INCORPORATING CONDITION ASSESSMENT INTO A COMPREHENSIVE ASSET MANAGEMENT PROGRAM

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1 INCORPORATING CONDITION ASSESSMENT INTO A COMPREHENSIVE ASSET MANAGEMENT PROGRAM Tony Urquhart Vice President MWH Business Solutions Suite 700, 380 Interlocken Crescent Broomfield, CO ABSTRACT In order to improve asset investment decision-making and achieve sustainable improvements in business performance, utilities must better understand asset condition, asset performance, remaining life and risks. Worldwide, annual expenditure on the maintenance and rehabilitation of water/wastewater reticulation pipes is estimated to be over $33 billion per year, and this is expected to rise significantly over time as aging assets continue to fail at an ever-increasing rate. The long-term cost implications for a utility with a poorly structured replacement/renewal regime can be dramatic. A formal asset management program can help this problem. A formal asset management program that includes condition assessment can enable an organization to better understand asset condition and remaining life allows for proactive budgeting for renewal/replacement of expensive and high-risk assets. This article will discuss how condition assessment relates to asset management; how to set up a targeted condition assessment program to support asset management; and how condition assessment data can be leveraged to support decision-making. KEYWORDS Asset management, condition assessment, risk, probability of failure, criticality, levels of service. INTRODUCTION Recent infrastructure studies undertaken in the UK, Australia and the US have shown a common theme - that the state of existing water infrastructure is deteriorating and there is a significant level of renewal/replacement investment required to ensure that water utilities can continue to deliver services to their communities. Worldwide, annual expenditure on the maintenance and rehabilitation of water and wastewater reticulation pipes is estimated to be over $33 billion per year, and this is expected to rise significantly over time as assets continue to deteriorate. Utilities also need to maintain aboveground assets such as treatment works and pumping stations, so as to ensure continuity of supply and compliance with water quality standards. 4198

2 The challenge for water utilities is how best to manage their assets with limited replacement funds, while maintaining a satisfactory level of service to customers and the environment. Since the long-term cost implications for a utility with a poorly structured renewal/replacement regime can be dramatic, a formal asset management process that includes a condition assessment program can help meet this challenge and enable an organization to better: Meet customer service expectations as well as legislative requirements Determine the risk of failure (probability vs. consequence) associated with different assets, and therefore prioritize spending within limited budgets Understand asset condition and remaining life, allowing for proactive budgeting for renewal/replacement of high-risk assets Quantify the benefits of different management/operational strategies Determine asset value and comply with accounting standards such as GASB 34 This article discusses the benefits of undertaking a formal condition assessment program and illustrates how condition assessment relates to asset management. BENEFITS OF CONDITION ASSESSMENT The benefits of performing an effective condition assessment program include more accurate capital planning and budgeting, better risk management, and improved regulatory compliance. These benefits are discussed in more detail below. Benefit Category Capital Planning And Budgeting Risk Management Regulatory Compliance Benefit More accurate capital planning and budgeting Extension of asset life and capital deferment Improved ability to prepare works program and effective works prioritization The ability to generate deterioration curves, to predict probability of failures and/or remaining life Improved risk management Reduced direct costs (through more effective operations and maintenance) Reduced risk-cost associated with asset failure, including social and environmental impacts Improved levels of service Demonstration of asset stewardship Improved financial/credit ratings The ability to adopt more favorable financial reporting approaches (including the modified GASB 34) 4199

3 IMPROVED CAPITAL PLANNING AND BUDGETING By determining the condition of assets, utilities can assess asset value and better understand remaining useful life. Understanding remaining life enables the timing of asset replacement to be forecast more effectively. Knowing the value of the asset allows more accurate budgeting for maintenance, rehabilitation, renewal, and replacement. Armed with this information, utilities can now project future expenditure more accurately and better justify spending to external stakeholders such as governing bodies or boards. In contrast, not understanding the condition of assets can lead to the unplanned failure. This failure usually incurs additional costs and can lead to reactive and unplanned replacement of the asset, which is often the most expensive option. MANAGEMENT OF RISK Not all assets are the same; some assets are more important than others and therefore should be treated differently. One way to determine the importance of an asset is to evaluate the risk of it failing. Risk is determined by taking into account both the probability (likelihood) and consequence (severity) of asset failure. The maintenance strategy adopted for a given asset depends on the assessed level of risk, as shown in Figure 1. As can be seen from Figure 1, condition assessment is generally associated with higher risk assets. However, assessment of lower risk assets may be undertaken for asset stewardship purposes, capital planning, or regulatory reporting. Figure 1 Risk and maintenance strategies: Condition is an indicator of Probability of Failure enabling utilities to prioritize based on risk. The initial focus of a condition assessment program should be on high-risk assets. 4200

