1 C. The Chief Executive Officer Affiliate Class of Services are 2 Provided at a Reasonable Cost

Transcription

1 1 C. The Chief Executive Officer Affiliate Class of Services are 2 Provided at a Reasonable Cost 3 Q. Are the costs of the Chief Executive Officer affiliate class of services 4 reasonable? 5 A. Yes. The costs of the Chief Executive Officer affiliate class of services are 6 reasonable. The Chief Executive Officer provides these functions and services on 7 a consolidated basis for multiple Xcel Energy legal entities. As a result, SPS 8 benefits from professional managerial services, the consolidated costs of which 9 are shared. The economies of scale inherent in this system result in reasonable 10 costs for SPS for these services Objective Evidence (Benchmarking) 12 Q. Is there any objective evidence that supports your opinion that the costs of 13 the Chief Executive Officer affiliate class are reasonable? 14 A. Yes. Approximately 45.66% of the costs for the Chief Executive Officer class 15 consists of compensation and benefits costs for XES personnel. Ms. Reed and 16 Mr. Schrubbe establish that the level of Xcel Energy's compensation and benefits 17 is reasonable and necessary Budget Planning 19 Q. Is a budget planning process applicable to the Chief Executive Officer class 20 of affiliate costs? 21 A. Yes. Annual O&M budgets are created for the Chief Executive Officer business 22 area, using guidelines developed at the corporate level. The organization 23 carefully reviews historical spend information, identifies changes that will be 24 coming in the future, and analyzes the costs associated with those changes prior to Locker Direct - Revenue Requirement Page 38 RR7 - Page 175 of

2 1 submitting a proposed budget. The budgeting process is discussed in more detail 2 in Section III of my testimony. 3 Q. During the fiscal year, does the Chief Executive Officer business area 4 monitor its actual expenditures versus its budget? 5 A. Yes. Actual versus expected expenditures are monitored on a monthly basis by 6 the Chief Executive Officer organization. Deviations are evaluated each month to 7 ensure that costs are appropriate. In addition, action plans are developed to 8 mitigate variations in actual to budgeted expenditures. These mitigation plans 9 may either reduce or delay other expenditures so that the revised budget supports 10 the authorized budget. If authorized budget adjustments are required, they are 11 identified and initiated. 12 Q. Are employees within the Chief Executive Officer organization held 13 accountable for deviations from the budget? 14 A. Yes. The Chief Executive Officer has responsibility for corporate governance and 15 maintaining the financial integrity of Xcel Energy and its subsidiaries. He and his 16 administrative assistant follow the same procedures as he requires of other 17 business areas, which includes measuring results on a monthly basis to ensure 18 adherence to the goals and to discuss actions necessary to address variances Cost Trends 20 Q. Please state the dollar amounts of the actual charges (per book) from XES to 21 SPS for the Chief Executive Officer affiliate class of services for the three 22 fiscal years preceding the end of the Test Year and the Test Year. 23 A. The following table shows, for the fiscal years 2012, 2013, and 2014 (calendar 24 years) and for the Test Year, the actual per book affiliate charges (Column J on Locker Direct - Revenue Requirement Page 39 RR7 - Page 176 of

3 1 2 3 Attachment KSL-RR-A) from XES to SPS for the services grouped in the Chief Executive Officer affiliate class: Table KSL-RR-2 Actual (Per Book) Charges Over Time Class of Services Test Year Chief Executive Officer $388,682 $383,526 $480,341 $504,206 4 Q. 5 A Q A What are the reasons for this trend? The decrease in costs between 2012 and 2013 was due to decreased costs for labor and labor loading offset by increased cost for industry dues and consulting costs. The increase in costs between 2013 and 2014 was due to increases in labor costs, consulting costs and industry dues. The increase in costs between 2014 and the Test Year was due to increases in costs in industry dues, strategic and financial consulting, and labor loading, partially offset by a reduction in labor costs. 4. Staffing Trends Please provide the staffing levels for the Chief Executive Officer class of services for the three fiscal years preceding the end of the Test Year and the Test Year. The following table shows, for the fiscal years 2012, 2013, and 2014 (calendar years) and for the Test Year, the average of the end of month staffing levels for the Chief Executive Officer class of services. Table KSL-RR-3 Average End of Month # of Staff Class of Services Test Year Chief Executive Officer Locker Direct - Revenue Requirement Page 40 RR7 - Page 177 of

4 1 Q. What are the reasons for this trend? 2 A. The department has maintained the same level of average staffing over this period 3 of time Cost Control and Process Improvement Initiatives 5 Q. Separate from the budget planning process, does the Chief Executive Officer 6 affiliate class take any steps to control its costs or to improve its services? 7 A. Yes. The Chief Executive Officer organization reviews its plans, initiatives, and 8 staffing to ensure they are appropriate and to identify and implement 9 improvements. 10 D. The Costs for the Chief Executive Officer Affiliate Class of I 1 Services are Priced in a Fair Manner 12 Q. For those costs that XES charges (either directly or through use of an 13 allocation) to SPS for the Chief Executive Officer affiliate class of services, 14 does SPS pay any more for the same or similar service than does any other 15 Xcel Energy affiliate? 16 A. No. 17 Q. Why do you answer "no"? 18 A. The XES charges to SPS for any particular service are no higher than the XES 19 charges to any other Xcel Energy affiliate. The costs charged for particular 20 services are the actual costs that XES incurred in providing those services to SPS. 21 A single, specific billing method, rationally related to the costs drivers associated 22 with the service being provided, is used with each work order. In his direct 23 testimony, Mr. Dietenberger discusses the selection of billing methods and XES's 24 method of charging for services in more detail. Locker Direct - Revenue Requirement Page 41 RR7 - Page 178 of

