Posted: 07 May 2021 15 min. read

How a risk-based approach can improve decision making and profitability across your asset base

An approach that links asset management to risk appetite and pricing submissions, as a mechanism for water utilities to remain agile in a highly regulated operating environment

The challenges facing water utilities

Utilities are challenged by scale and distribution of the networks, as well as extensive regulatory constraints. For water utilities, when considering a balance between performance, cost and risk, the complications are:

  • Regulators require defined pricing for multi-year periods
  • Service delivery is bound by the operational asset network
  • Pricing submissions effectively lock in revenue, based on expenditure

Based on this, these organisations are asking, “how can we manage operational risk so that we can remain agile and profitable within the revenue and budget constraints defined in pricing submissions?”.

The water utility trade-off space

Traditionally, asset management focusses on the balancing of cost, risk, and performance. With performance locked in by revenue, which itself is informed by cost, the trade-off space in which a water utility can leverage is largely limited to risk.

The management of risk is therefore the key area in which water utilities can advance profitability, so understanding which assets are critical to the business is key.

Utilising risk-based asset management

The scale and distribution of water networks makes the managing of risk challenging, but there are opportunities to link data to corporate risk drivers for iterative redistribution of available budget.

Your corporate risk appetite should make it possible for asset managers to clearly define what assets are critical to the business and which need to be prioritised for investment. The process to follow should look something like a Failure Modes, Effects and Criticality Analysis (FMECA), whereby:

  1. Critical events are defined, being those that the risk appetite defines as critical to the business
  2. Effects of these critical events are analysed to define an initial list of critical assets, being those assets that may cause an event to occur
  3. Events analysis are refined to shortlist critical assets
  4. Failure modes and controls for critical assets are assessed to define residual risk
  5. Cost of additional controls to reduce levels of risk to within risk appetite thresholds are detailed, to derive the asset management investment profile
  6. Trade-offs are performed across the entire network of assets, moving budget away from non-critical assets, to manage those that are truly critical to the business and its profitability.

Let’s look at an example of a flood event to determine the risk: A burst watermain, leading to flooding of a major road, which has a cost associated with clean-up, should have a very low risk threshold in the corporate risk appetite:

  1. The event is a flood event, and the appetite for this sort of event should be defined in the corporate risk appetite
  2. The attributes that a database would look for when determining assets associated with these events could be asset proximity to major roads, and flow rate, both which would define the effects of failure and the extent of flooding
  3. With an initial list of critical assets, analysis could be refined using key attributes on the roads, such as traffic density, 3D topography and stormwater capacity, which all work to define the scale of the flooding. With the analysis refined, a shortlist of critical assets can be derived
  4. An assessment of failure modes, and the current controls, will then define the level of residual risk and determine if intervention is needed. For example, watermains may have circumferential cracking or corrosion pitting as key failure modes, with design controls in place including depth of pipe, or pipe thickness. Also, the incident response teams, while being reactive controls, reduce the level of residual risk
  5. The level of residual risk should then be compared to the risk appetite, to determine the level of intervention needed, at which point options to reduce the risk to within pre-defined tolerance bands, can be employed. As an example, condition sensors and crack prediction technologies could be deployed for predictive maintenance to negate any reactive controls and prevent events occurring, where the assets are considered critical
  6. Finally, an investment profile for all critical assets associated with flood events, should be combined with all other events. Collectively, this enables decision makers to not only decide where to invest in better asset management, but also where to move investment from, where the assets are found to be non-critical and only needing reactive measures.

Closing the loop then, the trade-offs can be used to inform future pricing submissions and demonstrate commitments to the regulator through active risk management.

How can you apply this approach?

This risk-based approach is ideally suited to managing uncertainty and providing opportunities for trade-off that are linked to an organisation’s strategic direction.

There are five key questions to consider:

  1. What are the critical events impacting business as usual (BAU)?
  2. Are the risks associated with these events captured in your risk appetite?
  3. What assets are linked to those events?
  4. What are the controls in place to mitigate failure of the assets?
  5. Are the controls adequate, or do you need to release funds to invest in understanding the risks, or implementing new controls?

Does your risk appetite capture critical events that can impact the organisation, and is asset management connected to the associated decision making?

Jesse originally presented this perspective at the AMPEAK Conference on 21 April 2021.

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More about our author

Jesse Millar

Jesse Millar

Specialist Lead - Consulting

Jesse joined Deloitte in 2018 and is a specialist in the maritime assets practice. He’s a chartered engineer, holds a degree in Naval Architecture (Ship Design). Jesse’s worked across a variety of areas in the maritime industry, both in Australia and abroad, and is passionate about effective delivery of capability. Jesse’s operated naval warships, managed naval oil tankers and superyachts, designed and built patrol boats, was a chief systems engineer, and draws upon his depth of experience to solve complex client problems at Deloitte. His ambition is to change the vernacular of asset management, from one where assets are no longer the physical investment, rather the human life that needs to underpin everything we do, to create a truly sustainable future for his children.