EET&D: Let’s begin with a bit of background. The Edison Foundation estimates that $1.5 trillion of investment is needed in US electric utility transmission and distribution infrastructure between now and 2030 to meet growing demand, manage risk, and maintain operations. Similar needs exist in the natural gas and water utility industries. With the ongoing financial and credit market crisis, the need for greatly improved capital investment management capabilities is significant, so how can utilities best prepare themselves for such an enormous task?

Yarka: That’s correct, Mike, the task that we face as an industry regarding asset modernization is indeed a daunting one. Substantially all utilities – not just here in North America but the world over – will be increasingly challenged on several levels in this current market. The need to manage capital and O&M spending, align spending with multiple drivers and constraints, provide clarity and transparency regarding justification for individual investments, and demonstrate that the specific projects implemented actually deliver on their forecasted outcomes has never been more apparent or more urgently in need of attention. I think Greg would probably agree that this is a global challenge and one that all utilities must eventually overcome regardless of utility size, type or geographical location.

Bradley: Yes, there’s absolutely no question that this is a universal issue. Therefore, a comprehensive adjustment to a utility’s asset investment planning and management process and the introduction of a next generation decision-support capability can be essential in helping utilities address those challenges.

EET&D: Conceptually, that sounds like a good idea, but perhaps you could elaborate some on exactly what you mean by that?

Yarka: Sure, let’s begin by looking at traditional utility practices in this area of capital expenditures. Utilities are always looking for additional decision support methods, but in the meantime they continue to employ their traditional approach of identifying and tracking large capital projects along with capital program and O&M program blankets, frequently aggregating capital and O&M expenditures without necessarily capturing bottoms-up work or project-level detail. A frequent process improvement is to enhance an organization’s bottoms-up definition of most if not all identified and planned work.

Refinements to this process and enabling technology can also be achieved through the incorporation of additional steps and components of their end-to-end investment management process. Some organizations have linked basic investment management process steps and enabling decision support technology with associated processes and systems for risk management definition, asset strategy development, budgeting, and post investment review. Typically though, a limited subset of planning and investment analysis capabilities has been implemented when what is really needed is a comprehensive T&D asset investment planning and management process.

EET&D: What would you say are the key elements of such a process?

Yarka: There are really two things that a utility must be prepared to commit to for this process to work as intended. First, they must commit to moving toward an increasingly standardized combination of business process, business collaboration, technology, systems integration and organizational change. The latter element – organizational change – can be very difficult and usually takes the most time to achieve, but that is being somewhat accelerated by the aging workforce issues that are actually helping in some ways to break down the barriers to organizational change.

Second, they must be willing to embrace and encourage a more automated process that enables fact-based, data-driven, decision-making to optimize capital and expense spending.

EET&D: I’d like to pursue this issue of organizational change before we move on because I think it represents a potentially huge impediment to putting the future of the electric power industry on the right track. What do you feel are the most important elements of getting past the organizational logjam so that we can move ahead with the repurposing and redevelopment of the grid?

Yarka: There are a number of issues that need to be addressed head on if we’re going to move things forward. Perhaps most important is the need for clarity and transparency. Many utilities have gotten comfortable with the culture of horse-trading – and a little horse-trading now and then can be beneficial from a company culture and business perspective – when it comes to budgeting, in particular. But to be successful in getting control of fiscal policy and maintaining control, they need to adopt a much broader mindset that addresses the interests of all stakeholders. This means moving away from the notion that there is no need to provide detailed project definition for projects having less than what is usually a rather “unscientifically” calculated minimum threshold value.

How the organization defines non-discretionary funding, abandoning the widespread use of blanket budgets, and the idea that projects can be sufficiently scoped and budgeted with only minimal information and without a high level of financial awareness across the entire operating organization are all critical considerations. All too often, there is no official consensus on these matters; they just become S.O.P.

EET&D: Assuming that these organizational impediments can be overcome, what are some of the benefits to adopting this plan for utilities willing to follow it through to its conclusion?

Yarka: The benefits are several and quite tangible. Among other things, they will see both immediate and long-term improvements and operational efficiencies once the plan is adopted and put into motion. Specifically, project identification and the post-investment review process will be streamlined for better project and portfolio management. This immediately leads to improved spending management and trade-off analysis. Senior management attains clarity, transparency, and decision-making involvement in the planning and budgeting process.

And, because the process ultimately requires input from field operations, system operations, supply chain, finance, and others to those who actually plan and identify projects and programs, delivery of and accountability for forecast impacts and outcomes are better defined, and hence, more achievable. A lot of this might seem like common sense, but you have to realize that traditional ways of doing things are difficult to change in almost any business, and utilities are certainly no exception. This process simply gives them a roadmap that is fairly easy to understand and follow once the initial barriers are broken down.

EET&D: What might a utility expect to see in the longer view, once these changes are well under way?

Yarka: The first thing that comes to mind is being able to actually accomplish their longer-term goals and objectives in the areas of resource management, contractor management, material management, and portfolio management. Poor planning and visualization have historically derailed these long-term aspirations up front, followed by erratic or non-existent execution of the short-term objectives that were needed to support the longer view. As a result, the longer-term objectives only rarely were realized.

