As energy markets mature, and as national regulators become more demanding on the improvements that can be wrought from monopoly businesses, so the search for ‘best’ asset management practices is increasing. In Europe, this is being led by the UK and Scandinavian utilities, where separation of services such as metering and a strong approach to cost reduction has led companies to re-evaluate their operational structures.
Asset management best practices are being integrated into the operation of utilities throughout Europe in the more mature markets, and world-wide in areas such as Australia and some North American utilities. So the question to ponder at this point is, what is an ‘asset management’ business and how is it possible to develop one from the current operational thinking?
WHAT ASSET MANAGEMENT ENTAILS
To begin with, it is important to define exactly what is meant by ‘asset management’, as it is a phrase that will mean different things to different people. Asset management is a business operating model and supporting organisational structure that uses focused decisions, processes and activities to maximise the technical and economic performance and value of physical equipment over its lifecycle in order to achieve desired outcomes.
It refers to much more than just the physical equipment in the field; it refers to all of the initial and ongoing costs of the equipment in terms of installation, maintenance (inspection, routine parts replacement, testing, emergency repair, etc.), operations (switching, control, etc.), and removal from service (retirement, salvage, etc.). It is a holistic view of both individual and groups of equipment with the goal of maximising their economic life. The management of the assets refers to a structured set of decisions, processes and activities undertaken to achieve a desired outcome. The overriding concept here is ‘outcome optimisation’ in terms of corporate goals (customer service, reliability, efficiency and so on).
The role of an asset manager entails analytical and economic lifecycle planning and clearly defined asset strategies. It is also important that the IT support and infrastructure management is very well developed, in order to support the planning and strategies that the asset manager is to follow. The asset manager should enter into service level agreements and performance-based contracts, detailing improvement over 3-5 years, as well as being responsible for procurement and contract management issues.
In a fully disaggregated industry (or company) the asset manager would be responsible to the asset owner for the management of the assets and would employ a range of service providers (manufacturers, testing, maintenance contractors) to carry out the day-to-day operation of the business.
WHY UTILITIES SHOULD DO IT
At its heart, asset management provides clarity around the accountabilities for producing business results. It is the philosophical split between three core entities: ownership (asset owner) decision making (asset manager) and action (service providers).
Traditionally utilities were run with an operational management focus. In other words, they maximised service to customers and focused on supply reliability at the expense of development criticality. The concern was with short-term performance and therefore largely ignored uncertainty and new alternative methods of operating. The physical assets were often viewed in a regional or fragmented way, where the focus was on the cost of the assets.
This operational management framework usually led to sub-optimal capital investment strategies. Maintenance was often reactive and the attitude towards risk was unfocused, and as a result analysis of critical performance factors was extremely limited.
However, as the deregulated industry matured and the regulatory pressures on performance and level of scrutiny increased, so the asset management ethos became more relevant. The regulatory pressure for separation of responsibility along process lines to ensure accountability and transparency in operations and to prove genuine capital efficiency in investments has led more utilities to structure their businesses along asset management lines.
The key issues that drive an asset management-based company include:
- A focus on managing customer requirements and expectations (as opposed to purely attempting to maximise the service to the customer)
- A focus on long term performance through an increased awareness of key business drivers, uncertainty and risk (fully considered and managed as part of an ongoing asset strategy) and a view of the assets as a complete portfolio (with emphasis on maximising the return on investment as opposed to just optimising the cost).
The chain of responsibility allows the delivery of asset management services to asset owners, whether they are within the same organisation or wholly separate entities.
HOW IT IS DONE
To move from an operational to an asset management focus or framework is a long and sometimes painful process, where many hard decisions need to be made by the directors of the company. Thorough analysis needs to be carried out on current performance in all areas of the business, including asset strategy and contract management practices. Once the firm’s current capabilities are fully understood in terms of asset management (in most companies this understanding, at even the highest levels, is very limited) then gaps and opportunities for implementation can be identified.
Implementation of asset management methods and processes are typically guided by the following core principles:
- System planning is done based on maximum asset utilisation and optimising projected economic performance, while maintaining desired capacity and reliability targets. Overbuilding or ‘gold plating’ is not an option.
