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
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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
PUC Docket No. 46449 EXHIBIT ARC-6
Is It Worth It to Win the Talent War?
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
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Gerhart, B., & Milkoyich, G. T. (1992). Employee compensation: Research and practice. In M. D. Dunnette & L. M.Hough (Eds.), Handbook of industrial and organizational psycholociv (2nd Edition, Vol. 3, pp. 481-569). Palo Alto;CA: Consulting Psychologists Press, Inc.
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Journal of Human Resource Costing and Accounting, 1, 9-17. Hollenbeck, J. R., & Williams, C. R. (1986). Turnover functionality versus turnover frequency:
A note on work attitudes and organizational effectiveness. Journal of Applied Psycholoqy, 71, 606-611.
IOMA. (2002, May). Pay for performance report. New York: Institute of Management and Administration.
Jackofsky, E. F. (1984). Turnover and job performance: An integrated process model. Academy of Management Review, 9, 74-83.
Jenkins, D.G. Jr., Mitra, A., Gupta, N.,`& Shaw, J.D. (1998). Are financial incentives related to performance? A meta-analytic review of empirical research. Journal of Applied Psycholooy, 83, 777-787.
Johnson, A. A. (1995). The business case for work-family programs. Journal of Accountancy, 180 (2), 53-57.
Judiesch, M. K., Schmidt, F. L., & Mount, M. K. (1992). Estiniates of the dollar' value of employee output in utility analyses: An empirical test of two theories. Journal of Applied Psychology, 77, 234-250.
Kalbfleisch, J. D., & Prentice, R. L. (1980). The statistical analysis of failure time data. New York: John Wiley and Sons, Inc.
Kless, B. S., & McClendon, J. A. (1996). To lead, lag, or match: Estimating the financial impact of pay level policies. Personnel Psychology, 49, 121-141.
Kohn, A. (1993, September-October). Why incentive plans cannot work. Harvard Business Review, 54-63.
Latham, G. P., & Whyte, G. (1994). The futility of utility analysis. Personnel Psychology, 47, 31-46.
McKinsey & Company (1998). The war for talent. New York: McKinsey &Company. Milkoyich, G. T., and Newman, J. M. (2002). Compensation (7th ed). Irwin: Boston, MA. Morita, J. G., Lee, T. W., & MoWday, R. T. (1993). The regression-analog to survival analysis: A
selected application to turnover research. Academy of Management journal, 36; 1430- 1464.
Peck, C. (2002). Salary increase budgets: 2002 increases fall in manyindustries, rebound projected for 2003. Executive Action, 24 (June), 1-5.
Pfeffer, J. (1998). Six dangerous myths about pay. Harvard Business Review, May/June, 76, 108-120.
Ployhart, R. E., & Hakel, M. D. (1998). The substantive nature of performance variability: Predicting interindividual differences in intraindiyidual performance: Personnel Psycholooy, 51, 859-901.
Poiler, L. W., & Lawler, E. E. (1968). Attitudes and performance. Hoenewood, Ill.: Irwin-Dorsey.
Raju, N. S., Burke, M. J., & Normand, J. (1990). A new apprOach for utility analysis. Journal of Applied Psycholooy, 75, 3-12.
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Retherford, R.D., & Choe, M.K. (1993). Statistical models for causal analysis. New York: John Wiley & Sons.
Rich, J. T. (1999). The growth imperative. The Journal of Business Strategy, March/April, 20, 27-31.
Schmidt, F. L., & Hunter, J. E. (1983). Individual differences in productivity: An empirical test of estiMates deiived from studies of selection procedure utility. Journal of Applied Psychology, 68, 407-414.
Schmidt, F. L., Hunter, J. E., Outerbridge, A. N., & Trattner, M. H. (1986). The economic impact of job selection methods on size, productivity, and payroll costs of the federal work force: An empirically based demonstration. Personnel Psychology, 39, 1-29.
Schwab, D. P. (1991). Contextual variables in employee performance-turnover relationships. Academy of Management JOurnal, 34, 966-975.
Sherwyn, D. S., & Sturman, M. C. (2002). Job-sharing in the hotel industry: A potential new human resource tool resulting from theevents of September 11th. Cornell Hotel and Restaurant Administration, 43 (5), 84-91.
