Asset Management – what it is (and isn’t)

2013 WASHINGTON STATE PUBLIC TRANSPORTATION SYMPOSIUM

Darin Johnson, BIS Consulting

Introduction to BIS

Key Services¨ Decision-support for power

and water utilities, transit agencies.

¨ Health Indexing, risk assessment.

¨ Third-party business case.

Recent Clients¨ Washington State Ferries¨ Toronto Hydro¨ Duke Energy¨ Puget Sound Energy ¨ Tacoma Power¨ Seattle City Light

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“Asset management” is a broad topic…

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What is asset management really about?

There is a gap between engineering and finance

?Asset management

bridges this gap

Asset management (n): an approach to decision making that is…

Customer focused. Data driven.

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What makes for successful asset management?

What makes for a “successful” asset management utility?¨ Depends how you define success.¨ But, what makes it good is business case culture.

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What is a “business-case culture”?

¨ Spending must be justified in terms of customer costs and benefits.¨ Explicit, quantitative estimates – transparency.¨ “No exceptions” attitude from senior management.¨ Junkyard dogs.

CostsBenefits

“…total benefits of a project to whomsoever they accrue

exceed the costs of that project.”

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What factors create a good business-case culture?

3. Personnel

2. Staff

1. People

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A word about data and IT

Starting with data is a mistake - data matters only if it matters.

First define the questions you must answer and your approach, then ask what data you need.

If you start by collecting data and installing software, you are likely never to get there.

¨ Return on investment is low.¨ Buy-in is nearly impossible.¨ No early gains – can’t show tangible results.

There is a time to pursue good data collection, storage and access; analytical tools; and integration. That time is not at the beginning.

First example – managing aging infrastructure

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When should I replace aging assets?

Conventional Approach (technical)¨ Assess condition, consider calendar age¨ Replace when:

Condition is poor Age reaches expected life

Technical approach fails to consider risk quantitatively

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Survival Curve

0%

25%

50%

75%

100%

0 2 4 6 8 10Age

Pe

rce

nt

Su

rviv

ing

¨ Mean Life? MEAN LIFE

¨ Knee of curve?¨ N% failure rate?¨ Other?

¨ Median Life?

MEDIAN LIFE

Expected Useful Life

What, exactly, is expected useful life?

N% FAILURE RATE

KNEE OF CURVE

?

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Economic life

Condition, criticality, and risk assessment: a business case for aging assets

Least life cycle cost ¨ Optimize replacement or rehab timing¨ Balance risk of failure against benefits of delaying capital expenditures

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Calculating economic life, creating a long-range plan

Now all the pieces are in place…¨ Each asset is evaluated individually to determine remaining life.¨ Forms the basis for long-range spending projection.

Example applied by Pierce Transit – extended coach service.

0

50000

100000

150000

200000

250000

300000

0 5 10 15 20 25

Cost

Service Life

Service Life Optimization for Coaches

Maintenance plus risk Life-cycle cost Capital

40% reduction in capital15% reduction in life-cycle

Second example – WSF seismic upgrade

business case

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Background

¨ Washington State Ferries (WSF), largest ferry system in the US, ¨ Seven timber trestles constructed before modern seismic codes. ¨ Risk of damage or collapse. ¨ Current plan is replacement – $121 million budget item. ¨  What if we don’t? Could we reduce spending and improve return on

investment if we do something less than replace, or even leave some of the trestles as-is?

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TerminalGround Shaking Intensity (g)

Small Moderate Large

Orcas 0.09 0.19 0.36

Shaw 0.09 0.17 0.34

Lopez 0.09 0.18 0.34

F. Harbor 0.09 0.18 0.34

Anacortes 0.12 0.24 0.45

Mukilteo 0.15 0.28 0.51

Edmonds 0.15 0.29 0.52

Fauntleroy 0.15 0.29 0.52

Vashon 0.16 0.32 0.61

Southworth 0.17 0.32 0.61

Tahlequah 0.16 0.31 0.56

Pt. Defiance 0.16 0.31 0.56

Ground-shaking intensities

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Summary of damage in 72-year event, Vashon Island

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Quantifying seismic riskSummary of failure scenarios for Vashon Island

72-year event 224-year event 330-year eventDirect repair cost $8.2 million $10 million $10 millionRidership consequence

Days of trips lostWalk-ons 2 23 30Vehicles 23 23 30

Hours of delay 0.5 0.5 0.5Days affected by delay 225 315 720Total ridership cost $30 million $42 million $85 million

Total consequence cost $38 million $52 million $95 million

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$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

10 100 1000

Expected consequence cost versus return period

Quantifying seismic riskConsequence cost versus return period, Vashon

Calculating annual risk

330-year event: $870

224-year event: $1,000

72-year event: $7,200

Total annual seismic risk at Vashon Island trestle = $1.5 million

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Summary of alternatives analysis, Vashon Island

Conclusions, all trestles¨ Savings of $88 million NPV in cost of ownership.¨ Savings of $54 million in near-term capital spending.¨ Refurbishment preferred to replacement at three trestles.¨ No intervention is justified at four trestles.

$0 million

$10 million

$20 million

$30 million

$40 million

$50 million

No action Immediate replacement

Refurbishment

Cost of ownership, NPV

Minimum life-cycle cost

Final example - Prioritizing service in the face

of shrinking budgets

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Why do we want to spend money?¨ Must be based on costs/benefits from the customers’ perspective.¨ Defined in the same terms for every decision.

Common Drivers…

Benefits should be defined in terms of the things that matter to your stakeholders

Environment Safety FinancialLevel of Service

Big decisions are usually about trading dollars for service…

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Level of service, expressed in

customer served

How do we know if Benefit > Cost?

Here is the biggest challenge

Capital costs, expressed in

dollars

dollars

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Conceptually, counting benefits

Count up all the benefits to all the stakeholders.

¨ Riders directly affected.¨ Businesses affected.¨ Other drivers.¨ The community as a whole.

Cut (or add) service based on “bang for the buck.”

It can be difficult¨ Hard to identify stakeholders.¨ Hard to quantify benefits.

As decision-makers, we must do our best.

I’d pay $100 for this service.

We’d each pay $5

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Reality check

What’s the catch?¨ It’s almost impossible to know how

customers’ value service.¨ Surveys are noisy and unreliable.¨ Wide mix of stakeholders.

In the end, we’re usually stuck with a subjective estimate.Reality dollars

$ Reality!

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Is this really necessary?

Why not simply measure improvement in availability, for example? ¨ REASON 1: To justify spending – trading dollars for service.¨ REASON 2: To prioritize spending across a range of projects.

You will make spending decisions, implying a value for service.¨ Therefore, “no answer” is not an option.¨ Explicit → Consistent → Reliable.

YES …”dollarizing” is unavoidable.

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Here are the key points

Spending decisions should be based on whether benefits exceed costs.

Evaluate costs and benefits from the customers’ perspective.

Focus on estimating actual costs, risks, benefits, etc. Avoid “high, medium, low” or worst-case scenarios.

Don’t be afraid of uncertainty – quantify it. If more precision is needed, improve inputs.

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Thank you