CL&P Distribution Capital Investment Program

Resource Allocation Under Constraints

UCONN Graduate Business Studies ProgramOperations ManagementApril 24, 2008Mike Waggoner CL&P Distribution Asset Management(860) 280-2333

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CL&P Capital Program Agenda for Today

1. Capital Program Decision Making• Capital Needs, Framework & Planning Horizon• Capital Investment Decision Making

Strategic 5 Year Process• Resource Constraints & Cost Drivers

2. Reliability Improvement Optimization• Review of Reliability Indices (Background)

• Reliability Investment Examples Optimizing Investments

3. Summary

Capital Program Decision Making

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CL&P Capital ProgramInvestment Framework – Four Focus Areas

1. Run the Business – Minimum (Mandatory)– Replace Failed Equipment– Highway/Road Relocations – Meters & Transformers (pre-capitalized when purchased)

2. New Business & Growth (Mandatory)– New Services, Load Relief (Normal Overloads)

3. Improve the Business (Mandatory & Discretionary)– Load Relief (for Contingency transfers)

– Reliability & Obsolescence– Regulatory Requirements– Facilities, Tools, Equipment, etc.

4. Information Technology (Discretionary)

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Equipment Failure- Replace(S/S Cap & Pin, UG Sec…)

Regulatory Commitments

(i.e. TDRP, AB Chance C.O.s,Hi/Low…)

New Service(Indiv customers, new R/C&I developments…)

MAJOR PROGRAMS (some program examples)

INDIVIDUAL PROJECTS

Annual (<$50k ea.)

Smaller recurring /emergent work – completed soon after initiated

Specific (=/>$50k)

Larger focused efforts that require planning and address a need or

initiative

Capital Program FrameworkCapital Program Framework

Run the Business-Minimum

Relocations, Equipment Failures,

Meters

New Business/Growth

New Services, Lighting, Load Growth

Information Technology

Major Hardware Systems (CSI, Work Management ) & routine hardware upgrades

Improve the business

Hazard Reduction, Regulatory commitments,

Reliability improvement and Risk Mitigation

AREA OF FOCUS

Categories used to communicate capital expenditures to regulators and to identify investments in strategic 5 year plan

Circuits and Geography drive Individual Projects

Acute Reliability

Problems(i.e. CableCure., DR Annual,

…)

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CL&P Capital ProgramFive Year Forecast (Timing)

• Current Year – Actively Managed Projects– “Annual” Projects (< $50K each) done as needs emerge– “Specific” Projects (>/= $50K each) constructed as planned

• 90% planned and approved 1+ year(s) prior to construction– Review and update 5 year plan

• 1-2 Years Ahead– Planning– Engineering for Specific Projects

• Justification documented• Alternatives evaluated

– Project Review & Approval – Resource Allocation (order major materials, forecast funding changes)

• 3-5 years Ahead– Forecast Resource Needs– Planning, Siting, Preliminary Engineering

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5 Year Capital ForecastAREA OF FOCUS MAJOR PROGRAMS 2008 2009 2010 2011 2012

NEW BUSINESS - Customer Driven & Lighting Requirements 50,023 52,225 55,435 58,993 62,666 BACKGROUND LOAD GROWTH - Capacity Additions 53,783 61,405 64,757 72,247 70,763 TOTAL NEW BUSINESS AND GROWTH 103,806 113,630 120,192 131,240 133,430

RUN THE PLANT RELOCATIONS 9,299 11,770 12,200 12,670 13,170 EQUIPMENT FAILURES & MAJOR STORMS 34,156 35,355 38,925 40,145 40,411

TRANSFORMERS 29,234 41,840 33,650 36,300 39,200

THIRD PARTY ATTACHMENTS 751 1,693 2,555 2,661 2,750

OPERATIONAL EXPOSURES 9,076 9,910 10,400 10,795 11,240

METER REQUIREMENTS 4,723 4,813 4,837 5,066 5,265 OTHER CAPITAL

Tools & Equipment & Other Capital 1,537 3,260 2,029 3,501 2,190 TOTAL OTHER CAPITAL 1,537 3,260 2,029 3,501 2,190

TOTAL RUN THE BUSINESS 88,776 108,641 104,597 111,138 114,226

REGULATORY COMMITMENTS 39,529 29,479 29,320 24,995 19,425 RELIABILITY

Achieve SAIDI Targets 14,131 11,915 8,321 9,350 9,695 Manage Acute Reliability Problems - Five or More 9,616 9,460 14,200 14,770 15,351 Replace Obsolete Plant

