Fabric Tape Conductor Shield

Dear Amiable Amphibian,

I am wondering if you can provide some thoughts or comments on a cloth fabric semi-con we have here on some older #2 Cu cables, 15kV. Does the Ultrinium fluid harm this fabric?  Does the fluid react with any semi-conducting materials like carbon? Does Novinium think the injection process disturbs or harms the fabric?

Conducting Query

Dear Conducting-

The fabric tapes used on pre-1980 vintage cables were carbon-black dispersed on cotton fibers. Neither the cotton nor the carbon black in these semiconducting tapes react with the silanes used with Ultrinium™ fluid or Perficio™ fluid. In fact, cables with fabric tapes have been treated with alkoxysilane rejuvenation fluid for over two decades. Novinium has not experienced a single failure of a cable with a taped conductor shield.

The use of taped conductor shields in medium voltage distribution applications all but halted by the mid-1970’s in North America. Bartnikas and Srivastava relate in Power and Communication Cables, page 83 …

“Semiconducting carbon black tapes were … used as shields in the early linear polyethylene (PE) insulated cables. Due to poor adhesion between the tapes and the PE as well as occasional breaks or gaps between butting edges of carbon black tapes themselves, partial discharges often occurred within the voids formed at these faults. Polyethylene cables using carbon black shielding tapes were also found to be highly susceptible to tree growth.”

The fact that you have some of these cables in service today is testament to the absence of partial discharge and hence these particular cables do not suffer from the poor adhesion, occasional breaks or gaps which Bartnikas and Srivastava warned about in their book. However, there are certainly water trees and I’ll bet they’re doozies.  Fortunately, ameliorating the pernicious effects of water trees is precisely what Ultrinium and Perficio fluids are designed to do.

There are two operational considerations when injecting taped conductor shield cables. First, there is much more room in the strand interstices, so the fluid will flow faster and the cable will hold more fluid – these are both good things.  Second, when fluid flows through the strands it will entrain some un-adhered carbon black, so the outlet fluid will be black. Not to worry, there is much more where that came from and there is no need to try to flush it all out either.

Yours truly,

Thermo B. Frog

LIPA

Dear Felicitous Frog-

I have read a paper from the conference record of the 2008 IEEE International Symposium on Electrical Insulation (ISEI) by some folks at Powertech Labs from my home province of British Columbia. The paper was titled: “Condition Assessment of 15 kV Rejuvenated Underground XLPE Cables.” The cables in question are operated with AC, but the testing method is with DC.  Does a DC test have validity on an AC cable? The paper shows results of before-and-after diagnostic testing on two treatment methods, referred to as “method A” and “method B.” Are these results representative of Novinium’s post injection experience?

Currently,

AC in BC

Dear AC-BC:

Other frog fans may wish to review the full text of the paper to which you refer. The paper is available for a small charge from the IEEEXplore^® digital library; click here to view the abstract and full citation. The test method utilized in the paper is the LIpATEST™ technique, proprietary to PowerTech Labs. PowerTech is primarily owned by BC Hydro. The LIPA technique measures the DC leakage current through the cable insulation as a function of applied DC voltage. The 15 kV-class cables described in the paper are subjected to a negative voltage, increased in 4 kV steps of 1-minute duration, to a maximum of 16 kV. The leakage current is recorded at each step. The purveyors purport that the magnitude of the leakage current and its rate of change with applied voltage provide an indication of the quality of the cable insulation.

You asked two questions: Is the test valid and are the results representative? I provide answers to both in four parts, entitled: DC Testing, LIPA Validation, Rejuvenation Methods Tested, and Representative or Not?

DC Testing

The 2001 version of IEEE 400™, “Guide for Field Testing and Evaluation of the Insulation of Shielded Power Cable Systems,” provides some guidance and is available from ANSI. Click here to view the abstract and complete citation. Paragraph 4.2 states in part …

