Corporate Performance & Efficiency

UE 262 / PGE /200 Pope - Neitzke

BEFORE THE PUBLIC UTILITY COMMISSION

OF THE STATE OF OREGON

UE262

Corporate Performance

&

Efficiency

PORTLAND GENERAL ELECTRIC COMPANY

Direct Testimony and Exhibits of

Maria Pope

Tamara Neitzke

Table of Contents

UE 262 1 PGE 1200 Pope - Neitzke 1 i

Table of Contents ... i

I.

II. The Continuous Improvement Cycle ... 4

III. Efficiency and Effectiveness in Operations ... 10

IV. Qualifications ... 13

I.

Introduction

UE 262 I PGE 1200

Pope - Neitzke 11

1 Q. Please state your names and positions with Portland General Electric ("PGE").

2 A. My name is Maria Pope. I am Senior Vice President, Finance, Chief Financial Officer and 3 Treasurer for PGE.

4 My name is Tamara Neitzke. I am Director of Corporate Planning and Performance

5 Management at PGE. Our qualifications are included at the end of this testimony.

6 Q. What is the purpose of your testimony?

7 A. PGE is committed to maintaining its focus on providing customers with safe, reliable,

8 adequate, and reasonably-priced electricity while also meeting customers' broader service 9 expectations, laying the groundwork for future needs, and achieving all required regulatory

10 standards. The purpose of our testimony is to describe how PGE's improvement efforts and

11 commitment to efficiency are an integral part of this effort. By working to mitigate rising

12 costs while maintaining effectiveness, we are able to keep our revenue requirement request

13 in this proceeding - and thus our prices - much lower. Through our improvement efforts, 14 we project O&M savings and avoided costs of $15.6 million in 2014. As we continue to 15 emphasize cost efficiency in our operations, we expect to see savings accrue for our capital 16 projects as well. PGE Exhibit 201 provides a summary ofO&M efficiency savings.

17

Q.

18 A. Efficiency is aimed at how we deliver reliable energy and service to customers while 19 maintaining standards for safety and regulatory compliance. Technically, efficiency is 20 measured by comparing the ratios of output to input. A system increases its cost efficiency 21 when it maintains output with fewer or less costly input(s), or conversely delivers higher 22 value to customers for the same or lower cost. Effectiveness is the quality measure of output.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Q.

Q.

Our efficiency and effectiveness efforts aim to contain or reduce costs while keeping our high quality of customer service and system reliability. We are not effective if our system is not safe, not reliable, or we are not providing good customer service. This differs from mere cost cutting; obtaining the lowest absolute cost is not a responsible goal if it sacrifices our effectiveness in delivering safe, reliable power.

Why are efficiency and effectiveness important?

Our customers depend on PGE to run an efficient operation, while meeting their growing needs, by keeping our costs down while maintaining effectiveness by providing safe and reliable power.

What factors are considered in defining PGE's appropriate range of efficiency and effectiveness?

We use industry peer group analyses to help define appropriate ranges of effectiveness and efficiency for business areas. However, industry analyses often consider the efficiency and effectiveness metrics on separate scales and it is important to define an appropriate combination of these two metrics. The appropriate balance varies across industries, businesses and functional areas due to varying requirements and characteristics including compliance and reliability obligations. When striving for the appropriate combination, we must also manage the improvement changes we make in a way that the organization can absorb and integrate those changes effectively. PGE, as most businesses, has a maximum threshold for change absorption that must be considered when reviewing and prioritizing improvement initiatives. Change absorption represents how much change PGE can effectively undertake at anyone time.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Q.

A.

Q.

A.

How is operational efficiency and effectiveness incorporated into PGE?

Operational excellence is an integral part of PGE's strategy. Its objectives are to demonstrate operational cost effectiveness while upholding our commitment to performance, safety and customer satisfaction. Operational efficiency and effectiveness is a shared expectation throughout the organization. The Corporate Performance Management group (Corporate Performance) leads our efforts towards improvement while the expectation to drive for efficiency lies within all business units. This structure provides centralized leadership of the decentralized efforts to achieve continuous improvement and operational efficiency.