4 The consequence of an asset failure generally remains relatively constant over time. In contrast, the probability of failure does not; as the asset deteriorates and ages, the likelihood of asset failure generally increases. Asset management seeks to optimize a utility s expenditure by determining the most appropriate time to intervene in this deterioration process, and the most appropriate intervention (such as replacement, rehabilitation or increased maintenance). These factors have important implications for establishing a condition assessment program. Except where it is required for regulatory or financial reporting purposes, condition assessment is only warranted when it allows risk to be reduced sufficiently to justify the cost of the assessments. Since the consequence of failure is not affected, condition assessment is generally undertaken in an attempt to manage the probability of asset failure. The benefit derived is equal to the change in probability of failure multiplied by the expected consequence. It is this benefit that must be balanced against the cost of undertaking the assessment and subsequent interventions. A utility should therefore initially target its condition assessment program on its more critical (higher consequence of failure) assets and progressively move to lower criticality assets over time, as resources allow. Similarly, high criticality assets for which condition is not understood should be prioritized over similar criticality assets where the condition is known. Data from condition assessments allow the utility to develop deterioration curves that help manage the risk of failure. Such curves allow the utility to predict time to failure with failure meaning either: physical end of life; minimum level of acceptable service; or limit of asset capacity. Figure 2 shows a schematic of a deterioration curve. Figure 2 Asset deterioration curve: As an asset s condition deteriorates over time, its probability of failure increases. 4201

5 BETTER REGULATORY COMPLIANCE GASB 34 has been of interest to municipal water/wastewater utilities that are concerned with incorporating condition assessment into asset management programs. Statement 34, a regulation of the Government Accounting Standards Board (GASB), requires that public utilities enumerate and establish values for assets. GASB encourages utilities to implement rigorous methods of measuring and recording asset values. The purpose of this regulation is three-fold to improve the accuracy of infrastructure asset value reporting, to improve governments' accountability in financial reporting, and to provide government entities with improved economic and financial data for decision-making. Under GASB 34, asset value can be determined via the depreciation method or the modified approach. The depreciation method is often less costly to implement, however, it does not provide a true value of infrastructure assets, and sometimes creates a misperception of deterioration. In contrast, the modified approach provides a more accurate value of infrastructure assets. It can be more time-intensive to implement, however, once in place, it is easy to maintain and provides a tool for long-term planning. By undertaking regular condition assessments, a utility will be able to comply with GASB 34 s modified approach. HOW CONDITION ASSESSMENT RELATES TO ASSET MANAGEMENT As soon as a new asset is put into place, it begins to deteriorate at a rate dependent on local environmental conditions, operating context, and maintenance strategy. Condition progressively deteriorates until it reaches the point where the asset needs to be replaced. Asset management techniques do not seek to manage asset condition as such, but rather seek to manage overall service levels within the context of acceptable risk and available budgets. Nevertheless, there is a general relationship between the condition of an asset and its propensity to fail. For example, while some failures would be expected in the early part of an asset s life (due to defects in materials, installation and commissioning), failures due to fatigue, corrosion, and wear-out start to predominate as the asset reaches the end of its useful life. Even though it is not the main aim of asset management, it is still important to understand the structural condition of assets and the rate at which asset condition deteriorates. Condition assessment can be used to develop this understanding, in conjunction with assessments of performance undertaken at both asset and system level. Utilities should design assessment programs to obtain the outputs needed for their asset management systems, consider the extent and frequency of the assessments necessary to meet their asset management objectives, and ensure that a consistent approach to the assessment is developed and applied over time, as discussed below. 4202

6 ESTABLISHING THE PROBABILITY OF FAILURE Ideally, the output from a condition assessment would be a measurement of failure probability, which corresponds directly to the level of asset-deterioration. In combination with assessment of failure consequence, condition assessment would then allow the utility to quantify risk. Given an understanding of risk, utilities are able to determine appropriate operational, capital maintenance, and other asset management strategies. In general, however, an explicit estimate of failure probability cannot be derived from a single condition assessment. It is more feasible to specify thresholds of condition where interventions must occur, and identify if a given asset is above that condition threshold. It is also possible to use the data from condition assessment programs to produce deterioration curves for modeling/assessing the probability of asset failure, which can then be used in asset management. REMAINING-LIFE BASED ESTIMATIONS Remaining life can be defined as when an asset has physically failed or when a minimum level of acceptable performance is provided. In practice, it may be difficult or too costly to develop an assessment of failure probability with any reasonable degree of certainty. It may therefore be more pragmatic to classify an asset in terms of condition and relate this to remaining life. Realistic remaining life estimations are required, however, if this approach is to be used in asset management. Since asset age in itself does not necessarily provide a guide to remaining life, the following factors should be incorporated into such an approach: Where possible, asset lives should be estimated from historical data or from physical/probabilistic models such as those being researched by AwwaRf. Where this is not practical, condition assessments should be used to estimate remaining life, as well as rates of deterioration. Performance standards and/or risk factors should influence the age at which assets are considered for replacement. PERFORMANCE ASSESSMENTS Performance is not always directly related to condition; many assets can continue to perform their functions satisfactorily even when condition has significantly deteriorated. Hence, expenditure priorities are often more effectively determined by assessing asset performance, rather than merely structural condition. To understand performance fully, utilities need to consider other reasons why an asset may need replacing; for example, when an asset is under-capacity, obsolete, underutilized, or too expensive to maintain. 4203

