Opening the Black Box


A new approach to utility asset management.

A new approach to utility asset management.

Fortnightly Magazine - January 2014
Figure 8 - Spares Valuation: PJM Northern Group

these assets determined to have the same overall health might, in fact, need to be treated very differently. 

In some cases, the asset health measurement conflates both the likelihood of near-term failure and the consequences of failure. But that can lead to incorrect conclusions. Consider, for example, a car’s tires. Most of us would agree that replacing worn tires before they fail is a better strategy than waiting for a blowout, which can have severe consequences. However, keeping a worn spare tire can be a reasonable strategy because the consequences of tire failure can be managed as well with a worn spare as a brand new spare because both enable one to drive to the nearest tire store. Thus, the asset management policy associated with a tire’s condition depends on the tire’s intended use, not just the immediate failure rate and the consequences of failure. 

Yet another problem is that asset health measures typically fail to account for the dynamics of asset condition; i.e., how an asset’s condition changes over time. The condition of an asset changes not only naturally as it ages, but also because of how it’s operated and maintained. Again, a car engine is a good example: its condition depends not only on its age, but on how much it’s run, whether the car is driven in stop-and-go traffic or primarily on the highway, how frequently the oil is changed, and so forth. Therefore, the asset’s hazard rate will change over time as the asset’s condition changes. An asset management strategy that assumes the hazard rate doesn’t change over time won’t be least-cost. 3

Nor should asset health standing alone dictate asset-management strategy. For example, in some cases, utilities will rank T&D assets by their health and replace those assets in order until the utility reaches a predetermined budget amount. Thus, asset health is treated as if it were a benefit-cost ratio. However, ranking alternatives based on benefit-cost ratios is itself generally inaccurate. 4

Utilities also might fail to consider all failure costs. For example, widespread power outages can garner negative publicity and additional regulatory scrutiny of a utility’s actions. In other cases, such as with the gas pipeline explosion at San Bruno, California, regulators can levy multi-million dollar fines, as the California Public Utilities Commission levied against PG&E.

Finally, asset testing is also crucial to asset management. It’s impossible to determine a least-cost asset strategy without also determining the optimal asset testing regime. In other words, asset strategy and testing strategy are interdependent. We have found, for example, that utilities often test too frequently or rely on the wrong kinds of tests. An optimal asset management strategy must account for the outcomes of tests because those outcomes provide information about the true condition of the assets. That’s another reason for rejecting a static method of asset management, such as ranking assets by asset health, in favor of a dynamic one that reflects changing conditions over time. 

A Dynamic Alternative

These problems lead us to propose an alternative approach – which we call a dynamic optimization methodology to determine