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Background Material

Introduction

Customer Requirements

Customer Service

Delivery of Service


Introduction

The structure and operation of an electric utility is determined by the nature of electricity and the associated generation, transmission, and distribution facilities. In particular, the following factors have a significant effect on how the business is operated:

  • Electric utilities have a diverse set of customers, usually spread over a large geographic area, each having a particular set of requirements.
  • Electricity must be produced at the instant it is demanded and it must be consumed at the instant it is produced. In general, it cannot be stored economically.
  • Electricity is a secondary or carrier form of energy. It must be generated from primary sources such as coal, uranium, petroleum, or water. It is then delivered to customers and transformed into light, heat, and power for machinery and appliances.
  • Customer demands for electricity vary dramatically from hour to hour, month to month and season to season. These changes in customer demand require the system generation output to be altered to ensure demand is being met as economically and efficiently as possible.

For illustrative purposes, the map (Figure 1) of NB Power's system provides a simplified overview of the key elements of any electric utility system: the generating system produces electricity, the transmission system conducts it from the point of generation to the point of distribution and the distribution system (not shown on the map) delivers it to the customers. In addition, interconnections with other utilities allow the utility to both sell and buy electricity as necessary.

Within each of these components a number of important sub-elements exist. The sizing of each component of the electric power system, the type of generation and the length, number and nature of transmission and distribution systems, are defined by the number of customers, the location of customers and the demand that customers place on the system.

Matching the supply of electricity with demand has always been influenced by conflicting issues, competing requirements and differing priorities. Customers require high quality reliable service at a competitive price, at the same time demanding limited environmental interference. Balancing these issues, requirements and priorities is an increasingly difficult task.


Customer Requirements

Electricity Requirements

In developing an electrical system, utilities must recognize customer demand and energy requirements. These requirements have a significant effect on the structure of a utility and the configuration of assets deployed.

Demand is the rate at which electricity is delivered at a given instant or average over the designated period of time. Demands of each customer and each customer class are accumulated to form the system demands at any point in time. It is crucial for utilities to plan and operate facilities such that demands are met and service interruptions are avoided. Demand is commonly measured in kilowatts (KW) and megawatts (MW).

Energy is the amount of electricity supplied over a specified time period. Energy is commonly measured in kilowatt hours (KWh), megawatt hours (MWh), and gigawatt hours (GWh).

An analogy for demand and energy is the speedometer and odometer in a motor vehicle. Demand is similar to a speedometer which measures the speed over ground at any given instant perhaps varying from one instant to the next. Energy is similar to an odometer which adds up all those specific instantaneous measurements to indicate how far the vehicle has traveled.

Customers require different amounts of electricity at different times of the day, month and year. Daily loads normally reach a peak during the morning and late afternoon while the lowest loads occur during the night. Throughout the year, a Canadian utility's minimum load occurs in the summer and the peak loads occur in the winter during extended periods of cold weather. This is in contrast to many utilities in the southern USA whose peaks occur in the summer to meet air conditioning requirements.

The reasons for these fluctuations are commonplace: the lowest loads of the year generally occur on Canada Day or Labour Day when many industrial and commercial operations are closed for the holidays. Peak loads usually occur on a cold winter week day when demand from most customer sectors is greatest particularly due to additional heating and lighting requirements. Figure 2 provides an illustration of the fluctuation in NB Power's demand during the day of NB Power's peak load day in 1995/96. Figure 3 provides an illustration of annual fluctuations in NB Power's demand, primarily due to heating requirements of customers.

Power Supply Options

Electric utilities must be able to meet the peak demand whenever it occurs. Utilities have three basic types of power supply alternatives to meet the load, each with its own advantages and disadvantages.

  • Base generation supply - Provided by units, usually hydro, nuclear, coal, and also in NB Power's case Orimulsion®, which have high capital costs but relatively low fuel and operating costs. It is usually more economical to operate them whenever they are available. During the spring months, high water flows allow hydro facilities in New Brunswick to operate as base generation. Base load units generally operate more than 60% of the time.
  • Intermediate generation supply - Provided by units which typically have lower capital costs (60% of base load units). Fuel and operating costs, however, are higher than for base load units. Most often these units are oil-fired and are susceptible to price fluctuations. Intermediate units generally operate between 20-60% of the time.
  • Peaking generation supply - Provided by units, usually combustion turbines, which have the least expensive capital costs (30% of base load units) but utilize expensive high quality fuels. As a result, peaking units are only economical if operated for short periods of time. Peaking generation is also available from hydro facilities, depending on river flows. Peaking units provide needed reserve in order to maintain an acceptable level of reliability on the system.

The challenge for utilities is to meet customer requirements through the proper mix of these power supply options, as well as demand-side options. Demand-side options relate to conservation and energy management initiatives which reduce demands from customers for electricity. For example, conservation and efficiency measures may be more cost-effective methods of meeting customer requirements than the construction of new generating stations.

Managing Customer Requirements

There are two key issues that any power utility must address to meet its customers' requirements.

