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Properly managing variable associated with life cycle costs can help utility managers govern fiscal uncertainties
In the day and age of dwindling budgets and fiscal micromanagement, managing life cycle costs (LCC) is as important as ever. Combine the previous two variables with the fact that operating and maintenance costs continue to rise while, concurrently, utility managers are faced with more pressure than ever to keep these costs down.
Therefore, in depth analysis of equipment LCC and educated decisions by utility managers can help to minimize unexpected expenses while maximizing production life out of the equipment they incorporate in their water and wastewater systems.
Water and wastewater-related equipment manufacturers share this same philosophy and many have voiced their concerns recently to WWD.
As a result, WWD contacted a number of water and wastewater equipment manufacturers who have elected to provide feedback on a myriad of life cycle cost-related topics with the goal of aiding utility managers strive toward reducing their LCC.
Before continuing. it is important to define what is meant by LCC. For this article, WWD defines LCC as the overall cost of operation for a piece of individual equipment, not the LCC of a utility’s entire system, during a given length of time.
Additional components of the LCC could also come in the form of energy costs, repair costs, down time-related costs, and environmental costs.
In the past, many utilities only considered the initial purchase and installation costs of certain equipment when addressing their water and wastewater systems needs.
But that way of thinking has evolved as utility managers now know it may be in the best interest of their facility to evaluate the total LCC of different solutions before installing new equipment or undergoing a major overhaul.
“More and more, we’re finding utility managers are beginning to look at the total cost of operating the equipment, not just the up front product price,” said John Wright, vice president of marketing for Emerson Process Management, Rosemount Analytical.
A utility manager’s total life cycle cost evaluation is a critical variable of the purchasing process as it can often identify the most attractive option.
“I am quite confident it [LCC] is a large factor in making a decision,” said Dennis Mosbeck, engineering manager for Extech.
Just as important as the initial total cost evaluation is the role a utility manager plays after the purchase and installation of new water/wastewater equipment. Specifically, the vantage point a utility manager has in which he can observe the day to day operation.
“The utility manager can make a very large difference in the operation of a pump system, for example, and in understanding the system,” said Stefan Abelin, director of engineering for ITT Flygt. “With the correct knowledge, skills and attitude, much can be accomplished as far as savings operation and energy costs. After all, no one is in a better position to know the system, watch the day to day operation and see how a system responds to changes.”
It is at this juncture that utility managers often uncover hidden cost saving measures that can help reduce their total LCC.
“As plant managers better understand hidden life cycle cost issues, we’re seeing that it could make or break a decision,” said Emerson’s Wright. “This is especially the case for chlorine products—if a plant has four or five of these devices and you’re looking at $2,000 per year in operating costs per device, plus the other hidden costs of storing and handling reagents appropriately, you can see how this turns into big dollars very quickly.”
“In some cases, energy costs can make a giant impact,” Wright continued. “For example, in wastewater treatment plants, dissolved oxygen measurement can significantly affect energy costs. In fact, 30-50% of the energy used in a plant comes from operating the aerators and the pumps that drive the aerators. If the plant does not have reliable oxygen control, the pumps could either operate longer than they need to, increasing the plant’s energy costs or they might turn on in an untimely fashion, damaging the microbes in the basins and increasing costs and downtime to replace these organisms.”
Taking this life cycle cost scenario involving energy another step involves looking at the cost of energy itself.
“Energy costs can play a significant role in the LCC analysis for a specific product or process,” said Betty-Ann Curtis, director, biological processes for US Filter’s Envirex Products. “However, its importance is dependent on the local cost of energy. As we assist in preparing life cycle cost analyses, we have seen electrical costs as low as 2.5 cents/kW-hour and as high as 15 cents/kW-hour. Obviously, when electrical costs are as low as 2.5 cents, the amount of energy used for a process or the amount of energy saved by a process or product does not have the same impact on the life cycle cost analyses.”
Pay more, get more
As part of a utility manager’s evaluation of total LCC, invariably there may be a case where particular equipment initially may be more expensive than an alternative but offers better energy efficiency during the user phase.
Naturally, the utility manager must consider the flipside, which is a cheaper equipment that may not be as attractive from, say, an energy conservation standpoint.
