BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO * * * * * ) ) ) ) ) ) ) ) DIRECT TESTIMONY AND EXHIBITS OF AMY L.

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1 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO * * * * * RE: THE TARIFF SHEETS FILED BY PUBLIC SERVICE COMPANY OF COLORADO WITH ADVICE NO. 0 GAS RE: THE TARIFF SHEETS FILED BY PUBLIC SERVICE COMPANY OF COLORADO WITH ADVICE NO. - STEAM DOCKET NO. 1AL- G DOCKET NO. 1AL- ST DIRECT TESTIMONY AND EXHIBITS OF AMY L. STITT ON BEHALF OF PUBLIC SERVICE COMPANY OF COLORADO December 1, 01

2 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO * * * * * RE: THE TARIFF SHEETS FILED BY PUBLIC SERVICE COMPANY OF COLORADO WITH ADVICE NO. 0 GAS RE: THE TARIFF SHEETS FILED BY PUBLIC SERVICE COMPANY OF COLORADO WITH ADVICE NO. - STEAM DOCKET NO. 1AL- G DOCKET NO. 1AL- ST DIRECT TESTIMONY AND EXHIBITS OF AMY L. STITT INDEX I. INTRODUCTION AND QUALIFICATIONS...1 II. PURPOSE OF DIRECT TESTIMONY... III. FINANCIAL BUDGET PROCESS... IV. CAPITAL EXPENDITURES AND PROJECT OVERSIGHT...1

3 LIST OF EXHIBITS Exhibit No. ALS-1 Xcel Energy System View of Budgeting and Forecasting Exhibit No. ALS- Xcel Energy Corporate Budget Instructions, O&M Budget and Capital Budget Exhibit No. ALS- Exhibit No. ALS- Exhibit No. ALS- Exhibit No. ALS- Exhibit No. ALS- Exhibit No. ALS- Xcel Energy Budget Documentation & Workpaper Guidelines (01-01 Budget Trend Excluding Pipeline System Integrity Adjustment ( PSIA - Distribution Operations and Gas Systems Public Service Company of Colorado Actual vs. Budget by FERC Account 00 O&M Public Service Company of Colorado Actual vs. Budget by FERC Account 0 O&M Public Service Company of Colorado Actual vs. Budget by FERC Account 0 O&M Public Service Company of Colorado Actual vs. Budget Capital Expenditures

4 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO * * * * * RE: THE TARIFF SHEETS FILED BY PUBLIC SERVICE COMPANY OF COLORADO WITH ADVICE NO. 0 GAS RE: THE TARIFF SHEETS FILED BY PUBLIC SERVICE COMPANY OF COLORADO WITH ADVICE NO. - STEAM DOCKET NO. 1AL- G DOCKET NO. 1AL- ST DIRECT TESTIMONY AND EXHIBITS OF AMY L. STITT I. INTRODUCTION AND QUALIFICATIONS Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. A. My name is Amy L. Stitt. My business address is 1 Nicollet Mall, Minneapolis, MN 01. Q. BY WHOM ARE YOU EMPLOYED AND WHAT IS YOUR POSITION? A. I am employed by Xcel Energy Services Inc. ( XES, a wholly-owned subsidiary of Xcel Energy Inc. ( Xcel Energy, the parent Company of Public Service Company of Colorado ( Public Service or the Company. XES provides an array of support services for Public Service and the other utility subsidiaries of Xcel Energy. I am the Managing Director of Financial Performance and Planning. Q. WHOM ARE YOU REPRESENTING IN THIS PROCEEDING? A. I am testifying on behalf of Public Service.

