Improving Water Utility Capital Efficiency September 14, 2006

Transcription

1 Improving Water Utility Capital Efficiency September 14, 2006 Myron Olstein Director Black & Veatch

2 Where We Are Today The water industry is at a crossroads with respect to capital programs. It can choose Path A (business as usual) and expect to see annual rate increases at the rate of 3 times the rate of inflation, or It can choose Path B (the capital efficient approach) and keep the increases to under 2 times the rate of inflation

3 How Did We Get Here? After six flat years the 2003 Water Needs Survey jumped 67% Since then we have seen a perfect storm driving capital costs higher rising raw materials prices, the graying of the skilled construction trades, excess demand As a result some utilities have significantly increased their needs estimates (many by 2x), some have been unable to field complete construction crews and some have not received any bids Continuing to do business as usual will result in an extended period of rate increases at a multiple of the rate of inflation Your owners have placed obstacles in your path

4 Why Is It Important to be Capital Efficient? Water utilities have the highest ratio of net asset value to annual revenues (i.e., the amount of dollars in plant required to generate one dollar of revenue) Water utilities (220+) 8.25 Wastewater utilities (140) Electric 2.2 Gas..1.2 Telecom.2.1

5 More Reasons Debt service as a % of annual revenue requirement has been rising up 20% in the past 3 years It is most likely your single biggest cost A lot of savings and efficiencies are possible (L.A. improved capital efficiency 50% in 2 years)

6 If It s s Such A Big Problem Why Haven t t We Noticed It? High growth utilities (the ones with the highest asset to revenue ratio) have their asset additions paid directly by developers eventually, however, it will be their responsibility for repair and replacement Utilities are currently not getting much resistance to high rate increases (how long will this last?)

7 Isn t t Asset Management Supposed To Solve This? It might if utilities ever figure out how to use asset management programs to lower capital costs. Now, utilities that implement asset management are seeing increases in their Capital Improvement Programs as they identify overlooked work.

8 AwwaRF Project #3119 Is Path B Identify and discuss fundamental principles and innovative techniques to efficiently manage capital projects and programs. Building a Capital Program best practice fundamentals for identifying capital projects and assembling a prioritized and affordable capital improvement program (CIP) including business case analysis Implementing Capital Projects best practice fundamentals for implementing individual and coordinated projects and innovative techniques for planning and implementing projects Managing A Capital Program best practice fundamentals for managing and implementing a CIP

9 Path B Components Non-construction alternatives Reduced (lite) construction alternatives Best practices in capital programs Fair risk-allocation in contracts Additional money saving techniques, such as OCIP, forward material purchases, interest rate swaps

10 Non-lite Construction Alternatives Since traditional bricks and mortar construction will increase in cost at double digit rates, non/lite construction alternatives will become increasingly more cost-effective. Project will provide: Case studies (focusing on flow diagrams and organizational implications) Non-lite construction alternatives

11 Best Practices The project has identified two major sources of capital program best practices: California Multi-Agency CIP Benchmarking Study 4 rounds, 32 consensus best practices Construction Industry institute 2,000 project data base, 14 statistically validated best practices

12 California Multi-Agency CIP Benchmarking 642 projects with a value of nearly $933 million 32 Best practices in 6 CIP areas: - Planning (6) - Design (6) - QA/QC (4) - Construction Management (8) - Project Management (5) - Consultant Selection and Use (3) Reports available at eng.lacity.org/techdocs/cabm/

13 Construction Industry Institute (CII) 2,000 projects Formalized methodology to validate best practices that includes statistical validation of cost and schedule savings 14 validated Best Practices (more in the pipeline) Project established a cross-walk between California MACIP and CII Best Practices Info about CII at institute.org/scriptcontent/index.cfm

14 CII Best Practices Pre-Project Project Planning Alignment Constructibility Design Effectiveness Materials Management Planning for Startup Team Building Zero Accident Techniques Partnering Quality Management Implementation of Products Benchmarking and Metrics Change Management Disputes Prevention & Resolution

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16 Best Practices Case studies: - Project selection - Asset Management - Capital Program Administration Pilot projects: - Project Development Readiness Index (PDRI) - Alignment Thermometer - Benchmarking

17 Some Candidate Pilot Projects Alignment Thermometer Project Definition Rating Index (PDRI)

18 CII Best Practices Alignment

19 . Alignment The condition where appropriate project participants are working within acceptable tolerances to develop and meet a uniformly defined and understood set of project objectives.

