The Color of Capital

Dear Gregarious Green One,

My firm uses Ultrinium™ and Sustained Pressure Rejuvenation to treat cables after they fail. The ability to capitalize single section injection with Novinium technology means we can earn a regulated rate of return on the capital thus expended. I read your four-part blog, “The Color on Money” and was wondering if you could do a similar analysis to help us quantify the benefit of our approach.

Considering Capital in Colorado

Dear CCC-

I am pleased that you appreciated my “Color of Money” posts. Click on I, II, III, and IV to review that work. Many of the concepts in the “Color of Money” apply to the “Color of Capital.” In fact, Parts II and III are prerequisites if you need a primer on depreciation and the time value of money respectively.

The ability to capitalize single sections of injected cable is available only from Novinium. In FERCs (Federal Energy Regulatory Commission) Letter order dated January 18, 2000, John Delaware, the Chief Accountant, wrote to the petitioner, Georgia Power:

“You indicate that CableCURE is used to rehabilitate entire segments of your underground distribution system (e.g. entire residential subdivisions as opposed to individual runs of cable between two terminal points).”

The only way you can capitalize CableCURE is if the entire subdivision is rejuvenated. The letter order is attached to this post for the interested reader. Novinium’s technology has no such limitation. The Letter Order promulgated by FERC’s Chief Accountant on September 4, 2008 and associated submittal information removes that limitation and can be accessed by clicking here. All of the above discussion is also true for RUS-funded circuit owners. Click here is view the RUS order of April 3, 2009.

That takes care of the regulators; now the analysis. We will compare two cases. All of the inputs are shown on the worksheet nearby. Parenthetical references to the worksheet cell designations appear in the following text.

Case 1

The cable fails, is repaired and put back in service. In our model the user can indicate how many faults are tolerated before the cable is replaced, together with an estimate of the time between faults. For this example, we assume the cable will fault twice over a two year period before it is replaced. The capital cost to replace is a modest $33.00/ft (Cell B7) and the O&M cost of a fault is $13.72/ft (Cell D13) in today’s dollars. That’s $4,500 (Cell B11 + Cell B12) divided by as assumed segment length of 328 ft (Cell B13).

Case 2

The cable fails, is repaired and injected in a single integrated operation. In our model the bundled unit capital is $20.06/ft (Cell D23). The model user can change any of the costs inputs and an assumption of the post-treatment reliability. For this example, the post-treatment failure rate is assumed to be 2% (Cell B26), which is about twice Novinium’s actual post-failure experience of about 1%.  To put this 1% failure rate in perspective consider that it is three-times higher than Novinium’s non-post-failure experience of about 0.34%. This higher-than-typical post-treatment failure rate is inherent in post-failure treatment. The post-injection fault is assumed to occur two years (Cell B27) after injection. Again the model user can adjust any of these assumptions.

Other Assumptions

Warranty remittances of $10/ft (Cell B23) are negative capital expenditures, that is, the remittances are subtracted from the subsequent replacement capital. Upon post-injection failure, the book value is written off, terminating the ratemaking-allowed return and providing a lump sum tax benefit of the book value. Cash flows are calculated for two rehabilitation cycles, up to 100 years. This approach allows residual values to be properly ignored as de minimis. Finally, replacement is assumed to have a zero-percent failure rate. At least one major investor owned utility has reported that new installations suffer a 0.6% “infant mortality” failure rate, and hence this assumption results in a slight understatement of the incremental value of Novinium^® post-failure rejuvenation.

Bottom Line

The cumulative net present values (NPVs) for the two cases are plotted nearby. Since the revenue or sale of electricity is the same in all cases, those revenues are ignored and only capital and O&M costs are depicted. This cost-only analysis is why all of the NPV values are negative. Nonetheless, the higher the cumulative NPV value is on the graph, the more advantageous to the circuit owner.

The blue line is for Case 1, and in the short run it is the superior choice. The problem is that once a cable begins to fail, it will re-fail. Sooner or later the ratepayers will be very upset with deteriorating reliability. Capital inefficient replacement is executed after the second fault (Cell B14) and the NPV plummets.

