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BACKGROUND:DIGITAL STOCK,

MONEY IMAGE: 1999 CORBIS CORP.

IN THE PAST, ELECTRIC UTILITIES WERE VERTICALLY INTEGRATED


monopolies responsible for generation, transmission, and distribution. Prior to the
1970s, load was doubling more than once per decade and equipment was mostly
new. Since rates were declining and earnings were growing, utilities could spend
liberally to achieve high levels of system performance while minimizing most
aspects of risk. These were the glory days, and the glory days are gone.
Today, the industry is vertically unbundling so that generation, transmission, and
distribution can be operated as separate businesses. Many traditional utilities are now
wires companies, where the vast majority of spending relates to physical infrastructure. With slow load growth, aging equipment, depleting rate bases, rate freezes, and
regulatory uncertainty, electric utilities are looking for ways to increase earnings, credit ratings, and stock price. The transmission and distribution business is asset intensive,

may/june 2005

1540-7977/05/$20.002005 IEEE

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and many feel that asset management is the best way to


address these fundamental issues.
Asset management is a term derived from the financial
industry, where it is applied to investment portfolios containing stocks, bonds, cash, options, and other financial instruments. Fundamental to financial asset management is the
trade-off between risk and return. Investors identify acceptable risk, and asset management techniques are used to
achieve this level of risk for the highest possible return.
Many techniques of financial asset management are
applicable to infrastructure asset management. Of particular
importance is the treatment of risk, which is related to the
predictability of future performance. Transmission and distribution assets, however, are more complicated to manage
than financial assets for a variety of reasons. They have nonfinancial aspects of performance and risk, they require maintenance and replacement, and they are part of a highly
complex interconnected system. Also, there is not a liquid
market for them.
This article discusses asset management for transmission
and distribution companies. It first presents the goals and
objectives of asset management, a corporate framework, and
the competencies required to make it all work. The remainder
focuses on pressing issues facing transmission and distribu-

tion companies today and the ability of asset management to


help address these issues in an effective manner.

Goals

In its most general sense, asset management is a business


approach designed to align the management of asset-related
spending to corporate goals. The objective is to make all
infrastructure-related decisions according to a single set of
stakeholder-driven criteria. The payoff is a set of spending
decisions capable of delivering the greatest stakeholder value
from the investment dollars available.
Typically, utilities adopt an asset management approach to
either reduce spending, more effectively manage risks, or
drive corporate objectives throughout an organization. These
are good things but should be considered a result of asset
management rather than its objective. For example, asset
management is not:
reliability-centered maintenance
equipment condition monitoring
loading equipment to higher levels
risk reviews for cancelled projects
ablack box that tracks assets and prioritizes spending
requests.
Stated simply, asset management is a corporate strategy
that seeks to balance performance,
cost, and risk. Achieving this balance requires the alignment of corporate goals, management
decisions, and technical decisions.
Corporate Capital
It also requires the corporate culStrategy Structure
Business
ture, business processes, and inforRegulatory
Values
Management
mation systems capable of making
Financial
Data
rigorous and consistent spending
Targets
Reporting
decisions based on asset-level data.
The result is a multiyear investment
Corporate
Asset
Outage
Objectives
plan that maximizes shareholder
Owner
Response
value while meeting all performance, cost, and risk constraints. The
Maintenance
Capital
goals of asset management are to:
Planning
Asset
Condition
balance cost, performance,
Asset
Service
Operations
Monitoring
and risk
Manager
Provider
Planning
align corporate objectives
Inspection
Maintenance
with spending decisions
Planning
create a multiyear asset plan
Operations
Project Evaluation
based on a rigorous and
Construction
data-driven processes.
Life-Cycle Costing
Asset
management is ambitious
Procurement
Risk Management
in scope and requires supporting
Asset
Budgeting
Plan
metrics, organizational design,
processes, information systems, and
corporate culture. Successful implementation can be quite disruptive
and requires the involvement and
figure 1. Asset management is based on three functions (asset owner, asset
manager, and asset service provider), a single process, and many decisions.
support of top management, suffi-

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may/june 2005

cient resources, and effective change-management skills.


