PUC DOCKET NO. BEFORE THE PUBLIC UTILITY COMMISSION OF

PUC DOCKET NO. _______

BEFORE THE PUBLIC UTILITY COMMISSION OF TEXAS

APPLICATION OF TEXAS-NEW MEXICO POWER COMPANY

FOR AUTHORITY TO CHANGE RATES

PREPARED DIRECT TESTIMONY

OF MICHAEL P. MERTZ

ON BEHALF OF TEXAS-NEW MEXICO POWER COMPANY

May 30, 2018

DIRECT TESTIMONY OF MICHAEL P. MERTZ PUC DOCKET NO _____

ii

TABLE OF CONTENTS

INTRODUCTION AND QUALIFICATIONS .............................................................. 1 I.

II. PURPOSE OF TESTIMONY ................................................................................. 3

III. ORGANIZATION OF THE BTS DEPARTMENT ................................................... 3

IV. SERVICES PROVIDED BY THE BTS DEPARTMENT......................................... 6

V. COST LEVELS AND COST TRENDS ................................................................ 11

VI. COST ALLOCATION .......................................................................................... 21

VII. NECESSITY AND REASONABLENESS OF SERVICES ............................... 25

VIII. COST MANAGEMENT .................................................................................... 27

IX. CONCLUSION .................................................................................................... 29


1

INTRODUCTION AND QUALIFICATIONS I.1

Q. PLEASE STATE YOUR NAME, BUSINESS ADDRESS, AND PLACE OF 2

EMPLOYMENT. 3

My name is Michael P. Mertz and I am employed by PNMR Services A.4

Company (“PNMR Services”), a wholly owned subsidiary of PNM Resources, 5

Inc. (“PNMR”). PNMR Services was formed to house corporate shared 6

services functions for PNMR and its subsidiaries, including Texas-New 7

Mexico Power Company. I serve as Vice President (“VP”) and Chief 8

Information Officer (“CIO”). My business address is 414 Silver Ave, 9

Albuquerque, New Mexico 87102. 10

Q. ON WHOSE BEHALF ARE YOU TESTIFYING? 11

I am testifying on behalf of Texas-New Mexico Power Company (“TNMP” or A.12

“Company”). 13

Q. PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND AND 14

PROFESSIONAL EXPERIENCE. 15

I have more than 19 years of experience in the energy and technology A.16

industries including eight years with PNM Resources. I joined PNM 17

Resources in June 2010 as a Senior Project Manager primarily focused on 18

establishing the cyber and physical security programs to meet emerging 19

critical infrastructure protections standards. From 2011 through 2014 I served 20

as the Director of NERC Compliance, leading the development and 21

implementation of the corporate grid reliability standards compliance program. 22

In 2014 I assumed additional oversight of the advanced technology and 23

Operations Technology (“OT”) areas of the organization providing operations 24

infrastructure, network, and security support as the Director of NERC 25

Reliability Compliance and Operations Technology. I was appointed to my 26

current role of VP and CIO in January 2017. 27

I joined PNMR following five years at Southern California Edison (2005-2010) 28

with leadership and technical positions in power systems controls, information 29


2

technology, and risk management, finally serving as the manager of 1

information security. Prior to my role at Southern California Edison, I served 2

in a variety of technical roles providing systems and security integration, 3

application support, and systems administration at the California Independent 4

System Operator (2000-2005), Hathaway Industrial Automation (1999-2000), 5

and Industrial Automation Solutions (1999). 6

My educational background includes a Master of Science degree in Computer 7

Information Systems from Boston University, a bachelor’s degree in Biology 8

from the University of New Mexico, and an associate’s degree in Computer 9

Information Science from Sacramento City College. I also hold several active 10

professional technology certifications including: Certified Information Systems 11

Security Professional (CISSP #94322), Certified Information Systems Auditor 12

(CISA #0864949), and Certified Information Security Manager (CISM 13

#1013458). 14

Q. PLEASE DESCRIBE YOUR DUTIES AS VICE PRESIDENT, CHIEF 15

INFORMATION OFFICER OF PNMR SERVICES COMPANY. 16

As Vice President and Chief Information Officer I am responsible for the A.17

Business Technology Services (“BTS”) organization within PNMR Services. 18

My responsibilities include oversight of a diverse set of shared service 19

functions for PNMR and its subsidiaries primarily in the technology, security, 20

and regulatory compliance areas. More specifically, the BTS organization 21

includes data center services (Infrastructure, desktop client services, service 22

