Is It Worth It to Win the Talent War? Page 42 of 48 - Texas

PUC Docket No. 46449 EXHIBIT ARC-6

Is It Worth It to Win the Talent War?

Page 42 of 48

applied in a wide variety of situations, thus enabling the examination of external validity. A

,second limiting factor in our study is that there may be additional pay strategy-specific training

costs or administrative costs that we did not include. We believe, however, that such costs

could easily be incorporated into this framework. Third, as discussed throughout this study, we

made a number of assumptions and decisions in order to conduct the analyses. Although we

believe that we took the most logical and conservative approaches at these junctures, viable

arguments could be made for approaches different from our own. Fourth, although we modeled

employees performance levels as stable over time, research has shown that employee

performance levels change over time (e.g., Deadrick, Bennett, & Russell, 1997; Ployhart &

Hakel, 1998; Sturman & Trevor, 2001). Furthermore, changes in performance levels are related

to the likelihood of turnover, even after controlling for the effects of current performance levels

(Harrison et al., 1996; Sturman & Trevor, 2001). Considering the movement of employees

between different performancecategories across years, and the implications of these

movements for forecasting turnover, would certainly add complexity to the model we presented.

It may be valuable for future research to explore the implications of these model refinements.

The method we describe involves a significant amount of calculation, but is relatively

simple to replicate on a spreadsheet. Actual replication may require some customization to fit a

specific company's profile, but the basic premise of the methods should be ihe same. We hope

that this demonstration will inspire organizations to more fully tap available research findings to

help them enhance their HR policy4ecision-making. We also hope that this paper helps

demonstrate the value of research findings like those reported in Trevor et al. (1997) and will be

complemented by future research on additional factors that may influence the pay-for-

performance link with turnover. For example, satisfaction with different types of pay-for-

' performance plans (e.g., raises versus bonuses) can have different effects on outcomes-of

organizational interest, such as job s'atisfaction and organizational commitment (Sturman &

Short, 2000). Ideally, the research presented here will encourage extensions of this work that

Page 41 1800



Page 43 of 48

can prove valuable for both understanding HR practices in general and for evaluating specific

HR policies.

Organizations of all types will likely respond to increasing pressures to "win the talent

war by employing all available tools to enhance attraction, selection, and retention processes.

A formidable tool in this endeavor is the accumulated knowledge available from

industrial/organizational psychology and human resources research. The method described

here illustrates how utility analysis can be used to demystify and integrate this research, making

it a more practical decision-making tool, and thus a more potent influence on significant

strategic organizational goals (Boudreau, 1991; Boudreau & Ramstad, 1997; 1999; 2002;

2003a; 2003b).

Page 42 1801



Page 44 of 48

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Footnotes

1. The Boudreau and Berger (1985) model in its purest form would calculate the work force value in each intervening year and apply a discount factor to equaliie the time value of the dollar amounts., While these economic corrections can yield substantial changes to the estimated value (Sturman, 2000), such embellishments do not have a significant effect in this case because the changes in dollar amounts are assumed to be linear, the time frame is relatively short, and our focus is on the relative (versus absolute) value of the different strategies. We also did not have information about the organizational tax rate, so we report our results in pre-tax dollars. After-tax effects could be easily calculated by multiplying the final results by an appropriate after-tax proportion, but the relative effects of the options would not be altered.

2. The Bureau of Labor Statistics provides a wealth of information on hourly earnings for diverse groups and occupations (see BLS, 2002). We used the average hourly earnings and weekly hours of all white collar occupations, excluding sales jobs. The m6st recent information shows that white collar, full-time employees (excluding sales) earned an average hourly wage of $21.65 and worked an average of 39.4 hours per week in 2001. Based on the 29th Annual Report on the 2002-2003 Total Salary Increase Budget Survey (WorldatWork, 2002), salary increases averaged 3.9% for exempt salaried employees in 2002, and is projected to increase 4.1% for 2003. This led us to use an estimated hourly wage of $23.42, for a total salary for 2003 of $47,983. Note again that anyone employing the methods described in this paper can simply enter the data from other sources, such as their own companys data. The value we chose was intended to capture a broad, generalizable sample. More importantly, it is intended to be a reasonable estimate to help illustrate our technique.

3. There is no single accepted method of estimating the dollar value of average performance among workers or applicants. Some research has suggested that average performance value can be estimated equal to the average compensation of the work group (Boudreau, 1991, p. 654; Raju, Burke & Normand, 1990, p. 9). However, it seems unlikely that average-performing employees produce only enough value to offset their direct wage costs. Considering the other service costs that are incurred, and the need for organizations to obtain a positive return on costs, a higher level of average service value seems likely. Based on an analysis of wage and productivity estimates in the national income accounts of the United States, Schmidt and Hunter (1983) proposed assuming that the ratio of average dollar value to average wage is approximately 1.754.

4. Support of the 90% approach is proVided by Becker and Huselid (1992), who found direct observations of SDy fell in the 74% to 100% of mean salary range. Moreover, because researchers generally contend that SDy increases as job complexity increases (e.g., Judiesch et al., 1992), our 30% and 60% SDy values would appear to have additional support as conservative estimates, given our sample of all exempt hires in a large corbpany.

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PUC Docket No. 46449 EXHIBIT ARC16


Page 48 of 48

Appendix

Computing Separation Probabilities Using Survival Analysis Results

Our estimation uses the survival analysis frOm Trevor et al.'s (1997) Table 4 (model 1).

Probability of survival = S(0)e(u)

where S(0) =.baseline probability of survival, which was 0.77, = a ve'ctor of survival analysis regression coefficients,

X = a vector of independent variables, (FIX) = 4.941 + 0.314 *Salary Growth - 2.541 * Performance +

0.553 * Performance2 - 0.020 * Performance3 + 0.007 * Salary Growth3 - 0.663 *Salary Growth * Performance + 0.071 * Salary Growth * Performance2

The salary growth data used to estimate the equation above was measured in thousands of dollars. Thus, to use the equation, our example's percentage increases had to be converted to a parallel salary growth measure for each pay strategy and performance level combindtion. To do so, we determined the average pay growth under each strategy by subtracting 2003 pay from 2007. pay, dividing by 4, and then dividing this amount by 1000.

'For example, under strategy 3 and performance level 2.5, file average pay increase was [($54,005 - $47,983) / 4]/1000 = 1.5055. The table below lists the salary growth for each pay strategy and performance level.

Performance Catégory 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Strategy 1 2.0375 2.0375 2.0375 2.0375 2.0375 2.0375 2.0375 2.0375 2.0375 Strategy 2 2.0375 2.0375 2.0375 2.0375 2.0375 2.5853 3.1485 3.7283 4.3243 Strategy 3 0.000 0.4870 0.9888 1.5055 2.0375 2.5853 3.1485 3.7283 4.3243

Next, we need to estimate separation probability (i.e., 1 - probability of survival): 1 - S(0)eOW

. For example, for performers rated at 5.0 under Pay Strategy 2, the pay increase of 8% translates to an average dollar increase (in thousands) of 4.3243, which yields a separation

probability = 1 - .77e(U) = 1 1 - 0.86 .7.7e(4.941 -5.467) =

.7.7e(-0.526) = 1 _ .77(0.5910)

= 0.14. See Table 2 for separation prObábilities at each performance level/pay strategy combination.

The 4.941 constant in the (11X) calculation resulted from adding the estimated model constant (6.810) from Trevor et al.'s equation to the sum of the model terms that included neither perfôrmance nor salary growth (e.g. age, promotions). These terms wére evaluated at the means of the respective X variables. As an aside, we advocate centering variables prior to conducting hazard analyses, which causes the model constant and variables set at their means to drop out, thus simplifying the calculation of survival'probabilities (Retherford & Choe, 1993; Trevor, 2001). See Trevor (2001) and Morita et al. (1993) for more on computing survival probabilities.

Page 47 1806

EXECUTIVE SUMMARY OF ALICE A. BONNING

Alice A. Bonning, the Manager of Programs & Compliance for American Electric Power

Service Corporation (AEPSC), provides an overview and description of the American Electric

Power (AEP) Supply Chain, Procurement and Fleet Operations (SCPF0); describes the benefits

derived from managing Supply Chain, Procurement and Fleet Operations as a shared service to

American Electric Power's affiliates, including Southwestern Electric Power Company

(SWEPC0); and demonstrates that the costs incurred to provide Supply Chain, Procurement and

Fleet Operations products and support services ' to SWEPCO, including the Supply Chain,

Procurement and Fleet Operations class of affiliate charges, are reasonable and necessary.

The SCPFO department consists primarily of operating company employees that perform

the field operations for the Supply Chain, Procurement and Fleet Operations functions. The

Procurement function consists primarily of AEPSC employees that are focused on the leveraged

acquisition of both goods and services for AEP affiliates.

Ms. Bonning's testimony explains that Supply Chain is focused on providing

warehousing and inventory management services to supply the required material for construction

and maintenance activities of SWEPCO Generation, Transmission and Distribution. The Fleet

Operations team provides vehicle acquisition and maintenance activities for SWEPCO. The

Procurement team negotiates contracts that are used to obtain goods and services that are

primarily identified by SWEPCO.

Ms. Bonning's testimony demonstrates that use of the centralized organizational model

has allowed AEP and its operating companies to realize the benefits of economies of scale by

using corporate-wide information technology systems and by exercising large scale buying

leverage in their dealings with suppliers. The model has also improved AEP's ability to

1

1807

benchmark the cost and effectiveness of šervices provided by SCPFO. Thenet result has been a

steady improvement in the cost to deliver services to the affiliates.

The AEPSC affiliate costs charged to SWEPCO for SCPFO are $246,605.

Ms. Bonning's testimony establishes the reasonableness of these costs by applying a number of

methods including cost tiends, cost control efforts, process improvements, budgeting controls,

and benchmarking studies. For example, Ms. Bonning explains AEP's and SWEPCO's use of

principal process improvement tools to streamline operations, optimize storage capacity and

improve operating efficiency and effectiveness to ensure reasonableness of costs. These

processes as explained in Ms. Bonning's testimony demonstrate the diligence of SCPFO to

improve efficiencies and decrease costs.

Ms. Bonning further explains how SCPFO utilizes annual external benchmarking

processes to ensure its cost profile remains relative to its utility peers. Ms. Bonning describes

how SCPFO has demonstrated strong peer-to-peer performance on key benchmark metrics.

2

1808

PUC DOCKET NO. 46449

PUBLIC UTILITY COMMISSION OF TEXAS

APPLICATION OF

SOUTHWESTERN ELECTRIC POWER COMPANY

FOR AUTHORITY TO CHANGE RATES

DIRE'CT TESTIMONY OF

ALICE A. BONNING

FOR


DECEMBER 2016

1809

TESTIMONY INDEX

SECTION ,PAGE

I., INTRODUCTION 1

II. PURPOSE OF TESTIMONY 2 „

III. ORGANIZATION AND SERVICES PROVIDED BY SCPFO 3

IV. REASONABLENESS AND NECESSITY OF AFFILIATE COSTS 8

V. SUMMARY & CONCLUSION 20

EXHIBITS

EXHIBIT

DESCRIPTION

EXHIBIT AAB- 1

Services Provided by Supply Chain & Fleet Operations, Procurement & Supply Chain Center of Excellence

DIRECT TESTIMONY PUC DOCKET NO. 46449 i ALICE A. BONMNG

. 1810

1 I. INTRODUCTION

2 Q. PLEASE STATE YOUR NAME, BUSINESS ADDRESS AND POSITION IN THE

3 COMPANY.

1

4 A. My name is Alice A. Bonning. I am Manager of Programs & Compliance for

5 American Electric Power Service Corporation (kEPSC). My businešs address is

6 539 N. Carancahua Drive, Corpus Christi, Texas, 78401.

7 Q. WHAT ARE YOUR PRINCIPAL AREAS OF RESPONSIBILITY WITH AEPSC

8 AND THE REGULATED UTILITY COMPANIES TO WHOM YOU PROVIDE

9 SERVICES?

10 A. I am responsible for Supply Chain, Procurement and Fleet Operations (SCPFO)

11 programs, projects and compliance as well as the implementation, use and support of

12 business systems and process development for these functions. I carry out these

13 responsibilities for Sputhwestern Electric Power Company (SWEPCO) and the other

14 American Electric Power Company, Inc. (AEP) operating companies.

15 Q. PLEASE DESCRIBE YOUR EDUCATIONAL AND PROFESSIONAL

16 BACKGROUND. •

17 A. I graduated Magna Cum Laude with a Bachelor of Science degree in Technical

18 Management from Oklahoma City University' in Oklahoma City, OklahOma, in 2000.

19 I began my career with the former Central and South West Corporation (CSW)

20 subsidiary 6entra1 Power & Light Corbpany (now AEP Texas Central) in 1984.

21 I held various positions there in Accounting, Marketing, Supply Chain, Meters and

' 22 Training. In 1995, I transferred to the former CSW subsidiary West Texas Utilities

23 Company (now AEP Texas North) in Abilene, Texas, where I led the company's

DIRECT TESTIMONY PUC DOCKET NO. 46449- 1 ALICE A. BONNING

1811

1 workstation expert and information technology training programs. In 1996,

2 I transferred to CSW Services in Tulsa, Oklahoma, where I held posi-tions in Supply

3 Chain that included oversight of suppliers, key performance metrics, systems and

4 projects. In 2000, after the merger of CSW and AEP, I transferred to AEPSC in

5 Columbus, Ohio, where I held positions that include my, current responsibilities for

6 programs arid compliance for -SCPFO. In 2013, I transferred to AEP in Corpus

7 Christi, Texas, and my responsibilities Were expanded to include the adminištration of

8 AEP corporate programs such as Supplier Diversity and Corporate Credit Card.

9 Q. ON WHOSE BEHALF ARE YOU TESTIFYING?

10 A. I am testifying on behalf of SWEPCO.

11 Q. -HAVE YOU PREVIOUSLY FILED TESTIMONY BEFORE ANY REGULATORY

12 COMMISSIONS?

13 A. No.

14 Q. ARE YOU SPONSORING ANY EXHIBITS?

15 A. Yes. The Exhibit I am sponsoring is provided in the Index to my testimony.

16

17 II. PURPOSE OF TESTIMONY

18 b. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCaDING?

19 A. The purpose pf my testimony is to:

20 1) Provide an overview and description of the AEP SCPFO department and the

21 services it provides to SWEPCO and other AEP operating companies;

22 2) Describe the benefits derived from the centralized management of SCPFO as a

23 service to AEP's affiliates, including SWEPCO; and

DIRECT TESTIMONY PUC DOCKET NO. 46449 2 ALICE A. BONNING

1812

1 3) Through presentation of benchmarking results and other methods, demonstrate

2 that costs incurred to, provide SCPFO products and support services to

3 SWEPCO, including the SCPFO class of affiliate charges, are reasonable and

4 necessary.

5

6 III. ORGANIZATION AND SERVICES PROVIDED BY SCPFO

7 Q. WHAT ORGANIZATION DOES YOUR TESTIMONY SUPPORT?

8 A. My testimony supports SCPFO. The Supply Chain and Fleet Operations functions

9 within this department consist primarily of operating company employees that

10 perform the field operations, with support from AEPSC em'ployees. The Procurement

11 function consists of AEPSC einployees who are focused on the leveraged acquisition

12 ofboth goods and services for AEP affiliates.

13 Q. WHAT DO YOU MEAN BY SCPFO?

14 A. Supply Chain is focused on providing warehousing :and inventory management

15 services to supply the required material for construction and maintenance activities

16 necessary for SWEPCO's generation, transmission and distribution operations. The

17 Procurement team negotiates contracts that are used to obtain goods and services that

18 are primarily identified by SWEPCO. The Fleet Operations team pro-vides vehicle

19 acquisitibn and maintenance activities for SWEPCO.

20 Q. HOW DOES SCPFO FIT INTO AEP'S OVERALL STRUCTURE?

21 A. The central SCPFO department is led by the Chief Procurement Officer who reports

22 to the Chief Financial Officer. The SCPFO department is a section of the AEP

23 Finance and Accounting organization, which also includes other departments such as

24 Treasury, Risk, and Corporate Planning & Budgeting.


1813

1 The use of the centralized organizational model has allowed AEP and its

2 operating companies to realize the benefits of economies of scale by using

3 corporate-wide information technology systems and by exercising large-scale buying

4 leverage in their dealings with suppliers. The use of this model has also improved

5 AEP's ability to benchmark the cost and effectiveness of services provided by

6 SCPFO, which I discuss later in my testimony.

7 Q. DOES THE CENTRALIZED ORGANIZATIONAL MODEL OF SCPFO PROVIDE

8 OTHER BENEFITS TO SWEPCO?

9 A. Yes. The services provided by the centrally-organized SCPFO department are

10 designed to allow affiliates like SWEPCO an appropriate level of control over the

provided services and their related costs. The SCPFO department is, directed and

12 supported administratively by AEPSC employees but the work is primarily carried

13 out by operating company employees to provide line-of-sight accountabilities with

14 the various AEP operating companies.

