i summary of the self-build proposal, which conveys the

I Summary of the self-build proposal, which conveys the breadth and detail of the

2 proposal.

3 Q. WHAT WAS THE MAIN OBJECTIVE IN PUTTING TOGETHER THE SELF-

4 BUILD PROPOSAL?

5 A. The main economic objective in putting together the proposal was to identify the

6 lowest cost intermediate unit that would be efficient, reliable, flexible, and

7 environmentally responsible. Utilizing this 'process, AEPSC provided SWEPCO an

8 RFP bid that accurately represented the cost of the Stall project at that time.

9 Q. DID THE PROJECT TEAM USE INFORMATION FROM EXTERNAL SOURCES

10 AS A BASIS FOR THE SELF-BUILD PROPOSAL?

11 A. Yes. Where appropriate, the self-build proposal team issued requests for proposals to

12 estimate market prices and availability. As I will describe later in my testimony, this

13 process was used in securing a contract to engineer, procure and construct the Stall

14 Plant. An engineering, procurement and construction contract typically represents a

15 very significant portion of the costs to build a power plant because it includes a

16 majority of the project scope.

17 Q. WHAT IMPACT DID THE STALL SELF-BUILD PROPOSAL HAVE ON THE

18 PROJECT?

19 A. The Stall proposal laid the project groundwork. The proposal was developed using

20 industry standards, with input from qualified individuals, and prudent industry

21 practices. It was presented with pricing and schedule data, as known at the time of

22 development. It also thoroughly evaluated all areas of the project from siting,

PUC DOCKET NO. 40443 11DIRECT TESTIMONYCHRISTIAN T. BEAM

337

1 environmental, transmission/interconnection, operations and maintenance, fuels,

2 engineering and technology.

3 C. Planning

4 Contractor Selection

5 Q. WHAT WAS THE PROCESS USED FOR SELECTING THE ENGINEERING,

6 PROCUREMENT AND CONSTRUCTION CONTRACTOR?

7 A. AEPSC used a request for proposal process to thoroughly evaluate potential

8 engineering, procurement and construction contractors. In December 2005, AEPSC's

9 self-build proposal project team issued a request for proposal to engineer, procure and

10 construct what was then known as the Arsenal Hill Plant, now known as Stall, to nine

11 prospective bidders with a proven track record of performing similar work on a firm

12 price basis. The engineering, procurement and construction request for proposal

13 included a well-defined scope of work for the facility, with technical specifications

14 and both contractor's and owner's responsibilities governed by legal and commercial

15 terms and conditions, which included performance and schedule guarantees and

16 liquidated damages.

17 Q. HOW MANY PROPOSALS WERE RECEIVED IN RESPONSE?

18 A. Two bids were received in response to the request, which were generally equivalent

19 in total cost.

20 Q. WHAT PROCESS WAS USED TO SECURE THE ENGINEERING,

21 PROCUREMENT AND CONSTRUCTION CONTRACT?

22 A. AEPSC used an open book process to secure the engineering, procurement and

23 construction contract. Initially, both companies that submitted the engineering,


338

I procurement and construction bids used to develop the self-build proposal were

2 interested in proceeding on an exclusive basis and suggested developing a revised bid

3 using an exclusive, open book process, which I describe below. The use of this

4 revised bid was necessary due to the market escalation that had occurred since the

5 development of their responses to the self-build engineering, procurement, and

6 construction request for proposal. The revised bid, using the open book process, led

7 to a fixed price engineering, procurement, and construction contract that greatly

8 reduced SWEPCO's risk exposure to the escalation prevalent in the industry at that

9 time.

10 Q. PLEASE DESCRIBE THE OPEN BOOK PROCESS.

11 A. The open book process involved collaborating with the prospective engineering,

12 procurement and construction contractor to better define the design parameters and

13 obtain subcontractor pricing that formed the basis for the total contract price. In this

14 case, the open book process included updating the prices that had been provided in

15 the preliminary self-build proposals for market escalation and scope adjustments,

16 such as the purchase of certain equipment by SWEPCO. The benefit of the open

17 book process is that there could be an open confirmation of costs and decisions made

18 by the contractor. The open book process also allowed the price to be finned so that

19 both parties could proceed without assuming additional risk.

20 Q. DID AEPSC MOVE FORWARD WITH THE OPEN BOOK PROCESS WITH

21 BOTH CONTRACTORS?

22 A. No, the open book process was completed with only one contractor. Upon request to

23 participate in the process, one contractor declined due to being awarded another large

DIRECT TESTIMONYPUC DOCKET NO. 40443 13 CHRISTIAN T. BEAM

339

I project and not having the required resources to pursue the Stall Project in addition to

2 the newly awarded project. Therefore, a Memorandum of Understanding was

3 executed on April 25, 2007, with J. Lamar Stall Partners, and the open book process

4 was executed as described above. J. Lamar Stall Partners is a joint venture between

5 Sargent and LundyL11C of Chicago, Illinois and The Industrial Company of Steamboat

6 Springs, Colorado.

7 Q. DID AEPSC ULTIMATELY EXECUTE AN ENGINEERING, PROCUREMENT

8 AND CONSTRUCTION CONTRACT WITH J. LAMAR STALL PARTNERS?

9 A. Yes it did. Once the costs were updated, the estimate book became closed and the

10 stage was set to execute the Engineering, Procurement and Construction Agreement

11 which secured the vast majority of the Stall project on a firm fixed price basis. This

12 contract is attached as EXHIBIT CTB-3.

13 Q. WHEN WAS THE ENGINEERING, PROCUREMENT AND CONSTRUCTION

14 CONTRACT EXECUTED?

15 A. The execution of a firm price engineering, procurement and construction contract

16 between SWEPCO and J. Lamar Stall Partners occurred January 7, 2008.