desk), cyber and physical security, telecommunications support, Information 23

Technology (“IT”) Portfolio and Program Management, Quality Assurance, 24

NERC compliance, IT Applications, Enterprise Architecture, Records 25

Management, Operations Technology, and Advanced Technologies. 26

Q. HAVE YOU PREVIOUSLY TESTIFIED IN UTILITY REGULATORY 27

PROCEEDINGS? 28

No, I have not. A.29


3

II. PURPOSE OF TESTIMONY 1

Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING? 2

The purpose of my testimony in this proceeding is to describe the BTS A.3

affiliate class of services provided by organization and the types of services 4

provided for TNMP for the Test Year from January 1, 2017 through December 5

31, 2017. I will demonstrate that the associated costs for BTS charged to 6

TNMP are necessary and reasonable and are no higher than the price 7

charged for these same services to other PNM Resources affiliates. I will 8

also discuss cost trends for PNMR Services BTS class of service between 9

2014 and the concurrent 2017 Test Year. 10

Q. DO YOU SPONSOR ANY TABLES AND GRAPHS IN THIS PROCEEDING? 11

Yes, I sponsor the tables and graphs embedded in my testimony. These A.12

tables and graphs were prepared by me or under my direction and 13

supervision, and are true and correct to the best of my knowledge. 14

Q. DO YOU SPONSOR OR CO-SPONSOR ANY SCHEDULES IN THE 15

COMPANY’S RATE FILING PACKAGE? 16

I co-sponsor Schedule V-K. A.17

III. ORGANIZATION OF THE BTS DEPARTMENT 18

Q. PLEASE BRIEFLY DESCRIBE / SUMMARIZE THE AFFILIATE EXPENSES 19

YOU WILL COVER IN THIS TESTIMONY. 20

BTS, an organization within PNMR Services, has a mission to provide A.21

technology solutions, security, and expertise to navigate a dynamically 22

changing energy industry to all the PNMR subsidiaries. TNMP is billed the 23

affiliated expenses associated with utilizing the BTS services which include: 24

develop, operate, and maintain the information and communications networks 25

and systems; manage IT hardware, software (applications and tools), and 26

client devices; cyber and physical security and incident response 27

management; maintain and evolve the technology architecture and policies 28


4

pertaining to technology; records management, policy; NERC compliance; 1

portfolio and program management; IT quality assurance; and technology 2

strategic planning. 3

Q. PLEASE PROVIDE AN OVERVIEW OF HOW THE DEPARTMENT IS 4

ORGANIZED. 5

The BTS function consists of 120 employees. The department is organized A.6

into five primary functional areas: Technology, Security, IT Program and 7

Portfolio Management and Quality Assurance (“QA”), Regulatory Compliance, 8

and Information Technology / Operations Technology (“IT/OT”) Applications. 9

BTS outsources certain services to obtain additional operational flexibility and 10

to obtain services at reasonable costs. BTS has outsourced the maintenance 11

and support of several applications, software Test Center of Excellence 12

(“TCOE”), and portions of the technology infrastructure and client services. 13

The application maintenance and support and TCOE are provided under 14

internal BTS staff’s direction and guidance by Cognizant, a contracted 15

company, utilizing a mix of on-shore and off-shore contractors. The 16

infrastructure support is provided by Infosys Limited, a contracted company, 17

supporting PNMR Services Data Center services, desktop services, and the 18

service desk functions utilizing a mix of on-shore and off-shore contractors. 19

Q. PLEASE STATE FROM WHICH LOCATIONS THE BTS SERVICES ARE 20

PROVIDED. 21

Most of the personnel in the BTS group are in Albuquerque, New Mexico, with A.22

a small group in Lewisville, Texas, and the remainder spread out at smaller 23

sites in Texas and New Mexico. Off-shore Cognizant and Infosys Limited 24

resources are in various cities in India. Regardless of physical location, all 25

BTS personnel provide service to all of TNMP’s locations. 26

Q. PLEASE DESCRIBE ANY INITIATIVES THAT HAVE BEEN INTRODUCED 27

IN RECENT YEARS TO PROVIDE FOR ORGANIZATIONAL FLEXIBILITY 28

AND OPTIMAL SERVICE DELIVERY. 29


5

In 2011 and 2012, BTS expanded the number of application maintenance A.1

towers outsourced with Cognizant; outsourced the TCOE to Cognizant using 2

a flex model of on-shore and off-shore resources for end-to-end testing 3

support on projects, Banner Customer Information System and PNM.com; 4

and expanded the scope of outsourced services with Infosys Limited for client 5

services which include the Service Desk, End User Computing, and Desktop 6

Engineering. The convergence of IT and OT began in 2013 and continues to 7

evolve each year strengthening the alignment of the technology needs and 8

services across all PNMR subsidiaries. This includes consolidating functions 9

from the operations line of business, such as NERC compliance in July 2014 10

and Records Management in 2013, into BTS. In September 2011, TNMP 11

began its Advanced Metering System (”AMS”) deployment and continued 12

through September 2016. AMS has enabled customers in TNMP territories to 13

participate in competitive market offerings that help them manage their 14

energy costs and encourage energy conservation. Additionally, automated 15

service order processing has greatly improved TNMP’s customer 16

responsiveness as well as increased operational efficiencies. In 2013, TNMP 17

began its implementation of the Outage Management System (“OMS”) which 18

provided automation and improvements in the outage-to-restore business 19

process from planning and predicting outage locations to customer 20

communications, service restoration and reporting. In February 2017, BTS 21

deployed an Enterprise Asset Management (“EAM”) system, “Maximo,” which 22

provides a comprehensive long-term solution that supports future business 23

needs in process and technology for operations and Supply Chain across 24

New Mexico and Texas and allowed the retirement of the Work and Asset 25

Management System “Passport.” 26

Q. PLEASE EXPLAIN THE BENEFITS OF OUTSOURCING APPLICATION 27

MAINTENANCE AND SUPPORT, INFRASTRUCTURE AND CLIENT 28

SERVICES SUPPORT, TCOE, AND CERTAIN SECURITY SERVICES. 29

There are many benefits to outsourcing which include: reduced costs A.30

associated with standard services when compared with Full Time Equivalent 31


6

(“FTE”) loaded costs; partner with a provider with access to specialized skills 1

