Reaping the Benefits of Alliance Contracts

As power producers face declining sales growth and hefty costs for new emission controls, tools for improving efficiency and lowering operating costs are paramount for utilities with large generation assets.

One option allows power producers to outsource their maintenance and outage services to third parties. These third-party agreements are known as alliance contracts, a unique long-term arrangement designed to help utilities achieve their goals for safety, quality, availability and outage rates at a low cost. They are complex pay-for-performance agreements that incentivize the service providers.

Power Engineering explored the structure, makeup and rationale behind these contracts in an interview with executives of Westar Energy and Day & Zimmermann NPS. D&Z is one of the nation’s leading power plant maintenance and modifications contractors. Westar Energy is the largest electric utility in Kansas, with 7,000 MW of generation capacity and nearly 700,000 customers.

John Bridson, Westar’s vice president of Generation, and Paul Williams, vice president of Operations for D&Z, sat down with Power Engineering to discuss the benefits and challenges associated with alliance contracts.

What follows is a transcript, edited for style and length, of that discussion:

POWER ENGINEERING: What are the advantages of having an alliance contract versus doing the work yourself or contracted piecemeal?

BRIDSON: We see more consistency among our fleet. It’s better than having different contractors working at different power plants. It also helps us execute consistent processes and practices in our organization.

I can tell you a short story. We were facing a deadline on a particular project. It was an environmental project, so it had a deadline on it, but it was a pretty short time frame. Since we had our alliance contractor (Day & Zimmermann) on board, what we were able to do was work with them, while the engineering was still going on, to perform constructability reviews. They actually had input in the engineering. We were able to go ahead and develop timely estimates. We were able to execute the project both on time and on budget. If we didn’t have that alliance partner, things would have been a lot more difficult because the time frame was not conducive to getting the engineering done, putting a bid scope together for the installation and then going out for bids. Having a trusted partner made us comfortable to move forward on the project, which was very successful.

WILLIAMS: The alliance model provides the optimum environment for us to work with the customer. It provides safe, quality services at the lowest cost. John’s organization allows us to have a seat at the table with his team. We regularly share ideas and come up with the best solutions together.

We establish what we call Key Performance Indicators (KPI) or pay-for-performance measures. These measures help improve the process and the work product. We adjust them to continue to better meet business needs. My favorite part about the KPI contracts is it allows us to have a laser focus on what we need to work on to improve.

PE: What should a utility consider before entering a long-term alliance contract?

BRIDSON: You have to be real careful about the partner you pick. It’s kind of like entering a marriage. You don’t want to do this very often. You just want to do it once and hopefully be done with it. The companies need to have a shared value system and the cultures need to complement each other. That doesn’t mean it’s always rosy every day. Without a little bit of conflict, you’re probably not sharpening your saw and getting better. We enjoy our relationship with D&Z. We challenge each other and we work to get better.

I think you also need to define up front what the goals of the relationship are. You have to define the parameters around working toward that shared goal. You also have to provide some kind of framework for resolving conflicts.

WILLIAMS: When I meet with companies that aren’t using alliances, I talk a lot about the need to establish governance. John and I provide governance and are in lockstep as to our expectations for our teams. We regularly have discussions about that. Alliance contracts seem to be onerous to both sides in the beginning because of the need for a culture change. They work best when you have a formal change-of-management plan. If you’re going to be an alliance contractor, you have to see yourself as the brother-in-law sleeping on the couch. You better add value every day if you want to have a place to stay.

PE: Can you describe the scope of your alliance agreement with D&Z?

BRIDSON: For us, D&Z provides union craft labor primarily in boiler maintenance and construction activities. But they also have a core staff of both craft and management that is with us all of the time. Those folks perform ongoing work and respond to forced outages. They also provide us project management, project controls, quality controls, safety supervision and training for the work they’re involved with. For some of our small plants, they will provide the overall outage schedule, which includes work they’re not performing and potentially even work performed by other contractors. They truly are a partner in every sense of the word.

PE: Can you describe the contract terms and how Westar evaluates D&Z’s performance?

BRIDSON: It’s pay for performance. You might even call it a Fee-at-Risk Contract. We define certain goal the alliance needs to meet. Some of those goals are the exact same ones that our management staff is working toward - things like plant reliability and coming in on budget. We then turn that into a scorecard, which we evaluate twice a year after each outage season. We score D&Z in about nine key categories, including safety. If we find things that we want to work on, we’ll put those on the scorecard. Occasionally, we’ll modify the scorecard. We’ll take some things off where we’ve achieved what we wanted to achieve and we’ll add something new. Then we mutually agree on the outcomes of that score. D&Z has an opportunity to argue with us. Sometimes they can convince us to change the score.  

WILLIAMS: We develop scorecards to measure our performance and place our fee at risk to demonstrate value. The reason the scorecard is important is because if you can’t measure it, you can’t improve it. When you’re able to measure the results, it gives you the information needed to take corrective actions as required and to demonstrate success to the organization.  

Be sure to read the full article in the April issue of Power Engineering magazine.

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