The orange line is for Case 2, and it represents an investment in reliability. The initial cost is about twice as great, but because the investment is capital, the circuit owner begins to earn a regulated rate of return. In the end, the incremental NPV advantage of Novinium post-failure rejuvenation is $18.42/ft. If your replacement cost is higher, say $44/ft, the difference becomes $21.15/ft. If in Case 1, the cable is allowed to fault a total of three times, the difference rises to $24.56/ft. Even if the cable is replaced after a single fault, the best alternative to rejuvenation, rejuvenation still enjoys an $11.45/ft advantage.

If you would like to run this model on your specific circumstances and execute “what if” scenarios, contact us at novinium.com/Contac.aspx.

Always conserving capital,

T. B. Frog

70-20120322_FERC_Letter_of_Approval.pdf (78.87 kb)

The Color of Money – Part IV

In my post of February 27^th, The Color of Money – Part I, I gave the big picture answer to Cap’s query. In February 28^th’s follow-up post we delved into the details of depreciation. On my Leap Day post we deliberated discounting. Today, in the fourth and last post of the series, we will tie up loose ends and cover the rest of the assumptions.

Rejuvenation Technology Inputs

In cells B12, B13 and B14, the name for “Product X”, the fully absorbed cost for product X, and the warranty length are entered respectively. Cells B16, B17 and B18, hold the same values for “Product Y.” Cell B20 is the ratio of the warranty length of Product Y divided by the warranty length of Product X.  The accounting lives are assumed to be the respective warranty lives.  The actual life multiplier in cell B21 is the ratio of the actual life of Product Y divided by the actual life of Product X. The warranty life is an approximate indicator of the actual life, as the technology suppliers use some combination of experience, accelerated life experiments, and accelerated life simulations to arrive at reliable life expectations.

For individual large and stable firms, such as most utilities, the spread or difference between the discount factor in cell B3 and the inflation rate in cell B6 is quite constant. If inflation increases, discount factors increase too. The 5.9% spread in the example is typical for the power distribution industry in North America.

Accounting Treatment of Warranty Remittance 

GAAP would suggest that warranty remittances are handled as negative capital expenditures. That is, the cost of replacement is reduced by the amount of the warranty remittance. Any remaining undepreciated value associated with rejuvenation is written off in the year of the failure on both the tax books and the rate-making books. Individual circuit owners may treat these warranty refunds differently. Write to me to tell me how your firm accounts for these warranty payments.  I’ll enhance the model to accommodate your method.

Residual Value

For any net present value analysis there has to be an assumption regarding the handling of residual values at the end of the analysis period. Where two rejuvenation technologies with different actual lives are compared, the technology with the longer life will have a greater residual value than the product with lesser life. For the purposes of this analysis a single replacement cycle is executed after the rejuvenation cycle has completed and future value is calculated to a one century horizon. Cash flows after 100 years are ignored. This assumption favors the technology with the shorter life, since the product with the longer life would have the greater residual value.

Bottom Line

This rigorous analysis confirms and quantifies what should be self evident. The longer the life – the greater the value.

Greener is better,

Thermonuclear Frog 

The Color of Money – Part III

In my post of February 27^th, The Color of Money – Part I, I provided the big picture answer to Cap’s query. In yesterday’s follow-up post we delved into the details of depreciation. Today we will deliberate discounting – muse over money’s time-value. Please dust off your Frogonomics 201 textbook, The Time Value of Money, and Turn to Chapter 3. Consider the common amphibious aphorism used to explain why future cash flows must be discounted, to wit: “A frog in the hand is worth two in the pond.”

A dollar earned or saved today has a greater value than a dollar earned or saved in a future time period for two reasons. First, inflation – we all experience its pernicious penalty. In cell B6 illustrated nearby, the annual replacement inflation is assumed to be 2.4%. The inflation of replacement is due primarily to the increasing cost of labor, secondly to the increasing cost of the commodities that make up a new cable, but thirdly both increases are mitigated by increases in the productivity of the people and tools performing replacement. Inflation then, is the composite of these three effects. Notwithstanding claims by the Federal Reserve Chairman, nobody can predict what future inflation will be, but that shortcoming is not as onerous as one might expect.