17 Q. DESCRIBE THE MAJOR FEATURES OF THE ENGINEERING,

18 PROCUREMENT AND CONSTRUCTION CONTRACT.

19 A. The engineering, procurement and construction agreement is a fixed price contract

20 which defines the work and obligations, price and payment terms, warranty and

21 performance guarantees, project planning and control, scope changes, and the dispute

22 resolution process, among other typical contract details for a project of similar

23 magnitude.


340

1 Q. WHAT WERE THE FACILITY PERFORMANCE TARGETS AND

2 GUARANTEES BEING PROVIDED BY J. LAMAR STALL PARTNERS UNDER

3 THE ENGINEERING, PROCUREMENT AND CONSTRUCTION CONTRACT?

4 A. The facility performance targets consisted of a net power output of 523,072 kW

5 (523MW) and a net heat rate of 7,012 Btu/kWh at 72 degrees. Guarantee values

6 associated with these two parameters allowed for 7 percent deviation from these

7 targets. Additionally, the unit was required to meet a reliability guarantee of being

8 100 percent reliable for a consecutive period of 120 hours.

9 Q. WERE THESE PERFORMANCE TARGETS ULTIMATELY MET?

10 A. Yes.

11 Q. DOES THE SELECTION OF THE ENGINEERING, PROCUREMENT AND

12 CONSTRUCTION CONTRACTOR AND THE RESULTING CONTRACT,

13 DEMONSTRATE REASONABLE AND PRUDENT PROJECT PLANNING AND

14 MANAGEMENT?

15 A. Yes, it does. Prudent evaluation of the bids received, combined with the concepts of

16 fixed price contracting for the engineering, procurement, and construction of the

17 project through an entity such as J. Lamar Stall Partners demonstrates prudent

18 planning and management of the Stall project.

19 Proiect Organization

20 Q. WAS THE PROJECT ORGANIZED TO PROMOTE REASONABLE AND

21 PRUDENT PLANNING AND MANAGEMENT?

22 A. Yes, it was. From a contract perspective, the use of an engineering, procurement and

23 construction contract simplified the organization and communication channels


341

1

2

3

4 Q.

5

6 A.

7

8

9

10 Q.

11 A.

12

13

between the project team and the engineering, procurement, and construction

contractor. Additionally, the project team was efficiently organized within AEP to

promote clear reporting structures and responsibility sectors.

WHAT ROLE DID AEPSC PLAY IN THE PLANNING AND MANAGEMENT OF

THE STALL PROJECT?

AEPSC was responsible for the planning and execution of the Stall project. AEPSC

is an experienced power plant developer with resources to support the engineering

and project management of major power infrastructure construction projects such as

Stall.

WHAT RESOURCES DID AEPSC COMMIT TO THE STALL PROJECT?

With AEPSC's experience at hand, knowledgeable resources from across the

organization were committed to the Stall project. The departments that had primary

roles can be found in the table below:

Department RoleAEPSC Projects and Field Project management, constructionServices management, start-up and acceptance

expertise required to manage contractors inthe field.

AEPSC Safety & Health Establishing/approving internal and contractorsafety programs, and monitoring compliance.

AEPSC Quality Assurance Establishing/approving internal and contractorServices quality programs, and monitoring compliance.

AEPSC Engineering Services Engineering expertise required to developspecifications for plant equipment andconstruction processes.

AEPSC Environmental Services Securing environmental licenses and permitsrequired to construct and operate the facility.

AEPSC Fuel Emissions and Securing and scheduling appropriate fuelLogistics deliveries to match the operational needs of

the facility.


342

Department RoleAEPSC Generation Business Contract administration and procurementServices support

AEPSC Fossil & Hydro Responsible for the reliable, efficient and safeGeneration operation of the facility.

AEPSC Financial Securing appropriate funds to support thescheduled commercial operation date, as wellas accurate reporting and recording of allcosts associated with the construction.

I Q.

2

3 A.

4

5

6

7

8

9

10 Q.

11

12

13 A.

14

EXPLAIN THE INFORMATION FLOW BETWEEN THE PROJECT TEAM AND

SWEPCO.

Each month the Stall project management team presented a project status update to

AEPSC Project and Field Services Senior Management. In turn, Project and Field

Services Senior Management provided a monthly status update to the AEP Executive

Council, which includes SWEPCO's President. The Project and Field Services

project update began with the presentation of a project scorecard. The scorecard

included safety statistics, schedule performance, quality issues/concerns, and cost

data.

WHAT PROJECT SPECIFIC INFORMATION DID J. LAMAR STALL

PARTNERS ROUTINELY PROVIDE TO THE PROJECT TEAM AND SWEPCO

AS PART OF THE QUALITY ASSURANCE PROGRAM?

The table below provides the project specific information and the frequency it is

provided to AEPSC. AEPSC then shares this data with SWEPCO:

Report FrequencyEngineering Document Register Monthly

Action Items / Issues List Weekly

Expediting Report Monthly prior to mobilizationBi-Monthly after mobilization


343

RVort FrequencyEnvironmental or Public Relations Incident Reports Immediate verbal / followed by

written communication

Site Workforce Reports Weekly

Construction / Start-Up Look Ahead Weekly

Project Schedule Monthly

Generation / Backfeed Power Projections Daily (after 15t synchronization)

Work Remaining List Weekly

Project Progress Updates Weekly

Project Progress Reports Monthly

1

2

3

4 Q.

5

6

7 A.

8

9

10

11

12

13

14

15

Attached as EXHIBIT CTB-4 are examples of such reports. EXHIBIT CTB-4

includes the previously mentioned project scorecard along with the cost and schedule

reports for June 2010, the final month for which reports were issued.