5 Q. HAVE YOU INCLUDED A DESCRIPTION OF YOUR QUALIFICATIONS, DUTIES AND RESPONSIBILITIES? A. Yes. A description of my qualifications, duties and responsibilities is included as Attachment A II. PURPOSE OF DIRECT TESTIMONY Q. WHAT IS THE PURPOSE OF YOUR DIRECT TESTIMONY IN THIS PROCEEDING? A. My testimony describes Xcel Energy s Financial Budget process, including the process used in preparing the Operating and Maintenance ( O&M expense and Capital Expenditure budgets for Public Service. These are the major inputs to Public Service s forecast cost of service studies presented in this proceeding by Company witness Ms. Deborah A. Blair. A third major component of Public Service s forecasted cost of service is the customer and sales forecasts for Public Service. Company witness Ms. Jannell E. Marks will describe the retail and wholesale customer and sales forecasting process. Ms. Blair will describe how the Company derives the resulting revenue forecasts that are inputs to the forecasted cost of service studies used to calculate the revenue requirements in this proceeding. Q. ARE YOU SPONSORING ANY EXHIBITS AS PART OF YOUR DIRECT TESTIMONY? A. Yes, I am sponsoring Exhibit Nos. ALS-1 through ALS-, which were prepared by me, or under my direct supervision.

6 III. FINANCIAL BUDGET PROCESS Q. WHAT IS YOUR RESPONSIBILITY WITH RESPECT TO THE FINANCIAL BUDGET PROCESS? My organization facilitates the establishment of the corporate guidelines that govern the annual financial budget process for each of Xcel Energy s operating utility subsidiaries, including Public Service. We are responsible for the annual training that is provided to the budget managers for every business area. Persons within my organization work closely with the budget managers in every business area as they develop their budgets. We are charged with ensuring that the corporate O&M and capital expenditure budgets and the budgets for each of the operating utility subsidiaries reflect as accurate a forecast as possible of the costs we will incur to deliver utility service during the next year. We are also responsible for ensuring that the budget reflects the most efficient level of cost consistent with our obligations to deliver reliable utility service to our customers now and in the future. We do this by establishing a process that is transparent at every level and emphasizes the importance of budgeting accuracy and efficiency My responsibilities include the oversight and management of the five-year O&M and Capital Expenditures Budgets that flow into the Xcel Energy Financial Budget. I also have similar responsibilities related to the monthly forecast updates that are part of the financial governance process. The O&M Budget and the Capital Expenditures Budget are two components of the Xcel Energy Financial Budget process. My responsibilities include:

7 Developing the annual Corporate Budget Instructions, including the corporate budget calendar.. Developing and delivering the corporate budget training.. Developing the annual Corporate Budget Documentation & Workpaper Guidelines.. Providing maintenance and training for the CompetiSoft Budgeting System ( CBS. CBS is the system used for both input and retention of the O&M and Capital Expenditures details for the budget.. Providing corporate oversight and management of the labor budgeting process, including PeopleSoft loads, headcount analyses and labor overheads.. Coordinating and managing the business area s annual input and monthly updates of O&M and Capital Expenditure details into CBS.. Reviewing the corporate O&M and Capital Expenditures.. Coordinating and reviewing the business area Budget Documentation. Q. PLEASE DESCRIBE THE FINANCIAL BUDGET PROCESS. A. Beginning in 01, we modified our budget processes to require business areas to develop five-year O&M budgets rather than the two-year O&M budgets that we had been developing in the past. The five-year O&M Expenditure Budget is more consistent with the five-year Capital Expenditure Budgets we have been developing for many years. Under the current process, every year we prepare a five-year financial budget that serves as the baseline for an updated five-year financial forecast. Key components of the Xcel Energy financial budget are the

