Nuclear generation is the largest and most reliable source of carbon-free, around-the-clock electricity. While this idea is gaining environmental and mainstream recognition, we believe more needs to be done to economically compensate nuclear for its increasingly crucial role in maintaining grid reliability.
As part of an overall effort to inject more rigor into the development of their Operations & Maintenance (O&M) budget, a top-10 integrated utility in the Southwest sought to engage a firm with extensive experience in providing consulting services in zero base budgeting (ZBB) for utilities.
MCR assists nuclear plants by teaching techniques to prepare robust business cases with creative alternatives, quantifying reliability and financial risk. With this information, the Executive Review Team is empowered with previously unavailable insights to confidently make the best decisions.
Upon completing its merger with another utility, a large, multi-jurisdictional IOU needed to integrate its capitalization policies and unit of property (UoP) catalogues for its expanded generation fleet, transmission, distribution and general utility property. The existing UoPs were overly cumbersome and a perennial source of disputes in project capital/expense classification decisions. As one senior accounting manager at the company described, the UoP catalogues had grown “out of control.”
The merger presented an opportunity to align the capitalization practices of both companies, incorporate industry best practices, address key upcoming projects and resolve previous organizational disputes. Senior management also wanted to ensure any new levels of capitalization would be defensible to the public service commissions overseeing the company’s numerous jurisdictions. MCR had previously worked with the company on a UoP catalogue integration for its merger with a former utility and was asked to assist again.
Most nuclear plants require some form of business case before a significant project is approved. These business cases, however, often “just go through the motions,” resulting in higher than necessary budgets and crowding out other important projects in the portfolio. A successful business case and project review process requires an active Executive Review Team and robust business cases to quantify alternatives and structure evaluation of cost-risk tradeoffs. This process helps ensure power plants meet their reliability goals in the most cost-effective manner. Moreover, when led by senior plant management, this approach can produce cost savings of 20%-60%, thereby reducing the strain on power plant capital and operating budgets.
Reducing O&M costs is one of the highest priorities for nuclear generation executives today. Often overlooked, however, is the treatment of project expenditures. A nuclear generation plant is composed of numerous functionally interdependent items of equipment and components, and it can be difficult to identify which items constitute discrete units of property, major components or something else. As a result, many nuclear facilities can’t be sure they are capitalizing all costs they are entitled to and thus, are potentially expensing more costs than required.
When asked, most nuclear utility executives say their organizations develop effective Life Cycle Management (LCM) plans. However, when analyzing industry data, a somewhat different story emerges as industry and regulatory groups continually flag deficiencies in LCM planning. A recent analysis of INPO Equipment Reliability AFIs found almost 25% were LCM-related. LCM is not new to the nuclear industry, but successful implementation appears to be a struggle for many licensees. How did the industry get to this point, and what can be done to fix it?
The utility industry is undergoing dramatic change as new technologies, such as solar and batteries, threaten to disrupt the traditional utility generation model and may have a dramatic impact on revenues. At the same time, costs are increasing as interest rates rise, distribution systems are reworked to adopt two-way flow of power, and customer expectations drive the need to support new channels for information and transactions. Combined, these trends are placing significant pressure on earnings.
To address these pressures, utilities frequently look to traditional cost cutting methods to meet financial performance objectives: flat percentage or across-the-board cuts in base budgets, staff reduction or deferred project spending. While these traditional methods may achieve some results, a more analytical approach to optimize spending will help ensure the right funding is applied to the right efforts at the right time.
Risk Informed Budgeting is an analytical approach to budgeting where the timing, amount and consequence of every budget line item is challenged. In our experience, an effectively implemented Risk Informed Budgeting program can produce 10% to 15% savings in routine budgets, even after implementing other cost reduction initiatives.