What separates one utility vegetation management program from another? Of course good programs address system reliability, vendor cost, quality and customer satisfaction. But while each of these characteristics is important, the leading vegetation management programs possess a distinguishing trait that separates them from other programs: They use a consistent and disciplined approach that optimizes value by balancing the needs of all the key stakeholders (regulators, customers, shareholders, executive leadership, utility staff and vendors).
An asset management-centered approach to vegetation management weighs program costs against system reliability performance to provide the highest value, while focusing on diverse and sometimes conflicting needs. The desirability of such an approach has long been understood within the industry.
Davies Consulting Inc. (Chevy Chase, Maryland, U.S.), a utility asset management consulting firm, and Everest Management Consultants Inc. (Doylestown, Pennsylvania, U.S.), a utility vegetation management consulting firm, have partnered with their utility clients to develop and implement a new and progressive asset management approach to vegetation management.
Valuing Vegetation Management
The annual budget life cycle of electric utilities usually begins in October and employs various methodologies. Some utilities simply adjust the previous year's budget, while others go through a rigorous decision-making process. Whatever the process, it almost always results in a substantial budget allocation for managing vegetation. In fact, vegetation management is often the single largest utility operations and maintenance (O&M) budget line item. However, despite the significance of vegetation management, the traditional budget allocation process often fails to address the needs of all the stakeholder groups.
Vegetation-caused interruptions are usually the greatest contributor to poor service reliability, often accounting for 20% to 40% of all customer interruptions. According to the Electric Power Research Institute (EPRI), power outages and other power-quality disturbances cost the U.S. economy nearly US$120 billion a year. Much of this cost is attributable to vegetation-caused outages. Perhaps equally important, inadequate service reliability directly affects utilities' customer satisfaction ratings. Customers have always been an integral part of utility vegetation management practices and methods. For example, the 2002 JD Powers utility customer satisfaction rankings show a strong correlation with utility vegetation-caused customer interruptions.
Electric utilities are under constant regulatory scrutiny in many areas, including service reliability and customer satisfaction. Traditionally, regulators have focused on long-term business planning, multi-year budgetary spending plans, storm-restoration plans and results, and overall customer satisfaction. In the future, as increased financial pressures and performance-based rates become the industry norm, utilities will need to be more proactive in developing and implementing comprehensive vegetation management strategic plans that will show the regulators that they are in control of their vegetation management programs.
Vegetation management often involves the single largest vendor contract for a utility and, therefore, becomes a critical component of its maintenance programs. Because of this, many utilities are recognizing the value of strategic alliances in this area.
A vegetation management alliance offers a utility opportunities that the traditional “three bids and a buy” methodology overlooks. First, an alliance focuses the contract work force on consistently executing the work scope. Second, many strategic alliances include collaboration between the utility and the vendor to develop a comprehensive vegetation management business plan that drives performance and creates accountability for the program's success on both sides. This approach shows a businesslike focus to executive leadership and to regulators, and can be used to drive continuous program improvement. These strategies have been used successfully at utilities such as PacifiCorp, Orange & Rockland, Portland General Electric and PECO Energy.
Budget and Resource Challenges
Traditionally, vegetation management has faced many challenges in planning, execution and control, principally due to the lack of business focus within these programs. The root cause is twofold. First, many utilities see vegetation management as a secondary function, so their program managers continue to focus on traditional vegetation management practices and methodologies. This has led to inconsistency, and it creates significant opportunity for improvement within the industry.
Second, executive management often has a difficult time understanding the dynamics of the vegetation work scope. It is a struggle for them to recognize that vegetation is a living system that is growing each day. They often fail to appreciate that, according to industry studies, it costs up to one-third more to complete deferred work scope in the subsequent year. As a result, many vegetation management programs rely on extended cycles; suffer elimination of key program components, such as hazardous tree removals and tree grow regulators; and become inconsistent and overcomplicated.
The lack of long-term vegetation management budget stability and vendor resource allocation planning are the two largest drivers of high contractor costs, substandard reliability performance, inconsistent work practices and, ultimately, loss of confidence by executive leadership. According to major utility vegetation management vendors, yearly budget fluctuations greater than 10% have negative impacts on labor overheads and on the operational productivity of their work force. In fact, significant budget swings can reduce annual tree crew productivity by as much as 15% to 25%. Focused vendor resource allocation planning and management is a critical success factor in any utility vegetation management program.
To obtain the efficiencies that come from stable budget allocation and adequate planning, utilities must consider two fundamental changes. First, utilities should release tree crew control to the vendor to allow the vendor to execute the work scope in an uninhibited fashion. This approach also eliminates the geographic and “fiefdom” constraints, which create significant barriers to productivity. Second, executive leadership must understand the longer-term financial impact, and the impact on system reliability, of reducing vegetation management dollars to meet short-term earnings targets. With these changes in place, electric utilities can maximize their resources and devise better strategies to meet their stakeholders' needs.
|Drivers to Increase Expenditures||Drivers to Decrease Expenditures|
|Pressure to meet earnings per share targets||Average age of utility infrastructure is increasing|
|Difficulty in obtaining rate increases||Customers are demanding better quality of services|
|Current economic slowdown will manifest itself in the utility sales decrease||Regulators are concerned that the pressure to reduce costs ultimately will result in reliability deterioration|
Currently, there are only a few methodologies and tools to assist utility vegetation program managers in developing and communicating their resource requirements. One tool is a disciplined business-planning approach. A focused vegetation management business plan drives program effectiveness, consistency, productivity and resource stability over the longer term. Some more progressive utilities — among them American Electric Power (AEP), Duke Energy and PPL Utilities — are using fact-based decision-making tools for vegetation management. These tools apply historical company-specific performance data to a solid asset management foundation to drive optimal resource allocation.