8 O&M and Capital expenditures budgets for each of Xcel Energy s operating utility subsidiaries. The five-year financial budget and the five-year financial forecast are used by executive management to anticipate each of the operating utility s financial needs and to make major strategic decisions. The financial budget is a key component of the overall framework used by the Company to develop supportable and attainable financial plans for each operating utility and for the Company as a whole. Q. WHY DO YOU PLACE SUCH AN EMPHASIS ON BUDGETING ACCURACY? A. A key factor in maintaining the Xcel Energy s utility operating companies credibility with the their regulators and with the investment community is our ability to accurately forecast our results from operations. That, in turn, requires that we have in place a budget process that is transparent and accurately reflects the O&M and capital expenditures we expect to incur at each operating utility during the budget period. It also requires that we have in place processes that allow us to regularly monitor our actual spending as compared to our budgets and that allow us to update those budgets and forecasts as necessary to reflect the dynamic nature of our business. Q. WHAT ARE THE FINANCIAL SYSTEMS USED BY THE COMPANY IN DEVELOPING ITS FINANCIAL BUDGETS AND FORECASTS? A. The Company uses a number of different financial systems as part of its financial budgeting and forecasting process. Exhibit No. ALS-1 is a pictorial view of the systems used in the budgeting process that I will discuss below. All O&M and Capital budget data is initially input into CBS, which is the budgeting tool that is

9 used corporate wide. It allows the budget managers in every business area to enter their projected monthly O&M and capital expenditures for the next five years. Once the monthly O&M budget data for the next five years is input into CBS, it is then loaded into the Allocation Ledger System ( ALS, the Corporation s O&M reporting tool. Both CBS and ALS use the same account structure and system processing logic as in our JD Edwards ( JDE Accounting system. With consistent data and reporting within JDE, ALS and CBS, we are able to produce actual to budget reports from which we can compare actual and budgeted monthly O&M expenses by business area and by operating utility, based on either a Business Object account view (type of cost or a Federal Energy Regulatory Commission ( FERC account view. ALS is also the source of the O&M data that we use for financial forecasting and to develop the forecast cost of service sponsored by Ms. Deborah A. Blair in this proceeding. Monthly capital budget data in CBS is loaded into our PowerPlant system. PowerPlant is used by Capital Asset Accounting to maintain actual and budget capital expenditure data as well as actual and budget in-service dates for determining closings to plant in-service. Allowance for Funds Used During Construction ( AFUDC and depreciation expense associated with all budgeted capital project workorders are calculated within PowerPlant. PowerPlant is then used to generate the projected plant and Construction Work in Progress ( CWIP balances for the thirteen months from December 01 through December 01, and for each of the test years ending December 1, 01 and

10 December 1, 01. Company witness Ms. Lisa H. Perkett describes in more detail the process used to develop the projected plant and CWIP balances used by Company witness Ms. Blair to develop the forecasted cost of service studies for each year of the multi-year plan ( MYP. Q. PLEASE DESCRIBE MORE FULLY XCEL ENERGY S FINANCIAL GOVERNANCE PROCESS. A. The financial governance process consists of both the financial budget process and the processes we have in place to monitor the Company s financial performance. In order to ensure that we can effectively monitor financial performance in relation to the budget, our budgeting process mirrors the way we maintain our actual accounting records. For example, we develop separate O&M and capital expenditure budgets for each operating utility within Xcel Energy, including Public Service. Also, we use the same chart of accounts to book our actual costs as we use for budgeting costs we expect to incur over the next five years. This approach ensures that our budgeted dollars are recorded in the same FERC accounts as the actual costs will be recorded when they are incurred and allows us to examine any variances between our budgets and our actual costs on the basis of both the type of cost (the business object view and by FERC account. Similarly, we budget capital expenditures to grandparent and parent workorders that are associated with the child workorders will be used to record our actual costs. While we budget for capital expenditures at a higher level of detail than used to record actual costs, the budgeting includes sufficient detail to

11 ensure that costs are budgeted to the appropriate utility and functional plant accounts. As I indicated above, once the next five years budget data for each of the operating utilities has been approved by the Financial Council, the next year s O&M budget data is loaded into our financial systems to allow us to monitor on a monthly basis our actual spending against budgeted amounts by both Business Object and FERC account. In addition, the budget managers in each business area are required to update both their O&M and capital budgets in CBS on a monthly basis, as part of the monthly forecast process. This allows us to also compare the approved budget with updated forecasts that reflect changes in business operations that could not have been anticipated at the time the budget was first approved. It also allows us to adjust our business plans and financial forecasts continually. For example, the business may absorb unforeseen cost increases, or reduce or delay anticipated spending. We can also evaluate whether an increase in the original budget for that business area is needed. Q. WHAT ARE THE MAJOR STEPS OF THE ANNUAL FINANCIAL BUDGET PROCESS? A. The first step in the financial budget process is the establishment of spending guidelines for each of the next five years. Next, the Corporate Budgeting group within the Financial Planning and Analysis organization develops the Corporate Budget Instructions included as Exhibit No. ALS-, Budget Documentation Guidelines included as Exhibit No. ALS-, and training materials that are distributed and/or presented to budget managers in each business area. There