5 1 Q. How are the costs of the Chief Executive Officer affiliate class billed to SPS? 2 A. My Attachment KSL-RR-B lists all of the costs in this class broken out by activity 3 and, in conjunction with Column E in my Attachment KSL-RR-A, shows the 4 billing method and allocation method associated with each activity. 5 Q. What are the predominant billing allocation methods used for the Chief 6 Executive Officer affiliate class of services? 7 A. All of the XES charges to SPS for this class were charged using one of the 8 following two billing allocation methods: 9 Assets, Revenue, and Number of Employees % of XES charges to 10 SPS, or $489,116.66; and 11 Direct Billing % of XES charges to SPS, or $18, Q. Why is it appropriate to allocate costs based upon the "Assets, Revenue, and 13 Number of Employees" method for the costs captured in the work orders 14 that use that billing method? 15 A. The three factor billing method using assets, revenue, and employees produces an 16 allocation of costs that recognizes the complexity, risk, and overall business 17 activity levels that drives the costs included in the work orders and measures the 18 benefits received from those activities. For the work orders billed using this 19 allocator, there is no one specific cost driver for the support tasks and services 20 provided, and the services benefit multiple Xcel Energy affiliates. For example, 21 labor costs for the Chief Executive Officer's conducting his all employee 22 webcasts, which are collected in Work Order 110, are allocated using this method. 23 Within the Xcel Energy holding company group, those legal entities that have 24 proportionately more assets, revenues, and employees will have more focus Locker Direct - Revenue Requirement Page 42 RR7 - Page 179 of

6 I placed on their operations due to those subsidiaries' relative influence on the 2 consolidated business balance sheet, income statement and statement of cash 3 flow, and the subsidiaries will benefit accordingly from the services provided. 4 Thus, allocating these costs based upon the average of the total asset ratio, 5 revenue ratio, and the employee ratio is appropriate because it allocates costs in 6 accordance with cost causation and benefits received. Mr. Dietenberger discusses 7 this billing method in more detail earlier in his testimony. For the work orders 8 that assign costs based upon this billing method, the per unit amounts charged by 9 XES to SPS as a result of the application of this billing method are no higher than 10 the unit amounts billed by XES to other affiliates for the same or similar services 11 and represent the actual costs of the services. 12 Q. Why is the "Direct Billing" method appropriate for assigning the costs 13 captured in the work orders that use that billing method? 14 A. For the work orders that are assigned using the "Direct Billing" method, the costs 15 normally reflect work that was performed specifically for SPS only. In some 16 cases, however, the direct billing occurred after the application of an off-line 17 allocator that tracks the relevant cost drivers. In either situation, the work orders 18 charged using the "Direct Billing" method are appropriate because the assignment 19 of costs is in accordance with the distribution of benefits for the services received. 20 For example, the labor costs for the Chief Executive Officer for conducting plant 21 tours and site visits to foster interactive and engaged relationships on issues such 22 as safety with the employees, which are collected in Work Order , were 23 assigned using the "Direct Billing" method. The cost of these services benefitted Locker Direct - Revenue Requirement Page 43 RR7 - Page 180 of

7 I only SPS, the work was performed specifically for SPS alone, and the cost driver 2 is management of SPS employees. Therefore, the "Direct Billing" method is 3 appropriate because it assigns costs in accordance with cost causation and benefits 4 received. For the work orders that assign costs using Direct Billing, the per unit 5 amounts charged by XES to SPS are no higher than the unit amounts billed by 6 XES to other affiliates for the same or similar services and represent the actual 7 costs of the services. Locker Direct - Revenue Requirement Page 44 RR7 - Page 181 of

8 1 VI. AFFILIATE EXPENSES FOR THE CHIEF ADMINISTRATIVE OFFICE 2 CLASS OF SERVICES 3 A. Summary of Affiliate Expenses for the Chief Administrative 4 Office Class of Services 5 Q. Where does the Chief Administrative Office affiliate class fit into the overall 6 affiliate structure? 7 A. Attachment ARD-RR-6 to Mr. Dietenbergers's direct testimony provides a list 8 and a pictorial display of all affiliate classes, dollar amounts for those classes, and 9 sponsoring witness for each class. As seen on that attachment, the Chief 10 Administrative Office affiliate class was part of the Utilities & Corporate Services 11 business area during the Test Year. Attachment KSL-RR-3 to my testimony is an 12 organization chart showing the Utilities & Corporate Services business area, 13 which includes the Chief Administrative Office organization. 14 Q. What services are grouped into the Chief Administrative Office affiliate 15 class? 16 A. The services that are grouped into the Chief Administrative Office affiliate class 17 are providing executive leadership for the Utilities & Corporate Services 18 organization, which consists of multiple operational areas that provide services to 19 SPS. This includes providing oversight and management of business area strategy 20 and finance, and providing leadership for projects impacting the Utilities & 21 Corporate Services business area. The services of the class also include providing 22 leadership for Xcel Energy-wide projects. Locker Direct - Revenue Requirement Page 45 RR7 - Page 182 of