The Asset Management Approach
The demands of today's utility delivery environment require utility company management teams to maximize use of all deployed resources. Some of the key cost drivers for utilities are listed in the table above. Succeeding tomorrow will require electric-utility companies to strike a fine balance among achieving acceptable financial results despite potential revenue decreases; meeting higher system reliability standards and other regulatory requirements; and meeting increased demands for superior customer service.
A select few utility companies are beginning to achieve this important balance by applying strategic approaches to optimizing the use of scarce resources. Such an approach goes beyond the application of a new business model to a fundamentally new way of managing the delivery business. This strategic approach to asset management gives managers the ability to:
Consistently and effectively deploy and manage all assets across the breadth of the delivery system
Allocate resources optimally among widely differing types of projects (such as vegetation maintenance or implementation of a new OMS)
Improve productivity based on a clear understanding of how money is spent and what the expenditures return to stakeholders
Hold all members of the organization accountable for achieving results
Develop strategic direction by evaluating many scenarios
Demonstrate to utility commissions that assets are being deployed effectively so as to justify an adequate rate of return.
Several leading utilities, such as AEP, Toronto Hydro, Conectiv and PPL Utilities, are using similar approaches to manage certain maintenance programs and to allocate funds within those programs, especially within vegetation management. As discussed above, because of the size and scope of vegetation management programs, they are frequently targets of corporate budget cuts and efforts to achieve short-term earnings improvement. Applying concepts of asset management to vegetation management allows utilities to make better funding decisions and, therefore, more consistently meet regulatory, customer and shareholder needs.
There are many different approaches to asset management within the electric-utility industry. The Davies Consulting approach centers on several key elements that drive discipline and consistency in decision-making across a utility, such as managing by the facts and by performance metrics; setting capital and O&M investment priorities on system-wide basis; adopting a proactive regulatory strategy; and centrally managing work scope and resources. The figure on the right provides the full list of requirements necessary for a successful asset management program.
Applying Asset Management
To support the overall asset management framework and decision-making process, companies are implementing various decision support tools. In collaboration with PPL Utilities, Davies Consulting recently developed an economic model that helps utilities allocate tree-trimming dollars to specific circuits based on the biggest “bang-for-buck.” This Tree Trimming Model (TTM™) relies on actual utility-specific reliability and cost data.
Several utilities, including PPL Utilities and Duke Energy, are now using the model to determine the best allocation of their vegetation management funds and to project the impact of any budget reductions on the overall system reliability.
In short order, TTM can develop scenarios based on budget assumptions and can estimate the resulting reliability performance. The model is also used to estimate the minimum investment required to meet specific tree-related SAIDI or SAIFI performance targets. This is particularly critical in an environment where many electric utilities are facing performance-based rates. In addition to prioritizing funding, TTM:
Applies actual utility-specific work management and reliability data
Provides an objective method for developing the optimal tree-trimming program and trimming schedules
Permits quick scenario analysis and budget-cut risk assessments
Supports resource allocation discussions with senior management and regulators
Enables transparent decision-making.
The graph above is an example of the output from the scenario analysis conducted using the TTM. Based on this example, it is clear that cutting $1 million in 2004 will cost an additional $10 million in 2008 to meet the required SAIFI level for 2009.
The Future Management Model
The electric-utility industry has a significant opportunity to resolve the traditional challenge of budget stability, resource allocation and system reliability specific to vegetation management. As mergers and acquisitions, deregulation, financial earnings and regulatory pressures all continue within the industry, the use of a disciplined asset management approach to optimize vegetation management programs can be a critical element in ensuring the long-term viability of the delivery system. Business-focused economic models, such as the TTM, will enable vegetation management managers and their executive leadership to make better funding decisions and get the most return for each dollar expended.
Progressive utilities are leading the way. Many other utilities have recognized the value in this method and are quickly adopting the asset management approach to managing their vegetation management programs. Future decision support models will expand to cover all the components of a vegetation management program comprehensively and will match them up against other key electric-utility expenditures and projects. This will drive better funding and resource allocations.
In the electric-utility industry, vegetation managers traditionally have used intuition and basic business cases to justify the value of vegetation management to executive leadership. These approaches have been ineffective. Today, executive leadership, regulators, the financial community and customers are all demanding greater performance specific to financial, reliability and customer service metrics. A disciplined asset management approach to vegetation management can meet these enhanced requirements and can significantly elevate the overall performance of a utility that adopts it.
Miki Deric is the director of energy practice with Davies Consulting Inc. (DCI), an international management firm dedicated to working with clients to establish competitive advantage and deliver superior value to shareholders and customers. His consulting career has focused on helping clients in the areas of operational improvements, business process redesign, decision support tools, strategic planning and change management. He holds a MBA degree in international management from Thunderbird, The American Graduate School of International Management and earned a BS degree in finance from Northern Arizona University.
Rick Hollenbaugh is the founder and president of Everest Management Consultants Inc., an organization specializing in progressive business-driven electric-utility vegetation management solutions. His 16-year career has focused on assessing, designing and managing comprehensive vegetation management programs for major electric utilities. An International Society of Arboriculture Certified Arborist, he is a member of the IEEE, Project Management Institute, International Society of Arboriculture, Utility Arborist Association and American Society of Consulting Arborists. He holds an MBA degree from Eastern College and a BS degree in forest management from the University of Maine in Orono.