PwC Advisory
Viewpoint
Utilities are often challenged
to effectively manage high-
stakes capital investment
projects.
*connectedthinking
Managing large scale capital projects: How
utilities can avoid pitfalls and fully exploit value*
Utility companies are expected to invest more than half a trillion dollars to meet
burgeoning public demand for energy. As a result of decades of low capital
investment in the energy sector, todays utility company executives are embarking
on major, multi-year construction projects to respond. These capital investments
will not only expand the electricity transmission, distribution, and generation
infrastructure but also deliver new technologies that reduce carbon emissions,
better manage usage through smart metering, and improve energy efficiency. To
help ensure utility management enjoys the full benefits of these large construction
investments, in our view, management should embrace the following three steps:
analyze and plan for the projects regulatory climate, establish a capital investment
management framework and develop focused management reporting.
Large in scale and strategic in importance
These projects are strategic to the companys overall growth strategy and
effective execution is essential to driving the shareholder value that is demanded
from these management teams. The projects have complexities where business
plans hinge on integrating new physical assets, technology and comprehensive
optimization strategies. To get the job done, utilities will need to hire multiple
outside contractors representing varied competencies and devote significant
internal resources to managing these projects, which will be under intense scrutiny
from regulators and investors. And it will be the utility companiesnot the external
contractors hired to do the workwhose reputations and futures hinge on
effective regulatory compliance, accurate cost control and on-time project delivery.
However, considering the limited amount of major construction undertaken
by US utilities over the past decade, many utilities lack the in-house expertise
and processes to manage such large and complex capital investment projects.
Besides the core operational areas, utilities may find that other related functions
such as plant accounting and state and local tax departments are understaffed
or underskilled for the level of capital projects activity now being contemplated.
Further, although utilities typically have excellent controls over routine capital
projects, major construction efforts require specific enhanced controls focus.
The large scale, multi-party involvement and compressed project timelines
associated with these projects increase their complexity, and utilities can easily
lose sight of the factors contributing to scope creep, cost overruns, schedule
delays and quality control issues. Whats more, utilities may be unable to recover
reasonable costs if they or their contractors do not maintain a strong control
environment and document costs according to the applicable regulatory need.
In high-stakes investments like these, it is important that utility companies provide
effective management to ensure the financial and operational success of capital
investment projectsand ongoing compliance with regulatory requirements.
Knowing relevant risks up-
front can save a utility not
only money but also its
reputation.
Plan ahead to gain visibility and avoid surprises
To effectively manage these large scale and complex projects, utilities should
establish a structured framework that maps the specific requirements of a projects
lifecycle to discrete management activities and controls. Such a framework
enables the utility company to identifyand, where appropriate, proactively
address risks and potential gaps in management controls before embarking
on the project and assists in improving operational performance. Multiple
requirements are associated with managing a project such as scope and change
control, schedule/time management, quality and inspection, cost management,
HR management, communication and reporting, procurement and contracts, and
issue management. And the challenges involved in any project component may
change as the project moves through its lifecyclefrom initial project planning
through design, testing, and implementation to maintenance and operations. The
up-front creation of this capital investment risk management framework enables
the utility to gain visibility into the entire landscape of the projectacross all
project components and the full project lifecycleso that issues are surfaced and
can be addressed on a timely basis.
Using the framework, the utility can consider risks and opportunities associated
with each project component at each stage in the project lifecycle. For example,
specific project implementation issues that are typically associated with the scope
and change control component include excessive and inadequately supported
cost estimates; delays and labor disruption caused by a change that is not
adequately assessed at the change approval stage; change approval delays
leading to work disruption; and implementation of unnecessary changes.
The framework is most effective when involving key stakeholders to insure that
the company leverages key areas of expertise. For example, the tax department
can unveil key tax considerations that can create a competitive advantage by
accelerating cost recovery or reducing overall project costs. Tax efficient entity
structuring and financing can minimize the tax burden and contribute to lower
overall costs. Research and experimentation income tax credits as well as certain
qualified energy credits are available as utilities develop third generation nuclear
facilities, communication networks, and pollution control facilities. Additional value
can be achieved by considering local tax credits and incentives, applicable tax
depreciable lives or tax capitalization issues.
By understanding the risks and opportunities involved in the capital investment
project, the utility company can analyze and prioritize, distinguishing actions based
on whether they will have a major, a moderate, or a minor impact on the success
of the project. In this way, the utility can make the best decisions about how and
where to focus its mitigation efforts, ensuring that the biggest issues receive
the most attention. Then, the utility can formulate a response that assigns the
appropriate level of effort to each risk. This may involve taking steps to prevent an
event from occurring at all or, if it does occur, to minimize its impact.
Through effectively managing project risks and prioritizing responses,
management can make better decisions, avoid surprises, and improve operational
performance. In addition, the same framework that is used internally to understand
and manage projects can also be used externally to communicate project issues
from start to finish as well as the steps the utility is taking to manage those
risks. This transparency with investors and regulators builds confidence that
management will perform well in these high-stakes capital investment projects.
Effective capital project Three steps to managing risks and optimizing opportunities in capital
risk management investment projects
begins with a thorough
To manage large-scale capital investment projects, we believe utility companies
understanding of the should follow these three steps to effectively minimize and manage risks and drive
regulatory climate. project success:

1. Analyze and plan for the projects regulatory climate so that you can fully
identify and manage relevant issues based on regulatory expectations and
requirements. An up-front awareness of the projects regulatory implications
is critical for effective management of the project because of the key role the
regulatory environment and potential regulatory scrutiny plays in determining
cost recovery. Explicit front-end planning for regulatory risks and opportunities
can drive important tasks, such as a proactive communication program specific
to the regulators, building in the right controls to actively manage project cost,
scope, time and quality, and designing innovative rate solutions to minimize rate
shock and reduce shareholder risk.
2. Establish a capital investment management framework that identifies
project components and related issues for each phase of the project lifecycle.
Tailor the framework to your project, involving the people with first-hand
knowledge of each project component to ensure that risks are accurately
identified and mapped. In particular, it is important to involve key stakeholders
beyond engineering and construction, such as those in the regulatory
compliance, environmental planning, customer and community relations,
operations, accounting, finance, and tax departments, to take advantage of
their knowledge.
For effective management, you should regularly review the project components
and risks for each phase of the lifecycle in your framework. Such reviews
should comprise a cycle of identification, analysis, control, and reporting that
continue throughout the life of the project.
Once established, the capital investment management framework also helps
integrate disparate efforts so that duplicate or unaligned compliance and
control processes can be eliminated or improved, thereby reducing governance
and compliance costs. When integrated into a broader risk management
program, a capital investment management framework can contribute to
a comprehensive governance, risk management, and control program that
enables future financial and operational success.
3. Develop focused management reporting of both ongoing and exception
situations to highlight project risks, adequacy of mitigating actions, and impact
on operations and enterprise risk. This results in a centralized and coordinated
risk management program that is available to all levels of an organization and
ensures that challenges not only are clearly visible but also can be continuously
managed throughout the project lifecycle. The right reporting helps ensure
actions are taken when needed, thereby improving execution, and helps
provide a clear audit trail of management decisions.

These three steps help forward-thinking utility companies successfully deliver

major capital investment projects as necessary to implement their strategies. The
result? Utilities can better serve their customers, fulfill regulatory responsibilities,
and protect and enhance shareholder value.
For more information please contact
David Etheridge
Utilities Advisory Leader
david.etheridge@us.pwc.com

2007 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to

PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, the
PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate
and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US).
CI-07-1055