For individual large and stable firms, such as most utilities, the spread or difference between the discount factor in cell B3 and the inflation rate in cell B6 is quite stable. If inflation increases, discount factors increase too. The 5.9% spread in the example is typical for the power distribution industry in North America.

The second component of the discount factor involves a dispassionate assessment of the future financial risk – taking into account the financial expectations of the firm’s capital sources. The capital sources might include public debt and equity markets, they might include the ratepayers of a cooperative, or they might be taxpayers of a government-owned distribution firm. With the exception of some improperly functioning government entities, no capital source makes an investment without an expectation of a return. Further, the greater the perceived risk of the investment, the greater the expected return.

In yesterday’s post on depreciation, we also touched upon the rate of return on capital, and here again there is a generally stable historical spread between the rate of return and the discount factor.  Thus modelers must generally move these three values together for any sensitivity analysis. Inflation is less than the discount factor, which in turn is less than the rate of return.  The spreads are fairly stable for individual firms and are typically about 6% and 1% respectively. Check with your finance folks to determine the discount factor, inflation, and rate of return. Let this frog know of any values that differ substantially from the norms.

In my next post in this series we will examine the remaining assumptions required to compare two rejuvenation options.

For me, every day is a Leap Day,

Thermonuclear Frog

The Color of Money – Part II

In yesterday’s post, The Color of Money – Part I, I gave the big picture answer to Cap’s query. Today we will dive into the first of three sets of details that impact the answer, namely depreciation. In subsequent posts we will examine discounting and other assumptions. I had to pull out my green eyeshades to properly address depreciation. In the foreground of each of the graphs in yesterday’s post, a table of assumptions was provided.  In the illustration below I zoom in on the second table to shed light upon the details.

Depreciation is the allocation of capital cost over an accounting life of an asset. The accounting life and the actual life are not the same thing. Accounting life generally considers the actual life together with regulatory requirements and generally accepted accounting principles (GAAP). The accounting life for new cable is usually 40 years, so 40-years is the model assumption for “Replacement asset life” in cell B8.

There are a variety of ways in which the original capital cost of, say, a new cable might be spread over its accounting life of 40 years. The simplest method is called straight-line depreciation and it allocates an equal amount of depreciation expense for each of the 40 years of anticipated life. In our example, the replacement cost of $33.00 per foot in cell B7 would be spread over 40 years, and hence the annual straight-line depreciation would be 82.5¢ (i.e. $33 ÷ 40 yrs). There are other depreciation methods that accelerate expenses into the earlier years of the asset life. In my example, the double declining balance (DDB) method is used for tax purposes in cell B9. Wikipedia does a nice job of defining the concepts of depreciation, so the interested reader should visit …

http://en.wikipedia.org/wiki/Depreciation. 

Now for a not-so-secret secret – investor owned utilities keep at least two sets of books! One set of books is kept for the taxing authorities and the second set of books is kept for regulatory authorities. Often a third set of books is kept for internal purposes, but that has no impact on our analysis, because all we care about is actual cash flow.

In my next post in this series we will dive into discounting, but for now let’s agree that accelerated savings are good – a dollar saved today is worth more than a dollar saved tomorrow. That’s why for the tax books, the accountants use the most aggressive depreciation allowed by the tax authorities. For our example, I used DDB that switches to straight-line when straight-line becomes more favorable. The “2” in cell B9 represents the “Double” in “Double Declining Balance.”  The switch to straight line is controlled by a “True/False” switch in cell J9, which is not shown for brevity. If one has a depreciation expense of $100 and an “Incremental Income Tax Rate” of 32%, one would enjoy a $32 tax benefit. This is so because the $100 expense offsets $100 of revenue on which no taxes need be paid.