How is PGE moving forward with its improvement efforts?

In our last general rate case, VE 215, we hired Pacific Economics Group (PEG) to perform a high level econometric analysis benchmarking PGE's operations. The study illustrated PGE's overall effectiveness while maintaining O&M expenses that were in line with industry standards. The study provided a useful starting point with a high-level analysis of PGE operations, but since then we have probed deeper with comprehensive functional benchmarking efforts targeting all business areas of PGE. Please see Section II for an explanation ofPGE's improvement cycle and efforts since VE 215.

II.

The Continuous Improvement Cycle

UE 262 / PGE / 200 Pope - Neitzke / 4

1 Q. What is a continuous improvement cycle?

2 A. A continuous improvement cycle involves the constant effort toward improvement. The

3 cycle does not end when we reach the last step, but rather repeats. 4

Q.

5 A. At a very high level, our improvement cycle includes the following:

6 1) Benchmarking. The process begins by benchmarking key areas of PGE's business that 7 drive performance. Benchmarking compares the effectiveness and efficiency of PGE's 8 operations against peers within and outside the utility industry, where appropriate. 9 Metrics are reviewed by a third-party for validity to ensure the best "apples-to-apples"

10 comparison. Benchmarking is not the final answer but rather the beginning step towards

11 improvement. The true value is realized with the improvement work that follows.

12 2) Synthesizing Results. After benchmarking, data are reviewed from top-performing

13 companies to identify best practices. The combination of benchmarking results and best 14 practices are then synthesized to identify areas of strength and improvement 15 opportunities. Best practices provide us insight as to where change might be possible to 16 improve our performance and ultimately our benchmarking results in the future.

17 3) Strategizing. The improvement opportunities are then prioritized. Improvement projects 18 that require internal funding are required to supply a business case illustrating the 19 proposed change. A business case must describe the scope, justification and cost of the 20 project. When applicable, projects are then reviewed by the appropriate committee to 21 assess each project's capability and possible approval. (Note: not all improvement 22 projects require internal funding and thus don't require a business case.) Lastly,

1 2 3 4 5 6 7 8 9 10 11 12

Q.

improvement efforts are targeted to work in line with the overall business strategy of delivering safe and reliable power to customers.

4) Initiative Development. After the strategy is defmed, a roadmap of initiatives is developed to help guide projects to completion. Initiatives such as system automation and Lean process reviews have had a substantial impact. As projected savings associated with initiatives are quantified, we remove those savings from operational budgets, thus, creating a cycle of accountability among management to accomplish defined initiatives. 5) Cycle Repeats. The benchmarking cycle is repeated: (1) once initiatives are in place and

a business unit has completed its strategy, or (2) it is an appropriate time to measure improvement progress. As each functional group is in a different stage of reviewing its organization for improvement opportunities, benchmarking cycles vary.

How does PGE determine which business units to benchmark?

The goal of the corporate benchmarking initiative is to review all major business functions within PGE. However, identifying the business units to be benchmarked is largely

15 determined by the availability of peer data and existing benchmarking opportunities.

16 Common utility functions such as Information Technology and Customer Service have well 17 established vendors with reliable data that offer benchmarking programs. Less common

18 functions or very specialized areas such as Corporate Communications and Governmental 19 Affairs are more difficult to benchmark as less data are available and the functions included

20 vary greatly.

21 Q. How are peer groups selected?

22 A. Peer groups are most commonly selected by the benchmarking vendor and result from two

UE 262 1 PGE 1200

Pope - Neitzke 16

1 peer group is composed of organizations that chose to participate in that particular study;

2 and (2) If a vendor has a well-established database of cross-sectional company data, there is

3 more flexibility in selecting an appropriate peer group. Common factors used to create peer

4 groups from a database include: industry type, number of employees, revenue, and customer

5 base.