“Whenever dc testing is performed, full consideration should be given to the fact that steady-state direct voltage creates within the insulation systems an electrical field determined by the geometry and conductance of the insulation, whereas under service conditions, alternating voltage creates an electric field determined chiefly by the geometry and dielectric constant (or capacitance) of the insulation. Under ideal, homogeneously uniform insulation conditions, the mathematical formulas governing the steady-state stress distribution within the cable insulation are of the same form for dc and for ac, resulting in comparable relative values; however, should the cable insulation contain defects in which either the conductivity or the dielectric constant assume values significantly different from those in the bulk of the insulation [Editor: That would be all aged cable!], the electric stress distribution obtained with direct voltage will no longer correspond to that obtained with alternating voltage. … Furthermore, the failure mechanisms triggered by insulation defects vary from one type of defect to another. These failure mechanisms respond differently to the type of test voltage utilized. For instance, if the defect is a void where the mechanism of failure under service ac conditions is most likely to be triggered by partial discharge, application of direct voltage would not produce the high partial discharge repetition rate that exists with alternating voltage. Under these conditions, dc testing would not be useful. However, if the defect triggers failure by a thermal mechanism, dc testing may prove to be effective. For example, dc can detect the presence of contaminants along a creepage interface.

In the case of joints and accessories, their dielectric properties may differ from that of the cable with regard to conductivity. This may result in a dc stress distribution at the interfaces between the cable and the accessory that is very different from the stress under ac voltage. A careful examination of the system is necessary prior to a dc test in order to avoid difficulties.

Testing of cables that have been service aged in a wet environment (specifically, XLPE) with dc at the currently recommended dc voltage levels (see IEEE P400.1) may cause the cables to fail after they are returned to service (see Fisher, et al. [B23], and Steennis, et al. [B48]). The failures would not have occurred at that point in time if the cables had remained in service and not been tested with dc (see Eager, et al. [B21], and Srinivas, et al. [B47]). Furthermore, from the work of Bach, et al. [B7], we know that even massive insulation defects in extruded dielectric insulation cannot be detected with dc at the recommended voltage levels.”

In short, …

1.    DC testing does not measure the same defects to which the subject cable is exposed in its AC environment.

2.    There is little or no relationship between DC test results and likely AC performance.

3.    DC testing damages the aged cable it seeks to diagnose.

LIPA Validation

If the purveyors of the LIPA test wish to validate their test they simply need to run an experiment with a suitable control. To wit, divide a population of, say 100, homogenously aged cables into a control group of 50 and a test group of 50. Monitor the performance of the control group for future failure history. Submit the 50 cables in the test group to LIPA, and then monitor that group for future failure history. If the purveyor’s claims are accurate, there will not be a significantly higher failure rate in the test group compared to the control group and the failure rate in the subgroup of the test group that tested “bad” should be significantly higher than those of the test subgroup that did not test bad. Since PowerTech is a subsidiary of a utility with a sizable population of appropriately aged cables, it should be a simple matter to arrange such a test. This frog is unaware of any such test. Without the simple application of the scientific method the claims of efficacy cannot be confirmed by this, or any other frog.

Rejuvenation Methods Tested

Novinium can and does utilize both method A and method B. Method A is properly called unsustained pressure rejuvenation or UPR. Novinium has made improvements to the UPR method. The improved UPR method is called iUPR. Method B is sustained pressure rejuvenation or SPR. SPR outperforms UPR and iUPR by any measure of post-injection reliability.

Representative or Not?

Not – for two reasons. First, as mentioned above, the LIPA test should not be used to judge AC reliability. Second, even if LIPA were a valid test, 13 samples for UPR and 4 samples of SPR are not statistically significant.

Novinium is the only rejuvenation vendor in the world that performed a full third-party, side-by-side controlled experiment of rejuvenation technology. The work was executed by NEETRAC and the results are extraordinary. As soon as those results become public you can read about them here. In the mean time, actual post-injection performance of better than 99.6% on millions of feet of cable can be viewed at …

www.novinium.com/Lessons.aspx

Always skeptical of claims without data,

T. B. Frog

Better Than New

Dear Learned Leaper,

Why would I use rejuvenation, when I can have new cable?

Cable Guy

Dear Cable Guy-

I suspect, Cable Guy, that you’re not a circuit owner. Do you work for one of the cable manufacturers? If you were a circuit owner, you would know that money does not grow on trees and rejuvenation is almost always considerably less capital intensive than wholesale replacement. The question would have had more merit had it been asked two decades ago when the first generation of rejuvenation technology was becoming commercially important. The anticipated life of the first generation of fluid in non-demanding applications was and remains about two decades. The generally anticipated life of post 1990-vintage cables is about four decades. The 2X difference in anticipated life complicated the economic analysis of the treat or replace question. Advanced technology from Novinium can provide the same four-decades of service life, so that issue is a relic of the 20^th Century.