Obsolete Plant Overhead 2,971 4,699 7,102 6,973 7,597 Obsolete Plant Substation 22,829 20,946 22,610 20,385 21,261 Obsolete Plant Underground 9,807 14,853 12,829 13,354 12,277

Total Replace Obsolete Plant 35,606 40,498 42,541 40,712 41,135

TOTAL RELIABILITY 59,353 61,873 65,062 64,832 66,181 FACILITIES 5,624 6,224 12,322 12,918 5,245

TOTAL IMPROVE THE BUSINESS 104,505 97,576 106,704 102,745 90,852

INFORMATION TECHNOLOGY

TOTAL TECHNOLOGY 5,992 8,247 7,615 7,900 8,260

CUSTOMER SYSTEMS INTEGRATION 11,010 - - - - ADVANCED METERING INFRASTRUCTURE 20,000 8,681 30,000 60,000 60,000

TOTAL CL&P DISTRIBUTION CAPITAL EXPENDITURES 334,089 336,775 369,108 413,022 406,768

MAJOR PROJECTS

CL&P DISTRIBUTION CAPITAL EXPENDITURE PROGRAM 2008 to 2012 Forecast

NEW BUSINESS & GROWTH

IMPROVE THE BUSINESS

Major Programs typically have several sub-programs or initiatives

Capital Needs Growing Significantly. Recent Rate Case extends recovery only thru June 2009

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CL&P Capital Program Resource Constraints

• Rates – Amount of capital is either approved in rates, or ‘carried’ until the

next rate case

• Allowed Rate of Return – Sets maximum earning level on investment

• Ratepayers share over-earnings– Not guaranteed– Competes with other investment opportunities w/in NU Business (e.g. – CL&P vs. Transmission or other Operating Cos.)

• Franchise Commitments – Increasing mandatory and regulatory requirement spending

reduces discretionary investment opportunities• Increasing Costs

– Amount of work completed for fixed program amount is reduced

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CL&P Capital Program Cost Drivers• Material Costs Increasing

– Global Demand driving raw material costs

• Skilled Labor Shortages– Qualified craft workers in demand across industry, short supply,

takes years to train and qualify for HV work– Tree Trimmers (many from outside U.S.)– Power Engineers (few schools teach Power Eng. anymore)

• Rebuild/Replace Energized Systems – Initial installation done ‘dead’, much less expensive– Very labor intensive to work on high voltage systems – specialized

tools and methods required to ‘keep the lights on’ during const.

• Traffic Control – State/Municipal Police, Railroad flagman requirements ($60+/hour)

• Regulations, Siting, Permitting (CEAB, DOE Xfmr. Eff. Reqmts.)

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CL&P Capital Program Cost Containment Efforts

• Long term material forecasts are provided to suppliers

• Suppliers help manage inventory (JIT delivery)

• Work Clearances – combine efforts when possible

• Private Traffic Control where allowed (vs. State/Town PD)

• Competitive labor contracts, by project (low bid, NTX,…)

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Strategic Capital Decision Making Process –Major Program LevelStrategic Capital Decision Making Process –Major Program Level

Ties in with Business Planning Process

Program Development

team

Basis for Major Program Development

•Rate Case

•CL&P strategy

•Growth Forecast

•Reliability Performance

•Cost Expectations

Basis for Major Program Development

•Rate Case

•CL&P strategy

•Growth Forecast

•Reliability Performance

•Cost Expectations

5 year Strategic Plan Developed

( Major Program Examples: Regulatory

Commitments, Reliability)

5 year Strategic Plan Developed

( Major Program Examples: Regulatory

Commitments, Reliability)

Approval by CL&P Officers/

Management Committee

(June)

2 year Capital program Finalized (October)

Categorized by Major Program Drivers:

•New Service Growth

•Equipment Failure History

•Safety Hazards

•DPUC commitments

•Risk Mitigation

•System Performance

•Customer Satisfaction

2 year Capital program Finalized (October)

Categorized by Major Program Drivers:

•New Service Growth

•Equipment Failure History

•Safety Hazards

•DPUC commitments

•Risk Mitigation

•System Performance

•Customer Satisfaction

Trustee Approves

Capital Program

Submitted to DPUC

(Formal Docket Req)

CL&POfficers Approve 2 year Capital

Program

Allocation of major program dollars based on current impact of drivers

Ties in with TacticalProcess

Reliability Improvement Optimization

• Background - Review of Reliability Indices• Reliability Analysis • Examples of Alternative Improvement Options

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Electric System ReliabilityPerformance Metrics (Background)

• Electric Industry Reliability Indices (Annual) SAIDI = System Average Interruption Duration Index CAIDI = Customer Average Interruption Duration Index SAIFI = System Average Interruption Frequency Index

Definitions SAIDI – average interruption duration in minutes per customer served.