20 Why is Alignment Difficult to Achieve? Specialists tend to do their own thing Mixed stakeholders cause project complexity Decentralized decision-makers increase the need for coordination Project cycle time reduction can put pressure on alignment

21 Alignment v. Success Better S u c c e s s I n d e x Alignment Effort Better R 2 = 0.49 N = 20

22 Five Alignment Categories Organizational Culture Execution Processes Information Project Planning Tools Barriers to Alignment

23 Tool -The Alignment Thermometer Short questionnaire made up of 10 key alignment issues Used as individual or team scoring tool Captures agreement among members Captures how well alignment issues are addressed on project Results can lead to action Comfortable Road to Success Discomfort on the Road to Mediocrity Stressful Road to Failure

24 Steps 1 and 2 Legend: 1 = Strongly Disagree 5 = Strongly Agree Project Name: Project 1 LEVEL OF AGREEMENT ALIGNMENT ISSUES SCORE 1. Stakeholders are appropriately represented on the Project Team Project leadership is defined, effective, and accountable The priority between cost, schedule and required project features is clear. 4. Communication within the team and with stakeholders is open and effective 5. Team meetings are timely and productive Our team culture fosters trust, honesty, and shared values 7. The PPP process includes sufficient funding, schedule, and scope to meet our objectives. 8. Reward and recognition systems promote meeting project objectives. 9. Teamwork and team building programs are effective. 10. Planning tools (e.g. checklists, simulations and work flow diagrams) are effectively used TOTAL SCORE 67

25 Step 3 TEAM SCORE Respondent Issue Calculated Average Calculated Range Range/ Average TOTAL 71

26 Step AVERAGE RANGE 5

27 Step 4 (Cont d) Total Average Example Project Comfortable Road to Success Discomfort on the Road to Mediocrity Stressful Road to Failure

28 What s s Next? Poll team or stakeholders periodically and keep track of score Identify issues for discussion and remedial action Use results to facilitate or design team building activities Modify questions and substitute project specific issues as required TAKE ACTION

29 Mechanics of Using the Project Definition Rating Index

30 Applicability of PDRI Applicability of PDRI Project Assessment/ Feasibility Schematic Design Construction Programming Construction Design Development Documents Substantial Completion

31 Process for Using PDRI 1. Read descriptions of each element 2. Review data and discuss issues 3. Select definition level for each element 4. Score each element 5. Add element scores to obtain PDRI score 6. Take Action

32 Example CATEGORY Element Definition Level G. EQUIPMENT G1. Equipment List G2. Equipment Location Drawings G3. Equipment Utility Requirements CATEGORY G TOTAL Score Definition Levels 0 = Not Applicable 2 = Minor Deficiencies 4 = Major Deficiencies 1 = Complete Definition 3 = Some Deficiencies 5 = Incomplete or Poor Definition

33 Example, part ii CATEGORY Element Definition Level G. EQUIPMENT G1. Equipment List G2. Equipment Location Drawings G3. Equipment Utility Requirements CATEGORY G TOTAL Score Definition Levels 0 = Not Applicable 2 = Minor Deficiencies 4 = Major Deficiencies 1 = Complete Definition 3 = Some Deficiencies 5 = Incomplete or Poor Definition

34 Example, part iii CATEGORY Element Definition Level G. EQUIPMENT G1. Equipment List G2. Equipment Location Drawings G3. Equipment Utility Requirements CATEGORY G TOTAL Score Definition Levels 0 = Not Applicable 2 = Minor Deficiencies 4 = Major Deficiencies 1 = Complete Definition 3 = Some Deficiencies 5 = Incomplete or Poor Definition

35 Example, part iv CATEGORY Element Definition Level G. EQUIPMENT (Maximum Score = 36) G1. Equipment List G2. Equipment Location Drawings G3. Equipment Utility Requirements CATEGORY G TOTAL Score Definition Levels 0 = Not Applicable 2 = Minor Deficiencies 4 = Major Deficiencies 1 = Complete Definition 3 = Some Deficiencies 5 = Incomplete or Poor Definition

36 Example, part v CATEGORY Element Definition Level G. EQUIPMENT (Maximum Score = 36) G1. Equipment List G2. Equipment Location Drawings G3. Equipment Utility Requirements CATEGORY G TOTAL Score Definition Levels 0 = Not Applicable 2 = Minor Deficiencies 4 = Major Deficiencies 1 = Complete Definition 3 = Some Deficiencies 5 = Incomplete or Poor Definition

37 Example, part vi CATEGORY Element Definition Level Score G. EQUIPMENT (Maximum Score = 36) G1. Equipment List G2. Equipment Location Drawings G3. Equipment Utility Requirements CATEGORY G TOTAL 22 Definition Levels 0 = Not Applicable 2 = Minor Deficiencies 4 = Major Deficiencies 1 = Complete Definition 3 = Some Deficiencies 5 = Incomplete or Poor Definition

38 Next Steps? Evaluate individual elements Evaluate category scores Look at the vital few Understand risk-- --elements are rated relative to one another Project management and communications among participants Take action!

39 Uses of PDRI Scope definition tool Measure of completeness Assess risk Common language Communication tool Reconcile differences Training tool Monitor progress Parachute

40 Risk Allocation in Contracts Survey Expert panel

41 Additional methods Definitions, including savings estimates Case studies or examples

42 What We Have Done Research into capital intensity of comparative industries Definitions of capital efficiency Identification of best practices Tested four surveys Surveys currently underway

43 Capital Efficiency Toolkit Research Capital program best practices Expert panel non/lite construction alternatives Utility panel improved risk allocation in contracts Case studies Pilot projects Surveys

44 Questions?