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East meets West in risk management.

THE VIBRANT CITY OF HONG KONG LIES NESTLED ON THE SOUTHEAST COAST OF CHINA, EAST OF THE MOUTH OF THE PEARL RIVER. A BRITISH CROWN COLONY SITUATED AMONG THE DEVELOPING COUNTRIES OF ASIA, HONG KONG HAS EXPERIENCED PHENOMENAL ECONOMIC GROWTH IN THE PAST DECADE; THE ECONOMY GREW BY ALMOST TWO-THIRDS FROM 1984 TO 1990. WHILE RISK MANAGEMENT IS STILL A RELATIVELY NEW DISCIPLINE FOR MANY ASIAN COMPANIES, HONG KONG IS MOVING FORWARD MORE QUICKLY THAN MOST OTHER COUNTRIES IN THE ASIA-PACIFIC REGION. IN EFFECT, SOME HONG KONG COMPANIES ARE HIRING INTERNATIONAL ENGINEERING AND RISK MANAGEMENT FIRMS TO ASSIST IN MANAGING THE NEW EXPOSURES AND TO LOOK AFTER CORPORATE INTERESTS. AT THE SAME TIME, THESE BUSINESSES ARE REALIZING THE VALUE OF HAVING AN IN-HOUSE RISK MANAGER TO HANDLE A GROWING ARRAY OF RISKS AND LIABILITY EXPOSURES.

CHINA LIGHT & POWER Co. Ltd. is an example of a forward-thinking company based in Hong Kong that has combined the efforts of an outside consulting firm with in-house professionals to manage risk. Amidst a flurry of challenges, from unprecedented population growth and restricted land use to Hong Kong's scheduled transition to Chinese possession in 1997, China Light & Power is proactively managing a growing number of risks and implementing risk management practices to help protect its investments and standardize its protection systems. China Light & Power is also concerned about its commitment to protecting the environment and maintaining the goodwill of its customers. The risk management techniques of loss prevention, loss control and quality assurance - albeit they are relatively new to the region - are making these challenges easier to tackle.

Traditionally, most Asian companies have tended to rely on a fire protection manager and a loss adjuster to manage risks. With the stakes increasing, risk management needs are being addressed and responsibilities placed on the shoulders of dedicated managers to implement stronger controls. In recent years, Asian business have undergone significant changes - among them, changes in plant management. In years past, Asian plants were primarily capital intensive, allocating significant sums to equipment replacement and repair. Today some maintain this mode of operation, depending upon the level of engineering sophistication within the facility.

As facilities become more technologically advanced, new ways to reduce risk and capital expenditures are being explored. As such, a more proactive risk management approach to loss prevention has become increasingly common. And by shifting focus to loss prevention, many Asian companies are seeing risk management's increased impact on the bottom line. Technological advancement, however, does not come without its growing pains. New skills and knowledge are necessary, not only to operate new machinery or design new processes, but also to manage the new risks of more technologically advanced equipment and facilities.

Multiple and Mounting Risks

INCORPORATED IN Hong Kong in 1901, China Light & Power's supply area now encompasses about 1,000 square kilometers covering a population of roughly five million. The company has also exported power to China's Guangdong Province since 1979. As the region's population has grown, so has the demand for electrical power. Over the past 20 years, demand has increased 10 percent annually in the utility's service area. And with the continued expansion of the Hong Kong economy, demand is expected to further increase.

To meet the growing demand, China Light & Power has developed an intricate network of facilities to generate and transmit power to its customers. The utility owns shares in three major generating companies: Peninsula Electric Power Co. Ltd., Kowloon Electric Supply Co. Ltd. and Castle Peak Power Co. Ltd. To transmit power, the utility has built 170 primary and 6,903 secondary substations with a total of 6,033 kilometers of transmission circuits of all voltages -- most of them underground cables. The installed transformers have a combined loading of 34,676 megavoltamperes. The utility also owns hundreds of consumer substations where power is distributed.

The number of facilities and amount of equipment China Light & Power owns has climbed each year to meet the increasing demand for electricity. Between 1981 and 1984, four 350MW (megawatt) coal-fired units were commissioned at Castle Peak 'A' power station. Four 680MW units were later added at 'B' station between 1985 and 1989. Thus, including gas turbines, the capacity of Castle Peak is 4,350MW, making it one of the largest coal-fired complexes in the world. Because these increases in capacity are primarily to keep pace with demand, the older units at Tsing Yi, a 1,520MW oil-fired station, are still required. It is essential therefore that these continue to be maintained in prime condition.

For any large utility, rapid change and growth of this magnitude brings greater risks, especially when the risk portfolio mixes newer exposures with older, aging equipment. More difficult still is the impact of this risk for a utility in a developing region.

Consider the consequences if a boiler failure at the Castle Peak 'B' power station forces a shutdown. Since the utility is committed to provide reliable power for its customers 24 hours per day, 365 days per year, it has to incur extra expense during an equipment failure to keep power available. Replacement costs at Castle Peak can run as high as US$400,000 per day to purchase alternate power.