Now to the second set of books.  As long as the “Rate of Return on Capital” in cell B5 is greater than the “Discount Factor” in cell B3, it is to the circuit owner’s advantage to use the slowest depreciation method allowed by the regulators. In the long run the rate of return must be greater than the discount factor or investments by the circuit owner would make no sense. The FERC (Federal Energy Regulatory Commission) promulgates a Uniform System of Accounts (USoA) to regulate how capital assets are depreciated. For the example provided in this model, regulatory depreciation is straight line, indicated by a “1” in cell B10.

What if your firm is not an investor owned utility? What if your firm does not pay any income taxes? At first glance it appears that publically owned utilities should set both their incremental income tax rate and rate of return on capital to zero. That would ignore the stakeholders of public utilities have the same expectation of economic return as their investor owned neighbors. If the publically owned entity did not provide a return in the form of lower electrical rates or direct payments to a governmental unit, there would be a strong case to privatize the utility. This frog would argue that the same values used by neighboring investor-owned utilities should be utilized for this analysis, but check with the green-eyeshade guys upstairs.

Using GAAP (generally accepted amphibian practices),

T. B. Frog

The Color of Money – Part I

Dear Gregarious Green One,

My firm purchases rejuvenation services from both Novinium and UTILX. While we have a preference for the mastery displayed by your team and your inherently safer process and fluids, it is difficult for us to settle on Novinium as our sole vendor, because the UTILX price is lower. Can you help me understand your value?

Capital Concern

Dear Cap-

I’ll bet that you thought my FrogBlog tagline, ”It’s easy to be green™” focuses upon the environmental benefits of using Earth-friendly cable rejuvenation technology. Others might believe that the tag line is a play on the lyrics to that other famous frog’s song, “It’s Not Easy Being Green.” This frog is a master of the triple entendre. It’s easy to be green, while you are saving some green, and … I am not above poking fun at Kermit! Notice in the image nearby how nicely my complexion matches the color of money! That’s money that you earn when you employ superior technology.

We can provide a lower price by lowering the quality of the products and services we deliver to more closely match those of the two-decade-old approach, but we will not compromise on safety. For example, we will not use flammable fluids. But hey, there is no need to compromise safety or performance. The value of the longer post-injection reliable life and the longer warranty periods enjoyed by the patented Novinium processes and fluids can be calculated. Let’s consider two general cases.

In the first case, compare the 20-year life expectancy, warranted by the other guys, versus the 25 years enjoyed by the improved unsustained pressure rejuvenation (iUPR) process together with Ultrinium™ 732 fluid. At first glance 25-year life extension suggests a 25% increase in value, but there are the matters of the time value of money, regulated rates of return on capital, and distortions caused by the tax code. In the graph nearby I show the difference in net present value (NPV) between the two choices as a function of the post-injection reliable life. The actual value waxes and wanes depending upon the life of the cable, but for the most common case, where the life meets the expectations, iUPR enjoys more than a 10% value advantage. For other cases the value may be higher or lower, but it is generally positive.

In the second case, compare the 20-year life expectancy, warranted by the other guys, versus the 40 years guaranteed by the sustained pressure rejuvenation (SPR) process together with Ultrinium™ 732 fluid. Doubling the life extension does not double the value, because of the aforementioned time value of money, regulated rates of return, and tax code considerations. In the second graph I show the difference in net present value (NPV) between the two choices as a function of the post-injection reliable life. The actual value varies depending upon the life of the cable, but for the most common case, where the life meets the expectations, SPR has about a 16% value advantage. For other cases the value may be higher or lower, but it is always positive. For cases where the post-injection life is greater than 3 years, but the cable fails within the warranty period, the SPR/Ultrinium 732 fluid combination provides up to a 32% value advantage.

In subsequent posts, this frog will again crack open her Frogonomics 101 textbook and explain each of the factors that influence this dispassionate economic analysis. Friends of Frog (FoF) may request a copy of the MS Excel worksheet so that they can adjust the parameters of the model to calculate their unique incremental value of using state-of-the-art technology.