How about post-injection reliability? In the January 31, 2012 issue of the Las Vegas Regional Journal, it was reported that NV Energy experiences about a 0.6% failure rate when it replaces cable. NV Energy reports that the older injection approach has about the same failure rate over a 12-year period. Utilizing Novinium’s state-of-the-art technology and the outstanding craftsmanship of our service delivery experts, our overall failure rate is less than 0.4%. That’s about 33% better than the failure rate of new cable. Novinium rejuvenation technology is better than new! But, here’s the really cool part, Novinium technology and delivery methodology continues to improve! In the graph nearby I am pointing at the beta value of our Crow-AMSAA analysis of all of the faults we have ever experienced treating millions of feet of cable on three continents. The value is 0.56. A value less than one indicates that the failure rate is decreasing – a one would mean that it is staying the same, and a value greater than one would indicate deteriorating reliability. To learn more about Crow-AMSAA, check out my August 11, 2011 post, “Crow.”

Novinium announced the passing of the “Better than new” milestone today. Click here to read the press release. We periodically post a transparent summary of our failure history at novinium.com/Lessons.aspx.

Better next year,

Thermo B. Frog

The Color of Capital

Dear Gregarious Green One,

My firm uses Ultrinium™ and Sustained Pressure Rejuvenation to treat cables after they fail. The ability to capitalize single section injection with Novinium technology means we can earn a regulated rate of return on the capital thus expended. I read your four-part blog, “The Color on Money” and was wondering if you could do a similar analysis to help us quantify the benefit of our approach.

Considering Capital in Colorado

Dear CCC-

I am pleased that you appreciated my “Color of Money” posts. Click on I, II, III, and IV to review that work. Many of the concepts in the “Color of Money” apply to the “Color of Capital.” In fact, Parts II and III are prerequisites if you need a primer on depreciation and the time value of money respectively.

The ability to capitalize single sections of injected cable is available only from Novinium. In FERCs (Federal Energy Regulatory Commission) Letter order dated January 18, 2000, John Delaware, the Chief Accountant, wrote to the petitioner, Georgia Power:

“You indicate that CableCURE is used to rehabilitate entire segments of your underground distribution system (e.g. entire residential subdivisions as opposed to individual runs of cable between two terminal points).”

The only way you can capitalize CableCURE is if the entire subdivision is rejuvenated. The letter order is attached to this post for the interested reader. Novinium’s technology has no such limitation. The Letter Order promulgated by FERC’s Chief Accountant on September 4, 2008 and associated submittal information removes that limitation and can be accessed by clicking here. All of the above discussion is also true for RUS-funded circuit owners. Click here is view the RUS order of April 3, 2009.

That takes care of the regulators; now the analysis. We will compare two cases. All of the inputs are shown on the worksheet nearby. Parenthetical references to the worksheet cell designations appear in the following text.

Case 1

The cable fails, is repaired and put back in service. In our model the user can indicate how many faults are tolerated before the cable is replaced, together with an estimate of the time between faults. For this example, we assume the cable will fault twice over a two year period before it is replaced. The capital cost to replace is a modest $33.00/ft (Cell B7) and the O&M cost of a fault is $13.72/ft (Cell D13) in today’s dollars. That’s $4,500 (Cell B11 + Cell B12) divided by as assumed segment length of 328 ft (Cell B13).

Case 2

The cable fails, is repaired and injected in a single integrated operation. In our model the bundled unit capital is $20.06/ft (Cell D23). The model user can change any of the costs inputs and an assumption of the post-treatment reliability. For this example, the post-treatment failure rate is assumed to be 2% (Cell B26), which is about twice Novinium’s actual post-failure experience of about 1%.  To put this 1% failure rate in perspective consider that it is three-times higher than Novinium’s non-post-failure experience of about 0.34%. This higher-than-typical post-treatment failure rate is inherent in post-failure treatment. The post-injection fault is assumed to occur two years (Cell B27) after injection. Again the model user can adjust any of these assumptions.