  • Accurately forecasting these requirements - load forecasting.
  • Identifying the most effective mix of resources to meet these requirements in regard to operational and capital costs, reliability of service, and environmental impacts - resource planning.
Load Forecasting

Utilities annually prepare or review a load forecast, which represents a long-term projection of in-province customer requirements for demand and energy. The load forecast provides the foundation for resource, transmission and distribution, and financial planning. Factors typically used in developing the forecast are discussed in detail in a later section of this Business Plan entitled "Load Forecast".

Resource Planning

A utility's resource planning initiatives are typically developed using Load Forecast results and an Integrated Resource Plan (IRP). The IRP evaluates alternatives for supplying long-term future electricity requirements. Integrated resource planning analyzes supply-side and demand-side options in order to develop an economic, reliable long-term development plan. Each electric utility has its own particular responses to the challenge of matching supply and demand. Challenges facing NB Power's resource planning efforts are discussed in detail in the NB Power - Facilities section of this Business Plan.


Customer Service

The 1990s have been witness to significant increases in customer service demands in all industries. There is an increasing focus on a series of issues that define customer service and improvements in service are being demanded from all suppliers. The utility industry has not been exempt from this global trend.

A survey conducted in 1995 by Insight Canada Research Inc. on behalf of the Canadian Electrical Association (C.E.A.) investigated attitudes that residential electricity customers in Canada had relative to electric utilities. The list below summarizes the factors and level of satisfaction, from favourable to unfavourable, that customers had concerning electricity suppliers.

Reliability of Supply

Electric utilities spend considerable resources ensuring the supply of power is reliable. The utility must provide adequate facilities to ensure that service is continuous except in circumstances that cannot reasonably be avoided. Reliability of supply encompasses security of supply, quality of service, and diversity of primary energy sources, as well as supply adequacy and cost considerations.

As a result of the consistency of the electrical supply, society frequently takes for granted the availability of electricity. Customers naturally see availability as paramount to the provision of excellent service.

In addition to reliability of supply, "quality" power is also being demanded by customers. The preponderance of electronic equipment (personal computers, computerized cash register systems, computerized manufacturing systems, etc.) and their sensitivity to fluctuations in voltages, frequencies and harmonics create the need for "quality" power.

Speed in Restoration of Power

When power supply is interrupted, customers demand prompt restoration. The utility must balance such personalized demands with the requirement to ensure that power users with critical needs (e.g. hospitals) receive priority in restoration.

Concern for Public Safety

Customers expect electric utilities to operate, at all times, with due regard for public safety. This incorporates health issues which may arise from the generation, transmission and distribution of electricity as well as the safety of the public and the utility's employees.

Quality of Customer Service

The quality of customer service, defined by the quality and ease of communications with the utility, is of increasing importance to customers. Customers are holding all suppliers to the standards set by the top service performers. All utilities need to respond to these demands through improved responsiveness and "user friendly" communications with customers.

Ensuring Future Supply

Customers expect that electric utilities will plan and manage their facilities and operations to ensure that a sufficient supply of electricity is available in the foreseeable future.

Encourage More Efficient use of Electricity

Customers are demanding that electric utilities promote cost-effective conservation and the efficient use of electricity. This again becomes a balance question for utility management, setting the necessity to find a market for surplus capacity against the requirement to spend funds now to defer future capital expenditures.

Environmental Responsibility

Customers consider it to be very important that electric utilities operate in a manner which minimizes the impact of their activities on the environment.

Leadership Role in Economic Development

Electric utilities are viewed by customers as being key components of economic development efforts in their communities. Particularly in areas with a significant electrical intensive industrial base, the cost of power plays an important role in attracting and maintaining a healthy economy.

Efficient Management

Customers want to ensure that the utility is doing everything possible to keep costs to a minimum. Utility management needs to balance its efforts to reduce costs with the customers' other demands, such as prompt restoration, quality and good environmental practices. The challenge for any utility is to provide sufficient safeguards to maintain acceptable service levels without putting undue pressure on costs.

Social and Community Involvement

Customers expect electric utilities and their employees to be active participants in community activities within their service territory.

Keeps Customers and the Public Informed

The era of the knowledgeable consumer has fostered a desire by customers to be kept informed of all matters which impact on their rights and responsibilities. This is particularly true for electric utilities because of their pervasive influence on people's day-to-day lives as well as the fact that they are a supplier of an essential service. Customers therefore want to be educated about their utilities, the problems facing the utilities and the impact that utility operations will have on them as individuals.

The Price of Electricity

The overall price of electricity to the customer is a function of two factors - the amount of electricity consumed and the price per unit of electricity consumed.

These measures are generally expressed in kilowatt hours and cents per kilowatt hour. A utility can reduce the overall price by maintaining low rates and by encouraging customers to use less electricity. Although this second element is often overlooked when assessing price, demand-side management initiatives do have an effect on the total cost of electricity to the customer.