and expertise in commodity support services and bench depth to enable 2

flexibility in resources needed; and leveraging financially incented service 3

levels and key performance indicators with the providers to ensure goals are 4

achieved. Outsourcing also supports risk sharing with our services providers, 5

as the vendor company assumes and manages the risk associated with 6

unplanned demand and service fluctuations. Ultimately, outsourcing is aimed 7

at providing essential services at a reasonable cost. Although PNMR 8

Services does outsource certain necessary services, it does monitor the 9

services through service level agreements and provides strategic input to the 10

service providers to ensure service quality and appropriateness of services. 11

IV. SERVICES PROVIDED BY THE BTS DEPARTMENT 12

Q. DESCRIBE THE SERVICES BTS IS RESPONSIBLE FOR PROVIDING TO 13

THE OPERATING COMPANIES. 14

The primary responsibilities of BTS include: A.15

Technology includes technology services of data center services, service 16

desk (aka help desk), desktop services, telecommunications, and enterprise 17

architecture; which are all responsible for company systems and services that 18

support business applications and user productivity; ensuring that business 19

productivity tools and technologies are available for use including desktops 20

and laptops, servers and tools, disaster recovery and service desk support. 21

Responsibilities include: providing technology solution architecture services 22

and technology investment oversight including governance, risk management 23

and compliance through developing target enterprise architecture and 24

maintaining the architecture repository; managing technology lifecycles; 25

identifying emerging technologies; conducting initial authorization, on-26

boarding, and on-going support for cloud services; gathering, providing and 27

analyzing Infrastructure performance metrics; managing the service desk to 28

provide 24 x 7 critical problem reporting and resolution support; end user 29

computer support of desktops, laptops, and tablets; supporting the enterprise 30


7

data, voice, and telecommunication networks throughout service territories; 1

supporting phone-related issues including setting-up voicemail and phone 2

services; adding, moving, and changing hardware and software; and 3

assessing hardware and software to ensure alignment with defined 4

architecture and managing hardware and software material orders and 5

assets. 6

Security is responsible for enterprise physical, cyber and information security 7

controls to ensure security compliance through proper implementation and 8

updating of controls. Information Security minimizes cybersecurity risk 9

through effective implementation, administration, and use of logical and 10

technical security controls; creating incident response and disaster recovery 11

strategies and solutions; and assessing and managing disaster recovery and 12

incident management requirements and capabilities rollout. Information 13

security involves multiple systems including firewalls, intrusion 14

detection/prevention, email and web filtering, endpoint security protection, 15

various detection capabilities, policy, procedure, and training/awareness 16

activities. Physical security designs and implements security measures that 17

are intended to deny unauthorized access to facilities, equipment and 18

resources and to protect personnel and property from damage or harm (such 19

as espionage, theft, or terrorist attacks) while providing employees with a 20

secure environment to perform their assigned duties. Physical security 21

involves the use of multiple layers of interdependent systems which include 22

surveillance systems, security guards, protective barriers, locks, access 23

control protocols, and many other techniques. The physical security function 24

also develops and implements the physical security plan and ensures 25

appropriate controls are in place to meet NERC Critical Infrastructure 26

Protection (CIP) requirements. 27

IT Portfolio and Program Management and Quality Assurance which 28

includes the Program and Project Management Office (“PPMO”), portfolio 29

management, project governance, continuous process improvement, 30

strategic planning, and quality assurance. The PPMO is responsible for 31


8

tracking and running all IT corporate programs and projects, related capital 1

budgets and ensuring the successful delivery of the IT assets. IT QA which 2

includes IT Service Management (management of incident, problem, release, 3

change, and configuration), quality control and Test Center of Excellence, 4

process quality and governance, metrics, and audit compliance. 5

Regulatory Compliance includes the NERC compliance and records 6

management functions. The NERC compliance function is responsible for 7

increasing electric grid reliability by reducing security risks while 8

simultaneously maintaining regulatory compliance with the NERC reliability 9

standards; provides oversight of the Electricity - Information Sharing and 10

Analysis Center (“E-ISAC”) alert process, including communication, mitigation 11

coordination, and document filing; CIP, specifically compliance with CIP-002 12

through CIP-014, aimed at protecting the reliability of the Bulk Electric System 13

