Business Essentials for Utility Engineers

Richard E. Brown

• Publisher: CRC Press
• Year: 2017
• ISBN:
  9781351834070
• Edition: 1
• Topic: Business
• Subtopic: Management
• Index: Business

It is no longer acceptable for utility engineers to make spending decisions solely because they make good engineering sense. In today's environment, they must also demonstrate solid business acumen and show that recommendations make good business sense. With this goal in mind, Business Essentials for Utility Engineers systematically presents each business topic to arm engineers with the tools and vocabulary necessary to be more effective when interacting with senior management, and for promotion to senior management.

This book covers all business concepts important to utility engineers, including regulation, ratemaking, accounting, finance, risk management, economics, budgeting, and asset management. The author applies his vast corporate experience to give readers a solid foundation for business theory, discussing the idiosyncrasies of utilities and using advanced mathematics to demonstrate business concepts. He also explains how to properly apply this theory to utilities, expounding on specific business skills that will greatly benefit utility engineers in their daily jobs.

Chapters are organized to build sequentially upon each other, and take advantage of the mathematical sophistication and deductive nature of engineers when presenting material. After reading this book, utility engineers will view their industry from a new perspective, and will have a greatly expanded business vocabulary. Suitable for self-study, undergraduate study, graduate study, or as a desk reference, this book provides a robust framework for correct business thinking and a solid foundation for further learning.

WAtch Richard E. Brown talk about his book at: http://youtu.be/gdyjq77nQFI

1
Utilities

Public utilities provide essential services to society. Because of their importance, legal precedent has upheld the need for specialized government oversight of these businesses to ensure that safe and reliable utility services are widely available for rates that are reasonable and non-discriminatory.

The types of public utilities considered in this book require large investments in fixed infrastructure, typically extending to the premises of end-use customers. Examples of these infrastructure utilities include electric utilities, gas utilities, telephone utilities, water utilities, and wastewater utilities. Sometimes public transportation facilities are also considered public utilities (e.g., railroads, buses, subways), called transportation utilities. Much of this book is relevant to both infrastructure utilities and transportation utilities, but there are certain aspects of infrastructure utilities that require special consideration. Most people use the terms public utility and utility interchangeably. Therefore, unless otherwise stated, the remainder of this book uses the term utility to refer to a public utility that relies heavily on fixed infrastructure to provide an essential utility service.

Many of the business topics in this book apply to all industries. However, utilities have a large number of differences that make traditional business thinking potentially misleading or inappropriate, requiring this book to serve in dual roles. First, it educates the reader on the fundamentals of business theory, taking advantage of the analytical sophistication and deductive nature of typical engineers. Second, it discusses and applies each aspect of business theory within the context of utilities to describe what is similar and what dissimilar when compared to other businesses.

The remainder of this chapter describes the special aspects of utilities that affect their characteristics as businesses. It does not address any specific business topics, nor does it attempt to link these characteristics to business topics that have yet to be presented. To do so would be premature and unhelpful to the reader. Instead, the information in the remainder of this chapter provides the reader with a general overview of utilities and introduces terminology and context that are required for a full comprehension of future chapters.

1.1 TYPES OF UTILITIES

There are many types of utilities. The reader is probably familiar with the technical aspects of one or more, but may not be familiar with others. This section presents a general overview of the major types of infrastructure utilities as organized by the service provided to the end user. Emphasis is given to the physical system and service delivery process rather than industry or business structure.

A company that owns and controls the entire infrastructure required to deliver end-use utility service to retail customers is called a vertically integrated utility. Often customers do not receive services from a vertically integrated utility. In these cases, multiple utilities must coordinate to provide all vertical functions. The process is similar to other businesses where one company may produce raw materials, another may manufacture a product, and still another may sell the product to retail customers. The following sections present different types of infrastructure utilities in terms of vertically integrated infrastructure functionality. They also discuss the typical roles of major vertical business functions.

1.1.1 Electric Utilities

Electric utilities produce electric power and deliver this power to customers. The functions required to do this are generally categorized into generation, transmission, and distribution.

Most electric power is generated at large central stations that use fuel such as coal, oil, natural gas, or uranium (for nuclear reactors). Some generation facilities use non-thermal energy sources such as hydroelectric dams, wind turbine farms, and photovoltaic or solar-thermal facilities.

