(PG&E-7)
PACIFIC GAS AND ELECTRIC COMPANY
CHAPTER 5
SUPPLY CHAIN – MATERIALS HANDLING AND INVENTORY
A. Introduction
1. Scope and Purpose
The purpose of this chapter is to demonstrate that Pacific Gas and Electric Company’s (PG&E or the Company) operating costs and capital expenditures forecasts for materials and supplies (M&S) inventory and warehousing and distribution services provided by Supply Chain Materials Operations (Materials Operations) are reasonable and should be adopted by the California Public Utilities Commission (CPUC or Commission).
In support of PG&E’s ongoing maintenance and construction activities, Materials Operations warehouses and distributes materials and supplies to the field organizations throughout PG&E’s service territory. In addition, Materials Operations provides inventory control and management and other supply chain-related support services, including electric equipment repair, transportation logistics and risk management.
2. Summary of Dollar Requests
Materials Operations’ capital expenditures and operating costs are included in the revenue requirement calculation in eight ways:
(1) as M&S inventory, an element of rate base;
(2) As plant additions or replacements for materials handling tools and equipment, an element of rate base;
(3) As direct capital salvage labor charges for the disposition and sale of scrapped equipment (surplus, obsolete or damaged);
(4) As direct capital removal credits from the revenues received for scrapped equipment (surplus, obsolete or damaged);
(5) As direct materials in expense and capital projects;
(6) As materials burden in expense and capital projects;
(7) As direct expense charges for electric equipment repair and scrapping; and
(8) As provider cost center (PCC) charges in expense and capital for intracompany mail services.
In this chapter, PG&E is requesting that the Commission adopt its 2005 through 2007 forecasts for Category 1 and 2005 through 2009 forecasts for Categories 2 and 3 as detailed below. Requests for the costs associated with Categories 4 through 8 are included in the forecasts of other programs and, therefore, are not requested in this chapter. Categories 4 through 8 are referenced here for informational purposes only.
For Category 1, M&S inventory, PG&E requests that the Commission adopt its weighted average forecasts of $32.6 million for 2005, $33million for 2006 and $33.1 million for 2007. PG&E’s 2007 forecast in the amount of $33.1 million for the weighted average of M&S inventory is 5.7percent higher than the 2004 recorded adjusted weighted average of $31.3million. This request covers M&S inventory needed to support the maintenance and construction activities of electric and gas distribution. M&S inventory balances for Generation are included in Chapter 11 of Exhibit (PG&E-3), Electric Generation Rate Base.
For Category 2, handling tools and equipment, PG&E requests that the Commission adopt its total-Company capital expenditures forecasts of $164,000 for 2005, $561,000 for 2006, $594,000 for 2007, $547,000 for 2008 and $534,000 for 2009. PG&E’s 2007 expenditures forecast in the amount of $594,000 for tools and equipment is 330.4percent higher than the 2004 recorded expenditure of $138,000. The allocation of these forecasts to electric and gas distribution is discussed in Exhibit (PGE-2), Chapter 8, Electric, Gas and Common Plant.
For Category 3, direct capital salvage labor costs related to the disposition and sale of PG&E’s surplus, obsolete or damaged equipment, PG&E requests that the Commission adopt its total-Company capital expenditures forecasts of $234,000 for 2005, $382,000 for 2006, $392,000 for 2007, $404,000 for 2008 and $418,000 for 2009. PG&E’s 2007 expenditures forecast in the amount of $392,000 for investment recovery is 14.3percent higher than the 2004 recorded expenditure of $343,000. The allocation of these forecasts to electric and gas distribution is discussed in Exhibit (PGE-2), Chapter 8, Electric, Gas and Common Plant. For Category4, PG&E’s direct capital removal credits from the revenues generated through the disposition and sale of PG&E’s surplus, obsolete or damaged equipment are included in the depreciation chapter.
For Category 5, PG&E’s forecast for direct materials costs is included in the expense and capital project forecasts of other programs and, therefore, is not requested in this chapter. Direct materials costs are not part of the M&S inventory rate base because they are issued and charged to capital and expense projects.
For Category 6, PG&E’s forecast for materials handling costs is included in the expense and capital forecasts of other programs as materials burden and, therefore, is not requested in this chapter.
