Optimization

The optimized deprival valuation of the distribution and transmission systems should be based on an optimized arrangement of the infrastructure fixed assets.

Most infrastructure systems are constructed over time in accordance with certain planning guidelines to meet the growing demand for the system, and with allowance for projected system growth.

Typically, infrastructure systems designed in stages contain the following characteristics:

• Design and construction was based on the materials and technology available at the time.
• Design philosophy was that considered to be “best appropriate practice” at the time.

Systems were often built under government ownership to meet social objectives and without real economic drivers. As a result, system designs are often on a conservative basis.

The above factors may have changed over time and the existing system may not be meeting the expectations of customers in a cost effective manner.

The driving principles behind optimized systems are to ensure that:

• Current customers do not bear the burden of service costs loaded by the valuation of unnecessary capacity built into systems. The optimization process sizes the system for a actual demand related to current demand plus an allowance for immediate future forecast growth; this reduces over capacity historically built into many infrastructure systems.
• Customers do not bear past inefficiencies involved in the staged development of long-lived infrastructure systems. Optimization enables valuers to optimize designs and disregard historically determined inappropriate or redundant assets.

Given the required level of service, in terms of capacity and quality of supply, the optimized network should be designed to embody the most cost-effective set of assets to achieve the required level of service.

International Perspective

In Australia valuation of gas distribution and transmission systems have included optimization in the states of Victoria, New South Wales, South Australia and Queensland.

The concept is also being embraced by the electricity industry and water industry in Australia for the valuation of network based asset systems.

The following discussion focuses on Australian experience with optimization.

Methodology

There are basically two different approaches to optimization:

• Incremental approach
• Zero-based approach.

Incremental Approach

In the incremental approach, the existing system is examined and changes made to the rating, configuration, design or materials to optimize particular components or sub-components. The approach allows progressive optimization to the extent that such incremental growth occurs in the normal course of organization. Under-utilized assets are “replaced” by assets of lower capacity, and redundant assets are “removed”, but the historical configuration of the network of assets is preserved.

Since optimization may be constrained in one way or another by the existing layout, this approach may not produce the most optimal system as compared to the zero-based (undeveloped or “greenfields”) approach. Also, more effort may be required to produce optimization based on this approach if the “incremental optimization” is to be carried through to cover all the pipelines in the network instead of selective “incremental optimization”. As is typical of any “system” design, it is still necessary to re-design the network at the “supply system” or zonal level instead of examining individual pipes in isolation.

With the incremental approach, since each asset is considered and optimized individually, the optimized asset is depreciated at the same level as the original asset that it replaces.

Zero-based Approach

This approach (also known as “greenfields” optimization) assumes that the whole distribution and transmission system can be designed and constructed at the same time using modern engineering equivalents. The existing configuration layout is totally ignored.

The zero based approach usually results in better optimization since it is not constrained by existing layout, configuration requirements, and so forth.

As a notional system it is probably arguable that the optimized network bears no relation to the existing network in relation to layout and configuration; hence, the zero-based approach is the more appropriate approach.

With the zero based approach, since the whole network system (or sub-system) is optimized, the optimized system will be depreciated in the same ratio as the original assets at the system level.

Preferred Approach

At a conceptual level, the preferred approach for collection and distribution system valuations is the zero-based approach.

Practical limitations such as current modeling capabilities and cost need to be considered to determine the method to be applied.

It may be that an approach that combines zero-based optimization at a rudimentary level and incorporates some incremental aspects is achievable by an agency.