1 Ingmar Sterzing, August 1, 2013 Changes in Electricity Planning, Project Execution, and Operation Univ. of Pittsburgh School of Law 2013 Energy Law and

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Ingmar Sterzing, August 1, 2013Changes in Electricity Planning, Project Execution, and OperationUniv. of Pittsburgh School of Law 2013 Energy Law and Policy Institute

University of PittsburghSchool of Law

Energy Law and Policy Institute

Challenges in Electricity Planning, Project Execution, and Operation

Ingmar SterzingDirector, Commercial OperationsWestinghouse Electric Company

August 1, 2013

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Westinghouse Electric Company

Westinghouse Electric Company Headquarters

Cranberry Township Pennsylvania, USA

Westinghouse Electric Company provides fuel, services, technology, plant design, and equipment to utility and industrial

customers in the worldwide commercial nuclear electric power industry

Nearly 50 percent of the nuclear power plants in operation worldwide are based on Westinghouse technology

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Westinghouse Product Lines

Focused on operating plant success through reliable operation, maximized power output and better (shorter, more predictable) outages

A single-source fuel provider for PWR, BWR, VVER, AGR and Magnox reactors worldwide

Specializing in the technology of new nuclear power plants and component manufacturing

Nuclear ServicesNuclear Power Plants

Nuclear Fuel

Nuclear AutomationInstrumentation and control solutions to enhance the reliability of nuclear plant control and safety systems

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AP1000TM: Designed for Greater Certainty Simple, Practical, Standardized and Innovative

• Passive Safety replace mechanical & electrical systems -- results in fewer materials and equipment

• Modular design drives faster, predictable construction schedule

• Reduced Operations and Maintenance Cost versus other plant designs

• Majority of design utilizes proven Westinghouse experience and technology

Result: Reduced Construction Time, Greater Schedule Certainty, and Lower

Costs Enhanced Financing and Lower Investment Risk

Greater Levels of Safety and Quality

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AP1000TM Addresses Investment Risk ReductionReduction of risk is the key to new plant construction

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Project Execution

Plans

Cost Estimate and

Price

Commercial Terms and Conditions

Scope and Division of

Responsibility

Project Technical and Commercial Factors are Aligned for Project Success and Certainty

Customer Inputs &

Requirements

AP1000 Standard

Model and Lessons Learned

Site Specific and Local

Experience

Inputs

Progressive Elaboration

Customer and Vendor

Alignment

Price and Delivery Certainty

Value Optimized

Project

OutputProject Planning and

Development

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AP1000 EPC Delivery Model

• Ensures employees and stakeholders have a clear understanding of how Westinghouse will deliver the AP1000 plant on budget and schedule

• Provides consistent delivery of AP1000 Projects meeting customer and stakeholder requirements and exceeding expectations

• Consists of standard processes and procedures which are used to deploy projects globally building on prior projects’ lessons learned

• Project specific processes are developed or incorporated into the existing processes as unique project conditions require

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EPC Delivery Model-Project Plans

ProjectExecution

Plan

Regulatory/Licensing

ManagementPlan

Contract/SubcontractManagement

Plan

ConfigurationManagement

Plan

ResourceStaffing

ManagementPlan

CommunicationPlan

StandardizationPlan

InformationManagementSystem Plan

ProjectCompletion& Closeout

Plan

Startup &Commissioning

PlanSystem

TurnoverPlan

SchedulePlan

Risk &OpportunityManagement

Plan

Supply Chain/Procurement

Plan

ConstructionExecution

Plan

ProcessImprovement /

LessonsLearned Plan

QualityAssurance

Plan

ModulePlan

EPCAgreement

ProjectControls

Plan

ProjectEH&S Plan

ProjectEngineering

Plan

Standard set of project plans built on prior project lessons.

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AP1000 Risk Management

• Advanced risk management is necessary for the successful execution of multi-billion dollar projects

• Failure to manage risk on projects of this magnitude would have a significant impact to the project, to Westinghouse, to partners, to the industry, and to our customers

• Advanced risk management capabilities are needed to manage uncertainty, prevent unplanned costs and help achieve project objectives with high confidence

• Westinghouse has established an advanced risk management culture and a dynamic and continuous risk management system across the organization

AP1000 customers want confidence in Westinghouse’s ability to deliver and fulfill

contractual obligations.

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Project Risk Management Lifecycle Processes

Assign dedicated risk lead(s) Prepare preliminary plan Perform comprehensive

execution risk assessment Incorporate lessons learned Incorporate response

activities into plan Align and assess risk with

proposed delivery model

Pre-Proposal Phase Proposal Phase Execution Phase

Work with partners and customers to Identify potential risks

Respond to capture potential benefits and mitigate threats

Perform early work to reduce uncertainty

Prepare final Project Risk Management Plan

Charter project risk team Continually identify, assess

and respond to project risk Monitor and control project

risk management activities and risk areas

Document and incorporate lessons learned

A systematic and continuous model for managing and reducing uncertainty in the successful execution of an AP1000 project

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Project Optimization and Risk Response

• Risk Response Planning is the process of developing options or actions to enhance opportunity capture and to reduce threats to the objectives.– Avoid

• Either take significant action to reduce the threat risk factor to zero or revise program criteria to eliminate the exposure to the risk

– Transfer• Delegate the ownership of the risk to a third party

– Mitigate• Taking early actions to reduce the probability and/or impact of the risk to a more acceptable

level.

