BC Hydro anticipates spending C$3 billion to C$5 billion over the next five years on rehabilitation and upgrading of its hydro portfolio, a dramatic increase compared to recent years. To accomplish this, BC Hydro is taking a new approach to equipment procurement.
By D.T. Drew Dunlop and Kevin D. Staveley
C Hydro is about to embark on a period of significant capital investment. The utility is projecting to invest C$3 billion to C$5 billion over the next five years on rehabilitating and upgrading of its power generation portfolio. In addition to its three thermal facilities, BC Hydro’s portfolio includes 82 hydro generating units at 31 hydroelectric facilities with a total of 10,200 MW of capacity and that generate, on average, between 43,000 and 54,000 gigawatt-hours annually.
The increase in planned capital investment is in response to BC Hydro’s commitment to achieve a balance between the risk reduction of aging assets and the ratepayer’s ability to fund these efforts. Ultimately, these investments are required to reduce the risk associated with availability and reliability of the supply of power to acceptable levels.
Underlying BC Hydro’s rehabilitation plan are two directives in the British Columbia government’s Energy Plan: a mandate that the province be energy self-sufficient by 2016 and BC Hydro’s purpose of providing reliable power, at low cost, for generations. The proposed investment reflects the corporation’s proactive efforts of meeting the opportunities and challenges that lie ahead in achieving these directives.
One contributor to the success of these endeavors is the newly created Office of the Chief Procurement Officer (OCPO). The members of this office have been tasked with leading an integrated strategic procurement process and incorporating a holistic perspective to the corporation’s capital investment plans.
Formed in October 2007, the OCPO has been assigned with providing strategic leadership to the procurement process on select BC Hydro projects. The mission of the OCPO is built on improving or maintaining:
— Capacity (e.g., ensuring security of supply of labor, equipment, and materials);
— Value (e.g., mitigating risk through proper terms and conditions); and
— Control (e.g., compliance with governmental and BC Hydro policies and standards).
Ultimately, the OCPO seeks to ensure that project requirements are commercially feasible, opportunities to optimize economies are identified, key project deliverables are met, and a fair and competitive process is strictly adhered to.
Revisiting BC Hydro’s rehabilitation strategy
Decreased capacity throughout the vendor community led BC Hydro to revisit its procurement strategy. The proposed C$3 billion to C$5 billion investment over the next five years is a stark contrast to the corporation’s recent capital spending levels of C$100 million per year. A significant increase in capital investment in a hot supply market required BC Hydro to implement changes across multiple fronts. As local power consumption increased and capacity margins declined, the organization was forced to do more in less time. BC Hydro determined that its best prospect to address this issue was to optimize site work during pre-determined outage periods. This required the corporation to take a long-term approach to capital planning and proactively identify, years ahead of time, assets needing investment. Once identified, the corporation would be able to use this information to proactively engage suppliers and, potentially, leverage scale efficiencies and other economies across multiple sites.
Key to delivering on this strategy was overcoming another obstacle: lack of available resources (internally and externally). Internally, BC Hydro lacked the resources needed to support the volume of work that these investments represented. Externally, there was a limited capacity for supplier interests and commitments. The adoption of a new internal approach to planning and structuring work needed to be introduced, along with a new external approach to integrating and collaborating with suppliers.
To start with, BC Hydro redefined procurement priorities from narrow, cost-based award decisions to a Total Cost of Ownership (TCO) position. This involved a shift in BC Hydro’s approach to procurement and how BC Hydro worked with suppliers to meet objectives. One of the essential elements of this new approach is a closer involvement of suppliers in the rehabilitation and upgrading process and utilizing them as a source of capacity and added value. BC Hydro now solicits feedback from the vendor community in how it anticipates scheduling its projects and work packages. Market input is used to ensure alignment between BC Hydro’s needs and the capabilities of the vendor community. By engaging suppliers early in the project lifecycle, BC Hydro has better positioned itself to consider and integrate vendor feedback into its project plans. As a result of these efforts, the corporation is systematically shifting procurement’s involvement from the traditional post planning and work structuring to being a key contributor in how these decisions are made.
A collaborative approach to supply chain strategy is integral to BC Hydro successfully delivering maximum value to its ratepayers and shareholders, while maintaining critical project milestones, such as in-service deadlines. To facilitate this approach, the OCPO established strategic procurement teams within select capital projects and generation operations. These teams devised procurement strategies that addressed potential commercial risks and identified potential opportunities.
For example, opportunities to bundle multiple requirements with key suppliers has helped introduce standardized systems and products across facilities. Assembling bulk, or blanket, contracting opportunities for key capital equipment (e.g., governors and exciters) has aided in securing upfront supply at known and often preferential terms, as well as providing process efficiencies and procedures that will reduce future efforts.
BC Hydro is projecting to invest C$3 billion to C$5 billion over the next five years on rehabilitating and upgrading its power generation portfolio.
Two important elements are the foundation of the numerous steps BC Hydro has taken to mitigate project risks and deliver maximum value to its customers and shareholders. First, the utility is moving away from focusing on a lowest acceptable bid approach to one focused on working with suppliers who create value through the TCO process. This process is reinforced through BC Hydro’s recent inclusion of triple bottom line decision making, a holistic method in which the present and future environmental, social, and financial effects of decisions are considered. This process provides the framework and tools for more consistent and effective decision making.
Second, BC Hydro is engaging the market early and communicating its planned procurement activities. This early engagement is driven by the corporation’s demand plan, which summarizes the equipment health rating across the corporation’s asset fleet and provides early visibility of potential requirements.1 Once an opportunity has been identified and a high-level scope has been defined, the OCPO engages the market (either formally or informally) to verify feasibility and solicit vendor preferences that will help form the path forward for the project.
