1

Methods of Methods of Project Project

PrioritizationPrioritizationAlan SowellAlan Sowell

Regional Manager, T&D ServicesRegional Manager, T&D ServicesBurns & McDonnellBurns & McDonnell

April 10, 2006April 10, 2006APPA E&O Technical APPA E&O Technical

ConferenceConferenceSacramentoSacramento

2

EEI, Member C

ompanies Invited to

Testify at S

enate Conference on

Climate Change

EEI and some of its member companies

are among 29 individuals and

organizations invited to testif

y before

the Senate Energy & Natural

Resources Committe

e at an April 4

climate conference, th

e committee said

in a news release. The goal of th

e

session will b

e …

Senate Energy & Natural Resources Co

mmittee news re

lease

, 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 Su

n , 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 Needs

The 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-T

ribune

, March 15

3

PurposePurpose

Understanding that today’s utility Understanding that today’s utility environment generates a broader environment generates a broader range of projects competing for limited range of projects competing for limited resources, we shall discuss a resources, we shall discuss a prioritization framework that enables prioritization framework that enables us to:us to: Evaluate diverse projects equitablyEvaluate diverse projects equitably Incorporate multiple evaluation techniquesIncorporate multiple evaluation techniques Deliver a consistent forced project rankingDeliver a consistent forced project ranking

4

Assumptions…Assumptions…

Each 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 2006

5

The Elements of The Elements of PrioritizationPrioritization

Cost – BenefitAnalysis

Risk Analysis

External Impact Assessment

Weighted Evaluation Matrix

6

Cost-Benefit AnalysisCost-Benefit Analysis Financial MeasureFinancial Measure Normally favors Normally favors

revenue projects revenue projects over capital over capital replacement and replacement and O&MO&M

Sunk costs are not Sunk costs are not includedincluded

Avoided future costs Avoided future costs are a benefitare a benefit

Time horizon is life Time horizon is life of the investmentof the investment

Cost-Benefit Ratio = NPV / Initial Cost

7

Cost-Benefit AnalysisCost-Benefit Analysis

NPV = Net Present NPV = Net Present ValueValue

Calculating NPV is Calculating NPV is an exercise unto an exercise unto itselfitself Financial expertise Financial expertise

required:required: Sarbanes-OxleySarbanes-Oxley GAPGAP FERC AccountingFERC Accounting

Sample Cost-Benefit Sample Cost-Benefit Calculation:Calculation: Lineman training Lineman training

programprogram Cost: $250,000Cost: $250,000 Benefit: Improved Benefit: Improved

efficiency, reduced efficiency, reduced overtime; NPV = $1Movertime; NPV = $1M

Cost-Benefit ratio = Cost-Benefit ratio = $1M/$250K = 4.0$1M/$250K = 4.0

8

Risk AnalysisRisk Analysis Evaluates the risk of Evaluates the risk of

not performing the not performing the project against the cost project against the cost of the projectof the project

Hazard IdentificationHazard Identification is is the probability of a the probability of a certain type of certain type of risk/event occurringrisk/event occurring There can be many There can be many

HazardsHazards Exposure assessmentExposure assessment is is

the impact of the the impact of the risk/event (in $)risk/event (in $)

Risk Ratio = (Hazard Identification x Exposure Assessment) / Project Cost

9

Risk AnalysisRisk Analysis

Hazard Identification Hazard Identification Risk of not completing the projectRisk of not completing the project

Loss of RevenueLoss of Revenue Loss of LifeLoss of Life Loss of AssetsLoss of Assets Legal LiabilityLegal Liability Regulatory PenaltiesRegulatory Penalties

Each valid risk is evaluated with a % Each valid risk is evaluated with a % chance of occurrencechance of occurrence

10

Risk AnalysisRisk Analysis

Exposure AssessmentExposure Assessment Maximum financial exposure of each Maximum financial exposure of each

riskrisk Loss of revenue = revenue at risk if project Loss of revenue = revenue at risk if project

is not completedis not completed Loss of life = financial cost if failure Loss of life = financial cost if failure

contributes towards a fatalitycontributes towards a fatality Financial values of large value risks Financial values of large value risks

should remain constant across projects should remain constant across projects or reflect current accepted values.or reflect current accepted values.

