Introduction to Asset Management


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Introduction to Asset Management

  1. 1. Introduction 1.1 Intended Audience This guide to asset management is intended to provide some tools and theory to Technical Assistance Providers (TAP) for assisting very small to medium sized water or wastewater utilities. Larger systems have considerably greater resources in terms of personnel, expertise, and funding and should be expected to handle a higher level of asset management than this guidebook will discuss. This guide uses an Asset Inventory workbook developed by the Rural Community Assistance Corporation (RCAC) that visually presents information so decision makers can see the age of equipment, what allocation on a monthly and annual basis would be needed to replace items selected and a “Maintenance Scheduler” that alerts the utility to needed operational checks and scheduled maintenance. 1.2 What is Asset Management? All water and wastewater systems are made up of assets which are the physical components of the system and can include: pipe, valves, tanks, pumps, wells, hydrants, treatment facilities, and any other components in the system. The assets that make up a water or wastewater system lose value over time as the system ages. Along with this deterioration, it usually is more difficult to deliver the type of service that the utility’s customers want; low water pressure or outages due to repairs or broken equipment are examples. Costs of operation and maintenance will increase as the assets age and the utility may be faced with large rate increases. Asset Management (AM) is a comprehensive program that incorporates maintenance, utilization of well trained personnel, protection of system components, and financial planning to provide a level of service to your customers at the lowest appropriate cost. The intent of AM is to ensure the long-term sustainability of the water or wastewater utility. By helping management develop a long-term funding strategy, the utility can ensure its ability to deliver the required level of service and maintain capability to obtain bonds or loans for capital replacement or system expansion. As we proceed throughout this guidebook you will quickly become aware of the critical link between the costs to operate the system and the revenues generated from rates. As assets age, the operating costs invariably go up as well as the replacement cost. These costs must be factored into utility budgets and adequate reserve funds established. Failure to do this is probably the number 1
  2. 2. one shortfall in smaller utility financial planning. The Asset Inventory calculator will provide the necessary reserve computation. 1.3 Benefits of Asset Management (AM) The benefits of AM include, but are not limited to: • Better Operational Decisions • Improved Emergency Response • Greater Ability to Plan and Pay for Future Repairs and Replacements • Increased knowledge of the location of the assets • Increased knowledge of what assets are critical to the utility and which ones aren’t • More efficient operation • Rates based on sound operational information • Increased acceptance of rates • Capital improvement projects that meet the true needs of the system 1.4 Core Components of AM There are five core components in this AM outline; • Asset Inventory and Location Map • Adequate Reserves • Scheduled/ Preventative Maintenance • Emergency Planning • Long-term Funding Strategy A. Asset Inventory: The most important step is the asset inventory which is actually data collection and usually a very tedious effort. You must identify major system components that will require a “substantial” replacement cost. As example, replacing several 6” gate valves would generally require planning to ensure adequate personnel, equipment and funding was available but a small ¾” valve would typically be replaced out of normal operating costs as routine maintenance. You should list the number of components such as linear feet of pipe etc, when it was installed, what the life expectancy may be and what it would cost to replace the item today. The importance of this effort relates directly to establishing necessary reserve funds. If an item has an estimated 3 years useful life remaining, then you have 3 years to save the cost to replace it. If you wait until you have only one year and start saving, the cost needed from the utility’s rates increases. In the case where there is no reserve and the item fails, often there is an immediate large assessment necessary. Large rate increases are always unpopular with customers…..but sometimes necessary! 2