There are several fields of study that address the economics of electric power generation. This includes the optimal use of generation from a centralized planning perspective including real time generator output (called economic dispatch) and weekly generator scheduling (called unit commitment). It also includes the optimal market mechanics of generation and transmission from a competitive industry perspective. Both of these business topics are important to electric utilities, but do not generalize well to other utilities. They are specialized fields rather than general business subjects and, therefore, are beyond the scope of this book.

Figure 1.1

Electricity meters. The picture on the right shows a typical residential meter that is fed from underground electric cables. The picture on the left shows a more advanced meter, typically used for large industrial customers.

Most electric power is generated at large facilities that are long distances from the customers they serve. Therefore, most electric power must be moved from generation facilities to high concentrations of customers via high voltage transmission lines. These lines allow electric power to be transported efficiently over long distances, but require large and expensive transmission towers.

Electric transmission systems deliver power to electric distribution systems, which operate at lower voltages and require smaller structures (typically wood utility poles). Electric distribution systems transport power to retail customers, where consumption is tracked by electricity meters (see Figure 1.1). Retail customers are typically billed based on electric energy consumption, measured in kilowatt-hours (kWh).

Electric utilities are required to provide electric power to their customers at an acceptable voltage. High voltages can harm electric appliances and cause potential safety hazards. Low voltages can cause electric appliances to function improperly and can also cause electric motors to overheat. Other aspects of voltage that utilities must consider are frequency, flicker (i.e. slowly oscillating voltage), transients (i.e., voltage spikes), harmonics, and others.

Electric utilities are increasingly expected to provide high levels of service reliability to customers. When switches are flipped, customers want their lights to turn on and their computers to boot up. Utilities typically measure customer reliability by the number of service interruptions and the length of these service interruptions. Utilities are also expected to respond well after major weather events that cause widespread infrastructure damage and extensive customer interruptions.

Electricity has an important quality that affects the economics of electric utilities; it is difficult and expensive to store large amounts of electric energy. Because of this, most electricity must be instantaneously produced when it is needed. Generation and transmission capacity must be sized to handle the highest period of electricity demand. Most electric energy cannot be economically stored up during times of low demand for later usage.

The difficulty of electric energy storage is becoming increasingly problematic as more wind power and solar power are connected to the electric system. Wind turbines only produce electricity when the wind blows. Solar panels only produce electricity when it is sunny. Since electric utilities cannot depend on these sources being available when needed, the installation of wind and solar does not typically eliminate the need for traditional sources of generation. For example, if peak electricity demand increases by ten gigawatts, it is not sufficient to add ten gigawatts of wind power; it is likely that six or seven gigawatts of traditional generation will also need to be added.

Historically, most utilities were vertically integrated and owned the generation, transmission, and distribution systems required to provide service to their customers. There are still many vertically integrated utilities, but the industry recently went through a wave of “vertical unbundling.” There are now a number of dedicated generation companies (gencos), dedicated transmission companies (transcos), dedicated distribution companies (discos), and combined transmission and distribution companies (wires companies, or electric delivery companies).

The primary goal of vertical unbundling is to introduce competition to electricity generation. In a perfectly unbundled world, a disco will purchase required generation from a variety of gencos. This energy is then transported from the genco to the disco via the transco for a fee. An independent system operator (ISO) controls the transmission system to ensure reliability, allow fair access, and prevent market power abuses. Much of the electric energy in the US is purchased and delivered in this manner.

Retail electricity purchases amount to about 3% of the US economy. More importantly, society and economic activities essentially shut down when electricity becomes unavailable. Electricity has become one of the cornerstones of modern societies and electric utilities are the stewards of this essential service.

1.1.2 Gas Utilities

Gas utilities produce natural gas and deliver it to customers. Like electricity, the functions required to do this are generally categorized into generation, transmission, and distribution.

Most natural gas today comes from wells that drill into underground deposits in natural gas fields. Natural gas also occurs with oil deposits, coal deposits, and shale deposits (although it is often uneconomical to extract natural gas from shale deposits).

Figure 1.2

A typical residential gas meter. Natural gas is supplied from the vertical pipe on the left. The gas passes through a pressure regulator before entering the meter. The pipes to the right go on to supply gas appliances in the house such as stoves and hot water heaters.

