Direct TestimoW and Schedules Larry R. Crosby

Direct TestimoW and Schedules Larry R. Crosby Before the Minnesota Public Utilities Commission State of Minnesota In the Matter of the Application of Northern States Poxver Company, a Minnesota corporation For Authority to Increase Rates for Electric Service in Minnesota Docket No. E002/GR-08-1065 Exhibit Distribution Operating & Maintenance Expense November 3, 2008 Table of Contents Introductions and Qualifications iI. III. IV. Distribution Cost D~ivers Cost Management Initiatives Summary and Recommendations 1 2 10 12 Schedules Statement of Qualifications & Past Experience Schedule 1 1 2 3 4 5 6 7 8 9 10 1t 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 I. INTRODUCTION AND QUALIFICATIONS Q. PLEASE STATE YOUR NAM[E AND BUS12qESS ADDRESS. My name is Larry R. Crosby. My business address is 825 Rice Street, St. Paul, Mirmesota 55117. BY WHOM ARE YOU EMPLOYED AND xX~J,.AT IS YOUR POSITIONP I am Vice President - C{3nsm~ction, Operations and Maintenance for Northern States Power Company, a Minnesota corporation ("Xcel Energ)?’, or the "Company"). PLEASE SUM~MRIZE YOUR QUALIFICATIONS AND EXq3ERIENCE. I received a Bachelor of Science degree in Business Management-Administxation from Providence College in’ Rhode Island. In 1988, after graduating from college, I joined Utilicorp United (which became Aquila) and worked in various management positions. Since coming to Xcel Energy as Director Design, Construction, and Maintenance Operations in 2004, I have also served in the role as Vice President Control Center Operations and most currently as Vice President Construction, Operations and Maintenance. have provided a more detailed summary of my qualifications and experience in ExNbit (LRC-I), Schedule 1. Q. FOR ~rHOM A2,E YOU TESTIFYING? Docket No. E002/GR-08-1065 Crosby Direct 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 A. I am testifying on behalf of Northern States Power Compaw, a Minnesota corporation ("Xcel Energy" or the "Company"). WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING? I am sponsoffmg testimony in support of the reasonableness of the test-year revenue requirements associated with distribution operating and maintenance ("O&M") costs. I recommend that the Commission approve our overall distribution O&M budget of $102.1 million. .g-lOW H_AVE YOU ORGANIZED YOUR DIRECT TESTIMONY? First, I explain the Dimary drivers for the increase in our 2009 distribution O&M budget compared to the 2006 test year. Second, I provide examples of where we have m~dertaken efforts to manage expenses, both now and on a going-forward basis. Finally, I summarize my recommendations for the Commission to consider. II. DISTRIBUTION COST DRIVERS A. Overview PLEASE DESCRIBE THE TYPE OF COSTS TYPICALLY INCLUDED IN DISTRIBUTION O&M EXPENSE. Genera[iy speaking, O&M expense includes the cost assodated with operating and maintaining a safe and reliable electric distribution system, including facilities from the transmission substation to our customers’ meters. O&M expense typically includes the cost associated with labor and employee benefits, contractors, transportation, and materials necessary to operate and maintain a safe and reliable electric delivery network. 2 Docket No. E002/GR-08-1065 Crosby Dkect 1 q. 2 3 4 5 WHAT IS THE AMOUNT OF DISTRIBUTION O&:~V[ COSTS THAT THE COMPANY IS KEQUESTING RECOVERY OF IN THIS RATE PROCEEDING? A, We request recoverT of $!02.! mi!!ion in distribution O&M ~m our 2009 budget for the Minnesota jurisdiction. 6 Q. 7 9 10 ~7~OW DOES THIS AMOUNT COMPA1LE TO THE LE]FEL APPROVED IN THE COMPANY’S MOST RECENT ELECTRIC RATE CASE? 8 A. The 2009 budget is $21.5 million higher than the 2006 test-year level, representing an increase of approximately eight percent per year, 11 Q. 12 A. 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 WHAT FACTORS HAVE CONTRIBUTED TO THIS INCREASE? Approximately half of this increase is in our vegetation management program, a key maintenance activity that reduces the impacts of tree growth and tree failure on our electrical system. Vegetation management is an important activity required to enhance the reliability of our distribution system. We have increased o, ur budget for tl~s program by $9.3 million over 2006 levels. Table 1 provides the breakdown of the major cost drivers. 3 Docket No. E002/GR-08-1065 Crosby Direct I 2 3 (Dollars in ~i{liions) TABLE 1 O&M COST CHANGES SINCE 2006 2009 Change Vegetation Mgmt. Labor $ 9.3 4.1 2006 Budget 18.4 37.6 2009 Budget $ 27.7 41.7 2.3 3 Year % Increase Compound Annual Average % 51% 10.9% 14.6% 3.5% Capitai/O&M Allocation Shift Materials Damage Prevention Revenue Reclass. All Other Costs Total 2.3 1.2 n/a 6.8 2.9 -0.8 15.7 n/a 18% n/a 5.6% 14% 26% 4.9% 8.2% 8.0 4.3 0.0 1.4 0.8 48% 100% 15% 27% 2.4 $21.5 $80.6 18.1 $102.1 4 5 6 7 8 9 10 11 12 13 14 WHAT IS THE REASON FOR THE INCREASED SPEND IN THE VEGETATION MANAGEMENT PRO GI/~!? B. Vegetation Management Trees and other vegetation significantly contribute to customer outages. Vegetation-caused outages are consistently ranked in the top three causes of outages in our system each year. To reduce these outages and improve overall reliability, we have substantially increased our vegetation management budget over the past several years, as shown in Table 2. 