THE MYTH OF DEEP PIPES: CRITICALITY AND PIPE REHABILITATION STRATEGIES Ken Harlow, Director of Management Services, Brown and Caldwell kharlow@brwncald.com Introduction A fundamental principal of asset management is that asset risk governs most some would say all asset decisions. And asset risk is best understood by decomposing it into its two components: Probability of failure and consequence of failure. Risk is normally mapped by locating the risk on a matrix that has probability of failure on one axis and consequence of failure on the other. The probability/consequence approach to risk analysis becomes even more powerful when both probability and consequences are quantified, the former in percentages and the latter in dollars. This results in a fully-quantified risk cost, or annual risk exposure, which is the product of the consequence of the risk, in dollars, times the probability of occurrence in any one year. Knowing risk costs, combined with a good understanding of the true root causes of asset failures, leads to very high quality asset decisions. Risk governs almost all of our asset decisions. But we need to understand the two aspects of risk, probability and consequences. But even in its most basic and unquantified form, the matrix approach can be quite helpful. Because of its simplicity and usefulness, it is used widely in asset risk analysis sometimes even where it doesn t quite fit. Risk and Pipe Rehabilitation As an example, most risk-based approaches to prioritizing rehabilitation and replacement follow the matrix scheme. These approaches generally include an assumption that s with higher consequences of failure (that is, more critical s) should be addressed before less critical s if probabilities of failure are the same. Figure 1 on the next page shows a typical risk matrix for sewer, where both consequence and probability of failure are determined by evaluation of multiple factors, not shown here. One of the factors determining consequence of failure is usually the depth of the ; increasing depth means increasing criticality (consequence of failure) because replacing or repairing deeper is more expensive than for shallower. - 1 -
Risk Matrix Key to actions: Repair or replace within one month Consequence of failure Probability of Failure Figure 1: Typical risk probability/consequence matrix, sewer Repair or replace within six months Set high CCTV frequency, monitor for change Set low CCTV frequency While there is obviously some subjectivity in play here, the matrix approach seems to give us a clear and easy-to-understand way of prioritizing our work. The message is, Set a higher priority on those s that have the highest probabilities and consequences of failure. This certainly sounds right. But is it? As mentioned above, one element of consequence of failure is usually depth. There is an assumption, which is correct, that deep s are more critical than shallow ones because the cost of failure is higher. So deeper s, all else being equal, will be assigned a higher priority than shallower ones. If the probabilities of failure for a shallow and a deep are the same, and the cost of failure of a deep is higher, then the deep will get priority. er s are usually considered more critical and they are. But is that a good guide to rehabilitation priority? However, asset management is not merely about reducing costs risk costs or any other kind of costs. Asset management is about maximizing community value, that is, the excess of benefit (reduction in risk cost in this case) over cost (what we invest to achieve that reduction). Proactive measures to reduce risk also have costs, and these costs may be much higher for some s than for others. In other words, although proactive measures may indeed reduce risk, the value of that reduction must be measured against the costs incurred to achieve it. A Pipe Rehabilitation Example We have two 200-foot segments of ten-inch vitrified clay sewer, equally deteriorated and equally likely to fail. They are under similar roads with similar traffic volumes, in similar soils, in areas with similar development, etc. The only significant difference is that one is buried at six feet, the other at twenty feet. The preferred remedy in either case is to excavate and replace the segment. The cost of replacement of the shallow is $40,000. The same cost for the deep is $100,000. Replacement of either will cost the same cost regardless of whether the fails or we decide to replace it proactively. - 2 -
We believe that each is almost certain to fail sometime in the next thirty years, so each has a 3.33 percent chance of failure each year. For the shallow, the social and environmental costs of failure are $40,000. The same costs for the deep are $60,000, mostly because replacement will take longer with a resulting longer period of traffic disruption. In either case, a new will have a quarter percent chance of failure annually during the first thirty years of its life The deep in this example is more critical because the total cost of failure, including both direct and indirect costs, is $160,000 fully twice the $80,000 of the shallow. But, given equal probabilities of failure, should the deep have priority in our refurbishment program? Here s a summary of the facts given: Cost of failure, existing Annual probability of failure Annual risk exposure Direct $40,000 $100,000 Existing 3.33% 3.33% Existing $2,667 $5,333 Indirect 40,000 60,000 Replacement 0.25% 0.25% Replacement 200 400 Total $80,000 $160,000 Reduction 3.08% 3.08% Reduction $2,467 $4,933 Figure 2: