Methods of Project Prioritization

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

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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 • Incorporate multiple evaluation techniques • Deliver a consistent forced project ranking

4. Assumptions… Think Before You Invest Transmission & Distribution World March 2006 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.

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

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

7. NPV = Net Present Value Calculating NPV is an exercise unto itself Financial expertise required: Sarbanes-Oxley GAP 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 Cost-Benefit Analysis

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

10. Risk Analysis • Exposure Assessment • Maximum financial exposure of each risk • Loss of revenue = revenue at risk if project is not completed • 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.

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

12. External Impact Assessment Identifies externals, impact categories, and potential impact • 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)

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

14. External Impact Assessment • Example: new transmission line • Max value for this example is 9 • Scoring • 1= positive • 0 = neutral • -1 = negative • Documentation required • One matrix for all projects evaluated • Project score = 0

15. Putting it all Together Step 1: Raw Evaluation Matrix

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

17. Putting it all Together Step 3: Establish maximums Cost-Benefit max = 4 Risk max = 3 External max = 9

18. Putting it all together Step 4: Assemble Weighted Evaluation Matrix

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

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

21. Questions