6 Q. Has PGE benchmarked most areas?

7 A. Yes. PGE Exhibit 202 provides a list of benchmarked areas, the vendor, and timing. 8 Q. Which areas have not finished their first continuous improvement cycle?

9 A. Customer Service, Shared Services, and Legal have been benchmarked and are in the

10 process of reporting and synthesizing the results from the benchmark studies. Throughout

11 2013, each area will analyze results, review best practices and begin to develop an overall 12 strategy and roadmap for improvement. Public Policy is currently analyzing work processes

13 and developing an internal review based on best practices in the industry. A preliminary

14 benchmarking schedule is listed in PGE Exhibit 203.

15 Q. What major improvement initiatives have been completed, are underway, or are being

16 developed?

17 A. PGE has numerous improvement initiatives completed or underway as a result of our

18 benchmarking activities, process improvements, or other activities. Some of these major

19 initiatives are:

20 • Transmission & Distribution (T&D) Transformation is an effort to improve work

21 processes and leverage technology to improve safety, accountability, standardization, 22 productivity, and efficiency in transmission and distribution. The transformation

1

2

UE 262 1 PGE 1200 Pope - Neitzke 17

program projects O&M annual savings of $3.4 million in 2014. Details can be found in PGE Exhibit 800, Section II.

3 • Financial Systems Replacement Project (FSRP) replaced PGE's obsolete 26-year old

4 Masterpiece system with a new financial system that enables streamlined workflow and

5 automation of many manual processes. Examples of streamlined workflow include:

6 o 40% reduction in cash management processing time; and,

7 o Automation of80% of book-tax adjustments.

8 FSRP, in conjunction with Lean process analysis, allowed for Finance and

9 Accounting (F&A) to realize efficiencies through a net reduction of approximately

10 11 Full Time Equivalents (FTE) through 2012 and another 4.3 FTEs by 2014. Details can

11 be found in PGE Exhibit 1000, Section II, Part A.

12 • Procurement Efficiencies via Strategic Sourcing consists of performing spend analysis by

13 14 15 16 17 18 19 20

utilizing our new financial system (FSRP), identifying business requirements, understanding the marketplace, developing a supply category strategy, evaluating and selecting suppliers, negotiating agreements, developing scorecards to measure supplier performance and then repeating the process to drive continuous improvement. In 2012, PGE negotiated over $7.6 million of O&M cost savings and $2.6 million of O&M avoided costsl _{that span multiple years (i.e., $1.4 million in 2012, $1.2 million in 2013,}

$1.1 million in 2014, and the remaining $6.5 million after 2014). Details can be found in PGE Exhibit 1000, Section II, Part A.

21 • Lean Processing in Human Resources - Lean processing IS a process improvement 22 methodology that focuses on removing "waste" from processes so that efficiencies in

1 Based upon Utility Purchasing Management Group (upMG) defmition of cost savings and cost avoidance. See

1 2 3 4 5 UE 262 1 PGE 1200 Pope - Neitzke 1 8

time and resources can be achieved. Waste can be anything from wait time, to errors and re-work, to extra processing. As processes are improved, productive resources can be reallocated to higher-value activities. PGE's Human Resources (HR) has completed 20 Lean processes with more in progress. Details on HR Lean processing efforts can be found in PGE Exhibit 1000, Section II, Part C.

6 • Employee Benefit Provision Mitigation - Health care reform will have a significant

7 impact on medical plan design and cost as it evolves over the next few years. PGE is

8 monitoring health care reform, and we are evaluating possible future changes to existing

9 benefit plans. In preparation for reform, we have modified many benefit provisions to

10 offset the full effect of increases in benefit costs while maintaining an effective level of

11 benefit support for employees. Some of the benefit changes are:

12 o Increasing deductibles and co-pays;

13 o Adding additional coinsurance to various plans; and,

14 o Offering high deductible plans by each vendor in addition, not in lieu of other

15 offerings.

