Methods of Project Prioritization

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Methods of Project Prioritization. Alan Sowell Regional Manager, T&D Services Burns & McDonnell. April 10, 2006 APPA E&O Technical Conference Sacramento. EEI, Member Companies Invited to Testify at Senate Conference on Climate Change - PowerPoint PPT Presentation

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Methods of Project PrioritizationAlan SowellRegional Manager, T&D Services Burns & McDonnellApril 10, 2006APPA E&O Technical ConferenceSacramentoEEI, Member Companies Invited to Testify at Senate Conference on Climate ChangeEEI and some of its member companies are among 29 individuals and organizations invited to testify before the Senate Energy & Natural Resources Committee at an April 4 climate conference, the committee said in a news release. The goal of the session will be Senate Energy & Natural Resources Committee news release , March 28.As Bush Stalls, Domenici May Introduce Bill to Address Yucca MountainSenate Energy and Natural Resources Committee Chairman Pete Domenici, R-N.M. says he will introduce his own Yucca Mountain bill if the Bush administration does not quickly Associated Press via the Las Vegas Sun , March 30 Fallout From Enron Continues to Follow Energy IndustryThe aftereffects of the Enron collapse have continued to follow energy companies four years later, Wall Street Journal , March 16.Mexico Opts for Nuclear Energy for Future Power NeedsThe director-general of the Federal Electricity Commission of Mexico, Alfredo Alias Ayub, said the government is planning to construct a new nuclear power plant and to increase Associated Press via the San Diego Union-Tribune , March 15 PurposeUnderstanding that todays utility environment generates a broader range of projects competing for limited resources, we shall discuss a prioritization framework that enables us to:Evaluate diverse projects equitablyIncorporate multiple evaluation techniquesDeliver a consistent forced project rankingAssumptionsEach project is an investment in your utility. Investments that are not in line with your strategy should be culled from your project list before proceeding.Think Before You InvestTransmission & Distribution World March 2006The Elements of PrioritizationCost BenefitAnalysisRisk AnalysisExternal Impact AssessmentWeighted Evaluation MatrixCost-Benefit AnalysisFinancial MeasureNormally favors revenue projects over capital replacement and O&MSunk costs are not includedAvoided future costs are a benefitTime horizon is life of the investmentCost-Benefit Ratio = NPV / Initial CostCost-Benefit AnalysisNPV = Net Present ValueCalculating NPV is an exercise unto itselfFinancial expertise required:Sarbanes-OxleyGAPFERC AccountingSample Cost-Benefit Calculation:Lineman training programCost: $250,000Benefit: Improved efficiency, reduced overtime; NPV = $1MCost-Benefit ratio = $1M/$250K = 4.0Risk AnalysisEvaluates the risk of not performing the project against the cost of the projectHazard Identification is the probability of a certain type of risk/event occurringThere can be many HazardsExposure assessment is the impact of the risk/event (in $)Risk Ratio = (Hazard Identification x Exposure Assessment) / Project CostRisk AnalysisHazard Identification Risk of not completing the projectLoss of RevenueLoss of LifeLoss of AssetsLegal LiabilityRegulatory PenaltiesEach valid risk is evaluated with a % chance of occurrenceRisk AnalysisExposure AssessmentMaximum financial exposure of each riskLoss of revenue = revenue at risk if project is not completedLoss of life = financial cost if failure contributes towards a fatality Financial values of large value risks should remain constant across projects or reflect current accepted values.Risk AnalysisSample Risk CalculationProject: Rebuild an aging transmission lineCost: $250,000Risks:50% loss of revenue x $50,000 = $25,00010% loss of life x $1,000,000 = $100,00010% tort x $5,000,000 = $500,000Risk Ratio = $625,000/$250,000 = 2.5 External Impact AssessmentEvaluates the potential for external impacts using a multi-cell matrixReduces dependence on Mythical NumbersImpacts are either positive, neutral, or negative (1,0,-1)Identifies externals, impact categories, and potential impactExternal Impact AssessmentThese questions will serve as a guide for creating Externals and Impact Categories:Who will be impacted?What will be the nature of the impact?When will the impact occur?Where will the impact be felt?How will the impact affect all stakeholders?Resist the temptation to use subjective scoring techniquesExternal Impact AssessmentExample: new transmission line Max value for this example is 9Scoring1= positive0 = neutral-1 = negativeDocumentation requiredOne matrix for all projects evaluatedProject score = 0Putting it all TogetherStep 1: Raw Evaluation MatrixPutting it all TogetherStep 2: Weighting the categoriesCost-Benefit = 30%Risk = 40%External = 30% Weighting considerationsShould support strategyShould reflect critical factors in the business climateShould not favor one class of projectPutting it all TogetherStep 3: Establish maximumsCost-Benefit max = 4Risk max = 3External max = 9Putting it all togetherStep 4: Assemble Weighted Evaluation MatrixPutting it all TogetherFinal Observations:Weighted scores will be on a 0 to 100 point scaleWeightings can change final project rankingsTies are possible, but less likelySummaryCost BenefitAnalysisRisk AnalysisExternal Impact AssessmentAdopt a versatile framework to prioritize diverse projectsPlace data in an evaluation matrix, apply weightings, and establish project priorities on a 0 to 100 point scaleQuestions