  3. 3. The best source to identify what assets a utility has is usually the construction documents or payment vouchers which contain what the contractor was paid to install. However, information may be extracted from engineering reports, “as built” maps, operating manuals and most often in small systems by talking to previous board/council members, operators or even contractors if available. Life Expectancy: Once the number of items and year installed is identified, the tricky issue of how long it will last needs to be decided. In reality, this is a variable and often arbitrary figure. Let’s take a look at pipe. The quality of the pipe, the quality of the installation, the type of soil around the pipe, the characteristics of the water and the speed of the water are all factors. If the pipe was initially thin-walled cheap steel installed in corrosive soil with acidic water, is now extensively leaking and the current water use now produces water-hammer, you obviously have a low “life cycle”….meaning time between replacements. Today, the standards for something like AWWA C-900 PVC pipe, when properly installed (generally bedded in sand or gravel) may have a 100 year or even more life cycle. Often the sealing gaskets begin to fail long before the pipe. So, how do you do it? Generally the best way is to look at the operational history of the component. You should ask this question when you to talk to the previously mentioned people to identify “what’s in the ground”. As example, a common life cycle estimation for submersible turbine well pumps is 12-15 years, assuming they were sized properly, aren’t cycling excessively (turning off and on which generates heat and torque) and have proper electrical voltage. If there’s a history of replacing the pump every 6-8 years, that’s the life cycle without making other improvements. If the pump has been running for 20 years, one could assume that it is likely to fail anytime…….and the question then is, “What’s the plan for that?” This kind of thinking is the key to financial planning. Smaller items such as booster pumps will often have a history of being replaced every 6-10 years or so. Operators (assuming there IS a valve exercise program) should be able to identify valves and hydrants that are not working properly. You don’t need a lot of experience to just to walk around the utility and identify worn out buildings, rusting equipment, leaky roofs and beat-up trucks. Take a look at the water audit; the difference between water pumped and water sold on systems with meters. Using 15% or less as a benchmark, you can compare the year installed to the water loss and use some common sense. In one case, a community had a 62% water loss with steel pipe that was installed over 50 years ago. That’s a pretty good picture of piping that has little life remaining. Obverse to this, if the pipe is 50 years old but has little water loss and a good history of few repairs you might guess that it has another 20-30 years remaining. Herein lies the danger of overestimating the life cycle; you must NOT do this! Remember, these evaluations should be done annually. 3
  4. 4. Repair vs. Replace: When identifying future costs, a decision to repair or replace components is necessary. For instance, smaller booster pumps in a water system and small blowers in wastewater systems are often run until they fail and then replaced, however, a large electric motor driving a shaft driven submersible pump may be removed and re-furbished every 10 years or so. The component operating manual or a vendor may provide information to help make these decisions. In all cases, the cost to repair or replace should be in future planning. Appendix A and B provide a checklist of common components found in water and wastewater systems respectively to assist in the asset inventory. There may very well be other components not listed that can be inserted but this will be a good starting point. The information from the asset inventory will be entered into the Asset Inventory Calculator to provide information to the decision makers and to determine the revenues needed to establish equipment replacement reserve funds. B. Adequate Reserve Funds: Typically, the most pressing issue in smaller utilities is the lack of adequate reserve funds. Most small utilities do not develop “out-year” budgets, meaning they just predict revenues and expenditures for the next year. Identified reserves should be established either as line items in the utility budget or contained in a separate schedule. Often the smaller utilities have a “Beginning Balance” or “Cash-on-hand“ account line, but they cannot tell you how much of those funds are effectively not available because they are allocated, say, to replace the well pump in two years. The below two reserve funds should be established to ensure assets are replaced as necessary. Other reserve funds not discussed here could include Operating Reserves (Used to compensate for cash flow reductions), New Projects Reserves (Usually called Capital Improvements) and sometimes, Debt Service Reserves required for some types of loans. Equipment Replacement Reserves: This reserve is often called a “Depreciation Reserve”. As equipment wears out it loses value and will need to be replaced sometime in the future. By saving for future costs, you can readily see that rates can be minimized as long as the money is actually saved for replacement costs. The Asset Inventory Calculator will calculate the minimum amount of monthly and annual allocation to reserve funds to pay for the items selected. There is an explanation of this in the instructions in Appendix C. A very interesting subject is the length of time that smaller utilities are willing to “save ahead”. You will generally find that the maximum threshold will probably be only around 5 years. Obviously, if you saved money to replace something in 15 years and the funds were in an interest bearing account, the overall monthly cost to customers would be very low for that item vs. accruing the replacement cost in just five years. Customers usually don’t trust the board/council to save the money and often you will hear the response that “I 4
