FINANCIAL ASSESSMENTS OF ALTERNATIVES TO PRUNING

Pruning trees away from electric power lines represents an ongoing expense. Where this expense can be avoided it is financially beneficial to the power company and ultimately the ratepayer. However, a means is required to determine over what time frame the action considered will provide a financial benefit. To date, making such financial assessments on a case by case basis has required not only competence in financial management but hours of time. But the Avoided-Cost-of-Pruning Model changes all that.

A Financial Assessment Tool
For The Avoided-Cost-Of-Pruning

Now you can readily assess whether a tree replacement at a particular site makes good business sense - in minutes not hours. You don't have to be a financial wizard or a trained bean counter to take advantage of business decision-making processes. The Avoided-Cost-of-Pruning Model does it for you. And now you can take it for a free 30 day test drive.

The Avoided-Cost-of-Pruning Model applies financial concepts to determine the value of avoided pruning and provides the net present value, the payback period and the internal rate of return. These are time-tested measures that are commonly used in business to assess the viability of projects.

Does applying financial concepts seem too rigorous - overkill? Does it seem pretty apparent that when you have an opportunity to get rid of cycle busters trees through an offer of tree replacement that this represents a saving? Well, that isn't necessarily so. Without doing a financial assessment you can't prove that the tree replacement is financially sound. Getting rid of cycle busters is certainly appealing because it's annoying to manage the associated safety and reliability risks but that doesn't mean it's sound business practice.

Currently, few utilities do apply financial assessments for tree replacement on a site-by-site basis either because the competence to do so doesn't exist or because it would be too costly. Rather, someone makes a subjective determination where tree replacement is suitable. In other words, the decision has
little or no financial justification.

If you're a utility forester, I'm sure as most utility foresters do, you strive to provide economical service. But wouldn't it be better yet if you could demonstrate how your processes serve the ratepayer's interest?

Whether oversight is provided by a PUC, city administration or a co-op board, fact-based decisions effectively resolve overseer concerns whereas subjective judgements represent potential areas of controversy that invite scrutiny. It's simply prudent to financially justify your tree replacement program and even your
decision making process for removals.

Removals? Aren't removals a good thing?

Not always! If we examine the economics of tree removal vs. ongoing pruning we find that some removals have a negative present value. That is, it is actually cheaper to continue pruning. Naturally, there will be instances where the public relations benefits outweigh the financial considerations.

If you have unit costs for different diameter class tree removals you can use the Avoided-Cost-of-Pruning Model to determine when tree removals make financial sense and when they don't. I'll give you an illustration later but first let's get familiar with the Avoided-Cost-of-Pruning Model.

Here's what the Avoided-Cost-of-Pruning Model looks like. It's an Excel spreadsheet.

The Avoided-Cost-of-Pruning Model makes it easy to perform site-by-site financial assessments. So easy in fact that you could have your customer contact folks collect and enter the necessary data and customer/property information into a PDA version of the Avoided-Cost-of-Pruning Model and forward it to you for approval, further data entry or simply record storage.

What would be involved? The customer contact person would need to determine the units of pruning that will be avoided, the length of the pruning cycle and the tree ownership. The utility provides the average unit pruning cost, the discount rate and likely determine the cost of the alternative. In some cases the customer contact person might be able to complete the cost of the alternative. If for example, the alternative involves the removal of trees and stump grinding, the customer contact person would need information from the utility on average removal prices by diameter classes and the average cost of stump grinding to be able to complete the cost of the alternative. You would get back a file from the field that looks like the above screen shot. It tells you that removing the trees and grinding the stumps instead of pruning is a good business decision that would pay for itself over 6 years of avoided pruning. It has a positive net present value and the internal rate of return is certainly superior to what regulators allow utilities to make in the normal course of business. If the 6 year payback and/or the 22% internal rate of return meets your internal requirements you would advise your contractor to proceed with the removals.

OK, now that you've seen how the Avoided-Cost-of-Pruning Model works let's return to the question of whether or not taking every removal you can get is financially advisable. Let's assume you're facing a 38" dbh tree on private property that is being pruned on a 2 year cycle; that your average per tree pruning cost is $30 and that removing a 38" dbh tree with cleanup, costs you $700. Let's see what the Avoided-Cost-of-Pruning Model tells us.


Continued - Go to next page

ECOSYNC 2010