Electric Utility Sector OM&A Cost Management Best Practices

Electric Utility Sector OM&A Cost Management Best Practices

It doesn’t take very long working with electric utilities to discover that capital and OM&A dollars typically have different rules and values associated with them and that utility executives, stakeholders, and regulators are very interested in how they are treated. As a general rule, we observe that in many utilities, OM&A dollars are perceived to be more expensive than capital dollars and harder to acquire. Consequently, the level of scrutiny around OM&A spending is often different.

Delving into the truth about whether OM&A or capital is more expensive requires an analysis of the cost of capital under different ownership structures, the impact of investments on rates and ratepayers (SAIDI, CAIDI, etc.), and the speed of return for different investments, all of which are beyond the scope of this paper. However, for this discussion, it is reasonable to stipulate that OM&A versus capital spending is a point of interest in many utilities and drives behaviour at the executive and shop levels.

While this paper delves into OM&A management challenges, the first thing to highlight is that some of the scrutiny of OM&A spending is a by-product of the promises made by utilities to secure past capital investment. Whether that concerns the promises made to secure investments in major technology (IT systems), smart meters, smart grids, or investments in refurbishing utilities’ aging assets, more questions about utility spending are being asked, and the answers are not always compelling.

An example of questions being asked is the 2024 RBC inaugural Growth Project research report titled “Canada’s Growth Challenge: Why the economy is stuck in neutral.” Admittedly, the RBC report applies to more than just the utility sector. However, according to RBC, “The report explores the conditions that have led to Canadians working more but producing less and explains why our collective productivity is our country’s most pressing economic challenge.” Also, according to the RBC report, “When we look at the Canadian economy since the turn of the century, it’s clear that our growth has stagnated. On average, we’ve seen productivity growth of less than 1% per year. The problem is even more acute when we compare Canada’s growth against that of the United States.”

However, even in the US, scrutiny around capital investment is increasing. For example, in their article “Modernizing the investment approach for electric grids” (Nov 2020), McKinsey & Company explores the factors that drive investment, including climate change, distributed energy grids (DERs), and grid technology. The report highlights, “Historically, utilities’ grid-modernization choices haven’t always delivered the expected benefits. “Billions of dollars were spent (in the US) to develop the so-called smart grid as part of the American Reinvestment and Recovery Act of 2009. As a result, penetration of advanced metering infrastructure (AMI) in the United States exceeded 70 percent of households and promised to deliver savings and new capabilities.” “However, results have been mixed.” Also, “Despite accelerated capital investments in the grid by US utilities over the past ten years, the System Average Interruption Duration Index (SAIDI) is consistently above its 2000 level, reflecting the increase in frequency and severity of major events. McKinsey also concluded, “Clearly, there is a disconnect between what utility companies are proposing and what regulators see as appropriate.”

It could be argued that whether capital or OM&A dollars are more expensive is somewhat moot from an accountability perspective. That is because utilities that promise demonstrable benefits from their capital investments will be expected to demonstrate that benefit. If the benefit is not increased rates and revenues, it must be seen in reduced OM&A costs. That means that the investment in the new multi-million dollar IT system needs to reduce operating and administration costs, and the investment in the more reliable or smart devices needs to lower operating and maintenance costs.

Good Versus Bad OM&A

In thinking about scrutinizing OM&A costs as utilities attempt to optimize spending or stay on plan, we recommend that utilities be passionate about differentiating between good and bad OM&A expenditures. Simply put, good OM&A expenditures develop more value than cost, while bad OM&A expenditures destroy value.

Maintenance practices are an easy example. Doing preventative maintenance on a vehicle is generally seen as good OM&A. However, changing the engine oil weekly would be excessive and become bad OM&A. This danger of good ideas going too far is one of the biggest OM & A challenges in electric utilities. For example, maintenance experts believe planned maintenance is less expensive, more efficient, and safer than unplanned maintenance. Yet a senior manager at an electric utility recently explained that their