Preventive Maintenance Strategies for Deregulation by Chris Trayhorn, Publisher of mThink Blue Book, January 15, 2002 Introduction Companies do not emerge into a competitive environment with immediate knowledge of how to compete safely and effectively. Companies faced with cost-cutting pressures can inadvertently make excessive cutbacks in preventive maintenance, with potential adverse effects on safety, profitability, and regulatory relations. Possible Pitfalls As noted by Carroll et al. (1998), “In the short run, a plant can always cut preventive maintenance; the problems emerge later because preventive maintenance is an investment in the future.” In other words, “Sparse allocation of resources to maintenance is not a rational strategy for the organization as a whole,” but can nonetheless occur. For example, companies can (perhaps inadvertently) adopt policies that lead to cost savings in the short run, but result in problems later. Carroll et al. note, “Preventive maintenance seems to be a low priority in the face of immediate demands to keep the machines running at lower cost,” partly because “the ultimate effects of deferred maintenance can be denied, ignored, or blamed on others.” The experiences at the Millstone nuclear power plant in the late 1990s show that cuts can go too far. As the General Accounting Office (1998) noted about Millstone, “The need to trim costs in the face of future competition resulted in managers’ choosing to defer maintenance and allow backlogs of corrective actions to grow, eventually creating a situation that led to a shutdown and several hundred million dollars worth of repairs.” The shutdown also resulted to opportunity costs of lost sales during the period of the shutdown. One reason that such problems can arise is because the feedback for cutbacks is delayed and ambiguous, so plants that do not heed early warning signs could cut too far. Some plants are turning to reliability- centered maintenance (RCM) to avoid such problems. However, appropriate use of RCM creates increased demands for testing (e.g., non-destructive evaluation), data collection, and analysis. The lack of such data collection and analysis appears to have been a problem in the electricity distribution outages in Chicago during summer 1999. In reviewing those outages, the Department of Energy Power Outage Study Team (2000) noted that “Many fixed, periodic, substation maintenance programs had been scaled back or discontinued in transition to a ‘reliability-centered maintenance’ philosophy. However, the collection of data and measurements necessary for successful reliability-centered maintenance was not fully in place.” As a result, “the ability to predict possible component failures from the inspections that were performed and data that were collected was limited.” Another area in which companies make excessive cuts is maintenance of spares. Under economic regulation, spares might have seemed like an obvious place for cutbacks when cuts were needed. After all, spares obviously cannot be safety-critical since they are not even installed. Moreover, they are not used in routine operation, and some spares may not have been used at all in many years. This combination of factors makes spares appear to be an easy target for cutbacks. However, this is an old way of thinking that is no longer appropriate, where generating companies can no longer expect rate-payers to cover the cost of outages, even if they do not result from “imprudence” per se. New Ways of Thinking About Preventive Maintenance Airline industry experience shows that safe cuts can be made. A study of engine maintenance after deregulation by Kennett (1993) found “a significant increase in the number of engine hours between major overhauls following deregulation,” but noted, “engine ‘failures’ have not increased as a result of deregulation.” Kennett’s findings suggest that airlines may have been doing more maintenance than necessary, and then optimized their maintenance programs after deregulation,”… perhaps by improving the quality of service performed but paying less attention to minor problems between scheduled shop visits.” This is consistent with experiences after deregulation of the United Kingdom nuclear power industry. A recent study of the effects of economic deregulation on nuclear power safety (Bier et al., at press; see also Bier et al., 2001) found that in the United Kingdom, electricity deregulation appears to have increased the emphasis on reliability and regulatory compliance (despite some problems associated with extensive downsizing). In an interview summarized in Bier et al. (at press), a power plant site manager in theUnited Kingdom noted that managers now find themselves telling the staff not to rush: “Don’t make mistakes which can lead to a non-compliance with the regulations,” he emphasized. “We’d rather have the job done slowly but right.” These observations suggest several strategies for allocating resources to preventive maintenance: • Identify those maintenance activities that are truly cost-effective and/or risk-significant. Cutbacks can then be considered in those activities that provide little real value added, and are done mainly because “that is the way we have always done maintenance around here.” For example, South Texas project managers estimate that they will save roughly $1 million annually by “optimizing maintenance frequencies, [re-evaluating] how detailed post-maintenance testing needs to be and reconsidering how detailed plant documentation packages need to be” on components with little or no risk significance (Stellfox, 1999). Those activities that contribute significantly to productivity may actually justify increased levels of resources after deregulation. • Seek ways to accomplish needed maintenance at lower cost. For example, companies may seek competitive bids for activities that were formerly contracted to the original equipment manufacturer. With