Other Assumptions

Warranty remittances of $10/ft (Cell B23) are negative capital expenditures, that is, the remittances are subtracted from the subsequent replacement capital. Upon post-injection failure, the book value is written off, terminating the ratemaking-allowed return and providing a lump sum tax benefit of the book value. Cash flows are calculated for two rehabilitation cycles, up to 100 years. This approach allows residual values to be properly ignored as de minimis. Finally, replacement is assumed to have a zero-percent failure rate. At least one major investor owned utility has reported that new installations suffer a 0.6% “infant mortality” failure rate, and hence this assumption results in a slight understatement of the incremental value of Novinium^® post-failure rejuvenation.

Bottom Line

The cumulative net present values (NPVs) for the two cases are plotted nearby. Since the revenue or sale of electricity is the same in all cases, those revenues are ignored and only capital and O&M costs are depicted. This cost-only analysis is why all of the NPV values are negative. Nonetheless, the higher the cumulative NPV value is on the graph, the more advantageous to the circuit owner.

The blue line is for Case 1, and in the short run it is the superior choice. The problem is that once a cable begins to fail, it will re-fail. Sooner or later the ratepayers will be very upset with deteriorating reliability. Capital inefficient replacement is executed after the second fault (Cell B14) and the NPV plummets.

The orange line is for Case 2, and it represents an investment in reliability. The initial cost is about twice as great, but because the investment is capital, the circuit owner begins to earn a regulated rate of return. In the end, the incremental NPV advantage of Novinium post-failure rejuvenation is $18.42/ft. If your replacement cost is higher, say $44/ft, the difference becomes $21.15/ft. If in Case 1, the cable is allowed to fault a total of three times, the difference rises to $24.56/ft. Even if the cable is replaced after a single fault, the best alternative to rejuvenation, rejuvenation still enjoys an $11.45/ft advantage.

If you would like to run this model on your specific circumstances and execute “what if” scenarios, contact us at novinium.com/Contac.aspx.

Always conserving capital,

T. B. Frog

70-20120322_FERC_Letter_of_Approval.pdf (78.87 kb)

Euro-Rejuvenation

Dear Thermo,

I heard that besides the old rejuvenation technology offered by UTILX and Novinium’s improved technologies, that there is a third competitor in Europe.  Pray tell?

Hedging my bets

Dear Hedge-

There is only one firm in the world that can provide advanced Novinium technology. Today there are a total of twelve U.S. patents and their foreign equivalents. An up-to-date list of those patents is available at …

novinium.com/patents.aspx

If you want the safest and most reliable technology in the world, Novinium and our partners are the only source. Our friends down the road at UTILX Corporation offer technology invented by Novinium founders about two decades ago. Our founders are proud of their achievements, and this frog has written extensively that the performance of that old approach is quite good for non-demanding applications. Check with your risk management folks before you use that approach, however, because Novinium technology is much safer. Heaven forbid that you find yourself justifying your choice of a less safe choice to a jury. For a thorough discussion of the risks with all of the commercially significant injection approaches, check out my June 9^th, 2010 post, “Biggest Risk is Electrical.” Within that post is a link to a comprehensive risk analysis titled …

Rejuvenation Hazard Analysis 

There is a firm in Germany that offers silicone injection of power cables.  Their website is at …

www.kabelsanierung.de

Next, click on “Kabelsanierung,” which is German for cable rehabilitation. The firm is run by Professor Rudolf Wimmershoff formally at the Technical University of Regensburg. To this frog’s knowledge, Professor Wimmershoff’s rejuvenation approach has not been used too far from Bavaria. This frog cannot recommend the good Professor’s approach. He utilizes a common siloxane oligomer, which is generally used to waterproof masonry and such. The oligomer cross-links to a thick fluid resin after injection. The problem with this chemistry is that cross-linked polymers in the strand interstices can do nothing to improve the insulation’s dielectric properties, because they are way too big to diffuse into the insulation. To this frog’s knowledge there have never been any papers written to describe the post-injection performance of the good Professor’s approach. The firm’s primary businesses are transformer diagnostics and cable diagnostics.

Auf Widersehen,

Fehischlag Frog

P1816

Dear Thermo,

What is this swanky “reliability” event that Novinium is sponsoring on the Seattle waterfront in conjunction with the ICC meeting on March 26, 2012?

News in Jersey

Dear Jersey-

First I wish to object to prejudiced policy promulgated by local health authorities. Amphibians are prohibited from attending the March 26^th event to which you refer. Not that I would have any interest in the menu, I won’t eat anything unless it is still moving. The human proclivity to eat long-dead stuff is abhorrent. Forget the food; denying me access to the content is what frustrates my flippers.