Equipment repair and replacement used to be an expense management assumed it had to incur. But with the increased consumer demand for power, this reactive approach is no longer a cost-effective one. For example, without loss prevention, the chance of an outage multiplies. Thus, the related costs, such as equipment downtime, idle employees, repair or replacement, even lost production, are escalating all the time.

Consistent growth has become problematic in other ways, too. The growing population and subsequent expansion of the utility have restricted the amount of available land. Despite China Light & Power's attempts to locate its substations in remote locations, the scarcity of land has forced people to move their businesses and homes nearer the once isolated stations. Without adequate space, the risks to the utility, as well as to third parties, have increased. These are substantial exposures that, if not managed, could hurt China Light & Power's public credibility -- one of the most damaging risks a utility faces.

Growth can cause internal design risks, too. The expansion of China Light & Power's distribution and transmission systems has necessitated a continuous growth in fire service installations. Each substation was built during a different time period with the fire protection system of that day. Consequently, without a standard fire protection system for its substations, the utility faced a costly inspection, testing and maintenance problem.

Fighting Fire and Preventing Losses

CHINA LIGHT & POWER is particularly concerned with fire -- one of the utility's largest exposures -- and suppression measures with their potential adverse effects on the environment. Like many companies, China Light & Power uses chlorofluorocarbon (CFC) gases as a fire suppression agent in some of its older substations. These stations were built before studies revealed the adverse effects of CFC gases on the ozone layer. As a result of the 1986 Montreal Protocol, the use of CFC gases in now restricted. China Light & Power faces compliance with this and other environmental regulations, along with its own standards. Now, more than ever, the utility must carefully consider and measure the environmental impact of its actions before moving ahead on new development or expansion projects.

Today, to manage all of these challenges, the utility uses the proactive approach of loss prevention and loss control. No longer does China Light & Power operate from the perspective of putting out fires, but rather emphasizes preventing them in the first place. The utility is focusing on maintenance, risk management and technical instruction for engineers to reduce losses and better manage risk. But to fully and effectively institute such an approach usually requires outside assistance.

At present, companies are looking for more than a risk transfer mechanism when they shop for insurance. With the risks facing industries around the world, insurers and their customers can no longer afford to view insurance solely as a risk transfer device. The market today demands that a carrier be very knowledgeable about its client's business and provide assistance in managing the unique risks of that business. More and more insurers are going beyond risk transfer to provide the risk management support their customers need.

Trained engineers, not just claims adjusters, are responding to these needs. The emphasis is on the prevention of losses, rather than on the payment of claims after a loss occurs. These carriers bring the experiential link Asian companies need without jeopardizing the integrity or work of internal engineers and scientists. It is a relatively new approach for companies in the East, but one that China Light & Power has adopted on a broad scale.

The utility has formed a partnership with The Hartford Steam Boiler Inspection and Insurance Co. that fosters a common goal between the companies: plant availability. As partners, the utility and carrier are working together to reduce risk, improve machine efficiency and maintain public goodwill.

Charting Solutions

CHINA LIGHT & POWER has made many changes in its attitude toward loss prevention, particularly in its approach to maintenance. Today, maintenance supercedes repair and replacement in budget allocation; 50 percent of current costs have been redirected toward this endeavor.

Maintenance has become so ingrained in the corporate focus that China Light & Power is making strides beyond many of its Western counterparts. The utility believed that to realize the true benefits of loss prevention and loss control, it had to unite the financial department with the plant. This unprecedented communications channel between the risk manager and plant manager was obvious to China Light & Power since both share the same performance standards and commitment to safety, productivity and, ultimately, profitability.

Maintenance management has since played a leading role in making the operational performance of the inservice units at China Light & Power among the world's best in terms of availability, reliability and efficiency. Just last year, for example, the station achieved a record planned availability of 99.66 percent. As its loss prevention and risk management techniques develop, the utility is able to predict a higher percentage of equipment breakdowns and thus plan outages instead of waiting for them to occur.

To help China Light & Power expand its predictive maintenance capability, Hartford Steam Boiler has installed a direct line that links the utility with Hartford Steam Boiler's Knowledge Network Computer. This computer offers access to a group of "knowledge-based systems" (artificial intelligence programs). These programs employ several different types of artificial intelligence technologies including: expert systems that emulate the though process of experts with fixed rule-based systems; neural networks, rule-based systems that actually adjust themselves based on input from a dynamic data base of machinery information; and "fuzzy logic" systems that use probability data stored in a data base.

For China Light & Power, these systems offer engineers within the utility's scientific and technological services department the knowledge to solve difficult problems. For instance, China Light & Power is linked to Hartford Steam Boiler's turbomachinery diagnostic expert system, TURBOMAC. This system contains the knowledge necessary to diagnose abnormal conditions in large rotating machinery -- the type of conditions that could lead to a costly failure. For that reason, it is used as a screening tool to determine what part is failing and as a diagnostic aid to assess why. The utility's engineers indicate the presence or absence of different machinery symptoms and the expert system provides a diagnosis of probable causes. The utility can access the expert system at any time of the day or night using standard telephone lines.

