Monetizing Risks - A Prioritization & Optimization Solution
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The document outlines a prioritization and optimization solution for managing risks and capital improvement projects in the water utility sector, based on a survey of 368 utilities. It highlights key industry issues such as water scarcity, aging infrastructure, and funding challenges, and presents a structured process for project ranking and scheduling based on financial efficiency and planning criteria. Additionally, the framework aims to aid utilities in balancing trade-offs between budget constraints and risk management while maximizing the value of their projects.
![• Project
Value based
on the
Avoided
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• Process
Quantifies
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Cost/Risk of
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Delay
EXAMPLE PROJECT FINANCIAL ANALYSIS
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Project Scheduling Impact
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Value of
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Cost of
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Risk analysis is incorporated in NPV results
through Monte Carlo Simulation 14](https://image.slidesharecdn.com/monetizingrisktexaswater2015v2-150417155020-conversion-gate02/85/Monetizing-Risks-A-Prioritization-Optimization-Solution-14-320.jpg)
Monetizing Risks - A Prioritization & Optimization Solution
- 1. 17April2015 MANAGER MATT BOND, PE, WEF FELLOW JASON DE STIGTER, PE MONETIZING RISKS A PRIORITIZATION & OPTIMIZATION SOLUTION CLIENT SERVICES MANAGER
- 2. • Survey of 368 Water Utilities • Identified trends and status of water utility programs and issues • Continues to emphasize need to prioritize capital improvements projects • Survey available upon request STRATEGIC DIRECTIONS IN THE US WATER INDUSTRY 2
- 3. TOP 5 WATER INDUSTRY ISSUES – SOUTHWEST REGION 4.56 4.48 4.47 4.47 4.35 Water scarcity or availability, and/or conservation Aging water and sewer infrastructure Ability to fund capital programs Managing capital costs Justifying capital improvement programs/rate requirements Participants were asked to rate the importance of a variety of issues using a scale of 1 to 5, where 1 indicates, “Very Unimportant” and 5 indicates “Very Important.” This chart provides the five industry issues that received the highest rating based on the mean value for each item among all survey participants representing the Southwest region (24% of respondents), 9 June 2014Strategic Directions Report for Water Utility Industry | 3
- 4. Respondents were asked to select current usage for each of a list of tools / systems CURRENT USAGE PLAN FOR TOOLS / SYSTEMS THAT SUPPORT ASSET ,MANAGEMENT 4 53.3% 50.5% 46.5% 36.4% 34.2% 25.8% 17.7% 17.7% 16.3% 5.4% 35.3% 36.4% 34.0% 36.7% 46.2% 36.1% 30.7% 27.7% 36.4% 10.1% 3.3% 6.8% 4.6% 11.7% 10.1% 19.3% 14.7% 24.7% 22.3% 15.8% 3.8% 0.8% 6.3% 5.7% 2.2% 8.7% 16.0% 13.6% 11.1% 34.0% 4.3% 5.4% 8.7% 9.5% 7.3% 10.1% 20.9% 16.3% 13.9% 34.8% GIS system CIP prioritization Hydraulic models Computer maintenance management systems Condition assessment and inspections Paperless work order management system Enterprise management software Dashboards Mobile applications Deterioration models Using; Plan to Improve Using; Meets Needs Not Using; Not in Plans Not Using; Plan to Implement Not Using; Not in Plans 4
- 5. INTEGRATED ASSET INFORMATION SYSTEMS 5 PD Program Development & Implementation Gap Assessment Program Plan PD AMIS Asset Management Information Systems FacilitiesLinear Assets WaterWastewater Water Wastewater AMIS BRE & CIP Business Risk Exposure & CIP Project Identification SAMS GIS BRE&CIP WBMD Web-Based Management Dashboards PERFORMANCE MANAGEMENT DASHBOARDS WBMD CCP Comprehensive CIP Prioritization CIP PRIORITIZATION TOOL CCP AM Condition Assessments 5
