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Capital Management: The Missing Performance Driver
Does your company measure up?
management mindset in utilities. The utility focus on budgeting rather than planning is a key characteristic mentioned here. This operational focus also manifests itself in misaligned plans across organizational units and the use of metrics and incentives that do not accurately reflect relative organizational contributions and joint accountabilities. Effectively instituting and managing a best-practices portfolio-management process, and hence capital-management process, requires a fundamental shift in the management/governance style of the company.
Competitive companies most often employ corporate models that reflect one of three options based on the level of corporate-center control. For utilities, where business-unit integration and management often is key, a governance model more closely reflecting that of the strategic manager is appropriate. As a company acquires multiple utilities, for example, it might evolve toward the strategic architect or financial holding model. For example, Mid-American (Berkshire Hathaway) reflects more of the financial holding mindset toward utility ownership and management.
To move from an operational to a strategic focus requires a clear understanding of the key decisions made, who needs to participate in the decisions, and who has final authority. At the same time, it simplifies decision-making and ensures integration by making sure the "right" people and inputs are involved in the process. This also provides a key cultural benefit by de-emphasizing the often slow and disjointed consensus decision-making process, and begins to instill performance-based culture tenets on the executive team.
Asset Optimization: Looking at the Trade-Offs
Asset optimization is critical to implementing operational strategies at the tactical level. A utility can have the best capital management processes at the corporate level, but if it is not proficient making day-to-day spending decisions and tradeoffs, performance will lag.
The ability to balance disparate performance and operational objectives requires new approaches to asset management/investment decision-making within the utility. This is particularly acute in transmission and distribution (T&D). In T&D, the demand for capital to replace aging infrastructure is especially high, as many T&D systems in North America were built up in the 1950s, but T&D capital replacement programs were cut in the 1990s to help fund competitive market investments.
Three fundamental asset optimization capabilities should be addressed:
- Investment management;
- Information management; and
- Technical management.
Investment management effectively manages the trade-offs among performance, risk, and total lifecycle cost. Keys to achieving effective investment management are robust processes, organizational and governance structure within the organization supported by information and toolsets that enable effective decision-making. The investment management capability is fundamental to the effective development, tracking, and reporting of capital and operating spend, balanced against factors such as system performance and risk.
Information management is a key enabler to investment management. It defines and manages the information needed to fuel fact-based, data-driven decision-making to optimize asset spend. Typically, there are a large number of information sources and models that support decisions, and these must be properly integrated, aligned, and often expanded.
Technical management is the capability to develop, implement, monitor, and review commercially and operationally astute technical policies, procedures, and specifications—the drivers for the majority of spend within T&D. Typically, between 60 to 80 percent of T&D