through implementation of a variety of rigorous cybersecurity measures such 14

as: security management controls, access management, electronic security 15

perimeters, physical security technology, and malicious code prevention. 16

Records management supports operational records-related activities which 17

include data archive, data migration and storage, new system 18

implementation, system purge, system retirement, and electronically stored 19

information in accordance with policy; ensures records compliance to include 20

record destruction and disposition; and maintains awareness of most current 21

practices and regulations to prevent and/or support litigation. 22

IT/OT Applications are responsible for application support and development 23

for applications used to support business functions across the enterprise; 24

develops, implements, and supports solutions for applications using best 25

practice processes methodologies for development and code control, and 26

tools for change management and incident tracking; ensures procedures are 27

in place for appropriate ticket management and compliance to service level 28

agreements; and maintains relationships with business partners across 29

operating companies; coordinates advanced technology analysis, 30


9

development and implementation including coordination of research 1

partnerships with federal and industry research institutes. 2

Q. ARE BTS’ SERVICE OFFERINGS CONSISTENT WITH THOSE OF OTHER 3

DEPARTMENTS IN THE INDUSTRY? 4

Yes, the service offerings of the BTS function are consistent with those of A.5

other departments in the industry. Through my involvement in CIO peer 6

groups and industry forums, discussions with industry leaders and strategic 7

partners, and evaluation of research and benchmarking with research 8

analysts through outlets such as Gartner; I have had opportunities to discuss 9

the services and best practices that other similar departments offer and 10

compare service offerings. Although some functions and services that report 11

into BTS, such as NERC compliance and Corporate Security (physical 12

security), may report into other organizations at industry peers, the services 13

performed by those departments are consistent with similar departments in 14

the industry. 15

Q. WHAT IS THE PROCESS OR FORUM TO SET AND EVALUATE SERVICE 16

LEVELS AND PROVISIONS? 17

To set and evaluate service levels and provisions the BTS group primarily A.18

relies on periodic communication with business partners to review requests, 19

statuses, and priorities; and BTS relationship managers collaborate with them 20

on business and technology initiatives. The BTS relationship managers 21

consult business partners at a minimum once per year to solicit service 22

feedback, discuss TNMP’s technology needs, and to harvest/identify 23

opportunities for potential future technology projects/services. For services 24

that rely on outsourcing, the specific service levels and provisions are 25

explicitly defined within the service contract and periodically evaluated. 26

Examples of specific service levels for managed services for applications 27

support, infrastructure support and service desk offerings include but are not 28

limited to, metrics for business impact, availability, performance and quality. 29

The managed services providers provide frequent updates that compare 30


10

actual performance of services and provisions against requirements defined 1

within the contracts. BTS further leverages business partners through a 2

formal Enterprise Technology Steering committee to discuss technology 3

needs, prioritize services and provisions, and align the technology project 4

portfolio. A formal corporate scorecard of defined metrics and objectives for 5

BTS performance is also established each year, that includes specific 6

performance metrics and thresholds which the BTS leadership team are 7

evaluated against. 8

Q. HOW DO THE OPERATING COMPANIES OBTAIN THESE SERVICES? 9

The operating companies receive BTS services through a general services A.10

agreement discussed by witness Jason A. Peters. Operating company 11

employees also open service requests for BTS, which were previously 12

tracked through the Service Now IT Service Management (“ITSM”) 13

application, and transitioned to PeopleSoft IT Help Desk application in 2018. 14

These may be opened through self-service or by contacting the BTS Service 15

Desk directly. In addition, project opportunities are identified through 16

meetings with the operating companies’ employees and management. These 17

opportunities are documented and presented for consideration in the regular 18

budgeting process. Annually BTS relationship managers approach the 19

business to reaffirm and modify the five-year project portfolio, to address 20

business technology initiatives. Throughout the year, the business may have 21

a shift in priorities and introduce a “pop-up” initiative. Pop-ups are new 22

projects that are identified and proposed based on a newly discovered need 23

or opportunity outside of the Annual Operating Plan (“AOP”) process, which is 24

the annual operations and maintenance (“O&M”) and capital budgets are set 25

at the beginning each calendar year. Pop-ups are documented, justified, and 26

prioritized against the rest of the portfolio. 27


11

V. COST LEVELS AND COST TRENDS 1

Q. WHAT IS THE TOTAL COST OF AFFILIATE SERVICES DURING THE 2

TEST YEAR AND WHAT ARE THE COSTS BROKEN DOWN BY CLASS 3

OF SERVICE? 4

The total PNMR Services Test Year BTS costs were $29.60 million, with the A.5

largest investment in the technology services. Each BTS affiliate service as 6

described earlier in my testimony. See Table 1 below for a breakdown of the 7

2017 Test Year BTS costs by class of service. 8

TABLE 1: TOTAL BUSINESS TECHNOLOGY SERVICES COSTS BY SERVICES 9

10

Q. WHAT HAS BEEN THE TREND IN ACTUAL EXPENDITURES 11

ASSOCIATED WITH BTS IN RECENT YEARS? 12

The total BTS actual affiliate expenditures have increased by approximately A.13

$1.4 million (4.9%) between 2014 and the Test Year, equating to just over a 14

1% compound annual growth rate. The increase has been nominal 15

considering significant enhancements in cybersecurity, NERC compliance, 16

and additional capabilities supported by BTS, such as those added by a 17


12

recent enterprise asset management implementation: added between 2014 1

and the test year. Although costs decreases were noted associated with 2

phones and computer maintenance, the main drivers of the increase are 3

associated with incremental cost adjustments for outside services and labor. 4

Outside services are those services performed by third-party resources such 5

as outsourcing services, consulting, and other managed services such as 6

those utilized for IT applications support, IT infrastructure support, and some 7