15 - The use of the centralized organizational model has allowed AEP and its

16 operating companies to realize the benefits that include standardization of the

17 following:

18 1. Specifications for material and equipment;

19 2. Measurements, dashboards, and enterprise technology systems; and

20 3. Processes and Sarbanes-Oxley controls.

21 A significant result of the standardization process and the use of enterprise

22 information technology systems is that economies of scale can be exercised for


1814

1 procurement of goods and services. The result has been effective control of the cost

2 "th deliver SCPFO services to the affiliates.

( 3 Q. HOW IS SCPFO ORGANIZED?

A. The functional chart of Figure 1 shows how the core functions are organized into their

5 main departments for SCPFO. The functions and services of SCPFO are distinct and

6 complementary with no duplication bf either functions or services. Additionally,

7 Figure 1 specifically identifies the team, labeled as ".SWEPCO Supply Chain & Fleet

8 Operations," that is staffed by SWEPCO employees.

Supply Chain, Procurement and Fleet Operations

Supply Chain and Fleet Operations

Procurement

Supply Chain Center of Excellence

SWEPCO Supply Chain & Fleet Operations

9 Figure 1: Supply Chain, Procurement and Fleet Operations Functional

10 Organiiational Chart

11 Q. HOW DO YOU DISTINGUISH BETWEEN SERVICE' COMPANY (AEPSC) AND

12 • OPERATING COMPANY EMPLOYEES?

13 A. SCPFO employees that accomplish work for the benefit of more than one AEP

14 operating coinpany are usually classified as AEPSC employees. Employees whose

15 work is dedicated to a single operating company are employed by that operating

16 company. The overall department is primarily composed of operating company


1815

1 employees, with a small central management structure, that provide economies of

2 scale and leveraged buying as well as continuity for analysis, processes, and systems.

3 Q. CAN YOU NOW DESCRIBE IN MORE DETAIL THE RESPONSIBILITIES OF-

4 THE GROUPS DEPICTED IN FIGURE 1 ABOVE?

A. Yes, the various departments and their roles within the organization are as follows:

6 Chief Procurement Officer & VP, SCPFO — This group, composed of AEPSC

7 employees, provides the strategic leadership and management oversight to ensure that

the SCPFO organization is focused on providing and delivering efficient support

9 services tO AEP affiliates.

10 Supply Chain and Fleet Operations — Supply Chain and Fleet Operations is staffed by

11 AEPSC personnel and provides warehousing support and inveniory control functions

12 as well as vehicle acquisition and administrative functions for SWEPCO.

13 SWEPCO Supply Chain and Fleet Operations — The SWEPCO Supply Chain and,

14 Fleet Operations team is staffed with SWEPCO operating company employees who

15 are focused on ensuring that material * is available to support the construction and

16 maintenance, work for SWEPCO. These employees are also responsible for the safe

17 • and orderly ,operation of the SWEPCO storerooms. Additionally, this department

18 also maintains the fleet of cars, trucks, line trucks, forklifts, and special-duty vehicles

19 for SWEPCO. The department provides highly skilled mechanics to perform repair

20 services that enable the line vehicles to be available on a continuous basis.

21 Procurement — The Procurement team, staffed by AEPSC personnel, provides

22 strategic management and tactical overšight for the procurement of goods and

23 services to support SWEPCO.

DIRECT TESTIMONY PUC DOCKET NO. 46449 6 ALICE -A. BONNING

1816

1

Supply Chain Center of Excellence — The Supply Chain Center of Excellence, also

2

staffed with AEPSC employees, provides an overall support structure for the SCPFO

3

functions. This includes measurement tools for SCPFO metrics and benchmarking,

4 programs and systems support, and reporting. Additional services include

5

maintenance and standardization of the AEP material catalog as well as management

6

of the asset recovery process.

7 Q. PLEASE PROVIDE MORE DETAIL ON THE SERVICES PROVIDED BY THE

INDIVIDnAL DEPARTMENTS THAT COMPRISE SUPPLY CHAIN AND

9 FLEET OPERATIONS, PROCUREMENT AND SUPPLY CHAIN CENTER ,OF

10 EXCELLENCE.

11 A. The services provided by the individual departments that comprise Supply Chain and

12 Fleet Operations, Procurèment and Supply Chain Center of Excellence are detailed in

13 EXHIBIT AAB-1.

14 Q. ARE THE SERVICES PROVIDED BY SCPFO NECESSARY TO SUPPORT

15 RELIABLE UTILITY SERVICE BY SWEPCO?

16 A. Most definitely. SCPFO enables SWEPCO to cost-effectively acquire goods and

17 services needed to support SWEPCO construction and maintenance activities.

18 Timely and cost-effective acquisition of goods an'd services is essential to SWEPCO

19 operations.

20 Q. IS THERE ANY DUPLICATION OF THE SERVICES PROVIDED BY SCPFO TO

21 SWEPCO?

22 A. No, all of these services are carried out exclusively through the SCPFO department as

23 I have previously described. Additionally, the roles of AEPSC and operating

DIRECT TESTIMONY PUC DOCkET NO. 46449 7 ALICE A. BONNING

1817

1 company employees in providing SCPFO services are distinct and complementary

2 and do not result in any duplication of services.

3

4 IV. REASONABLENESS AND NECESSITY. OF AFFILIATE COSTS

5 Q. WHAT ARE THE TEST YEAR SERVICE COMPANY CHARGES TO SWEPCO

6 FOR SCPFO?

7 A. The SWEPCO test year service company charges for SCPFO are $246,605. These

8 charges do not include costs relative to operating company employees. My testimony

9 supports the reasonableness and necessity of billings from AEPSC for SCPFO

10 charges provided to SWEPCO.

11 Q. HOW DO THE RESPONSIBILITIES OF SCPFO RELATE TO THE LEVEL OF

12 AFFILIATE LHARGES TO SWEPCO?

13 A. SCPFO provides services to SWEPCO that leverage centralized AEPSC services only

14 where d:oing so enhances efficiency. It should be noted that SCPF6 is predominktly

15 staffed with personnel from various op-erating companies. In the following:testimony,

16 I explain the affiliate cost transactions that result from the centralization of services in

17 AtPSC.

18 Q. WHAT TYPES OF PROOF OF REASONABLENESS OF THESE COSTS DO

19 YOU PRESENT IN THIS TESTIMONY?

20 A. I have applied a number of methods including cost trends, cost control efforts,

21 process improvements, budgeting controls, and benchmarking studies. I will next

22 discuss each of these methods. Althotigh several 'of these items are addressed to the

23 overall costs of AEP or SWEPCO, they nevertheless demonstrate how the overall


1818

1 management model for supply chain, procurement and fleet services, including the

2 centralized services provided by AEPSC, is leading to reasonable costs.and effidient

3 provision of -these services to SWEPCO.

4 Q. WHAT ARE THE COSTS ASSOCIATED WITH AFFILIATE BILLINGS FROM

5 AEPSC TO SWEPCO FOR SCPFO AND AVIATION SERVICES?

A. In Figure 2, the 2013-2015 numbers include both SCPFO and Aviation Services.

7 Aviation Services are managed by AEP's security and aviation team, which reports to

8 the Chief Security Officer within AEPSC. .A test year adjustment has been made to

9 exclude Aviation costs from this request for recovery as addressed by SWEPCO

10 witness Brian J. Frantz.

11 Figure 2: SCPFO Affiliate Costs

2013 ($) 2014 ($) 2015 ($) Test Year ($)

$1,117,320 $1,562,863 $1,426,882 $246,605

12 Q. WHAT ARE THE COST TRENDS ASSOCIATED WITH AFFILIATE BILLINGS

13 FROM AEPSC TO SWEPCO SPECIFICALLY FOR SCPFO SERVICES?

14 A. The affiliate cost trends are identified in Figure 3 below. SCPFO personnel have

15 been working diligently to improve efficiencies and control costs. The increase in

16 cost from 2013 to 2014 is primarily due to an increase in AEPSC Fleet vehicles to

17 support transmission projects. Total costs then decreased in 2015 due to cost-savings

18 Measures such as zero-based budgeting and integrated supply "model for contract

19 labor. COsts decreased again from 2015 to 2016 due to the cOntinuation of the


1819

1

cost-savings measures previously mentioned. AEPSC costs are allocated to

2

SWEPCO based on a billing process that is discussed by SWEPCO witness Frantz.

3

Figure 3: SCPFO Affiliate Cost Trends

2013 ($) 2014 ($) 2015 ($) Test Year ($)

$426,812 $553,045 $278,760 $246,605

4 Q. PLEASE DESCRIBE THE RECENT ACTIVITIES OF SCPFO IN COST

5 CONTROL.

6 A. The incorporation of careful management of operating company demand for SCPFO

7 services into a centralized model that leverages best pfactices, technologies,

8

economies of scale, and expertise throughout the AEP system has resulted in a

9

controlled trend in affiliate charges. Process improvements have been conducted to

10

streamline operations, optimize storage capacity, an& improve operating efficiency

11

and effectiveness. Strategic procurement sourcing 'processes have been transformed

12

via the implementation of integrated supply and category management models of

13

business. As business needs dictate, Supply Chain storeroom tasks have been

14

outsourced while contractual relationships have been leveraged to exploit the buying

15

power of AEP as an enterprise. Furthermore, common, repetitive low-value fleet

16

tasks such as oil changes, tire repairs and alignments are being outsourced while more

17

complex tasks such as hydraulic repairs are being performed in-house. Since there is

18

a very limited number of external companies who can perform complex hydraulic

19

repairs, which can result in higher costs and extensive wait times for vehicle

DIRECT TESTIMONY PUC DOCKET NO. 46449 10 ALICE A. BONNIING

1820

1 availability, this distribution of fleet repair work ensures more cost-effeCtive repairs

2 and availability of vehicles to align with SWEPCO job constraints and timelines.

3 Q. HOW D6 PROCESS IMPROVEMENT TOOLS HELP AEP AND SWEPCO

4 ENSURE REASONABLENESS OF COSTS?

5 A. Two of the principal process improvement tools that AEP and SWEPCO use are the

integrated supply model and category management. The integrated supply model

7 represents the implementation of an integrated supplier program . for the full

procurement, standardization, supply and delivery of, low-dollar, high-Volume

purchases of maintenance, repair and operating materials for all SWEPCO

10 This model further enables AEP and SWEPCO io maximize contract labor progräms

11 by using managed service jroviders and systems to effectively leverage spend and

12 control costs. This integrated supply model allows AEP Procurement, along with

13 SWEPCO personnel, to concentrate efforts on value-added tasks related to sourcing

14 complex/strategic materials such as transformers and conductors. This focus results

15 in a more effective cost control process that takes full advantage of AEP's economies

16 of scale. Additional efforts to standardize certain. categories of mateiial, such as

17 personal protective equipment, have also allowed AEP to better leverage its

18 purchasing power resulting in a more effective control of costs.

19 Procurement prOcesses were further streamlined, optimized and improved by

20 the implementation of a category management model of business, which enables the

21 AEP Procurement team to partner with SWEPCO leaders to better understand the

22 total cost of ownership, to leverage supplier relationships and provide better guidance

23 around market drivers and supply challenges. Category management is a rigorous,

DIRECT TESTIMONY liUC DOCKET NO. 46449 11 ALICE A. BONNING

1821

1 fact-based decision-making process that improves total cost of ownership and

2 increases value by leveraging the total spend of the organization, proactively

3 managing supplier relationships, rationalizing demand, streamlining the procurement

4 process and focusing on value drivers.

5 Q. CAN YOU GIVE AN EXAMPLE OF CATE6ORY MANAGEMENT?

6 A. Category managers are assigned to categories of goods and services such as: 1) wire,

7 cable and hardware, 2) transformers, 3) motors and major electrical equipment,

8 4) extra high voltage labor, and 5) other third-party services supporting AEP and its

9 affiliates. Using an eight-step strategic sourcing fact-based process, the ctegory

J.

10 managers provide expertise and guidance in collaboration with SWEPCO personnel

11 from requirements development through delivery for the supply of goods and services

12 to ensure AEP is using effective competitive sourcing processes in order to leverage

13 spend, take advantage of economies of scale, and extract the total value out of the

14 supply chain process.

15 Q. HOW DOES SWEPCO OBTAIN AND PAY FOR THE PRODUCTS AND

16 SERVICES THAT SCPFO PROVIDES?

17 A. The SCPFO,department provides goods and services in a collaborative process that is

18 geared toward optimizing value. SWEPCO mdnagement drives requests for goods

19 and services that vary from transformers to vehicles based on their requirements.

20 SCPFO responds by obtaining the goods and services required by SWEPCO using

21 negotiated contracts that mitigate price and supply disruption risks to ensure

22 SWEPCO can take advantage of AEP's economies of scale and realize cost controls,

23 thus maintaining a competitive advantage in the utility marketplace. For example,


1822

1 assume that a SWEi3C0 distribution system line crew in Longview, Texas, is called

2 out to extend service to a new cuštomer's residence. The job is planned by the crew

3 supervisor with the material for the job electronically ordered through a work

4 management system that alerts the Longview Storekeeper (a SWEPCO employee

5 within SCPFO) to pull three utility poles, wire, arid a 15 kV transformer from the

6 storeroorn and make it ready for the crew.

7 While ihe crew takes the material to the job to begin work, the inventory

8 management systeni adjusts the inventory balances for the material just issued and

9 alerts the Longview Storekeeper to ensure enough poles, wire, and transformers are

10 available to work the next job. The system software is programmed to generate

11 reorder notices to bring the storerooms up to acceptable inventory levels. These

12 reorder notices are processed by the storekeepers and become a purchase requisition.

13 This purchase requisition is released against an already-established corporate

14 blanket order that was developed in a process resulting in competitive and leveraged

15 pricing. Contracts or blanket orders are generally awarded by an AEPSC

16 Procurement Strategic Sourcing Analyst to the lowest (lowest numerical price) and

17 best (non-price factors) suppliers/vendors that meet the technical and commekial

18 requirements of AEP. The charges for the material are direaly incurred by SWEPCO

19 and are not an affiliate charge. Since the Longview storekeeper is a SWEPCO

20 employee, his/her labor is' alšo a SWEPCO cost rather than an affiliate cost.

21 However, since the cost of the systems and the labor of the AEPSC Procurement

22 Strategic Sourcing Analyst benefit multiple operating companies, these costs are

DIRECT TESTIMONY PUC DOCKET NO. 46449 13 ALICE A. BONMNG

1823

1 'affiliate costs and are allocated to SWEPCO based on allocation faciors that are

2 discussed by SWEPCO witness Frantz.

3 Q. YOU MENTIONED ABOVE THAT THE MANAGEMENT OF SWEPCO AND

4 OTHER OPERATING COMPANIES DRIVES REQUESTS FOR SCPFO GOODS

5 AND SERVICES. CAN YOU ELABORATE?

6 A. AEP's affiliate units have been given substantial control over the quantity and type of

7 SCPFO goods and services that are delivered and are also able to clearly understand

8 the cost of the goods and services through the billing process, which is described in

9 the testimony of SWEPCO witness Frantz. The strategic sourcing process that I'

10 previously described also adds visibility into the total cost of ownership of goOds and

11

services rather than a focus simply on price paid. With the billing and strategic

12

sourcing processes that are in place today, operating company leaders can make better

13 decisions about purchases of goods and services. They can adjust their requirements,

14 up or down, to achieve the operating benefit they are seeking, balanced against the

15 full knowledge of the eosts associated with their decisions. In addition, SWEPCO

16 controls the quality of the goods and services delivery through standards and periodic

17 feedback for user satisfaction, which allows SWEPCO personnel to inform SCPFO

18 management whether they are getting the right types and levels of goods and services.

19 Q. WHAT TYPES OF CONTROLS ARE IN PLACE WITHIN SCPFO TO ASSURE

20 THAT COSTS ARE,CONTROLLED?

21 A. The process of cost management starts with the preparation of a forward-looking

22 SCPFO budget that portrays anticipated expenditures. Budgeting processes, such as

23 zero-based budgeting (ZBB) and variance analysis, are used to .ensure an in-depth


1824

1 analysis of projected costs and actual expenditures takes place. ZBB,is a method of

2 budgeting in which all expenses must be justified for each annual budget. ZBB starts

3 at zero and every potential cost within SCPFO is analyzed for its need. The current

4 year budget 'is reviewed on a monthly basis _and year-end projections are revised as

5 appropriate.