4 Docket No. E002/GR-08-1065 Crosby DJxect 1 2 3 TABLE 2 VEGETATION I~IANAGEMENT BUDGET (DISTRIBUTION) 2006 2007 2008 8.4 million $22.9million $25.8million $27.7rnillion 2009 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 These increased budgets were and are necessatT to support the Company’s initiative to ensure a five-year vegetation management cycle for our entire distribution system. This overall effort was identified, developed, and implemented in support of our Safety, Reliability and Service Quality Reports submitted in compliance with the Commission’s electric service quality rules (Mi,m. Rules 7826.1300 to 7826.2000) (see, for example, Docket No. E002/M05-551, where the Commission indicated that it wanted us to achieve a five-year cycle on at least 95 percent of our lines by year-end 2009). In contrast, approximately 73 percent of our distribution line miles xvere on a five-year cycle in 2006. We have made significant progress in our vegetation management program since 2006 and project that we will achieve the target of 95 percent of our distribution lines on a five-year cycle by year-end 2009. Under our expanded program, we now perform vegetation management on roughly 3,400 distribution miles annually, compared to approximately 2,200 miles in 2006. \X/’HAT COSTS _ARE REQUIRED TO SUPPORT THIS LEVEL OF VEGETATION MANAGEMFLNT PERFORMANCE.) Docket No. E002/GR-08-1065 Crosby Direct 1 2 3 4 A. The main driver is contract labor expense. We requi~ed a substantial increase in the number of contracted distribution tree crews needed to perform vegetation management services on the increased number of miles managed. The number of contracted full time equivalents ("FTEs") in 2006 averaged approximately 246. In 2009, we forecast ti~s number to average 340 FTEs. In addition, contractor labor and equipment rates have increased 9.6% since 2006, in large part due to increases in wages, benefits and fuel costs. 5 6 7 8 9 10 11 Q. Do YOU BELIEVE THE OVERALL COST INCREASE IN VEGETATION MANAGEM[ENT IS REASONABLE AND NECESSARY FOR THE SAFE _)_ND RELLABLE PROVISION OF ELECTRIC SERVICES? A. Yes, I do. [[ believe we have exercised prudent management controls and 13 14 15 16 17 18 19 20 21 22 23 24 25 26 HAVE THERE BEEN RECENT CHANGES IN THE VEGETATION MANAGEMENT PROGRAM? appropriate planning that ensures that we are spending these resources wisely. Yes. In 2006, the Company engaged in a formal re-evaluation of our vegetation management program to gauge its effectiveness. Based on the results of that evaluation, we made adjustments to our program to better match tree selection and pruning methods with tree-rdated outage risk. In 2006 all trees that had potential to encroach ~vithin the trim zone xvere targeted for work. This resulted in prover line corridors where all trees had similar clearances. Starting in 2007, we moved to an approach targeting only trees that had a high probability for causing outages or posed safety concerns. We believe that this targeted approach will result in a more effective program. Docket No. E002/GR-08-1065 Crosby Dixect 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 With adjustments like these, we have been able to accomplish a significant reduction in the per-mile cost of vegetation management. Adjusting the budgeted costs for non-cycle maintenance items, our ct~rrent cost is approximately $7,300 per mile, compared to a 2006 cost of approximately $7,600 per mile. Had we not implemented these more effident processes and our costs remained at the 2006 cost per mile, our 2009 budget would be $1.0 million higherthan our proposd. Overall, I believe our performance has been good, and xve have successfully managed a significant expansion of this important mNntenance program. \vffHY DO YOU BELIEVE THE INCREASED VEGETATION MANAGEMENT PROGIL~{ SPEND IS NECESSARY? It is necessary for the safe and reliable perforrnance of our disvribution system, and specifically to reduce the impact of customer tree-related outages, as shown in Table 3 below. TABLE 3 TREE-RELATED OUTAGES (Distribution, Sustained Customer Intertyptions coded as Vegetation Management) Stoi-nl Yea£ Nm~nalized 138,264 2005 2006 2007 2008 Forecast 20 21 22 23 C. Other Cost Drivers 122,198 122,340 102,239 LET’S TURN TO THE OTHER KEY COST INCtLEASES SINCE 2006.PLEASE DESCRIBE THE $6.4 MILLION OF LABOR