12 are certain aspects of the budget process that are controlled at a corporate level. For example, we establish and control the application of appropriate labor escalators and labor loadings at the corporate level. The escalators and loadings are then applied automatically in the CBS system once each business area inputs the headcount expected for the next five budget years. Once the business areas begin developing their budgets, corporate budgeting and finance directors within my organization help coordinate those efforts. Working together, budget managers within each business area and managers from my organization develop the bottoms-up budgets for each of the next five years and input their O&M and Capital budgets into CBS. The budgets are then reviewed at several levels within the Xcel Energy organization. First, business area management reviews the developed budgets several times during the budget cycle. Prior to the budget cycle closing, five-year detailed O&M and capital expenditure budgets are reviewed and approved at the executive management level by the Financial Council. In addition, the Financial Council approves a five-year capital expenditure forecast. The Company s one-year overall capital budget by operating utility is then presented to the Board of Directors for their review and approval. The Xcel Energy Board of Directors approves the total capital spend for the following year and all new projects greater than $ million. Public Service Company s Board of Directors approves the following year s total capital budget and all new projects greater than $ million.

13 Q. HOW DOES THE FINANCIAL COUNCIL ESTABLISH THE SPENDING GUIDELINES FOR EACH OPERATING UTILITY THAT ARE PROVIDED TO THE BUSINESS AREAS AT THE BEGINNING OF THE BUDGET PROCESS? A. The starting point is the most recent update to the budget that was developed for the relevant budget period during the prior year s budget process. In other words, we take the latest forecast that was developed for the relevant budget period and incorporate the updated retail and wholesale sales forecast for the next five years. We then consider the Company s business plans and a number of other factors that are expected to significantly affect our costs such as regulatory/legislative or operational requirements, changes in customer counts, fuel costs, as well as investor expectations in order to develop broad spending guidelines for each business area by operating utility and for Xcel Energy as a whole. Q. WHAT IS THE ROLE OF THE SPENDING GUIDELINES? A. The purpose of the spending guidelines is to establish parameters for O&M and capital expenditures for each operating utility and on a consolidated basis by each business area. It is one of the tools the Company uses to provide discipline in the budget process. The spending guidelines are a signal to the business areas that they do not have a blank check in developing their budgets and that we expect the business areas to be able to justify and explain any significant deviations from the general spending guidance.

14 Q. WHO IS RESPONSIBLE FOR PREPARING THE O&M AND CAPITAL EXPENDITURE BUDGETS FOR EACH BUSINESS AREA? A. Budget managers within each business area are responsible for the initial development of O&M and Capital expenditure budgets for each functional area within the business areas. For example, Corporate Services includes Business Systems, Customer Care, Human Resources, and the Business Services functional areas, each of which is led by a vice president. Each one of these functional areas is supported by a finance representative. The finance representative and the vice president determine the level of participation further down in the organization. The assigned business area finance representative works with the designated employees in each organization compiling the budget, through the gathering of data and supporting assumptions. The information is consolidated and reviewed at various levels within the functional group, until ultimately the information is reviewed and approved by Marvin McDaniel, Senior Vice President and Chief Administrative Officer, who is responsible for presenting the final Corporate Services budget to the Financial Council. The business areas also review their completed budgets with the Operating Company Presidents in advance of the Financial Council meeting to assure that all spending is consistent and supportive relative to each operating utility s operating and financial objectives. Q. HOW DO THE BUSINESS AREAS DOCUMENT THEIR BUDGETS ONCE THE BUDGETS HAVE BEEN APPROVED? A. Woven throughout the budget process is the requirement that the business areas

