Critical thinking

  • Share

Aging assets present power and utility companies with increasing risk of catastrophic failures. Critical asset risk and investment planning (CARIP) can help better manage these risks while lowering costs and improving reliability. Roy Ellis reports.

Many P&U companies own critical assets that are nearing or exceeding their useful life. As these assets age, they present an increasing risk of failure. Catastrophic asset failures can incur huge financial burdens. The cost of restitution and rebuilding in a populated area can be billions, easily bankrupting an operator.

Utility operators need to understand their aging asset exposure. By assessing critical asset risk and developing an investment plan, they can calculate the relative likelihood and consequence of failure.

This information can then be used to inform all stakeholders of the necessary mitigation activities and schedule. Such a plan can help create shared consent for investment priorities, which is the first step to avoid the financial and reputational damage of the next catastrophe-in-waiting.

Beyond compliance

Historically, utilities have designed, built and maintained regulated assets to a precise level of recoverable compliance costs in an approach known as compliance management. Regulators have traditionally authorized recovery based on the practical cost to achieve and maintain compliance.

This approach works reasonably well for modern infrastructure. However, with age, assets can be compliant but still have a relatively higher likelihood of failure. Recent high-profile failures of old assets have exposed operators to the true consequence of a catastrophic failure, enabling them to quantify their aging asset risk and understand their true exposure more precisely.

CARIP shifts the regulated utility’s critical asset investment and recovery strategy from one primarily driven by compliance mandates to one that includes a quantified risk of failure assessment for certain compliant but high-risk, mission-critical assets.

This planning helps assess the true risk exposure of critical assets by quantifying the impact of age on all degradation considerations, while including the consequence of failure, to help inform investment priorities.

Three critical steps

There are three steps utilities can take to develop and implement an appropriate risk and investment plan:

1. Assess risk exposure. Shift from a compliance perspective to a CARIP perspective by assessing risk. For competing business unit or jurisdictional investments, conduct an assessment of assets to confirm compliance, risk exposure and unique jurisdictional mitigation priorities.

2. Prioritize and optimize the investment plan. Once all jurisdictions or business units have completed their individual assessment, their input informs a corporate-level view of the overall exposure to develop the corporate risk profile. This information, when combined with all other risk components, creates a structure against which a utility can consider all risk-informed investments and weigh risk mitigation scenarios to compare the risk impact of alternative mitigations.

3. Create risk and regulatory alignment. Utilities can share the information developed from the first two steps with all external stakeholders to inform and gain support for the required investment plan. The plan and supporting data should clearly articulate the corporate risk tolerance and current risk profile, explaining how each risk mitigation investment changes the profile, at what cost and over what period of time. The objective is to build consensus with regulators and other stakeholders for the needed investments. Ongoing analysis and reporting during this step is critical.

Proactive approach

Aging utility infrastructure assumes an increasing level of failure risk that should be shared with all who benefit from the extended use of the assets. Critical assets in high-consequence areas that have not undergone a dedicated risk assessment — with results used to guide investment priorities — are exposing shareholders to disproportionate levels of risk.

As the current compliance management approach to asset management fails to account for this increasing level of risk, it is time for utilities to shift to a more proactive risk management approach.

CARIP can help utilities understand their exposure, which is the first step to effectively manage the risk. It can also produce a compelling regulatory case that can accelerate the replacement of high-risk assets — or make a constructive case for a more equitable approach to risk-sharing between shareholders and ratepayers.

Three categories of assets and associated risk:

1. Compliance risk. Investment planning for all assets in a traditional compliance management system must be adequate to comply with federal and state regulations. These investment decisions should seek to minimize overall risk exposure while achieving compliance.

2. High-consequence area risk. This includes all assets in high-consequence areas, as well as any specific assets that an owner or operator considers an unacceptable failure risk. These assets should be targeted for future investments proportional to their relative likelihood of failure.

3. Aging asset in high-consequence area risk. Aging assets in high-consequence areas represent a higher relative likelihood and consequence of failure due to their age and location. These assets require priority mitigation activities beyond mandated compliance.

For more information

Global Capital Confidence Barometer survey Managing the risk of catastrophic failure.

Previous Next