16 PGE evaluates if a change in benefit options offered is prudent and if further 17 cost shifting to employees, in terms of out-of-pocket contributions, deductibles and

18 choices of care are appropriate. See PGE Exhibit 500, Section IV for more details on

19 how PGE is working to mitigate benefit cost increases.

20 • myTime is a web based time collection system (TCS) that will increase accuracy and

21 reduce resources spent on time-keeping processes and payroll. myTime will replace the

2

UE 262 / PGE /200

Pope - Neitzke / 9

$1.0 million, which is reflected in wages and salaries in both 2013 and 2014. myTime is explained in more detail in PGE Exhibit 1000, Section II, Part C.

3 • Information Technology (IT) Vision Design is a roadmap of 15 initiatives directed at

4 improving IT's effectiveness, capabilities, and efficiency over the next three years. Each

5 initiative encompasses one or more of the following six foundational principals: partner 6 with the business; eliminate complexity; source strategically; standardize IT

7 process/procedures; build a strong workforce; and, meet increasing service expectations. 8 Through the 15 initiatives, IT will be able to continue supporting PGE's growing need for 9 technical infrastructure and services while maintaining a relatively flat IT employee 10 count. From 2011 through 2014, we project a net reduction of 7.8 IT FTEs. See PGE

11 Exhibit 600, Section III, Part B for details.

12 • Generation Excellence. In 2006, PGE's generation organization established the 13 Generation Excellence initiative to focus on improvement efforts such as safety, 14 employee performance, process improvements, and reliability. Generation Excellence

15 has continued to evolve with the establishment of Reliability and Maintenance 16 Excellence (R&ME), which is a comprehensive approach to reliability and maintenance;

17 it encompasses, and better aligns, several sub-initiatives including Reliability Centered

18 Maintenance (RCM) and utilization of our Enterprise Work and Asset Management 19 System (Maximo). R&ME is plant specific and each plant is anticipated to have their

20 strategy in place by the end of 2013. For more detail see PGE Exhibit 700, Section III,

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Q.

Q.

Q.

Q.

III. Efficiency and Effectiveness in Operations

Is PGE also implementing changes in operational day-to-day activities that lead to lower costs?

Yes. We have several operational methods that reinforce efficiency and cost effectiveness in our daily operations including: budget development and management as well as goods and services procurement.

How does PGE reinforce efficiency and effectiveness through its budget process?

The goal of PGE's budget process is to allocate limited resources to achieve our corporate goals of delivering safe, reliable power and effective customer service. Our budget process reflects our commitment to an efficient use of resources to effectively deliver safe and reliable power.

How do O&M budgets reflect a commitment to efficiency and cost effectiveness?

Our O&M budget process relies on managers who know their areas of responsibility, including how the work is performed and the resources required to perform it. With officer guidance, managers develop their budgets while also identifying variances from the previous year's budget. Proposed budgets are then reviewed by senior managers and officers, and finally PGE' s Board of Directors. Officers review actual results compared to budget on an income statement line-item basis. On a regular basis, analysts and managers monitor actual expenses and revenues, taking timely corrective action in response to deviations. The budget reports as well as management and executive reviews serve as controls during the budget year. Again, our process reflects our commitment to an efficient use of resources to effectively deliver safe and reliable power.

UE 262 / PGE /200 Pope - Neitzke /11

1 A. PGE uses a cross-functional group of senior PGE managers called the Capital Review Group

2 (CRG) to review proposed capital projects (except major projects such as T&D

3 Transformation and Customer Engagement Transformation, which are evaluated at the

4 Officer and/or Board levels). Funding Project documentation must be submitted for each

5 project and includes the scope, justification, and cost of the project. The CRG prioritizes

6 projects and recommends to the CEO which ones should proceed. Prioritization is primarily

7 based upon necessity (i.e., projects that are required to remain in regulatory or contractual 8 compliance or avoid system obsolescence). Other factors that the CRG considers are

9 urgency, consequences, economic value, and alignment with corporate strategy. Project

10 approval and prioritization ensures that plans to commit resources are thoroughly

11 scrutinized, appropriately authorized, monitored and adequately reviewed upon completion.

