Using Tolerable Risk to Drive Asset Management Decision Making

Using Tolerable Risk to Drive Asset Management Decision Making Richmond, Virginia May 12, 2016 1

Principal Asset Management Consultant with GHD and has over 25 years experience in utility management. Nationally recognized in the field of asset management and has led many of GHD s largest and most complex AM projects in the US. He has led numerous workshops, training sessions, and presentations on advanced asset management. Gage Muckleroy, PE BCEE Institute of Asset Management (IAM) Endorsed Assessor. Received his Bachelor s degree in Civil Engineering from Texas A&M in 1988 and his Master s degree in Environmental Engineering from The Johns Hopkins University in 1993. 2

Acknowledgments Acknowledgments: Walter Graf, WERF Duncan Rose, GHD (Retired) Steve Albee, US EPA (Retired) Ned Paschke, University of Wisconsin Madison Sunil Sinha, Virginia Tech 3

Asset Management Definition and Frameworks 4

Challenges Facing Infrastructure Owners Knowledge Loss Customer Demands Financial Constraints Which of these impact you most significantly? Regulatory Compliance Climate Change Many organizations have found that a comprehensive approach to Asset Management helped address these challenges Growth Security & Emergency Response Aging Assets Any additional challenges you face not on this list? Asset Management 101 April, 2016 Copyright 2016 GHD Inc. 5

Changing Utility Business Environment Demand to do more with existing resources Need to make every dollar work to better use capital and operating budgets Move from reactive to proactive work environment 6

A Paradigm Shift Transition from building and operating to managing assets Extending asset life Optimizing maintenance and renewal Developing accurate long-term funding strategies Sustain long-term performance 7

What, Then, Is Asset Management (AM)? Systematic integration of advanced and sustainable management techniques into a management paradigm or way of thinking. Primary focus on the long-term life cycle of the asset and its sustained performance, rather than on shortterm, day-to-day aspects of the asset. 8

Asset Management Frameworks WERF / EPA Framework Basic for initial understanding 5 Core Questions Ten Step Process ISO 55000 - Overview of principles & terminology ISO 55001: Management systems requirements ISO 55002: Management systems Guidelines for applying Asset Management 101 April, 2016 Copyright 2016 GHD Inc. 9

Asset Management US EPA Definition Management paradigm and body of management practices Applied to the entire portfolio of infrastructure assets at all levels of the organization Seeking to minimize total costs of acquiring, operating, maintaining, and renewing assets Within an environment of limited resources While continuously delivering the service levels customers desire and regulators require At an acceptable level of risk to the organization COS LOS RISK Comprehensive Asset Management Asset Management 101 April, 2016 Copyright 2016 GHD Inc. 10

IMPLEMENTATION Organization values, prioritization criteria and risk policy PLANNING ASSET MANAGEMENT SYSTEM Stakeholder Requirements Strategic Requirements ORGANIZATIONAL STRATEGIC PLAN (OSP) Vision, mission and values, business policies, stakeholder requirements, goals and risk management ASSET MANAGEMENT POLICY Mandated requirements, overall intentions/principles and framework for control of asset management ASSET MANAGEMENT STRATEGY Long-term optimized and sustainable direction for the management of the assets, to assist in delivery of the organizational strategic plan and apply the asset management policy ASSET MANAGEMENT OBJECTIVES Specific and measurable outcomes required of assets, asset systems and the asset management system ASSET MANAGEMENT PLAN(S) Actions, responsibilities, resources and timescales intended to implement the asset management strategy and deliver the asset management objectives ASSET MANAGEMENT PROCESS & PRACTICES Functional, policies, strategies, standards, processes and procedures Concept Operate & Specify Acquire Improve Dispose Maintain Source: IAM (adapted from PAS-55:2008) 11