15 prepare budget documentation, including variance analysis, as well as workpapers supporting their budgets as finally approved. The budget narratives and walk-forwards with variance explanations for each business area whose costs have been assigned or allocated to Public Service s gas and steam utilities are submitted as Appendix A to my testimony. The budget documentation is prepared for Public Service Total Operating Company or Xcel Energy for Service Company business areas. Also included at the end of Appendix A are supporting schedules for the documentation showing the total budgeted costs by business area for Public Service or Xcel Energy broken down by FERC account and utility for each year of the MYP, including the 01 forecast completed in July 01. Q. WHAT DOES THE COMPANY DO TO ENSURE THE RESULTING BUDGETS ARE ACCURATE? A. First, it is important to recognize that by budgeting accuracy, we are not striving to ensure that every budgeted dollar is spent in exactly the same way that it was forecast to be spent. Nor do we believe that this Commission should be evaluating the accuracy of our budget process based on such a detailed comparison of budget assumptions to actual results. What is important is that overall our budgets reflect a reasonable level of costs and are reasonably representative of the costs we will incur to deliver electric utility services to our customers during each year of the budget period. In addition, we know that circumstances often arise that result in deviations from budget, both positive and negative. For example, there may be weather related events that result in negative deviations from the O&M budget. 1

16 On the other hand, we may be able to use less overtime labor if weather is mild during a period, causing less maintenance activity than originally assumed during the budget process. Related to capital, for example, it is not uncommon for actual capital expenditures to deviate from their budgeted levels due to project delays prompted by siting, permitting or other considerations. Conversely, it is also possible that rapid customer growth on the system, such as that which occurred in the late 10s, might lead to significantly higher required investment in gas distribution facilities than originally planned. Thus, our budget process serves as a tool for both estimating O&M and capital expenditures and imposing financial discipline on behalf of our customers and investors. That being said, we enforce budgeting accuracy by emphasizing the importance of accurately projected expenditures for the coming years at every level of the budget process. We have also designed a process that is transparent at every level, so that any variances between actual and budgeted expenditures that do occur are quickly identified and explained. By implementing a process that is transparent at every level, we ensure that business area management is accountable for the budgets they develop. Q. DID THE COMPANY TAKE INTO ACCOUNT POTENTIAL GAINS IN COST EFFICIENCIES IN DEVELOPING THE O&M BUDGETS FOR 01, 01 AND 01? A. Many of the business area budgets for 01 and 01 do reflect the impact of anticipated gains in cost efficiency. As relevant to this proceeding, a significant portion of the O&M costs included in the gas department s cost of service for 1

17 1 01 and 01 are from the Gas Systems and Distribution Operations business areas. Excluding the impact of O&M associated with our Pipeline System Integrity Adjustment ( PSIA program, which is an extraordinary program focused on the assessment and maintenance of our pipeline infrastructure, the baseline budgets for these two business areas for 01 and 01 include the effects of expected efficiency or productivity gains during each of these two years. Q. WHAT IS THE SOURCE OF THE COST EFFICIENCY GAINS THAT ARE REFLECTED IN THE GAS SYSTEMS AND DISTRIBUTION OPERATIONS BUDGETS FOR 01 AND 01? A. Particularly over the last few years with the downturn in the economy that occurred in 00, the Company has worked to find ways to operate more 1 efficiently and thereby drive costs out of its utility businesses. As a consequence, the cost efficiency gains we are projecting for 01 and 01 are expected to be achieved through expanded use of technology within the business. While the specific plans are still in development, the reflection of the reductions in our budgets demonstrates the Company s commitment to achieving the efficiency gains. Q. WHAT IS THE EVIDENCE THAT SUCH EXPECTED COST EFFICIENCY GAINS HAVE BEEN INCORPORATED INTO THE O&M BUDGETS FOR 01 AND 01? A. Focusing specifically on the Gas Systems and Distribution Operations business areas, the overall increases in O&M for these areas from 01 to 01 are 1

