T&D Projects. Robert Howard Vice President, Gas Transmission & Distribution

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1 T&D Projects Robert Howard Vice President, Gas Transmission & Distribution 1 1

2 Supplier Development & Maintenance Supplier Diversity Material Process Optimization Initiative Business Relationships 2 Transmission & Distribution Discussion Topics 2

3 PG&E is working collaboratively with our suppliers to safely deliver quality services on-time and on-budget PG&E will achieve the collaboration by introducing, measuring, increasing and negotiating all metrics for the following: Supplier Relationship Management (SRM) Key Performance Indicators (KPI) Scorecards Audits Introduction of Supplier Relationship Management (SRM) program with primary suppliers to drive safety, performance and quality metrics which are deemed as threshold measurements in order to meet the necessary requirements to perform work for PG&E Collaboratively develop qualitative scorecards to be reviewed quarterly with our primary engineering and construction suppliers measuring agreed upon KPIs KPIs will be measured, drive accountability and will be tied to future award allocations and overall volume of project work Increase auditing of large EPC projects to validate contract compliance and cost management Service Excellence: Supplier Development & Maintenance 3 3

4 PG&E has begun performing audits at established milestones for projects over $10M with the ET EPC Contractors to validate contract terms, scope, schedule, and cost Areas of validation to be reviewed by audit team: Markups Material Costs Labor Hours Project Milestones Supplier Diversity Timing intervals to perform selective EPC audits Final Target Price Engineering awarded and long-lead time materials ordered Intermediate Phase After mobilization of the Construction phase of project Final Project Cost Upon project completion Service Excellence: Quality Assurance 4

5 Service Excellence Supplier Diversity 5

6 6 Service Excellence: Supplier Diversity 6 T&D Supplier Diversity goal for 2009 is 30%. For 2010 the goal will be at least 30% or higher. T&D is in jeopardy of not meeting our goal for 2009 and needs to focus on improving our Supplier Diversity performance All strategically sourced contracts will have diversity goals of 30% or more All prime suppliers should have plans in place to meet or exceed their 2010 diversity goals Only subcontracting directly related to PG&E projects can be reported. All subcontracting should be reported on the SDMS system monthly Both the CPUC and the multitude of advocacy groups, especially Greenlining in California, are very focused on Supplier Diversity. Failing to meet our Supplier Diversity goals will have strong ramifications: Reduced work for our suppliers Lack of support for our rate cases Bad publicity Lack of advocacy support in the legislature Reduced stockholder value

7 Supplier Diversity, Sourcing, the LOB and our Suppliers have to work together to be successful in order to meet our Supplier Diversity goals Identify qualified diverse suppliers Mentoring and supplier development are critical elements to building a strong Supplier Diversity Program Supports further development and business growth Only subcontracting directly related to PG&E projects can be reported. All subcontracting must be reported on the SDMS system monthly Questions on how to report on SDMS should be addressed to Perry Bumanlag at pvb1@pge.com or CPUC Database Database for DVBE 7 Service Excellence: Supplier Diversity 7

8 MJ Avila Company L-351 (14.7 mi 30 Capacity) Supplier Diversity Success Story Potential maximum cost, fully engineered road replacement (7 AC w/class II base, PG64-10) was priced at $3,500,000 Final build cost: $660, irrigation lines fully interconnected under roads, extending over 4 mi with active irrigation in progress (water filled) Solution: live plugs immediately ahead and following pipe-laying construction (estimate of $200,000 saved) PG&E Livermore Training Center Phase I Completed December 08, on time and under budget Cost Reimbursable shared savings: $285,000 8 Service Excellence: Supplier Diversity 8

9 Service Excellence Materials Process Optimization (MPO) 9

10 1. Define Teams Identify cross functional participants Identify supplier participation 2. Current Situation Assessment Collect and analyze data Test working hypotheses and potential improvement opportunities 3. Identify, Prioritize and Plan Opportunities Review situational assessment Brainstorm improvement opportunities Shortlist, prioritize and plan initiatives 4. Create Value Proposition and Plan Define and estimate potential benefits Develop implementation/roadmap Team is here in the process 5. Share Results and Agree to Next Steps Discuss results with stakeholders Summarize and agree on next steps 6. Implement (Beginning in 2010) Identify owners and teams Launch improvement program MPO Complexity Reduction Process 10 10

11 PG&E would like to thank ABB, Valmont and Maclean for their participation in the Material Process Optimization workshops Validating PG&E hypothesis s identified in the workshops Proposing additional complexity reduction ideas performed by other utilities not identified by PG&E Suggestions of other areas for improvement based on their experience of working with PG&E Service Excellence: Materials Process Optimization 11 11

