Establishing the Framework for Preparing the Business Case

Traditional SPM and other conventional business case approaches emphasize cost minimization. In doing so, these approaches implicitly establish the functionality of existing metering and information management processes as the defacto standard against which all other alternatives are judged. With this approach, new investment is judged not by the value of the future capabilities and customer needs supported but by how well the `new system' can satisfy the `existing system' business practices. Regulatory approaches rarely start from or assign value to functional capabilities necessary to support anticipated future customer or market needs. Consequently, metering options that provide additional and more valuable functionality at a higher initial cost, immediately become less attractive investments because there is no attempt to value the increase in functionality relative to the level of service provided in the existing metering system.

Investments in advanced metering are usually evaluated using a form of capital investment model or Standard Practice methodology. Both methodologies compute the net present value of a stream of costs and benefits over a defined time period. In both cases, the prospective investment is considered feasible only if the net present value is positive. Utilities that operate in a regulated environment may also have to consider other Pareto Optimal 'least cost' criteria where guidelines may mandate that (1) the aggregate dollar value of the benefits must exceed the investment cost and (2) the investment must also produce an outcome where no one will be worse off - a no loser outcome.

However, both the Standard Practice¹ and other conventional approaches have many limitations that tend to misstate both the costs and potential benefits from implementation, specifically:

_ Meter system costs do not generally consider outsourcing or other less expensive alternatives to utility ownership and benefits often are defined only as customer demand and energy savings, valued according to existing rates rather than actual wholesale or effective market prices.

_ Investments in advanced metering do not consider the aggregate cost for other utility hardware and information system investments necessary to provide related call center, outage management, billing and customer services that would otherwise be provided through implementation of an integrated advanced metering system. In other words, the business case focuses on the costs and benefits from only one individual component of a much larger suite of loosely connected systems.

_ Finally, the risks and opportunity cost for `not investing' in updated metering systems, while difficult to estimate are often ignored all together.

A capital investment model provides a reasonable and comparable approach for evaluating the metering investment decision only if the traditional `metering system' analytical framework is modified to specifically address the three limitations identified above. Three changes to the analytical framework are required.

1. Scenario Approach: A scenario approach that includes three levels of implementation and two financing alternatives will produce the information necessary to examine the sensitivity of the business case to implementation related economies of scale and financial economies of ownership. Figure 3, depicts the six scenarios to be examined under the recommended scenario approach. Each financing and implementation option is described in Table 3.

2. Integrated Utility System Cost/Benefit Scope: Each of the scenarios must assume that metering is just one component of an integrated set of utility operating and information systems. Changes in one system, metering in particular, will create beneficial and non-beneficial impacts in other systems. Cost and benefits must account for the differing impacts that each implementation scenario will / could be expected to have on utility costs, benefits and operations.

3. Opportunity Costs and Risk: Not having the capability to quickly respond to short-term weather related outages; normal market price spikes or longer-term outage/price situations incur a cost to both the utility and customer. For example, the inability to quickly implement supplemental interruptible, curtailable and demand response rates during 2000-2001 resulted in extraordinary increases in the rates and bills for all customers and potentially unnecessary rotating outages. Like traditional loss of load probabilities, some of these situations can be anticipated and estimated using risk-based adjustments. Developing rate designs that focused customer attention on just those hours with high market prices was simply not feasible. The potential opportunity costs and risks to not making the investment in advanced metering and related systems must be identified as part of the business case assessment.

Figure 3. Recommended Scenarios for the Advanced Metering Business Case

	Financing Options
Implementation Options	Utility Ownership	Outsourcing
1. Base Case	A1	B1
2. Partial Implementation	A2	B2
3. Full Implementation	A3	B3

Table 3. Scenario Parameters

Financing Options
A. Utility Ownership	Assumes conventional utility purchase and ownership.
B. Outsourcing	Assumes that the utility purchases metering and related services on a contract, outsource basis.
Implementation Options
1. Base Case	Assume no additional advanced metering for the next 10 years, with a continuation of the existing metering and related systems, maintenance/expansion plans and existing rates. The Base Case must identify the actual costs for maintaining the existing metering and related support systems. The Base Case must also identify or estimate the actual financial and other impacts on other hardware and utility information systems as well as other improvements necessary to address development that would have otherwise been served by the Full Implementation scenario. The Base Case should also identify any significant investments in new metering systems made during the last five years.
2. Partial Implementation	Assumes implementation (electric only) that targets customer segments with a significant opportunity to save on their bills (residential and C/I) with support for TOU, Critical Peak Pricing and two-part RTP for the largest C/I customers.
3. Full Implementation	Assumes full system implementation (gas and electric) over a five-year period with support for TOU, Critical Peak Pricing and two-part RTP for the largest C/I customers. Implementation should specify an advanced metering infrastructure (AMI) with interval metering (minimum 15 minute intervals) and remote communication capability. Useful modifications to outage detection and other operating systems that are associated with the use of the AMI system should also be specified.

The traditional business case evaluation of advanced metering compares the costs of full implementation to existing base case system costs. Additional utility investment in billing, customer information, load survey, outage management and other related operating systems are almost always excluded from base case system costs. However, the full implementation or AMI scenario often includes the costs to modify these same systems, without also accounting for the benefits that might accrue from these modifications. Under the recommended scenario approach, modifications to the base case to keep the existing system up-to-date and to provide special functionality that might otherwise have been provided with AMI will be identified.

The scenario approach will allow a comparison of the incremental difference in costs and benefits across financing and implementation scenarios. This will provide the joint agencies with the data they need to evaluate the cost effectiveness of each scenario and the impact of AMR deployment on different customer segments.

¹ See "Briefing Paper: Problems with the Standard Practice Methodology", Report to the California Energy Commission, Levy Associates, August 2003.