18 limited to 0. percent and 1. percent, respectively. The 01 vs. 01 O&M increases are only 1. percent and 1. percent, respectively. Yet included within the overall budgets for these two business areas are assumed wage increases in each year of percent. Exhibit No. ALS- shows the change in the O&M budgets from 01 to 01 and from 01 to 01 for both Distribution Operations and Gas Systems, excluding expenses budgeted in connection with our efforts under the PSIA. As shown in this exhibit, since labor makes up nearly percent of the overall budget for these business areas and includes an assumed percent increase in wages for each year, cost efficiency gains are necessarily embedded within the overall budgets for these areas to be able to maintain overall budget increases at levels close to the 1 percent guidance provided at the beginning of the budget process. Q. HOW HAVE THE COMPANY S ACTUAL EXPENDITURES COMPARED TO BUDGETED AMOUNTS OVER THE LAST THREE YEARS? A. Attached to my testimony as Exhibit Nos. ALS- through ALS- are spreadsheets showing and explaining the variances between Public Service s actual O&M expenses for the gas and steam utilities compared to budgeted amounts by FERC account for calendar years 00, 0 and 0. As these exhibits show, Public Service s actual costs for the gas utility were 1. percent over budget for 00,. percent under budget for 0, and 1. percent over budget for 0. For the steam utility, actual costs were.0 percent over budget for 00, 0. percent under budget for 0, and.0 percent over budget for 0. 1

19 In 00, the Company experienced increased costs due to a variety of factors, including lower Company use of gas services which reduces the revenue credit to O&M. The resulting increase in O&M costs for the gas business was then partially offset by cost reductions made implemented throughout the year in response to the economic downturn that were not previously anticipated when the 00 budget was first created. In 0, the under run was mainly in Administrative and General ( A&G expenses, mostly related to lower employee benefits costs than budgeted primarily due to reductions in retiree medical costs. In 0, the overrun was mainly due to costs related to the PSIA program that had not been included in the 0 budget, as the program was not initiated until after the budget was completed. In my view, the governance process the Company has put into place has enabled us to react to the changing economic conditions, while still providing safe and reliable natural gas and steam service. The transparency of our financial governance process ensures that this is done in an informed and deliberate fashion. Exhibit No. ALS- is an analysis of variances between the total budgeted and actual capital expenditures for Public Service for the last three years. As this analysis shows, total capital expenditures are historically reasonably consistent with the budget, and the forecasts are reviewed and updated to reflect changes in timing and/or prioritization of projects as the year progresses. Q. YOU DISCUSSED ABOVE, THE FACT THAT ACTUAL OPERATIONS NEVER 1

20 EXACTLY MIRROR FORECASTED ASSUMPTIONS. HOW DO THE BUSINESS AREAS TAKE CONTINGENCY PLANNING INTO ACCOUNT IN DEVELOPING THEIR O&M AND CAPITAL BUDGETS? A. Even though we realize that unforeseen events may cause our costs to exceed their budgeted levels, we do not build unspecified costs into our O&M budgets to account for such contingencies. Executive management expects the business areas to manage their spending in such a way as to be able to absorb some portion (if not all of contingencies that may arise either by reprioritizing work, trimming costs in other ways, or identifying additional revenue. If cost increases associated with unforeseen events cannot be absorbed and necessitate spending in excess of the budget, the business area management must present such variances to the Operating Company presidents and Financial Council as soon as they are known. When budgeting major capital projects expected to span multiple years, we do include contingencies in our individual project cost estimates. Generally, such contingencies are limited to long-term construction projects with significant scope, timing or price risk considerations. These project contingency estimates are separately identified line items in the approved budgets and are reviewed for reasonableness during the budget process. Similar to the O&M expense, Business Area Management must present variances to the Operating Company presidents and the Financial Council as soon as they are known. This governance process serves to instill discipline in our budget and financial management processes. 1