  5. 5. won’t be here then!” It is true that smaller management organizations change board members frequently and the intent of the reserve funds is lost with new members. C. Scheduled Maintenance: Scheduled maintenance is often called “preventive maintenance”. It is a proactive rather than reactive program meaning that you have the ability of scheduling routine tasks when it is convenient for you and servicing equipment before it breaks. An example would be a valve exercise program done on a mild day in June vs. a cold one in February. A valve exercise program identifies where the valves are, if the valve risers are accessible and not filled with debris, if you can get the valve key on the valve itself, the position of the valve (fully open or closed) and if the valve operates. This should be done at least once a year and should include all valves, even the smaller ones on pump house manifolds. You should never over-torque valves to the position needed as they can “stick”. On larger valves, such as found on water mains you should actually back off ¼ turn from the position needed. The valve will not leak and the ¼ turn allows an indication of which position the valve is in during the next exercise. Likewise, you should exercise all hydrants and blow-offs and inspect reservoir roofs and interiors at least annually in addition to your routine reservoir inspections. If available, the operating manual for a piece of equipment will provide suggested maintenance such as lubrication. Better known vendors often provide equipment data readily available on the internet, and speaking to a local vendor will allow you to determine what maintenance may prolong the life of the equipment. Don’t overlook painting, roof repairs and ensuring that any equipment enclosures aren’t leaking or deteriorating. There is an example of a small system “maintenance scheduler” at Appendix D. The program allows you to schedule daily, weekly and monthly tasks. It will automatically identify the current day and provide you with the next 6 days tasks. The instructions are on the scheduler itself and are self-explanatory. Any red backgrounds means data is missing or has been improperly entered. Emergency Planning: As you will see, the Asset Inventory Calculator will “ask” you to identify the most critical components of a particular utility. This is designed to get to the question “What are we going to do if this component fails tomorrow?” Generally, other than having an outside funding source available in an emergency or an emergency source of water, this means that an emergency reserve should be established in the utility budget to address failure of critical components. The emergency reserve should be able to fund “what is feared the most!” In small utilities this could be the failure of the primary well-pump for water or failure of a clarifier drive or lift-station pumps for a sewer utility. 5
  6. 6. The instructions at Appendix C will also describe how to include the cost of establishing a cash reserve other than for equipment replacement. D. Long Term Funding Strategy: Large cost items are not typically funded by cash reserves because, as previously mentioned, most small systems are very resistant to saving ahead more than 5 years and then the cost to fund a major system upgrade with cash would drive rates through the ceiling. Each system will have a “threshold of financial pain” where increasing rates to meet future system improvements becomes untenable. These large cost items should then be planned to have long term financing as the revenue source. However, care must be taken not to assume that this financing will always be available. That said, there is still always the need for cash outlay for larger capital projects. Often the initial engineering or environmental reports will need to be paid from reserves and these should be included in the asset management calculator similar to establishing the emergency reserve as described above. 1.5 The Asset Inventory (AI) Calculator The AI calculator provides the minimum allocation to reserves from customers needed for selected assets on an average monthly basis as well as the annual amount. If the utility bills bi-monthly or quarterly you would need to multiply the amount as appropriate. It also calculates the reimbursement component of the “Connection Fee” which repays the utility for its previous investments (which is the value of components and often called Equity). Appendix E describes the use of the calculator. You should review your state rules to see which methods are allowed in calculating the reimbursement to the utility for previous equity accrued. While the establishment of connection fees, which are called many names, is not the primary intent of this manual, because they are based on equity (the calculated current value of assets) which is derived from the condition and usually the depreciated replacement cost of your assets, this calculation has been included in the AI calculator. You will find that connection fees are often just made up or copied from a nearby utility and in actuality have no legal standing. Properly using the AI calculator would provide data based on the water or wastewater system itself and is likely to be of more legal validity. In other words someone who disagrees, such as developers, would need to demonstrate why they think your figure is “wrong”. There is a large amount of arbitrary subjective data in analyzing assets but using this calculator would explain how you arrived at “the amount”. REMEMBER, this is for reimbursement for equity and any services rendered such as installation of meters etc. would be an additional expense. 6