COST INCREASES. Docket No. E002/GR-08-1065 Crosby Direct 1 A. Our 2009 budget for distribution labor reflects an increase of $4.1 million in 2 3 4 5 6 7 8 9 10 11 12 13 14 15 I6 17 18 19 2O 21 22 23 24 25 26 27 xvages and salaries, representing an estimated 3.5 percent average annum increase for both bargaining and non-bargah~ing empIoyees. The remaining $2.3 million of the labor increase p1~marily reflects allocation changes made in the construction and operations area base labor and overtime budgets to more accurately reflect recently experienced O&M and capitaI xvork profiles, in functions such as the replacement and removal of electric underground facilities, the replacement and repair of net~vork facilities, and the installation of new underground facilities. These allocation changes do not reflect an increase in total spend, rather they reflect the appropriate allocation of such spend betxveen our O&M and capital budgets. Q. O~N YOU FURTHER DESCKIBE THE COST INCREASES IN THE DAM_AGE PREVENTION PROGRAM? Yes. Damage Prevention refers primarily to our facility locating work performed in compliance with Minnesota’s "One-Call Statute" (Minn. Stat. 216D). Under this statute, we must identify and mark our underground facilities within 48 hours of a request. This process is designed to ensure public safety xvhen digging or otherwise constxucting around our facilities. We use contractors to provide much of our locating ~vork. We find that it is effective to supplement our internal staff xvith such contract labor due to the seasonal fluctuations in volume of locathag requests. The increased expenses are due to increases in the price of hiring contract Labor specialized in locating underground electrical equipment. We recently sought competitive bids and executed contracts for these services, coveting the period Docket No. E002/GR-08-1065 Crosby Direct 1 2 3 4 5 6 7 8 9 January 1, 2008 through December 31, 2010. The bids submitted in this process offered services at prices ranging from $20.33 to $35.21 per locate ticket compared to a ticket p*qce ~f $16.91 in 2006. Based on t!~e new contracts we are currently averaging $22.91 per ticket. While we secured the best resources to provide these services on our system, the costs are higher than previous contracts. These price increases reflect inflationary costs facing the contractors. We believe that our contractor selections represent an appropriate balance of qualiw, price, and safety. 10 Q. PLEASE DESCRIBE THE $1.2 5aILLION INCREASE FOR MATEILTALS. 1~ A. Materials are often thought of as capital items, however based on our capital asset 12 13 14 15 16 17 18 19 20 21 Q. 22 23 24 A. 25 26 27 TABLE 1 IDENTIFIED A COST INCPdgASE DUE TO REVENUE RECLASSIFICATION. CAN YOU DESCRIBE THAT ITEM AND ITS EFFECT ON THE DISTRIBUTION O&M BUDGET.) accounting policies there are materials that are charged to O&M related work as well. Our increase in materials cost is primarily due to con~modity price increases. Commodities used in the manufacture of our materials have escalated since the ~ae of our last case. 3, recent 2007 versus 2008 material spend analysis indicates that these commodity escalations have resulted in material cost increase ranging from 5% to 37% depending on the category of material (transformers, wires & cable, electrical, poles & structures, mechanical equipment, other electric distribution components). In the 2006 test year, certain miscellaneous revenues (i.e. damage claims) were credited to the electric distribution O&M expense budget In 2009, those revenues will be recorded as Other Revenues, causing the appearance of a $0.8 million increase in the 2009 electric distribution budget. Overa]l, the 9 Docket No. E002/GR-08-1065 Crosby Dh:ect 1 2 3 reclassification itself has no impact on our revenue requirements or net income calculations. PLEASE DESCRIBE THE OTHER NON-LABOR INC]P,~F~ASES OF $2.4 ivlILLION. 4 Q. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 These costs reflect inflationat7 increases, including fuel price impacts, on transportation, construction contractor pricing, and other non-labor expenses. III. COST MANAGEMENT INITIATIVES Q. ]3ESIDES THE EFFICtENCIES ACHIEVED IN THE VEGETATION i~IANAGE1ViENT PROGRAM ALREADY DISCUSSED, WHAT HAS THE COMPANY DONE TO MANAGE DISTRIBUTION O&M COSTS? We undertake a variety of initiatives to manage our O&M expenses. I describe several of these beloxv: Vmfable Resource Deployment. We have enhanced control and governance over our use of variable resources, such as contractors. This has positioned our operation to more effectively monitor contractor performance and utilization. Under this initiative, we carefully and continually review our use and justification for outside contractors to ensure efficiency. Each xveek, our directors, planners, and other appropriate