security functions. The cost increase for outside services is generally 8

attributed to incremental annual cost/rate adjustments associated with 9

outsourced services. Labor cost increases are attributed to overall annual 10

labor cost increases of an average of 2.5% per year, as noted in testimony of 11

TNMP witness Laurie Monfiletto, along with several BTS positions added 12

between 2014 and 2017 to improve the security posture of both physical and 13

cyber security. See Tables 2 and 3 below. 14

TABLE 2: BUSINESS TECHNOLOGY SERVICES COSTS BY SERVICES 15

16

17


13

TABLE 3: BUSINESS TECHNOLOGY SERVICES COSTS BY COST TYPE 1

2

Q. WHAT ARE THE TOTAL COSTS CHARGED TO TNMP IN THE TEST 3

YEAR AND WHAT ARE THE COSTS BROKEN DOWN BY MAJOR COST 4

CATEGORIES / COST TYPES? 5

The total test year BTS costs charged to TNMP were $9.14 million. Table 4 A.6

below shows the BTS costs by services. 7

8


14

TABLE 4: TOTAL TNMP BILLINGS BUSINESS TECHNOLOGY SERVICES COSTS BY 1

SERVICES 2

3

Q. WHAT HAS BEEN THE TREND IN COSTS BILLED TO TNMP BY THE 4

FUNCTIONS IN RECENT YEARS? 5

BTS costs billed to TNMP have nominally increased by approximately A.6

$500,000 from 2014 to the test year, which are shown in Tables 5 and 6 7

below. The billed cost increase represents a compound annual growth rate of 8

1.4%. The costs are broken down by the costs for each of the major 9

functions as previously described in the services performed by BTS, along 10

with the costs broken down by cost type. 11

12


15

TABLE 5: TNMP BILLINGS BUSINESS TECHNOLOGY SERVICES COSTS BY 1

SERVICES 2

3

TABLE 6: TNMP BILLINGS BUSINESS TECHNOLOGY SERVICES COSTS BY COST 4

TYPE 5

6


16

Q. PLEASE EXPLAIN THE DIFFERENTIAL IN COSTS FROM THE 2014 TO 1

THE 2017 TEST YEAR FOR EACH OF THE BTS SERVICE GROUPS. 2

BTS costs billed to TNMP have nominally increased by approximately A.3

$500,000 from 2014 to the test year. TNMP billings for each of the services 4

associated with Regulatory Compliance, IT PPMO/QA, Security, and 5

Technology increased slightly over the period, while billing decreased 6

associated with IT/OT Applications. 7

Regulatory Compliance - Billed costs for Regulatory compliance services 8

are those costs primarily associated management of oversight of the NERC 9

reliability standards compliance program, along with costs associated with 10

management, storage, retrieval, and disposition activities through the records 11

management program. These costs are necessary to ensure TNMP is 12

compliant with the NERC reliability standards, a broad set of mandatory 13

standards aimed at ensuring the reliability of the bulk power system.. BTS 14

billings to TNMP for Regulatory Compliance services noted in Table 7 below, 15

increased by approximately $30,000 between 2014 and the Test Year. 16

Despite increasing focus on a substantially revised version of the NERC CIP 17

standards in 2016 and other modifications to NERC reliability standards; 18

costs associated with BTS Regulatory Compliance functions only increased 19

slightly. Increasing costs associated with NERC compliance oversight, were 20

largely offset by reductions in records management storage costs realized 21

through tighter enforcement of records retention and destruction policies and 22

procedures. The records management area also streamlined processes to 23

distribute some electronic records management functions throughout the 24

business areas, resulting in reduction on the number of centralized resources 25

necessary to support processes. 26

27


17

TABLE 7: TNMP BILLINGS REGULATORY COMPLIANCE COSTS BY COST TYPE 1

2

IT PPMO/QA - Billed costs for IT PPMO/QA services are those costs 3

associated with the Program and Project Management Office (“PPMO”) and 4

portfolio management, project governance, continuous process improvement, 5

strategic planning, and quality assurance. These costs also include IT 6

Quality Assurance (“QA”) which includes IT Service Management 7

(management of incident, problem, release, change, and configuration), 8

quality control and Test Center of Excellence, process quality and 9

governance, metrics, and audit compliance. These costs are necessary for 10

providing the expertise needed for successfully managing and implementing 11

technology solutions that provide TNMP with new capabilities and efficiencies 12

to provide services to customers. BTS billings to TNMP for IT PPMO/QA 13

services, noted in Table 8 below, nominally increased by approximately 14

$60,000 between 2014 and the Test Year. The increase is primarily related 15

to the slight cost increase associated with increased utilization of employees 16

over outside services/outsourced labor for this function. 17


18

TABLE 8: TNMP BILLINGS IT PPMO/QA COSTS BY COST TYPE 1

2 Security - Billed costs for Security services are those costs associated with 3

the physical and cyber security for protecting TNMP, employee, systems, 4

data, and facilities. These costs are necessary to protect TNMP from 5

breaches in data security, sabotage on company assets like transmission 6

substations, and ensuring the protection for staff to work in a safe 7

environment. BTS billings to TNMP for Security services noted in Table 9 8

below, increased by approximately $220,000 between 2014 and the Test 9

Year. The increase was necessitated by increasing staff (outside services 10

and labor) to more effectively manage cyber and physical security risk for 11

TNMP, while also meeting increasingly complex NERC regulatory 12

compliance security requirements. 13

14


19

TABLE 9: TNMP BILLINGS SECURITY COSTS BY COST TYPE 1

2

Technology - Billed costs for Technology services are primarily associated 3

with data center services, service desk (the help desk), desktop services, 4

telecommunications, and enterprise architecture, which are all responsible for 5

company systems and services that support business applications and user 6

productivity, ensuring that business productivity tools and technologies are 7

available for use including desktops and laptops, servers and tools, disaster 8

recovery and service desk support. These centralized services are necessary 9

to provide the foundational equipment, data, and support for TNMP to perform 10

the daily activities for their operations and is more cost effective for TNMP to 11