Five Core Questions of Asset Management 1.What is the current state of my assets? What do I own? Where is it? What condition is it in? What is its performance? What is its remaining useful life? What is its remaining economic value? 2.What is my required level of service (LOS)? What is the demand for my services by my stakeholders? What do regulators require? What is my actual performance? 3.Which assets are critical to sustained performance? How does it fail? How can it fail? What is the likelihood of failure? What does it cost to repair? What are the consequences of failure? 4.What are my best O&M and CIP investment strategies? What alternative management options exist? Which are the most feasible for my organization? 5.What is my best long-term funding strategy? Asset Management 101 April, 2016 Copyright 2016 GHD Inc. 12

10-Step Process 1. What is the current state of my assets? 2. What is the required LOS? System layout Data hierarchy Standards inventory Condition assessment Protocol Rating methodologies Expected life tables, decay curves Valuation, life cycle costing Demand analysis Balanced scorecard Performance metrics Develop asset registry Assess conditions failure modes Determine residual life Determine life cycle and replacement costs Set target Levels of Service (LOS) Determine Business Risk ( Criticality ) Optimize O&M Investment Optimize Capital Investment Determine Funding Strategy Build AM Plan Failure mode and effects analysis Business risk Exposure Delphi technique Root cause analysis Reliability centered and Predictive maintenance Optimized decision-making Confidence level rating Strategic validation Optimized decision making Renewal annuity 3. Which assets are critical? 4. Best O&M and CIP strategy? 5. Best funding strategy? Asset management plan Policies and strategies Annual budget Asset Management 101 April, 2016 Copyright 2016 GHD Inc. 13

Risk as a Component to Asset Management Decision Making (Basic and Advanced) 15

Risk is the Heart of Asset Management Risk Asset Management 16

Characteristics of Good Asset Management An asset management system that realizes value from all of the assets in order to achieve organizational objectives Characteristic Multi-Disciplinary Systematic Systems-Oriented Risk Based Optimal Sustainable Integrated Demonstration of Application Crosses departmental & discipline boundaries with focus on net value for money Rigorously applied in a structured management system Looks at assets in their system context Incorporates Risk into all decision making Seeking best compromise. Cost vs Performance vs Risk & Short term vs Long term Life cycle value, Environmental performance Joined up - it is more than a sum of the parts Source: Adapted from PAS-55:2008 and ISO 55000 17

Risk Framework Defines in a consistent and repeatable way what risk is and how it will be calculated Includes a system for reevaluation of risk and the framework itself on a periodic basis Is comparable across the organization through the use of a consistent risk scale Integrates with other processes such as CIP, business case analyses and O&M related decision making Assigns responsibility for managing risk to specific individuals or groups within the organization 18

Steps in Implementing a Risk Framework Establish Risk Context Identify Risks Evaluate Risks Manage Risks Monitor and Review Source: International Infrastructure Management Manual 2011 Edition 19

Establish Risk Management Context Corporate Guides Policy Executive Management Team Activity Guides Strategies Asset Managers Operational Guides Specific Actions Operations and Technical Staff Source: International Infrastructure Management Manual 2011 Edition 20

Examples of Using Risk in AM Decision Making Capital Project Prioritization Business Case Evaluations Risk Reduction Key Performance Indicator Number or Value of Assets in Significant Risk Zone 1 vs Total Assets in Zones 1, 2 and 3 Maintenance Strategies PM Optimization vs Enhanced Predictive Maintenance Programs 21

Simple Risk Metric Condition, Reliability, Performance Costs of the Consequences of Failure Business Risk Exposure (BRE) Probability of Failure (PoF) Consequence of Failure (CoF) PoF x CoF = BRE 22

Business Risk Exposure Core Risk Probability of Failure x Consequence of Failure x Risk Mitigation = Business Risk Score Use design or standard life table Adjust for Design standard Construction quality Material quality Operational history Maintenance history Operating environ. External stresses Consider Failure mode Condition Operating Performance Reliability Availability Maintainability Consider Safety, health, and welfare Environmental impact Process criticality Repair costs Revenue and aggravation impact on customers and agency Consider Redundancy Diversion/Pipe around Spares on site SCADA Etc. 23

