Incorporating Service Levels Into a Value Framework

As described in a previous blog post (“Why Do You Need a Value Framework“), Copperleaf’s Value Framework helps clients define what brings value to the organization, and align investment decisions to its strategic objectives. By developing a Value Framework, organizations can objectively trade-off different types of investments to understand what combination of investments, alternatives and start dates will bring the most value.

One consideration that’s extremely important for companies managing critical infrastructure is being able to understand how investments contribute to meeting minimum level of service (LOS) targets. These service level targets might be imposed on the organization by a regulator or through their own corporate objectives, and can introduce additional constraints in determining the portfolio of investments that are most suitable. Examples include:

• an electrical utility might be mandated to create a plan that will target a specific reliability (e.g. SAIDI value), or achieve a specific percentage of renewable generation within a set time frame
• a water utility might be mandated to create a plan that targets a maximum number of expected leaks per customer

As you can see from these examples, the service levels I am referring to are overall objectives of the organization. They cannot be evaluated by looking at asset strategies of individual asset classes. Creating a plan that requires all assets with a condition worse than some threshold, to be replaced or refurbished does NOT create a plan that minimizes the cost to obtain an overall corporate service level. Determining the optimal plan for achieving a specific service level requires that all asset classes be evaluated as part of an overall optimization process.

How does a service level contribute to a Value Framework?

In Copperleaf’s Value Framework, everything is translated into common units. For example, if we are incorporating reliability into the framework, we use the societal costs of outages to determine how much value to attribute to improvements of reliability. However, if a certain level of reliability is mandated, either by management directives or externally (e.g. by law or regulation), then it is not sufficient to translate the impact into economic units.

For some service level requirements, such as renewable capacity, it might be very difficult to assess the impact economically because the mandate may be based on a political decision to drive a certain policy. In such cases, it’s important to be able to create a plan that is constrained by the service level requirement. Even in cases where service levels are not mandated, it is useful to report on the expected impact of a specific plan on future service levels.

As explained in my previous article, any number of “value measures” can be included in a Value Framework:  financial and non-financial benefits, mitigated risk, improvements to KPIs, and of course, service level impacts. When all of these value measures are converted to a common economic scale, the optimization process can then determine the solution that brings the highest possible value, while honoring constraints on spend, timing and resources. An optimization solution can incorporate service levels in a number of ways:

• Constraints:  Service levels can be incorporated as constraints and the optimizer can determine the highest value solution that respects all the constraints, including service level constraints
• Reporting:  When service levels have not been mandated, it is useful to report on the impact of different scenarios on service levels (i.e. if Scenario A is adopted, then the expected impact on customer reliability is…)
• What-if analysis:  Utilizing service level constraints makes it possible to evaluate the cost of different policies. For example, how much do we have to invest to improve reliability by 10% over the next 5 years?

Developing a Value Framework that incorporates service levels will help you make better decisions, and defend those decisions internally, and to your regulator, board, and other stakeholders. We’ve created two white papers that go into more detail on Copperleaf’s Value Framework. Please visit our resources page for more information.