6 Q. ONCE BUDGETS ARE IN PLACE, WHAT FURTHER COST MONITORING

7 OCCURS?

8 A. Once the budget is in place, actual costs are compared. to budget targets on an "

9 ongoing basis and variances are reported and explained. Projects, major purchases,

10 and contracts are vetted to ensure they are amiropriately prioritized and aligned with

11 corporate initiatives or mandates and are properly funded. Finally, the billing process-

12 allows SWEPCO to monitor SCPFO billings for cost accuracy and spending

13 authorization.

14 Q. WHAT ARE THE TRENDS IN SCPFO BUDGETS VS ACTUALS?

15 A. The 2014 SCPFO budget shows actuals exceeding budget. After the 2014 budget was

16 finalized, AEP Transmission requisitioned additional vehicles needed for new

17 employees added to support the new transmission growth strategy. This increase in

18 transmission vehicles is the primary driver for the increase in actuals over budget for

,19 2014. All other costs remained steady. The 2015 budget shows actuals below budget

20 as we focused on process improvement initiatives that enabled us to cut costs and

21 reduce the impact of the 2014 transmission vehicle requisftion. The test year budget

22 shows a continuation of this downward trend as actuals are shown to be below budget

23 once again due to the progression of the same process improvement initiatives.


1825

1 Q. DOES SCPFO PARTICIPATE IN PERIODIC BENCHMARKING TO MONITOR

2 ITS EFFICIENCY?

3 A. Yes. SCPFO utilizes annual external benchmarking processes to ensure we

4 understand our cost profile relative to our utility peers. As described throughout the

5 remainder of my testimony, SCPFO has demonstrated strong peer-to-peer

6 performance on key benchmark metrics. These benchmarks compare SCPFO overall

7 costs for various functions against those of peer companies. This functional

8 benchmark view is the one that is most meaningful to the management of SCPFO

9 costs. In addition, these benchmarks, demonstrate the effectiveness of the AEPSC

10 oversight, administration, and cost management in the SCPFO area.

11 Q. WHICH BENCHMARKING STUDY HAS BEEN USED TO COMPARE SUPPLY

12 CHAIN AND PROCUREMENT COSTS TO OTHER INDUSTRY PEERS?

13 A. The Utility Purchasing Management Group (UPMG) benchmarking study provides a

14 'comparison of supply chain warehousing and procurement expenses. The 2015

15 UPMG Annual Benchmarking Study utilized 2014 year-end actual data (the most

16 recent data available) with a total of 29 utilities participating. Nearly half of the

17 'participant utilities, including AEP, had revenue over $5 billon. In this UPMG

18 benchmarking study, the AEP data is displayed using company code 137.

19 Q. WHAT WAS THE MAJOR SUPPLY CHAIN WAREHOUSING FINDING FROM

20 THE UPMG BENCHMARKING STUDY?

21 A. The major supply chain warehousing finding from the UPMG benchmark was that the

22 AEP "Cost per Issue was $14.85 as compared to the median response of $26.13.

23 Figure 4 praides an overall view of the sample population performance. The Cost


1826

UPMG 2015 Supply Chain Benchtnarking Survey Cost Per issue: Warehouse Expenses /Number of issues - Total

$250.0C

$200.0c1-

5150.0

V100.0

$0.00—

... „lb..; Mem= zimitife -.4 Its s s 42,

I 111.1.11111RIEMMEM111-

210 61 166 166 252 202 5 20 235 137 134 122 165 263 251 28 95 204 207 203 190 212 19S 233 199

Company Code (ranked) CliVetssue (25 ses.) 11111=

1 per Issue benchmark provides a simple mechanism to evaluate the overall

2 warehousing costs against the amount of material being processed. A low Cost per

3 Issue as compared to the overall population indicates efficient warehousing prodesses.

4 Figure 4: Cost per issue

5 Q. HOW WAS THE COST PER ISSUE CALCULATED?

6 A. The UPMG benchmark speCHIfied that 2014. year-end data for the supply chain

7 warehousing costs and the number of material issues be supplied to consistently

8 calculate the Cost per Issue. The Cost per Issue was directly calculated for the

9 participating companies by dividing the warehousing costs by the total number of

10 material issues.

11 Q . WHAT WERE THE MAJOR PROCUREMENT FINDINGS FROM THE UPMG

12 BENCHMARKING STUDY?

DIRECT TESTIMONY PUC DOCKET NO. 46449 17 ALICE A. I1ONNING

1827

1.20

1.00

0.80

0.60

a. 0.40

0.20

0.00

UPMG - 2015 Supply chain'Benchmarking Survey Purchasing Budget / Total Purchasing Spen&

250 252 202 61 134 253 251 190 12 137 zs 204 16131 210 166 212 20 199 203 165 235 122 195 207 233

Company Code (ranked) COcc6acc7e (25 res p ) PABdan =0.38

1 A. The first procurement-related benchmarking measurement is "Purchasing Budget

2 (actual labor and other costs incurred to administer the procurement department) as a

3 Percentage of Total Purchasing Spen& (procurement administration costs plus costs

4 of materials). As shown in Figure 5, the AEP value for this benchmark was 0.29% as

5 compared to the median of 0.38%. With this benchmark, a lower value as compared

6 to the median indicates efficiency in Procurement. AEP ranked as being more

7 efficient than 18 of the 25 benclimarking respondents.

Figure 5: Purchasing Budget as a Percentage of Total Purchasing Spend

9 The second Procurement benchmark, shown in Figure 6, is "Purchasing Spending per

10 Purchasing Employee." In this case, larger benchmark values indiCate efficiency in

11 the sizing of Procurement. The median value for this benchmark is $26.65M per

12 Purchasing employee, with AEP performing substantially better than the median with

13 a value of $32.47M per purchasing employee.

DIRECT TESTIMONY PUC DOCkET NO. 46449 18 ALICE A. BONNING

1828

UPMG - 2015 Supply Chain Benchmarking Survey Purchasing Spending Per Purchasing Employee.

168 233 95 134 137 212 250 165 28 203 253 20 61 210 195 204 12 235 35 190 207 199 122 166 91 251 202 252

Company Code (ranked) Q#cc8ecctotemps (28 (esp.) Median =26.65

$80.00

16- $70.00

$60.00

g $50.00

$40.00-

g $30.00

$20.00

$10.00

MOO

Figure 6: Purchasing Spending Per Purchasing Employee 1

2 Q. WHICH BENCHMARKING STUDY HAS BEEN USED TO COMPARE FLEET

3 COSTS TO OTHER INDUSTRY PEERS?

4 A. The SCPFO department participates in benchmarking studies performed by Utilimarc.

5 Tlie 2016 benchmarking study had 50 utilities participating and utilized 2015

6 year-end data.

7 Q. DID THE FLEET BENCHMARK PROVIDE ANY MAJOR FINDINGS?

8 A. Yes. The major finding from the benchmarking study was that overall Total Cosf per

9 Unit for SWEPCO was well below the population average. In 2015, the overall Total

10 Cost per Unit for SWEPCO was $17,247 as compared to the population average of

11 $18,449. The Total Cost per Unit was calculated by dividing the total cost of all units s

12 by the total, number of units. The total costs included items such as lease,

13 maintenance, labor, fuel, external repair costs, and tags. Figure 7 proVides an


1829

3

1 overview of the Total Cost per, Unit for the sample population. With this benchmark,

2 a lower value as compared to the median indicates efficiency in managing fleet costs.

Yoial "eo'st ger -1Q1','

A

S '17,2

S :4.000r

Figure 7: Total Cost per Unit

4

5 V. SUMMARY & CONCLUSION

6 Q. PLEASE SUMMARIZE YOUR TESTIMONY.

7 A. My testimony establishes that the SCPFO department is effectively organized to

8 provide its services to SWEPCO through a combination of work performed by

9 AEPSC and by SWEPCO's own employees. Through a detailed description of the

10

nature of the services, use of cost trends, budgeting processes, benchmark results,

11 strategic utilization of outsourcing practices, and the use of cost savings programs,

12

I have demonstrated that the SCPFO affiliate charges to SWEPCO are reasonable and

13

necessary.


1830

1 Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY?

2 A. Yes, it does.

DIRECT TESTIMONY ' PUC DOCKET NO. 46449 21 ALICE A. BONNING

' 1831

PUC Docket No. 46449 EXHIBIT AAB-1

SERVICES PROVIDED BY Page 1 of 4

SUPPLY CHAIN & FLEET OPERATIONS, PROCUREMENT & SUPPLY CHAIN CENTER OF EXCELLENCE

AEPSC Supply Chain and Fleet Operations

Individual Departments & Corresponding SerVices

Fleet Administrative Services

1. Track vehicle maintenance and repair costs to ensure those costs are applied to the appropriate vehicle and using departments.

2. Process and track vehicle warranty claims to ensure recovery of funds where possible and the safe operation of vehicles..

3. Place orders for the acquisition of vehicles, process payments to ensure costs are applied to the appropriate vehicle and using departments, arid obtain initial titles and registrations to ensure compliance with state and/or federal requirements.

4. Process, manage and monitor vehicle leases to en'šure compliance with SOX and policy requirements.

5. Process annual vehicle license and permit renewals to ensure compliance with.state and/or federal requirements.

6. Process and track fuel usage and billing.

Inventory Control

1. Work with storerooms in the review and establishment of optimum inventory levels and material reorder points.

2. Review SWEPCO material requests for accuracy and the ability to source from inventory rather than purchase new material.

3. Provide coordination for. SWEPCO to ensure material is available td supPort project start dates.

4. Provide material ordering and replenishment assistance and coordination for storm and outage planning and to support the emergency restoration of power.

5. Assist in the continued standardization of material to maintain economies of scale in material purchases.

6. Set the standards for cost effective inventory management processes, provide training 'as needed, and monitor results to ensure those standards are being followed.

SWEPCO SWEPCO Supply Chain & Fleet Operations

1. Ensure material is available to support construction and maintenance work for SWEPCO.

2. Provide material to support SWEPCO in the emergency restoration of electrical service and in restoration of electrical generation from both forced and planned outages.

1

1832

PUC Iiocket No. 46449 EXHIBIT AAB-1



3. Ensure inventory transactions are made in an accurate and 'timely manner 'and, in compliance with SOX requirements, to facilitate the reordering of material from suppliers.

4. Ensure the safe operation of' SWEPCO storerooms by providing training to operate storeroom equipment and lift material.

5. Perform vehicle and hydraulic equipment preventives maintenance and testing to ensure safe,,reliable vehicles are available for use by SWEPCO personnel.

6. Ensure fleet mechanics demonstrate the highest level of competency by obtaining national certifications such as Automotive . Service Excellence (ASE), International Fluid Power Society Mobile Hydraulic Certification (MHM), and Master Truck Technician Certification.

7. Facilitate the acquisition and in-service operator training for new vehicles and equipment.

8. Coordinate the disposal of vehicles and equipment that are no longer needed or are at the end of their useful life.

9. Provide vehicle inspections to comply with load/stability testing and dielectric certification.

10: Perform the annual Department of Transportation (DOT) certification inspections for vehicles and trailers.

11.Taci1itate the understanding of governmental regulations and maintain the appropriate licenses for vehicles.

AEPSC Procurement

Individual Departments & Corresponding Services

Corporate Procurement

Ï. Develop short and long-term sourcing, contracting, integrated supply and category management strategies that allow SWEPCO support functions, 'such as Information Technology, Safety & Health, Human Resources, and Fleet Operations, to experience the lowest and best cost, measure supplier performance, and receive overall value for vehicles, equipment, goods and services in compliance with SOX requirements and established authorization and procurement policies.

2. Develop expertise in understanding the capability of material, veh'icle, equipment, and services suppliers used by functions such as Information Technology, Safety & Health, Human Resources, and Fleet Operations.

3. Coordinate the logistics of expedited delivery of material and equipment to support SWEPCO outage- and restoration activities_ and manage the delive'fy of large items, such as substation transformers, to ensure safe, cost effective and timely delivery.

4. Provide coordination of the vehicle lifecycle process, including competitive bidding for vehicles, to ensure corporate-wide leveraged pricing. Assist field operations with resolving issues related to vehicle specifications and monitor changes in Department

2

1'833

PUC Docket No. 46449 EXHIBIt AAB-1



of Transportation and Department of Energy rules to ensure vehicle specifications comply with new requirements. Provide coordination for special studies to determine `r-oot cause" issues with like models of vehicles.

5. Manage a fleet fuel hedging strategy to mitigate the volatility of fuel costs and take advantage of cost reductions where possible.

Generation Procurement

1. Develop short and long-term sourcing, contracting, and category management strategies that allow the SWEPCO Generation function to experience the lowest and best cost, measure supplief performance, and receive overall value for various goods and services.

2. Develop expertise in understanding the capability of material, equipment, and services suppliers used by the SWEPCO Generation function.

3. Coordinate the development of leveraged contracts to obtain material, equipment, an'd services to support construction and maintenance activities of the SWEPCO Generation function.

4. Execute approved purchase orders to obtain material, equipment, and services in compliance with SOX requirements and established authorization and procurement policies.

5. Align strategic sourcing function to a commodity focus to strengthen commodity subject matter expertise and resulting contract negotiations and agreements.

6. Provide collocated Procurement sourcing for short term regional-based acquisitions of materials and services to support the SWEPCO Generation function.

Transmission & Distribution Procurement

1. Develiv short and long-term sourcing, contracting, and category management sirategies that allow the SWEPCO Transmission and Diaribution functions to experience the ldwest and best cost, measure supplier performance, and receive overall value for various goods and services.

2. Develop expertise in understanding .. the capability of material, equipment, and services suppliers used by the SWEPCO Transmission and Distribution functions.

3. Coordinate the development of leveraged contracts to obtain material, equipment, and services to support construction and maintenance activities of the SWEPCO Transmission and Distribution functions.

4. Execute appi-oved purchase orders to obtain material, equipment, and services in compliance with SOX requirements and established authorization and procurement policies.

5. Expedite material and equipment as required, to support the . construction, maintenance, and service restoration activities of the SWEPCO Transmission and Distribution functions.

3

1834

PUC Docket No. 46449 EXHIBIT AAB-1



AEPSC Supply Chain Center of Excellence

Individual Departments & Corresponding Services

1. Develop processes, tools, and training related to Supply Chain, Procurement & Fleet in an effort to leverage industry best practices, set operational standards and achieve sustainable cost savings.

2. Provide cost analysis, reporting, and benchmarking. 3. Register and maintain supplier information that includes items such as financial,

safety or operational risk. 4. Seek opportunities to provide value from iterhs that are no longer needed and ensure

corporate-wide leveraged contracts are in place to assist operating cdmpany personnel with the investment recovery of normal scrap material created from construction and maintenance activity of SWEPCO.

5. Provide additions, deletions, and modifications to the material catalog as specified by SWEPCO and ensure that safety and accounting policies are followed during the approval process for adding material to the'catalog.

6. Administer the AEP Corporate Credit Card program to ensure lodging, meals and availability of purchasing tools to support outages; emergency response and service restoration activities of SWEPCO.

7. Administer and support the AEP Supplier Diversity program and related governmental reporting reqUirernents.

8. Assist diverse suppliers with identifying and registering material, equipment, and services that may be needed by SWEPCO.

9. Provide guidance and support on the development and implementation of Supply Chain, Procurement and Fleet Operations systems to ensure alignment with coriporate initiatives and legal and financial controls.

10. Implement 'and support tools to assist field operations in simplifying data consblidation and analysis and to provide quick arid consistent overview of fleet and inventory metrics.

11. Perform operational, risk, and safety assessments on new suppliers and assist current suppliers in process improvement, resolution of quality issues, and 'safety practices in order to improve cost, quality, and schedule.

12. Use analytics to evaluate levels of inventory and ensure an effective balance between cost controls and sufficient inventory to meet SWEPCO outage and service and restoration needs.

4

1835

EXECUTIVE SUMMARY OF RANDOLPH J. WARE

Randolph J. Ware, Managing Director Real Estate and Workplace Services for American

Electric Power Service Corporation (AEPSC), addresses the costs incurred to provide Real Estate

and Workplace Services to Southwestern Electric Power Company (SWEPCO).