  7. 7. Appendix A: Equipment Replacement - Water Size, Type of Material Number, Year Useful Life Cost to Item Description, Yardage etc. Installed Remaining Replace (years) Today AirVac relief valves Alarms Billing/software Blow-offs Chlorinators Computers Electrical Panel Electrical upgrades Emergency equipment Fencing Filters / Filter Media Generators Hydrants Hydro/Bladder tanks Leak-Detection Lighting Major tools Meters New Projects Office Equipment Pipe Pipe Pipe PRV Pumps Pumps Reservoir Safety Equipment Security Signs Spare parts Valves Vehicles Water Right Wellhouse Wellpump 7
  8. 8. Appendix B: Equipment Replacement - Wastewater Size, Type of Material Number, Year Useful Life Cost to Item Description, Yardage Installed Remaining Replace (years) Today Air/Vac release Valve Alarms Billing/software programs Blower Blow-offs Chlorinators Communication equip. Computers Electric motors Electrical Panel Electrical upgrades Emergency equipment Fencing Flow Meter Generator Lighting Major tools Membranes New Projects Office Equipment/Furniture Pipe Safety Equipment Signs Spare parts Submersible pumps UV Bulbs Valves Vehicles 8
  9. 9. Appendix C: Instructions for the Asset Inventory (AI) Calculator Data entry is in the white cells and the light yellow cells are computed and protected. You may enter the utility name. There are two “conditional formatting” background colors to alert the user for possible mistakes. If the background is red, then there is either missing required data or the entry is in error. If the background is violet, then that means “check for possible missing data or accuracy”, but the entry is not an error otherwise. The bright yellow column titles all contain drop down comment boxes with the instructions for entries in that column. In order to use the calculator you will find the data collection is the hardest part. It is suggested to either keep similar categories together such as all piping, pumps etc. or list items in order of shortest life remaining, however you may enter assets in any order you desire. The calculator is unique in that it calculates a minimum, stable reserve component to be added annually to your budget. Most “depreciation” calculators divide an item’s cost by the years to be replaced and then add them all together. This method is inaccurate at best and actually “wrong” sometimes. The cost derived using “straight-line depreciation” is often very much more than necessary. The calculator will show you the minimum needed to meet your goals. As an example, the annual contribution to fund an item costing $14,000 in ten years and another item costing $6,000 in 3 years is $2,000 per year for ten years. Straight-line depreciation would produce a result of $3,400 per year: a considerable difference. To select items to be included in the reserve calculation you enter the information on that component from left to right on the spreadsheet, and enter an “x” in column P and the interest from your savings account in column O. Be sure to include the inflation rate in column L. The future cost for any particular item is calculated for you in column R. The calculator looks at previous reserve allocations, when items are replaced and future costs to process the minimum necessary savings. NOTE: It is possible that in order to replace an expensive item in a short amount of time that you will not see an increase in the needed amount to the reserve fund when you enter other items! The reason is that the amount necessary to say, replace the first item, may be large enough to cover the costs of all future items after the first item is replaced. As previously mentioned, you will probably see customer resistance to saving ahead for more than around 5 years, even though it’s cheaper to save for longer periods of time. If you wish to simply establish a cash reserve for other than equipment replacement you need an extra “step”. For instance, if you wanted to include establishing a $10,000 emergency reserve in the calculations you would enter “Emergency Reserve” as an asset, enter the current year as the install date, the 9
  10. 10. number of years over which you wish to accrue the funds under “Estimated Effective Life”, $10,000 in either “Original Cost” or “Replacement Cost” and enter $10,000 in column N under “Debt and Grants”, and then the entries as described above. This ensures the amount is not computed in the connection fee. If you have cash on-hand you’d like to apply to reserve funds, enter the information as described above and print a copy of the original AI calculator. Then subtract the money on-hand from items listed in the “Future Cost” column, beginning with the items needed first. If you have enough funds to pay off the “Future Cost” of items, remove the “x” in column P until you do not have enough to replace the future cost of the next item. If there is a substantial amount of money remaining to be applied you may reduce the entry under either “Original Cost” or “Replacement Cost” (which one you are using) by that amount otherwise just stop. The worst case would then be you would have more money than mathematically required as assets come due for replacement. Remember, this is done annually and things will change annually as well. The spreadsheet will then show the needed monthly and annual contribution to reserves factoring in the cash on hand. You will need the original list to fully explain this. Remember, these funds are allocated and this spreadsheet “proves it!” This worksheet is code protected and may not be accessed by the user, other than formatting cells, columns and rows. 10
