Mid Term Exam
Study Books Used in Class:
Description: Instructions: Do not discuss the mid-term with your Study Group members or anyone else. The mid-term is an open book exam. When quoting a reference, use proper APA style citations and then the full reference at the end of the answer to that specific question. If you have a question of clarification, post it in the designated Conference area and it will be answered for all. You are to use Times New Roman 12 pt. font, double-spacing, and 1 inch margins on all four sides.
I. Terminology definitions: Define the following Risk Management terms, and illustrate with an example in two written paragraphs per term. (6 points, 2 points each, ½ page for each, 1.5 page limit)
1) Crashing a Schedule
2) “Black Swans”
3) Decomposition of a WBS
II. Incorrect activity duration estimates may result in increased risk. Explain how methods of activity duration estimating that we have studied could be utilized to mitigate Technical Risks and Project Management Risks.
(4 points, 2 points per clear description of estimating method, ½ page for each, 1 page limit)
III. Discuss why a key motive for risk management is the identification of opportunities. Give at least one example (citing your assigned articles and/or textbook readings) about pro-active Risk Management describe how such opportunity could mitigate project risks. (3 points, 1 page limit)
IV. Case Analysis (7 points) – Instructions at the end of the case
Sam Martinez is seeking to invest a portion of his considerable assets in the “independent” electric power production industry in California, a sector projected to experience very rapid growth in the 21st century. He has set up a company “MexiEnergy Inc.” using his own
funds and those of a number of family and colleagues. The intention is to use the company to build and operate an electric power plant, and then form a non-profit organization to “donate” some of the power to social service agencies serving immigrant families in L.A.
However, the large public sector, California Energy Resources, produces most of the power for California. The main exceptions are co-generation plants associated with food processing, timber and similar industries, some small hydro plants which generate electricity for northern California via water, and purchased power from other states. California Energy operates all long distance distribution, selling electricity to municipal utilities for local distribution; brokering power sales to large industrial customers, and providing electricity wholesale to small rural customers. California Energy will buy power from independent producers, but at rather low prices negotiated privately with each potential supplier, based on “avoided costs” which vary considerably from base to peak load usage patterns.
California Energy wishes to increase its current significant dependence upon Navo Valley nuclear power reactor, which is projected to construct seven-ten more 880-megawatt units over the next twenty-five years. Should this happen, “avoided cost” for base load power could be very low. However, there is strong political pressure from a range of sources for publicly declared prices well above current avoided costs to encourage private co-generation of electrical power.
Privatization of California Energy is being argued by leading environmental groups, with a view that increases in electricity cost per unit which would decrease electricity consumption. These probabilities have been calculated as part of California Energy’s financial forecasts and risk planning.
Sam has identified what he believes to be his first big opportunity. It would involve:
1. Producing base load electric power for sale to California Energy in a northern California town using a CCGT (combined cycle gas turbine) set (2 or 3 natural gas powered turbines driving generators with waste heat producing high pressure steam to drive a steam turbine generator).
2. Providing low-pressure steam for manufacturing organizations in the immediate vicinity of the CCGT plant.
The local city has a natural gas network and supply, but the supply pipeline is not large enough to cope with the proposed CCGT. The gas supply company will provide a new main and gas at a price per unit fixed for a substantial period, but requires a “take-or-pay” contract. If MexiEnergy decides to contract to take gas from any given date — they will in effect have to pay for the contracted gas flow whether they use it or not.
A range of established suppliers of CCGT plants can provide the required equipment. They each tend to be at a different point in a cycle, which can be approximated by three phases as follows.
A) New untested design: It is expected to be of very high fuel efficiency. Initial reliability is uncertain, however, likely to be very reliable in the long run. It is claimed to have very low maintenance costs and low capital cost to encourage purchase.
B) State of the art tested design: It is of high fuel efficiency, high reliability and low maintenance costs with very high capital cost.
C) Tried and true design: It is of low fuel efficiency, moderate reliability and maintenance costs with moderate capital cost.
CCGT plant suppliers will install the major plant components on a fixed price basis. MexiEnergy Inc. has revised the scope and Contract, with stiff penalty clauses for 1) delays or 2) performance failures for which the manufacturer is responsible. However, such penalty clauses may not be operable; for example, if ground conditions are not as tested environmentally or grid connections are not in place when required.
California Energy will provide grid connections, and will not allow anyone else to do so. The plant could be delayed for weather reasons and start-up delayed due to grid hook-ups or electrical black-out failures due to ‘rolling black-outs’.
Water for the CCGT will be taken from a river which flows through the municipality. However, no Environmental permits have been granted to remove water from these rivers during the several drought years in California. Permit fees statewide are rumored to rise dramatically before construction begins.
Extraction of water requires State Govt. as well as municipal approval. Municipal planning approval is required for the plant; water pipelines, low pressure steam lines and power lines, and all construction must be scheduled dependent upon Permitting agencies.
The latter two also require provincial approvals with respect to safety issues.
Sam proposes the purchase of phase 2 (state of the art tested design) CCGT plant to be installed and running as soon as possible. His Engineering team has voted for high-fuel efficiency and low maintenance costs over price. What are the risks?
He has made you responsible for preparing an RBS and providing a Risk Assessment soon. If you succeed, in Sam’s view, you will become a Vice-President in charge of new plant developments for MexiEnergy Inc. Mr. Martinez has made it clear that he has no time for failure.
a) Based upon your understanding of Ch.6 in the Kendrick textbook, what schedule modifications (see Kendrick, Ch.4, pp.94-96) might help for MexiEngery? Describe these in complete sentences. (2 points, 1 page limit)
b) Identify what risk areas could be quantified in order to provide appropriate risk data for tables for Mexi-Energy’s Management team to analyze. Format these into a Table for their review. Limit the table to one page and make certain you rank risks quantitatively. Demonstrate, through at least one example, how the Management team could calculate probabilities/likelihood and impact of risk for this project? (3 points, 1 page limit)
c) Identify what you perceive are two critical decisions MexiEnergy Inc. should take based upon the Risk Management and Assessment methods studied this semester. One paragraph per decision explained. (2 points, ½ page limit)