Natural gas delivered to consumers primarily consists of methane. When first extracted from the ground, natural gas also contains significant quantities of ethane, propane, butane, pentane, and hexane, as well as non-fuel substances such as water vapor, carbon dioxide, hydrogen sulfide, nitrogen, and helium. After extraction, natural gas is transported via pipes to processing plants so that these impurities can be removed in a process often called sweetening.

Most natural gas is produced in remote areas that are long distances from the customers they serve. Therefore, most gas must be moved from production and processing facilities to concentrations of customers via high pressure transmission pipelines. These high pressure pipes allow large volumes of natural gas to be transported efficiently, but require compressor stations about every fifty miles to keep pressures sufficiently high.

It is not practical or cost-effective to build natural gas pipelines across oceans. For trans-oceanic transport, natural gas is cooled until it becomes liquefied natural gas (LNG). Liquefication occurs at about 260 °F below zero, and the resulting LNG occupies about six hundred times less volume than the gas. LNG can then be transported in special ships similar to oil tankers. LNG can also be transported in specialized tanker trucks and tanker railcars.

Transmission systems deliver natural gas to distribution systems. Up to this point, the natural gas has been colorless and odorless. Upon entering the distribution system, a tiny amount of odorant is added, typically with a rotting cabbage or rotten egg smell. The foul odor allows gas leaks to be easily detected. The gas distribution system operates at lower pressures than the transmission system and delivers gas to customer premises, where consumption is tracked by gas meters (see Figure 1.2). Customers are typically billed based on either gas volume or gas heat content. Gas volume is measured in thousands of cubic feet (Mcf). Heat content is measures in therms, with one therm defined as one hundred thousand British thermal units (BTUs). A therm is typically equal to about one hundred cubic feet of natural gas.

Gas utilities are required to provide natural gas to customers with sufficient pressure and heat content. Excessive pressure can cause leaks and ruptures. Insufficient pressure and insufficient heat content can cause gas appliances to function improperly. From a billing perspective, utilities that base bills on gas volume increase customer charges when heat content is reduced; more gas is required to perform the same amount of heating. Gas utilities must also place a high emphasis on safety, since gas leaks can lead to dangerous explosions. A safe gas system is ensured by regular inspections for leaks and timely repairs.

Unlike electricity, storage is an important part of the natural gas delivery system. Most gas storage occurs on the transmission system. Gas that is not needed by the local delivery companies is diverted to underground storage reservoirs, of which there are three major types. By far, the largest amount of storage occurs in depleted gas fields (86% of storage volume in the US). The remaining storage occurs in aquifer reservoirs (10% of storage volume in the US) and salt cavern reservoirs (4% of storage volume in the US). These storage facilities are drawn from when gas demand exceeds the rate of production or when large production facilities become unavailable.

Wholesale natural gas is sold and traded as a commodity in the US and in many other countries. Gas pricing, trading, and purchasing are important and interesting business subjects, but are narrow specialties and are therefore not covered in this book.

Methane is a natural by-product that occurs when organic matter undergoes anaerobic decay. Newly produced methane is commonly called biogas. It is becoming more common to capture biogas and use it to run electric generators, such as at a landfill or a hog farm. Since these facilities are not connected to gas transmission or distribution systems, they are not considered part of the gas utility infrastructure.

The major actors in the US natural gas industry are producers, pipeline companies, local distribution companies (LDCs), and natural gas marketers. A typical producer will sell gas to a combination of LDCs, power marketers, and end users. Gas is then transported through transmission pipelines for a federally regulated fee.

Many houses do not have natural gas service, and rely on electricity for all of their energy needs. Those with gas typically use it to fuel furnaces, hot water heaters, ovens, and clothes dryers. In the last decade, many private companies have built electric generation facilities powered by natural gas. These facilities have the advantages of fast start times and relatively low emissions. In terms of volume, gas sales are about 20% residential, 50% commercial/industrial, and 30% power generation. Revenue splits are somewhat different, since rates for these customers classes vary widely.

For-consumption gas purchases amount to about 1.5% of the US economy, which is about half that of electricity. Society is better able to handle gas interruptions than electricity interruptions, but many industrial processes are shut down when gas is not available. Natural gas is a critical element of ou...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Table of Contents
• Preface
• Author
• 1 Utilities
• 2 Accounting
• 3 Economics
• 4 Finance
• 5 Risk
• 6 Financial Ratios
• 7 Ratemaking
• 8 Budgeting
• 9 Asset Management
• Index