12 MPO - Wood Poles: Current Situation Assessment Findings from Operations Improvement PG&E Interviewees identified a range of operational benefits by having fewer wood pole types to administer and manage Productivity We have too many heights and classes to choose from it s too complex. Reducing the number of codes will definitely reduce the time we spend on selecting poles We needed all these heights and classes in the past when we did not have the right equipment. Today we have bucket trucks - I am sure we can eliminate some heights and classes Operational Benefits From Pole Rationalization Planning and Inventory Management Fewer codes to manage naturally makes planning and inventory management and easier I don t think there are any applications for the 30 and 35 ft poles in the primary network Pole Hardware Impact If we reduce the number of heights and classes, I am sure we can eliminate some types of pole hardware. Fewer options for hardware would simplify things for everyone 12 12

13 Service Excellence Business Relationships 13

14 In 2009, Sourcing completed strategic sourcing initiatives with efforts to secure preferred relationships with suppliers that mitigate risk and lower cost Introduction of cost structures that are mutually beneficial to both the supplier and PG&E to reduce risk and associated cost Electric Transmission Cost Performance incentives (Risk/Reward) require the supplier to share the financial risk of improving/missing the target price for a given project Schedule Incentives require the supplier to share the financial risks of improving/missing the required Operation Date Cost Performance and Schedule Incentives are defined in the MSA agreements and applied on a CWA by CWA basis Gas Transmission Cost Reimbursable Compensation Structure (CRCS) Service Excellence: Business Relationships 14 14

15 A mixture of cost performance goals and specific incentives have been jointly developed to reward supplier performance Cost Incentives: Currently implemented with all EPC supplier MSAs Risk/Reward based on final project cost compared to the Target Price Schedule Incentives: Implement schedule incentives on a CWA by CWA basis Completion of critical tasks or project milestones Meeting Operation Date and tied to AFUDC Charges Performance/Quality and Safety Incentives: Safety and Performance/Quality incentives deemed as threshold measurements Drawing Quality Quality of Design against PG&E standards Design Errors Forced Outages Rework Zero OSHA Recordables Zero Work Procedure Errors Service Excellence: Business Relationships 15

16 ET EPC Supplier Risk-Reward Structure ET EPC Risk-Reward Contract Structure Risk/Reward based on final project cost compared to the Target Price Risk / Reward incentives are typically applied to Open-Book EPC contracts against the Target Price Contractors will not receive profit markups on costs that exceed the Target Price Currently implemented within all EPC supplier MSAs Eliminates contingency premium associated with firm fixed price (lump-sum) contracts Mechanism for increasing Target Direct Cost via authorized Change Order Contractor direct costs are auditable Actual Project Cost Relative to Target Project Cost (including change orders) (Overrun = costs in excess of Target Cost of which are not attributable to change in scope or errors by supplier) Target Cost 100% Contractor and PG&E Split Savings 50/50 T C Contractor and PG&E Split Overrun 50/50 (Contractor will pay for all Target Cost overruns that are caused by Contractor) 16 16

17 Cost Reimbursable Compensation Structure (CRCS) Cost Reimbursable Compensation Structure (CRCS) Provides cost saving incentives for contractor to deliver projects under the agreed upon Target Direct Cost Eliminates contingency premium associated with firm fixed price (lump-sum) contracts Reduces contractor risk o All direct costs are reimbursed o Guaranteed overhead and profit fixed fees on Target Direct Cost o Mechanism for increasing Target Direct Cost via authorized Change Order Contractor direct costs are auditable Target Direct Cost (TDC) Maximum Direct Cost (MDC) Below TDC Above TDC and Below MDC Above MDC Supplier Compensation Contractor receives: All actual direct costs incurred Full fixed fees for OH & profit 50% sharing of savings if below TDC Contractor receives all costs stated in Below TDC plus: All direct costs on the actual direct cost above TDC and below MDC 50% of the quoted percentage for OH on the actual direct cost above TDC and below MDC Contractor receives all costs stated in Above TDC and Below MDC plus: Direct costs on amount over MDC 17 17

18 Business Relationships Success Story Gas Transmission - Line 351 Southwest Contractors, Inc. and MJ Avilla, Inc. Mc Mullen Grade L-351 Capacity General Location and Rout Map FRESNO COUNTY Henderson Marks Valentine Brawley Blythe Cornelia Hayes lincoln ave. L-138 L-111 manning ave

19 19 Service Excellence: Line Through collaboration with the supplier, the project was converted from a fixed fee project to the Cost Reimbursable Compensation Structure (CRCS) with fixed fees for overhead and profit and cost sharing of savings below the target price resulting in a cost reduction of $500k or 5% of the project contract price Project Scope: Line 351 is a new mile gas transmission line of 30-inch pipeline in the rural Southern Fresno area PG&E engaged Southwest Contractors and MJ Avilla early in the planning stage The project was completed with zero injuries Southwest Contractors complimented the PG&E project team referencing strong team work and quick problem resolution in which the Line 351 project was managed contributed to the positive outcome Upon project completion, the project was built well within the low target values and $625,000 savings were shared with Southwest from using CRCS

20 Take Aways Maintain and Improve our Supplier Relationship Improve Supplier Diversity Simplify Processes Improve & Solidify our Business Relationship 20 20