12 If the project scope changes significantly after approval, the project is again reviewed.

13 Q. How does PGE reinforce efficiency and cost effectiveness through procurement

14 processes?

15 A. PGE's general procurement strategy uses a competitive process led by the Sourcing and 16· Contracts team of specialized buyers. The buyers are familiar with vendors, products, and

17 services as well as current market conditions. By using PeopleSoft (part of FSRP) as PGE's

18 primary supply chain software in conjunction with Oracle Business Intelligence (OBI), a

19 reporting tool, PGE is able to perform "spend analysis" to combine similar purchases and 20 leverage PGE's buying power through strategic sourcing. PGE buyers now better understand

21 what PGE purchases across the enterprise. Additional information on Procurement's 22 strategic sourcing process is provided in PGE Exhibit 1000, Section II, Part A.

1

UE 262 / PGE /200 Pope - Neitzke / 12 For significant purchases, we encourage the use of formal bidding. Construction

2 projects with defined scopes of work and available contractors are nearly always bid,

3 although the type of the contracts may differ. Bids are evaluated based on total ownership 4 cost? However, cost of the good or service, while important, is not the only factor

5 considered. For example, fleet purchases, (e.g., hybrid or specialized equipment) may have 6 other factors such as the uniqueness of the required product. In software purchases, factors

7 like maintenance or replacement may significantly influence the purchasing strategy. In

8 these cases, users are required to justify single or sole sources for the purchase. In many

9 areas, procurement decisions are a collaborative effort with the department that uses the

10 good or service.

11 Q. Please summarize your testimony.

12 A. Operational excellence is an integral part of strategy at POE. Since 2009, we have made

13 progress in centralizing and developing our continuous improvement cycle, which will

14 continue to evolve. The product of our hard work can be seen in over $15 million of O&M

15 savings and avoided costs projected for the 2014 test year. By mitigating rising costs while

16 maintaining effectiveness, we work to keep our prices lower than otherwise. We are proud 17 of our history of effectiveness as described in the PEO benchmark study. It is our

18 responsibility to run an efficient operation for customers, while not sacrificing safety and

19 high reliability and meeting growing customer expectations. For more information on how

20 POE is working to meet customers' future needs see POE Exhibit 900.

2 Total ownership cost is a comprehensive systems approach to analyzing purchases, processes, and supply chain-related decisions.

Q.

Q.

A.

IV.

Qualifications

Ms. Pope, please describe your educational background and experience.

I received my Bachelor of Arts degree from Georgetown University in 1987 and my Master's degree in Business Administration from the Stanford University Graduate School of Business in 1992. I was named Senior Vice President, Chief Financial Officer and Treasurer ofPGE in January 2009. From January 2006 through December 2008, I served on the PGE Board of Directors. Previous to January 2009, I served as Vice President, Chief Financial Officer at Mentor Graphics Corp., an Oregon-based software company, where I was responsible for multiple departments including the company's financial affairs, corporate development and operations. Before I joined Mentor Graphics in 2007, I served 12 years in a variety of capacities at Pope & Talbot, Inc, and worked previously at Morgan Stanley.

Ms. Neitzke, please describe your educational background and experience.

I received my Bachelor of Science degree in Business Administration with an emphasis in Finance from Oklahoma State University in 1984 and my Post-Baccalaureate Accounting Certificate (PBAC) from Portland State University in 1997. I have worked for PGE since 2007 in various managerial positions including Financial Reporting Group, Assistant Treasurer and Director of Planning and Performance Management. From 1998-2007, I was a Senior Manager in the audit practice of KPMG LLP, Portland office. From 1992-1997, I was a credit analyst for First Interstate Bank; and from 1984-1990, I was in a similar credit

20 analyst role at the Bank of Oklahoma.