9 1 Q. 2 3 A. What is the dollar amount of the Test Year XES charges that SPS requests, on a Total Company basis, for Chief Administrative Office affiliate class? The following table summarizes the dollar amount of the Test Year XES charges for the Chief Administrative Office affiliate class. explained in following the table. Table KSL-RR-4 The table headings are Requested Amount of XES Class Expenses Billed to SPS (Total Company) Total XES Class of Requested % Direct Class Services Amount Billed Expenses % Allocated Chief Administrative $3,467,845 $359, % 99.48% Office Total XES Class Expenses Requested Amount of XES Class Expenses Billed to SPS (Total Company) Dollar amount of total Test Year expenses that XES charged to all Xcel Energy companies for the services provided by this affiliate class. This is the amount from Column F in Attachment KSL-RR-A, which I will discuss in the next question. Requested dollar amount of XES expenses to SPS (total company) for this affiliate class after exclusions and pro forma adjustments. This is the amount from Column L in Attachment KSL-RR-A. % Direct Billed The percentage of SPS's requested XES expenses (total company) for this class that were billed 100% to SPS. % Allocated The percentage of SPS's requested XES expenses (Total Company) for this class that were allocated to SPS. Locker Direct - Revenue Requirement Page 46 RR7 - Page 183 of

10 1 Q. Please describe the attachments that support the information provided on 2 Table KSL-RR-4. 3 A. There are four attachments to my testimony that present information about the 4 requested SPS affiliate expenses for the Chief Administrative Office affiliate 5 class. I explained these attachments in detail previously in Section V.A of my 6 testimony. 7 Q. Does XES bill all of its expenses for the Chief Administrative Office affiliate 8 class to SPS? 9 A. No. XES bills the majority of its expenses for the Chief Administrative Office 10 affiliate class to affiliates other than SPS. SPS receives approximately 11.15% of 11 total XES billings for the Chief Administrative Office class, as shown on 12 Attachment KSL-RR-A (Columns F, G, and H) and Attachment KSL-RR-B 13 (Columns G, H, and I). 14 Q. Are there any exclusions to the XES billings to SPS for the Chief 15 Administrative Office affiliate class? 16 A. Yes. As I mentioned earlier, exclusions reflect expenses not requested, such as 17 expenses not allowed or other below-the-line items. Exclusions are shown on 18 Attachment KSL-RR-A, Column I, and on Attachment KSL-RR-B, Column J. 19 The details for the exclusions are provided in Attachment KSL-RR-C. As I also 20 mentioned earlier, Mr. Dietenberger describes how the exclusions were 21 calculated. Locker Direct - Revenue Requirement Page 47 RR7 - Page 184 of

11 1 Q. Are there any pro forma adjustments to SPS's per book expenses for the 2 Chief Administrative Office affiliate class? 3 A. Yes. Pro forma adjustments are revisions to Test Year expenses for known and 4 measurable changes. Pro forma adjustments are shown on Attachment 5 KSL-RR-A, Column K, and on Attachment KSL-RR-B, Column L. The details 6 for the pro forma adjustments, including the witness or witnesses who sponsor 7 each pro forma adjustment, are provided in Attachment KSL-RR-D. 8 Q. Attachment KSL-RR-D shows that you are a sponsor for pro forma 9 adjustments that result in a net decrease of $20, for the Chief 10 Administrative Office affiliate class. Please explain the adjustments. 11 A. The adjustments that I sponsor were for: (1) removal of charges for prior period 12 adjustments correcting dollars outside of the Test Year (a net decrease of 13 $3,968.74); (2) removal of credits and costs not benefitting SPS (a net increase of 14 $2,703.03); (3) removal of charges for alcoholic beverages (a decrease of 15 $235.55); (4) removal of other charges, primarily for labor and expenses 16 associated with an eliminated position (a decrease of $18,770.04); and other small 17 adjustments. 18 B. The Chief Administrative Office Affiliate Class of Services are 19 Necessary Services 20 Q. Are the services that are grouped in the Chief Administrative Office affiliate 21 class necessary for SPS's operations? 22 A. Yes. The Utilities & Corporate Services organization provides many essential 23 services that are necessary in order for SPS to provide electric service to its 24 customers, and leadership and oversight of the operational areas that provide Locker Direct - Revenue Requirement Page 48 RR7 - Page 185 of

12 1 those services is required. This leadership is provided through the Chief 2 Administrative Office affiliate class. These are functions required by all utilities 3 and without which SPS would not be able to provide electric service to its 4 customers. 5 Q. What are the specific services that are provided to SPS by the Chief 6 Administrative Office affiliate class? 7 A. The specific services that are provided to SPS by the Chief Administrative Office 8 affiliate class are leadership and oversight of the operational areas within the 9 Utilities & Corporate Services organization. This includes responsibility for the 10 overall direction of the many services provided to SPS by the Utilities & 11 Corporate Services Organization, and providing leadership of business area-wide 12 projects, strategy, and finance. The operational areas included within the Utilities 13 & Corporate Services organization are: 14 Group Presidents, which: oversee financial reporting, regulatory filings, 15 budgets and forecasts as well as the development and implementation of 16 regulatory strategy, business strategy, policies and procedures and 17 business planning for SPS. This operational area is discussed in detail by 18 Mr. Evans; 19 Human Resources and Employee Services, which includes the following 20 departments: Aviation & Travel Services; Property Services; Security 21 Services; Human Resources and Workforce Relations & Safety. These 22 departments facilitate business travel, provide and maintain physical 23 facilities, ensure a safe work place, provide security for facilities and 24 assets, administer union relations, provide apprentice training, provide 25 safety training for employees and contractors and ensure that SPS hires 26 and retains employees that are needed to provide electric service to 27 customers. These operational areas are discussed in detail by SPS 28 witnesses Lawrence A. Bick and Ms. Reed; 29 Corporate Giving, which facilitates the administration of the Xcel Energy 30 Foundation and corporate giving. Please refer to Mr. Evans's testimony 31 regarding the treatment of expenses related to corporate giving in this rate 32 case; Locker Direct - Revenue Requirement Page 49 RR7 - Page 186 of