Canned approaches are doomed to fail, but thoughtful
approaches can help utilities reach the next level in business
success.

Framework
In its classical form, asset management separates itself from
asset ownership and asset operations. The asset owner is
responsible for setting financial, technical, and risk criteria.
The asset manager is responsible for translating these criteria
into an asset plan. The asset service provider is responsible
for executing these decisions and providing feedback on actual cost and performance (risk is determined through variation
in performance).
This decoupled structure allows each asset function to have
a focus: owners on corporate strategy, managers on planning
and budgeting, and service providers on operational excellence (see Figure 1). The asset owner sets the business values,
corporate strategy, and corporate objectives in terms of cost,
performance, and risk. The asset manager identifies the best
way to achieve these objectives and articulates this in a multiyear asset plan. The service provider executes the plan in an
efficient manner and feeds back asset and performance data
into the asset management process.

Asset management is also about process. Instead of a


hierarchical organization where decisions and budgets follow
the chain of command into functional silos, asset management is a single process that links asset owners, asset managers, and asset service providers in a manner that allows all
spending decisions to be aligned with corporate objectives
supported by asset data.

Competencies
A robust asset management structure is supported by three pillars of competency: management, engineering, and information (see Figure 2). Building these competencies is daunting
when viewed in isolation. Far more difficult is developing
cross-functional expertise so that management, engineering,
and information skills can be addressed in a mutually supporting manner. At a minimum, this requires knowledge of the concerns, jargon, and methodologies associated with each pillar.
There are not many people in the transmission and distribution business who have strong skills relating to all three pillars.
As such, many projects and initiatives will be led by project
managers who need support when considering the full range of
issues related to asset management. Without this support, projects will often achieve tactical goals but will be incongruent with
the overall corporate asset management strategy. Awareness is

Asset Management

Management

Engineering

Information

Business Strategy

Planning

System Architecture

Regulatory Strategy

Design

System Integration

Organizational Design

Operations

Business Intelligence

Performance Management

Maintenance

Knowledge Management

Process Design

Reliability

Asset Registry

Resource Planning

Protection

EAM, CIS, GIS

Decision Analysis

Equipment Health

CMMS, SCM

Financial Risk

Technical Risk

SCADA, OMS

figure 2. Asset management must be supported by three pillars of competency: management, engineering, and
information.
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the first step towards solving this problem.


The remainder of this article examines the role of asset
management in pressing issues facing the transmission and
distribution business today. For each issue, it discusses major
concerns, common pitfalls, key success factors, and advantages that can be realized by taking a comprehensive asset
management approach.

Aging Infrastructure

Pole Count

Cumulative (%)

Most transmission and distribution utilities in the United


States have average equipment ages exceeding 30 years. It
often seems wasteful to replace old equipment before it
fails, but the possibility of drastic increases in equipment
failures is unacceptable from both financial and system performance perspectives. A typical situation is shown in Figure 3: 30% of a utilitys distribution poles are more than 40
years old, but the utility is on a pole
replacement schedule of .5% each year.
Clearly, old equipment must eventually
100
2,500
be replaced, and present investment
90
rates are not sustainable. The traditional
80
2,000
utility structure seems incapable of
proactively addressing this ubiquitous
70
and looming problem.
60
1,500
More than any other issue, aging
50
infrastructure illustrates the potential of
40
1,000
asset management to address critical
30
transmission and distribution problems.
500
20
First, it forces asset owners (executive
management) to articulate clear goals in
10
terms of budgets, system performance,
0
0
and acceptable risk. It also requires an
0
10
20
30
40
50
60
70
80
90 100+
asset registry that tracks, at a minimum,
Pole Age (years)
the age of each piece of equipment in the
field. Engineers can then perform
figure 3. Thirty percent of this utilitys poles are more than 40 years old. This
detailed technical analyses comparing
is typical for many classes of equipment and illustrates the looming issue of
tactics such as inspect, repair, extend
aging infrastructure.
life, replace, and make system modifications. This analysis must take a multiyear approach, since aging infrastructure
cannot be addressed in a single budget
cycle. If performance and risk targets
cannot be met within budget constraints,
asset owners must decide which targets
to relax. When done properly, asset management will produce an aging-infrastructure plan that justifies increased
capital spending through a rigorous,
data-driven, and auditable process.