managers meet to assess and approve our additions and rdeases of such variable resources. The results of this effort have contributed to a decline in contractors on site by nearly 40-50% in 2007 and similar results are forecast in 2008. This same improvement is forecasted for 2009. Interna! Workforce Deployment. We have improved our strategies for redeploying our workforce across our service territou, as opposed to 10 Docket No. E002/GR-08-1065 Crosby Direct 1 2 3 4 5 maintaining our traditional territories associated with our various service centers. Some recent examples include: Metro East crews assisting with Metro West pole replacements; Metro East and Metro West underground crews performing ~vork for outstate Minnesota areas and for one another; and outstate Monticello crews assisting on Metro West overhead projects. We are also enhancing our abilities to redeploy design resources across our set’vice centers. These efforts result in more efficient use of overall resources not only within specific service centers, but also across the metropolitan and outstate service territories. These redeployment efforts have reduced our dependency on additional contractors as described above. Ojotimize FleetInvento~. We have eliminated over 100 fleet units since 2006, as a result of enhanced fleet utilization strategies. These efforts include pooling of appropriate fleet units as well as better management of seasonal fleet (i.e. sha~ng lower use common equipment between areas, coordination of shift worker vehicles, sharing of trucks between operating departments). Design Improvements. We hired a director to oversee our Design department to help us enhance that organization’s performance. Good design and planning of projects and the associated materials is essential to efficient perfomaance in the field. The improvements made in the design area improve the overall performance and efficiency of our construction resources. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Outage Restoration Enhancements. Our control center organization is piIothag a technology whereby we are able to verify customer outage stares by 11 Docket No. E002/GR-08-1065 Ctgsby Direct 1 2 3 4 5 6 7 8 9 10 11 12 i3 14 I5 16 17 18 19 2O 21 22 23 24 25 26 27 "pinging" our automated metering technology. If successful, we believe this effort will result in more efficient outage repair response during our stotTn restoration efforts. IV. SUMMARY AND I~COMMENDATIONS Q. A. - PLEASE SUMMARIZE YOUR DLKECT TESTIMONY. I have identified the key drivers of the budget increases for the operation and maintenance of the distribution system. A significant portion of this increase is due to .our efforts to improve reliability through improved and expanded vegetation management. Further, I have outlined several efforts to control costs in our organization, providing support for the overall reasonableness of the overall distribution O&M budget. Q. PLEASE SUMM_A_RIZE YOUR KECOM2VfENDATIONS FOR THE COMMISSION TO CONSIDER. I recommend that the Commission accept the Company’s overall test-year bu@t of $102.1 million in distribution O&M expense. I believe these budgets are reasonable and prudent, and necessary for the safe and reliable provision of delivery services. These O&M expenditures support an enhanced vegetation management program, reflect competitive and necessary labor increases, track ~vith accelerated commodity and contractor price increases, and they appropriately align with recent actual expenditures, and reflect cost mitigation efforts by the Company. Q. DOES THIS COMPLETE YOUR TESTIMONY? A. Yes, it does. 12 Docket No. E002/GR-08-1065 Crosby Dixect Northern States Power Company, a Minnesota corporation Electric Utility – State of Minnesota DISTRIBUTION INITIATIVES SCHEDULES Statement of Qualifications – Larry R. Crosby Docket No. E002/GR-08-1065 Exhibit___(LRC-1) Schedule 1 Page 1 of 1 Statement of Qualifications Larry R. Crosby Education: Bachelor of Science Degree, Business Management/Administration, 1988 Providence College, Rhode Island Employment: Xcel Energy Inc. March 2007 – Current Vice President, Construction, Operations & Maintenance January 2006 – March 2007 Vice President, Control Center Operations March 2004 – December 2005 Director, Design, Construction & Maintenance Operations AQUILA February 2004 July 2002 – February 2004 September 2001 – June 2002 UTILICORP UNITED May 2001 – August 2001 1997 – 2001 1995 – 1996 1995 – 1996 (Dual Role) 1992 – 1994 1990 – 1991 1988 – 1989 Vice President, Western Operations Director, Business Operations & Asset Management Regional Director of Operations (MI/MN) Director, ServiceOne U.S. Operations Director MN Customer Operations Director, Administration & State Coordinator Director, Customer & Community Relations Region Administrator Area Administrator Administrator