13 1 Business Systems, which ensures that SPS has the information technology, 2 including networks, hardware, applications, and systems that are required 3 to provide service to its customers. This operational area is discussed in 4 detail by SPS witness David C. Harkness; 5 Resource Planning, which ensures reliable and cost-effective electric 6 service to SPS's customers. This operational area is discussed in detail by 7 SPS witness Bennie F. Weeks; and 8 Marketing, which is responsible for developing customer choice options 9 such as load management programs for SPS; performing regulatory 10 compliance, and performing assessments for SPS's customer programs; 11 developing new methods of customer engagement and improving 12 customer satisfaction with interactions with SPS. This operational area is 13 discussed in detail by SPS witness Shawn M. White. 14 Q. Are any of the Chief Administrative Office affiliate class of services that are 15 provided to SPS duplicated elsewhere in XES or in any other Xcel Energy 16 subsidiary such as SPS itself? 17 A. No. Within XES, none of the services grouped in the Chief Administrative Office 18 affiliate class are duplicated elsewhere. No other Xcel Energy subsidiary 19 performs these services for the Operating Companies. In addition, SPS does not 20 perform these services for itself. 21 Q. Do SPS's Texas retail customers benefit from the services that are part of the 22 Chief Administrative Office affiliate class of services? 23 A. Yes. The services of the Chief Administrative Office affiliate class benefit SPS's 24 customers in many ways. The oversight and coordination provided by the Chief 25 Administrative Office class is instrumental in ensuring that the services provided 26 to SPS by Utilities & Corporate Services departments are efficient, effective, and 27 support SPS's needs in providing electric service to customers. Locker Direct - Revenue Requirement Page 50 RR7 - Page 187 of

14 1 C. The Chief Administrative Office Affiliate Class of Services are 2 Provided at a Reasonable Cost 3 Q. Are the costs of the Chief Administrative Office affiliate class of services 4 reasonable? 5 A. Yes. The costs of the Chief Administrative Office affiliate class of services are 6 reasonable. It is typical for a corporate organization, such as Xcel Energy and its 7 subsidiaries, to centralize executive management in a shared services provider 8 such as XES. Xcel Energy provides this centralized executive management 9 service through the office of the Chief Administrative Officer. This centralized 10 structure reduces overall management and administrative costs by not having 11 duplicate executive management in SPS and the other Xcel Energy subsidiaries. 12 This structure allows costs for the Chief Administrative Office to be shared by 13 and distributed across multiple Xcel Energy legal entities Objective Evidence (Benchmarking) 15 Q. Is there any objective evidence that supports your opinion that the costs of 16 the Chief Administrative Office affiliate class are reasonable? 17 A. Yes. More than 92% of the requested costs for the Chief Administrative Office 18 class are compensation and benefits costs for XES personnel. Ms. Reed and Mr. 19 Schrubbe establish that the level of Xcel Energy's compensation and benefits is 20 reasonable and necessary. Locker Direct - Revenue Requirement Page 51 RR7 - Page 188 of

15 1 2. Budget Planning 2 Q. Is a budget planning process applicable to the Chief Administrative Office 3 class of affiliate costs? 4 A. Yes. Annual O&M budgets are created for the Chief Administrative Office class 5 of affiliate costs, using guidelines developed at the corporate level. The process 6 includes the review of historical spend information, identification of known 7 changes for the coming years, and analysis of the costs associated with those 8 changes prior to submitting a proposed budget. The budgeting process is 9 discussed in more detail in Section III of my testimony. 10 Q. During the fiscal year, are the actual expenditures of the Chief 11 Administrative Office affiliate class monitored versus the budget? 12 A. Yes. Actual versus expected expenditures of the Chief Administrative Office 13 affiliate class are monitored on a monthly basis by management. Deviations are 14 evaluated each month to ensure that costs are appropriate. In addition, action 15 plans are developed to mitigate variations in actual to budgeted expenditures. 16 These mitigation plans may either reduce or delay other expenditures so that 17 overall expenditures comply with the authorized budget. 18 Q. Are employees within the Chief Administrative Office organization held 19 accountable for deviations from the budget? 20 A. Yes. The Chief Administrative Office organization follows the same procedures 21 required of other business areas, which includes measuring results on a monthly 22 basis to ensure adherence to the established budgetary goals and to provide for 23 action plan development. Locker Direct - Revenue Requirement Page 52 RR7 - Page 189 of

16 1 3. Cost Trends 2 Q. Please state the dollar amounts of the actual charges (per book) from XES to 3 SPS for the Chief Administrative Office class of services for the three fiscal 4 years preceding the end of the Test Year and the Test Year. 5 A. The following table shows, for the fiscal years 2012, 2013, and 2014 (calendar 6 years) and for the Test Year, the actual per book affiliate charges (Co4umn J on 7 Attachment KSL-RR-A) from XES to SPS for the services grouped in the Chief 8 Administrative Office affiliate class: 9 Table KSL-RR-5 Actual (Per Book) Charges Over Time Class of Services Test Year Chief Administrative $1,348,343 $226,810 $450,239 $381,360 Office 10 Q. What are the reasons for this trend? 11 A. The decrease in costs from 2012 to 2013 was primarily related to Commercial 12 Operations incentive costs shifting to OS Senior VP Commercial Operations 13 affiliate class starting in There was also a reduction in labor and labor 14 loadings due to the average headcount reduction from 2012 to 2013, a one-time 15 retention payment made in 2012, and records management system costs necessary 16 to ensure continuing compliance with legal and regulatory requirements which 17 occurred one-time in The increase in costs between 2013 and 2014, was the 18 result of a Commercial Operations 2012 incentive adjustment credit included in 3 Please refer to Ms. Reed and SPS witness Jeffrey A. Butler regarding the treatment of these costs in this rate case. Locker Direct - Revenue Requirement Page 53 RR7 - Page 190 of