use enterprise services where costs are shared verses providing each service 12

on their own. As noted in Table 10, the Technology services functions noted 13

TNMP billed cost increased by approximately $213,000 from 2014 to 2017 14

primarily the result of standard contract cost escalation rates for outsourced 15

infrastructure costs (outside services), and labor costs for the addition of a 16

new position to manage oversight of incident response (cyber and physical 17

security), disaster recovery, and business resiliency. Cost increases in these 18

areas was largely offset by reduction in costs associated with software license 19


20

and support through software consolidation/replacement and/or license 1

renegotiation. 2

TABLE 10: TNMP BILLINGS TECHNOLOGY COSTS BY COST TYPE 3

4

IT/OT Applications - The costs associated with IT/OT Applications are 5

primarily related to application support and development for applications used 6

to support business functions across the enterprise along with coordination of 7

advanced technology analysis, development and implementation, including 8

facilitation of research partnerships with federal and industry research 9

institutes. These costs are necessary in providing TNMP the required tools 10

and applications to perform daily activities in their operations so that they can 11

effectively provide services to their customers. As noted in Table 11, the 12

IT/OT Applications services functions noted TNMP billed costs remained 13

largely unchanged from 2014 to the test year, with a slight decrease of 14

approximately $20,000, or less than 1%. The slight variance is primarily 15

associated with minor changes in utilization of outside services vs. internal 16

resources to align with fluctuating business needs throughout the period. 17

18


21

TABLE 11: TNMP BILLINGS IT/OT APPLICATIONS COSTS BY COST TYPE 1

2

Q. ARE THE COSTS PREVIOUSLY DESCRIBED REASONABLE? WHY? 3

Yes. As set forth above, given the increases in costs associated with A.4

improving security for TNMP systems and facilities, reasonable incremental 5

annual labor and outsourcing cost increases, along with increases in TNMP 6

technology capabilities supported by BTS, the changes in costs were 7

reasonable. Further, the nominal increases in cost were balanced with BTS 8

cost reduction and control initiatives. 9

VI. COST ALLOCATION 10

Q. WHAT ARE THE PREDOMINANT BILLING METHODS USED FOR THE 11

AFFILIATE SERVICES YOU ARE DISCUSSING? 12

The billing methods used by BTS include direct, transactional and general A.13

allocation methodologies. Direct billing means the costs are directly billed to 14

the operating companies when they are incurred while performing tasks 15

specifically for that operating company. Transactional billing is when costs 16

are billed on a transactional basis when they cannot be billed on a direct 17


22

basis and there is an allocation factor that can be identified as the cost driver. 1

In the case of BTS’ transactional allocations to TNMP, these cost drivers 2

primarily include the number of general ledger transactions, number of 3

phones, number of network IDs, and employee headcount. The number of 4

general ledger transactions is used as a proxy for the complexity of the 5

operating company with respect to accounting systems. The number of 6

phones is the cost driver of maintaining telecommunications services 7

provided by BTS. The number of network IDs drives the costs associated 8

with account management. Employee headcount is the driver for general 9

BTS services that benefit an operating company’s employees, but that does 10

not tie directly to user IDs. The best example of how these allocations work is 11

demonstrated through the functions of the Human Resources system. It 12

would be very difficult to measure and manage how much each of PNMR 13

subsidiaries utilize the HR system or specifically time or resource utilization, 14

so it is more logical and generally more acceptable to allocate the costs to 15

support such a system based on the number of employees in the business 16

unit, in this case TNMP. The general allocation factor is used for corporate 17

matters such as Executive Policy Committee (“EPC”) support. A breakdown 18

of allocation factors is below in Table 12. 19

20


23

TABLE 12: BTS BILLING METHODS 1

2

Q. WHICH ENTITIES ARE THE PNMR SERVICES COSTS FOR THESE 3

AREAS BILLED TO AND HOW ARE THE COSTS BILLED TO THESE 4

ENTITIES? 5

PNMR Services BTS costs are billed to all subsidiaries of PNMR that they A.6

support. The costs are direct billed whenever possible and when that is not 7

possible, the costs are allocated based on the allocation factor driving the 8

costs. PNMR Services currently bills the following entities: PNM and TNMP. 9

Each entity receives its direct and allocated share of the BTS costs per the 10

cost allocation manual as discussed by witness Jason A. Peters. 11

Q. WHAT PERCENTAGE OF BTS AFFILIATE EXPENSES THAT YOU ARE 12

DISCUSSING IS “DIRECT” BILLED VERSUS COSTS THAT ARE 13

“ALLOCATED” TO THE OPERATING COMPANIES AND TO TNMP 14

SPECIFICALLY. 15

In the test year, BTS allocated 19% of its total affiliate costs on a direct bill A.16

basis, 70% on a transactional allocation basis, and 12% on a general 17

allocation basis. To TNMP specifically, BTS directly charged 31% of its costs 18

on a direct assignment basis, while it billed 60% on a transactional basis and 19