Strategic procurement in action
The following examples highlight BC Hydro’s use of strategic procurement and illustrate the benefits of its approach.
Procuring new units in the Mica powerhouse
On September 19, 2008, BC Hydro issued an open tender for the design, supply, and installation of two 520-MW Francis-type turbines coupled to umbrella-type synchronous speed generators. These units are to be installed in the existing 1,792-MW Mica generating station. The powerhouse, completed in 1973, was designed for six units, but had always contained just four. Due to increases in local energy demand and as part of the BC Energy Plan, two new generation units are scheduled to be in service, possibly as early as 2013 and 2014.
Although this project involves the installation of new equipment, it is subject to the typical challenges of a rehabilitation project. The procurement strategy for the two new units focused on three areas: mitigating the potential risks of multiple handoffs between contractors, attracting the widest range of qualified vendors, and achieving competitive, fixed pricing throughout the project lifecycle.
Successful handoffs among multiple contractors will play a critical role in the successful delivery of the new units for the Mica project. Realizing that unforeseen site conditions can affect achieving rehabilitation project milestones and that this can, in turn, affect the collaborative efforts between contractors, BC Hydro implemented the use of floats (time buffers). Floats have been inserted into critical handoff points in the project schedule to minimize the potential consequence of one contractor being affected by another’s schedule overrun. For example, work in the turbine pit will require finely orchestrated handoffs between the turbine vendor and the civil contractor to successfully embed and support this equipment. Although the uses of floats are at the discretion of BC Hydro, liquidated damages are not assessed to vendors who make use of them.
BC Hydro structured the tender document to allow for the award of turbine(s), generator(s), or both. This structure has served BC Hydro well many times in the past and was selected to allow for the greatest number of potential candidates to participate in the bidding process. Structuring the tender to only allow for a combined turbine and generator bid would have reduced the potential vendor base to only those who could provide a complete turbine and generator solution.
Competitive price surety throughout the project lifecycle is a preferred criterion for large BC Hydro projects. The primary challenge in achieving this goal is bridging the gap between bid close and award. During this period, potential candidates can be exposed to the risks of sudden and wide market fluctuations or the additional costs of purchasing hedges for a potential project. To address this risk, BC Hydro developed a cost adjustment mechanism whereby identified items that may be subject to market changes could be tied to common indices. The mechanism allows for a one-time adjustment reflective of the net increase or decrease in the posted values between bid close and bid award. By incorporating this mechanism, the potential risk and additional costs to the vendor have been eliminated while still providing BC Hydro with firm pricing and the option to hedge its escalation risk.
The Mica tender was scheduled to close February 27, 2009; contract award is expected within 150 days of the closing. Thanks to initiating early vendor engagement, BC Hydro anticipates it has structured the work packages for this project in the best manner possible to ensure contractor success in meeting BC Hydro’s deliverables.
Revelstoke: use of incentives and cooperation agreements
BC Hydro is installing a new 500-MW generating unit at the 2,000-MW Revelstoke station. The procurement strategy to deliver the new unit involves approximately ten interdependent contracts, with the interface risk managed by BC Hydro. The two main site installation/construction contracts are with Peter Kiewit and Sons (civil and penstock contract) and Voith Siemens Hydro Power Generation (turbine-generator contract). To minimize the risk of delay in meeting the in-service date of October 2010, BC Hydro pursued a series of initiatives with these two companies, including incentives for early delivery of key installation components and a site cooperation agreement.
An incentive agreement was reached with Voith Siemens to accelerate certain items of work to try to advance the target in-service date by two months. BC Hydro is compensating Voith Siemens through bonus payments at specific milestone dates. The first bonus milestone payment was for successful delivery of the draft tube pier nose liners two weeks early. This early delivery permitted Peter Kiewit to commence the liner installation ahead of schedule.
BC Hydro is pursuing the use of cooperation agreements with all major project contractors, as it anticipates that the tool will enhance schedule certainty and collaboration at site by providing a forum for communication, cooperation, and, when needed, a mechanism for resolving disputes between contractors. The terms of the agreement require each contractor to:
— Cooperate and avoid interference with one another;
— Appoint representatives to an interface committee, which will meet monthly (or as necessary) to resolve disputes or potential disputes between parties;
— Commit a senior executive to assist in dispute resolution where necessary; and
— Agree that where there is a dispute as to responsibility for performance of certain work, they will proceed in accordance with the direction provided by BC Hydro, pending resolution of the dispute.
The goal of a cooperation agreement is to assist in reducing schedule risks through enhanced communication across all parties and, when needed, to have a clearly understood process for resolving any disputes between parties. In addition, within this agreement, BC Hydro is obliged to participate in the interface committee and in any dispute resolutions, and ultimately, not to interfere, delay, or obstruct other parties’ abilities to successfully deliver a BC Hydro project.
Declining capacity margins, coupled with limited availability throughout the vendor community, has required BC Hydro to seek innovative ways to achieve more in shorter time frames. Being able to deliver on its purpose of reliable power, at low cost, for generations has necessitated BC Hydro to reflect introspectively and examine its position to deliver on this commitment. Creation of the OCPO is an innovative and effective approach to assist the internal lines of business in responding to market fluctuations and ultimately delivering value to the province of British Columbia.
Drew Dunlop, P.Eng., is the principal in the Asset Management and Planning Department of Generation Operations, and Kevin Staveley, MBA, B.Sc., is a senior advisor, Generation Strategic Procurement, for BC Hydro. BC Hydro is the largest electric utility in British Columbia, Canada, serving approximately 95 percent of the province’s population and 1.7 million customers. BC Hydro is a commercial crown corporation, owned by the province of British Columbia.