17 Q A , and a severance payment included in The additional decrease between 2014 and the Test Year, was in labor and labor loadings due to the average headcount reduction from 2014 to the Test Year. 4. Staffing Trends Please provide the staffing levels for the Chief Administrative Office affiliate class of services for the three fiscal years preceding the end of the Test Year and the Test Year. The following table shows, for the fiscal years 2012, 2013, and 2014 (calendar years) and for the Test Year, the average of the end of month staffing levels for the Chief Administrative Office affiliate class of services. Table KSL-RR-6 Average End of Month # of Staff Class of Services Test Year Chief Administrative Office 12 Q. 13 A What are the reasons for this trend? The decrease from 2012 to 2013 was due to the timing of support roles changing with hiring, as well as organizational changes occurring during the time period. The reduction in average staffing levels between 2014 and the Test Year was the result of elimination of one position and the transfer of an executive and executive assistant into another organization during the Test Year. Locker Direct - Revenue Requirement Page 54 RR7 - Page 191 of

18 1 5. Cost Control and Process Improvement Initiatives 2 Q. Separate from the budget planning process, does the Chief Administrative 3 Office affiliate class take any steps to control its costs or to improve its 4 services? 5 A. Yes. The Chief Administrative Office continually reviews its plans and initiatives 6 and staffing to ensure they are appropriate and to identify and implement 7 improvements. Staffing levels are increased only when it becomes apparent that 8 there will be a long-term need for a specific type of expertise that is not currently 9 on staff, when work levels appear to have increased on a permanent basis, or 10 when systematic employee transfers result in the need to replace staff. 11 Conversely, staff is decreased when the opposite trends become apparent. 12 D. The Costs for the Chief Administrative Office Affiliate Class of 13 Services are Priced in a Fair Manner 14 Q. For those costs that XES charges (either directly or through use of an 15 allocation) to SPS for the Chief Administrative Office affiliate class of 16 services, does SPS pay any more for the same or similar service than does 17 any other Xcel Energy affiliate? 18 A. No. 19 Q. Why do you answer "no"? 20 A. The XES charges to SPS for any particular service are no higher than the XES 21 charges to any other Xcel Energy affiliate. The costs charged for particular 22 services are the actual costs that XES incurred in providing those services to SPS. 23 A single, specific billing method, rationally related to the cost drivers associated 24 with the service being provided, is used with each work order. In his direct Locker Direct - Revenue Requirement Page 55 RR7 - Page 192 of

19 1 testimony, Mr. Dietenberger discusses the selection of billing methods and XES's 2 method of charging for services in more detail. 3 Q. How are the costs of the Chief Administrative Office affiliate class billed to 4 SPS? 5 A. My Attachment KSL-RR-B shows all of the costs in this class broken out by 6 activity and, in conjunction with Column E in my Attachment KSL-RR-A, shows 7 the billing method and allocation method associated with each activity. 8 Q. What are the predominant billing allocation methods used for the costs that 9 SPS seeks to recover for the Chief Administrative Office affiliate class of 10 services? 11 A. Of the requested XES charges to SPS, 100% were charged using one of the 12 following two billing allocation methods: 13 Assets, Revenue, and Number of Employees: 99.48% of XES charges 14 to SPS - $357,788.52; and 15 Direct Billing: 0.52% of XES charges to SPS - $1, Q. Why is it appropriate to allocate costs based upon the "Assets, Revenue, and 17 Number of Employees" method for the costs captured in the work orders 18 that use that billing method? 19 A. The three factor billing method using assets, revenue, and employees produces an 20 allocation of costs that recognizes the complexity, risk, and overall business 21 activity levels that drive the costs included in the work orders and measures the 22 benefits received from those activities. For the work orders billed using this 23 allocator, there is no one specific cost driver for the support tasks and services 24 provided, and the services benefit multiple Xcel Energy affiliates. For example, Locker Direct - Revenue Requirement Page 56 RR7 - Page 193 of

20 1 the costs associated with planning and conducting senior leadership strategy 2 meetings, which are collected in Work Order 110, are allocated using this method. 3 Within the Xcel Energy holding company group, those legal entities that have 4 proportionately more assets, revenues, and employees will have more focus 5 placed on their operations due to those subsidiaries' relative influence on the 6 consolidated business balance sheet, income statement, and statement of cash 7 flow, and the subsidiaries will benefit accordingly from the services provided. 8 Thus, allocating these costs based upon the average of the total asset ratio, 9 revenue ratio, and the employee ratio is appropriate because it allocates costs in 10 accordance with cost causation and benefits received. Mr. Dietenberger discusses 11 this billing method in more detail in his testimony. For the work orders that 12 assign costs based upon this billing method, the per unit amounts charged by XES 13 to SPS as a result of the application of this billing method are no higher than the 14 unit amounts billed by XES to other affiliates for the same or similar services and 15 represent the actual costs of the services. 16 Q. Why is the "Direct Billing" method appropriate for assigning the costs 17 captured in the work orders that use that billing method? 18 A. For the work orders that are assigned using the "Direct Billing" method, the costs 19 normally reflect work that was performed specifically for SPS only. In some 20 cases, however, the direct billing occurred after the application of an off-line 21 allocator that tracks the relevant cost drivers. In either situation, the work orders 22 charged using the "Direct Billing" method are appropriate because the assignment 23 of costs is in accordance with the distribution of benefits for the services received. Locker Direct - Revenue Requirement Page 57 RR7 - Page 194 of