– Accept • Some risks cannot be eliminated or addressed through a viable strategy. These risks must be

managed effectively or provisioned.

• Westinghouse seeks to first mitigate risk through design and effective execution.• Westinghouse prefers to align scope and risk with the party best capable of

managing the scope and mitigating the risk.

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Risk Management and AP1000 PricingUncertainty for Planned Events• Contingency is a cost factor used to account for

uncertainty in the cost estimate, and includes cost allowances for areas such as:

– Design uncertainty– Equipment cost estimates– Labor productivity– Wage rates– Commodity costs

• Contingency does not include any allowance for risk items

• The use of contingency funds by the project is expected

• The level of confidence in the amount of contingency needed changes as the project progresses

Uncertainty for Un-planned Events• Risk allowance accounts for the potential cost

exposure of unplanned activities and events• Risk allowance may include cost allowances for

areas such as:– Defects liability– Performance guarantees– Schedule guarantees– Force Majeure Events– Regulatory Changes– Catastrophic loss– Permitting uncertainty

• The use of risk allowance by the project is not expected

• The level of risk allowance required is dependent on the project delivery model, risk tolerance, and the commercial arrangementsResidual project delivery uncertainties can be managed collectively

with reserve funds (risk and contingency) to minimize the overall cost impact associated with distributed and uncoordinated risk provisioning.

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Project Cost and Price Terms and Concepts

Actual Costs and Planned Committed

Costs

Contingency

Risk

Budget at Completion

(BAC)

Total AllocatedBudget (TAB)

ManagementReserve

(Contingency and Risk)

Fee/Profit

Price EstimateAt

Completion

(EAC)

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Uncertainty of Achieving Project Cost Objective

Budget at Completion

(BAC)

Total AllocatedBudget (TAB)

Break Even

Range of possible Cost

Low Cost High Cost

• Desired outcome• There is a probability that the project will be completed with a total cost less than the Budget at Completion (BAC)

• Effective project performance can enhance the probability that this occurs

• Acceptable outcome• There is a probability that the project will be completed with total cost greater than the BAC but within budgeted reserves (TAB)

• Effective project performance can enhance the probability that this occurs

• Business can decide to allocate reserves to mitigate or accommodate risks

• Unacceptable outcome• There is a probability that the project will be completed with total cost greater than the Total Allocated Budget (TAB)

• Total project costs will exceed budgeted limits established for the project and may exceed risk tolerance of the organization

• Business must be willing to sustain or accept the potential for such a loss or seek to mitigate this potential outcome

• Devastating outcome• There is a probability that the project will be completed with a total cost beyond the capability of the business to accept such a loss

• Total project costs will far exceed the risk tolerance of the organization

• Potentially unlikely outcome but given the impact, the business should protect itself to the extent possible (Force Majeure, Insurance, etc.)

Management Reserve

Loss Contract

Fee/Profit

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Innovative Commercial Approach to New Plant Development

• New nuclear plant stakeholders want confidence that their investment will provide a return in balance with the level of risk

• The AP1000 program was founded on the principle of re-building confidence in new nuclear projects

• Westinghouse seeks

– to be flexible and innovative in order to arrive at a balanced approach

– to work in an open, transparent manner to build trust and confidence

– to align scope and risk with the party best capable of managing the scope and mitigating the risk

– to arrive at a delivery approach that optimizes the value of the overall project and gives the stakeholders the appropriate incentive to help assure high quality, on-time, on-budget delivery

The right technology, the right team, and an effective commercial approach is necessary element for the successful execution of multi-

billion dollar projects

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A Successful Risk Management Culture… Integrity, Transparency, Flexibility, Diversity

Georgia, Plant Vogtle 3 and 4 with 1 and 2 in the Background, July 2013

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AP1000 Standard Model Improve Certainty

• AP1000 program was designed with standardization as a foundation principle– Standardization eliminates risk and increases stakeholder confidence

• Standardization provides for increased certainty in all aspects of project delivery that relate directly to improved project financing

– Licensable design– Finalized design– Demonstrated equipment fabrication– Proven construction techniques and execution plan– Repeatable processes and procedures

• Lessons learned are continually incorporated from the experience gained on China and US projects

Westinghouse is confident in the standard plant model which will provide a high level of commercial certainty for

standard plant scope

Documents

1 Ingmar Sterzing, August 1, 2013 Changes in Electricity Planning, Project Execution, and Operation Univ. of Pittsburgh School of Law 2013 Energy Law and