The Four Major Failure Modes Failure Mode Definition Tactical Aspects Management Strategy Capacity Volume of demand exceeds design capacity Growth, system expansion Redesign LOS Functional requirements exceed design capacity Codes & permits: NPDES*, CSOs, OSHA, noise, odor, life safety; service, etc. O&M optimization, renewal Mortality Consumption of asset reduces performance below acceptable level Physical deterioration due to age, usage (including operator error), acts of nature O&M optimization, renewal Efficiency Operations costs exceed that of feasible alternatives Pay-back period Replace *NPDES is National Pollutant Discharge Elimination System, CSOs are combined sewer overflows, and OSHA is Occupational Safety and Health Administration 24

Probability of Failure (PoF) PoF is directly related to the failure mode We cannot absolutely determine PoF Sometimes we have good data, sometimes we do not We can estimate a range of failure how early (pessimistic) and how late (optimistic) 25

Age? Usage? Condition? Performance Finding a Proxy for Measuring Failure Can age, usage, or condition be substituted? High Data distribution of asset performance Decay curve Mean asset condition Low 0 Minimal asset standard Assets performing below standard 50 Percent of Effective Life Consumed 100 26

Condition Assessment Scoring Score Description Maintenance Level Percent Replacement 1 Perfect/excellent condition Normal 0 2 Minor defects only Minor 5 3 Backlog maintenance required Significant 10-20 4 Major renewal required Renew 20-40 5 Asset nearly unserviceable Renew >50 27

Condition How to Determine the Remaining Life? Relating asset condition to percent of effective life consumed Data distribution of asset condition 1 2 Current Condition Decay or failure curve 3 4 5 Remaining Service Life Physical Failure 0 25 50 75 Percent of Effective Life Consumed 100 28

Probability Determining Significance of Failure The business risk exposure (BRE) trade-off High B High probabilitylow consequence D High probabilityhigh consequence Low Low A Low probabilitylow consequence Consequence C Low probabilityhigh consequence High 29

Probability Business Risk Exposure (BRE) Drives Prioritization High Worst first? No B Poor D Fair A Good Low Low Consequence C Good High 30

Probability Business Risk Exposure (BRE) Drives Prioritization Work program response High B Aggressive monitoring D Immediate work A Sample monitoring Aggressive monitoring Aggressive monitoring C Low Low Consequence High 31

Probability of Failure BRE Example 1 Basic Scoring Approach (Low Medium - High) Business risk exposure (BRE) increases (higher numbers) as probability of failure (PoF) and consequence of failure (CoF) increase High 3 3 6 9 2 2 4 6 1 1 2 3 Low Low 1 2 3 Consequence of Failure High 32

PoF BRE Example 2 Basic Scoring Approach (1 to 5 Scale) P5 Certain P4 Almost certain or very likely P3 Likely P2 Possible P1 Rare Risk = Categories C5-Catastrophic C4-Extreme Immediate action to prevent impact to LOS, safety, and environment Gearing up for immediate action Insignificant Minor Moderate Major Catastrophic C1 C2 C3 C4 C5 C3-High C2-Moderate C1-Low Monitoring regime, response plan in place Management responsibility specified Manage using routine procedures CoF 33

Determining Business Risk Exposure for Linear Assets Desktop condition model Probability of failure GIS Proximity to environmentally sensitive areas Asset size Client type supported State vs local road X Consequence of failure = BRE 34

Business Risk Exposure Results 35

Tolerable Risk A level of risk deemed acceptable by society in order that some particular benefit or functionality can be obtained, but in the knowledge that the risk has been evaluated and is being managed. 36

Consequence of Failure Criteria Regulatory compliance Regulatory violations Environmental impact Environmental Economic Social / Community Health & safety Levels of service Public image Direct cost (external) Indirect cost (internal) Triple Bottom Line 37