21 1 For example, the labor costs for the Chief Administrative Officer to meet with 2 SPS employees and engage in discussions around topics such as company 3 initiatives and changes impacting the employees, which are collected in Work 4 Order , were assigned using the "Direct Billing" method. The cost of 5 these services benefitted SPS, the work was performed specifically for SPS alone, 6 and the cost driver is management of SPS employees. Thus, the "Direct Billing" 7 method is appropriate because it assigns costs in accordance with cost causation 8 and benefits received. For the work orders that assign costs using Direct Billing, 9 the per unit amounts charged by XES to SPS are no higher than the unit amounts 10 billed by XES to other affiliates for the same or similar services and represent the 11 actual costs of the services. Locker Direct - Revenue Requirement Page 58 RR7 - Page 195 of

22 1 VII. AFFILIATE EXPENSES FOR THE CORPORATE OTHER CLASS OF 2 SERVICES 3 A. Summary of Affiliate Expenses for the Corporate Other Class of 4 Services 5 Q. Where does the Corporate Other affiliate class fit into the overall affiliate 6 structure? 7 A. Attachment ARD-RR-6 to Mr. Dietenberger's direct testimony provides a list and 8 a pictorial display of all affiliate classes, dollar amounts for those classes, and 9 sponsoring witness for each class. As seen on that attachment, the Corporate 10 Other affiliate class is a department level group of costs, which is managed at the 11 corporate level. 12 Q. What expenses are reflected within the Corporate Other affiliate class? 13 A. The Corporate Other affiliate class is used to record costs billed to SPS for the 14 shared asset costs of the CRS software. Additionally, expenses relating to the 15 corporate accrual of purchases on the corporate credit card that are pending 16 expense statement processing are also reflected in this class. 17 Q. What is the dollar amount of the Test Year XES charges that SPS requests, 18 on a total company basis, for the Corporate Other affiliate class? 19 A. The following table summarizes the dollar amount of the Test Year XES charges 20 for the Corporate Other affiliate class. The table headings are explained 21 following the table. Locker Direct - Revenue Requirement Page 59 RR7 - Page 196 of

23 1 2 Class of Services Corporate Other Total XES Class Expenses Total XES Class Expenses Table KSL-RR-7 Requested Amount of XES Class Expenses Billed to SPS (Total Company) Requested Amount % Direct Billed % Allocated $1, 708,393 $245, % % Dollar amount of total Test Year expenses that XES charged to all Xcel Energy companies for the services provided by this affiliate class. This is the amount from Column F in Attachment KSL-RR-A, which I will discuss in the next question. Requested Amount of XES Requested dollar amount of XES expenses to Class Expenses Billed to SPS SPS (total company) for this affiliate class after (Total Company) exclusions and pro forma adjustments. This is the amount from Column L in Attachment KSL-RR-A. % Direct Billed The percentage of SPS's requested XES expenses (total company) for this class that were billed 100% to SPS. % Allocated The percentage of SPS's requested XES expenses (total company) for this class that were allocated to SPS. 3 Q. Please describe the attachments that support the information provided on 4 Table KSL-RR-7. 5 A. There are four attachments to my testimony that present information about the 6 requested SPS affiliate expenses for the Corporate Other affiliate class. I 7 explained these attachments in detail previously in Section V.A of my testimony. Locker Direct - Revenue Requirement Page 60 RR7 - Page 197 of

24 1 Q. Does XES bill all of its expenses for the Corporate Other affiliate class to 2 SPS? 3 A. No. XES bills the majority of its expenses for the Corporate Other affiliate class 4 to affiliates other than SPS. SPS receives approximately 13.35% of total XES 5 billings for the class, as shown on Attachment KSL-RR-A (Columns F, G, and H) 6 and Attachment KSL-RR-B (Columns G, H, and I). 7 Q. Are there any exclusions to the XES billings to SPS for the Corporate Other 8 affiliate class? 9 A. Yes. As I mentioned earlier, exclusions reflect expenses not requested, such as 10 expenses not allowed or other below-the-line items. Exclusions are shown on 11 Attachment KSL-RR-A, Column I, and on Attachment KSL-RR-B, Column J. 12 The details for the exclusions are provided in Attachment KSL-RR-C. As I also 13 mentioned earlier, Mr. Dietenberger describes how the exclusions were 14 calculated. 15 Q. Are there any pro forma adjustments to SPS's per book expenses for the 16 Corporate Other affiliate class? 17 A. Yes. As I mentioned earlier, pro forma adjustments are revisions to Test Year 18 expenses for known and measurable changes. Pro forma adjustments are shown 19 on Attachment KSL-RR-A, Column K, and on Attachment KSL-RR-B, 20 Column L. The details for the pro forma adjustments, including the witness or 21 witnesses who sponsor each pro forma adjustment, are provided in Attachment 22 KSL-RR-D. Locker Direct - Revenue Requirement Page 61 RR7 - Page 198 of