For Category 7, PG&E’s forecast for the repair and scrapping costs of electric equipment is included in the expense forecasts of other programs and, therefore, is not requested in this chapter. The allocation of this forecast is discussed as major work categories (MWC) BG and BK in Exhibit(PGE-4), Chapter 2, Electric Distribution Maintenance.
For Category 8, PG&E’s forecast for operating costs related to the handling of intra-company mail is included in the expense and capital forecasts of other programs and, therefore, is not requested in this chapter. The allocation of this forecast to other internal operating clients is based on the amount of square footage occupied.
3. Support for Request
PG&E’s forecasts for M&S inventory, tools and equipment, and salvage costs are reasonable and necessary because the Company:
· Uses over $500 million worth of materials and supplies annually to support its ongoing maintenance and construction activities to provide safe, reliable service;
· Manages a large supply chain distribution network throughout PG&E’s 70,000 square mile service territory;
· Provides materials and supplies to the field organizations during emergencies (e.g., storms, earthquakes, car pole accidents, major mudslides, etc.);
· Establishes key supply chain metrics (e.g., order fill rate, inventory turns, inventory count accuracy, returns rate, etc.) to measure operating and financial performance and to drive improvements and cost savings;
· Implements process improvement initiatives (e.g., reducing goods receipt cycle time, enhancing internal controls, etc.) that increase operational efficiency and inventory accuracy; and
· Identifies and implements inventory reduction opportunities (e.g.,inactive inventory review, standardization of materials, vendor-direct shipments to jobsites, etc.).
4. Organization of the Remainder of This Chapter
The remainder of this chapter is organized as follows:
· Program Management Process;
· Estimating Methods;
· Costs by Major Activities;
· Materials and Supplies Inventory; and
· Cost Tables.
B. Program Management Process
The supply chain director and the immediate Materials Operations staff manage all aspects of the organization including its expenditures. This management team is responsible for the oversight of PG&E’s materials, information, and finances as they move through the supply chain process. On a monthly basis, the management team monitors the department’s year-to-date expenditures to ensure consistent and rigorous accountability over costs and spending. The Materials Operations staff regularly reviews anticipated materials demand with the internal operating clients to establish appropriate inventory levels, to adjust burden rates, and to improve mutual performance metrics.
C. Estimating Methods
In forecasting the M&S inventory under Category 1, the 2005 through 2007 forecasts are based on the 2004 recorded weighted average, which includes adjustments for inactive inventory and unbilled receipts. Stock is considered inactive if it has been in inventory for more than three years. Unbilled receipts are stock items that have been received from vendors, but have not been invoiced to PG&E for payment.
In forecasting the capital expenditures needed for materials handling tools and equipment under Category 2, MWC 05, Materials Operations evaluated the condition and quantity of the equipment currently used in its operations and determined whether it was necessary to repair or replace the existing equipment or acquire additional equipment.
In forecasting the capital expenditures needed for direct salvage labor costs related to the disposition and sale of PG&E’s equipment under Category 3, Materials Operations evaluated the quantity of equipment that is expected to be salvaged based on historical trends and the related resources needed to sell and dispose of such equipment.
In forecasting the direct capital removal credits from the revenues generated through the disposition and sale of PG&E’s equipment under Category 4, Materials Operations evaluated the quantity of equipment that is expected to be salvaged and compared the forecast with historical trends. As noted earlier, Category 4 is referenced here for informational purposes only.
In forecasting the expenditures needed for managing and distributing M&S inventory under Categories 5 and 6, the materials required for anticipated maintenance and construction activities were estimated and compared with historical labor costs of Materials Operations. As noted earlier, Categories 5 and 6 are referenced here for informational purposes only.
In forecasting the expenditures needed for repairing electric distribution equipment under Category 7, the equipment required for anticipated maintenance and construction activities was estimated and compared with historical labor costs of Materials Operations. As noted earlier, Category7 is referenced here for informational purposes only.
In forecasting the operating costs needed to provide intra-company mail services under Category 8, historical labor and contract and materials costs associated with such services were used. As noted earlier, Category8 is referenced here for informational purposes only.
D. Costs by Major Activities
1. Supply Chain – Materials Operations
Materials Operations has 348 employees located throughout the PG&E service territory who are responsible for the day-to-day operation and execution of the four core activities described below.
