Utilities and regulators are stuck in a rut, treating rate-base assets in a traditional way and depreciating their value according to a straight-line calculation. But alternative accounting...
Reducing Lifecycle Expenditures
Total cost of ownership accounting optimizes long-term costs.
approach provides visibility to both near-term budget and long-term cost implications. Successful implementation of TCO and complimentary strategic sourcing leading practices can result in long-term savings of 10 to 20 percent. 4 Most important, use of TCO improves communication of project risks and cost drivers, both internally and with external regulatory agencies and investors. Because of the decreased investor risk tolerance resulting from the current economic downturn, this increased transparency and clarity in decision making displays a focus on operational excellence that can result in favorable treatment from regulatory agencies and gain preferred access to capital.
Large Capital Projects
TCO applicability to large capital projects by project lifecycle phase can be demonstrated by exploring material and equipment cost drivers. Currently, numerous utilities employ practices in which large spend materials are procured during the project’s planning and design phase with a strong emphasis on acquisition cost and lead time. There’s moderate coordination of large spend materials resulting in some saving efficiencies. Frequently, moderate to low-spend items are purchased in an ad-hoc fashion throughout the remaining project phases with emphasis placed solely on delivery timing. This ordering just-in-time mentality detrimentally impacts the project budget by increasing expediting and handling costs. Additionally, it prevents the supply-chain organization from fully leveraging supplier contracts and developing an optimized procurement strategy across the entire suite of corporate capital projects.
In contrast, using the TCO method provides innovative opportunities for reducing the cost of asset ownership. During the planning and design phase, stringent adherence to material standardization codes maintains procurement leverage and minimizes project and corporate inventory levels for design materials, associated tools, and spare parts. Collaborative analysis between design engineers and supply-chain staff provides a detailed understanding of the impact that project-design decisions have on the overall project cost to the organization. For example, the analysis should include a simple comparison of the cost of using a different 100-hp motor for a specific project by quantifying the additional design time due to unfamiliarity with the motor, the inventory expenses for alternate replacement parts, and procurement costs associated with purchasing a previously unstocked SKU.
TCO analysis also may be extended to labor resources. Few utilities have an integrated approach to sourcing and utilizing contracted labor for each work stream. Typically, utilities develop sourcing agreements for specialized services such as vegetation management, but then contract engineering and field labor as needed during the procurement phase of the project. Again, this just-in-time approach poses significant budget and schedule risks as resources may not be available or may command a significant premium because of a tight regional labor market.
The TCO method may be used to frame a discussion on labor needs across key business units and the associated cost penalties of employing a just-in-time approach. In conjunction with precise planning and scheduling practices, contractor resource needs can be determined during a project’s feasibility or planning and design phases. Moving the discussion into these phases provides opportunities for leveraging resources across capital projects and entering negotiations with suppliers well before peak staffing periods. A comparison of labor expenses for contracted