25 1 Q. Attachment KSL-RR-D shows that you are a sponsor for pro forma 2 adjustments that result in a net increase for the Corporate Other affiliate 3 class of $279, Please explain the adjustments. 4 A. The adjustments that I sponsor reflect the reversal of entries made in the first 5 month of the Test Year that were related to prior period activity and were 6 subsequently reversed (an increase of $279,707.81), and other small adjustments. 7 B. The Corporate Other Affiliate Class of Services are Necessary 8 Services 9 Q. Are the services that are grouped in the Corporate Other affiliate class 10 necessary for SPS's operations? 11 A. Yes. The costs grouped in the Corporate Other affiliate class are for necessary 12 business expenses, including the software used to bill SPS customers. They are 13 related to functions required by all utilities and are necessary for SPS to be able to 14 provide electric service to its customers. 15 Q. What costs are reflected in the Corporate Other affiliate class? 16 A. The costs reflected in the Corporate Other class are primarily expenses relating to 17 the corporate accrual of purchases on the corporate credit card that are pending 18 expense statement processing, and shared asset costs associated with the CRS 19 software that is used in billing SPS's customers. Shared asset costs occur when 20 employees in two or more of the Xcel Energy legal entities use or share an asset 21 owned by one of the Xcel Energy legal entities. The transactions result in the 22 sharing of the costs for that asset, including depreciation. Mr. Dietenberger and 23 SPS witness Melissa L. Ostrom address the type of shared assets costs requested 24 in this case. In addition, the Corporate Other affiliate class includes Locker Direct - Revenue Requirement Page 62 RR7 - Page 199 of

26 1 miscellaneous expenses, which are corporate in nature, such as the corporate 2 accrual of the company credit card transactions pending expense statement 3 processing and that have not yet been assigned to specific business areas (e.g., 4 Distribution Operations, Transmission, etc.). 5 Q. Are any of the Corporate Other affiliate class of services that are provided to 6 SPS duplicated elsewhere in XES or in any other Xcel Energy subsidiary 7 such as SPS itself? 8 A. No. The billing of these services from XES is only included in the Corporate 9 Other department. No other Xcel Energy subsidiary performs these services for 10 the Operating Companies. In addition, SPS does not perform these services for 11 itself. The services related to the shared asset costs are actually performed by the 12 Business Systems organization within XES and charged through a three digit 13 allocator to SPS at the Corporate Other level. The Corporate Other department 14 does not perform the services. 15 Q. Do SPS's Texas retail customers benefit from the services that are part of the 16 Corporate Other class of services? 17 A. Yes. As noted above, the services provided by the Corporate Other class are 18 primarily related to the net accrual amount during the Test Year of expenses made 19 on the corporate credit card, as well as a key computer software system that is 20 used to bill SPS's customers. Locker Direct - Revenue Requirement Page 63 RR7 - Page 200 of

27 1 C. The CorDorate Other Affiliate Class of Services are Provided at a 2 Reasonable Cost 3 Q. Are the costs of the Corporate Other affiliate class of services reasonable? 4 A. Yes. The corporate credit card transactions which are pending expense statement 5 processing are associated with services provided by all Xcel Energy business 6 areas and are incurred through the normal course of business, and the shared asset 7 costs for the customer billing system are reasonable and necessary. 8 Q. Please state the dollar amounts of the actual charges (per book) from XES to 9 SPS for the Corporate Other class of services for the three fiscal years 10 preceding the end of the Test Year and the Test Year. 11 A. The following table shows, for the fiscal years 2012, 2013, and 2014 (calendar 12 years) and for the Test Year, the actual per book affiliate charges (Column J on 13 Attachment KSL-RR-A) from XES to SPS for the services grouped in the 14 Corporate Other affiliate class: 15 Table KSL-RR-8 Actual (Per Book) Charges Over Time Class of Services Test Year Corporate Other $194,948 $28,110 $1.17 ($34,591) A. Q What are the reasons for this trend? The decrease in costs from 2012 to 2013 is primarily due to a decrease in the corporate credit card accrual and the decrease from 2013 to 2014 is further reductions in the corporate credit card accrual. The decrease in costs from 2014 to the Test Year is primarily a reduction in the shared assets costs for the Locker Direct - Revenue Requirement Page 64 RR7 - Page 201 of

28 1 customer billing system. The charges for unreconciled transactions fluctuate 2 annually and within the months due to the activity on the corporate credit card. 3 D. The Costs for the Corporate Other Affiliate Class of Services are 4 Priced in a Fair Manner 5 Q. For those costs that XES charges (either directly or through use of an 6 allocation) to SPS for the Corporate Other affiliate class of services, does SPS 7 pay any more for the same or similar service than does any other Xcel 8 Energy affiliate? 9 A. No. 10 Q. Why do you answer "no"? 11 A. The XES charges to SPS for any particular service are no higher than the XES 12 charges to any other Xcel Energy affiliate. The costs charged for particular 13 services are the actual costs that XES incurred in providing those services to SPS. 14 A single, specific billing method, rationally related to the costs drivers associated 15 with the service being provided, is used with each work order. In his direct 16 testimony, Mr. Dietenberger discusses the selection of billing methods and XES's 17 method of charging for services in more detail. 18 Q. How are the costs of the Corporate Other affiliate class billed to SPS? 19 A. My Attachment KSL-RR-B shows all of the costs in this class broken out by 20 activity and, in conjunction with Column E in my Attachment KSL-RR-A, shows 21 the billing method and allocation method associated with each activity. Locker Direct - Revenue Requirement Page 65 RR7 - Page 202 of