IEEE P1816™ is a soon-to-be-approved, “Guide for Preparation Techniques of Extruded Dielectric, Shielded Cable Rated 2.5 kV through 46 kV and the Installation of Mating Accessories.” P1816 starts where most accessory installation instructions end. It defines the best practices for accessory installation that will lead to the highest level of reliability. The P1816 Guide was assembled by circuit owners, component manufacturers, and reliability masters like my Novinium colleagues. On March 26^th, humans who have a stake in reliability will gather to kick-off a multi-part series of webinars that will delve into the details of high-reliability craftsmanship.

Regular attendees of the Insulated Conductors Committee (ICC) will recognize the speaker’s names as authorities on the subject of reliability. Vern Buckholz, an expert on neutral corrosion, Glenn Luzzi of Richards Manufacturing, and expert on cable accessories of all types, Harry Orton an expert on sources of reliability problems, Mike Smalley of WE Energies, a P1816 Co-chair, and Bill Taylor of 3M, an expert on splices and terminations, are just some of the proficient people who will be introducing the topic and setting the stage for a year of informative webinars designed specifically to spread the gospel of reliable craftsmanship. The webinars will be designed for the craft-folk that largely determine the post installation reliability of underground cable components. Management and engineers should plan on attending too, because there will be revelations for all.

Select attendees will also be given access to Novinium’s state-of-the-art eLearning “Cable Prep Course” based upon P1816 at knovinium.com and a companion field guide. If you have not been invited to this invitation-only event, contact your Novinium sales professional at novinium.com/Contact.aspx. To see the agenda click here.

Unable to attend myself, but there in spirit,

T. B. Frog

The Color of Money – Part IV

In my post of February 27^th, The Color of Money – Part I, I gave the big picture answer to Cap’s query. In February 28^th’s follow-up post we delved into the details of depreciation. On my Leap Day post we deliberated discounting. Today, in the fourth and last post of the series, we will tie up loose ends and cover the rest of the assumptions.

Rejuvenation Technology Inputs

In cells B12, B13 and B14, the name for “Product X”, the fully absorbed cost for product X, and the warranty length are entered respectively. Cells B16, B17 and B18, hold the same values for “Product Y.” Cell B20 is the ratio of the warranty length of Product Y divided by the warranty length of Product X.  The accounting lives are assumed to be the respective warranty lives.  The actual life multiplier in cell B21 is the ratio of the actual life of Product Y divided by the actual life of Product X. The warranty life is an approximate indicator of the actual life, as the technology suppliers use some combination of experience, accelerated life experiments, and accelerated life simulations to arrive at reliable life expectations.

For individual large and stable firms, such as most utilities, the spread or difference between the discount factor in cell B3 and the inflation rate in cell B6 is quite constant. If inflation increases, discount factors increase too. The 5.9% spread in the example is typical for the power distribution industry in North America.

Accounting Treatment of Warranty Remittance 

GAAP would suggest that warranty remittances are handled as negative capital expenditures. That is, the cost of replacement is reduced by the amount of the warranty remittance. Any remaining undepreciated value associated with rejuvenation is written off in the year of the failure on both the tax books and the rate-making books. Individual circuit owners may treat these warranty refunds differently. Write to me to tell me how your firm accounts for these warranty payments.  I’ll enhance the model to accommodate your method.

Residual Value

For any net present value analysis there has to be an assumption regarding the handling of residual values at the end of the analysis period. Where two rejuvenation technologies with different actual lives are compared, the technology with the longer life will have a greater residual value than the product with lesser life. For the purposes of this analysis a single replacement cycle is executed after the rejuvenation cycle has completed and future value is calculated to a one century horizon. Cash flows after 100 years are ignored. This assumption favors the technology with the shorter life, since the product with the longer life would have the greater residual value.

Bottom Line

This rigorous analysis confirms and quantifies what should be self evident. The longer the life – the greater the value.

Greener is better,

Thermonuclear Frog 

The Color of Money – Part III

In my post of February 27^th, The Color of Money – Part I, I provided the big picture answer to Cap’s query. In yesterday’s follow-up post we delved into the details of depreciation. Today we will deliberate discounting – muse over money’s time-value. Please dust off your Frogonomics 201 textbook, The Time Value of Money, and Turn to Chapter 3. Consider the common amphibious aphorism used to explain why future cash flows must be discounted, to wit: “A frog in the hand is worth two in the pond.”