21 Q. PLEASE DESCRIBE HOW THE BUSINESS AREAS DEVELOP THEIR LABOR BUDGETS. A. In early March, the budget system is populated with the most current list of employees and their respective salaries by downloading details from the PeopleSoft system. We coordinate the download of the PeopleSoft data with the Human Resource organization and the Business Systems organization. We also perform an initial review to ensure that all the data has downloaded into CBS correctly. The starting point for each business area to develop their labor budgets is the most current payroll data. This ensures that all employees on the payroll at that time are accounted for and assigned to business areas. The managers within each business area are required to review their list of employees and evaluate their staffing needs for the five year budget period while taking into consideration their current employees. They are responsible for creating what we refer to as pseudos, which are placeholders for vacant or open positions or for new positions in order to establish their staffing levels for the budgeting cycle. When adding pseudos, the business area is responsible for determining the job title, pay grade and estimated salary for each position added. They also determine whether the position is a regular position or a part-time position and, if it is a part-time position, designate whether it is a benefit position or a non-benefit position. Updates are made that include zeroing out the payroll amounts associated with employees who terminate employment between the PeopleSoft load date and the completion of the labor phase of the budget development. During the review process, the manager also evaluates 1

22 whether promotion/progression steps are necessary for any employees and whether there are any additional changes. All known or anticipated changes are built into the budget. To supplement the information in CBS, the business areas may prepare headcount trend information to assist each manager in understanding the historical perspective of their staffing headcount and the associated labor costs. The business areas are also responsible for assigning the account coding associated with employees either on an individual basis or on a pooled basis. The account coding is the basis for directly billing or allocating the labor to the appropriate operating companies or affiliates and to the appropriate utility within each operating company. Assigning the account coding also designates whether the labor costs will be O&M, capital, clearing or deferred. We work closely with the business areas to manage and finalize the labor portion of the budget by providing reports that summarize the headcount in the budget and also providing labor utilization information that helps the business areas validate that each employee is fully utilized or assigned. We also make sure each business area is finished with their labor updates prior to the corporate deadline, including providing and phone call reminders, as necessary, to ensure the labor information in the system is as complete and accurate as possible. Because labor is a significant portion of the overall budget, there are multiple iterations in the review and validation process, up to and including review at the Financial Council level, as the budget is nearing completion. 1

23 As noted earlier in my testimony, there are certain aspects of the budget process that are controlled at the corporate level. For example, I control the application of labor escalators and labor overheads at the corporate level within CBS. Labor escalators are developed by the Human Resources organization at the corporate level by employee category. There are separate labor escalators for each union population across the operating companies and one labor escalator for non-bargaining employees. In addition, there are separate labor overhead percentages for pension and benefit costs, workers compensation costs, non-productive time, incentives, and payroll taxes. Company witness Mr. Mark P. Moeller discusses the basis for the Company s forecast of pension and benefits costs for each year of the MYP. Company witness Mr. Mark R. McCloskey discusses the level of compensation and incentive costs that have been allocated to the natural gas and steam utilities within Public Service and included in Company witness Ms. Blair s forecast test year cost of service studies for the two utilities for the three years of the MYP. We receive the pool of costs for each of the labor overhead categories from Mr. McCloskey s business area, among others, and calculate the labor overhead percentages based on the productive labor in the budget. The escalators and loadings are applied automatically in CBS after the labor budget is closed. Q. HOW DO THE BUSINESS AREAS DEVELOP THEIR NON-LABOR BUDGETS? A. The non-labor expenditures budget is developed by object account or type of cost within CBS. The development of the budget is business-area specific, and 0