- 6. PROJECT PRIORITIZATION AND OPTIMIZATION PROCESS ANSWERS THESE QUESTIONS Utilities Need to Understand and Manage Risk Which projects to delay or accelerate? Which, if any, to cut? How much risk are we taking on? Are we spending capital where it is most valuable? 6
- 8. PROCESS DELIVERS THREE CRITICAL PLANNING RESULTS FOR THE BUDGET PROCESS 1. Project Rankings Based on Financial Efficiency NPV benefit and ‘Bang for the Buck’ metric quantified 2. Project Rankings Based on Planning Criteria Weighted Scoring Approach 3. Optimized Implementation Schedule that Incorporates Budget Constraints Dovetails with Utility Financial Plan for Rate Increases and Financing Needs 8
- 9. OVERVIEW OF PROCESS Genetic Algorithm0.000 0.005 0.010 0.015 0.020 0.025 0.030 0.035 0.040 -25 -20 -15 -10 -5 0 5 10 15 20 25 Identify Projects Project Assumptions Input Assumptions Planning Criteria Capital Costs O&M Impact Growth Assumptions Revenues Preferred Install & Schedule Constraints Failure Probability Business Case Development Project Scheduling Key Results Financial Template NPV Benefit – Avoided Case Financial Efficiency Balance Scorecard Project Ranking / Prioritization Monte Carlo Simulation Optimization Model: Financial Efficiency o Risk Tolerance o Budget Constraints Criteria Scoring o Reg. & Env. o Safety o Customer Service 1 1 1 9
- 10. Assess Condition, Failure Modes THE AM “10-STEP” PRACTICE MODEL Develop Asset Registry Determine Residual Life Determine Life Cycle & Replacement Costs Set Target Levels of Service (LOS) Determine Business Risk (“Criticality”) Prioritize O&M Investment Prioritize Capital Investment Determine Funding Strategy Build AM Plan 2. What is my required level of service? 3. Which assets are critical to sustained performance? 4. What are my best O&M and CIP investment strategies? 5. What is my best long-term funding strategy? 1. What is the current state of my assets? Identify Projects 10
- 11. ASSUMPTIONS FORM AND FINANCIAL TEMPLATE = CONSISTENCY, DOCUMENTATION • Input parameters • Capital costs • Target installation • O&M pre- and post-construction • Probability of failure • Consequence of Failure • Revenue generated Planning Criteria • Reg. & Env. • Customer Service • Safety Primary Output Calculation of financial efficiency Total score based on cost and risk factors 0.000 0.005 0.010 0.015 0.020 0.025 0.030 0.035 0.040 -25 -20 -15 -10 -5 0 5 10 15 20 25 0.000 0.005 0.010 0.015 0.020 0.025 0.030 0.035 0.040 -25 -20 -15 -10 -5 0 5 10 15 20 25 0.000 0.005 0.010 0.015 0.020 0.025 0.030 0.035 0.040 -25 -20 -15 -10 -5 0 5 10 15 20 25 Project Assumption TMUA BUSINESS CASE DEVELOPMENT PROJECT FORM Project Number: User Input Required Project Name: Project Type: Prepared By: B&V/ACR Asset Type: Latest Date Submitted: 17-Jan-13 Please review Ratings Section: Original Project Date: 1-Oct-13 Asset Description: Primary Investment Driver: Historical Project No. 179 Project Type: Project Number: Rating: Rating: Rating: Score: Score: Score: Rating Rating: Rating: Score Score: Score: Rating: Rating: Score: Score: Rating Rating: Rating: Score Score: Score: Northside WPC_NS_0001 Northside Interceptor Lift Station Screening Improvements and Upgrades Wastewater Facility Water Pollution Control PLANNING CRITERIA SECTION Replacement/Rehabilitation PROJECT DESCRIPTION SECTION Description Insert Project Description (3-4 sentences) Raw wastewater flows through bar screens before discharging to the wetwell at the Interceptor Lift Station. Trash and rags frequently pass through the screens and clog the lift station pumps. The pumps currently operate on constant speed motors. This project will replace the bar screens with mechanically cleaned fine screens and add variable