A dollar earned or saved today has a greater value than a dollar earned or saved in a future time period for two reasons. First, inflation – we all experience its pernicious penalty. In cell B6 illustrated nearby, the annual replacement inflation is assumed to be 2.4%. The inflation of replacement is due primarily to the increasing cost of labor, secondly to the increasing cost of the commodities that make up a new cable, but thirdly both increases are mitigated by increases in the productivity of the people and tools performing replacement. Inflation then, is the composite of these three effects. Notwithstanding claims by the Federal Reserve Chairman, nobody can predict what future inflation will be, but that shortcoming is not as onerous as one might expect.

For individual large and stable firms, such as most utilities, the spread or difference between the discount factor in cell B3 and the inflation rate in cell B6 is quite stable. If inflation increases, discount factors increase too. The 5.9% spread in the example is typical for the power distribution industry in North America.

The second component of the discount factor involves a dispassionate assessment of the future financial risk – taking into account the financial expectations of the firm’s capital sources. The capital sources might include public debt and equity markets, they might include the ratepayers of a cooperative, or they might be taxpayers of a government-owned distribution firm. With the exception of some improperly functioning government entities, no capital source makes an investment without an expectation of a return. Further, the greater the perceived risk of the investment, the greater the expected return.

In yesterday’s post on depreciation, we also touched upon the rate of return on capital, and here again there is a generally stable historical spread between the rate of return and the discount factor.  Thus modelers must generally move these three values together for any sensitivity analysis. Inflation is less than the discount factor, which in turn is less than the rate of return.  The spreads are fairly stable for individual firms and are typically about 6% and 1% respectively. Check with your finance folks to determine the discount factor, inflation, and rate of return. Let this frog know of any values that differ substantially from the norms.

In my next post in this series we will examine the remaining assumptions required to compare two rejuvenation options.

For me, every day is a Leap Day,

Thermonuclear Frog

The Color of Money – Part II

In yesterday’s post, The Color of Money – Part I, I gave the big picture answer to Cap’s query. Today we will dive into the first of three sets of details that impact the answer, namely depreciation. In subsequent posts we will examine discounting and other assumptions. I had to pull out my green eyeshades to properly address depreciation. In the foreground of each of the graphs in yesterday’s post, a table of assumptions was provided.  In the illustration below I zoom in on the second table to shed light upon the details.

Depreciation is the allocation of capital cost over an accounting life of an asset. The accounting life and the actual life are not the same thing. Accounting life generally considers the actual life together with regulatory requirements and generally accepted accounting principles (GAAP). The accounting life for new cable is usually 40 years, so 40-years is the model assumption for “Replacement asset life” in cell B8.

There are a variety of ways in which the original capital cost of, say, a new cable might be spread over its accounting life of 40 years. The simplest method is called straight-line depreciation and it allocates an equal amount of depreciation expense for each of the 40 years of anticipated life. In our example, the replacement cost of $33.00 per foot in cell B7 would be spread over 40 years, and hence the annual straight-line depreciation would be 82.5¢ (i.e. $33 ÷ 40 yrs). There are other depreciation methods that accelerate expenses into the earlier years of the asset life. In my example, the double declining balance (DDB) method is used for tax purposes in cell B9. Wikipedia does a nice job of defining the concepts of depreciation, so the interested reader should visit …

http://en.wikipedia.org/wiki/Depreciation. 

Now for a not-so-secret secret – investor owned utilities keep at least two sets of books! One set of books is kept for the taxing authorities and the second set of books is kept for regulatory authorities. Often a third set of books is kept for internal purposes, but that has no impact on our analysis, because all we care about is actual cash flow.

In my next post in this series we will dive into discounting, but for now let’s agree that accelerated savings are good – a dollar saved today is worth more than a dollar saved tomorrow. That’s why for the tax books, the accountants use the most aggressive depreciation allowed by the tax authorities. For our example, I used DDB that switches to straight-line when straight-line becomes more favorable. The “2” in cell B9 represents the “Double” in “Double Declining Balance.”  The switch to straight line is controlled by a “True/False” switch in cell J9, which is not shown for brevity. If one has a depreciation expense of $100 and an “Incremental Income Tax Rate” of 32%, one would enjoy a $32 tax benefit. This is so because the $100 expense offsets $100 of revenue on which no taxes need be paid.