- Condition Based Assessment (CBA), Reliability Centered Maintenance (RCM) and End Of Life (EOL) modelling are required for decision-making processes and to guide the 5Rs strategy (repair, replace, refurbish, retire, and run-to-
fail) for all asset decisions.
- Capital and O&M costs are considered equally (and simultaneously) in developing the strategy for maintaining assets. While internal cost accounting requirements may demand the separation of capital and O&M for accounting purposes, the fact that their impacts reside separately on the balance sheet does not bifurcate decision-making.
- Assets are broken down into groups (transformers, breakers, lines, cable, meters etc.) and each group has a specific asset mission. This mission is defined in terms of operational characteristics (failure rates), financial considerations (cost/unit), and capacity/utilisation (load factor).
- Developing and maintaining standards for equipment physical attributes, purchasing decisions, and maintenance work plays a key role in the feedback loop for asset decisions. These standards also include unit costs for all maintenance activities.
- Risk is an integral part of the decision-making process and includes both upside risk (risks associated with doing a project – normally included in the project itself) and downside risk (the risk of not doing a project).
WHAT BENEFITS ENSUE?
The benefits of the asset management business model include a shift from ‘functional’ to ‘process’ orientation in all decision-making. The operation of the business is also streamlined, with tighter, more well-defined decision-making processes and a more structured and pro-active work load.
It also leads to greater transparency in the business operations and allows for proper accountability and scrutiny of operations. This is a key factor in the development of regulated asset businesses in Europe at present. Regulators are looking for methods to reduce electricity tariffs by getting companies to reduce operational and capital expenditures. Through the application of asset management methods, management can demonstrate to the regulator that proper investment decisions are being made and that operation and maintenance activities are being performed as efficiently as possible.
Operating costs of the company almost always fall significantly under the Asset Management model. This typically follows a two-step process. First, the split between decision-making and service provisioning allows clearer focus on which work is really necessary to support optimal asset performance. Often, a significant percentage of the work originally done is deemed to be ‘low value’ and is subsequently eliminated. Then as a second step, after rationalising the resources and costs in the business, Asset Management often discovers that the per unit rates (productivity) of internal service provider resources are not market competitive. The imposition of performance targets based on competitive rates then drives operating costs lower again by a substantial margin.
Capital investments also see a significant impact from adoption of the Asset Management model. The primary benefit is as a result of better investment decisions, made on the basis of the impact of each investment on achievement of the strategic goals of the business. This requires a more thorough understanding of both the goals of the business and of asset performance (technical and economic) asset physical condition, and asset optimal lifecycle care. This typically results in a significant redirection of priorities and a reallocation of the capital budget to different projects.
Asset management practices apply to all parts of the utility industry, from large high voltage transmission systems to the provision of metering. The installation, maintenance, operation and replacement of metering assets involves the same issues of lifecycle care and performance optimisation. Asset management is becoming a particularly relevant operating structure for the metering business as the move towards full contestability in meter services gathers pace.
Metering companies can still benefit from certain aspects of the asset management ethos. As in all parts of the industry there is downward pressure on the cost of metering, so companies are going to have to start to manage their assets in an efficient and timely manner. Decisions will need to be made based on how often meters need to be maintained, replaced through fault, tested, upgraded or replaced. Asset lifecycle planning, investment in new technologies, installation and maintenance contracts and manufacturer contracts all involve decisions that are made more efficiently through application of asset management strategy.
Metering asset management will go hand in hand with increased service provision as meters are at a direct customer interface. Timely scheduling of appointments, skilled engineers and proactive technology implementation such as handheld communication terminals will enhance the service to the customer. The information stored on the assets, combined with improved customer management, should see the meter businesses improve dramatically over the next few years.
In this context, there is no real differentiation between the types of metering for electricity, gas or water. Decisions between different types of meter, such as an inferential or volumetric meter for water or to replace meters based on new technologies such as AMR, can be viewed in terms of performance, investment and efficiency of service. They are all part of a portfolio of well managed assets.