Consequence of Failure Scoring Matrix - Example Public image (odor / noise / discharges) No Impact Social/Community Alert posted on website but no media attention Local coverage State coverage National coverage Customers Affected <10 and No Critical Customers 11 to 250 and No Critical Customers 251 to 1000 and No Critical Customers 1001 to 10,000 and No Critical Customers >10,000 or 1 or more Critical Customers Health & safety No impact Minor injury Moderate injury and some sickness Major injury, sickness Potential for fatalities 1 2 3 4 5 Financial Financial impact Operational/resource impact Regulatory compliance $5,000 - Supervisory approval Negligible impact $50,000 - Department Head approval Low impact $150,000 - Manager approval High impact (scheduled work is delayed) $500K to $1M - Less than available reserves High impact & diverts funds >$1M - Greater than available reserves Outsourcing to Specialty Contractors 1 2 3 4 5 Environment/Regulatory No consequence Regulatory sanction possible Regulatory sanction likely; damage reversible in less than one year Extensive regulatory sanction virtually assured; damage reversible in one to five years Severe sanctions likely; damage reversible in five years or more 1 2 3 4 5 38

Tolerable Risk What is the tolerable Consequence of Failure to the organization? Society? Deaths, illnesses? Customers out of service? Calculated in dollar terms? To what condition must you manage your assets to stay within tolerable limits? 39

Developing Tolerable (Significant) CoF - Example Public image (odor / noise / discharges) No Impact Social/Community Alert posted on website but no media attention Local coverage State coverage National coverage Customers Affected <10 and No Critical Customers 11 to 250 and No Critical Customers 251 to 1000 and No Critical Customers 1001 to 10,000 and No Critical Customers >10,000 or 1 or more Critical Customers Health & safety No impact Minor injury Moderate injury and some sickness Major injury, sickness Potential for fatalities 1 2 3 4 5 Financial Financial impact Operational/resource impact Regulatory compliance $5,000 - Supervisory approval Negligible impact $50,000 - Department Head approval Low impact $150,000 - Manager approval High impact (scheduled work is delayed) $500K to $1M - Less than available reserves High impact & diverts funds >$1M - Greater than available reserves Outsourcing to Specialty Contractors 1 2 3 4 5 Environment/Regulatory No consequence Regulatory sanction possible Regulatory sanction likely; damage reversible in less than one year Extensive regulatory sanction virtually assured; damage reversible in one to five years Severe sanctions likely; damage reversible in five years or more 1 2 3 4 5 40

Development of Risk Management Zones Zone 1 Zone 5 Zone 4 Zone 3 Zone 2 41

BRE Example 3 - Scoring Approach Using Management Zones Zone 1 - Significant risk zone: Zone 4 Standard maintenance and replacement strategies Zone 5 - Low CoF assets. Run to repair: Not critical Redundancy Spares Maintenance optimization Significant CoF environmental and operational impacts Address in short term (0-5 years) Zone 2 - Assets with high CoF but failure not imminent - Real time / more aggressive condition monitoring (as applicable). Zone 3 - Assets with moderate CoF but failure not imminent - Real time / more aggressive condition monitoring (as applicable). 42

Likelihood of Failure Risk Framework - Example Business Risk Exposure Risk Zones Example for Illustrative Purposes Only 43

Example Using Redundancy as a Risk Mitigation Strategy Redundancy is a type of risk mitigation that can significantly reduce the risk metric BRE = PoF x CoF x R Where PoF is probability of failure CoF is consequence of failure R is a redundancy or risk mitigation factor ( 1.0) 45

Example Determining Mitigation Factor as Redundancy Start Does any other system/asset/approach fully fulfill the function if the asset fails? No Does any other system/asset/approach No partially fulfill the function if the asset fails? Yes Full Redundancy Yes Partial Redundancy No No Redundancy 46