EET&D: One of the key dimensions of the Smart Grid Initiative that is rapidly gathering momentum all across the industry is the notion that there is a true paradigm shift under way as regards the way that utilities plan and carry out their budgeting process. That shift appears to be underscored by movement toward a much more centralized, top-down approach, as contrasted with the bottom-up, piecemeal approach that has traditionally characterized the utility budgeting process. Is the process you have outlined here compatible with that trend?

Yarka: This process most definitely embraces a budgeting process that is more centralized and standardized than what we have seen in the past. Reduced planning and tracking time, improved estimating accuracy and the ability to create a level playing field and consistent investment guidelines for all involved in the business planning process will help tremendously to further that trend. Moreover, the ability to keep project and portfolio information current and implement a consistent risk framework across this process will directly help utility managers elevate the organization’s overall project and program understanding and collaboration.

EET&D: Where and how does technology fit into all of this – or does it?

Yarka: As asset investment planning and management decision support tools evolve, a variety of additional functional capabilities are still needed. Apart from providing a tool to compile, manage, and prioritize investments, tools of today – and in the future – are being developed by several different industry groups including large ERP software providers. These companies, as well as some engineering-oriented firms with experience in T&D asset strategy decision support tools, are extending their platforms to support various aspects of investment management. And, some relatively new firms are developing multi-user decision support tools that support several aspects of the end-to-end investment management process.

EET&D: What do you feel are some of the capabilities that utilities want and need for risk management, asset strategy development, budgeting and post investment review?

Yarka: On an enterprise level, integration with top ERP and EAM platforms to access actual capital construction expenditure data, maintenance cost and equipment history data, and asset register data is essential. But there are also other important factors that must be taken into account on a more detailed level. Perhaps Greg would like to elaborate further on the core elements that we have both seen in our respective geographical markets.

Bradley: Yes, I think we are both seeing and hearing many of the same needs and requests by utilities, regardless of which continent – or continents – their service territories cover. Some of the most important ones involve the ability to develop, analyze, save and adjust “what if” investment scenarios; the ability to assemble, compare, analyze, prioritize and optimize investments across the enterprise; the ability to support a multi-user collaborative environment across multiple lines of utility business in all facets of work identification, risk assessment, comparison, analysis, prioritization, and optimization; the ability to forecast and manage a five-year capital and O&M plan; and finally, the ability to model asset class-specific, end-of-life/replacement plans based on failure models.

EET&D: While it certainly makes sense that there would be some similarities, should we expect to see some or all of these trends materializing in North America at some point as well?

Bradley: There are many other capabilities that utilities seek in next generation asset investment planning and management tools. Across Europe, we are observing an increased level of scrutiny from regulators and infrastructure-owner consortia acting as asset owners. Both require better visibility of long-term investment plans, which justify both the volume of capital work proposed as well as the cost for executing it. Work volumes for asset replacement need to be justified in terms of their linkage to network performance and reduced risk, whilst the budget associated with the works need to demonstrate capital efficiency.

But let me be clear that I’m referring here primarily to regulators in the UK and the increasing trend toward consolidation of asset ownership by large players such as Suez, GDF, Veolia as well as infrastructure funds like Macquarie. These companies – as well as others – are investing in “network businesses” to secure a stable level of return on capital, in effect guaranteed by the regulatory or government-set tariffs. We’ve already seen some of this trend in North America as well. The recent investments by Warren Buffet’s Mid-American Energy in PacifiCorp – and more recently BG&E/Constellation Energy – as well as Macquarie’s investment in Duquesne Light & Power are some examples of this, I think.

Yarka: I would also add that in some cases, these plans are linked transparently to customers to test their “willingness to pay” for the level of service offered by the utility for a given level of cost. This growing trend requires utilities to be able to articulate these linkages in ways, which they previously were unable to and also requires extensive integration of systems, data and business processes.

EET&D: A lot of these measures sound rather long-term in nature. What – if anything – is keeping utilities from realizing the value sooner rather than later?

Bradley: One of the key constraints that European utilities encounter is the availability of data to support these systems and modeling requirements. Often, there are gaps in the asset register or in the attribute data associated with the assets. Similarly, the data can often be stored in multiple systems in multiple formats, which makes integration for investment planning complex and limits the ability to generate rolling, dynamic plans that can easily be reforecast or updated to meet emerging business priorities, overcome unexpected constraints, or provide an update to a regulatory review. Yet even with a strong commitment to the process and steady investments in information infrastructure, it will definitely take time to overcome these impediments. Meanwhile, there is clearly an opportunity to realize incremental benefits along the way – virtually from day one – with proper planning and execution.

EET&D: Is it fair to say that these constraints also apply here in North America, or are they different?

Yarka: Although there are certainly some regional differences due to the dissimilar regulatory environments between North America and other parts of the world, I think the data availability constraint is widely relevant. As Greg points out, it will indeed take time to overcome, but of course, the best way to shorten the path to seeing real progress and tangible results is to get started today.