A webinar participant asked the questions below:
“Based on experience at different places, what is the best way to track O & M (operation and maintenance) cost, and how to estimate the asset value, depreciation, all the equipment refurbishments for replacement pricing and insurance purposes?”
Heather asked Ross to tackle the question. Ross proceeded to answer the second part of the question:
“How to estimate the asset value, depreciation, all the equipment refurbishments for replacement pricing and insurance purposes?”
Right, so we can talk about insurance all day if we wanted to because we’ve had lots of recent experience – that with the earthquake we had in Christchurch a few years ago.
What we found, just to cover that one off was that the city was under-insured by a significant margin. When you have a big natural event, often the scale is the issue, they just create more havoc than you realize.
In terms of asset value, it really depends again on what you’re required or mandated to do by your accounting standards or by your state or federal law.
But certainly over here in Australasia, Australia, New Zealand, we’re using replacement costs.
So, it’s based on current replacement cost and the valuations are updated on a three to five-year cycle, depending on the authority and the assets.
So what that does is if you get a breakthrough in say, trench-less technology, or just the cost of replacing assets, that then feeds back into the valuation. So valuation can move around a little bit.
If you get some more information that says, “Hey, this pipe that we thought we’re going to get a hundred years out of, we’re only getting 70 years out of it,” you can adjust that on that three to five yearly basis.
Again, if you do some condition sampling and for arguments sake you had a pipe that you said was going to get a hundred, and maybe get a hundred and thirty years out of. Again, you can adjust that.
We have a few authorities here that are doing yearly valuations. But most would be that three to five years. I would encourage people to work out a valuation of assets because that’s the next exercise off your asset inventory.
So if you build an inventory that says, “I’ve got X miles of pipe and I’ve got X number of pump stations or lift stations and I’ve got some treatment plants and some reservoirs or some ponds or storage,” or whatever it is that you’ve got.
That’s step number one, it’s actually not that much of an exercise to put a replacement cost against each of those. If you have an estimated life then you’ve got a valuation. And from there, it’s actually very simple math in a spreadsheet to produce your first cut of a 10, 20, 30, 50-year replacement forecast.
And that’s where you can stop and have a look at it and go. Well, in our case in New Zealand, and again I know America’s very similar, we had an awful lot of asset construction went on after World War II.
So in the period of maybe 1950 to the late 1960s, and particularly in water and wastewater infrastructure. And a lot of that, it’s fair to say in the next 20 or 30 years – it’s all going to be a need to be replaced.
And I would think for a lot of your towns in the US you’re in similar sort of a situation. So, “Hey we’ve got maybe a five or a seven or a ten-year window we were not going to be replacing a lot. But then we’ve got a lot of replacements that are going to start hitting us.”
You can start the conversation about how you’re going to afford that, how you’re going to manage it, what’s the best way forward if you’ve got a shrinking town, what are you actually doing. And plan the thing out and start making some good judgments about it.
But the inventory and the valuation are the absolute basis for that. We have answered the second question first. We’ll come back to the O & M cost. Is there anything you want to add to that one, Heather?
NOTE: The text here corresponds to the recording at 47:43 – 51:58 minutes of the “Ask the Expert Asset Management Webinar” recording.
PHOTO CREDIT: San Francisco, USA by Karl Hipolito