  11. 11. Appendix D: Maintenance Scheduler Most small systems are not so complicated that they need an expensive computerized maintenance management program, but still, unfortunately operators leave, or die, and all the maintenance knowledge is missing for the “new guy”. Also, it’s easy to forget to do some things that only happen once or twice a year. By taking a few minutes to enter maintenance tasks into the program you will be reminded of what needs to be done today, as well as the next six days whenever you open it. This program is also very good for new employees that haven’t memorized the routine as yet. It’s also handy for when you go on vacation and someone else stands in for you. They will be able to see what they are to do. There’s an interesting feature that allows someone to enter other than today’s date and it will show you, again, what’s supposed to be done on that day as well as the next 6 days. The instructions are on each page of the spreadsheet. You will enter the “daily” tasks, the tasks that are done on some kind of weekly schedule, and then the tasks that will be done on specified days during every month or any identified month. The example below shows what you would see on a given date and reflects the tasks typically seen in a small water system, 11
  12. 12. 12
  13. 13. Appendix E: Connection Fees Connection Fees are known by many names: capacity charges, system development charges, general facility charges, reimbursement fee, plant investment fees, but most commonly, connection fees. Connection fees are usually used to pay back the utility for its previous investments in infrastructure. Some of the other names are often used to establish a fund for future capital improvements. There are several methods to arrive at the figure. The term Connection Fee will be used in this description and implied as a reimbursement. Connection Fees normally have two components: the reimbursement portion plus a component to pay for actual services rendered. Utilities generally provide new connection inspections of some sort and often install meters and mainline taps with various appurtenances attached. Small utilities typically greatly undercharge for these services. Equity Method ERU: The annual averaged water use of a residential customer, usually expressed as monthly; ex: 7,500 gallons per month. In the winter the monthly use is less and in the summer, more. The formula for determining the reimbursement charge is relatively simple to write: The overall value of the utility is first determined. This amount is reduced by any debt and any grants, yielding the “equity” (remaining value of investment from users). The overall equity is then divided by the number of ERUs (Equivalent Residential Use: in this case the annual water use of an average residential customer) allowed at maximum capacity. The result is the reimbursement per ERU. The total ERUs authorized is determined by the governing agency with jurisdiction and may be found in the Water System Plan, Facility Plan or often in the operating permit. System value may be determined by using original cost plus an inflation factor (which appreciates its present worth) or replacement costs at today’s pricing. You should check to see if state statutes limit or prohibit either procedure! Herein lays the difficulty in establishing the fees. Each system component group, such as 10” DI pipe, 6” PVC pipe, valves, hydrants, meters, wellhouse, well pump, reservoir, rolling stock, PRVs etc. should be valued individually and adjusted for depreciation (devaluation due to less remaining life). This entails a very detailed and lengthy effort and quite a few arbitrary decisions. Proper installation, for example, can extend the life cycle, where poor installation can reduce it. Cheap components will also reduce life (increase depreciation). Ex: Today’s cost of 5000 feet of 6” PVC @ $32 foot = $160K 50 year life assigned, its now 40 years = 80% depreciation or 20% life remaining = $32K value (.20 x $160K) The resulting value of each group is the “total” value of the utility and the difference between the total value and the replacement costs is the “total” 13
  14. 14. depreciation. You should never just arbitrarily assign an overall depreciation value to the whole system because you can’t defend this method! Final Calculation: System calculated value is $1.8M. With an outstanding debt of $300K, equity is $1.5M. If the capacity was 525 ERUs, the reimbursement component would be $2,857 per ERU. New non-residential customers could estimate their annual use in ERUs and pay fees accordingly with an adjustment for actual use ± once records are established. The methodology and charges should be legally reviewed by counsel knowledgeable in the procedure prior to implementation. Connection fees should be recalculated every 3-5 years. 14