HOW DID THE ORGANIZATIONAL STRUCTURES AND TOOLS YOU JUST

DESCRIBED SUPPORT THE REASONABLE AND PRUDENT MANAGEMENT

OF THE CONSTRUCTION OF STALL?

The organizational structure of the Stall project supported reasonable and prudent

management by aligning various areas of expertise, such as environmental services,

project and field services, and financial services to name a few, with the applicable

area of the Stall project. This organizational alignment followed by weekly updates

and monthly reports, which included the project scorecard, ensured that the required

knowledge and experience was provided to each area of the project and results were

then reviewed with senior management. The organizational structure and reporting

processes provided the basis for making prudent decisions in the execution of the

Stall project.


344

1 Engneering

2 Q. HOW WAS ENGINEERING FOR THE STALL PROJECT PLANNED AND

3 MANAGED?

4 A. Upon initiation of the project, an AEPSC engineering team was formed which

5 developed an engineering, procurement and construction scope of work specification

6 that defined the project work, the codes and standards for the work, and the design

7 document review methodology. This was included as part of the engineering,

8 procurement and construction contract. The engineering in the scope of work

9 included the requirement that J. Lamar Stall Partners make design document

10 submittals and present detailed design review in periodic meetings. The engineering

11 team then reviewed, monitored and approved design document submittals, required

12 per the engineering, procurement and construction contract, throughout the

13 engineering process to assure that J. Lamar Stall Partners' engineering met the codes,

14 standards, and requirements of the engineering, procurement and construction

15 contract.

16 Q. HOW DID AEPSC ENSURE THAT J. LAMAR STALL PARTNERS'

17 ENGINEERING DELIVERABLES MET THE CONTRACT CRITERIA?

18 A. AEPSC's engineering team reviewed design document submittals to assure that they

19 met the requirements of the engineering, procurement and construction contract,

20 AEPSC's Quality Assurance Program, and all applicable industry engineering codes

21 and standards. The AEPSC engineering team, along with AEPSC construction, and

22 AEP plant operations representatives also conducted periodic reviews with J. Lamar

23 Stall Partners' engineering team to assess the constructability, operability, and


345

1 maintainability of the Stall plant from an engineering perspective. These reviews

2 occurred when the project was approximately 15, 30, 60, and 90 percent complete,

3 with the AEPSC engineering team and J. Lamar Stall Partners jointly determining the

4 point at which these milestones were reached. These periodic reviews were

5 supplemented with on-site reviews by the AEPSC engineering team throughout the

6 construction process.

7 Q. IN YOUR OPINION, WAS THE USE OF J. LAMAR STALL PARTNERS FOR

8 ENGINEERING A REASONABLE AND PRUDENT WAY TO MANAGE THE

9 STALL PROJECT?

10 A. Yes. In order to ensure that the facility performed to its specifications, the assignment

11 of responsibility of engineering efforts to J. Lamar Stall Partners under the

12 engineering, procurement and construction contract was a reasonable and prudent

13 process for engineering the Stall project. With this assignment of responsibility,

14 J. Lamar Stall Partners was held accountable for ensuring that the engineering efforts

15 resulted in meeting the predefined performance guarantees.

16 Procurement

17 Q. WHAT STEPS WERE TAKEN TO PROCURE THE EQUIPMENT THAT WAS

18 NOT INCLUDED IN THE ENGINEERING, PROCUREMENT AND

19 CONSTRUCTION CONTRACT?

20 A. The project team performed an extensive search of available pre-owned equipment on

21 the so-called "gray market" that offered the best value to SWEPCO customers. In

22 this effort, the team issued requests for proposal for intermediate equipment to

23 various owners and brokers of pre-owned equipment, either installed or stored. The


346

1 lowest evaluated cost options were pursued further and purchases were made by

2 AEPSC for two combustion turbine generators (excluding auxiliary equipment), the

3 steam turbine generator, and the condenser. The combustion turbines and the steam

4 turbine purchases were complete by the end of 2006. The condenser purchase was

5 complete in August 2007.

6 Q. WHAT MAJOR EQUIPMENT WAS PROCURED BY SWEPCO FOR THE STALL

7 PROJECT?

8 A. SWEPCO procured two combustion turbines and generators, two heat recovery steam

9 generators, one steam turbine and generator, a steam turbine condenser, and five

10 transformers for the project.

11 Q. IS THIS THE SAME EQUIPMENT USED IN DEVELOPING THE SELF-BUILD

12 PROPOSAL?

13 A. No. The self-build proposal was developed on the basis that SWEPCO would

14 purchase a General Electric F-class CTG and a steam turbine from the gray market.

15 However, the General Electric equipment that was included in the self-build proposal

16 was not available when AEPSC attempted to purchase it. This necessitated the search

17 for alternatives using the procurement process I described above, and AEPSC

18 purchased the equipment that provided the best value available at the time.

19 The procured Siemens combustion turbine-generator will each generate about

20 10 MW more than the General Electric combustion turbine-generator specified as part

21 of the self-build proposal, producing 20 additional MW. In turn, the steam turbine

22 generator also will generate about 10 MW more as a result of the increased

23 combustion turbine-generator output.


347

I The Siemens equipment provides comparable operational and maintenance

2 characteristics as the original General Electric equipment and meets the performance

3 criteria requested in SWEPCO's request for proposal.

4 Q. WHY WAS THE ORIGINAL EQUIPMENT UNAVAILABLE?

5 A. The gray market equipment that was represented in the request for proposal bid was

6 sold to another entity prior to AEPSC's ability to purchase it. This was simply due to

7 the nature of the gray market. Opportunities that are present in the new equipment

8 marketplace, such as the ability to take an option to buy equipment, are not common

9 in the gray market. The gray market is more fluid and often lacks a significant

10 inventory and the ability to secure commitments for future equipment delivery.

