Sponsored and written by Warren Wood, Vice President – Regulatory & Legislative Affairs, Ameren Missouri
Missourians rarely have to think about where the power comes from when a switch is flipped to light a room, the heating system starts warming their house, or all that goes into being able to quickly run a credit card to pay for a purchase. That’s the way it should be thanks to billions of dollars of past investments and a lot of careful planning.
Reliability is dependent on infrastructure. Whether it’s wind, solar, coal, hydro, natural gas or nuclear energy creating Missouri’s power, the ability to deliver that energy to customers relies on a series of transformers, substations, wires and poles and underground cables, most of which were built in Missouri in the 1950s, 60s and 70s.
Would most of our customers dream of trying to turn on an appliance from that era and expect it to work, not to mention deliver the most efficient results?
A recent report by the American Society of Civil Engineers (ASCE) claims the United States should invest over $100 billion to shore up the nation’s electricity grid by 2020.
According to the ASCE report titled Failure to Act, “Closing the electricity investment gap would lead to fewer brownouts and blackouts and save U.S. businesses $126 billion, prevent the loss of 529,000 jobs and $656 billion in personal income losses for American families.”
The ASCE report provides a state-by-state Report Card…and Missouri’s energy systems are graded a D+.
So does Missouri really have a problem? Our reliability is top quartile and our electric rates are among the lowest in the country.
To the casual observer it appears that all is well. Unfortunately our aging infrastructure is largely a hidden problem. Electric service providers have continued to find ways to get every last bit of value out of the aging electric grid but at some point the risk and observed rate of failure of these carefully engineered and maintained systems will go up.
If you look at the average age of our major electric system grid components you will see that the average age of many of these components now exceeds four decades and the average age is increasing each year, not stable or declining. This trend is continuing despite hundreds of millions of dollars of aging infrastructure investments every year by electric service providers. These investments continue to be well in excess of depreciation recovery rates set by the PSC. Unfortunately, these investment levels are simply not adequate to get ahead of the aging infrastructure problem.
So, what’s the problem? Why can’t infrastructure investment levels be accelerated to get ahead of this situation?
When an electric service provider invests in a utility pole to serve customers in Missouri, the day that pole goes into service it starts depreciating. The electric service provider also continues to pay the cost of capital for these investments to banks and shareholders. When that electric service provider later files a rate case at the PSC, and that pole is later included in rate base, only the depreciated value of that pole is included. No accounting of the actual cost of the new pole or the ongoing actual cost of capital for that pole between when it starting serving customers and when it was included in rate base is provided. Basically customers pay used infrastructure prices for new infrastructure. The losses add up to about 10% of the new value of infrastructure each year this infrastructure is not addressed in a rate case. Multiplied by the hundreds of millions of dollars of annual investments by electric service providers this situation is simply unsustainable.
This process acts as a barrier to making these additional investments in infrastructure when customers would be best served by encouraging these investments. This process also drives frequent rates cases when customers have been clear they want less frequent rate cases. Many states have adopted approaches to address these problems. These approaches include, but are not limited to: future test years, capital expenditure trackers and/or riders, and formula rates.
Electric service providers have been replacing aging infrastructure for decades and doing well from an operations and financial standpoint. Why is this a problem now? What’s different?
The electric service provider business model and the regulations that it has been operating under for about 100 years are under new pressures, pressures they have never had to adapt to before.
Much of the infrastructure providing us with reliable service today was built 40 to 60 years ago. This infrastructure was built when new air conditioning load, urban sprawl and new electric appliance loads were resulting in revenue growth rates of 8% to 10% per year. The load growth during this time period forced old infrastructure replacements and new infrastructure construction while providing the revenues to fund these projects.
The situation is completely different today.
Load growth is nearly flat, partnerships with our customers to become more energy efficient are achieving great success, and ever more customers are moving ahead with customer-owned distributed generation systems. These things are happening while rates continue to be historically based and a large percentage of the fixed cost incurred to provide customers with service are embedded in the variable portion of the rate to continue to encourage further conservation, which often results in under recovery of real fixed cost. At the same time, EPA, NRC and NERC mandated investments have sky rocketed. This is happening while customers have ever higher expectations for high quality and reliable power. Also, the period of 8% to 10% growth rates in load 40 to 60 years ago now has the effect of creating a ‘bow wave’ of aging infrastructure unlike any investment challenge the electric service providers have ever experienced.
Bottom line – revenues to support additional incremental investments are relatively flat, costs have increased significantly, aging infrastructure modernization investment needs are real and becoming more urgent, and customer expectations have never been higher. Again, this is simply not sustainable.
Customers are more sensitive than ever before to additional increases in rates. Is this is the best time to seek to ramp up investments to modernize aging infrastructure? When should we work to find a resolution to tis problem?
Now. Missouri’s aging infrastructure challenge, and the reductions in system reliability it will precipitate will not go away and the cost to proactively get ahead of it will only go up with time. Skilled workers are ready for projects, suppliers are eager to competitively bid this work, material costs are low, and interest rates are low. When you consider the economic development upside associated with this work, and the downside of not acting, it’s unfortunate an approach to move forward with this work wasn’t adopted several years ago.
Many other states have updated their regulatory laws and energy policy and are moving forward with electric system infrastructure upgrades more quickly than Missouri. For example, in Illinois, legislation was passed in 2011 specifically targeted to modernize their aging energy infrastructure. In 2012 the Illinois legislature passed additional legislation to accelerate their modernization efforts.