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

1. Asset Management – what it is (and isn’t) 2013 WASHINGTON STATE PUBLIC TRANSPORTATION SYMPOSIUM Darin Johnson, BIS Consulting

2. 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

3. “Asset management” is a broad topic…

4. What is asset management really about? • There is a gap between engineering and finance Asset management bridges this gap ?

5. Asset management (n): an approach to decision making that is… • Customer focused. • Data driven.

6. 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.

7. 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. Costs Benefits “…total benefits of a project to whomsoever they accrue exceed the costs of that project.”

8. What factors create a good business-case culture? • 3. Personnel • 2. Staff • 1. People

9. 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.

10. First example – managing aging infrastructure

11. 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

12. KNEE OF CURVE MEAN LIFE MEDIAN LIFE N% FAILURE RATE Expected Useful Life • What, exactly, is expected useful life? • Median Life? • Mean Life? • Knee of curve? ? • N% failure rate? • Other?

13. 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

14. 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. 40% reduction in capital 15% reduction in life-cycle

15. Second example – WSF seismic upgrade business case

16. 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?

17. Ground-shaking intensities

18. Summary of damage in 72-year event, Vashon Island

19. Quantifying seismic riskSummary of failure scenarios for Vashon Island

20. 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

21. 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. Minimum life-cycle cost

22. Final example - Prioritizing service in the face of shrinking budgets

23. Safety Environment Financial Benefits should be defined in terms of the things that matter to your stakeholders • 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… Big decisions are usually about trading dollars for service… Level of Service

24. dollars Here is the biggest challenge • How do we know if Benefit > Cost? Level of service, expressed in customer served Capital costs, expressed in dollars

25. Conceptually, counting benefits I’d pay $100 for this service. • 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. We’d each pay $5

26. 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.

27. 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.

28. 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.

29. Thank you