11 Q. DO THE SIEMENS F-CLASS CTGS HAVE ANY EFFECT ON THE OPERATION

12 OF THE PLANT WHEN COMPARED TO THE GENERAL ELECTRIC

13 COMBUSTION TURBINES?

14 A. No. The use of the Siemens F-Class combustion turbines does not have any effect on

15 the plant's ongoing operations.

16 Q. DID SWEPCO PURCHASE ANY ADDITIONAL MAJOR EQUIPMENT THAT

17 WAS NOT SPECIFICALLY REPRESENTED IN THE CCN?

18 A. Yes, it did. SWEPCO determined it would be beneficial to add evaporative cooling

19 to the combustion turbines in order to increase capacity and improve fuel efficiency

20 when ambient temperatures are above approximately 60 degrees F. At 96 degrees,

21 the incremental capacity added by the use of evaporative cooling is 26 MW, at a cost

22 of approximately $250/kW. This equipment package enhances the total unit output,


348

I particularly during the summer peak, and ultimately increases the value of the Stall

2 Plant to SWEPCO's customers.

3 Q. WAS PROCUREMENT FOR STALL REASONABLY AND PRUDENTLY

4 PLANNED AND MANAGED?

5 A. Yes it was. SWEPCO's efforts in procuring the major equipment for the Stall project

6 through the use of fixed price contracts mitigated cost volatility due to market

7 uncertainty. Additionally, the procurement of major equipment outside the scope of

8 the engineering, procurement and construction contract ensured that the major

9 equipment was purchased at a reasonable cost. In this case, doing so avoided the

10 markups that are typical in the construction industry for items purchased by an

11 independent contractor.

12 D. Project Execution

13 Construction

14 Q. WHEN DID CONSTRUCTION ON THE STALL PROJECT BEGIN?

15 A. Clearing and grading of the site began on March 10, 2008. Construction of the

16 physical plant, such as foundations, began soon after the air permit was received on

17 March 20, 2008.

18 Q. THROUGH PROJECT COMPLETION, WAS CONSTRUCTION PERFORMED

19 AND EXECUTED AS PLANNED?

20 A. Yes, with the exception of the heat recovery steam generator module installation

21 which I will address later in my testimony. Throughout the project, J. Lamar Stall

22 Partners performed detailed inspections of its work and that of its subcontractors, in-

23 progress and at intervals appropriate to the stage of construction or fabrication as was


349

1

2

3

4

5

6 Q.

7

8

9 A.

10

11

12

13

14

15

16

17

necessary to ensure that such work is proceeding in accordance with the agreement,

the project schedule, and design documents. The results of these inspections were

then communicated to the project team for validation. The joint effort of J. Lamar

Stall Partners and the project team have ensured construction was prudently and

reasonably planned and managed.

DOES THE STALL PLANT AS IT WAS BUILT DIFFER FROM THE SELF-

BUILD PROPOSAL PRESENTED IN THE CERTIFICATE OF CONVENIENCE

AND NECESSITY CASE?

Yes it does, as previously mentioned. Since the Certificate of Convenience and

Necessity was granted, the project continued natural physical progression while under

construction. With this progression, two main differences evolved with the plant

between the proposal in the Certificate of Convenience and Necessity Case and as it

exists now. Those differences are (1) the capital cost, and (2) increased capacity. The

table below provides a comparison of the cost and performance increases when

compared to the Certificate of Convenience and Necessity Filing. As you will note,

the overall unit capacity has increased by 53 MW and the cost has increased by

$147/kW.

Pro osed / As Built Variance

Proposed As BuiltA

(increase)Unit Capacity

(MW) 454 507 53Heat Rate(btu/kWh 6909 7073 164Cost ($/kW) 610 757 147

'Table assumes an ambient tem perature of 96 degrees.


350

I Q. WHAT IS THE REASON FOR THESE DIFFERENCES?

2 A. The primary reasons for these differences are market escalation and evaporation of

3 the gray market, which occurred during the period of time that coincided with the

4 development of the self-build proposal, securing of the engineering, procurement and

5 construction contract, and entering into fixed price contracts for the major equipment

6 and services. The Stall self-build proposal submitted in the Certificate of

7 Convenience and Necessity Case included costs and overall capacity associated with

8 (1) equipment that later became unavailable, and (2) a preliminary engineering,

9 procurement and construction proposal that later had to give way to the contract that

10 reflected the open book process I discussed above.

11 Q. ARE THE CHANGES IN THE STALL PLANT YOU HAVE DISCUSSED A

12 RESULT OF IMPRUDENT PLANNING OR MANAGEMENT BY SWEPCO?

13 A. No, they are not. The increased performance capabilities and associated cost for

14 constructing the Stall facility have resulted from an updated engineering, procurement

15 and construction proposal and the purchase of different equipment than originally

16 specified in the self-build proposal. Both of these changes occurred due to rapidly

17 changing market conditions during the period of time that elapsed from self-build

18 proposal development to project execution as described above.

19 Cost Comparison

20 Q. WHAT WAS THE FINAL COST OF STALL AS COMPARED TO THE AMOUNT

21 PRESENTED IN THE CERTIFICATE OF CONVENIENCE AND NECESSITY

22 CASE?


351

1 A.

2

3

4 Q.

5 A.

6

7

8

9 Q.

10

11

12 A.

13

Excluding allowance for funds used during construction, the estimated capital cost

presented in the Certificate of Convenience and Necessity Case was $277 million

($610/kW). The final cost is $384 million ($768/kW).

