1. 1 Methods of Project Prioritization Alan Sowell Regional Manager, T&D Services Burns & McDonnell April 10, 2006 APPA E&O Technical Conference Sacramento

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3. 3 Purpose Understanding that today’s utility environment generates a broader range of projects competing for limited resources, we shall discuss a prioritization framework that enables us to: Evaluate diverse projects equitably Evaluate diverse projects equitably Incorporate multiple evaluation techniques Incorporate multiple evaluation techniques Deliver a consistent forced project ranking Deliver a consistent forced project ranking

4. 4 Assumptions… Each project is an investment in your utility. Investments that are not in line with your strategy should be culled from your project list before proceeding. Think Before You Invest Transmission & Distribution World March 2006

5. 5 The Elements of Prioritization Cost – Benefit Analysis Risk Analysis External Impact Assessment Weighted Evaluation Matrix

6. 6 Cost-Benefit Analysis Financial Measure Financial Measure Normally favors revenue projects over capital replacement and O&M Normally favors revenue projects over capital replacement and O&M Sunk costs are not included Sunk costs are not included Avoided future costs are a benefit Avoided future costs are a benefit Time horizon is life of the investment Time horizon is life of the investment Cost-Benefit Ratio = NPV / Initial Cost

7. 7 Cost-Benefit Analysis NPV = Net Present Value NPV = Net Present Value Calculating NPV is an exercise unto itself Calculating NPV is an exercise unto itself Financial expertise required: Financial expertise required: Sarbanes-Oxley Sarbanes-Oxley GAP GAP FERC Accounting FERC Accounting Sample Cost-Benefit Calculation: Lineman training program Cost: $250,000 Benefit: Improved efficiency, reduced overtime; NPV = $1M Cost-Benefit ratio = $1M/$250K = 4.0

8. 8 Risk Analysis Evaluates the risk of not performing the project against the cost of the project Hazard Identification is the probability of a certain type of risk/event occurring There can be many Hazards Exposure assessment is the impact of the risk/event (in $) Risk Ratio = (Hazard Identification x Exposure Assessment) / Project Cost

9. 9 Risk Analysis Hazard Identification Hazard Identification Risk of not completing the project Risk of not completing the project Loss of Revenue Loss of Revenue Loss of Life Loss of Life Loss of Assets Loss of Assets Legal Liability Legal Liability Regulatory Penalties Regulatory Penalties Each valid risk is evaluated with a % chance of occurrence Each valid risk is evaluated with a % chance of occurrence

10. 10 Risk Analysis Exposure Assessment Exposure Assessment Maximum financial exposure of each risk Maximum financial exposure of each risk Loss of revenue = revenue at risk if project is not completed Loss of revenue = revenue at risk if project is not completed Loss of life = financial cost if failure contributes towards a fatality Loss of life = financial cost if failure contributes towards a fatality Financial values of large value risks should remain constant across projects or reflect current accepted values. Financial values of large value risks should remain constant across projects or reflect current accepted values.

11. 11 Risk Analysis Sample Risk Calculation Sample Risk Calculation Project: Rebuild an aging transmission line Project: Rebuild an aging transmission line Cost: $250,000 Cost: $250,000 Risks: Risks: 50% loss of revenue x $50,000 = $25,000 50% loss of revenue x $50,000 = $25,000 10% loss of life x $1,000,000 = $100,000 10% loss of life x $1,000,000 = $100,000 10% tort x $5,000,000 = $500,000 10% tort x $5,000,000 = $500,000 Risk Ratio = $625,000/$250,000 = 2.5 Risk Ratio = $625,000/$250,000 = 2.5

12. 12 External Impact Assessment Evaluates the potential for external impacts using a multi-cell matrix Reduces dependence on “Mythical Numbers” Impacts are either positive, neutral, or negative (1,0,-1) Identifies externals, impact categories, and potential impact

13. 13 External Impact Assessment These questions will serve as a guide for creating Externals and Impact Categories: These questions will serve as a guide for creating Externals and Impact Categories: Who will be impacted? Who will be impacted? What will be the nature of the impact? What will be the nature of the impact? When will the impact occur? When will the impact occur? Where will the impact be felt? Where will the impact be felt? How will the impact affect all stakeholders? How will the impact affect all stakeholders? Resist the temptation to use subjective scoring techniques Resist the temptation to use subjective scoring techniques

14. 14 External Impact Assessment Example: new transmission line Example: new transmission line Max value for this example is 9 Max value for this example is 9 Scoring Scoring 1= positive 1= positive 0 = neutral 0 = neutral -1 = negative -1 = negative Documentation required Documentation required One matrix for all projects evaluated One matrix for all projects evaluated Project score = 0 Project score = 0 Impact Category Externals Land Use Public Policy Political Impact Homeowners00 Local Governments 110 Environmental Groups 00

15. 15 Putting it all Together Step 1: Raw Evaluation Matrix Projects Cost-BenefitRiskExternal Total Project 1 - Training Class424 10 Project 2 - New Distribution line219 12 Project 3 - Substation Breaker Maintenance0.535 8.5

16. 16 Putting it all Together Step 2: Weighting the categories Cost-Benefit = 30% Cost-Benefit = 30% Risk = 40% Risk = 40% External = 30% External = 30% Weighting considerations Should support strategy Should reflect critical factors in the business climate Should not favor one class of project

17. 17 Putting it all Together Step 3: Establish maximums Projects Cost-BenefitRiskExternal Total Project 1 - Training Class424 10 Project 2 - New Distribution line219 12 Project 3 - Substation Breaker Maintenance0.535 8.5 Cost-Benefit max = 4Risk max = 3External max = 9

18. 18 Putting it all together ProjectsCost-BenefitRiskExternalTotal Project 1 - Training Class4/4 x 30 = 30 2/3 x 40 = 26.7 4/9 x 30 = 13.370 Project 2 - New Distribution line2/4 x 30 = 15 1/3 x 40 = 13.39/9 x 30 = 3058.3 Project 3 - Substation Breaker Maintenance.5/4 x 30 = 3.753/3 x 40 = 40 5/9 x 30 = 16.760.5 Step 4: Assemble Weighted Evaluation Matrix

19. 19 Putting it all Together Final Observations: Final Observations: Weighted scores will be on a 0 to 100 point scale Weighted scores will be on a 0 to 100 point scale Weightings can change final project rankings Weightings can change final project rankings Ties are possible, but less likely Ties are possible, but less likely

20. 20 Summary Cost – Benefit Analysis Risk Analysis External Impact Assessment Adopt a versatile framework to prioritize diverse projects Place data in an evaluation matrix, apply weightings, and establish project priorities on a 0 to 100 point scale

21. 21 Questions