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Squeezing Juice from Plants

Asset optimization is a favored utility strategy in an economic downturn.
Fortnightly Magazine - December 2002

mix," Hanser says.

Hanser notes that optimization occurs more on the unregulated side, because of incentives. Hanser points to an example of a utility operating under an incentive rate for having a high capacity factor for its plant. But the plant was operated at an incredibly high capacity factor, and was operating even when it wasn't economical to do so (i.e., the marginal cost of purchasing the power was below the cost of generating power for that plant). But with a high capacity factor under the incentive regulation scheme, the plant would continue to operate. And so the utility found it more profitable to run the plant at a high capacity factor than to turn the plant off and buy the power on the open market. Hanser concluded that in such a case, regulation tends to create sometimes "perverse incentives" as to how to operate a plant.

Take for example a recent case where Duke/Fluor Daniel turned generating plants from a utility operating environment to a merchant plant-operating environment. In California, Ted Rosiak, senior vice president of operating plant services at Duke/Fluor Daniel, explained that they had a client purchase a number of generating plants from a utility, but that the employees came with the mind-set from having worked in a regulated-utility environment. Rosiak says the Duke team worked with the employees to introduce them to the merchant plant mind-set, which included how to make a profit, not just make megawatts. "Actually it was pretty easy once you got focused on what the goals were," he says. The team worked with staff to teach them how to operate in the open market so they could realize the impact their decisions had on the bottom line. The result was the staff says they were "energized" and "enthusiastic" and felt more in control of their own destinies. "The transition from a utility mind-set-which is not bad, it's just different-to a merchant mind-set set actually occurred by laying out a real business plan and putting goals and objectives forth, while the profit motive was the driver," Rosiak says.

Glenn Burney, a plant manager at a facility operated by Duke/Fluor Daniel, pointed out that all individuals at the newly minted merchant plants then receive employee performance incentives as a certain percentage of base pay. So the incentive plan helps get employees interested in learning the business plan, plus added training helps them achieve the new goals. According to Dean Blaha, also a plant manager at Duke/Fluor Daniel, the utility versus merchant-plant mind-set for maintenance often comes down to a replace versus repair mind-set. He noted that a regulated utility often simply would replace a piece of equipment because it gets built right into the rate base, while at a merchant plant, the repair versus replace decision is based much more on economics.

In the Trenches

Five plant managers who run very different types of generating plants for Duke/Fluor Daniel's Operating Plant Services talked to the Fortnightly about situations they have dealt with involving asset optimization. Ted Rosiak, senior vice president of Duke/Fluor Daniel's Operating Plant Services