PLEASE PROVIDE AN EXPLANATION OF THESE DIFFERENCES.

The table below provides an estimate of the changes between the cost presented in the

Certificate of Convenience and Necessity Case and the final project cost. These cost

changes are broken out into the six impacted project areas and provide the specific

reason for the cost change.

Estimated Cost Updatesby area

AreaDifferencemillion $

Reason for Update

The majority of this equipment was competitively re-bid

Engineered Equipment 37 upon project award. The heat recovery steam generatoralone escalated 70%.

The availability of gray market equipment decreased,which resulted in increased costs. The cost for the

Gray Market Equipment 7 combustion turbine auxiliary is the primary source ofvariance.

Evaporative Cooling 6 Added project scope.

The demand for labor exceeded supply, which resultedin increased man-hour rates. This also resulted in the

Labor 20 use of less experienced craft, which resulted in lowerproductivity and increased supervision.

Engineering, Material, 24 This represents an increase due to market escalation.and SubcontractsInternal & Miscellaneous 13 Escalation and SWEPCO overheads.

IS THE PRICE CHANGE REFLECTED IN THE FINAL COST FOR STALL

TYPICAL OF THE CONSTRUCTION MARKET AT THE TIME OF THE OPEN

BOOK ESTIMATE?

Yes. From the submittal of the self-build proposal in February 2006 to the execution

of an engineering, procurement and construction agreement in January 2008, the cost


352

1 for new power plant equipment, material, and labor began increasing substantially

2 due to a dramatic increase in the demand for environmental retrofits, new power

3 plants, and other industrial expansion, as well as continued hurricane recovery in the

4 Gulf Coast Region and international market demand.

5 Q. PLEASE PROVIDE EXAMPLES OF COST INCREASES THAT OCCURRED IN

6 THE INDUSTRY DURING PROJECT EXECUTION?

7 A. For example, power plant construction costs increased 27 percent between 2006 and

8 2007 alone {Feb. 2008 Cambridge Energy Research Associates}. The cost increases

9 were the result of escalation in the cost of commodity/raw materials such as iron,

10 steel, copper, and cement, that are required in large quantities for construction of

11 power plants. Figure 1 below depicts the cost indices for these key

12 commodity/construction materials from 2002 through 2011.


353

Figure 1. Producer Price Index Data for VariousCommodities/Construction Materials

600 -- -- - - -----

-Nickel

.... Copper

500 Cement• •, •Iron & Steel • • .• ^..

-Heavy Construction ^' '•1 ; • •• • ••• . ' • •+ • .• • .

_ ••^•• a • ^ • •^ • ••400 s _._._:-- •

------------ ----- -- ----------- ^^ =^--.-..------• • --^-. . n-s-^ ------• ti+ .' • • •

• s•M • •+ • ♦y • • ^ : •+i i

• ••••

' . •

300 __ -___-__ .___._^-_^-___.-. • __. • .-„-^ --;--------------9 ` ^ •

^ ^• -• ^...•

200

i^.. ..•. ... .e^^...^ • "^.`.^.. *1,'*^ ..^ .^. .. .. ^+

100..•• •^•• •,:.

^ • _^ ++eq^i, /r•'^' ^ _ ' '^' ..w^►r. ..^.

, _ .d°"!'^^ • ,.r+! ^ f ^„/'•^

o .-_._-. . , _. _ _ _..- _, _ _. ._ . - _- .,-__.__ _, ____ _. -. ._Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

1 Month

2 As can be seen in Figure 1 above, during the 2007-2008 timeframe when the majority

3 of procurement for the Stall Plant took place, key commodities and construction

4 materials were experiencing extreme volatility and cost escalation.

5 Q. HOW DOES THE FINAL COST COMPARE TO OTHER COMBINED CYCLE

6 FACILITIES CURRENTLY UNDER CONSTRUCTION?

7 A. The updated cost of $844/kW for the Stall Plant is well below comparable facilities.

8 The Power Plants: Characteristics and Costs November 13, 2008 report for Congress

9 analyzed seven natural gas combined cycle projects across the United States set for

10 commercial operation in the 2010-2012 timeframe. The cost per kW for these plants

11 ranged from $1,017 to $1,409. In more recent experience, AEP received a quote in

12 2011 for a new natural gas combined cycle facility. The cost for this facility was in


354

1 the range of $1,300/kW. This indicates that the cost of comparable facilities is

2 approximately 30-80 percent higher than the final cost of the Stall Plant.

3 Schedule Comparison

4 Q. PLEASE COMPARE THE SCHEDULE IN THE CERTIFICATE OF

5 CONVENIENCE AND NECESSITY CASE TO THE FINAL PROJECT

6 SCHEDULE.

7 A. The Certificate of Convenience and Necessity provided an estimated in service date

8 of June 1, 2010. As stated earlier, the project had a guaranteed completion date of

9 July 26, 2010, and was brought on-line 6 weeks ahead of schedule on June 16, 2010.

10 Q. WHY WAS THE GUARANTEED DATE NEARLY TWO MONTHS LATER

11 THAN THE SCHEDULE IN THE CERTIFICATE OF CONVENIENCE AND

12 NECESSITY CASE?

13 A. Due to the time necessary to negotiate the engineering, procurement and construction

14 contract and purchase the gray market equipment, we were unable to negotiate a

15 guaranteed completion date prior to July 26, 2010. However, the project work was

16 still completed in time for SWEPCO to avoid entering into a power purchase

17 agreement for capacity that year as discussed by SWEPCO witness A. Naim Hakimi.