Now to the second set of books.  As long as the “Rate of Return on Capital” in cell B5 is greater than the “Discount Factor” in cell B3, it is to the circuit owner’s advantage to use the slowest depreciation method allowed by the regulators. In the long run the rate of return must be greater than the discount factor or investments by the circuit owner would make no sense. The FERC (Federal Energy Regulatory Commission) promulgates a Uniform System of Accounts (USoA) to regulate how capital assets are depreciated. For the example provided in this model, regulatory depreciation is straight line, indicated by a “1” in cell B10.

What if your firm is not an investor owned utility? What if your firm does not pay any income taxes? At first glance it appears that publically owned utilities should set both their incremental income tax rate and rate of return on capital to zero. That would ignore the stakeholders of public utilities have the same expectation of economic return as their investor owned neighbors. If the publically owned entity did not provide a return in the form of lower electrical rates or direct payments to a governmental unit, there would be a strong case to privatize the utility. This frog would argue that the same values used by neighboring investor-owned utilities should be utilized for this analysis, but check with the green-eyeshade guys upstairs.

Using GAAP (generally accepted amphibian practices),

T. B. Frog

The Color of Money – Part I

Dear Gregarious Green One,

My firm purchases rejuvenation services from both Novinium and UTILX. While we have a preference for the mastery displayed by your team and your inherently safer process and fluids, it is difficult for us to settle on Novinium as our sole vendor, because the UTILX price is lower. Can you help me understand your value?

Capital Concern

Dear Cap-

I’ll bet that you thought my FrogBlog tagline, ”It’s easy to be green™” focuses upon the environmental benefits of using Earth-friendly cable rejuvenation technology. Others might believe that the tag line is a play on the lyrics to that other famous frog’s song, “It’s Not Easy Being Green.” This frog is a master of the triple entendre. It’s easy to be green, while you are saving some green, and … I am not above poking fun at Kermit! Notice in the image nearby how nicely my complexion matches the color of money! That’s money that you earn when you employ superior technology.

We can provide a lower price by lowering the quality of the products and services we deliver to more closely match those of the two-decade-old approach, but we will not compromise on safety. For example, we will not use flammable fluids. But hey, there is no need to compromise safety or performance. The value of the longer post-injection reliable life and the longer warranty periods enjoyed by the patented Novinium processes and fluids can be calculated. Let’s consider two general cases.

In the first case, compare the 20-year life expectancy, warranted by the other guys, versus the 25 years enjoyed by the improved unsustained pressure rejuvenation (iUPR) process together with Ultrinium™ 732 fluid. At first glance 25-year life extension suggests a 25% increase in value, but there are the matters of the time value of money, regulated rates of return on capital, and distortions caused by the tax code. In the graph nearby I show the difference in net present value (NPV) between the two choices as a function of the post-injection reliable life. The actual value waxes and wanes depending upon the life of the cable, but for the most common case, where the life meets the expectations, iUPR enjoys more than a 10% value advantage. For other cases the value may be higher or lower, but it is generally positive.

In the second case, compare the 20-year life expectancy, warranted by the other guys, versus the 40 years guaranteed by the sustained pressure rejuvenation (SPR) process together with Ultrinium™ 732 fluid. Doubling the life extension does not double the value, because of the aforementioned time value of money, regulated rates of return, and tax code considerations. In the second graph I show the difference in net present value (NPV) between the two choices as a function of the post-injection reliable life. The actual value varies depending upon the life of the cable, but for the most common case, where the life meets the expectations, SPR has about a 16% value advantage. For other cases the value may be higher or lower, but it is always positive. For cases where the post-injection life is greater than 3 years, but the cable fails within the warranty period, the SPR/Ultrinium 732 fluid combination provides up to a 32% value advantage.

In subsequent posts, this frog will again crack open her Frogonomics 101 textbook and explain each of the factors that influence this dispassionate economic analysis. Friends of Frog (FoF) may request a copy of the MS Excel worksheet so that they can adjust the parameters of the model to calculate their unique incremental value of using state-of-the-art technology.

Always in the green,

Thermo B. Frog