11

Risk AnalysisRisk Analysis

Sample Risk CalculationSample Risk Calculation Project: Rebuild an aging transmission Project: Rebuild an aging transmission

lineline Cost: $250,000Cost: $250,000 Risks:Risks:

50% loss of revenue x $50,000 = $25,00050% loss of revenue x $50,000 = $25,000 10% loss of life x $1,000,000 = $100,00010% loss of life x $1,000,000 = $100,000 10% tort x $5,000,000 = $500,00010% tort x $5,000,000 = $500,000

Risk Ratio = $625,000/$250,000 = 2.5Risk Ratio = $625,000/$250,000 = 2.5

12

External Impact External Impact AssessmentAssessment

Evaluates the potential for external impacts using a Evaluates the potential for external impacts using a multi-cell matrixmulti-cell matrix

Reduces dependence on “Mythical Numbers”Reduces dependence on “Mythical Numbers” Impacts are either positive, neutral, or negative (1,0,-1)Impacts are either positive, neutral, or negative (1,0,-1)

Identifies externals, impact categories, and potential impactIdentifies externals, impact categories, and potential impact

13

External Impact External Impact AssessmentAssessment

These questions will serve as a guide These questions will serve as a guide for creating Externals and Impact for creating Externals and Impact Categories:Categories: Who will be impacted?Who will be impacted? What will be the nature of the impact?What will be the nature of the impact? When will the impact occur?When will the impact occur? Where will the impact be felt?Where will the impact be felt? How will the impact affect all stakeholders?How will the impact affect all stakeholders?

Resist the temptation to use subjective Resist the temptation to use subjective scoring techniquesscoring techniques

14

External Impact External Impact AssessmentAssessment

Example: new Example: new transmission transmission line line

Max value for Max value for this example is this example is 99

ScoringScoring 1= positive1= positive 0 = neutral0 = neutral -1 = negative-1 = negative

Documentation Documentation requiredrequired

One matrix for One matrix for all projects all projects evaluatedevaluated

Project score = Project score = 00

Impact CategoryImpact Category

ExternalExternalss

Land Land UseUse

Public Public PolicyPolicy

Political Political ImpactImpact

HomeowneHomeownersrs -1-1 00 00

Local Local GovernmenGovernmen

tsts

11 11 00

EnvironmeEnvironmental ntal

GroupsGroups

-1-1 00 00

15

Putting it all TogetherPutting it all Together

Step 1: Raw Evaluation MatrixStep 1: Raw Evaluation Matrix

ProjectsProjects Cost-Benefit Risk External Total

Project 1 - Training Class 4 2 4 10

Project 2 - New Distribution line 2 1 9 12

Project 3 - Substation Breaker Maintenance 0.5 3 5 8.5

16

Putting it all TogetherPutting it all Together

Step 2: Weighting Step 2: Weighting the categoriesthe categories

Cost-Benefit Cost-Benefit = 30%= 30%

Risk = 40%Risk = 40% External = External =

30% 30%

Weighting Weighting considerationsconsiderations Should support Should support

strategystrategy Should reflect Should reflect

critical factors in critical factors in the business the business climateclimate

Should not favor Should not favor one class of projectone class of project

17

Putting it all TogetherPutting it all Together

Step 3: Establish maximumsStep 3: Establish maximums

ProjectsProjects Cost-Benefit Risk External Total

Project 1 - Training Class 4 2 4 10

Project 2 - New Distribution line 2 1 9 12

Project 3 - Substation Breaker Maintenance 0.5 3 5 8.5

Cost-Benefit max = 4Risk max = 3External max = 9

18

Putting it all togetherPutting it all together

Projects Cost-Benefit Risk External Total

Project 1 - Training Class 4/4 x 30 = 30

2/3 x 40 = 26.7

4/9 x 30 = 13.3 70

Project 2 - New Distribution line 2/4 x 30 = 15

1/3 x 40 = 13.3 9/9 x 30 = 30 58.3

Project 3 - Substation Breaker Maintenance

.5/4 x 30 = 3.75 3/3 x 40 = 40

5/9 x 30 = 16.7 60.5

Step 4: Assemble Weighted Evaluation Matrix

19

Putting it all TogetherPutting it all Together

Final Observations:Final Observations: Weighted scores will be on a 0 to 100 Weighted scores will be on a 0 to 100

point scalepoint scale Weightings can change final project Weightings can change final project

rankingsrankings Ties are possible, but less likelyTies are possible, but less likely

20

SummarySummary

Cost – BenefitAnalysis

Risk Analysis

External Impact Assessment

Adopt a versatile framework to prioritize diverse projects

Place data in an evaluation matrix, apply weightings, and establish project priorities

on a 0 to 100 point scale

21

QuestionsQuestions