frequency drives to improve the operating efficiency of the pumps. Cleaning the screens is also a dirty job and TMUA feels like it would be beneficial to eliminate the job for the employees. Dependent Projects Insert any projects that are dependent on or support this project and associated assumptions. InvestmentDriver Insert Investment Driver justification assumptions (Text must justify the driver). Trash and rags passing through the screens cause clogs in downstream pumps. Impact of deferral: Costly repairs and overflows. Reduce handling of screenings at Northside Reference List any Technical Documents or reports where information came from. Comprehensive Study Reg.andEnv.Compliance Insert Regulatory and Environmental Compliance assumptions here (text must justify rating/score). Potential overflows into a golf course. Minor potential for consent order in the long term. Reg. and Env. Compliance Definition Scoring Results Regulatory Impact - WPC Environmental Impact Safety Insert Safety assumptions here (text must justify rating/score). Staff hurt during cleaning of basket. Project would mitigate the manual process of cleaning. Safety Definition Scoring Results Employee Safety and Health Public Safety and Health ServiceLevel Insert Service Level assumptions here (text must justify rating/score). Reputation and Customer Perception Customer needs Overflows could occur. Historically none. Service Level Definition Scoring Results Operational Efficiency and Impact on Rate Control Impact on critical customers / facilities Model Home Logo 11
- 12. PROJECT BUSINESS CASE IS EVALUATED USING FINANCIAL TEMPLATE TO CALCULATE RISK WEIGHTED NPV • Capital Cost of Project • O&M Costs of Project • Failure • Probability of Failure • Consequence of Failure • Revenue Impact of Project All of the above costs and revenues drive Project NPV. Process Incorporates NPV and includes Risk Analysis Business Case Development 0.000 0.005 0.010 0.015 0.020 0.025 0.030 0.035 0.040 -25 -20 -15 -10 -5 0 5 10 15 20 25 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% $500 $550 $600 $650 $700 $750 $800 $850 $900 $950 Probability 0.000 0.005 0.010 0.015 0.020 0.025 0.030 0.035 0.040 -25 -20 -15 -10 -5 0 5 10 15 20 25 0.000 0.005 0.010 0.015 0.020 0.025 0.030 0.035 0.040 -25 -20 -15 -10 -5 0 5 10 15 20 25 Probability DistributionInputs DiscountedCash FlowModel Probability DistributionOutput (Incorporates Risk/Uncertainty)Financial Template 12
- 13. 0.0000 0.0001 0.0002 0.0003 0.0004 0.0005 0.0006 0.0007 0.0008 0.0009 0.0010 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 Probability NPV of Cost (Thousands $) NPV of Cost Water Distribution - Sheridan No. 2 Tank Repaint/Rehab.NPV of Cost - Water Tank Rehab/Repaint Failure Consequence Planned Install Distribution 40-yr NPV Probability Distribution Example Y-axis shows relative probability X-axis shows range of NPV results Business Case Development 13
- 14. • Project Value based on the Avoided Case • Process Quantifies the Cost/Risk of Project Delay EXAMPLE PROJECT FINANCIAL ANALYSIS 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% $200 $300 $400 $500 $600 $700 $800 Probability NPV of Cost [$000] Project Scheduling Impact Avoided Case Planned Install 2 Year Delay Value of Project Cost of Delay Risk analysis is incorporated in NPV results through Monte Carlo Simulation 14
- 15. FINANCIAL ANALYSIS CONSISTENTLY EVALUATES PROJECTS BASED ON PROJECT NPV • Consistent project proforma used for economic and risk analysis • Both avoided costs and cash savings /revenue incorporated • Financial Efficiency or ‘Bang for the Buck’ = Expected Outcome / Capital Cost Expected Outcome NPV Capital Cost Nominal$ $000 $000 1 Project G -36,710 1,419 2014 2 Project Q -19,686 2,361 2014 3 Project X -10,912 6,401 2015 4 Project H -5,636 26,480 2019 5 Project B -4,041 5,875 2016 6 Project W -3,981 256 2014 7 Project E -3,731 8,778 2017 8 Project K -3,359 2,199 2019 9 Project T -2,392 1,794 2014 10 Project D -1,201 2,846 2017 11 Project I -815 13,355 2015 12 Project M -550 5,586 2015 Project IDCount Install Year Business Case Development 15
