A new approach to utility asset management.

**Charles D. Feinstein ** is an associate professor of operations management and information systems at Santa Clara University and the CEO of VMN Group, LLC. **Jonathan A. Lesser ** is the president of Continental Economics, Inc.

A new approach to utility asset management.

the expected present value marginal benefit from fewer replacements; *i.e.*, the slopes of the curves are equal in magnitude and opposite in sign. Note that the optimal replacement age generally isn’t where the planned cost and risk cost curves cross.

3. For those who are mathematically inclined, finding the least-cost strategy over time is known as an “optimal control problem.”

4. For a brief discussion, see Leonardo R. Giacchino and Jonathan A. Lesser, *Principles of Utility Corporate Finance *, chapter 17, Public Utilities Reports, Inc., 2011.

5. The Appendix to this article provides a formal mathematical description of the modeling structure.

6. For further discussion, see Charles D. Feinstein and Peter A. Morris, “The Role of Uncertainty in Managing Aging Assets In Electric Utility Systems,” IEEE PES Transmission and Distribution, New Orleans, April 2010. A copy of this presentation is available from the authors.

7. Technically, the CDM establishes a Markov-chain type of probability model, in which we estimate the probability of moving from state A to state B. For example, the probability of a transformer in good condition today being in fair condition next year might be 20 percent, the probability of its being in poor condition next year 5 percent, and the probability of it remaining in good condition 75 percent.

8. The hazard functions are similar in concept to survivor curves used by utilities for depreciation analysis.

9. The post-repair conditions are estimated using a statistical concept called “Bayesian revision.” Using the analogy of depreciation survivor curves, repairs can move an asset from one survivor curve to another.

10. From a technical standpoint, these impacts are dealt with by the CDM.

11. In this example, P _{O} (fair) = 1 – P _{O} (good).

12. The names of the locations, as well as the characterization of the “Northern Group,” are for convention only. The actual substation locations are confidential.

13. This value includes the cost of locating the spare at Lovell.