29 1 Q. What are the predominant billing allocation methods used for the Corporate 2 Other affiliate class of services? 3 A. Of the requested XES charges to SPS, 100% were charged using one of the 4 following two billing allocation methods: 5 Assets, Revenue, and Number of Employees % of XES charges to 6 SPS, or $230,482.61; and 7 Number of meters and number of contacts % of XES charges to 8 SPS, or $14, Q. Why is it appropriate to allocate costs based upon the "Assets, Revenue, and 10 Number of Employees" method for the costs captured in the work orders 11 that use that billing method? 12 A. The three factor billing method using assets, revenue, and employees produces an 13 allocation of costs that recognizes the complexity, risk, and overall business 14 activity levels that drives the costs included in the work orders and measures the 15 benefits received from those activities. For the work orders billed using this 16 allocator, there is no one specific cost driver for the support tasks and services 17 provided, and the services benefit multiple Xcel Energy affiliates. For example, 18 the costs of the corporate wide accounting accrual for amounts owed to the Bank 19 of Montreal for charges on the corporate credit card, which are collected in Work 20 Order 123, Accounting - Operating Companies, are allocated using this method. 21 These amounts are not identifiable to a certain organization or type of cost and 22 therefore a three-factor general allocator is used to distribute the costs to the 23 Operating Companies. Within the Xcel Energy holding company group, those 24 legal entities that have proportionately more assets, revenues, and employees will 25 have more focus placed on their operations due to those subsidiaries' relative Locker Direct - Revenue Requirement Page 66 RR7 - Page 203 of

30 influence on the consolidated business balance sheet, income statement and 2 statement of cash flow, and the subsidiaries will benefit accordingly from the 3 services provided. Thus, allocating these costs based upon the average of the total 4 asset ratio, revenue ratio, and the employee ratio is appropriate because it 5 allocates costs in accordance with cost causation and benefits received. Mr. 6 Dietenberger discusses this billing method in more detail in his testimony. For 7 the work orders that assign costs based upon this billing method, the per unit 8 amounts charged by XES to SPS as a result of the application of this billing 9 method are no higher than the unit amounts billed by XES to other affiliates for 10 the same or similar services and represent the actual costs of the services. 11 Q. Why is it appropriate to allocate costs based upon the "Number of Meters 12 and Number of Contacts" method for the costs captured in the work order 13 that uses that billing method? 14 A. Work Order 503 uses the "Number of Meters and Number of Contacts" method as 15 the allocator captures the shared asset costs for the CRS software. The CRS 16 software is used in billing customers and responding to their inquiries, and the 17 cost driver is the number of customer meters billed and the number of call center 18 contacts made. Thus, this work order allocates costs among the Xcel Energy 19 Operating Companies based upon each Operating Company's proportionate share 20 of the total number of meters and total number of contacts with the customers 21 (i.e., the number of meters and contacts of a particular Operating Company as a 22 percentage of the total number of meters and contacts of all of the Operating 23 Companies). This allocation reflects cost causation and the distribution of the Locker Direct - Revenue Requirement Page 67 RR7 - Page 204 of

31 benefits of the services received. For the work order that assigns costs based upon this billing method, the per unit amounts charged by XES to SPS as a result of the application of this billing method are no higher than the unit amounts billed 4 by XES to other affiliates for the same or similar services and represent the actual costs of the services. Locker Direct - Revenue Requirement Page 68 RR7 - Page 205 of

32 1 VIII. AFFILIATE EXPENSES FOR THE RISK MANAGEMENT AND AUDIT 2 SERVICES CLASS OF SERVICES 3 A. Summary of Affiliate Expenses for the Risk Management and 4 Audit Services Class of Services 5 Q. Where does the Risk Management and Audit Services affiliate class fit into 6 the overall affiliate structure? 7 A. Attachment ARD-RR-6 to Mr. Dietenberger's direct testimony provides a list and 8 a pictorial display of all affiliate classes, dollar amounts for those classes, and 9 sponsoring witness for each class. As seen on that attachment, the Risk 10 Management and Audit Services affiliate class was part of the Financial 11 Operations business area during the Test Year. Attachment KSL-RR-4 to my 12 testimony is an organization chart showing the Financial Operations business 13 area, which includes the Risk Management and Audit Services organization. 14 Q. What services are grouped into the Risk Management and Audit Services 15 affiliate class? 16 A. The services that are grouped into the Risk Management and Audit Services 17 affiliate class are internal auditing, evaluating and improving internal controls, 18 corporate governance, ensuring ethical conduct, providing insight on leading 19 practices, commodity-related transactional governance, valuation and reporting 20 for both traditional utility operations and trading, applicable credit risk 21 management, generation cost modeling, modeling support for resource planning, 22 contract development, distribution asset risk management, and other risk 23 management activities. Locker Direct - Revenue Requirement Page 69 RR7 - Page 206 of

33 1 Q. What is the dollar amount of the Test Year XES charges that SPS requests, 2 on a total company basis, for the Risk Management and Audit Services 3 affiliate class? 4 A. The following table summarizes the dollar amount of the Test Year XES charges 5 for the Risk Management and Audit Services affiliate class. The table headings 6 are explained following the table. 7 Table KSL-RR-9 Requested Amount of XES Class Expenses Billed to SPS (Total Company) Class of Services Total XES Class Expenses Requested Amount % Direct Billed % Allocated Risk Management and Audit Services $g9g39,345 $1,326, % 71.89% Total XES Class Expenses Requested Amount of XES Class Expenses Billed to SPS (Total Company) Dollar amount of total Test Year expenses that XES charged to all Xcel Energy companies for the services provided by this affiliate class. This is the amount from Column F in Attachment KSL-RR-A, which I will discuss in the next question. Requested dollar amount of XES expenses to SPS (total company) for this affiliate class after exclusions and pro forma adjustments. This is the amount from Column L in Attachment KSL-RR-A. % Direct Billed The percentage of SPS's requested XES expenses (total company) for this class that were billed 100% to SPS. Locker Direct - Revenue Requirement Page 70 RR7 - Page 207 of