- 16. 6.7 6.7 5.9 5.8 5.7 4.5 4.1 3.9 3.8 3.8 3.2 3.2 2.7 2.7 2.2 2.1 1.9 1.8 1.6 1.5 1.5 1.3 0.9 0.6 0.6 0 1 2 3 4 5 6 7 ProjectA ProjectB ProjectC ProjectD ProjectE ProjectF ProjectG ProjectH ProjectI ProjectJ ProjectK ProjectL ProjectM ProjectN ProjectO ProjectP ProjectQ ProjectR ProjectS ProjectT ProjectU ProjectV ProjectW ProjectX ProjectY Score Project ID Customer Service Safety Reg. & Env. Financial Efficiency PLANNING CRITERIA ARE USED WITH THE FINANCIAL RESULTS TO ARRIVE AT A BALANCED SCORE FOR EACH PROJECT These Planning Criteria Results are used to validate and ‘fine tune’ the CIP schedule decisions. Business Case Development 16
- 17. PROJECTS SCHEDULED TO INCLUDE BUDGET CONSTRAINTS Annual Capital Costs NO BUDGET constraint Installation years determined through Prioritization Process Annual Capital Costs WITH BUDGET constraint Lower ranking projects moved back in schedule to meet budget constraints Optimization Model 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 2012 2013 2014 2015 2016 Nominal$Millions Transmission Substation Powerhouses Dams& Convyance Asset 1 Asset 2 Asset 3 Asset 4 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 2012 2013 2014 2015 2016 Nominal$Millions Transmission Substation Powerhouses Dams& Convyance AnnualBudget Asset 1 Asset 2 Asset 3 Asset 4 17 Project Scheduling
- 18. OPTIMIZATION MODEL Project Scheduling 18 Genetic Algorithm Budget Constraint Schedule Constraints Non-Financial Constraints Project Economics Optimized Schedule Project Portfolio NPV Benefit Maximized &
- 19. PORTFOLIO OPTIMIZATION RESULTS • $48 million delayed out of 5 Year CIP • $8 Million reduction in Total Risk Weighted NPV of Cost (40 year) with Optimized CIP w/o changing budget level Project Scheduling 19
- 21. RECAP: PROCESS DELIVERS THREE CRITICAL PLANNING RESULTS FOR THE BUDGET PROCESS 1. Project Rankings Based on Financial Efficiency NPV benefit and ‘Bang for the Buck’ metric quantified 2. Project Rankings Based on Planning Criteria Weighted Scoring Approach 3. Optimized Implementation Schedule that Incorporates Budget Constraints Dovetails with Utility Financial Plan for Rate Increases and Financing Needs 21
- 22. VALUE OF PRIORITIZATION AND OPTIMIZATION PROCESS • Objectively Incorporates Risk Tolerance and Budget Constraints • Defendable Approach • Visual and quantified risk of project delays • Condition of Asset incorporate • Understanding and quantification of risk • Documentation of all project assumptions • Quick sensitivity analysis • New budget constraints • Easy integration of new projects added to CIP • Quick re-prioritization when assumptions change • Communication Between Business Units and Functions • Consistency Strategic and Functional Value Align to Defend Your Capital Program Strategic Value Functional Value 22
- 23. Process helps management balance tradeoffs between budget constraints and risk. SUMMARY - BALANCING TRADEOFFS In summary, this prioritization process and model assists utilities with managing the important balance of the following management and budget tradeoffs: • Performance, Cost, and Risk • Budget constraints • Capex vs. Opex tradeoffs • Risk: Reliability and Outages, Safety, Financial • Identifies greatest Value Creation projects in portfolio 23
- 24. • Jason De Stigter, P.E. | Manager • (913)-458-3433| DeStigterJD@BV.com • Matt Bond, PE, WEF Fellow| Associate VP, B&V Water • (469)-513-3216|BondDM@BV.com Questions?
Editor's Notes
- #8: $48 Million delayed out of an original $300 million 5 year CIP, 16% Decrease!