Solomon, J. (1988)., Companies try measuring ,cost savings from new types of corporate benefits. The Wall Street Journal '(Dec. 29), B1.
teers, R. M. & Mowday, R. T. (1981). Employee turnover and the post decision accommodation process. In B. M. Staw & L. L. Cummings (Eds.), Research in Organizational Behavior (pp: 235-281). Greenwich, CT: JAI Press.
Sturman, M. C. (2000). Implications of utility analysis adjustments for estimates of human resource intervention value. Journal of Management, 26, 281-299.
Sturman, M. C., & Short, J. C. (2000). Lump-sum bonus satisfaction: Testing the construct validity of a new pay satisfaction dimension. Personnel Psychology, 53, 673-700
Sturman, M. C., & Trevor C. O. (2001). The implications of linking the dynamic performance and employee turnover literatures. Journal of Applied Psychology, 86, 684-696.
Trevor, C.O. (2001). Interactive effects among actual ease of movement determinants and job satisfaction in the prediction of voluntary turnover. Academy of Management Journal, 44, 621-638.
Trevor C. O., Gerhart, B., & Boudreau, J. W. (1997). Voluntary turnover and job performance: Curvilinearity and the moderating influences of salary growth and promotions. Journal of Applied Psychology, 82, 44-61.
U.S. Department of Labor. (2001). Employer Costs for Employee Compensation: March 2001, Washington, D.C.: U.S. Department of Labor.
Whyte, G., & Latham, G. P. (1997). The futility of utility analysis revisited: When even an expert fails. Personnel Psychology, 50, 601-610.
Williams, C. R., & Livingstone, L. P. (1994). Another look at the relationship between performance and voluntary turnover. Academy of Management Journal, 37, 269-298.
WorldatWork (2002). 29th Annual Report on the 2002-2003 Total Salary Increase Budget Survey. Scottsdale, AZ: WorldatWork.
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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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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 +
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.
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
= 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
SOUTHWESTERN ELECTRIC POWER COMPANY
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.
DIRECT TESTIMONY PUC DOCKET NO. 46449 3 ALICE A. BONNING
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
DIRECT TESTIMONY PUC DOCKET NO. 46449 4 ALICE A. BONNING
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
DIRECT TESTIMONY PUC DOCKET NO. 46449 5 ALICE A. BONNING
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 $246,605. These
8 charges do not include costs relative to operating company employees. My testimony
9 supports the reasonableness and necessity of billings from AEPSC for SCPFO
10 charges provided to SWEPCO.
11 Q. HOW DO THE RESPONSIBILITIES OF SCPFO RELATE TO THE LEVEL OF
12 AFFILIATE LHARGES TO SWEPCO?
13 A. SCPFO provides services to SWEPCO that leverage centralized AEPSC services only
14 where d:oing so enhances efficiency. It should be noted that SCPF6 is predominktly
15 staffed with personnel from various op-erating companies. In the following:testimony,
16 I explain the affiliate cost transactions that result from the centralization of services in
17 AtPSC.
18 Q. WHAT TYPES OF PROOF OF REASONABLENESS OF THESE COSTS DO
19 YOU PRESENT IN THIS TESTIMONY?
20 A. I have applied a number of methods including cost trends, cost control efforts,
21 process improvements, budgeting controls, and benchmarking studies. I will next
22 discuss each of these methods. Althotigh several 'of these items are addressed to the
23 overall costs of AEP or SWEPCO, they nevertheless demonstrate how the overall
DIRECT TESTIMONY PUC DOCKET NO. 46449 8 ALICE A. BONNING
1818
1 management model for supply chain, procurement and fleet services, including the
2 centralized services provided by AEPSC, is leading to reasonable costs.and effidient
3 provision of -these services to SWEPCO.
