January 10, 2002

To:

J.G. Rodford

S.A. Gillies

J.R. Irvine

D.T. Dunlop

E.Y. Leung

R.P. Penneway

G.N. SherlockD.A. HarrisonL.I. BellM. CostelloAudit and Risk Management Committee

AU0213PS

Audit Services

Internal Audit Report

Power Facilities Maintenance

Prepared by:G. Parmar

R.E. de Leeuw

B Roby (Delta Electricity Australia)A.Y. Lee

Executive Summaryq As observed in our previous audit in Fiscal 1999, the maintenance strategy is forward-looking as

it optimizes the balance amongst maintenance, commercial management and water resourceavailability. Although the strategy implementation has progressed, some initiatives are notcompleted as planned due to funding and staff constraints.

q The number of hours that BCH generation is unavailable is better than Canadian ElectricityAssociation (CEA) average while the generating unit failure frequency is worse than CEA. Thisindicates that either BCH failures are less complex or that BCH staff are more effective inrepairing failures. These results are similar to the last audit results. (Comparison to CEA averagedoes not suggest using this as BCH performance targets. Indeed, BCH should set its owntargets for competitiveness and maximum profitability.)

q Overall, facility managers indicated that current asset performance is satisfactory, with no seriousimmediate concerns. The various systems for measuring asset health are not yet sufficientlyinstalled to assess future trends. Facility managers also suggest that risks are increasing. Thereare competing funding demands (e.g., safety), deferral of non-critical maintenance items, gradualdeterioration of some major equipment and civil works (excluding dams), and decreasing time formaintenance due to other business initiatives such as training and regulatory requirements.

q Maintenance funding (OMA) has increased since 1999 but recent benchmarking studies stillshow BCH maintenance costs to be lower than other utilities. Facility managers state that thecurrent funding addresses immediate critical needs. The level of maintenance funding beyondthe next few years is difficult to assess because acceptable risks and desired performancetargets have not been set. Risk is known to be increasing. Better information on asset risks,proposed risk mitigation measures and their related ranking is needed to support fundingrequests and ensure effective resource allocations.

q Capital investments have increased since 1999 and benchmarking indicates that BC Hydros re-investment rate is low. A Generating Equipment Strategic Investment Program (GESIP)framework is being utilized to assist investment decision-making and a proposed, five year

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Executive Summary

q Performance monitoring and reporting continues to require development. A Power FacilitiesScorecard has been developed but other management reporting and performance measures varyacross facilities. The maintenance and operational data captured by various groups and systemsare not consolidated, integrated, and analyzed to obtain maximum value. Also, the ability to linkthe budget and actual expenditures to work (planned, performed, and completed) still remains achallenge due to the current financial reporting system constraints.

q This audit did not address People Resourcing, a significant risk area in the 1999 audit, This risk isnot limited to maintenance work and the audit time did not allow proper re-evaluation of this area.

q Our audit conclusions are summarized in the following table:

MANAGEMENT ELEMENT CURRENT PERFORMANCE RATING

Requires Mgt.Attention

(Increasing Risk)

Developing(System

Evolving)

Performing(WorkingSystem)

Superior

Maintenance Strategy X

Asset Health Current Condition Future Condition X

X

Funding Capital Investment Maintenance Costs (short term) Maintenance Costs (long term) X

XX

Performance Monitoring/ Reporting Performance Reporting Management Monitoring

XX

Effectiveness of Maintenance Maintenance Planning Work Management

XX

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$280 million capital plan has been drafted. Some facility managers expressed concerns thatapproved capital work is not always completed, primarily due to a lack of qualified personnel.

Executive SummaryKey Recommendationsq Continue with the maintenance strategy and expedite development of techniques for predicting

asset health. Review the project status of the Reliability Centered Maintenance and EquipmentHealth Rating initiatives underway. Determine remaining work required and the costs involved,identify elements that can be integrated to avoid overlap, and set targets for completion.

q Review each plant and determine acceptable risk level and performance targets (e.g., failurerate, availability etc.) based on commercial needs, business requirements, and strategic value.Standardize risk ranking criteria for annual work planning and resource prioritization among thefacilities. Use the risk information and desired performance targets to demonstrate a cost-effective program of corrective and preventive maintenance, and from this determine thenecessary funding.

q Continue to enhance the GESIP framework for capital investments planning, address the issuesrelating to the under-utilization of capital funds and provide the necessary personnel to completethe planned capital work.

q Identify the information requirements of Power Facilities staff and key stakeholders and continuedeveloping a formal management reporting package at the fleet level that meets their needs.Standardize and streamline the information capturing process to improve accuracy andefficiency. Improve the accounting of costs and work and ensure there is consistent and accuratereporting of work status (work planned and performed, with associated budget and expenditures)as well as appropriate accountability measures.

Management Responseq Significant progress has been made since the last audit on Asset Plans and the Generating

Equipment Strategic Investment Program. Management agrees with the further improvements inthese key recommendations and, subject to competing resourcing requirements, will implementthese improvements by March 2003.

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Contents

Executive Summary

1. Background

2. Audit Objective and Scope

3. Observations and Recommendations3a. Maintenance Strategy3b. Asset Health3c. Maintenance Costs3d. Capital Investment3e. Performance Monitoring and Reporting

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1. Background

q The Power Supply generation assets include generation, control system and switchyardequipment; buildings and grounds; dams and waterways. The assets are located in 35 hydroand thermal facilities.

q In December 1999, Audit Services conducted a Power Supply Maintenance audit. The auditfocused on seven key areas: maintenance strategy, asset health, capital investment,maintenance costs, performance monitoring and management reporting, maintenance workmanagement, and people and resources.

q Key observations from the 1999 audit were:

u The new maintenance strategy provides a strong foundation for effective maintenance.

u The generation assets were performing at levels that were comparable to Canadian utilityindustry averages.

u Several early warning indicators showed that the level of asset risk was increasing.

u Capital work was consistently below approved plan and reinvestment in hydro assets wasrelatively low compared to that of other utilities.

u While core hydro maintenance costs had increased, they were relatively low compared tothat of other utilities. The process of defining work requirements based on riskassessment tended to be informal.

u Major initiatives of developing condition assessments and asset plans for each plant, aswell as new information systems were underway.

u Staff competencies were considered superior but many plant staff were approachingretirement age. There was a need to accelerate resource planning to ensure appropriateknowledge and skill transfer.

Objectiveq The objective of this audit is to provide assurance that the power plant maintenance level is

appropriate, maintenance management is effective, and maintenance and capital funding isadequate.

Scopeq The scope of this audit is to review the implementation of the recommendations of the

December 1999 audit, and to review the business risks, processes, procedures and controls inthe key component areas of:

u Maintenance Strategyu Asset Healthu Maintenance Costu Capital Investmentu Performance Monitoring and Management Reporting

The review comprised interviews with Power Supply staff and other BCH employees,examination of maintenance strategy initiatives and documentation, and analyses of assetperformance and maintenance costs. We also reviewed benchmarking studies conducted byHaddon Jackson Associates.

q This audit did not address People Resourcing issues. It is recognized that this was a significantrisk area in 1999, however this risk is not limited to maintenance work and the time frame forthis audit does not allow proper re-evaluation of this area.

q The technical nature of the audit required the addition of subject matter expertise in the areas ofpower asset maintenance. Consequently, the internal audit resources were supplemented byMr. Brian Roby, Delta Electricity (Australia) and Mr. Bob DeLeeuw, both are professionalengineers with extensive maintenance experience in hydro and thermal assets.

2. Audit Objective and Scope

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