24 we provide the flexibility to accommodate the various processes. For example, the Financial Operations organization ( CFO prefers to start with the budget that was developed the previous year and provides this information to each manager within the CFO organization. Each manager then reviews the details provided and determines whether the forecast cost of any non-labor resource should be increased or decreased. They focus on resources such as outside contractors, employee expenses, conferences, seminars, training, and personal communication expenses. Each business area s finance department determines whether the starting point for the development of the non-labor portion of the budget is historical year spend information and/or current year spend information as incurred year to date to assist managers in developing their budgets. The information supplied varies by manager and business area. The result of the input and the timeline of the input are what is overseen at the corporate level. Business areas are instructed to escalate dollars where escalations are appropriate for a particular resource. Managers are encouraged to budget their expenditures based on the month the expenditure is expected to occur; however, they are given the option of having CBS spread the costs evenly over a twelvemonth period. If the business area deviates from the corporate-provided assumptions, they are asked to document such deviations in their workpapers. 0 1 IV. CAPITAL EXPENDITURES AND PROJECT OVERSIGHT Q. PLEASE DESCRIBE THE PROCESS IN PLACE FOR CAPITAL EXPENDITURES AND PROJECT OVERSIGHT. 1

25 A. On an ongoing basis, each Company business area assesses its operating needs and identifies potential capital projects. The scope, cost, and timing of these projects are evaluated and prioritized within the business area by Operating Company, resulting in an aggregate projection of recommended capital expenditures for each of the next several years. The business area is supported by the business area finance groups, which report up independently through the Financial Planning and Analysis/Financial Operations organization. Corporate management, supported by the Financial Performance & Reporting group in my area, reviews the aggregate forecast of capital spending for each Operating Company and Xcel Energy in total, on a periodic basis. In addition to the formal annual budgeting process that I described above which occurs each spring/summer, capital spending projections are revised monthly through forecasting updates. These corporate capital reviews consider strategic priorities, resource planning requirements, overall funding capability, and capital allocation priorities and constraints. With input from corporate management, the business areas continually manage their planned level of capital spending, taking into account changing business priorities, new operating and regulatory requirements, and funding constraints. The highest prioritized capital projects are identified, and those satisfying approval criteria request corporate governance approval. After the requisite level of approval is obtained, the project is designed to appropriate specifications and a capital work order is set up in the Company s integrated financial systems. Each project is assigned staff to perform, and

26 management to oversee, the completion of planned work, materials, vendors, and project timing are determined as needed. As the project proceeds, the business area monitors its actual capital spending for each Operating Company by project and in the aggregate, in relation to budgeted/approved levels. Business area capital spending is also aggregated and monitored on an Operating Company level and at the total Xcel Energy level. Corporate management, again supported by the Financial Performance & Reporting group, conducts ongoing reviews of planned capital spending, through discussions at regularly scheduled meetings of the Financial Council, the Operating Company Financial Oversight group, and the Financial Performance Team. In addition, a Quarterly Capital Review process takes place to review the current year s capital forecast and update the five-year projection for capital spending. In addition to look-forward capital spending projections, the cumulative amounts actually being spent are also monitored, on a project-by-project basis by each business area, and in the aggregate for each Operating Company. The Financial Council oversees the process for approval and authorization of key capital projects, based on corporate governance guidelines. Q. DOES THIS CONCLUDE YOUR TESTIMONY? A. Yes, it does.

27 Attachment A Statement of Qualifications Amy L. Stitt I received my Bachelor of Business Administration degree in Accounting in 1 from St. Edward s University in Austin, Texas, and have an Inactive CPA certificate from the State of Minnesota. My current position with Xcel Energy Services Inc. ( XES is Managing Director, Financial Performance and Planning. I am responsible for the budget and forecast process, and internal reporting and financial statement analysis for Xcel Energy Inc., and its subsidiaries. I am also responsible for the O&M and Capital budget finance support for the business areas. I have been employed by XES since November 00, first as Principal Technical Accounting Analyst, then as Manager, Corporate Accounting, then as Director, Financial Process and Controls, then as Director, Financial Performance and Reporting. I worked for Land O Lakes Inc., KPMG, DTM Corporation and High End Systems in various accounting roles before coming to work at XES. I have previously submitted testimony for Public Service Company of Colorado in its electric rate cases in Docket No. 0S-0E, and Docket No. 0AL- E, and the gas rate case in Docket No. AL-G.