SAIDI = ∑ Customer Minutes = CAIDI * SAIFI Total # Customers Served

CAIDI – average service restoration time (minutes) CAIDI = ∑ Customer Interruption Durations

Total # Customers Interrupted SAIFI – average number of times a customer is interrupted during a year (# inter)

SAIFI = Total # Customers Interrupted Total # Customers Served

Industry focus is on non-storm SAIDI (major storm interruptions excluded)

2007 CL&P non-storm performance (CT DPUC Criteria):SAIDI = 120.8 Min CAIDI = 124.9 Min. SAIFI = 0.984 Interruptions

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Reliability Improvement Analysis

• Interruption Analysis by Circuit or Device completed using past performance Average annual Customer Minutes Interrupted (CM)

= # Customers Interrupted * Minutes Interrupted (annual average calculated based on prior 4 year history)

• Improvement Options evaluated for Cost and Impact Unit Cost Estimates prepared Reliability impact guidelines exist for most improvement types (% improvement predicted = % of Customer Minutes Saved - CMS)

• Outage history analysis is used with the estimated improvement cost and predicted impact to calculate a “Cost per Customer Minute Saved” ($CCMS) value

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CL&P Capital Program Investment Optimization

• Capital reliability improvement investments are optimized using one or more effectiveness criteria:

1. Cost per Customer Minute Saved ($CCMS) Compare various options on a given circuit or device Provides ‘bar’ from which to judge options across system

2. SAIDI Impact (CL&P System Level) Measures impact on system goals

3. Cost per Interruption Saved ($CIS) Focused on O&M savings

• Examples will help illustrate

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Example 1Problem: Tree Caused Outages on Bare WireProposed Solution: Reconductor with Tree Wire

Analysis: # Customers on device = 1,000

Length of Overhead Dist. Line = 2.0 miles

Average # outages/year = 4

Average outage time = 150 minutes

Annual Customer Minutes = 1,000 * 4 * 150 = 600,000 CM

Cost to reconductor Line w/ Tree Wire (Improvement) = $500,000/mile

Predicted Improvement Impact = 30%

Calculated Cost Effectiveness of Reconductoring this Line ($CCMS):

= 2.0 mile * $500,000/mi. = $5.56 CCMS

0.30 * 600,000 CM

Calculated Impact on CL&P System SAIDI = 0.30 * 600,000 CM = 0.15 Minute of CL&P SAIDI

1.2M Customers (total CL&P)

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Example 2 (same circuit, alternate solution)Problem: Tree Caused Outages on Bare WireProposed Solution: Re-sectionalize circuit using reclosers (auto-loop)

Analysis: # Customers on device = 1,000 Length of Overhead Dist. Line = 2.0 miles Average # outages/year = 4 Average outage time = 150 minutes Annual Customer Minutes = 1,000 * 4 * 150 = 600,000 CM Cost to sectionalize (install two reclosers) = 2 * $60K ea. = $120,000 Predicted Improvement Impact = 50% (place recloser at customer half-way point,

resulting in 500 customers in each of two zones, vs. 1,000 customers in one zone)

Calculated Cost Effectiveness of Re-sectionalizing Circuit ($CCMS): = 2 * $60,000 = $0.40 CCMS 0.50 * 600,000 CM

Calculated Impact on CL&P System SAIDI = 0.50 * 600,000 CM = 0.250 Minute of CL&P SAIDI 1.2M Customers

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Investment ComparisonBetween Alternatives

Example 1 - ReconductorCost = $1,000,000CMS = 180,000CCMS = $5.56SAIDI Impact = 0.15 Min.

Example 2 – Auto SectionalizeCost = $120,000CMS = 300,000CCMS = $0.40SAIDI Impact = 0.250 Min.