Always in the green,

Thermo B. Frog

Middle East Query – Rejuvenation Saves Capital

Dweller of the Desert asked 22 questions in his post …

Middle East Query – 22 Questions.

In this installment I address question 12.

12.   What is the expected cost of curing compared to cable replacement?

Typical costs for injection are one-half to one-third of the cost of cable replacement.  For submarine cables and armored cables, cable injection can be only one-sixth the cost of replacement.  With soaring costs for copper, aluminum, and petroleum-based polymers the economics of injection only get more compelling.  In addition to raw material costs, skilled craftsman to replace cables are becoming increasingly scarce and more costly.  Rejuvenation requires one-half to one-third of the labor-effort to replace a length of cable, so the cost to rejuvenate will always be proportionally less than replacement.  With the state-of-the-art sustained pressure rejuvenation process, even cables in ducts, conduits, or trays enjoy the cost advantage of rejuvenation. Because splices are either non-existent or easily accessible in these systems, the rejuvenation productivity remains two to three times higher than replacement. Hence the cost to deliver rejuvenation remains below the cost of replacement.  Finally, the funds expended for cable rejuvenation are capital cost – just as cable replacement is a capital cost.  In fact, Novinium technology is the only cable rejuvenation that the FERC (U.S. Federal Energy Regulatory Commission) and the RUS (Rural Utility Services) have approved to be capitalized for post-failure treatment.  Check out the FERC Letter Order and the RUS Letter Order for more details.  Saving capital is what we do.  Technology invented by Novinium founders has saved circuit owners around the world over one billion U.S. dollars!

For now, Ma’a salama (مع السلامة/Good bye)

T. B. Frog

Projecting Future Load – Compound Growth

Dear Thermo,

Thanks for your insightful answer in your previous post, “Why does the load matter?”  How important is the future load growth?  Our planning team gives me a range instead of a single value; they suggest 2-3%.  I have sent you some real data for several of our circuits.  Teach me oh webbed one!

Still Overworked in Ohio

P.S.  Steve is actually very helpful once you get used to him.

Dear Overworked- 

Albert Einstein is said to have once quipped, “The most powerful force in the universe is compound interest.”  He was talking about money, but the same principle applies to compound growth of any kind as you shall see if you read on.

Your planners undoubtedly consider whether the geography served by the circuit is mature or whether there is still new development likely.  On top of the growth rate from new services, how are existing customer electrical demands changing?  In general, more and more electrical applications are being deployed, but greener, more energy efficient appliances may mitigate or even reverse that load growth.  Also demand management may reduce peak loads.  I picture the planners pulling out their crystal balls to determine how fast plug-in hybrid cars will be deployed.  These are just a few of the considerations in estimating future load growth.  The impact is huge, so the exercise is well worth considering.

To test that impact, let’s do a sensitivity analysis on a single 3-phase feeder circuit, your Carrollton AM-1215.  Nearby, I have plotted estimated temperature data for the circuit for most of 2010 in 30 minute increments.  The lowest curve on this graph is the ambient soil temperature at cable depth.  The temperature of the individual cables for phases A, B, and C, are displayed as fine red, grey and blue lines respectively.  The flux weighted temperature, that is the equivalent constant temperature that provides the same permeation of fluid through a cable, are the three heavy horizontal lines using the same red, grey, and blue color scheme.  I described this process generally in my previous post and I have promised a future post to examine in more detail what flux weighting means.

The next illustration of three graphs stacked on top of each other shows the extrapolation of the Carrollton AM-1215 data with 1%, 2% and 3% annual load growth.  First allow me to explain the common elements of each graph.  The x-axis is the year.  The red, grey, and blue dashed lines are projections of flux weighted amperage for phases A, B, and C respectively.  All dashed lines are plotted against the left-y-axis.  The corresponding flux weighted annual temperatures are like-colored solid lines and are plotted against the right-y-axis.  The top-most horizontal dashed line (purple) at 603 amperes is the rated ampacity of each cable.  The lower horizontal dashed line (violet) at 469 amperes is the maximum flux weighted load.  Based upon the historical difference between the peak and flux weighted temperatures for all three phases, when the flux weighted current grows to be greater than or equal to the flux-weighted maximum load, the circuit will experience significant thermal excursions above the maximum operating temperature during periods of peak load.

