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.