9% on a general basis. Transactional charges tend to be higher in BTS than 20

other services groups given the number of enterprise systems that are 21


24

supported across the enterprise such as: email, telephones, infrastructure, 1

and PeopleSoft HR/Finance systems. 2

Q. WHAT TRENDS HAVE YOU NOTICED REGARDING DIRECT CHARGES? 3

From 2014 to the test year, direct charges have decreased while transactional A.4

charges and general allocations have increased slightly. This is the result of 5

fewer BTS services provided that are unique to TNMP, as BTS continues to 6

focus on use of solutions that provide efficiencies across operating 7

companies, providing value at an enterprise level. These trends are 8

demonstrated in Table 13 below. 9

TABLE 13: BTS COSTS by Allocation Method 10

11

Q. WHAT IS YOUR OVERALL CONCLUSION WITH RESPECT TO THE 12

APPROPRIATENESS OF THE COST ALLOCATION / BILLING METHODS 13

USED? 14

I believe the cost allocation and billing methods are appropriate services A.15

being performed and the benefit received by TNMP. We continue to improve 16

the transparency with our effectively managing the daily operational costs and 17

are always striving to direct bill affiliates whenever possible. 18


25

VII. NECESSITY AND REASONABLENESS OF SERVICES 1

Q. ARE THE SERVICES PROVIDED TO THE OPERATING COMPANIES 2

NECESSARY TO SUPPORT THE BUSINESS OF THE OPERATING 3

COMPANIES? 4

Yes, for the reasons established previously, the services provided by the BTS A.5

function to the operating companies are necessary to support the business 6

activities of the operating companies. 7

Q. WHAT TYPE OF CORPORATE OVERSIGHT IS IN PLACE TO ENSURE 8

THAT THE SERVICES PROVIDED ARE THOSE THAT ARE MOST 9

BENEFICIAL TO SUPPORT THE OPERATING COMPANIES’ PROVISION 10

OF UTILITY SERVICE? 11

As discussed above, the leadership team, in coordination with the BTS A.12

relationship managers, ensures that the services provided by BTS are those 13

that are the most beneficial to support each operating company, including 14

TNMP. Further oversight is provided through BTS department following the 15

standard PNMR Services budgeting process that provides transparency into 16

the services provided for each area. BTS develops annual budgets by month 17

for both O&M and Capital using the O&M and Capital targets issued by the 18

EPC. The detailed budgets are created at the home center level by cost type. 19

Additionally, many services performed by BTS department are mandated by 20

regulation, legislation or other security requirements. Therefore, several of 21

the BTS services that are the most beneficial for the support of the operating 22

companies’ utility service are those that ensure PNM Resources and its 23

operating units adhere to requirements and expectations established by 24

PUCT, NERC, Sarbanes-Oxley (“SOX”), Payment Card Industry-Data 25

Security Standards (“PCI-DSS”), and other regulatory or industry 26

requirements. 27

Q. ARE THE SERVICES PROVIDED BY THE DEPARTMENTS DESCRIBED 28

DUPLICATED BY PERSONNEL WITHIN THE OPERATING COMPANIES? 29


26

There are three complementary services provided across BTS and TNMP: A.1

desktop services, NERC regulatory compliance, and telecommunications. 2

Although complimentary, the services are not duplicated and are segregated 3

between enterprise and operations technology assets as outlined in Table 14. 4

Table 14: Complimentary Activities 5

6

7


27

Q. IS IT NECESSARY AND REASONABLE FOR THESE ACTIVITIES TO BE 1

PROVIDED BY AN AFFILIATE (AS OPPOSED TO THE OPERATING 2

COMPANIES PROVIDING THESE SERVICES THEMSELVES)? 3

Yes, it is necessary and reasonable for these activities to be provided by an A.4

affiliate. One of the primary benefits of the BTS function is the overall cost 5

savings generated by the economies of scale the BTS function provides. The 6

BTS function requires employees with specific skill sets and generally deals 7

with applications that transcend the operating companies to leverage 8

economies of scale. Furthermore, IT maintenance and support are naturally 9

centralized activities. For instance, the BTS Service Desk is a central activity, 10

which allows us to smooth the peaks and valleys associated with IT support. 11

The current setup maximizes the utilization of IT representatives. Finally, a 12

centralized IT organization allows for greater consistency of applications and 13