In the top graph of 1% annual growth, the cable is approaching its ampacity limit in the year 2050 – 40 years from now.  All is well.  In the middle graph of 2% annual ampacity growth, constraints are experienced in about 2031 or 20 years from now.  The doubling of the growth rate halved the ampacity-life of the circuit.  In the bottom graph of 3% annual ampacity growth, constraints are experienced in about 2025 or 14 years from now.

Einstein was right – the compounded growth rate is the most powerful force in the universe!  The difference between 1%, 2%, and 3% is bigger than my belly.  For the Carrollton AM-1215 circuit, 40 years of life is simply not possible in the 2% and 3% load growth scenarios unless a portion of its load is transferred to another circuit.

If you don’t expect to keep a circuit in service for 40 years, don’t ask Steve to warrant it for that long.  Ask him for a shorter life and a discount.  The cost of the technology to obtain 40 years of life is more than the cost to reach 20 years.

Compounding my own growth,

Thermo

P.S.  As for me I have never really gotten used to Steve.  His skin lacks any camouflage pattern.  I am pleased that you have learned to look the other way.  I will endeavor to be more tolerant.

Of Splices and Prices

Dear Ms. Frog,

The other rejuvenation vendor refers to a “blow & go” injection method.  What is blow & go?  Does blow & go make sense for me?

California Dreamin’

Dear Dreamer-

Nobel prize winner, John Steinbeck, set his novella Of Mice and Men in California.  Few would know that my Great-great-…-great Grandmother, Salinas Bull Frog, a friend of Steinbeck talked him out of his working title, which was “Of Frogs and Men.”  As appealing as that title is, Salinas pointed out three problems to John.  First and foremost, a frog would not be pleased to ride around in Lenny’s pocket.  Second, the words Mice and Men are mutually alliterative and would sell more books.  And lastly she pointed out the play upon the famous line of the poem by Robert Burns that most would recognize, to wit,  “The best laid schemes o' mice an' men.”  Again, clever marketing cachet.

You have to be wondering where this frog is going with this lesson in American literature!  Bear with me for now; it will come into focus soon.  In the story, Lennie, a giant of a man, but with limited mental abilities, loves to pet soft things and cares for a mouse in his pocket.  He accidentally gets into really big trouble and the mob rushes to judgment and would undoubtedly kill Lennie, an outcome that would not be tolerated in 21^st Century California.  The story brings tears to my big eyes, but like Lennie, first impressions are often wrong and a more careful analysis and a cooler head are required to reach the right conclusion.  “Of Splices and Prices” requires the same careful analysis, and if they are paying attention in Stockholm, perhaps this post will land the first ever Nobel Prize in Literature to an amphibian.

First, the phrase, “blow and go” was coined by injection operating personnel about a dozen years ago shortly after a pricing paradigm called “Productivity Pricing” was introduced.  Productivity pricing was benevolently conceived by my Novinium colleague, Glen Bertini, to address productivity issues with the more traditional unit pricing.  When a rejuvenation supplier provides straight unit pricing to a circuit owner, the circuit owner has no incentive to provide timely switching orders.  At first glance the circuit owner might prefer the unit approach.  A more enlightened consideration recognizes that the rejuvenation supplier, over the long run, must simply raise prices to cover the inefficiency this situation creates.  Hence, productivity pricing introduces a time-based charge so that both the circuit owner and rejuvenation supplier are incented to work efficiently.  That’s the good news – productivity pricing leads to lower rejuvenation cost per foot.  The bad news, and unintended consequence of productivity pricing, is that minimization of the rejuvenation cost is not the optimum strategy for a circuit owner.  Those operating guys were the first to recognize this fact when they coined the “blow and go” phrase.  They recognized that the rejuvenation vendor’s profit was maximized by injecting all the cables that are easy to inject and abandoning those that present any challenge.

