FINANCIAL ASSESSMENTS OF ALTERNATIVES TO PRUNING
Pruning trees away from electric power lines represents an ongoing expense. Where this expense can be avoided, it’s financially beneficial to the power company and ultimately, the ratepayer. However, we need a smart way to determine over what time frame the action considered will provide financial benefit. To date, making such financial assessments on a case by case basis has required not only competence in financial management but also hours of time. The Avoided-Cost-of-Pruning Model changes all that.
The Avoided-Cost-Of-Pruning Model
Now you can readily assess whether 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. 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 while providing the net present value, the payback period and the internal rate of return. These are time-tested measures commonly used in business to assess project viability.
Does applying financial concepts seem too rigorous – even 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, 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 appealing because it’s annoying to manage the associated safety and reliability risks, but that doesn’t translate to sound business practice.
Currently, few utilities apply financial assessments for tree replacement on a site-by-site basis, either because competency has yet to be developed, or because it’s simply 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 you strive to provide economical service. But think of the “value add” when you have the means to demonstrate how your work serves 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. Subjective judgments represent potential areas of controversy that invite scrutiny. It’s simply prudent to financially justify your tree replacement program and your decision-making process for tree removals.
Speaking of removals…aren’t removals a good thing?
Not always! When we examine the economics of tree removal vs. ongoing pruning, we discover some removals have a negative present value. That is, it’s actually cheaper to continue pruning. However, we know there will always be instances where maintaining public relations outweigh the financial considerations.
If you have unit costs for different diameter class tree removals, using the Avoided-Cost-of-Pruning Model helps you determine when tree removals make and don’t make financial sense. I’ll give you an illustration later, but first let’s get familiar with the Model.
Here’s what the Avoided-Cost-of-Pruning Model looks like….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 staff 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 record storage.
How it Works
The customer contact person determines the units of pruning to 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’d receive 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, paying for itself over 6 years of avoided pruning. It has a positive net present value with an internal rate of return 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’d 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 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.
It indicates a negative net present value and the payback period is incalculable. In other words, it’s cheaper to continue pruning that tree every two years than removing it.
Other Applications
You can use the Avoided-Cost-of-Pruning Model to determine the value of a tree voucher. You’ll need average unit pruning costs and average removal costs. By setting the units to 1, once you enter the removal cost in the Cost of Alternative, the Net Present Value provide the maximum value you can place on a voucher to recover the cost of the tree replacement in avoided pruning over the specified term.
You can even use the Avoided-Cost-of-Pruning Model to evaluate the financial viability of engineering options such as line moves, use of tree wire and undergrounding versus ongoing pruning.
The Avoided-Cost-of-Pruning Model brings order to alternative to pruning, providing justification for proceeding with or rejecting an alternative. At the end of the year you can readily tally up the amount of savings and the average internal rate of return of the alternative implemented. And whether you decide to save each analysis as a separate electronic file or make a paper copy, should anyone inquire, you’ll have the justification for each alternative to pruning that you implemented.
To get the full benefits from the Avoided-Cost-of-Pruning Model, you’ll need to set parameters including the discount rate and your company’s maximum payback period length or a minimum internal rate of return. You’ll find more information about this in the Avoided-Cost-of-Pruning User Manual.
Your Cost Benefits
The Avoided-Cost-of-Pruning Model makes tracking and demonstrating your savings simple, with a savings quite conceivably in the tens of thousands of dollars per year.
Were I to charge $1,000, it would be a deal as you could conceivably pay for it with one good tree replacement project. And $1,000 is a small fraction of the cost to build something similar. If you’re doing financial analysis on an ad hoc basis, you’d invest a minimum of a couple of hours to a half day per case.
But I’m not going to charge $1,000 or even $100. A single license is just $69.95. And because I’d like you to fully realize the Model’s value, by having your customer contract people to use it, I’m making discounted volume pricing available.
Your 30 Day Free Trial
If you’re ready to harness the financial insight of the Avoided-Cost-of-Pruning Model or want to decrease the cost and effort of financial assessment, I’d like to send you the Avoided-Cost-of-Pruning Model for a free 30 day trial. You can start your 30 day free trial by completing an Order Form or calling (780) 467-6389. Of course, if you want to forego the trial and order now, please go ahead. I’ll email you a zip file that includes Avoided-Cost-of-Pruning file, operating instructions, and the Avoided-Cost-of-Pruning Manual. You will need Microsoft Excel to use the Avoided-Cost-of-Pruning file.
Devices such as laptops, tablets, smartphones, PDA’s that have MS Excel installed can run the Avoided-Cost-of-Pruning Model.
I look forward to hearing from you.
Sig Guggenmoos
Ecological Solutions Inc.
www.ecosync.com
P.S. If you are familiar with terms like “present value” and “internal rate of return,” you’ve no doubt set up your own process for financial analysis and justifying the maximum cash value of a tree voucher. But at what investment of your time? Might time be a barrier to doing site-by-site financial assessments? The Avoided-Cost-of-Pruning Model will reduce the effort to a small fraction of what it would otherwise take. Enter a few variables and instantly you’ve got net present value, the payback period, and the internal rate of return. Try it for free for 30 days. You have nothing to lose. Simply complete the Order Form and hit Submit.