Real Estate and Workplace Services is part of AEPSC's Chief Administrative Officer's

organization and is the property Management group for AEPSC, including SWEPCO. As the

property management group for AEPSC, Real Estate and Workplace Services provides a wide range

of building and office services to American Electric Power Comiiany, Inc.'s (AEP) operating

companies, including SWEPCO, that are necessary to support reliable utility service.

The services provided by Real Estate and Workplace Services Department fall into two broad

categories — Workplace Service and Real Estate Asset Management. Workplace Services involve the

provision of property management services and the operation and maintenance of office and service

center facilities.. Real Estate Asset Management services include the purchase and acquisition of land

and buildings, management of property acquisition and dispošal, property inspections, management

and maintenance of real estate records, and management of income producing property.

Mr. Ware's testimony demonstrates that these services are essential to efficiently and

securely support the operation and rnaintenance of facilities and land necessary to support utility

service, to house the employees who prõvide that service, and to support office, fleet and storeroom

activities in support of SWEPCO generation, transmission and distribution functions.

The total test year affiliate Real Estate and Workplace Services costs charged by AEPSC to

SWEPCb are $5,072,769. To demonstrate the reašonableness of these costs, Mr. .Ware applied a

number of methods, including cost trends, budgeting controls, and benchmarking studies. For

instance, Mr. Ware explains that Real Estate and Worktilace Services cost per square foot for

SWEPCO's facilities were below the International Facility Management Association averages.

1

1836


PUBLIC UTILITY COMMISSION Of TEXAS

APPLICATION OF



DIRECT TESTIMONY OF

RANDOLPH J. WARE

FOR


DECEMBER 2016

1837

TESTIMONY INDEX

SUBJECT PAGE

I. INTRODUCTION 1

II. PURPOSE OF TESTIMONY 2

III. AEPSC REAL ESTATE AND WORKPLACE SERVICES ORGANIZATION AND SERVICES 2

A. Description of Services 3 B. Reasonableness and Necessity of Test Year Real Estate & Workplace

Services Costs 5

1. Cost Trends and Budget Performance 5 2. Real Estate & Workplace Services Benchmarking 7

IV. CONCLUSION 9

DIRECT TESTIMONY PUC DOCKET NO. 46449 i RANDOLPH J. WARE

1838

1

I. INTRODUCTION

2 Q. PLEASE STATE YOUR NAME, BUSINESS ADDRESS AND POSITION.

3 A. My name is Randolph J. Ware. I am Managing Director, Real Estate and Workplace

4 Services for American Electric Power Service Corporation (AEPSC). My business

5 address is 1 Riverside Plaza, Columbus, Ohio 43215.

Q. PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROÜND, PROFESSIONAL

7 QUALIFICATIONS, AND BUSINESS EXPERIENCE.

8 A. I earned an Associate in Applied Science degree in Electrical Engineering Technology

9 in 1981 from Delmar College, Corpus Christi, Texas, a Bachelor of Science degree in

10 Organizational Management in 2000 from Oklahoma Wesleyan, Bartlesviile,

11 Oklahoma, and a Master of Business Administration degree in 2004 from Ohio

12 University, Athens, Ohio. I began my career with the former Central and South West

13 Corporation (CSW) subsidiary Central Power & Light, now AEP Texas Central

14 Company (TCC). I held a variety of positions with TCC and CSW including

15 Supervisor, Telecommunication Operations ahd Manager, Telecommunication Voice

16 & Video. In 2000, with the merger of CSW with American Electric Power (AEP), I

17 assumed the role of Telecommunications Business Services Manager AEP. In March

18 2005, I became the Director, Fleet Services for AEP. In May 2007, I was named to a

19 new role as Director, Business Logistics Business Operations for AEP. In June 2010,

20 I then serve-a as Senior Manager, Shared Service Business Services, subsequently,

21 Senior Manager, Corporate Planning Analysis & Reporting. In May 2016, I was

22 promoted to my current position.

DIRECT TESTIMONY PUC DOCKET NO. 46449 1 RANDOLPH J. WARE

1839

1 Q. HAVE YOU PREVIOUSLY FILED TESTIMONY BEFORE ANY REGULATORY _

2 AGENCY?

3 A. No.

4


6 Q. PLEASE EXPLAIN THE PURPOSE OF THIS TESTIMONY.

7 A. The purpose of my testimony is to:

8 1) Provide an overview and description of AEPSC Real Estate and Workplace

9 Services; and

10 2) Demonstrate that the costs incurred to provide Real Estate and Workplace

11 Services to Southwestern Electric Power Company (SWEPCO or Company),

12 are reasonable and necessary.

13

14 III. AEPSC REAL ESTATE AND

15 WORKPLACE SERVICES ORGANIZATION AND SERVICES

16 Q. HOW DOES REAL ESTATE AND WORKPLACE SERVICES FIT INTO AEP'S

17 OVERALL STRUCTURE?

18 A. Real Estate and Work Place Services is part of the Chief Administrative Officer's

19 organization and is the property management group for ikEP, providing a wide rarige

20 of real estate, building and office services to AEP operating companies including

21 SWEPCO. The organizational chart above depicts the Real Estate and Workplace

22 Services functions under my management that pertain to SWEPCO.


1840

Real Estate and Workplace Ser.Vices Functional Organization Chart

Managing Director Real Esiate & Workplace Services Randolph J. Ware

Manager Projects and Business Services

Manager —SWEPCO Workplace Services

Manager Real Estate

1 A. Description of Services

2 Q. PLEASE DESCRIBE THE SERVICES REAL ESTATE AND WORKPLACE

3 SERVICES PROVIDED TO SWEPCO.

4 A. These services fall into two broad categories—Workplace.Services and Real Estate

5 Asset Management.

6 Workplace Services involve the operation and maintenance of officd and service

7 center facilities, including repairs, preventative maintenance, and grounds care.

8 When new workspace is needed, Workplace Services nianages the new facility's

9 design, engineering, estimating, and contracting. Cost for Physical Security is

10

included in these numbers and managed by AEP's security team, which ieports to the

11

Chief Security Officer within AEPSC. For existing space, Woi-kplace Services

12

prOvides furniture, workspace layout planning, and remodeling. This group also

13

provides office relocation services.

14

Additionally, Workplace Sérvices provides property Management services,

15

including:

16 • Print and high speed copy services; mail and supply services; administration

17 of national contract§ for office supplies, toner, paper and third-party courier

DIRECT TESTIMONY Ric DOCKET NO. 46449 3 RANDOLPH J. WARE

1841

1

services; provision and maintenance of office equipment such as copier

2

equipment and printers;

3

• Provision of audio/visual equipment; and

4

• Travel and meeting 'event planning services.

5 Real Estate Asset Management services include:

6

• Purchase and acquisition of land and buildings;

7 • Management of property acquisition and disposal;

8

• Leasing of office space or property from others;

9 • Management and maintenance of real estate records and payment of fees,

10 including management of easement grants and licensee agreements;

11 • Management of income producing property;

12 • Property inspections;

13 • Negotiation and provision of necessary documents required for the removal,

14 relocation or closure of public roads, or other facilities as may be necessary for

15 constrixtion of Company facilities; and

16 • Management of land held for future use, forestlands and other land

17 management' initiatives as may be required.

18 Q. ARt THE SERVICES PROVIDED BY REAL ESTATE AND WORKPLACE

19 SERVICES T6 SWEPCO NECESSARY TO SUPPORT RELIABLE UTILITY

20 SERVICE?

21 A. Yes, they are. SWEPCO cannot provide utility service without physical facilities to

22 house its employees nor without the office supplies and services necessary to support

23 the employees and maintain 'their work environment. In addition, SWEPCO has a

24 responsibility to provide a safe working environment for employees, contractors and

25 visitors, and must also strive to protect the physical security of equipment and

26 property to ensure continued, reliable service to customers in the SWEPCO service

27 territory. These services are essential to efficiently and securely support the operation


1842

1 and maintenance of facilities and land necessary to support utility service, to house

2 the employees who provide that service, and to support office, fleet and storeroom

3 activities in suppoA of SWEPCO generation, transmission and distribution functions.

'4 Q. IS THERE ANY DUPLICATION OF THE SERVICÈS PROVIDED BY REAL

5 ESTATE AND' WORKPLACE SERVICES?

6 A. No, there is not. SWEPCO employees focus on day-to-day maintenance and

7 operation of facilities within the SWEPCO service territory. AEPSC employees

8 provide other Real Estate and Workplace Services that can be perfOrmed in common

9

for multiple AEP business units, such as administration of faci1ity7re1ated contracts

10 for supplies and services.

11 B. Reasonableness and Necesšity of

12 Test Year Real Estate & Workplace Services Costs

13 Q. WHAT ARE SWEPCO'S TEST YEAR COSTS FOR REAL ESTATE AND

14 WORKPLACE SERVICES?

15 A. The total test year affiliate Real' Estate and Workplace Services operations and

16 maintenance costs for AEPSC services charged to SWEPCO are $5,072,769.

17 Q. WHAT TYPES OF PROOF OF REASONABLENESS OF THESE COSTS DO YOU

18 PRESENT IN THIS TESTIMONY?

19 A. I have applied a number of methods, including cost trends, budget performance, and

20 benchmarking studies. Each of these is discussed below.

21 1. Cost Trends and Budget Performance

22 Q. WHAT DO THE RECENT TRENDS IN AEPSC CHARGES TO SWEPCO FOR

23 REAL ESTATE AND WORKPLACE SERVICES DEMONSTRATE?


1843

AEPSCCharges to SWEPCO for Real Estate and Workplace Sennces and Security

2013 2014 2015 Te's4 14ar

" 5 A65,501

tt '4,1; Vier

,:ft Ait.'"'

11.

moo sesulty atit; REWS:7 Total

A. The table provided immediately below shows cost trends for AEPSC billings to

2 SWEPCO for 2013, 2014, 2015, and the test year. Costs have been steady to slightly

3 declining over this time period. Primarily this is due to the cost control measures put

4 in place to minimize or eliminate cost increases.

PLEASE DESCRIBE THE RECENT DVERALL TREND OF COSTS FOR THE

REAL ESTATE AND WORKPLACE SERVICES ORGANIZATION.

The overall trend of operating and maintenance costs for the Real Estate and

WorlTlace Services organization has increased ($9.6 million) since the prior test year,

as shown below. New infrastructure for mission-critical facilities including ,a new

data center was completed during this time frame and was a significant reason for the

5

6 Q.

7

8 A.

9

10

11

12 increase. Additionally, a safety program to rectify slips, trips and falls was

13 implemented and added to these costs. Actual costs exceeded forecast as shown in

14 the comparison due to year-end spend opportunities from external departments. In

15 addition, there was an increase to our fixed costs such as higher utilities and

.DIRECT TESTIMONY PUC DOCKET NO. 46449 6 RANDOLPH J. WARE

1844

Real Estate and Workplace Servicespverall Actual Cost to Forecast comparison (millions)

Pilor Test Year 2013 20i4 2015

c Forecast F Actual

1 housekeeping services. The overall operating and maintenance costs are expected to

2 remain at these higher levels going forward as infrastructure improvements to mission

3 critical facilities are anticipated to continue. The impact to SWEPCO specifically is

4 expected to remain steady as shown in their recent cost.tretids.

5

6

7 Q.

8

9

10 A.

11

2. Real Estate & Workplace Services Benchmarking

HAVE REAL ESTATE AND WORKPLACE SERVICES COSTS AND

PROCESSEŠ BEEN BENCHMARKED AGAINST THOSE OF OTHER

UTILItIES?

Yes. Real Estate and Workplace Services participates in the benchmark study

performed by the International Facility Management Association (IFMA), one of the

12 most well-recognized and respected benchmarking entities in this area. IFMA

13 conducts an annual benchmarking study to provide comparative cost and process data

14 across major companies to business and industry involved in real estate and

15 workplace services. These comparisons extend to facility-related costs across


1845

1 42 major utilities. The most recent study is based on 2015 data and was Completed in

2 2016. The study benchmarked both custodial and maintenance costs at service,

3 centers and office buildings. Other than energy costs, these categories represent the

4 largest share of Real Estate and Workplace Services costs.

5 Q. WHAT WERE THE FINDINGS FROM THE IFMA BENCHMARKING

6 PROCESS?

7 A. Real Estate and Workplace Services cost per square foot for AEP's SWEPCO

8 facilities were below the IFMA average in service center maintenance. The cost of

9 office and service center custodial cost per square foot is higher than the average and

' 10 contributes to the cost difference between overall IFMA and SWEPCO costs. per

11 square foot rate. This difference is largely the result of'having multiple, relatively

12 small facilities across a large geographic area and having to use multiple small service

13 providers for custodial services. The table below provides more detail on the

14 categories of the benchmark.

2016 IFMA Benchmark Cost/Sq. Ft.

Category

2015 IFMA

Average 2015

SWEPCO Office Custodial $1.10 $1.30 Office Maintenance $2.13 $2.31 Service Center Custodial $1.40 ' $2.39 Service Center Maintenance $1.83 $1.38 Admin $0.30 $0.29

15 Q. ARE THERE OTHER USEFUL BENCHMARKS FOR THIS AREA?

16 A. Yes. Each year, in-house printing costs, which include the SWEPCO print center, are

17 benchmarked against external print providers. The table below details commonly


1846

'ordered internal print jobs, which AEP Printing Services used to request quotes from

Staples. As with all AEP print centers, SWEPCO manages costs by rightsizing both

its workforce and'equipment as well as utilizing national contracts to keep equipment

and supply costs competitive.

Internal AEP Print Benclunark Job Description Staples AEP % Difference

Black & White - 100 sets of 3 originals, 2-sided, staple, regular paper S 32.50 $ .26.97 -17%

Black & White - 20 pads, 50 sheets per pad S 55.00 S 20.23

. -63%

Black & White - 200 binders, 150 originals w/ tabs S 2,865.85 S 2,757.36 -4%

Color - 13 originals, 2-sided, stapled, 225 sets S 1;800.00 S 391.78 -78%

Color - 46 pages, spiral bound booklet, 100 sets S 5,242.50 S 1,408.69 -73%

Color/B&W Mix - 40 originals, tabs, spiral bound booklets S 888.65 S 215.06 -76%

IV. CONCLUSION


9 A. Ys, it does.

1

2

3

4

5

7


1847

EXECUTIVE SUMMARY OF ALBERTO G. RUOCCO

Alberto G. Ruocco, Vice President and Chief Information Officer, Information

Technology for American Electric Power Service Corporation, is reVonsible for the system-

wide development, operations, and support of American Electric Power's (AEP) computer,

network, and telecommunications systems. His responsibilities include providing information

technology support for Southwestern Electric Power Cbmpany (SWEPCO) and all other AEP

Operating Companies.

Mr. Ruocco provides an overview of AEP's Information Technology organization,

staffing, and the services it provides. Specifically, Mr. Ruoccd explains hoW Information

Technology services to SWEPCO are organized into information and some operational

technology-related services. Mr. Ruocco describes Information Technology's use of common

centralized resources to meet common needs resulting in delivery with the lowest reasonable cost

and greatest efficiency. The centralized provision of information technology systems and

services provides economies of scale by allowink affiliate companies to share common

investments in technology, and to share skilled support staff to the extent possible.

Mr. Ruocco describes information Technology's mission to enable AEP's business

success through effective and efficient information and operations management tools and

services. This mission is carried out by Information Technology providing SWEPCO and other

AEP Operating Conipanies cost-effective infOrmation, operations, telecommunications

equipment and services as well as security to enable the fulfillment of providing safe and reliable

service to customers. His testimony establishes, among other things, that Information

Technology provides essential and necessary support for the systems that allow SWEPCO to bill

1

1848

its customers, coordinate outage response and repair, and account for its costs, which. enable

virtually all SWEPCO employees to perform their everyday work.

The total test year costs billed to SWEPCO by Information TeChnology for information

technology services is $12,007,942. To demonstrate the reasonableness and necessity of these

charges, Mr. Ruocco analyzes cost trends and budget performance, process improvements,

budgeting controls, full-time equivalent trends, outsourcing reviews, cost-effective additions of

services, and benchmarking studies. In particular, Mr. Ruocco:

• concludes that Information Technology budget and actual expenditures have been on a static cost trend, even while it continues to increase capabilities in response to the rising demand for technology;

• describes the types of oversight measures in place and the major process improvement initiatives implemented to ensure that Information Technology activities and services support SWEPCO's utilities services in a cost-effective manner;

• describes the budgeting process and cost monitoring that goes on within the Information Technology organization;

• states that overall staffing levels have minimally increased, as driven by telecommunications support of transmission and distribution growth and explains how the as-needed use of specialized contractors helps to 'Maintain an agile organization at a reasonable cost;

• concludes that Information Technology utilizes outsourcing in a targeted mannér to optimize ovetall cost and performance;

• provides examples of how Information Technology has successfully added new environments and capabilities while reducing its costs; and

• describes benchmarking data that shows AEP has reduced many of the costs for providing information technology services.