Reliability

Penalties and/or Rewards

Performance Standards

Reporting and Monitoring

No Requirements or No Response

Standards for One Company

figure 4. A majority of states require reliability reporting, and many have set
specific reliability targets. Reliability is quickly becoming one of the most
important performance issues regarding asset management.
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The 14 August 2003 blackout will most


likely result in mandatory reliability
standards for all U.S. transmission systems. On the state level, more than 35
commissions require reliability reporting, and many have set reliability targets
that utilities are expected to achieve (see
Figure 4). Clearly, reliability is the most
important measure of system performance for both transmission and distribution. Utilities will be required to meet
reliability targets and must manage the
may/june 2005

Asset management is ambitious in scope


and requires supporting metrics, organizational design,
processes, information systems, and corporate culture.

Asset Utilization

Distribution Transformers

risk of not meeting these targets. Reliability is also a major


cost driver and is often the major focus of asset management
initiatives.
Although reliability is best achieved through proactive
planning and design, most reliability initiatives are reactive
and not fully aligned with corporate objectives. By taking an
asset management approach, reliability is treated explicitly,
rigorously, and cross-functionally. All
reliability decisions are based on solid
historical information relating to equip1,400
ment performance, system performance,
operational performance, and cost.
1,200
Decisions related to expansion, replacement, reconfiguration, operations,
1,000
inspection, and maintenance are all considered together. Reliability is critical to
800
performance, cost, and risk and is insep600
arable from asset management.

supporting planning criteria, maintenance criteria, loading


guidelines, information systems, and operating processes.

Planning
Good planning ensures that money spent today has lasting
value in the future. Since this definition is best understood in
terms of capital spending, most utilities equate planning with

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may/june 2005

115+%

100-114%

90-99%

80-89%

70-79%

60-69%

50-59%

40-49%

30-39%

20-29%

10-19%

0-9%

An easy way to address an overloaded


200
piece of equipment is to increase its rating. Of course, this increases loss-of-life
0
and the probability of premature failure.
The opposite problem is underutilized
assets. Is lightly loaded equipment justified as redundancy, or is it poor asset
Maximum Loading
management? The issue of asset utilization is illustrated in Figure 5. On aver- figure 5. At peak, this utility has an average distribution transformer loading
age, the distribution transformers of this of less than 50%. An important goal of asset management is to address this
utility are loaded less then 50% of type of underutilization.
nameplate at peak. Better asset utilization should help this utility to reduce
infrastructure expansion, retrofitting, and replacement. Howcapital spending and increase returns on its asset base.
Many utilities are increasing equipment loading in an ever, when viewed in isolation, capital planning is not comattempt to defer spending. Although this effectively increases patible with asset management. When planning a system,
risk and reduces cost, it does so in a nonrigorous manner. An capital projects must be weighed against operational projects
asset management process forces an asset utilization strategy and maintenance projects so that performance and risk targets
to quantify the impact of increased loading to ensure that risk can be achieved for the least life-cycle cost.
To be aligned with asset management, planning must
and performance are still acceptable. It also ensures a consistent approach to seasonal ratings, emergency ratings, dynamic consider all activities that impact performance and risk. Capacity
ratings, initial sizing, and replacement criteria. It quantifies the planning is replaced with performance and risk planning.
pronounced trade-off between the sophistication of informa- Capital planning is replaced with integrated capital, operations,
tion systems and the ability to load equipment to higher levels. and maintenance planning. This new function is called asset
Asset management takes a comprehensive look at equipment planning, and it is the essence of asset management (see Figure
utilization and results in an asset utilization plan with mutually 6). Asset planning is driven by corporate objectives,
IEEE power & energy magazine

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determines all asset-level spending, and is based on rigorous


analysis and asset-level data.

Protection, Control, and Automation


In the age of digital relays and open communication protocols, protection, control, and automation become the same
topic. Unfortunately, many utilities have independent groups
in charge of each function, and coordination is difficult to
achieve. Common mistakes that leave value on the table
include: one-for-one replacement of electromechanical
devices; underutilization of computer-based relays; insufficient consideration of communications protocols and substation local area networks; and insufficient integration with
enterprise systems.