The use of expert system technology allows China Light & Power to conduct preventive and predictive maintenance in line with its new approach. Preventive maintenance involves regularly scheduled activities like lubrication and replacement of parts such as seals, belts and bearings that have known life expectancies. Predictive maintenance is based on actual measurements of machine condition such as vibration level, lubrication oil condition and noise level. This data is collected at regular intervals and analyzed to see if abnormal failure producing conditions are developing.

The combination of predictive and preventive maintenance programs provides the most cost-effective method of preventing unexpected equipment failure. However, China Light & Power is also pursuing other inspection technologies on its own and with Hartford Steam Boiler, including infrared thermography for detecting problems in electrical equipment.

Reducing Risk

IN ORDER TO tackle the CFC problem as well as to address the current state and future growth of its fire service installations, China Light & Power has assembled a special project group of its own engineers and professional fire risk consultants from Professional Loss Control, Hartford Steam Boiler's fire protection engineering subsidiary. The project's objectives took the form of three questions: How well are our substations protected from fire? If a fire develops, how will it affect neighboring properties and the environment? and Are we doing everything possible to minimize risk to area residents?

Together with the utility's engineers, the team of fire risk consultants conducted a comprehensive risk survey, first of 89 large electrical substations at both 400kV (kilovolt) and 132kV voltage levels, and subsequently at 97 smaller substations. The substations' risks were assessed through the use of advanced computer modeling techniques that simulate how a fire develops and spreads. The adequacy of installed fire suppression systems and fire barriers was then evaluated based on current standards.

Other factors were taken into consideration, too. As described, China Light & Power is a growing company that must contend with physical barriers. When China Light & Power expands a facility, part of the structure is often demolished to open up new space. In its place, new structures are erected. This state of flux impacts the type of fire protection system chosen.

Having considered a variety of factors, the risk consultants developed fire detection and protection systems with recommendations for each substation. The consultant recommended replacing less reliable systems, such as gaseous suppression systems, with water spray systems to accommodate the changing conditions and to help the utility comply with environmental legislation.

An Emphasis on Quality

CHINA LIGHT & POWER purchases fire protection systems from a variety of countries, among them the United States, Great Britain and Australia. This poses a problem for the utility since fire protection standards vary from country to country. Without a unified set of internal standards to regulate and manage a fire protection program, the utility's engineers face a web of procedures that may conflict. At the same time, the engineers must satisfy China Light & Power's guidelines and the set of standard fire regulations established by the Hong Kong Fire Services Department. With its growth in size and complexity, the utility needed a uniform internal plan to operate more efficiently.

To initiate a loss control system from the outside, Professional Loss Control developed a quality assurance program and a set of standard fire protection system equipment specifications. Since vendors supplying China Light & Power with fire protection materials are located all over the world, the utility's new quality assurance standards are performance-based. Now the utility's engineers choose from an approved list of vendors developed by Professional Loss Control; only vendors who follow approved material testing procedures are included.

Once all of these controls were in place at the larger stations, Professional Loss Control repeated each step with the 97 smaller distribution centers. Then, Professional Loss Control trained China Light & Power's staff to manage its new program at existing facilities. It is important for China Light & Power not only to standardize its fire protection systems, but also to maintain them over time. To help the utility monitor its new sprinkler systems, Professional Loss Control designed a hydraulic calculation computer program. This gives the utility's engineers the power to manage the system themselves, rather than rely on an external service contractor. The procedures also help to assure that all new construction meets China Light & Power's rigorous new safety standards and that old systems are upgraded accordingly.

One Country, Two Systems

BY TAKING a proactive approach to risk management, China Light & Power is tackling a number of issues today for tomorrow. The standardization of fire protection systems and implementation of quality control guidelines will stabilize the ever-changing nature of the utility. The influence of the standardization will be most prominent in the design of new facilities and if the utility enters into joint ventures like those with the Guangdong Power Authority in China.

But the future is clouded by Hong Kong's transfer to China's possession in 1997, making specific long-term risk management planning difficult. Of this, however, China Light & Power is certain: The utility will continue to grow, and grow more interdependent with China. The number of generation projects in which the utility is already involved in China's Guangdong Province demonstrates this fact. And if the past is any indication of what is to come, the level of loss prevention and loss control will rise to meet the constant changes of the years ahead.

[Augustus C.K. Lau is insurance and claims manager for China Light & Power Co. Ltd. and Ted Ng, Ph.D., is engineering director, Asia/Pacific for The Hartford Steam Boiler Inspection and Insurance Co.]
COPYRIGHT 1992 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:partnership between China Light and Power Company Ltd and Hartford Steam Boiler Inspection and Insurance Co.
Author:Lau, Augustus C.K.; Ng, Ted
Publication:Risk Management
Article Type:Cover Story
Date:Jun 1, 1992
Words:2838
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