The total amount of Information Technology-related capital additions included ,in

SWEPCO's rate base since its last rate case is $40,462,157 in software blanket charges plus

$4,978,489 for a new data center. Mr. Ruocco describes how the costs of Information

Technology capital projects are captured and tracked. He asserts that the majority of the capital

projects relate io computer system installations and upgrades.

2

1849



APPLICATION OF

SOUTHWESTERN ELECTRIC POWER COMPANY 0


DIRECT TESTIMONY OF

ALBERTO G. RUOCCO

FOR

SOUTHWESTERN ELECTRiC POWER COMPANY

DECEMBER 2016

1850

TESTIMONY INDEX

SECTION PAGE

I. INTRODUCTION 1


III. ORGANIZATION OF INFORMATION TECHNOLOGY 4

IV. REASONABLENESS OF SWEPCO'S IT COSTS 13

A. Cost Trends and Budget Performance 14 B. Budgeting Controls 16 C. Process Improvements 17 D. FTE Trends 21 E. Outsourcing 22 F. Cost-Effectiveness 24 G. Benchmarking 25

V. IT CAPITAL ADDITIONS 39

VI. SUMMARY AND CONCLUSION 43

DIRECT TESTIMONY PUC DOCKET NO. 46449 i ALBERTO G. RUOCCO

1851

1 I. INTRODUCTION

2 Q: - PLEASE $TAT'E YOUR NANT, BUSINESS ADDRESS AND POSITION.'

3 A. My name is Alberto G. Ruocco. I am Vice President and Chief Information Officer,

4 Information Technology (IT) for American Electric Power Service Corporation

5 (AEPSC). My business address is 1 Riverside Plaza, Columbus, Ohio 43215. I am

6 responsible for the system-wide development, operations, and support of American

7 Electric Power Company, Inc.'s (AEP) computer, network, and telecommunications

'8 systems. This includes information technology support for Southwestern Electric

9 Power Company (SWEPCO or Company) and all other AEP Operating Companies.

10 Q. PLEASE DESCRIBE YOUR EDUCATIONAL AND WORK EXPERIENCE.

11 A. I received a Bachelor of Arts degree in Architecture from Yale 'University, New

12 Haven, Connecticut in 1984. I also earned a Master's in Business Administration at

13 the Kellogg School of Management, Northwestern University, in Evanston, Illinois in

14 1990.

15 " Before joining AEP, I was a pre- and post-sales application engineer for a

16 Computer Aided Design software company, a Senior Manager in the Information

17 Technology (IT) consulting practice of Deloitte, a VP of Process and IT (a Chief

18 Information Officer (CIO)-equivalent position) for the $1.3 billion Americas division

19, of Kerry (a global wholesale food ingredients companST based in Ireland), and an

20 Executive Vice President in the IT. consulting practice of The Revere Group, a

21 subsidiary of NTT DATA (a Japan-based global system integrator).

DIRECT TESTIMONY PUC DOCKET NO. 46449 1 ALBERTO G. RUOCCO

1852

1 Since joining AEP in 2012 as a Vice President and Chief Information Officer,

2 I have led the implementation of IT process improvements utilizing a new

3

organizational model based on a Demand arid Supply concept (which has improved

• 4 IT and business partner collaboration), improved operational practices based on the

Information Technology Infrastructure Library (ITIL) dikiplines and, as a result,

6

improved service levels and reduted costs. Most recently, I led the effort to outline a,

7

10-year investment plan to address AEP's technology investments based on emerging

8 business unit requirements (including Generation, Transmission, Distribution,

9 Commercial Operations, and Corporate business units), the current state of AEP's

10 infrastructure, 800+ applications, and internal network capabilities. —

11 Q. ARE YOU A MEMBER OF ANY INFORMATION TECHNOLOGY-RELATED

12 GROUPS OR ASSOCIATIONS?

13 A. Yes, I am a member of the following associations devoted to information technology

14 education, management and innovation:

15 • Utility Information Technology Benchmark (referred to as UNITE) — A

16 benchmarking group forthed by the Southern Company with an objective to study

17 enterprise information teanology costs and use them to identify and share

18 information technology best practices.

19 • Electric Power Research Institute (EPRI; www.epri.com) — I am the Co-Chair of ,

20 the CIO group who are members of EPkI. We collaborate to decide where to

21 focus EPRI's research to improve electric utility operation and information

22 technologies.

23 • Edison Electric Institute (EEI; www.eei.org) I am the Co-Chair of the CIO

24 group Who are members of EEI. We collaborate to develop policy for the electric

25 utility industry. Through my affiliation with EEI, I collaborate with the•Electric

26 Sector — Information Sharing and Analysis Center on security topics for the

27 Electric Sector Coordinating Council under North American Electric Reliability

28 Corporation.


1853

1 • ColumbUs Collaboratory L.L.C. (www.columbuscollaboratory.com) — As AEP is

2 a charter member of this company, I am on the Board. The Columbus

3 Collaboratory is a company that was formed with major companies in the

4 Columbus, OH area (including NationWide Insurance, Huntington Bank,

5 L Brands, Cardinal Health, Ohio Health, and Battelle) to share resources to invest

6 in shared emerging technology areas (e.g., cyber security, analytics, talent

7 development, and third-party vendor reviews).

8 • Tech Corps (www.techcorps.org) — This organization is a not-for-profit

9 organizat,ion that promotes access to technology skills, programs and resources

10 for K-12 students.

11 Q. HAVE YOU PREVIOUSLY TESTIFIED BEFORE THE PUBLIC UTILITY

12 COMMISSION OF TEXAS OR 11EFORE ANY OTHER REGULATORY BODY?

13 A. No.

14


16 Q. PLEASE DESCRIBE THE PURPOSE OF YOUR TESTIMONY.

17 A. My testimony has several purposes. First, I provide an overview of AEP's IT

18 organization, staffing, and services. In particular, I explain how information

19 technology services to SWEPCO are organized into information and some operational

20 technology (OT) -related services. This information supports the cost analysis that

21 AEP Operating Companies use to determine their desired level of services.

22 Second, I explain how IT controls its 'costs for information and operation

23 technology through budget, headcbunt, process and staffing monitoring.

24 Third, I use our benchmarking studies to show that the services and associated

25 costs IT bills to SWEPCO are necessary and reasonable for SWEPCO to effectively

26 serve its customers. Information on the allocation and billing of costs is discussed in

27- the testimonY of SWEPCO witness Brian J. Frantz.

DIRECT TESTIMONY PUC'DOCKET NO. 46449 3 ALBERTO G. RUOCCO •

1854

1 Fourth, I show that the capital costs IT bills to SWEPCO are necessary and

2 reasonable for SWEPCO to gain efficienq and effectiveness in serving its customers.

3

4 III. ORGANIZATION OF INFORMATION TECHNOLOGY

5 Q. WITH REGARD TO THE UTILITY OPERATIONS OF SWEPCO AND THE

6 OTHER AEP OPERATING COMPANIES, WHAT DOES IT CONSIDER TO BE

7 ITS MISSION?

8 A. The mission: of IT is to enable AEP's business success thiough effective and efficient

9 information and operations management tools and services. IT provides the AEP

10 Operating Companies with cost-effective information, operations, and

11 telecommunications equipment and services, as well as security to enable the AEP

12 Operating Companies to fulfill their mission of providing safe and reliable electric

13 service to their customers.

14, Q. PLEASE PROVIDE SOME EXAMPLES OF THE IT SERVICES pROVIDED TO

15 SWEPCO.

16 A. In the course of providing service to customers, SWEPCO employees and contiactors

17 depend on many computerized information and communications systems, alorig with

18 security services, which are all provided and suppbrted by the IT organization. For

19 example, in the event of a power outage to customers, SWEPCO customer service

20 representatives use automated systems to help answer customer calls, identify

21 affected customers, record information related to the affected premises and

22 communicate customer information to distribution system dispatchers.


1855

1 Distribution field employees use mobile computers (via 800 MHz radio) to

2

receive work orders from dispatchers for daily work and storm restoration. The

3

system is used to communicate with the dispatchers'regarding new or changed orders,

4

estimated time of completion or restoration, and any unique material needs or

5

requests for additional assistance. The work orders flow through AEP's integrated

6

800 MHZ radio system to help provide timely and accurate communication and

7 service to dispatchers and customers. The radio system is also used for vehicle/ 4

8 Global Positioning System (GPS) assistance, and provides voice communications for

9 10,000 AEP employees, including SWEpC0 employees.

10 SWEPCO field construction staff also use computerized systems for

11 engineering, managing and scheduling construction and maintenance work, and for

• 12 purchasing materials and managing inventory needed for transmis'sion and

13 distribution construction work. Operations employees use automated systems to

14 monitor and control the real-time status of the SWEPCO transmission and

15 distribution networks. Other employees use automated systems to support accurate

16 and timely billing for services, to maintain electronic maps of SWEPCO

17 transmission, distribution, and generation networks, and to maintain employee and

18 financial records for SWEPCO.

19 SWEPCO employees, operations, and intellectual property are protected from

20 cyber threats by the AEP security services team that works in collaboration with IT.

21 Given the scope, scale and complexity of their operations and their heavy

22 dependence on information and operations technology systems and services, the AEP

23 Operating Companies and their customers benefit from the reasonable cost, secure,

DIRET TESTIMONY PUC DOCKET NO. 46449 5 ALBERTO G. RUOCCO

1856

Demand Supply

Demand Management

Business Applications

infrastructure 3 , Operations

Telecommunica-Sons Architecture

Cornerstone Business Office

1 and reliable information and communications technology and support services ,

2 provided by IT to all of AEP's affiliate companies and organizations.

-3 Q. PLEASE PROVIDE AN OVERVIEW OF HOW IT IS ORGANIZED.

4 A. IT is one of six organizations aligned under the Chief Administration Office. All IT

5 services are centrally managed. The chart below depicts the IT organizational

6 structure.

Q HAVE THERE BEEN ANY RECENT ORGANIZATIONAL CHANGES IN IT?

A. Yes. As part of a multi-year transformation program that began early 2013, IT

'separated demand and supply funciions. This structure allows close alignment with

IT internal business partners in the AEP business units and operating companies,

while at the same time increasing coordination of requests, working to avoid

duplication, and encouraging standards and scalability.

In March 2015, the IT Business Office was established to provide financial

analysis and support to help manage IT's budget, administrative assistance ,‘to the

IT management team, and software asset management for all of AEP. And, in early

2016, this team merged with the IT Telecommunications Business Office to

18 streamline related business functions, in addition to providing IT safety coordination

19 and support, -telecommunications material management, and work release/invoice

20 processing.


1857

7

8

9

10

11

12

13

14

15

16

17

1 In September 2015, the Cyber Risk and Security Services functons were

2 aligned under the newly created corporate Chief Security Officer, but continue to

coordinate directly with IT to protect IT and OT assets:

4

In early 2016, the Cornerstone program was established to enable continuous

5

improvement and efficient business processes using a well-integrated software

6

platform. The program will require ten years to renew large corporate enterprise

7

systems, such as: work and asset management, reporting, human resources, finance,

8

and customer information and relationship management systems.

9 In May 2016, the -IT Service Management (ITSM) team was realigned under

10 the IT Processes & Methods team (formerly known as the IT Program Management

11 Office), with the goal to expand collective awareness and further adoption of ITSM

12 best processes. ITSM processes utilize the ITIL set of practices to define ideal IT

13 organization standards, which set targets for IT's continuous process improvement

14 efforts.

15 Q. WHAT IS THE PURPOSE OF THE IT ORGANIZATIONAL STRUCTURE?

16 A. The purpose of this organizationat structure is to streamline access to the IT

17 organization, reduce complexity in providing solutions, and increase the flexibility

18 and agility of IT to respond to AEP's business needs. IT uses common centralized

19 resources to,meet common needs resulting in delivery with the lowest reasonable cost

20 and greatest efficiency. AEP Operating Companies collaborate to identify business

21 unit requirements that are communicated to IT. The business Units focus on

22 consistent solutions for shared requirements and unique solutions where necessary for

23 individual Operating Companies.


1858

1 Q. WHAT ARE THE FUNCTIONS AND TYPES OF COSTS OF EA2CH OF THE

2 INFORMATION TECHNOLOGY ORGANIZATIONS?

3 A. Demand Management:

4 The Demand Management team is responsible for defining and meintaining the

5 portfolio and investment plans of all IT solutions required to run a business unit's and

6 an operating company's operations. The team is responsible for aligning business

7 unit strategic plans with technology strategic plans, governance and prioritization of

8 projects, and managing short- and long-term financial plans. Costs incurred by this

9 group are all labor-related.

10 Business Applications:

11 The Business Applications team 'develops software based on defined requirements

12 and specifications to meet the generation, transmission, distribution, customer service

13 and corporate functional needs of the 'company. The costs associated with this

14 function are labor and labor-related, and are mainly accounted as capital investments.

15 Additional capital charges may be incurred for licenses for acquired business

16 application software and software development tools.

17 The application support team within Business Applications performs proactive

18 and reactive application support activities t6 ensure effective operations of the

19 applications. In the event of an application failure, the support tdam collaborates with

20 the Infrastructure & Operations and Telecommunications teams to perform root cause

21 analysis and remediation. In addition to the labor and labor-related costs for the staff,

22 application support also includes the annual maintenance charges for purchased

23 business application software.

D1REdT TESTIMONY PUC DOCKET NO. 46449 8 ALBERTO G. RUOCCO

1859

1 Infrastructure & Operations:

2 The Infrastructure & Operations team deploys cost-effective infrastructure solutions

to enable the deliVery of business applications. The team supports all of the

4 computing and storage platforms in AEP's primary and backup data centers. The

5 Service Desk team provides primary and secondary (more coniplex) support fOr

individual computing devices, hardware and software, and 24x7 monitoring of AEP's

7 IT infrastructure. Costs incurred in this area inclutle the labor and labor-related

8 charges for the infrastructure engineers and technicians supporting the computing and

9 storage platforms as well as the, staff involved in the IT Service Desk, data center

10 operations and monitoring. This area also incurs lease and maintenance charges for

11 infrastructure 'hardware and software. Software license charges and some labor are

12 capital.

13 Telecommunications:

14 The Telecommunicatións team implements and supports a network that is available

15 24x7 to provide access to applications, e-mail, data, internet, Supervisory Control and

16 Data Acquisition, radio, telephone and wireless services. This includes all local area

17 networks (LAN) and wide area networks (WAN) (excluding LANs in substations).

18 Costs incurred here are labor and labdr-related charges for the telecommunications

19 engineers and technicians who design, install and support the network. Also included

20 are hardware lease and maintenance costs for the telecommunications infrastructure.

21 Some of these costs may be capital.


1860

1 Enterprise Architecture:

2 The Enterprise Architecture, team is responsible for defining and maintaining the

3 technology product standards of all information and operations technology solutions

4 required to run ihe business units and operating companies. The team's scope

5 includes technology governance, technology .research, and review of the portfolio's

6 obsolete technologies to establish remediation plans. The costs incurted by this group

7 are all labor and labor-related.

8 Cornerstone:

9 The Cornerstone team is responsible for implementing the Cornerstone Program, the

10 ten-year initiative to- renew large corporate enterprise systems (described above).

11 Costs incurred are the same as for the business application development area.

12 Processes & Methods:

13 The Processes & Methods team supports successful delivery of IT processes and

14 projects. The team measures and monitors project delivery metrics for improvement

15 opportunities, and manages project methodologies and the enabling software

16 applications. The team also supports development of project manager skills and

17 competencies within the IT organization. In addition, the team ensures effective and

18 efficient execution of daily IT processes (change, problem, incident, knowledge, etc.

19 as defined by ITSM and ITIL as described above). Expenses incurred by this group

20 are labor and labor-related costs for the architects, analysts and support speciališts

21 who support this area.


1861

1 IT Business Office:

2 The IT Business Office team provides financial analysis and support to help manage

3 IT's budget, IT safety coordination and support, telecommunications material

4 management, work release/invoice processing, administrative assistance to the

5

IT management team, and software asset management for all of AEP. Costs for this

6

area are also labor and labor-related for the specialists who provide these services.