18 Q. WERE ALL ENVIRONMENTAL PERMITS RECEIVED TO ALLOW

19 CONSTRUCTION AND OPERATION TO PROCEED?

20 A. Yes, they were.


K14-1

I E. Monitoring and Controlling

2 Q. WHAT PROCESSES WERE IN PLACE FOR MONITORING AND

3 CONTROLLING THE ACTIVITIES OF THE PROJECT?

4 A. The project team monitored and controlled the project through risk analysis and

5 tracking, in an effort to ensure accurate and timely data was received. This data was

6 in turn used to provide forecasts which updated project trends, current cost, and

7 current schedule information. Additionally, the activities of the Stall project were

8 validated through the use of an independent monitor.

9 Independent Monitor

10 Q. WHO WAS THE INDEPENDENT MONITOR?

1I A. As required by the Louisiana Public Service Commission and the Arkansas Public

12 Service Commission, SWEPCO retained an independent monitor. The independent

13 monitor was Cothren, Graff, and Smoak Engineering, Inc. of Shreveport, Louisiana.

14 Mr. Brice discusses how Cothren, Graff, and Smoak Engineering, Inc. was selected.

15 Q. WHAT WERE THE RESPONSIBILITIES OF COTHREN, GRAFF, AND SMOAK

16 ENGINEERING, INC. AS INDEPENDENT MONITOR?

17 A. Cothren, Graff, and Smoak Engineering, Inc. evaluated the project team's monitoring

18 and controlling efforts and coordinated with SWEPCO and project team

19 representatives to provide services and appropriate reports to the Arkansas Public

20 Service Commission, Louisiana Public Service Commission, and AEPSC. These

21 services included reviews of the self-build proposal, contracts, permits and other

22 approvals, contract change orders, project status, and project monthly progress

23 reports. In addition to these reviews, Cothren, Graff, and Smoak Engineering, Inc.


356

1 conducted site visits to validate project progress. The results of these reviews and site

2 visits were used to complete the quarterly reports submitted to the Arkansas Public

3 Service Commission, Louisiana Public Service Commission, and AEPSC.

4 Q. HAS THE INDEPENDENT MONITOR CONCLUDED ITS DUTIES ON THE

5 STALL PROJECT?

6 A. Yes, Cothren, Graff, and Smoak Engineering, Inc. prepared its final report dated July

7 2010, which is attached as EXHIBIT CTB-5.

8 Cost Controls

9 Q. WHAT PROCESSES WERE IN PLACE TO CONTROL AND MANAGE

10 PROJECT COSTS?

11 A. The prime process in place to control and manage costs was the process of executing

12 contracts under a fixed price as described above. In the event that scope changes

13 were requested which could have affected project costs, the engineering,

14 procurement, and construction contract states in Section 13:1 "that all scope changes

15 must be authorized by a written scope change order and only the Owner [SWEPCO]

16 may authorize scope change orders. "

17 Q. UNDER WHAT CIRCUMSTANCES WOULD SWEPCO AUTHORIZE SUCH

18 SCOPE CHANGE ORDERS?

19 A. Scope Change Orders were authorized only after a thorough economic analysis that

20 evaluated impacts to cost, performance, safety, schedule, and other relevant

21 circumstances. These change orders were then routed through the proper

22 management chains, dependent upon associated cost, for authorization. Therefore,


357

1 change orders were processed only after proper evaluation in an effort to manage

2 project costs.

3 Q. WERE THERE ANY APPROVED SCOPE CHANGE ORDERS?

4 A. Yes. A list of these Scope Change Orders is attached to my testimony as EXHIBIT

5 CTB-6.

6 Q. DO THESE COST CONTROLS REFLECT REASONABLE AND PRUDENT

7 PLANNING AND MANAGEMENT?

8 A. Yes. These cost controls ensure that changes to project scope, which ultimately

9 affects cost, were thoroughly evaluated before execution.

10 F. Closing

11 Q. PLEASE DESCRIBE THE PROJECT CLOSING ACTIVITIES THAT HAVE

12 BEEN PERFORMED TO DATE.

13 A. Approximately 120 punch list items have been completed as part of the project

14 closing activities that have occurred since the June 16, 2010 commercial operation

15 date. Examples of significant punch list items include the resolution of water

16 treatment system performance issues, upgrade of the auxiliary water cooling system

17 to meet design conditions, and the installation of sound control equipment to reduce

18 noise leaving the site. In addition, engineering as-built documentation was completed

19 and issued, and a disposition of claims and issues has been completed to close out

20 multiple contracts.

21 Q. ARE THERE ANY OUTSTANDING PROJECT CLOSING ACTIVITIES THAT

22 HAVE YET TO OCCUR?


358

1 A. Yes. As I prepare this testimony, two main activities have yet to occur.

2 The first is related to the completion of minor mechanical and electrical work

3 related to the installation of several automatic valve operators on the cooling tower by

4 the engineering, procurement and construction contractor. This work requires an

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

outage and is currently planned for the second half of 2012.

The second item is related to the litigation of a builders risk insurance claim

related to the project. Following damage done to two heat recovery steam generator

modules while in transit, SWEPCO pursued reimbursement from the supplier for new

modules. This reimbursement was received and is reflected in the final price of the

Stall Plant. SWEPCO is also pursuing a builders risk insurance claim related to the

increased costs assumed by SWEPCO while the new heat recovery steam generator

modules could be fabricated and shipped. At the present time, SWEPCO disagrees

with its insurance carriers regarding the extent to which insurance coverage should

respond to SWEPCO's costs associated with the damaged heat recovery steam

generator modules. In an effort to resolve this dispute, SWEPCO filed suit against

the carriers in Caddo Parish, Louisiana District Court in September, 2011, seeking to

recover these costs. SWEPCO continues to evaluate the dispute resolution options

available to it under the insurance policies while it pursues the suit. No trial date has

been set for the suit.


