How to Predict a Utility’s Transmission and Distribution Costs: Count the Customers

The number of customers found in a utility’s territory, not how much energy is delivered to them, is the best predictor of annual transmission, distribution, and administration costs

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Photo: Jose A. Bernat Bacete/Getty Images

The transmission and distribution system links power generators and electricity consumers, but it is an often neglected part of any discussion about the future of electricity. Yet paying for this key piece of infrastructure is a giant influence on how the electric grid can or should change as such new technologies as renewable generation go mainstream.

About the Full Cost of Electricity Project

The Full Cost of Electricity (FCe-) is an interdisciplinary initiative of the Energy Institute of the University of Texas. The goal of the project is to identify and quantify the full-system cost of electric power generation and delivery—from the power plant to the wall socket—and inform public policy discourse with comprehensive, rigorous, and impartial analysis. The FCe- study employs a holistic approach to thoroughly examine the key factors affecting the total direct and indirect costs of generating and delivering electricity. The project synthesizes the expert analysis and different perspectives of faculty across the UT Austin campus, from engineering, economics, law, and policy.

As part of The Full Cost of Electricity (FCe-) project at the University of Texas at AustinEnergy Institute, my colleagues and I wanted to ensure that public and policy conversations started with real numbers. So we asked a simple question: “How much are we paying for transmission and distribution, and how does this quantity compare to the past?” Then we dug into the data submitted by investor-owned utilities to find the answers.

Turns out, the number of customers in a utility’s territory is the best predictor of annual transmission, distribution, and administrative (TD&A) costs.

Utilities recover their TD&A costs by a combination of charges for each kilowatt-hour of energy sold, charges for peak power demand, and a fixed connection charge. Since 1960, each customer in the utilities we studied has typically paid US $700 to $800 annually toward TD&A.

Administrative costs are not trivial. Transmission—high voltage and long-distance transport of electricity—accounts for less than 20 percent of the total TD&A cost. Distribution and administration costs are each approximately 40 percent of total, but administration is a bit larger and is the telltale factor: Administrative costs are associated with number of customer accounts, and customer services are related to the number of customers.

Further evidence comes from the fact that utilities have pushed more energy through per customer without it increasing TD&A costs. As a function of the amount of energy delivered, costs decreased significantly from 1960 to 2000, while the average energy consumption per customer nearly doubled from 11,700 kilowatt-hours per customer-year in 1960 to 24,400 kilowatt-hours per customer-year in 1980 and then flattened through 2014.

Thus our result: It’s not how much energy is delivered, it’s how many customers the energy goes to.

graph shows average annual TD&A costs per kWh declined between 1960 and 1980Average annual transmission, distribution, and administration costs per kilowatt-hour declined between 1960 and 1980, but have been approximately 2.5 to 3.5 cents per kilowatt-hour since 1980. The decrease between 1960 and 1980 was likely driven by increasing energy consumption rather than decreasing service costs.Image: Robert L. Fares/The University of Texas at Austin Data sources: FERC Form 1 ( 2015) and Edison Electric Institute (2005).

More data and analysis is available in the full white paper, “ Trends in Transmission, Distribution, and Administration Costs for U.S. Investor Owned Electric Utilities” [PDF], on the Energy Institute’s page for The Full Cost of Electricity. (IEEE Spectrum is posting blogs from the UT researchers and linking to the white papers as they are released.)

Carey W. King is the assistant director and a research scientist at the University of Texas at Austin Energy Institute.

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