7

Cyber Risk and Security Services:

8

The Cyber Risk and Security Services team collaborates with the' IT organization to

9 secure all AEP data and applications. In partnership with AEP's business partner

10 staff, this team maintains the security and confidentiality of AEP's business and

11

customer data, responds swiftly to cyber security events, develops efficient and

12 sustainable cyber security standards and architecture, tests the"effectiveness of cyber

13 security protections, tests the organization's response in the event of a cyber-attack,

14 and promotes the security awareness and compliance culture within AEP. Costs for

15 security include labor and labor-related expenses for the security architects, analysts

16 and technicians designing and monitoring the security programs that protect AEP.

17 Also included are hardware and software licenses, leases and maintenance costs for

18 the assets that are used. Some of these costs may be capital. ,t

19 Q. WHY HAS AEP CHOSEN TO TAKE A CENTRALIZED APPROACH TO THE

20 PROVISION OF IT SERVICES?

21 A. Since most business processes are common across SWEPCO and other AEP

22 Operating Companies, a centralized model creates the opportunity to share systems

23 and associated support costs. The centralized provision of IT systems and services


1862

1

provides economies of scale by allowing affiliate companies to share common

2

investments in technology, and to share skilled support staff whenever possible. For

3 example, a 'single AEP data center serves all AEP affiliates, including SWEPCO.

4 This allows for optimal use of resources, including real estate, hardware and software,

5 and support staff. In addition, consolidated acquisition of hardware and software

6 purchases qualifies AEP for volume discounts on those purchases.

7 Q. WHAT IS THE COMPOSITION OF IT'S WORKFORCE?

8 A. The central management and leadership of IT is provided by AEPSC employees, but

9 the information technology-related work to support the Operating Companies is

10 carried out by a combination of service company and dperating Company personnel,

11 as well as third-party contractors.

12 As of June 30, 2016, the IT work force was composed or a total of 687 service

13 company employees, 189 Operating Company employees and 221 staff augmentation

14 contractors. Twenty-three (23) of the Operating Company employees are SWEPCO

,15 , - employees.

16 Q. HOW DO YOU DISTINGUISH BETWEEN SERVICE COMPANY (AEPSC) AND

17 OPÉRATING COMPANY EMPLOYEES?

18 A. IT employees who perform work for the benefit of more than one AtP Operatifig

19 Company are employed by AEPSC. Employees whose work is dedicated to a single

20 Operating Company are employedby that Operating Company.

2i Q. ARE THE SERVICES PROVIDED BY IT TO SWEPCO NECESSARY FOR

22 SWEPCO TO PRQVIDE RELIABLE UTILITY SERVICE?


1863

A. Yes. IT provides essential support for the systems that allow SWEPCO to bill its

2 customers, coordinate outage response and repair, perform system operation, manage

3 'system construction and maintenance, maintain cyber security, and accolint for its

4 costs, which enable virtually all SWEPCO employees to perform their worCand serve

5 customers as effectively and efficiently as possible. Each service provided to

6 SWEPCO is essential to the mission of providing safe and teliable utility service in a

7 cost-effective manner.

8 Q. ARE IT SERVICES DUPLICATED BY PERSONNEL OUTSIDE IT, WITHIN

9 SWEPCO OR ANY OTHER ENTITY?

10 A. No. There is no duplication of the work performed by IT in SWEPCO or any other

11 AEP business unit or other entity.

12

13 IV. REASONABLENESS OF SWEPCO'S IT COSTS

14 Q. WHAT ARE THE TEST YEAR AFFILIATE IT OPERATIONS AND

15 MAINTENANCE (O&M) COSTS BILLED TO SWEPCO BY AEPSC IT?

16 A. The total test year affiliate O&M information technology costs for AEPSC services

17 for SWEPCO are $12,007,942. These charges do not include costs related to

18 Operating Company employees.

19 Q. WHAT TYPES OF PROOF OF REASONABLENESS OF, THESE COSTS DO

20 YOU PRESENT IN THIS TESTIMONY?

21 A. I have applied a number of methods for demonstrating the reasonableness of affiliate

22 costs, including cost trends and budget performance, process improvements,


1864

1 budgeting controls, full-time equivalent (FTE) trends, cost-effective additions of

2 services and benchmarking studies. Each of these is discussed below.

3 A. Cost Trends and Budget Performance

4 Q. HOW HAVE IT CHARGES- BEEN TRENDING OVER THE LAST FEW YEARS

5 FOR SWEPCO?

6 A. The table below sets forth SWEPCO's charges for calendar years 2013, 2014 and

7 2015, as well as the test year.

2013 2014 2015 TEST YEAR

$11,551,781 $11,467, 497 $11,492,379 $12,007,942

8 Q. WHAT ARE SOME OF THE PRIMARY REASONS FOR THESE TRENDS?

9 A. As can be seen by the above table, the cost of providing IT services to SWEPCO has

10 remained relatively static over the three-year period, with a slight increase in the test

11 year. The small variability shown is due to the fluctuation in demand for IT services

12 on a year-to-year basis for application support. As business requirements change,

13 application support efforts vary and, in turn, the costs incurred by each business unit

14 and operating company will fluctuate. The slight ,increment in the test year over

15 normal variability can be attributed to costs for the new data center. In the previous

16 rate case (PUC Docket No. 40443) the total cost of IT services provided to SWEPCO

17 was $14,170,220. This significant reduction is a reflection of cost-cutting measures

18 that were implemented including staff reductions and operational reorganizations.

19 Q. HOW HAS IT PERFORMED OVERALL IN TERMS OF BUDGETED TO

20 ACTUAL EXPENSES?


1865

Information Technblogy Budget Trend Chart

O&M, Direct Dollars in MiHions

200

180

160

140

120

100

80

60

40

20

0

Budget

r: Actual

2013

2014

2015

2016 (Actuals YTD June)

1 A. As you can see by tile chart below, actual IT departmental expenses have remained

2 relatively flat each year, with the exception of 2015 and have remained within budget

3 target ranges. This chart records direct IT budget and actuals under" the control of the

4 Chief Information Officer, plus cyber security.

WHAT DO YOU CONCLUDE FROM THESE COST TRENDS?

The IT organization is continuously looking for more efficient and effective ways to

8 provide services, while meeting budget targets and providing additional capabilities.

9 The actual total AEP IT spend for 2013 through 2014 was flat, which corresponds to

10 the flat cost's incurred on behalf of SWEPCO. In 2015, both budget and actuals

11 reflected an increase due to the development of a new primary data center. However,

12 the actuals are less than budget due to corporate funding requirements for other


5

6 Q.

7 A.

1866

1 enterprise needs. The new data center praides major benefits in reliability of,

2 operations for all AEP- application's, including those used by SWEPCO. Thus far in

3 2016, the actuals run rate indicates the budget target will be met.

4 B. Budgeting Controls

5 Q. WHAT TYPE OF BUDGETING PROCESS IS EMPLOYED WITH REGARD TO

6 INFORMATION TECHNOLOGY O&M AND CAPITAL COSTS?

7 A. Budgets are developed annually for each AEP organization. The current year budget

8 is compared to actual spend on a monthly basis and year:end projections are revised

9 as appropriate. The budget is created by considering corporate and Operating

10 Company financial and business requirements, operational and cost benchmarks and

11 market conditions relevant to AEP's overall electric utility business.

12 Q. ONCE BUDGETS ARE IN PLACE, WHAT FURTHER COST MONITORING

13 OCCURS?

14 A. Within IT, managers at every level are responsible for monitoring and controlling

15 budgets that are assigned to their respective teams or projects. Proposals for new

16 projects are reviewed weekly by the Chief Information Officer (CIO) direct reports to

17 ensure that the work is necessary and can be reasonably funded. IT- senior

18 management reviews all capital proposals to ensure that:

19 • projects are aligned with corporate initiatives and are properly budgeted and

20 funded;

21 • existing technology is utilized wherever possible as opposed to building or buying

22 new technology;

23 • business cases have clear justifications for new technology or enhancements;


1867

1

• duplicate systems are not built; and

2

• 'the IT management team works with the CIO as necessary to address any

3

exceptithal requests (e.g., temporary staffing, training opportunities, etc.).

4 C. Process Improvements

5 Q. WHAT ARE THE MAJOR IT PROCESS IMPROVEMENT EFFORTS TO

6 ENSURE THAT ITS SERVICES SUPPORT SWEPCO'S UTILITY SERVICE IN A

7 COST-EFFECTIVE MANNER?

8 A. The most significant recent effort to implement process improvements began in late

9 2012. In addition to the initial s'avings identified during the implementation phases

10

completed in early 2014, these practices have instituted a culture of 'continuous

11

improvement. The significant sustained reduction in IT O&M spending was the

12

result of a comprehensive effort to streamline processes across all IT functions and

13

reduce,spending on hardware, software, and services. A few examples include:

14 • reduction in the total number of applications by 155, which resulted in a

15 corresponding reduction of $700,000 in application support costs along with

16 corresponding reductions in hardware and software maintenance expenses of

17 $2.3 million;

18 and

19 • implementation of virtualization technology at the server, storage, and end-user

20 device levels to enable fulrutilization of hardware resources.

21 Q. HOW DOES IT ENSURE THAT EFFECTIVE SERVICES ARE DELIVERED TO

22 SWEPCO?

23 A. IT monitors the efficiency, effectiveness and quality of services delivered through

24 surveys (Service Desk call satisfaction surveys, business"partner satisfaction survey,

25 and our internal business unit IT governance business partners) and service level

26 tracking, including measures such as application and network availability, resolution


1868

1 of calls into the IT Service Desk and successful completion of projects and

2 infrastructure 'programs. On a daily, monthly and quarterly basis, comprehensive

3 scorecards are published to monitor important performance measures, and to confirm

4 corrective actions are taken where necessary. Our emphasis on performance

5 measurement has supported our continuous improvement mindset throughout the

6 organization.

7 In addition, IT engages with SWEPCO through the Telecom OPerations

8 Directors (located on site in the regioh) who ensure consistent telecommunications

9 services for SWEPCO. These services include installation, maintenance and repair of

10 equipment in support Of transmission and distribution grid monitoring and control.

11 The new operational model resulting from ongoing IT process improvements defines

12 the Service Desk as the IT entry point for issues and work requests. Our process

13 improvements have allowed the Service Desk to keep performance metrics at an

14 acceptable level notwithstanding the additional ticket volumes and fewer resources.

15 For example, 'first call resolution at the Service Desk is 85%.

16 The graph below .highlights IT's customer satisfaction performance on the

17 Service Desk. On average, 75% of customers who contact the Service Desk are

18 surveyed 'each month, including AEPSC and SWEPCO Operating Company

19 employees. The team's average performance is 5.7 on a 6 point scale over the years

20 indicated.

DIRECT TESTIMONY PUC DOCKET NO. 46449' 18 ALBERTO G. RUOCCO

1869

Service Desk Custorner Satisfaction

,

IT's organization &

governance processes

IT's role in AEP's business

2.57 •'

4 -

2.68 2.82 .... —

A

1

2 The graph below highlights IT's performance based on responses from key

3 business partners (majority of who are Director-level and above) on IT's role,

4 governance and processes, capabilities and resources, and culture and mindset.

5

Overall, our 2016 results improved in each category as compared to 2014. From

6

these results (which also include questions focused on the performance and

7

importance of specific IT functions plus qualitative feedback), we hold discussions

8

with our business partners and identify improvement action plans.

IT Service Satisfaction Survey: Overall Results Scale: 1=Very Poor, 2=Poor, 3=Good, 4=Very Good

2 - — 2.86

.68

177

oei/A

IT's capabilities &

resources

IT's culture & mindset

9 2014 2016


1870

1 The I following- are additional measures that demonstrate the efficiency,

2 effectiveness and quality of our services:

3 • Application availability remains consistentlY above 99% for most of the key

4 applications, including those that support our customers in Texas.

5 • Overall network "reachability"/availability is consistently above 99%.

6

• Application development projects are at or befow budget 84% of thè time.

7

Overall project satisfaction is at 96%.

8 • Telecommunications program delivery, which includes efforts such as server

9 lifecycle replacements and radio system build-outs, is at a 98% success rate.

10 Q. WHAT TYPE OF CORPORATE OVERSIGHT OF IT'S ACTIVÍTIES IS IN

11 PLACE TO ENSURE THAT ITS SERVICES SUPPORT SWEPCO'S UTILITY

12 SERVICE IN A COST-EFFECTIVE MANNER?

13 A. The corporate oversight process begins approximately six months prior to each

14 calendar (fiscal) year. The Chief Financial Officer leads a prOcess to establish O&M

15 and capital budget guidelines for the following year. The IT leadership team works

16 within these guidelines to prioritize and plan detailed expenditures.

17 The O&M budget is managed through a collaboration of IT and Corporate

• 18 Planning & Budgeting (CP&B). Actual expenditures are monitored against the

19 budget every month.

20 The capital budget is managed through a collaboration of opefating

21 companies, business units, IT and CP&B. The AEP SubCompany Board grants final

22 approval for major (over $2 million) capital investments each month. Investments

23 below this threshold are evaluated and prioritized by IT governance boards in each

24 business unit and ultimately approved by the,leadership of the Operating Companies,


1871

46.

Annual avg 2013 Annual avg 2014 Annual avg 2015 Annual avg 2016

(through June)

Ei IT Enioloyees El IT Contractors

1200 -

1000 -

800

600

400 -

200 -

0

1 business unit and IT. The planning process is used to prioritize capital investMents

2 for the following year. While some changes do occur during the year, for the rhöst

3 part, the highest priority capital projects are implemented.

4 D. FTE Trends

5 Q. WHAT ARE THE STAFFING TRENDS FOR INFORMATION TECHNOLOGY?

6 A. The table below depicts overall ahnual average staff levels (including AEP employees

7 and staff augmentation contractors). The table shows minimal eMployee increases,

8 the majority of which is driven by telecommunication support of transmission and

9 distribution capital growth. In addition, contractor levels fluctuate in response to the

10 number of capital projects in progress.

Q. CAN YOU EXPLAIN THE USE OF CONTRACTORS WITHIN IT?

A. IT leverages staff augmentation contractors for development projects, as well as

Telecommunications design, planning and project coordination, in order for our

workforce to increase and/or decrease to suppoit the fluctuating (primarily capital)


11

12

13

14

15

1872

1

demands. Additionally, contractors are utilized for specialized niche skills that also

2

fluctuate with project demands. Examples of niche skills include: Documentum,

3

WebMethods, ServiceNow, Business Objects, Informatica, Install/1 (used by

4

MACSS), Remote Terminal Unit (RTU) configuration and deployment, PeopleSoft,

5

PowerPlant and LoadRunner. Augmenting staff on an "as needee basis helps to

6

maintain an agile organization at a reasonable cost by rotating specialized contractors

7

out of the organization when their project assignments are complete.

8

Through IT's Preferred Vendor Program, all contractor positions are

9 competitively bid through vendors that agree to participate in our, rebate program (that

10 is based on spending thresholds), overtime savings and AEP's requirement for "the

11 first week-free."

12 E. Outsourcing

13 Q. HOW DOES OUTSOURCING PROVIDE A MEANS TO CONTROL IT COSTS?

14 A. IT uses several forms of outsourcing to control and reduce costs while maintaining or

15 improving operational efficiency and effectiveness.

16 For narrowly defined, repeatable processes, IT utilizes outsourcing in the

17 following ways:

18 • IT usually relies on original equipment manufacturers (OEMs) or third-party

19 value-added resellers for maintenance of hardware assets. An example of

20 outsourced hardware maintenance is our use of Pomeroy LLC. IT purchases PC

21 assets through Pomeroy and' the maintenance of the PCs is included in the cost.

22 Pomeroy is responsible for the OEM warranty work. Pomeroy Uses a neiwork of

23 authorized warranty' service technicians who travel to AEP's various locations to

24 perform repair services.

25 • In some cases, application support and maintenance can be provided by a third

26 party at a lower cost than the software licensor. An example of outsourced

27 application maintenance is our use of Rimini Street for PeopleSoft (financials and


1873

1 human resource applications) support. Rimini Street provides support at

2 approximately 50% of the cost for the same services from the licensor of the

3 software.

4 • In some cases, AEP will subscribe for the use of an application "off premises" rather than licensing the software to run the application "on premises." This

6 business model is commonly referred to as Software as a Service (SaaS).

7 Frequently, a SaaS solution is less expensive because the application service

8 provider provides the software application as well as the hardware, personnel and

9 support. An example of a SaaS solution is our subscription to Kenexa for

10 Enterprise Talent Management (recruiting).

11 • Operating system support is available exclusively from the operating system

12 licensor. For example, AEP contracts with MicrOsoft for Windows operating

13 system support and with IBM for AIX (Unix) operating system support

14 • Application support (for a select set of applications) for incidents that have well-

15 documented solutions and require minimal technical expertise and business

16 knowledge has been outsourced to Capgemini. This third-party service provider

17 leverages a combination of on-shore and off-shore resources to control cc4ts, and

18 the service is provided at a low fixed cost.