the economies of scale associated with consolidation, companies may also find it cost-effective to have their own staff perform work that had formerly been done by contractors — for example, to permit greater management control. • Seek alternative ways to achieve the same goals. Careful use of non-destructive evaluation may make it possible to postpone or even eliminate formerly routine overhauls. Conclusion Electricity deregulation changes the incentives for preventive maintenance at power plants. Generating companies used to focus on engineering-oriented figures of merit such as capacity factor and forced outage rate. Under economic regulation, annual average capacity factor made sense as a performance measure for use by electric utilities, especially since some regulators used it as a performance benchmark. However, in a competitive market, electricity prices can vary by more than two orders of magnitude between high-cost and low-cost hours, so achieving good annual average capacity factors is no longer sufficient. Instead, the timing of when a plant is available also becomes critical to its economic performance. Under these situations, reliability is more important to profitability than it used to be. Thus, avoiding a day of forced outage may be worth several days of planned outage at a low-cost time of year. In fact, as future electricity markets evolve, forced outage rates may have yet another direct financial consequence for utilities, since they may affect the cost of required reserves to cover possible forced outages (equivalent to an insurance premium). Moreover, controlling the duration and timing of forced outages is as important as controlling their frequency. One way to control the duration of forced outages is through effective spares maintenance. This obviously does not mean that an organization should not cut maintenance of spare parts — only that it should not do so blindly, under the erroneous assumption that spares maintenance is unimportant. Rather, optimal spares maintenance must carefully weigh the savings from any cutbacks against the possibility that failure to maintain spare parts in working condition could extend the duration of a forced outage. In this context, arrangements with other plants or vendors (to ensure that spares will be available on short notice) can provide one mechanism for reducing spares maintenance with diminished downside risk. The idea of controlling the timing of forced outages at first would appear to be a contradiction in terms. After all, if an outage is truly forced, how can a plant be expected to control the timing of that outage? However, the timing of forced outages can in fact be influenced by paying careful attention to the circumstances that can cause such outages — for example, by limiting online maintenance to times when outages would not be excessively costly. Optimizing financial performance rather than conventional engineering figures of merit requires increased economic sophistication. Moreover, with the advent of electricity deregulation, responsibility for making economic decisions is now being pushed down to lower and lower levels within power plant management structures and organizations. The types of decisions where economic considerations are important range from relatively long-term decisions (such as deciding which work to include in a particular outage), to short-term decisions (such as whether to call in a maintenance crew on overtime versus waiting until the next weekday), to general decision rules (such as whether and when to perform online maintenance). While the specifics of these decisions are often unique, certain categories of decisions arise over and over. Therefore, it is important for power plants to develop better tools for economic analysis of such situations. Better economic decision-making can result in plant performance that is more consistent with corporate financial goals and policies, while still incorporating the technical knowledge of plant decision-makers. References 1 Vicki Bier, James Joosten, David Glyer, Jennifer Tracey, and Michael Welsh (at press), “Effects of Deregulation on Safety: Implications Drawn from the Aviation, Rail, and United Kingdom Nuclear Power Industries,” Washington, D.C., U.S. Nuclear Regulatory Commission. 2 Vicki Bier, James Joosten, David Glyer, Jennifer Tracey, and Michael Welsh (2001), “Deregulation and Nuclear Power Safety: What Can We Learn from Other Industries?” Electricity Journal, May, pp. 49-60. 3 John S. Carroll, John Sterman, and Alfred A. Marcus (1998), “Playing the Maintenance Game: How Mental Models Drive Organizational Decisions,” in Debating Rationality — Nonrational Aspects of Organizational Decision Making (Jennifer J. Halpern and Robert N. Stern, editors), Ithaca, New York, ILR Press. 4 General Accounting Office (1998), Nuclear Regulatory Commission — Preventing Problem Plants Requires More Effective Action by NRC, Washington, D.C. 5 D. Mark Kennet (1993), “Did Deregulation Affect Aircraft Engine Maintenance? An Empirical Policy Analysis,” RAND Journal of Economics, Vol. 24, No. 4, pp. 542-558. Power Outage Study Team (2000), Report of the U.S. Department of Energy’s Power Outage Study Team — Findings from the Summer of 1999, Washington, D.C., U.S. Department of Energy. 6 David Stellfox (1999), “STP Finds Risk Ranking Components Pays, Even Before NRC Changes,” Inside N.R.C., December 20, pp. 3-4. Filed under: White Papers Tagged under: Utilities About the Author Chris Trayhorn, Publisher of mThink Blue Book Chris Trayhorn is the Chairman of the Performance Marketing Industry Blue Ribbon Panel and the CEO of mThink.com, a leading online and content marketing agency. He has founded four successful marketing companies in London and San Francisco in the last 15 years, and is currently the founder and publisher of Revenue+Performance magazine, the magazine of the performance marketing industry since 2002.