359

1 V. TURK PLANT

2 A. Description

3 Q. GENERALLY DESCRIBE THE TURK PLANT.

4 A. The Turk plant is a coal-fired, nominally-rated 600 MW baseload generating plant

5 that is being constructed in southwest Arkansas, north of the town of Fulton,

6 Arkansas and approximately 15 miles northeast of the city of Texarkana, Arkansas.

7 SWEPCO witness Mr. Franklin describes Turk in detail in his testimony.

8 Q. AS OF MARCH 2012, WHAT WAS THE ESTIMATED CAPITAL COST OF

9 TURK AT COMPLETION?

10 A. At that time, the estimated capital cost of the plant at completion was $1.762 billion,

11 which excludes allowance for funds used during construction. Below in Section

12 IV.D, I discuss what the estimated cost is as calculated on a basis consistent with the

13 cost estimates in the Turk Texas Certificate of Convenience and Necessity Case (PUC

14 Docket No. 33891). SWEPCO witness Mr. Brice discusses the Turk Certificate of

15 Convenience and Necessity Case in his testimony.

16 Q. WHAT WERE THE ACTUAL TURK COSTS AS OF DECEMBER 31, 2011?

17 A. As of December 31, 2011, the actual Turk costs were $1.479 billion, excluding

18 allowance for funds used during construction. This amount represents total plant

19 costs. SWEPCO witness Randall W. Hamlett presents SWEPCO's share of these

20 total costs.

PUC DOCKET NO. 40443 34

DIRECT TESTIMONYCHRISTIAN T. BEAM

360

1 Q. WHAT IS THE ESTIMATED IN-SERVICE DATE OF TURK?

2 A. The Turk Plant is scheduled to be in-service in the 4th quarter of 2012. The most

3 likely outcome is for the plant to be placed in-service during the month of December

4 2012.

5 Q. HOW MUCH OF TURK HAS BEEN COMPLETED?

6 A. Through March 2012, engineering for Turk was 99 percent complete and construction

7 was approximately 90 percent complete. As I prepare this testimony, Turk is

8 approximately 92 percent complete. Attached as EXHIBIT CTB-7 are recent

9 photographs of the Turk Plant.

10 Q. IS THERE AN INDEPENDENT MONITOR FOR TURK?

11 A. Yes, there is. The independent monitor for Turk is E3 Consulting out of Englewood

12 Colorado. As the independent monitor for Turk, E3 Consulting is responsible for

13 preparing progress reports every six months. I discuss the independent monitor for

14 Turk in more detail in Section V.E later in my testimony.

15 Q. WHAT PROCESSES, STANDARDS, OR CRITERIA WERE APPLIED TO THE

16 PLANNING OF THE TURK PROJECT?

17 A. These are described above in Section III of my testimony, where I discuss AEPSC's

18 Engineering, Projects and Field Services Quality Assurance Program and the

19 Standard Operating Procedures and Project Guidelines which are used by AEPSC

20 project teams during the planning and execution of internal generation projects. The

21 Quality Assurance Program Standard Operating Procedures and Project Guidelines

22 are consistent with the principles and process standards outlined by the Project

23 Management Institute's Project Management Body of Knowledge key project phases


361

1 of initiating, planning, executing, monitoring and controlling, and closing. I will

2 follow these topics in discussing Turk.

3 B. Initiation

4 Q. WHEN WAS TURK INITIATED?

5 A. Turk was initiated when AEPSC (on SWEPCO's behalf) prepared a self-build

6 proposal for Turk in response to the request for proposal for power resources that

7 SWEPCO issued in December 2005, as SWEPCO witness Mr. Brice describes in his

8 testimony. This phase of the project included AEPSC developing and submitting the

9 Baseload Capacity and Energy Resources (Hempstead) Proposal, known as the

10 Hempstead self-build proposal, that outlined the various facets of the project

11 including the engineering and construction, project schedule, project management

12 organization, pricing agreement, and operational characteristics.

13 Q. ARE THE HEMPSTEAD PROPOSAL AND THE TURK PROJECT THE SAME?

14 A. Yes. The Turk project began as what was then called the Hempstead proposal based

15 on the selected facility location in Hempstead County, Arkansas. The project was

16 later named the John W. Turk, Jr. Power Plant.

17 Q. WHAT KEY INITIAL DECISIONS WERE ESTABLISHED BY THE SELECTION

18 OF THE TURK PROPOSAL IN THIS REQUEST FOR PROPOSAL PROCESS?

19 A. Primarily, three such decisions were determined by the selection of the Turk self-

20 build proposal: First, the location of the plant in Hempstead County in southwest

21 Arkansas; second, the use of ultra-supercritical pulverized coal technology; and third,

22 the basic scope and nature of the project as contained in the underlying self-build

23 proposal that was submitted, evaluated, and ultimately selected. These decisions


362

I followed from the fact that Turk was selected over all other alternatives in the request

2 for proposal process, as SWEPCO witness Mr. Brice describes in his testimony. In

3 other words, the proposal that was selected was for a power plant at a specific

4 location, with a specific technology, and described in a specific proposal.

5 Q. HAVE YOU ATTACHED THE EXECUTNE SUMMARY OF THE SELF-BUILD

6 PROPOSAL FOR TURK?

7 A. Yes, the self-build' proposal executive summary is attached as CONFIDENTIAL

8 EXHIBIT CTB-8. The executive summary conveys the depth and breadth of the

9 proposal.