Performance
Targets
Risk
Targets

Capital
Plan
Asset
Planning

Budget
Targets

Operations
Plan
Maintenance
Plan

figure 6. Asset planning identifies the best combination of


capital, operations, and maintenance spending to achieve
all targets for the least possible life-cycle cost.

Asset management can help in this area by forcing decisions to be made based on process, rather than basing them on
decisions made within functional silos. Decisions about protection upgrades are forced by process to consider SCADA
implications. Information experts instinctively consider the
ability of information systems to provide wide access to captured data and for processes to extract the most value out of
this data. Risk management forces consideration of catastrophic issues such as blackouts and cyberattacks. Protection,
control, and automation are three huge opportunities for most
utilities, and asset management will make the whole far
greater than the sum of its parts.

Maintenance and Inspection


Many utilities have extensive maintenance backlogs, and others do not even know the maintenance requirements of existing infrastructure. In this situation, asset management begins
with equipment condition assessment, and the development
of supporting information systems and processes to best
make use of this information.
Once equipment condition is known, maintenance and
inspection becomes a microcosm of asset management. How
should the maintenance backlog be prioritized? How often
should equipment be inspected? Should maintenance be periodic, condition based, or reactive? How does reliability-centered maintenance fit into a greater asset management
framework? How should system performance and risk be
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IEEE power & energy magazine

quantified and balanced against cost? How should maintenance and inspections be planned in conjunction with operations and capital spending? Such questions are difficult, but
can be answered through an asset management process that
forces management, engineering, and information competencies to act in unison.

Risk Management
Risk management is perhaps the most misunderstood aspect
of asset management. Most executives view this topic in
terms of financial risk management, where statistical methods
are well established. The trade-off between risk and reward is
quantifiable, and risk mitigation can be pursued through
diversification, indemnification, options, futures, swaps, and
a myriad of other financial instruments.
Physical risk management is seemingly unrelated and
concerns itself with undesirable events such as equipment
failure, misoperation, injuries, and other headline events.
Many utilities approach risk by looking at the probability and
severity of bad things happening if a project is not approved.
Although this is a good start, it falls short of true asset management since it is based on projects rather than performance
and is not rigorous in its approach.
Risk is best thought of as the risk of not meeting performance targets (for example, reliability, environmental, and
safety). Viewed in this way, it is insufficient to set a performance target such as achieve less than two interruptions per
customer. Instead, each target is accompanied by a risk tolerance, for example, achieve less than two interruptions per
customer with 90% confidence. If this target is not achieved,
the asset management group can confidently state that this
was a one-in-ten-year occurrence and that the system is performing as designed.
Proper treatment of risk requires the knowledge of equipment condition, the impact of maintenance and operations on
equipment condition, and the impact of equipment condition
on the probability of failure. It also requires supporting information systems and business processes that allow risk mitigation in the form of inspection, maintenance, operations,
replacement, and system modifications. A complete technical
risk management program will be integrated into an overall
corporate risk management program and should be familiar
with hedging, real options, scenario analysis, the cost of capital, regulatory affairs, legal affairs, and public relations. Risk
management is an explicit goal of asset management and
must become a core competency of transmission and distribution utilities.

Budgeting and Project Selection


Ultimately, asset management is responsible for spending
decisions. The purpose of a budgeting and project selection
process is to ensure that these decisions are made consistently, in the best manner possible, and in full alignment with
corporate objectives. Typical utility budgeting processes are
insufficient, and it is often helpful to ask the following quesmay/june 2005