• Example 2 investment option is more cost effective than example 1 based on a lower $CCMS and greater impact on CL&P system SAIDI

• Reconductoring (ex. 1) eliminates outages (30% prediction). Re-sectionalizing (ex. 2) does not eliminate outages, only mitigates by reducing customer count

Application of Cost Effective Analysis1. Used to ‘screen’ and prioritize options (e.g. – re-sectionalize before recond.)2. Guidelines developed and used as ‘bar’ to judge projects for approval3. Once a project is Engineering approved, metrics are used for budget year

funding and construction prioritization.

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CL&P Reliability InvestmentsLimitations of Optimization Analysis

• Reactive vs. Proactive (or Predictive)– Requires past outages to justify investment– History does not always repeat – Customers are inconvenienced with outages and poor reliability

• Predictive models are typically focused on a particular construction type or equipment class (age, manufacturer) that has a history of poor performance. – Some equipment types fail infrequently but consequences of failure are

severe and to be avoided (e.g. UG network, Substation equipment)

• CL&P has capital improvement programs based on known poor performing and vintage equipment types - examples:– Rubber ties on insulators (Circuit Backbone rehab)– Cap and Pin Insulators (Substation Bus rehab)– UG Network Secondary Cable Replacement (UG Obsolescence)

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Asset Investment Strategy (AIS)Capital Project Evaluation Model

• AIS evaluates projects on four primary attributes1. Financial Value

– Impact on earnings– Cost confidence of estimate

2. Operational Improvement– Reliability (SAIDI, SAIFI Impact)– Capacity Improvement (Overload relief)

3. Strategic Goal Alignment– Company Goals Impact (Safety, Reliability, Environmental,…)– Regulatory/Political Relations

4. Employee and Public Responsibility – Safety (Employee & Public, Environmental)

• A score for each of the four attributes is developed and can be used for comparison to other projects within the same program, across all of CL&P, or across multiple NU Operating companies

• Model is only as good as original design and update efforts

• A separate project evaluation tool, called the “Asset Investment Strategy” model is also used to evaluate or “score” projects for comparison and funding decisions.

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Tactical Decision Making – Tactical Decision Making – Individual Project LevelIndividual Project Level

Identify Need

•New Service Growth

•DPUC Commitments

•Risk Mitigation

•System performance

•Customer Satisfaction

Identify Need

•New Service Growth

•DPUC Commitments

•Risk Mitigation

•System performance

•Customer Satisfaction

Identify Major Program Category

Decision Making Estimates

&

Cost Benefit Evaluation of

Options

Decision Making Estimates

&

Cost Benefit Evaluation of

Options

AIS Model

Cost Effectiveness

Evaluation

AIS Model

Cost Effectiveness

Evaluation

Project Proposal Project

Proposal

Benefit & Engineering Challenge

Approve

Reject

Project Timing

Proposal

OCRC Review & Preliminary Prioritization

of approved projects for year-2 (May 1)

•AIS MODEL•Resource Levels•Metrics

OCRC Review & Preliminary Prioritization

of approved projects for year-2 (May 1)

•AIS MODEL•Resource Levels•Metrics

OCRC Final Review & Prioritization of Projects for year 2 construction (Oct)-Ties in with Strategic Process

OCRC Final Review & Prioritization of Projects for year 2 construction (Oct)-Ties in with Strategic Process

Certain projects on hold for

future considerations

End of Project Post Construction Effectiveness

Review

Selected Option

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Ties in with Strategic Process

AIS

CCMS

CIS

CL&P SAIDI

Design

Adequ

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“CONTINUOUS PROCESS”

Analysis Metrics

Metric

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CL&P Capital Program Summary

• CL&P utilizes a 5 year capital investment planning and strategic decision making process

• A large percentage of capital programs are driven by mandatory franchise commitments (new service, load growth, regulatory reqmts…)

• Overall investment levels are constrained by DPUC approved rates and allowed Rate of Return (ROE)

• The cost to replace existing plant is much higher than original installation, driven by work on and around energized HV equipment

• Capital available for reliability improvement is limited

• Reliability investments are optimized using cost effectiveness metrics ($CCMS and impact on SAIDI) using a past history of interruptions

• The AIS tool can be used to compare individual projects across a program, operating company or multiple operating companies

• The tactical (project) approval process is ongoing and ties back to the overall 5 year strategic planning process by introducing new programs and modifying program funding levels as needs dictate

Q&A