Delivery of Service

Electric Utility Organization

Historically, electric utilities throughout the world have operated as monopolies. To avoid duplication of facilities and operations, governments have provided utilities with franchises that protect them from competition in return for a guaranteed future electricity supply. This concept has been used exclusively in New Brunswick and generally in Canada. Exceptions to this model are limited non-utility generation or co-generation in most provinces. As an example, in 1993 NB Power supplied approximately 95% of electrical energy to New Brunswick users with the remainder being supplied through non-utility generation and co-generation. The Canadian experience does not differ significantly from this example.

This monopolistic model has recently been replaced in the United Kingdom where state-owned utilities were privatized and divided into smaller units. Further, the generation, transmission, and distribution components were split up into separate entities. The generation and distribution companies compete directly with each other for load, whereas the transmission facilities are jointly owned by the distribution companies. By 1998, all customers with loads greater than 100 KW will have complete freedom to choose their supplier, similar to the method currently used in North America for long-distance telephone service.

In the United States, the majority of utilities are investor owned and were set up initially to service a specific area or load. The Energy Policy Act of 1992 provides for increasing wholesale competition in the U.S., and certain states are even considering implementing competition at the retail (homeowner) level. This changing model is clearly having a significant effect on financial and operating management within utilities, and has made electricity pricing more market driven rather than being based strictly on regulatory control. The short-term benefits of deregulation are readily apparent, namely lower rates for selected customers. In the long-term, customers will have to cope with new and more difficult issues such as reliability of service, stranded investment where there is no longer a load demand for specific utility assets and the uncertainty of guaranteed supply for new requirements.

Electric Utility Regulation

Accompanying these shifts in competitive models has been an equally important transition away from a "rate of return" regulatory regime to a "price cap" regulatory model and other incentive based regulation. In exchange for the monopoly position, utilities in both Canada and the United States were generally subject to a public utilities board which determined the rates and tariffs which could be charged to different consumer classes. For investor-owned utilities, the most common model used was rate of return regulation, where the public utilities board determined the level of invested capital in assets (rate base) and an appropriate level of rate of return and allowed the utility to recover its forecast costs plus the return. The rate of return model is modified slightly for crown corporations in Canada, which are generally allowed to recover, through rates, their forecast costs plus a net income to achieve an acceptable interest coverage ratio.

The rate of return model on its own provided limited incentive for utilities to manage costs since they were virtually guaranteed to recover their budgeted costs plus a return. If they managed their costs efficiently, the savings had to be passed on to consumers and could not be used to increase the return. Recognizing this fact, the United Kingdom government experimented with a newer form of regulation, the price cap model, when it began its program of privatization in the 1980s. This model is now used throughout the electric utility industry in Great Britain.

For public utilities, such as NB Power, there has been a desire by government to keep rates as low as possible to encourage economic development in the governing jurisdiction. To continue and solidify this objective the price cap regulatory model was adopted by the Province of New Brunswick in 1993. This model encourages efficiency and cost management as revenue increases are limited and it is price, not profitability, which is subject to regulatory control.

Competition

Electric utilities generally are faced with three distinctive types of competition. The first competitive force is the pressure to keep electricity prices low enough in order for an economy to compete in global markets. If electricity pricing is not competitive in any one jurisdiction, electric-intensive industries will not be competitive and could be forced to move to another location, or to simply close. Clearly this underscores the importance of managing a utility to provide the most competitive rates possible.

The second competitive force relates to electricity competing with other sources of energy for such applications as space and water heating and energy for appliances. Traditionally, these competitive sources of energy have included oil, wood, propane and natural gas. In the future, alternative energy sources such as solar and wind-based technologies may be readily available.

The third competitive force is present with the transition of electric utilities from a regulated to a deregulated environment. Utilities in the U.S., and perhaps soon in Canada, are competing for customer loads regardless of long standing autonomy from one another. Achieving true open access competitive markets will require the electric utility industry to develop a fair and effective operating model, a task it is presently studying. Perhaps two of the most difficult issues facing the industry are how to price transmission access and how to price stranded investment no longer required by utilities.

With this transition comes significant changes to operations and policies traditionally used by utilities. Embedded cost rates, rate universality, defined service boundaries, vertically integrated utility structures, integrated resource planning and social policy objectives are each subject to change in the presence of deregulation. As the rules change, utilities are searching for competitive pricing strategies to combat the risk of major load losses while preventing erosion of existing revenues. To achieve this objective, utilities are turning toward innovative measures to realize benefits for both the utility and its major customers. Examples of some pricing strategies include incentive rates, interruptible rates, time of use rates, incremental pricing and curtailable credits. As embedded cost ratemaking evolves toward market based rates, utilities are differentiating customers into alternative rate classes in order to price services more competitively. Generally, customers are grouped based on the type and amount of power required; however, other classifications such as urban/rural and site specific factors may be considered.

Summary

As with other commodities, customers are demanding some degree of choice in their supply of power. This desire for choice is forcing changes to the electric utility industry. Despite the desire for deregulation, the transition to reach this objective is very complex. The U.S. has struggled with this issue much longer than in Canada, however, there remains a significant amount of uncertainty concerning how a competitive electricity market will function.



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