“There are a few occasions when an owner will take the lowest cost offering, regardless of LCC and regardless of reputation of the manufacturer,” said USFilter’s Curtis. “Ultimately, they may end up replacing the equipment with higher quality goods sooner than anticipated.”
Utility managers are faced with a dilemma: spend more and have the potential for minimal maintenance or spend less and risk having high maintenance equipment.
Add to the fact that utility managers are facing more pressure to keep their capitol expenses low and one can see the contradicting philosophies.
“Many agencies are under pressure to reduce costs and I think they are under more pressure to keep a project’s cost down, and within the capital budget,” said Kim Paggioli, manager of engineering and marketing for Hobas Pipe. “This, unfortunately, can run contrary to the best life cycle alternative.”
Maintenance and upkeep
What role does maintenance and upkeep play in the life cycle cost scenario?
“Maintenance and upkeep plays a critical role,” said Emerson’s Wright. “When you look at the LCC, if a product doesn’t feature advanced diagnostics that tell you when it needs to be maintained or re-calibrated or any of the other maintenance steps along the way, a plant can unknowingly operate that device to the point of destruction. This will lead to skyrocketing costs due to replacement costs, and more importantly, costs resulting from production downtime while the unit is offline. This is not necessarily a cost of the product itself but it’s a cost of plant operations that’s impacted by the device.”
ITT’s Abelin agreed with Wright’s assessment on the importance of maintenance and upkeep. “As a manufacturer, we see two extremes—users who run their equipment into the ground, and those who follow maintenance schedules. Clearly, regular inspections and servicing are less costly. Equipment problems can be found long before they lead to major damage and consequential damage.”
What hasn’t been addressed are the considerable LCC that could be deterred by properly operating the equipment.
“The commitment of a utility manager to continuously optimize system performance can have a significant impact,” said Stratton Tragellis, vice president sales and marketing for USFilter’s Memcor Products. “The manager can and should ensure that all operators are properly trained and follow manufacturer recommendations for operation and maintenance.”
Utility managers and their staffs play a significant role in keeping LCC low because they are ultimately responsible for the care, maintenance and operation of the equipment.
“Only through proper care and operation will the product or process meet its expectations in performance and LCC,” added USFilter’s Curtis.
Do utility managers tend to shy away from being the early users of innovative equipment?
“New products are slow to be adopted and until they have had sufficient numbers of successful installations and time to be proven reliable, their use is viewed as risky by the conservative engineering set,” said Michele LaNoue, president of Headworks, Inc.
This risk drives the end-user to want to buy proven equipment from manufacturers that have a good track record in backing up their equipment and customers.
“Who would want to go out on a limb with an unproven product from an unknown manufacturer?” asked ITT’s Abelin.
Brand name recognition and the equipment’s reputation and history is a factor that has solidified itself into the total life cycle cost equation.
“Brand recognition and reputation is a major factor in making decisions for acquiring a type of product,” said Extech’s Mosbeck.
The value that name recognition can bring to a scenario is very important because utility managers need a manufacturer that is going to be there for them over the long term, a manufacturer that has been in the industry for a long time, understands their business and can help them solve their problems.
Emerson’s Wright said, “this level of service can really only come from a well-established business that’s been in the industry for a long time and has built a strong reputation.”
A positive experience can also have an impact on the decision making process as well.
“If an engineer has had a good experience with a vendor on a previous project, that obviously can have an impact on the evaluation,” added USFilter’s Tragellis.
What may be the most important variable found in the LCC analysis research by WWD is that, unfortunately, many of the people making the product buying decisions do not have interest in LCC for a project as they are only focused on initial capital expenditures.
In some cases, it has been noted that the people responsible for buying and/or paying for the equipment are not involved in, or even responsible for, operating the equipment and paying for operational costs.
“In many municipalities, the capital budget decision makers are different from the operational budget people,” said Headworks’ LaNoue.
Most likely, those buying the equipment have a fixed budget and may be less concerned with the long-term operating costs of the equipment than completing the purchasing process under budget. There’s little incentive to pay a higher price for more efficient and reliable equipment.
“This disconnect results in decision making based on low initial purchase costs with no regard to LCC or expected life of the equipment,” said LaNoue.
As a result, future operators of the utility will demand and specify more efficient equipment.
The new challenge lies in demonstrating how life-cycle costs work to financial officers and the general managers within a utility.