4 Q. WHAT ARE THE COSTS ASSOCIATED WITH AFFILIATE BILLINGS FROM
5 AEPSC TO SWEPCO FOR SCPFO AND AVIATION SERVICES?
A. In Figure 2, the 2013-2015 numbers include both SCPFO and Aviation Services.
7 Aviation Services are managed by AEP's security and aviation team, which reports to
8 the Chief Security Officer within AEPSC. .A test year adjustment has been made to
9 exclude Aviation costs from this request for recovery as addressed by SWEPCO
10 witness Brian J. Frantz.
11 Figure 2: SCPFO Affiliate Costs
2013 ($) 2014 ($) 2015 ($) Test Year ($)
$1,117,320 $1,562,863 $1,426,882 $246,605
12 Q. WHAT ARE THE COST TRENDS ASSOCIATED WITH AFFILIATE BILLINGS
13 FROM AEPSC TO SWEPCO SPECIFICALLY FOR SCPFO SERVICES?
14 A. The affiliate cost trends are identified in Figure 3 below. SCPFO personnel have
15 been working diligently to improve efficiencies and control costs. The increase in
16 cost from 2013 to 2014 is primarily due to an increase in AEPSC Fleet vehicles to
17 support transmission projects. Total costs then decreased in 2015 due to cost-savings
18 Measures such as zero-based budgeting and integrated supply "model for contract
19 labor. COsts decreased again from 2015 to 2016 due to the cOntinuation of the
DIRECT TESTIMONY PUC DOCKET NO. 46449 9 ALICE A. BONNING
1819
1
cost-savings measures previously mentioned. AEPSC costs are allocated to
2
SWEPCO based on a billing process that is discussed by SWEPCO witness Frantz.
3
Figure 3: SCPFO Affiliate Cost Trends
2013 ($) 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
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
DIRECT TESTIMONY PUC DOCKET NO. 46449 19 ALICE A. BONNING
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.
DIRECT TESTIMONY PUC DOCKET NO. 46449 20 ALICE A. BONNING
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
SERVICES PROVIDED BY Page 2 of 4
SUPPLY CHAIN & FLEET OPERATIONS, PROCUREMENT & SUPPLY CHAIN CENTER OF EXCELLENCE
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
SERVICES PROVIDED BY Page 3 of 4
SUPPLY CHAIN & FLEET OPERATIONS, PROCUREMENT & SUPPLY CHAIN CENTER OF EXCELLENCE
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
SERVICES PROVIDED BY Page 4 of 4
SUPPLY CHAIN & FLEET OPERATIONS, PROCUREMENT & SUPPLY CHAIN CENTER OF EXCELLENCE
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
PUC DOCKET NO. 46449
PUBLIC UTILITY COMMISSION Of TEXAS
APPLICATION OF
SOUTHWESTERN ELECTRIC POWER COMPANY
FOR AUTHORITY TO CHANGE RATES
DIRECT TESTIMONY OF
RANDOLPH J. WARE
FOR
SOUTHWESTERN ELECTRIC POWER COMPANY
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
5 II. PURPOSE OF TESTIMONY
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.
DIRECT TESTIMONY PUC DOCKET NO. 46449 2 RANDOLPH J. WARE
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
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
PUC DOCKET NO. 46449
PUBLIC UTILITY COMMISSION OF TEXAS
APPLICATION OF
SOUTHWESTERN ELECTRIC POWER COMPANY 0
FOR AUTHORITY TO CHANGE RATES
DIRECT TESTIMONY OF
ALBERTO G. RUOCCO
FOR
SOUTHWESTERN ELECTRiC POWER COMPANY
DECEMBER 2016
1850
TESTIMONY INDEX
SECTION PAGE
I. INTRODUCTION 1
II. PURPOSE OF TESTIMONY 3
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.
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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
15 II. PURPOSE OF TESTIMONY
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 •
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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
DIRECT TESTIMONY PUC DOCKET NO. 46449 11 ALBERTO G. RUOCCO
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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?
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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,
DIRECT TESTIMONY PUC DOCKET NO. 46449 13 ALBERTO G. RUOCCO
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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?
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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
DIRECT TESTIMONY PUC DOCKET NO. 46449 15 ALBERTO G. RUOCCO
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;
DIRECT TESTIMONY PUC DOCKET NO. 46449 16 ALBERTO G. RUOCCO
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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
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)
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12
13
14
15
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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
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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
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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
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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