7 GRADE SYSTEMS Since assessing the probability of failure or specifying a meaningful remaining life can be challenging, grade systems are often used to summarize the condition and performance of the asset. Condition grades are assessed through visual examination of an asset and with reference to specified descriptions of each grade. An asset s condition grade can only be allocated reliably after explicit visual inspection of the asset. Grading asset condition in this way gives a measure of the extent of physical deterioration with respect to the 'as new' condition. Different levels of condition grades can be established depending on the type of data used and the certainty of the condition grade. Where visual inspections are not possible or have not yet occurred, interim grades can be established based on available information such as age, material, repair history, or observations on similar assets. Similarly, performance grades give a broad categorization of an asset's ability to function in accordance with the utility s requirements, and are allocated using operational knowledge of the asset, again with reference to specified descriptions of each grade. A performance grade can only be allocated reliably with reference to detailed local operational knowledge. Grading systems can be simple (Grade 1 to 5), intermediate (Grade 1 to 5 with sub grading for worse three grades), and sophisticated (multiple faceted ranking schemes), although these can be reduced to 1 to 5 where necessary. Ideally, the observations made during a condition or performance assessment will be recorded, as the combination of a number of distinct observations into a single grade at the point of survey results in a loss of useful information. EXTENT AND FREQUENCY OF ASSESSMENTS Whatever approach is used to characterize an asset s condition/performance, it is important to attempt to optimize the extent and frequency at which the assessments need to be carried out. The extent of assessment is influenced by: The type and criticality of the asset Variations in operating context and environmental conditions Assessment frequencies may be based on regular intervals (determined by regulatory and other factors), condition, risk, or other factors such as maintenance cost. Aboveground assets can be accessed and assessed more readily, so comprehensive programs may be economic. Again, however, the benefits of the assessment must be compared against the costs. The assessment of below ground assets is more expensive and often focuses on critical assets that should not be allowed to fail. When the assessment is undertaken for financial or regulatory reporting, including asset stewardship requirements, statistical sampling is widely used. Statistical samples can be implemented with various approaches used to 4204

8 determine the sample size, including: Sampling all assets Concentrating on problem assets Actuarial (statistically valid) sample; using appropriate means of stratification CONSISTENCY REQUIREMENTS The collection of consistent condition and performance data facilitates analysis and interpretation, and also allows preparation of deterioration curves that permit prediction of either the probability of failure, or the remaining life of assets or components. It is thus important to develop formal assessment techniques that give repeatable and objective assessments and apply these consistently over time. SUMMARY In order to improve asset investment decision-making and achieve sustainable improvements in business performance, utilities must better understand asset condition, asset performance, asset remaining life and risks. A structured condition assessment program can provide a greater understanding of risk associated with different assets and help a utility move from a reactive unplanned environment to a proactive environment. Key issues to consider when embarking on a condition assessment program include: Focus on high consequence assets for which there is no condition data first. Then, progress to lower risk assets as time and resources allow. Use statistical sampling techniques on lower criticality assets. It is not necessary or even desirable to assess the condition of every asset. Remember that not all assets fail due to poor condition. Other performance indicators are important. Consistency in data collection, storage, and management is essential. Grade systems can be a pragmatic solution, but where possible collect defect information and grade assets away from the point of survey 4205

9 ENDNOTE Developing Protocols for Assessing the Condition and Performance of Water and Wastewater Assets MWH and CSIRO are currently undertaking a research project to review the variety of condition assessment approaches and methods available both nationally and internationally. The Water Environment Research Foundation (WERF) is managing the project, entitled Developing Protocols for Assessing the Condition and Performance of Water and Wastewater Assets. The US EPA, WERF, and the AWWA Research Foundation (AWWARF) are jointly funding the project. The scope of assets covered is water and wastewater treatment, collection, and distribution assets. The project is scheduled for completion in early 2007 of If you are interested in participating in the research, please contact Tony Urquhart, the project s Principal Investigator, at Project intent: Identify and document the broad range of available condition assessment tools and techniques Provide practical guidance on how to incorporate these strategies into a utility's management philosophy Phase 1 Objectives: Research available tools for condition and performance assessment from both small and large utilities and available publications and literature Identify assessment practices from other industries and explore the applicability to water and wastewater utilities for different asset types Identify the best applicable practices from the tools and methodologies identified, based on cost effectiveness and case studies Phase 2 Objectives: Develop a programmatic approach for condition and performance assessment methods in water and wastewater utilities including: - Program development and implementation schedules - Resource needs (staffing, equipment, software and training) required to implement a comprehensive condition assessment program Provide case studies that provide positive cost-justifications to both small and large utilities 4206