In order to enjoy this result it is necessary to suspend consideration of the cables that must be replaced -- the "go" part of blow and go.  As illustrated nearby, rehabilitaiton encompasses both rejuvenation and replacement.  It is not prudent to consider the two separately.

From where I am sitting in the rejuvenation supply side of the equation, it is tempting indeed to embrace blow and go.  But at Novinium we have a different perspective.  Sure we want to make a profit like the next guy, but we believe that we are best served by aligning our interests with those of our cherished circuit owner customers.  So no, Dreamer, you do not want to embrace “blow and go” and you do not want to embrace productivity pricing.  I will share with you a better pricing paradigm in a moment, but first, let’s see why “blow and go” is usually not the lowest capital solution to your underground reliability issues.

Here is where the “Splices” portion “Of Splices and Prices” comes into play.  On average about half of legacy splices support flow with the unsustained pressure rejuvenation (UPR) paradigm.  Blow and go ignores those cables with problematic splices and those cables must be replaced for a reliable circuit.  You like rejuvenation in part, because it is so much more capital efficient than replacement.  With blow and go in a typical URD project, about a third of the cables must be replaced.  With an aggressive splice replacement approach, Novinium routinely injects over 90% of the cable segments it addresses.  Digging and repairing splices cost money, but it costs a lot less than replacing the cables for the 20-25% of the cable population where the tactic is judiciously applied.  The figure nearby illustrates the concept.  As the aggressiveness with which splices are addressed is increased, the capital cost of rejuvenation (including the capital cost of addressing associated splices) goes up, but the total capital cost of rehabilitation goes down.  Remember, replacement costs much more!

There is a better way.  We call it Enhanced Productivity Pricing (EPP) and it builds upon the operational lessons of the last two decades to provide a highly reliable, fully rehabilitated circuit at the minimum capital cost.  This result is achieved by carefully aligning the interests of the circuit owner with those of the rehabilitation supplier.

Here is how EPP works.  Each of the important, but independent tasks required to test and treat a cable are given individual unit prices.  For a typical looped URD cable for example, these tasks include …

1.     closing the normal open at the beginning of the day

2.     switching a cable out of service and grounding it, when performed by Novinium

3.     testing the cable for splices and corrosion

4.     pinpointing splices and corrosion when required

5.     excavating/restoring a pit when required

6.     removing old splices and installing new splices when required

7.     preparing ends for injection

8.     injection

9.     finishing the injection (removing equipment, clean-up, etc)

10.   switching a cable back into service

11.   opening the normal open at the end of the day

Each of these tasks are billed only as they are executed.  There are no separate charges for time in any of the injection units, 3-9.  For the switching units 1, 2, 10, and 11, Novinium agrees with the circuit owner on an appropriate time standard for each.  We then track the actual time to execute these steps.  For example if step 2 should take 15 minutes, but is delayed by the circuit owner’s dispatch operator and the step requires 30 minutes, the excess time is billed as non-injection activity at an agreed upon hourly rate.  Other tasks, ancillary to the injection, also crop up in a typical rehabilitation job.  For example, suppose a bushing fails when an elbow is removed.  The injection team must cease their injection activity and replace the failed bushing.  Again, this time is billed to the nearest tenth of an hour as non-injection activity. 

Enhanced productivity pricing or EPP is the best way to structure a rehabilitation program.  EPP aligns the strategic interests of the circuit owner with the rehabilitation supplier.  We still get customers that want to use the blow and go paradigm and we are happy to comply, but at least we tell them there is a better way.  Unfortunately the productivity pricing paradigm has been utilized for over a decade, so some are reluctant to change.  Which reminds me again of something the author “Of Mice and Men,” John Steinbeck once said, “It is the nature of man as he grows older … to protest against change, particularly change for the better.”

Looking out for you and embracing the future,

Thermo