quality of support across operating companies. 14

Q. IN SUMMARY, ARE THE SERVICES THAT THE FUNCTION PROVIDES 15

NECESSARY TO PROVIDE RELIABLE ELECTRIC SERVICE TO TNMP 16

CUSTOMERS? 17

Yes, given the need to automate processes to improve consistency and A.18

reduce costs and the necessity of real-time data in today’s business 19

environment, the services that the BTS function provides are necessary to 20

provide reliable electric service to TNMP customers. 21

VIII. COST MANAGEMENT 22

Q. WHAT PROCESSES DO YOU EMPLOY TO ENSURE THAT AFFILIATE 23

EXPENSES INCURRED BY OR ON BEHALF OF THE OPERATING 24

COMPANY ARE REASONABLE? 25

To ensure that BTS expenses are incurred by or on behalf of the operating A.26

companies are reasonable, the BTS leadership team performs monthly 27

budget variance reviews. The monthly report presents detailed information 28

about service company charges and provides transparency to the service 29


28

charges. Budgets variances are reviewed monthly at various levels in the 1

BTS group from departmental mangers, directors and to the Vice President / 2

CIO level. Additionally, from time to time BTS also performs periodic 3

benchmarking and reviews industry best practices to evaluate costs for key 4

functions. 5

Q. DISCUSS HOW THE BTS DEPARTMENT UTILIZES BUDGETING, 6

PLANNING, COST REVIEW AND REPORTING TO CONTROL CHARGES 7

TO THE OPERATING COMPANIES. 8

BTS builds an annual budget based on the guidelines established in the AOP. A.9

Every quarter, through a quarterly reforecast, the BTS budget is updated with 10

refined information, which requires careful cost planning and discipline within 11

the function. BTS leadership is held accountable for this budget through 12

monthly variance reports, which compares budgeted costs to its actual costs 13

incurred. BTS leadership must explain significant variances. If the variance 14

report is significantly under or over budget, it will be reviewed by senior 15

management, who then may determine whether the budget warrants 16

adjustment or impose strict cost cutting measures. 17

Q. WHAT TYPES OF CONTROLS ARE IN PLACE THAT EFFECTIVELY 18

CONTROL BUDGETS WITHIN THE FUNCTIONAL ORGANIZATIONS 19

COVERED IN YOUR TESTIMONY? 20

The BTS function works closely with the Controller’s office to ensure that all A.21

costs are direct billed when possible and allocated fairly when they are not 22

able to be direct billed. This adds transparency to BTS costs and allows the 23

organization to determine the budget’s validity. Furthermore, as discussed in 24

the testimony of witness Jason A. Peters, PNM Services short-term incentives 25

program links incentive pay to workgroup O&M budget targets. Meeting O&M 26

budget targets are included in the performance scorecards for the Executive 27

Management workgroup. If workgroup targets are not met, then incentives 28

are not paid according to plan. Performance against the scorecard goals 29


29

determines the bonus opportunity. Finally, there is the aforementioned 1

monthly variance report on which BTS is evaluated. 2

Q. WHAT BENCHMARKING HAS BEEN CONDUCTED BY THE FUNCTIONAL 3

AREAS TO EVALUATE COST AND / OR PERFORMANCE LEVELS? 4

For several years, BTS has subscribed to Corporate Executive Board (“CEB”) A.5

for access to research, best practices, and business intelligence data, that 6

also includes ability to conduct functional benchmarking or service 7

diagnostics/controls maturity for several key BTS areas. The CEB 8

benchmarking results included efficiency recommendations and cost 9

comparisons in various functional areas such as: PMO, Enterprise 10

Architecture, Security, and Applications. BTS also coordinated a more 11

targeted benchmarking effort in late 2017 by ISG, a leading global technology 12

research and advisory firm. This benchmarking was aimed at evaluating 13

pricing and services associated with the primary functions of application 14

development/support, infrastructure support, help desk functions, and desktop 15

support. The evaluations within this effort indicated that the overall pricing for 16

outsourced services provided by Cognizant and Infosys, were below market. 17

Additionally, in late 2017, BTS initiated a subscription service with Gartner 18

research, to allow for additional cost and performance level benchmarking 19

that is underway. 20

IX. CONCLUSION 21

Q. WHAT IS YOUR OVERALL CONCLUSION ON THE REASONABLENESS 22

AND NECESSITY OF COSTS FOR THESE SERVICES? 23

In conclusion, I believe the services offered by BTS are necessary and A.24

reasonable to provide reliable electrical delivery service. To ensure that BTS 25

expenses are incurred by or on behalf of the operating companies are 26

reasonable, the BTS leadership team is subject to cost controls and performs 27

monthly budget variance reviews. The monthly report presents detailed 28

information about service company charges and provides transparency to the 29


30

service charges. The VP/CIO and department directors, receive systematic 1

budget to actual variance reports, participate in the annual corporate 2

budgeting process, and perform quarterly reforecasts. 3

Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? 4

Yes, it does. A.5

AFFIDAVIT

STATE OF NEW MEXICO § §

COUNTY OF BERNALILLO §

BEFORE ME, the undersigned authority, on this day personally appeared

/yjich^l fAerfa , who, upon proving his identity to me and by me being duly sworn,

deposes and states the following:

"My name is

fO&V , and have never been convicted of a felony. I certify that the foregoing

testimony, offered by me on behalf of Texas-New Mexico Power Company, is true and correct

MicH /^lerh- . I am of legal age, a resident of the State of (AC

and based upon my personal knowledge and experience."

^4/ Witness

}{< >}* }{<

SWORN TO AND SUBSCRIBED before me, Notary Public, on this £3 day of May

2018, to certify which witness my hand and seal of office.

NOTARY PUBLIC jji and for the State of P

i/i'aW-M OC Qui' ntan(h

rht/n

OFF1[CIAL SEAL ) Victoria J. Quintana » NOTARY PUBLIC

STATE OF ICO aws j My Commission Expirest

Printed Name:

SEAL; My Commission expires:

hl/fi Notary ID#

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PUC DOCKET NO. BEFORE THE PUBLIC UTILITY COMMISSION OF