21 Q. Does this conclude your testimony?

List of Exhibits

PGE Exhibit Description

201

202

203

UE 262 / PGE / 200 Pope - Neitzke /14

Test Vear: 2014 O&M Efficiency Summary (In $ millions)

Initiative

1. A&G - Procurement Efficiency via Strategic Sourcing 11)

Utilizing FSRP and strategic sourcing methodology. Procurement has become more efficient 2. F&A - Financial System Replacement Project (FSRP) and Work Process Analysis 12)

Replacement of obsolete financial system. By utilizing new technology and analyzing work processes a net 15.3 FTE reduction is achieved by 2014. 3. F&A -1% Rebate on P-Card Purchases

pge receives annual lump sum rebates from Bank of America for using corporate credit cards for business purchases 4. HR - Net Reduction of 9.3 FTE 12)

lean Processing implementation and the leverage of technology contribute to HR's ability to reduce and redeploy FTEs by streamlining workflow and reducing

resources needed to complete work processes

5. HR - myTlme

Replacement of obsolete time collection system with web-based system 6. HR - Employee Benefit Mitigation Efforts

In-source health and welfare administration Self-Insured Metlife Dental 11)

Higher Deductibles, Increased Co-Pays

Vendor Change for Pre-1992 Non-Union Medicare Supplemental Plan 401(k) Administration Provider Change

7. IT - Vision Design 12)

IT will continue to support PGE's growing need for infrastructure while achieving a net reduction of 7.SIT FTE 8. IT - Application Management

Rationalizing outstanding applications and eliminating duplicative functions 9. IT - Agile Initiatives (')

Through Agile Initiatives. IT has been able to eliminate contract labor needs for IT application support 10. IT - Virtual Servers 11114)

Utilizing virtualized servers over physical servers 11. T&D - Transformation O&M Savings

Centralization and standardization of work processes, as well as, intergration of technology In an effort to improve safety, accountability, standardization, productivity and efficiency

Centralization of Regional line Dispatch Off - Shift Crews

Supervisor in the Field (SITF) Fleet Optimization

Service Coordinator

Other

2014 O&M Efficiency Savings

Footnotes:

(1) Avoided cost savings

2014 Savings 1.1 1.5 0.1 0.8 1.0 0.3 0.1 O.S 0.7 O.S O.S 0.6 0.4 3.3 0.5 0.7 O.S 0.2 0.1 1.2 $

(2) Based on FTE reductions for each business area, which can include redeployment. For net reductions by operating area, please see PGE Exhibit 501. Benefits ore calculated using average W&S for each respective area.

(3) Calculated based upon savings realized since the inception 0/ intiative (2010 - 2014) (4) Calculated on a 1:1 basis

PGE Exhibit location Exhibit 1000 Section II Part A Exhibit 1000 Section II Part A Exhibit 1000 Section II Part A Exhibit 1000 Section II Part C Exhibit 1000 Section II Part C Exhibit 500 Section IV Exhibit 500 Section IV Exhibit 500 Section IV Exhibit 500 Section IV Exhibit 500 Section IV Exhibit 600 Section III Part B Exhibit 600 Section III Part B Exhibit 600 Section III Part B Exhibit 600 Section III Part B

Exhibit 800 Section II Part C Exhibit 800 Section II Part C Exhibit SOO Section II Part C Exhibit SOO Section II Part C Exhibit SOO Section II Part C Exhibit SOO Section II Part C 15.6

UE 2621 PGE 1 Exhibit 201

Pope - Neitzke Page l o f l

n

marking

t

ate

* Includes Mid-Back Office Survey completed in 2012

UE 262 / PGE / Exhibit 202 Pope - Neitzke

Page 1 ofl

Projected benchmarking schedule

UE 262 / PGE / Exhibit 203 Pope - Neitzke

Page I ofl

Re-evaluating benchmarking schedule, determining appropriate

cycles for each organization and centralizing benefit tracking in 2013

Note: Difficult to project what departments will be captured within each study. For

example, depending on study taxonomy, Meter Reading could be captured in

a

Transmission

&

Distribution or Customer Service study.

,

_{.. /. and:(ittna"al}