This presentation explains a budget prioritization process and model that assists utilities with managing the important balance of asset/system performance, cost, and risk. Originally presentation at Texas Water 2015. Learn more at www.bv.com

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

7. $48 Million
7

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
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-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

20. OPTIMIZED IMPLEMENTATION SCHEDULE
Project
Scheduling
20

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?