tions: Are performance, cost, and risk being truly balanced, or


being dealt with in another manner? Is performance based on
meaningful and quantifiable measures? Is budgeting based on
multiple years and total life cycle costs? Is the risk of meeting
budget and performance targets treated in a rigorous manner?
When implementing an asset management strategy, many
utilities begin by focusing on project ranking. By forcing all
projects to be assigned a benefit and a cost, projects across
departments and functions can be directly compared. By
ranking all projects based on the ratio of benefit to cost, projects can be selected in order until performance targets are
reached or budgets are exhausted.
Compelling as project ranking may seem, it is problematic
if there is not a natural definition of benefit. Within narrow
functions, such as reliability improvement, it may be possible
to have a good, single measure of benefit (for example,
reduction in customer interruptions). Within a greater asset
management context, many different performance issues
must be considered, and a single measure becomes meaningless. It is always possible to create a generic benefit index
based on the weighted sum of a wide range of disparate benefits, but the resulting list of ranked projects can often cause
more problems than it solves.
Is it likely that the executive champion of Project A will
surrender quietly when Project B scores a bit better on a generic index? It is more likely that this champion will argue to
adjust the generic index formula. Since there is no direct link to
specific performance targets, it is equally likely that a ranked
list of projects will be relegated to guideline status, eliminating
the rigor that asset management strives to achieve. What if
there is not enough money to meet all of the utilitys performance targets? Project ranking avoids this issue by implicitly
lowering target levels, a questionable tactic for public utilities
with a statutory obligation to provide prudent levels of service.
To avoid these problems, utility performance should be
based on meaningful targets with corresponding levels of risk
tolerance. Once these and budget constraints are identified,
optimization techniques can identify a multiyear spending
plan that satisfies performance, risk, and budget constraints in
a way that minimizes total life cycle cost and maximizes
shareholder value.

Enterprise Applications
Information systems touch nearly every aspect of the
transmission and distribution business and are key drivers to
productivity improvement, performance management, and
the ability to make data-driven decisions about asset spending. Fundamental to asset management is an asset registry,
which is a repository of all equipment that tracks information
related to economic and technical performance. Important
questions to ask include: Can a geographic information system or a maintenance management system serve as an asset
registry? Is asset-level information used for all decision-making processes, including forecasting, planning, engineering,
operations, and maintenance? Do applications related to asset
may/june 2005

management work in unison with financial, project management, supply chain, and human resource systems?
Many utilities are also faced with legacy hardware, internally
developed applications, a large number of separate databases,
and a large amount of data that is not in electronic format.
Addressing these situations can be a distraction from asset
management and risks having the tail wag the dog. When
addressing these issues, it is important to develop a comprehensive asset information plan. However, it is equally important for this plan to complement, rather than drive, an overall
asset management process.

Summary
Asset management is the art of balancing performance, cost,
and risk. Achieving this balance requires support from three
pillars of competency: management, engineering, and
information. Initiatives can stem from each of these pillars
but must always consider and coordinate with the other two.
Asset management is capable of addressing the most
pressing issues facing the transmission and distribution
businesses: aging infrastructure, reliability, asset
utilization, planning, automation, maintenance, project selection, and risk management. Each issue is daunting when considered in isolation. More daunting is the thought that true
asset management will optimize decisions across all of these
issues simultaneously. Asset management can be truly revolutionary but only when it is based on three functions, a single
process, supporting systems, and a robust skill set of management, engineering, and information.

Biographies
Richard E. Brown is a principal consultant with KEMA, Inc.
and specializes in helping utilities improve business performance through management and technical consulting. He has
published more than 60 technical papers related to reliability
and asset management, is author of the book Electric Power
Distribution Reliability, and has provided consulting services
to most major utilities in the United States. He is a Senior
Member of IEEE, chair of the Working Group on Distribution
Planning and Implementation, and recipient of the Walter Fee
Outstanding Young Engineer award (2003). Richard has a
B.S.E.E., M.S.E.E., and Ph.D. from the University of Washington and an M.B.A. from the University of North Carolina. He
can be reached at rebrown@kema.com.
Bruce G. Humphrey, vice president at KEMA, Inc., leads
consulting engagements on corporate strategy,
economic analysis, and public policy. He has numerous
publications on a wide variety of topics, including the corporate implications of evolving competition, the economics of
climate change, and techniques for scenario planning. Prior to
joining KEMA, Bruce was a partner at Putnam, Hayes &
Bartlett; director of North American Electric Power at CERA;
and chief economist at the Edison Electric Institute. His career
also includes federal government service on energy and regulatory policy. He can be reached at bhumphrey@kema.com. p&e
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