Costs involved in example, shallow versus deep Note that the annual risk exposure (aka risk cost ) is simply the total cost of failure, in each case, multiplied by the annual probability of failure. The benefit is the Now let s do two benefit/cost analyses to see whether dealing with present value of the reduction in risk the deep should have priority over the shallow, as the cost; the cost is that matrix shown in Figure 1 would suggest. of excavating and replacing the. In each case: The benefits are the present values of the reductions in risk exposure, $4,933 annually in the case of the deep and $2,467 for the shallow. We ll use 30-year present value calculations at a real discount rate of three percent to calculate the value of these annual benefits today. The cost is the outlay required to achieve the risk reduction, $40,000 for the shallow and $100,000 for the deep. This is a one-time outlay, so no present value calculations are necessary. Here s what the two benefit/cost analyses look like. Do nothing Remedy Net benefit Do nothing Remedy Net benefit Cost $0 $40,000 ($40,000) $0 $100,000 ($100,000) Risk (PV) 52,268 3,920 48,348 104,536 7,840 96,696 Total $52,268 $43,920 $8,348 $104,536 $107,840 ($3,304) Benefit (reduction in risk) $48,348 $96,696 Cost (outlay for replacement) $40,000 $100,000 Benefit/cost ratio 1.21 0.97 Figure 3: NPV and benefit/cost analyses, replacement of shallow versus deep - 3 -
Replacing the deep clearly has a higher benefit, a reduction in the present value of risk exposure of about $97 thousand, twice the $48 thousand reduction achieved by replacing the shallow. But at what cost? We re paying $100 thousand for this risk reduction; more than it is worth. The investment has a benefit/cost ratio of only 0.97, not a good use of our customers money. Investing in replacement of the shallow, although it offers a smaller benefit, costs only $40 thousand and has a benefit/cost ratio of 1.21, suggesting that it is a sound investment for our customers. So in this case, replacing the shallow offers a far better benefit/cost ratio, or more bang for the buck. In general, our utility s customers will be best served if the benefit/cost ratio determines the action to be taken, and (in this case) the shallow is replaced in preference to the deep one even though it is far less critical than the deep and the probabilities of failure of the two s are exactly the same! Summary In prioritizing rehabilitation or replacement of assets, criticality should not be used without considering the cost of intervention. What is important is not just the risk averted the cost of averting the risk must be considered as well. Utilities should prioritize rehabilitation projects, or any projects for that matter, based on return on investment or time-adjusted benefit/cost ratio regardless of the various costs and probabilities taken in isolation. This will maximize return to the community. If this rule is followed rather than depending on criticality alone, there will be an increased tendency to deal with easier s at the Rehab priorities should be based on the ROI or benefit/ cost ratio expected, not simply the risk avoided. expense of difficult ones. Because of the lower average cost of each intervention, utilities will be able to remedy more high-risk situations and avert more water outages or sewer spills at the same level of spending. Some Cautions (Important!) The example given here is an all else being equal one. Before we decide to rehabilitate all our shallower s first, we need to consider that: 1. er s are often larger. A failure of a large is likely to have more severe consequences than failure of a small. Both the direct costs of replacement and the indirect costs to the community may be much greater. If this were the case in the example above, the benefit/cost analyses might have come out quite differently. 2. These deeper and larger s may be found more frequently where population densities are the greatest that is, downtown. Again, the economic impacts of failure may be very significant if this is the case. 3. Another comment, offered by Kevin Young, Managing Director of Hunter Water, Australia (and added to the first version of this paper posted). Sliplining is an increasingly popular alternative to dig-and replace, and the cost difference between shallow and deep s may be minimal. If sliplining is an alternative, then deeper s will get higher priorities because of the greater social costs of failure. - 4 -
Still, the principles of benefit/cost continue to apply. The numbers may change, and with them the priorities, but the form of the analysis remains the same. Other Implications This approach suggested in this paper applies not only to rehabilitation work, but to condition assessment as well. In the case of sewer s, for example, where CCTV inspections are often used as an early warning system of failure, CCTV schedules should be driven by the same ROI or benefit/cost considerations as rehabilitation. These same principles should govern condition assessment activities. This is because there are only two possible immediate outcomes from a CCTV inspection: Do nothing, or else take proactive measures to reduce risk. Since taking proactive measures in higher-roi situations will offer the best value to the community, inspection priorities just like rehabilitation priorities should be based on the expected community value of the interventions that might result from the inspections. Interested? Bookmark Ken Harlow s Asset Management Page: http://www.bcwaternews.com/assetmgt/ - 5 -