While particular emphasis must be placed on data collection, the power of the software tool lies in how it is used.
Kansas City Power & Light prioritizes transmission and distribution capital construction projects using rigorous processes to ensure that both project benefits and risks are considered during project scoring and selection.
A New Beginning
In May 2008, without knowing the turn of events that would affect financial markets in the next six to 12 months, Kansas City Power & Light (KCP&L) decided to upgrade and redeploy its portfolio optimization and project prioritization software package, which had been purchased from UMS Group in 2002. New software upgrades provided significant value as they allow multiple-year prioritizations, the ability to consider alternative investment solutions and the ability to recognize linkages between related projects. Redeployment of the optimization tool provided a more stringent selection process and enabled KCP&L to normalize project scoring while capturing supportive rationale for project selection. The value became quite obvious as the customer base and capital expansion budget increased dramatically with the acquisition of neighboring utility Aquila Corp.
Starting in September 2008, each project sponsor had to input their project requests for the 2009-2013 budget cycle in the format as required for the portfolio optimization software package. Each of the more than 700 transmission, distribution and substation construction projects was subjected to standardized scoring criteria across six strategic objectives and assigned a probability and a consequence for the risk of deferral. Following the data-input phase, the portfolio optimization software tool was run to provide relative rankings between projects.
All it takes to optimize a portfolio once the projects have been properly input and scored is the proverbial point and click. At KCP&L, it actually takes three clicks. The portfolio is optimized for three different scenarios: maximize benefits, minimize risk and maximize benefits while excluding project financials.
The rationale behind the three scenarios is simply to achieve a well-balanced portfolio of projects representative of strategic objectives: financial, customer and community, winning culture and safety, innovation and operational excellence, regulatory and government, and reliability. The weighting of each strategic objective is dependent on its relative importance at the time of portfolio optimization.
Interpretation of Output
The maxim “Garbage in gives garbage out!” is alive and well in the realm of portfolio optimization and project prioritization. If the data-collection phase of the process is overlooked, construed as unnecessary or ignored altogether, the results will be all too evident.
During the first couple of years of implementing the prioritization tool into KCP&L's selection process, garbage collection is exactly what the data-collection phase amounted to. Although the appropriate informational fields were populated, there was not enough supporting evidence to justify the project selection. At that point in time, the cutoff line among projects not adequately scored had to be blindly drawn, as opposed to having the leverage to ask for additional funding to pursue the absolutely necessary projects. In today's financial climate, it is extremely hard to get approval to fund projects that are justifiable, let alone those that are seen as having little tangible value.
To overcome some of the volatility associated with normalized project scoring, the portfolio was optimized through three separate scenarios. The first two scenarios were selected based on conversations with industry experts; the third scenario was selected based on KCP&L's experiences with insufficient data collection and the preferential treatment of projects that did not have scoring submitted for the financial categories of net present value, internal rate of return and discounted profitability index. Again, these scenarios are the maximization of benefits, minimization of risk and maximization of benefits while excluding project financial scoring categories.
Once the output reports of all three scenarios were collected and formatted, a comparative analysis was performed between the recommended portfolios. Through the comparing of recommended portfolios, it was easy to identify projects that had high risks associated with their deferral and were highly beneficial if selected. These projects are the shoo-ins, so to speak, and the starting point to identifying the correct mixture of projects. Following the comparison of scenario outputs, a list of recommended projects and deferred projects was compiled given the established funding level.
Meeting the Challenge
Albert Einstein is credited with saying: “In the middle of difficulty lies opportunity.” KCP&L's system administrator met with engineering managers, allowing all interested parties to simultaneously compare investment options and challenge why certain investments were selected and others were deferred. These meetings are referred to as Challenge Meetings, and the title clearly describes the activities that transpire.
The Challenge Meeting is a forum in which project sponsors and stakeholders discuss the various regulatory mandated, governmental compliance, reliability and system expansion projects in greater detail to come to a consensus and solidify the candidate pool of projects. The output of this meeting was an agreed-upon preliminary portfolio of projects. In the past, project selection was based solely on which project sponsor screamed the loudest or who was the most articulate in communicating a project's necessity — regardless of the project's justifiability.
Process Evolution Drives Project Reconciliation
Early on, portfolio optimization was run annually. Now, KCP&L has the need and ability to perform dynamic control, continuous performance monitoring and scope management to address changes throughout the year. On a monthly basis, the portfolio management department performs an earned-value analysis on each project by comparing the year-to-date financial accrual information provided by the financial planning department and the year-end financial forecasts provided by the project sponsor.
Following the comparison, project financial performance is color-coded based on its realized performance as a percentage of the year-end forecast. As projects approach their maximum funding levels, the project sponsors are asked to re-predict their project's year-end forecast given the performance to date. It is the project sponsor, not the portfolio management department, who ultimately decides if any scope changes are required based on project performance.