2. Warehouse Distribution
Through its warehouse distribution group, Materials Operations manages and operates a network of three major distribution centers to fill orders, manage inventory and returns, and deliver materials. These distribution centers are strategically located in Fremont, Marysville, and Fresno to deliver materials and supplies directly to PG&E’s field organizations (including gas and electric distribution, information systems technology services, metering services, gas transmission, electric transmission, and electric generation). The three major distribution centers occupy 54 acres of land and approximately 177,000 square feet of enclosed storage space to receive, store, and issue PG&E’s inventory. In 2004, the warehouse distribution group logged over 1.8 million miles to deliver materials to the client organizations throughout PG&E’s service territory.
The warehouse distribution group is also responsible for maintaining and overseeing PG&E’s Materials and Fleet Coordination Center (MFCC) in Fremont to support and respond to major emergencies and catastrophic events. The primary purpose of the MFCC is to operate as a 24/7 resource during emergencies, to coordinate the delivery of materials, supplies, equipment, vehicles, and to provide other logistical support as needed. The warehouse distribution group prepares for storm seasons by adjusting inventory levels in anticipation of spikes in demand for items commonly used for service restoration. In addition, the warehouse distribution group provides ongoing emergency training to its employees and participates in companywide emergency drills and mandatory practice exercises.
Other services provided by the warehouse distribution group include procuring fuel for all of PG&E’s service centers, substations and other facilities. In 2004, the warehouse distribution group purchased nine million gallons of fuel valued at $17.6million. In addition, this functional group manages overnight deliveries of intra-company mail to 175 office locations, covering approximately 680,000 miles per year.
As stated earlier, PG&E is not requesting in this chapter handling costs under Categories (6) and (8) associated with warehouse distribution and intra-company mail because such costs are included in the forecasts of other programs. However, PG&E is requesting in this chapter that the Commission adopt its 2005 through 2009 total-Company capital expenditures forecasts for materials handling tools and equipment under Category 2 needed to support warehouse distribution.
3. Materials Field Services
The materials field services group within Materials Operations provides yard stock, on-site materials management, and other local supply chain support to the internal operating clients at over 130 sites throughout PG&E’s territory. These sites provide PG&E’s crews with immediate access to the yard stock and materials needed to perform maintenance and construction activities. The materials field services group is responsible for: (1)replenishing and managing appropriate yard stock levels at these remote locations; (2) receiving shipments from PG&E’s distribution centers and suppliers; and (3) arranging the yard stock and materials for the crews. Additionally, this group delivers materials directly to jobsites and supports emergency power restoration efforts in coordination with the warehouse distribution group.
As stated earlier, PG&E is not requesting in this chapter materials handling costs under Category 6 associated with materials field services because such costs are included in the forecasts of other programs. However, in this chapter, PG&E is requesting that the Commission adopt its 2005 through 2009 total-Company capital expenditures forecasts for materials handling tools and equipment under Category 2 needed to support materials field services.
4. Electric Equipment Repair Services
Materials Operations operates an electric equipment repair and refurbishment facility in Emeryville. This facility provides scheduled in-shop inspection and cost-effective repair and refurbishment of electric distribution equipment, primarily transformers, regulators and reclosers. It also performs scheduled and emergency field repairs of in-service electric equipment. As part of its repair and refurbishment program, the Emeryville facility engages in the disposition and salvage of outdated and damaged electric equipment, which includes recycling waste oil. This group also provides insulation testing of rubber goods (e.g.,blankets, hoses, and jumpers, etc.) and inventory management of the Company’s emergency substation equipment.
Through its repair, refurbishment and recycling services, the Emeryville facility has captured $9.9 million in 2003 and $8.1 million in 2004 in avoided purchase costs for electric distribution equipment. Avoided purchase costs are achieved by repairing or refurbishing existing equipment (when it is economically feasible to do so) and placing the equipment back into service. Through the use of recycled oil, PG&E is able to avoid the purchase of new oil for its repaired or refurbished electric equipment. The duration of outages can often be reduced by performing on-site repairs of electric equipment rather than removing the defective unit and replacing it with new equipment.
As stated earlier, PG&E is not requesting in this chapter repair and scrapping costs under Category 7 associated with the Emeryville facility because such costs are included in the forecasts of other programs. However, in this chapter, PG&E is requesting that the Commission adopt its 2005 through 2009 total-Company capital expenditures forecasts for materials handling tools and equipment under Category 2 needed to support the Emeryville facility.