19 • Utilizing the corporate work release process, our Telecommunications team

20 solicits competitive bids for maintenance 'activities including: tower inspeCtions

21 and site maintenance, anchor replacement, antenna alignment, and fiber

22 replacement and splicing. Third-party construction activities include:

23 underground fiber placement, tower builds, and tower buildings. All external

24 work over $50,000 is piit out for bid. In some instances, the bid process is waived

25 (with management approval) to address urgent repairs for system outages.

26 For more complex support and, occasionally, projects to develop new

27 capabilities, IT utilizes outsourcing in the following ways:

28 • Application support (for a šelect set of applications) that require deeper technical

29 expertise and business knowledge is partially outsourced to Capgemini. This

30 third-party service provider leverages a combination of on-shore and off-shore

31 resources to control costs, and provides the service to AEP at pre-negotiated, low

32 hourly rates.

33 • In some cases, AEP will contract third-party service providers with a specialized

34 expertise to assist with the development and implementation of new applications

35 or functiOnality. Since these projects have defined start and end dates, it is more

36 cost-effective in the long run for AEP to contract for specialized resoiirces than to

37 hire full-time employees. Hub City Media (Oracle Identity and Access

38 Managernent upgrade), and Red Clay Consulting (Oracle Meter Data

DIRECT TESTIMONY PUC DOCKET NO. 46449 23 ALBERTO G. RIJOCCO

1874

1

Management System upgrade) are examples of firms AEP is using for limited,

2

specialiied services.

3 Q. HOW DOES IT ENSURE THAT ITS USE OF OUTSOURCING IS

4 COST-EFFECTIVE?

5 A. AEI" IT uses competitive bidding, preferred vendor pricing, fixed-cost contracts and

6 volume discounts for all types of oUtsourced services. Contract negotiation processes

7 that include market benchmarks and "best and finar requests ensure that all products

8 and services are procuied at competitive rates. Periodic contract reviews, driven by

9 the annual budget cycle and contract renewal dates, trigger lease and license renewal

10 negotiations ensure that marketplace opportunities to improve service or reduce costs

11 are captured in a timely"manner.

12 Q. WHAT DO YOU CONCLUDE FROM THE ABOVE INFORMATION

13 , REGARDING THE USE OF OUTSOURCING?

14 A. IT utilizes outsourcing in a targeted manner to optimize overall cost and performance

15 using a mix of external capabilities and firms (to encourage competition). tach

16 outsourcing opportunity is carefully evaluated to ensure it provides AEP with a lower

17 cost and equal or higher level of service than an equivalent internal solution or team.

18 • F. Cost-Effectiveness

19 Q. HOW HAS THE INCREASED DEMAND FOR, IT SERVICES AFFECTED IT

20 COSTS?

21 A. Despite increased demand for IT services, we have successfully added new

22 capabilities while controlling our costs (see budget versus actuals chart earlier in my

23 testimony). For example:

DIRECT TESTIMONY PUC DOCKET NO. 46449 24 • ALBERTO' G. RUOCCO

1875

1 • IT continues to add mobile data computing capabilities to field trucks to allow

2 orders and communication to be delivered without technicians needing to return

3 to the office, thus improving customer service. Three-hundred-forty-eight (348)

4 mobile data computers are assigned in the SWEPCO service area.

5 • We have also installed GPS in all field trucks to efficiently dispatch the field

6 workforce. These tools have significantly improved ikEP's outage response. In

7 addition, GPS ensures we are able to locate our field employees for any safety-

8 related issue.

9 • AEP continuously evaluates cyber security defenses to ensure protection of the

10 electric grid, business operations and, in particular, our customers personal

11- information. While it is impossible to ensure complete cyber security protection,

12 AEP balances investment with compliance requirements and risk mitigation.

13 • IT continues to evaluate evolving infrastructure requirements as the organization

14 grows and equipment moves through typical lifecycles. Infrastructure includes

15 network devices (e.g., routers, switches, firewalls), servers (e.g., mainframe,

16 Unix, Windows) and data, storage (e.g., attached, Storage-Area Networks) that

17 provide SWEPCO the computer systems and network connectivity to operate.

18 We have also implemented the' necessary tools and processes to comply with

19 Sarbanes-Oxley requirements for our financial data.

20 • The Telecommunications team continues to work closely with Transmission and

21 Distribution to evolve a 10-year capital improvement plan to increase AEP's

22 internal network capabilities and to reduce dependency on external services

23 (i.e., leased lines). The expanded fiber footprint will provide greater bandwidth

24 .and more secute and reliable technology to substations across the system,

25 reducing usage of current lower bandwidth devices. This internal network growth

26 further provides much needed redundancy for reliability and sustainability.

27 G. Benchmarking

28 Q. ARE THERE ANY OTHER FACTORS THAT DEMONSTRATE THAT THE

29 COSTS OF IT. SERVICES TO SWEPCO IN THE TEST YEAR ARE

30 REASONABLE?

31 A. Yes. AtP uses benchmarks to compare the costs of our information technology

32 services to its peers in the industry. IT participates in a utility consortium (UNITE) to

33 benchmark its costs against costs of other utilities. The UNITE consortium contracts


1876

1 the Gartner Group, the leading global analyst firm in the IT industry, to provide the

2

benchmarking framework and analysis of the cost components of an information

3

technology function.

4

There are two data sets that show a comprehensive picture of AEP's IT costs.

5

The first shows the latest set of data in cbmparison tô the other members of the

6 UNITE consortium, and the second shows the trend for AEP in each cost component.

7 Q. PLEASE DESCRIBE THE METHODOLOGY USED TO DEVELOP THE

8 BENCHMARK AND COST TREND DATA.

9 A. Every other year, the companies in the UNITE consortium conipare costs of

10 'providing IT services for the previous fiscal year (whfch, in AEP's case, coincides

11 with the calendar year). (Note: After the 2011 benchrnark year, UNITE determined

12 that a bi-annual benchmark is sufficient given the pace of change in each area of IT

13 cost components.) Total IT 'costs are parsed into their several "cost components (or

14 technical "towers"), covering hardware lease and maintenance costs, infrastructure

15 software acquisition and maintenance costs and the staff required to suppO"rt the

16 technology. Some labor costs associated with planning, security, process

17 management and other information technology departmental costs are allocated

18 across towers.

19 UNITE is very focused on using a consistent framework (froni one benchmark

20 year to the next) so cost analyses can be compared and trends can be discerned.

21 The UNITE consortium also compares costs in two other towers where costs

22 are incurred mostly for labor: the "back office" and application development and

23 support. Back ,office covers costs associated with sirategic planning, financial


1877

a- 1-1 n F-11- •

\,co ± • ± ..cA co + 4t\Y° c, 604V \43*&.(\e' ''s • • \e'c'

coe,e et?

«/\ç,

x

250.00% 200.00% 150.00% 100.00%

50.00% 0.00%

CIAEP as a % of UNITE..

1 planning and management, project and process management ind other administrative

2 activities in IT. The applications tower looks at the costs of developing and

3 deploying new business application systems, and maintaining existing business

4 application systems. These two towers include only staff-level comparison§ and no

' 5 'cost comparisons because there is no standard measure available for these services

6 and companies investments in applications is cyclical.

7 Q. HOW DO THE BENCHMARK MEASURES COMPARE TO OTHER

8 COMPANIES?

9 A. AEP's benchmark metrics may be compared to the UNITE median reflected in the

10 chart below. AEP is above the_median in five towers, but at or belOw for all the rest.

11 AEP's large geographic coverage (200,000 square miles) and our numerous operating

12 companies greatly increase the comPlexity of our organization in comparison to most

13 other members of the consortium.

14 AEP falls near or below the median in most areas even though AEP is one of the most

15 complex and geographically-dispersed members of the consortium. These features


1878

1

are major cost drivers in the network and voice areas, operations complexity,

2

application complexity and data retention requirements.

3

The large cost for facilities relative to the .median is due to AEP building a

4

new data center in the study year. AEP determined that a neW data center was

5

necessary to provide an appropriate environment for the systems and information

6

ne`cessary to perform the core operations and strategic functions that provide electric

7

service to , our customers. The data center was designed to meet the industry

8

designation of "Tier 111 — defined as: Concurrently maintainable, requiring no

9 shutdowns for equipment replacement and maintenance. A redundant delivery path

10 for power and cooling is added to the redundant critical components of a Tier II data

11 center so that each and every component needed to support the IT processing

, 12 environment can be shut down and maintained without impact on the IT operation.

13 The new data center greatly minimizes risks associated with security, power,

14 connectivity and equipment,that support the IT assets and information used by AEP

15 and SWEPCO. In the future, the cost of this new facility is expected to compare

16 favorably with our peers.

17 Q. CAN' YOU NOW PLEASE DISCUSS PERTINENT TRENDS IN THE

18 BENCHMARK DATA FROM 2008 THROUGH 2015?

19 A. The following comments are based on data up to 2015 (the latest year for which we

20 have'data). As noted above, in 2011, the UNITE consortium de'cided from that point

21 forward to only benchmark odd-number years. The graphs below are followed by a

22 brief discussion of the trends. There is no trend analysis, however, for security or

23 facilities bedause those are new towers for UNITE.


1879

$24_00

$22.00

$20.00

$18.00

$16.00

$14.00

$12_00

$23.76

$13100

• $10.00 2008 2009 2010 2011 2013 2015,

$15.51 $15-57 $15.87

IT Service Desk Cost per Contact

1

2

3

4

5

6

7

8

9

10

Service Desk costs are measured by 'cost' per contact. Our overall costs

remained relatively flat from 2008 to 2010, increased significantly in 2011 and then

decreased dramatically in 2011 The increase in 2011 was a cost impact resulting

from a reorganization of the Service Desk and the subsequent decrease in 2013

indicates the benefits of the reorganization and additional process imprOvements. The

increase in 2015 is attributable' to a reduction in the number of calls to the service

desk, not fully offset by a reduction in the number of service desk employees. A

relatively greater number of employdes were retained in order to proyide an increased

level of service for our users, as evidenced by a significant increase in first contact


1880

End-User Computing Cost per Personal Computing Device

$1,229

$1 RO

$993

$915 r---a •

2009 2010 2011 2013 2015

$1,500

$1,400

$1,300

$1,200

$1,100

$1,000

$900

$1,412

2008

1

resolution in 2015. We expect fluctuations in number of calls to the Service Desk as

2

new technologies are rolled out to users. We incur costs to maintain a reasonable

3

level of service while managing increased call volume.

4

5 The reduction in cost from 2008 through 2011 is mainly due to the extension

6 and suspension of life cycle replacement of the end-user devices (primarily desktop

7 and laptop computers). In 2013 and into 2014, the majority of the end-user devices

8 around the entire AEP system were replaced (primarily to address Microsoft's

9 decision to end support for the XP operating system). The costs include the one-time

10 end-user device replacement costs. The cost in 2015 reflects all workstations in being

11 under lease and increased security costs for this platform.

DIRECT.TESTIMONY PUC DOCKET NO. 46449 30 ALBERTO G. RUOCCO

1881

Voice Network Cost per Minute

.1 1 • $0.030

0 25 $0.025

$0.020 $0.020

$0.015 - $0.012

r7-71 $0.010 2008 2009 2010 2011 2013 2015

UNIX Cost per OS Instance

$42,500 $40,000

9,2 9 $ 8 00 $37,500 $33 908 $35,000 $32,500 $30,000 3 $27,500 $25,000 $22,500 $20,000 $17,402 $17,500

- $15,000 $12,500 - 11,128 $10,000

2008 2009 2010 2011 2013 2015

The Voice Network includes the cost of long-distance service and has

remained relatively constant over the benchmark period. The reductions in 2013 and

then 2015 reflect the benefits realized from new contracts with the long-distance

service providers as well as a large increase in the total number of minutes served.

AEP uses Unix servers for hosiing major corporate applications. The number

of operating system (OS) instances is the best measure for this benchmark as it

accounts for the use of virtualization (virtual Unix servers) as a way to reduce costs


1882

Windows Server Cost per OS Instance

,

I

$5.734

--,.. -/

$3,784

- $3,050

, ni $2712

$2,145 rri

$7,000

$8,000

$5,000

$4,000

$3,000

$2:000 2008

2009

2010

2011

2013

2015

1 and increase utilization of the physical hardware. The increase from 2008 to 2009

2 reflects an increase in software costs, including additional security software to protect

3

corporate data. The reduction from 2009 to 2011 reflects reductions in both software

4

and hardware, due to the end of the hardware leases and careful consideration of

5 requirements. The subsequent significant reduction in 2013 is a result of increased

6 use of virtUalization on Unix servers and the introduction of Linux servers (a

7 lower-cost operating environment) for some applications. The continued reduction in

8 cost in 2015 reflects further virtualization and significant increased investment in the

9 Linux environment, moving costs from the UNIX tower to Linux.

' 10

11

Similar to the Unix tower, Intel servers running the Windows operating

12

system are benchmarked using OS instances. The reduction in cost per OS instance

13

through 2013 refleCts increased virtualization and a significant increase in the number

14

of OS instances. The increase in 2015 is a result of a refresh of this environment,

15 both in hardware and software. We have had an increase in the number of physical

16 servers and OS instances, along with a very significant increase in the cost of


1883

Mainframe Cost per MIPS

$5,647

____

____

•

$2 124 .- $1,458 $1,262

$685 Mon!Mil

$602 flJ_

2008 2009 2010 2011 2013 2015

$6,500

$5,500

$4,500

$3,500

$2,500

$1,500

$500

1 hardware and software. The refresh of this environment has resulted in a much more

2 robust ability to respond to changing business requirements. Even with theIncrease

3 in the costs, our cost perOS instance is at the UNITE median.

AEP has a large investment in a mainframe platform since our marketing,

accounting and customer service applications are run in tlVis. environment. The very

large reduction in cost per Million Instructions Per Second (MIPS) is due to the

8 introduction of "specialty engines." These are add-on processors that provide

9

considerable processing power at very low incremental cost. In 2015, we obtained a

10

new mainframe processor and increased the number of MIPS while reducing the

11

headcount supporting this platform.

- 4

5

6

7

DIRECT TESTIMONY ' PUC DOCKET NO. 46449 33 ALBERTO G. RUOCCO

1884

LAN/WAN Cost per User

$1,600 1 3 $1,400

$1,200

$1,000

$800 $700 $739 $738 2

$600 $400

$200

$b 2008 2009 2010 2011 2013 2015

1

2

3

4

5

6

7

8

9

10

11

12

In order to achieve economies of scale, AEP uses the same physical network

for multiple communication needs, including the Local and Wide Area Networks.

The changes from year to year represent alterations in the allocation of the

•

telecommunications costs across the various uses of the technology, including

LAN/WAN, phone service, RTUs on the grid, etc. These updated allocations are the

result of studies of utilization of the telecommunications network by the various

functions. Also included is the cost for significant, incremental cyber security tools

used to protect the information network from hostile intrusions. In 2015, we saw a

significant cost increase for this environment including hardware, software, security

and personnel in order to ensure the stability and safety of this function. In addition,'

the number of users decreased.


1885

Storage Cost per Allocated "It

........, . _J

---, $6,320

____ —

____

. ,

$4,671

.. .. ,

$3,502 $2,925

ri $2,83

rn

$10,150 $9,150 $8,150 $7,150 $8,150 $5,150 $4,150 $3,150 $2,150

2008

2009 2010

2011

2013 2015

2008 2009 2010 2011 2013 2015

PBX Cost per Extension

$495

$435

$375

$315

$255

$195

$135

$75

$c2R

- $304

$122

1.111.41111.W

$239 $231

8

The cost of storage has consistently decreased despite an ever-increasing

demand for data storage across all areas of the business. AEP uses tiered storage

where data that is accessed less frequently is stored on cheaper, slower devices — to

help control the cost of increasing demand. From 2013 to 2015 our total cost of

storage increased, while the amount of storage almost doubled, resulting in still lower

cost per allocated terabyte.

