Asset Management as a Strategic Technology for a distribution utility / Vicente C. Sioson

Year : 2005

Number of Pages : 87 leaves

Adviser : Prof. Goco

Executive Summary

Manila Electric Company (MERALCO) invests large amount of resources annually to build, expand, operate and maintain its electric distribution system. This system is a large man-made technological system of wires and various electromechanical equipment assembled to deliver electricity from the point of supply to the point of use by its more than four million customers. To ensure the reliable and efficient performance of the energy delivery system, the utility need to invest continuously to meet the growing demand for reliable supply of electricity as more customers apply for service and increase their energy consumption. The continued success and survival of the country depends on the efficiency and effectiveness of its investments and operations. It also depends on how well it can satisfy its stakeholders, namely, the shareholders, customers and the regulator. Shareholders are concerned with the return on their investments, while customers are concerned with affordability, reliability and convenience of electric service. The company is also facing the challenges of electric power industry restructuring that is fast taking shape. These challenges include business unbundling, competition in the Supply Sector, competitive energy market and performance based regulation in the Distribution Sector. The latter is adopted from the UK CPI-X model that allows an electric utility to increase tariff by the rate of inflation CPI minus an efficiency factor X. This tariff model splits the efficiency gain between the utility by providing incentives to the utility to be more efficient and to the customers by guaranteeing tariff reduction. Even before the advent of power industry restructuring, the electric power industry has long recognized and exploited technologies to continuously improve efficiency, reduce cost and improve reliability and service quality. These include technologies such as information, computer and communication technologies, material technology, etc. Given, however, the complexity of the distribution system, assembling these technologies over time to achieve the desired optimum performance of the system still remains a challenge. An integrative framework and a business philosophy is therefore needed that will ensure that the distribution system achieve the strategic goals of the company. The concept of asset management has long been employed by asset-intensive industries such as transportation, telecommunications, gas, water and electric utilities. In the last 10 years or so, a mature form of asset management known as the Strategic Asset Management (SAM) emerged and has been adopted by a number of utilities in UK, US, Australia and New Zealand in response to PBR regulation. SAM advocates prudent investments and economic operation of the distribution system and its equipment. It is a management discipline and a systematic process of managing the lifecycle cost of the electric distribution system to optimize their performance and achieve the targeted levels of reliability and service quality, while mitigating risks. The asset lifecycle starts with planning, design, procurement, construction, operation, maintenance, retirement and disposal of the asset. It ensures, not only, the management of financial, technical and service quality aspects, but also business risks, personnel and public safety and environment protection. It is also comprehensive in terms of technologies, processes and tools that it employs in an integrative manner. SAM reconstructs the traditional organization of utilities into both a process-based and role and responsibility-based organization. This is implemented by separating three distinct functions : the Asset Owner, Asset Manager, and the Service-Provider. The Asset Owner is the franchise holder and is concerned with overall return on investment. The Asset Manager is concerned with decision-making and optimum management of the distribution system on behalf of the Asset Owner. The Service Provider is responsible for all operational services for the assets, such as design, construction, operation, maintenance, restoration and resource management. A key feature of the SAM process is its holistic approach to integrate the different elements of asset management to ensure long-term success and sustainability. This approach integrates the interrelationship of corporate vision, asset strategy and business strategy. The asset strategy is concerned with the capabilities, capacities and condition and performance of the electric asset. It requires the development of the asset plan based on sound engineering and economic principles. The business strategy addresses the business capabilities that are achieved through people, process, information and technology. It separates the business process into the decision making process (performed by the Asset Manager) and the action process (performed by the Service Provider). The decision-making process includes business intelligence, performance management, investment planning, risk management, information management, technology management, and resource management. The action process includes work management, design, construction, operation and maintenance. The experience of the utilities that implemented SAM shows a remarkable success in terms of improving efficiencies, reducing costs and improving the reliability and service quality levels. A number of these utilities implemented SAM to address the challenges of PBR regulation, some introduced contestability in its service provision function, AND some developed new competencies for new markets. The LE Group (based in UK) was able to successfully leverage SAM to increase it market share through merger and acquisition. In assessing SAM as a strategic technology for MERALCO, the study used Porter's five forces competitive analysis and Kaplan's balance scorecard. The study also assessed SAM in terms of the key performance parameters identified such as capacity, power quality, reliability, cost of service, system efficiency, customer service quality and safety, public health and environment protection. It also assessed SAM in terms of three strategic domains : supporting existing business, altering rules of rivalry, and creating fundamentally new business. The study identified several success factors in SAM implementation, notably, top management support, project plan and organization, technology transfer agent (e.g., consultant), processes to be implemented, change management, strategic competencies, and lastly, the SAM information system. In summary, SAM provides a robust, comprehensive and holistic strategic technological alternative in addressing the challenges of industry restructuring, specifically, performance-based regulation. It also provides new opportunities for business growth by developing new competencies, transforms the organization to a higher maturity level of managing the distribution system, enhances business processes and exploits technologies effectively. It is, thus, the recommendation of this study for MERALCO to consider Strategic Asset Management as a strategic management technology.