Example Redundancy Scenario Assuming Only One Asset Can Fail at a Time Lift station with 5 interconnected pumps of equal capacity and 4 pumps can handle the peak flow demand (i.e., 1 installed spare). Failure definition: 1 (of 5) pump fails during peak flows (i.e., no simultaneous pump failure). Since there is 1 installed spare pump to replace a failed pump, there is 100% redundancy in this system. 100% redundancy is reflected as 90% reduction in risk. Mitigation score then is 1-90% = 0.1 (or 10%) (i.e., 10% of the core risk). Example: 2 installed spare pumps would be 200% redundancy, reflected as 98% reduction in risk. 47

Example Mitigation Factors Mitigation Description Factor No Backup All capacity lost 1 10% Backup 10% of capacity available after failure of an asset Increase capacity Equivalent to 10% backup 0.9 20% Backup 20% of capacity available after failure of an asset Emergency response plan 0.9 0.8 Equivalent to 20% backup 0.8 Mobile backup online Equivalent to 20% backup 0.8 25% Backup 25% of capacity available after failure of an asset 0.75 Bypass / diversion Equivalent to 25% backup 0.75 Real time monitoring* Equivalent to 25% backup 0.75 Spares on site Equivalent to 25% backup 0.75 Increase inspection frequency* Equivalent to 25% backup 0.75 30% Backup 30% of capacity available after failure of an asset 35% Backup 35% of capacity available after failure of an asset 0.7 0.65 Containment Equivalent to 35% backup 0.65 Mitigation Description Factor 40% Backup 40% of capacity available after failure 0.6 of an asset 50% Backup 50% of capacity available after failure of an asset Can be operated by hand Can take manual reading Constant speed can be used Equipment it controls can be operated in hand 50% of capacity available after failure of an asset 50% of capacity available after failure of an asset 50% of capacity available after failure of an asset 50% of capacity available after failure of an asset 75-80 % Backup 75-80% of capacity available after failure of an asset 80% Backup 80% of capacity available after failure of an asset 100% Backup One complete redundant system 0.1 200% Backup Two complete redundant systems 0.02 >200% Backup More than two complete redundant systems 0.5 0.5 0.5 0.5 0.5 0.2 0.2 0.01 48

SIMPLE (WERF & WRF) http://simple.werf.org/ 49 49

Tolerable risk tool Organization: Sunshine City Department: BSK WWTP Date of Analysis: June 10, 2014 Analysis ID: 01 1 Enter the maximum COF score of the scale you are using: 10.0 2 Enter the minimum COF score of the scale you are using: 1.0 Input framework boundaries 3 Enter the maximum POF score of the scale you are using: 10.0 4 Enter the minimum POF score of the scale you are using: 1.0 5 The pre-determined non-tolerable COF score (upper limit): 8.0 6 The pre-determined tolerable COF score (lower limit): 3.0 7 Select the POF score to determine non-tolerable risk: 8.0 75 percent equivalent of the maximum POF score possible is recommended as default. Tolerable risk limits 8 Your non-tolerable risk is calculated as: 64.0 9 Using the WERF BRE Tool, populate the fields on the sheet "Asset Data". Comparative Scenarios Scn ID Non-tol COF Tol COF Baseline 8.0 3.0 <-------- Active Scenario Lax 8.0 4.0 Lax-->Baseline 7.0 3.5 Baseline-->Conservative 5.7 2.5 Conservative 5.0 2.0 Scenario comparison 50

PoF Tolerable risk tool Tolerable risk chart - for active scenario EXAMPLE 10 1 2 3 4 5 6 7 8 9 10 10 9 9 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 0 1 0 1 2 3 4 5 6 7 8 9 10 CoF Zone 1 Zone 2 Zone 3 Zone 4 Zone 5 Assets 51

Setting Tolerable Risk for Your Utility Where And How Would You Draw The Significant Risk Line? 52

Thank You! Gage Muckleroy, PE BCEE Gage.Muckleroy@ghd.com 240-206-6831 53