DIRECT TESTIMONY PUC DOCKET NO. 46449 35

ALBERTO G. RUOCCO

1

2

3

4

5

6

7

1886

VoIP Cost per Extension

372

,---- $355 .---

i

,

$315 $295

i .__.# $232 — $212

2008

2009

2010

2011

2013

2015

$380 $360 $340 $320 $300 $280 $260 $240 $220 $200

These two towers cover voice premise technology and include costs for voice

3 traffic measured in "cost per extefision." In general, there is a favorable downward

4 trend for the cost of office telephone service. This improvement is the result of

5 AEP's major investment in Internet Protocol (IP) telephony. The increase in private

6 branch exchange (PBX) costs and reduction in IP costs in 2011 was a result of the

conversion of several major office locations to IP technology, shifting the number of

8 extensions without a corresponding major shift in costs. By the end of 2013, almost

9 all locations at AEP had been converted to IP. The remaining PBX locations were in

10 locations that were planned to be retired. By 2015, almost all extensiOns are serviced

11 by Voice over Internet Protocol (VoIP) and the only costs associated with our few

12 PBX focations are for transport. We have ample spare parts for those few locations

13 that we do not anticipate incurring hardware costs for this technology.


1887

Internet Access Cost per GB of Data

$9.00

$7.00 77

$7.76

$5.13 $5.00 -

$3.73

$3.00 2008 2009 2010 2011

$5.71

r-

$3.37 r-1

2013 2015

1

2

3

4

5

6

7

8

9

10

11

The cost for internet access is measured against tile amount of data being

accessed (traffic). The changes in costs for accessing the internet are attributable to

the security needed to protect the network from unauthorized intrusions. These costs

continue to rise as the types and risks associated with malicious attacks and

unauthorized intrusions increase. From 2009 to 2010, our cost for internet access

decreased while the amount of traffic increased, resulting in the large drop in cost per

Gigabyte (GB) of traffic. In 2013, we saw a significant decrease in the 'amount of

traffic so even though the total cost of this tower actually went down, the cost per GB

of traffic increased. In 2015 the amount of traffic doubled while the costs decreased

somewhat, resulting in' a very favorable cost per GB reduction.


1888

LINUX Cost per OS Instance

$9 4,5g $10,000 $9,000 $8,000 57,045

$6,580 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000

$0 2011 2013 2015

1

2 The Linux tower is a relatively new server technology in the AEP IT

3 environment. It is used as an alternative to UNIX with a lower cost for the hardware,

4 as can be"seen in the lower cost per OS instance compared to UNIX. The increase in

5

2015 is due to having added database management and other software to the servers

6 in this tower in order to suPport the applications that'are how being served by this

7 equipment.

8 As this benchmarking data shows, AEP has reduced the costs of many of the

9 foundational information and communication technologies year after year. We

10 review these costs on a constant basis to look for more ways to reduce costs as

11 business requirements change, technologies evolve, and costs decrease.

12 Q. ARE THERE ANY OTHER STUDIES THAT COMPARE AEP'S IT

13 PERFORMANCE WITH THAT OF OTHER COMPANIES?

14 A. For the fourth year in a row, AEP was the top-ranked utility company in overall ease

15 of use -of utility websites, according to the J.D. Power 2016 Utility Website

16 Evaluation Study. The largest U.S. electric and/or gas utility companies are included


1889

1

in ihe study (65 in 2016). The web sites are evaluated based on customer reports of

their satisfaction after completing a standard set of tasks on their local utility's sites.

3

The results of the study showed AEP's utility company websites (including the site

4

for SWEPCO:https://www.swepco.com/) to be the most successfurin the nation for

5

customer satisfaction. These customer service functions were built by a partnership

6

of business unit groups and the IT team that serves Customer Services.

7

8 V. IT CAPITAL ADDITIONS

9 Q. WHAT IS THE PURPOSE OF THIS SECTION OF YOUR TESTIMONY?

10 A. In this section of my testimony, I describe the information technology-related capital

11 additions to rate base that reflect affiliate charges from AEPSC to SWEPCO.

12 Q. WHAT IS THE TOTAL AMOUNT OF IT-RELATED CAPITAL ADDITIONS

13 INCLUDED, IN SWEPCO'S` RATE BASE SINCE ITS LAST BASE RATE.CASE

14 IN DOCKET NO. 40443 THAT CONSIST OF IT CHARGES?

15 A. The total for SWEPCO is $40,462,157 'in software blanket charges plus $4,978,489

16 for the new data center.

17 Q. HOW ARE THE COSTS OF IT CAPITAL PROJECTS CAPTURED AND

18 " TRACKED?

19 A. The affiliate capital costs are captured and billed in much the same way as other

20 affiliate costs, using the AEPSC accounting processes and systems. The means of

21 gathering and billing costs by work order is explained more fully in the testimony of

22 Mr. Frantz. The capitalized software costs that I support can be charged to work

23 orders specific to a certain project, or charged to work orders established to capture


1890

1 ongoing software maintenance and routine application support of the distribution;

2 transmission, generation, and customer service systems. These "routine" work orders

for capitalized projects, are known as blanket work orders. S'WEPCO affiliate IT

4 capital additions include three blanket work orders for capitalized software, one for

`5 generation-related projects, one for distribution-related projects and one for

6 transmission-related projects. These services are either direct billed, or allocated

7 using the same principles as described above for cost allocation of O&M work and in

8 the testimony of Mr. Frantz.

9 Q. HOW WERE THE AFFILIATE CAPITAL ADDITIONAL COSTS RECORDED

10 AND 'TRACKED?

11 A. Capital charges are recorded by IT to work orders by project. These work orders are

12 set up to bill to appropriate benefiting locations using allocation factors that refleCt

13 cost causation principles. When these costs are billed to the affiliate companies by

14 AEPSC, most of the IT work orders are summarized and charged to the blanket work

15 orders for capital software. These work orders are separated by transmission,

16 distribution, and generation projects.

17 Q. WHY IS A BLANKET WORK ORDER USED TO BILL THESE CAPITAL

18 ' ADDITIONS?

19 A. Blanket worleorders are commonly used for capital projects that are smaller in scope

20 and cost, usually high-volume and have the same depreciable life and plant

21 accounting category, (with a <$500,000 loaded-cost threshold). This allows the

22 Company to more efficiently account for these ongoing capital items, such as

23 maintenance 'and development of software applications. It would not be practical to


1891

.1 attempt to separately frack and depreciate each instance of a programmer modifying a

2 program. Blanket work orders are a standard property accounting and industry

3 solution to efficiently account for smaller capital investments.

4 Q. SINCE itIE LAST RATE CASE WHAT WERE THE MAJOR IT-RELATED

5 PROJECTS REFLECTED IN SWEPCO'S CAPITAL ADDITIONS?

6 A. The majority of the following capital projects, each with project costs in excess of

7 $1,000,000, relate to computer system installations and upgrades. The key systems

8 that are used in the financial managementstribution, transmission, and generation

9 areas of SWEPCO, along with a description of the benefits of these investments

10 include:

11 • Tier III Data Center: A project to replace the corporate data center that was over

12 30 years old, has had physical and mechanical malfunctions, and cannot be

13 retrofitted to current data center design best practices. This is a shared data center

14 located near Columbus, Ohio for hosting all of the enterprise and business

15 applications.

- 16 • Southwest Power Pool: A project to revamp the Southwest Power Pool (SPP)

17 market introducing day-ahead market with transmission congestion rights,

18 reliability unit commitment processes, and incorporating price-based operating

19 reserves procurement. The modifications associated with this project will benefit

20 the operating companies that participate in the SPP market.

21 • PowerOn: PowerOn assists AEP operators in the restoration of power to

22 customers. PowerOn has .predictive outage capabilities which allow AEP to see

23 all confirmed and predicted outages within their operating company. PowerOn

24 allows AEP operators the ability to prioritize and dispatch work crews during

25 outage restoration activities, and keeps track of total customers affected, estimated

26 restore times, and available utility crews along with their assignments and

27 locations.

28 Infrastructure Software Upgrades (IBM ELA): This contract/agreement is

29 necessary to ensure that we maintain current technologies, provide lowest total

30 cost of ownership for our IT environment, and ensUre the integrity of our systems

31 and data.


1892

1 • Electric Office: A project to replace the GE SmalIWorldTM Geographic

2 Information System with GE SmallworldTM Electric Office. The goals of the

3 project are to rninimize customizations, leverage functional ehhancements, 1.

4 maintain a supported platform, and integrate it with the distribution management

5 and outage management systems.

6 • Alstom- replacement project: Alstom was replaced 'with Open Systems

7 International, Inc. beginning with PJM in October 2013, followed by SPP 8- '(SWEPCO and Public Service Company of Oklahoma) in March 2014.

9 Implementation of this project will reduce the overall Generation dispatch annual

10 cost by approximately $1,000,000 over a five-year period. It also produced the

11 Human Machine Interface enhancement for dispatchers with improved kipport.

12 This project also resulted in the Generation Market Control System.

13 Q. WHAT PROCESSES DOES IT HAVE N PLACE TO ENSURE THAT THE

14 COSTS OF THESE PROJECTS ARE REASONABLE?

15 A. I have already described in Section IV of my testimony the internal planning,

16 budgeting, approval, and quality control that combine to control the costs of IT O&M.

17 These same processes equally apply and are utilized to control IT capital project

18 costs. Each capital project over1500,000 includes an evaluation of the options

19 cdinsiderea — including a high-levei assessment of costs and benefits of each optiOn

20 (e.g., buy a solution vs. build a solution). Project estimates are prepared after an

21 analyis phase that includes collaboration of business partners, system analysts, and

22 application developers. Estimates are reviewed and refined through a series of

23 increasingly narrower thresholds to the final approval. The estimates are reviewed by

24 IT management and approved on a weekly basis. If a third party is engaged, the

25 project is bid to multiple vendors. In addition, each project is approved by bOth IT

26 management and business unit management. The proposal for each project identifies

27 the high-level requirements arid goals for the project. Once a proposal is approved, it

28 becomes an active project with a business unit sponsor. Each project is actively


1893

1

monitored to ensure that the requirements are met and the project is within budget.

2

Moreover, the overall staffing trends and benchmarking comparisons I have discussed

3

previously, support the conclusion that we have a reasonable amount of staff devoted

4

to these and other IT projects.

5

VI. SUMMARY AND CONCLUSION

7 Q. PLEASE SUMMARI2E YOUR TESTIMONY.

8 A. I have discussed the IT services provided to SWEPCft by AEP IT. I have

9 demonstrated that SWEPCO's IT O&M costs are reasonable and necessary by

10

desctibing a combination of process improvements, cost and staffing trends,

.11

budgeting controls and benchmarking comparisons.

12

Finally, I have described the affiliate IT capital additions and reasons that they

13

are reasonable and necessary.

14 In summary, my testimony supports the conclusion that IT capital and expense

15 (O&M) charges satisfy Commission standards for inclusion in SWEPCO's rates.


17 A. Yes, it does.


1894

EXECUTIVE SUMMARY OF A. NAIM HAKIMI

A. Naim Hakimi is Director, Power Cost Recovery for American Electric Power Service

CorpOration (AEPSC). In that position, Mr. Hakimi directs 'activities related to recovery of

expenses associated with wholesale power transactions in the various jurisdictions served by the

American Electric Power Company, Inc. (AEP) Operating Companies.

Mr. Hakimi addresses the operations and costs of the AEPSC Commercial Operations

Group. He explains how the Commercial Operations Group is organized to provide dispatch and

related services to SouthWestern ElectriC Power Company (SWEPCO) and the AEP operating

companies and why the specific services provided to SWEPCO support SWEPCO's provision of

reliable and economic utility services. He also demonstrates that the costs billed to SWEPCO for

Commercial Operations are reasonable and necessary. Mr. Hakimi also describes the capacity

purchase contracts included in base rates and shows that SWEPCO's Capacity purchases and

costs included in the case have been reasonably incurred and are necessary for the provision of

electric service to SWEPCO's, customers.

Mr. Hakimi also addresses certain aspects of SWEPCO's settlement with the Sierra Club

thai resulted in an agreement to (I) limit the capacity factors of Welsh Unit 2, and (2) enter into

wind-generated energy purchases. °

AEPSC's Commercial OpeFations group charged SWEPCO $4,045,403 for its services

during the adjusted test year. Mr. Hakimi establishes the reasonableness of these coas by

demonstrating the benefits SWEPCO and its customers receive from the associated activities, the

actual performance of Commercial Operations compared to its budget during the test year and

the previous three years, and the downward trend in• costs charged to SWEPCO by Commercial

Operations.

1895



APPLICATION OF



DIRECT TESTIMONY OF

A. NAIM HAKIMI ,

FOR


DECEMBER 2016

1896

TESTIMONY INDEX

SUBJECT PAGE

I. INTRODUCTION 1


III. COMMERCIAL OPERATIONS MISSION 4

IV. DESCRIPTION OF COMMERCIAL OPERATIONS DEPARTMENTS. 8

V. NECESSITY AND REASONABLENESS OF COSTS 16

VI. SWEPCO CAPACITY PURCHASES 22

VII. SIERRA CLUB SETTLEMENT 25

A. Welsh 2 Unit Capacity Factor Restrictions 27 B. Wind Contracts 31

EXHIBITS

EXHIBITS DESCRIPTION

_ EXHIBIT ANH-1 Welsh-2 Replacement Energy Cost

EXHIBIT ANH-2 I HIGHLY SENSITIVE Economic Valuation of Long- Term Wind PPAs

DIRECT TESTIMONY PUC DOCKET NO. 46449 i A. NAIM HAKIMI

1897

1 I. INTRODUCTION

2 Q. PLEASE STATE YOUR NAME, POSITION AND BUSINESS ADDRESS.

3 A. My name is A. Naim Hakimi, and I am Director, Power Cost Recovery, for American

4 Electric Power Service Corporation (AEPSC). AEPSC is a subsidiary of American

5 Electric Power Company, Inc. (AEP). My busiriess address is 1201 Elm Street,

6 Suite 800, Dallas, Texas 75270.

7 Q. WOULD YOU PLEASE DESCRIBE YOUR RESPONSIBILITIES'AS DIRECTOR,

8 POWER COST RECOVERY?

9 A. I direct activities related to recovery of expenses associated with wholesale power

10 ' transactions in the various jurisdictions served by the AEP Operating Companies. In

11 this capacity, I prepare expert testimony on behalf of the AEP Operating Companies,

12 respond to inquiries and data requests related to bulk power sale and purchase

13 activities, resolve power settlement issues, design and implement 'solutions to

14 improve the power settlement process, and provide training related to pool settlement

15 and cost recovery.

16 Q. WOULD YOU PLEASE BRIEFLY DESCRIBE YOUR EDUCATIONAL

17 BACKGROUND AND PROFESSIONAL EXPERIENCE?

18 A. I hold two degrees from The University of Texas at Austin. I received a Bachelor of

19 Science degree with Highest Honors in Electrical Engineering in 1976 and a Master

20 of Science degree in Electrical Engineering in 1979. I am a registered professional

21 engineer in the State of Texas (License No. 77766) and a member of the Institute of

22 Electrical and Electronics Engineers Pover Engineering Society and the Texas

23 Society of Professional Engineers. I joined Central and South West Services, Inc.

DIRECT TESTIMONY PUC DOCKET NO:46449 1 A. NAIM HAKIM

1898

1 (CSWS) in 1980 as an applications engineer responsible for Energy Management

2 System software used to monitor and control generation systems. During the years

3 1980 to 1988, I was assigned to several software development and operations support

4 positions. From 1988 to 1992, I served as Manager of Control Center Operations. In

5 1993, I was transferred from CSWS to Southwestern Electric Power Company

6 (SWEPCO or Company) as Manager of System Control Center. In April 1994,

7 I returned to CSWS as Manager of System Operations Support. In April 1996, I was

8 named Manager, Energy Operations, where I was responsible for managing the bulk

9 power sale and purchases activities of the Central and South West Corporation

10 (CSW) Operating' Companies. The CSW Operating Companies included Public

11 Service Company of Oklahoma (PSO), SWEPCO, AEP Texas Central Company

12 (formerly Central 'Power and Light Company) and AEP Texas North Company

13 (formerly West Texas Utilities Coinpany). In June 2000, I was named to the position

14 of Director, Sy4em_Operations-West, AEPSC, after the closing of the AEP and CSW

15 merger. In August 2002, I became Director, Long Term Markets. I was assigned to

-

16 my current position of Director, Power Cost Recovery, in July 2003.

17 Q. HAVE YOU PREVIOUSLY FILED TESTIMONY BEFORE ANY REGULATORY

18 AGENCY?

19 A. Yes. I have filed testimony before commissions in Texas, Oklahoma, Arkansas, and

20 Louisiana. I haife also filed testimony. at the Federal Energy Regulatory Commission

21 (FERC).

DIRECT-TESTIMONY PUC DOCKET NO. 46449 2 A. NAIM FIAKIMI

1899

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