After all re-predictions are entered into the portfolio, the performance of the portfolio as a whole is analyzed. The portfolio's performance is a summation of all year-end project forecasts divided by the budgeted financial target. This mathematical operation is commonly referred to as the cost performance index (CPI). The CPI of the portfolio is the primary steering mechanism for recommending and identifying practical scope changes to realign the year-end forecast with the budgeted financial target. As scope changes are required, the portfolio is populated with up-to-date financial information and re-optimized.
Some might think this additional earned-value analysis is a duplication of effort, since this is performed in addition to the earned-value analysis that is completed on project-managed projects. However, the primary difference between the two analyses is that one is concerned with the project's financial performance throughout entire project life cycle, while the other is only concerned with the project's current budget-year performance. Hence, sunk cost is disregarded. Also, there are only a select few projects assigned to certified project managers, with the majority of projects indirectly managing themselves through supervised field construction personnel.
The direct benefit of this perceived duplicate effort is hard to grasp, but it is easily realized once the organization is committed to proceeding along the progressive path of complete portfolio management. This is engineering accounting, not to be confused with financial accounting or property accounting.
The portfolio re-optimization is one of the most confusing and least consulted upon aspects of portfolio optimization. This is because there are extremely few products that are able to optimize projects in incremental units.
Prior to re-optimization, revised project financial parameters were input into the optimization software to more accurately model and assess the value of the new project portfolio. During the re-optimization, projects are re-ranked and further recommendations are made on which projects to pursue, target for deferral or cancel given revised portfolio projections or financial constraints. This process is repeated monthly to account for any anomalies, additional mandates or customer compliance projects that may have been generated after budget approval.
Several obstacles are encountered during re-optimization, which deal with how to handle the following scenarios:
Carryover projects from the previous year
Future projects that may have accelerated spending
Correctly Account for Project Relationships
Projects that have material received for either before or after their budgeted time
Projects accruing charges due to improper time entry.
KCP&L chose to have the system administrator consider UFOs through summing the combined financial impact of the UFOs and reducing the financial constraint of the project portfolio accordingly. This may not have been the best approach since preferential treatment is given to projects not previously scored. In future years, investment scoring will be required for all investments to avoid the preferential treatment of projects.
Whether called dependencies or relationships or referred to as parent/child or predecessor/successor, there is not one way for a software package to correctly account for all of the potential scenarios that related projects can be funded. There are multiple ways that dependencies or relationships can be handled:
Parent/child where the parent can be exclusive of a child
Success Relies on Support and Strategy
Parent/child where the parent is not necessary without a child
Related projects are combined into one project
Separate portfolio is created for related projects: do all or do none.
One method cannot really be recommended over another because of the sheer complexity of project relationships. Some of the confusion is because relationships take on different forms throughout the budgeting and construction process, and the differences need to be understood. During the project selection process, parent/child dependencies are of the form that a distribution substation project is the parent of the transmission line project (i.e., the distribution substation project has to be selected in order for the transmission line project to be selected).
However, the construction sequence is, quite possibly, the exact opposite. The transmission line routing and construction process could precede the construction of the substation. Selection of projects with dependencies are more complicated than those without dependencies as the process of selecting projects can be confused with the process/order of constructing projects.
Companies mentioned in this article:
At the end of the day, it is the system administrator and engineering managers' responsibility to ensure all relationships have been taken into consideration.
Other electric utilities are using similar portfolio optimization tools. Whatever the overall process, success is highly dependent on executive support and the execution strategy. True to the project management mantra, the performance and success of the portfolio is not based solely upon the initiation, planning and execution of projects. The main focal point is the monitoring and controlling of the project portfolio and refining as conditions change.
The challenge is not selling the tool; the challenge is getting people to buy in to the process change. Change management is extremely important; the emphases need to be placed on the people and the process. If change management is not considered and supported, the new software and procedure for performing formerly routine tasks will be construed as unproductive or unnecessary.
Standardization and consistency are necessary for accurate project scoring. Standardization involves the normalization of project scoring parameters, while consistency is driven by standardization and repetitive utilization. It does not matter which software product a utility selects, but what matters is how the utility ingrains the tool into its processes. Like any software, portfolio optimization software is a support mechanism and is not meant to replicate the immense wisdom of its human operators, nor does it have the artificial intelligence that some commonly think.
Travis J. Clark (email@example.com) is a senior engineer and portfolio manager for Kansas City Power & Light (KCP&L). Since joining KCP&L, Clark has worked in distribution system planning, field design, technical training and is currently in the project and project portfolio management department. Clark holds a BSEE degree from Iowa State University, has 10 years of professional experience, and is a registered professional engineer and project management professional.
Kansas City Power & Light www.kcpl.com
UMS Group www.umsgroup.com