10 Q. WHAT WAS THE COST ESTIMATE FOR THE SELF-BUILD PROPOSAL?

11 A. The Turk self-build proposal estimate was $1.344 billion. This estimate was later

12 revised to $1.347 billion following the addition of an Activated Carbon Injection

13 system for enhanced mercury control. This system is necessary for the proposed

14 facility to comply with the May 2006 New Source Performance Standards for

15 mercury emissions set forth by the Environmental Protection Agency.

16 Q. HOW WAS THE SELF-BUILD PROPOSAL FOR TURK PREPARED?

17 A. To prepare the Turk self-build proposal, a team was first assembled from various

18 functional areas within AEPSC with relevant expertise and tasked with developing

19 the proposal for an asset which would meet SWEPCO's needs, with the primary

20 objective of minimizing plant life-cycle costs by developing an optimum balance of

21 low capital, fixed, and variable costs with high levels of efficiency, reliability, and

22 flexibility while providing a high degree of environmental stewardship. Fuel


363

1 selection, power-cycle design, equipment selection and execution strategy are the key

2 elements to achieving this objective.

3 As the executive summary in CONFIDENTIAL EXHIBIT CTB-8 indicates, a

4 comprehensive approach was taken in developing and fleshing out the proposal and

5 integrating the various areas of expertise that Turk required. Information was

6 developed and provided not only for capital costs but also for project operational

7 characteristics, fuel, financial, siting, transmission, environmental, engineering and

8 technology, operations and maintenance, and project management from AEPSC.

9 Of course, a major element of the self-build proposal was estimating the cost

10 of the project. Below in Section V. D., (under the heading "Cost Comparison"),

11 I describe in detail how the cost estimate was developed. For now, I simply observe

12 that AEPSC was diligent in this process, as the few following items illustrate:

13 • We used indicative proposals and some quoted proposals for major14 equipment.

15 • We used an Architect-Engineer's estimate based on experience in16 engineering, procuring and constructing a facility of this type. Estimates17 were built up from quantities of materials needed for the plant and their18 estimate of the cost to install these materials.

19 • We used an independent construction assessment of the Architect-20 Engineer's estimate.

21 Q. DID THE TURK SELF-BUILD PROPOSAL LAY THE GROUNDWORK FOR

22 THE REASONABLE AND PRUDENT PLANNING AND MANAGEMENT OF

23 THE TURK PROJECT?

24 A. Yes, it did. The proposal process integrated a qualified project team from a variety of

25 disciplines and used reasonable means to prepare a response to SWEPCO's request

26 for proposals and to calculate the estimated costs and schedules. Once SWEPCO


364

I accepted the self-build proposal, the proposal, along with the work performed to

2 develop the proposal, served as a reasonable basis to continue planning and managing

3 the Turk project.

4 C. Plannina

5 Contractor Selection

6 Q. WHAT HAS BEEN THE OVERALL CONSTRUCTION AND PROCUREMENT

7 STRATEGY FOR THE TURK PROJECT?

8 A. AEPSC/SWEPCO has desired to achieve a balance between risk mitigation and

9 paying an unjustifiable risk premium. To mitigate the risk, it would have been ideal

10 to have one contractor perform all work, including procurement, for a single lump

11 sum price. However, for a project of the magnitude and duration of Turk, and given

12 the nature of the markets for materials and services at the time, this would not have

13 been a reasonable approach. Having a single contractor procure all major

14 equipment-including the boiler, air quality control system and steam turbine

15 generator-would have resulted in SWEPCO having to pay a considerable mark-up

16 on those items. Instead, a more balanced approach was taken.

17 Q. WHAT WAS THAT MORE BALANCED APPROACH?

18 A. AEPSC/SWEPCO directly procured the two largest cost packages, the boiler/air

19 quality control system and the turbine generator/boiler feed pump. By directly

20 procuring this equipment, with appropriate guarantees and remedies,

21 AEPSC/SWEPCO did not take on unreasonable risk and was able to avoid the

22 payment of a very considerable mark-up had an engineering, procurement and

23 construction contractor procured the equipment. Additionally, the decision to have


365

I Babcock and Wilcox erect the boiler, which it supplies, will result in lower costs than

2 would be the case if that work were included in the scope of work of the engineering,

3 procurement and construction contractor. This is because the ultra-supercritical

4 boiler is a very specialized set of equipment that is critical to ultimate performance of

5 the power plant. It would, be very difficult to coordinate the enp-ineerin¢

6 procurement and construction of this equipment without a highly integrated team

7 responsible both for the supply and the erection. In addition, the transfer of contract

8 performance guarantees between separate entities would add additional costs. These

9 contracting risk charges are mitigated by utilizing a single contractor having overall

10 performance responsibility for the contract execution of this boiler and air quality

11 control system equipment.

12 Q. BEYOND THAT, WHAT WAS THE CONTRACTING STRATEGY?

13 A. For the design and construction of the plant, AEPSC/SWEPCO desired to have

14 contracts that would put contractors in the position of taking on significant portions of

15 risks they could control. For example, contractors should have responsibility for the

16 amount of labor a job should take. However, contractors may have no control over

17 the market conditions that determine the labor rate for a particular area at a given

18 time. Similarly, contractors should be responsible for the quantities of materials that

19 go into a job, particularly if they provided the engineering for that job. However,

20 contractors may have no control of the costs of commodities and manufacturing,

21 especially in a time of a very volatile global market. The means of meeting the

22 objectives of AEPSC/SWEPCO are more fully described below for each of the major

23 contracts.


RI-P

1 Q. WOULD THE SAME CONTRACTING STRATEGIES YOU MENTION BE

2 NECESSARILY APPLICABLE TO ALL POWER PLANT PROJECTS?

3 A. No. For instance, in December 2008, SWEPCO completed its Mattison Plant, the

4 simple cycle gas-fired peaking facility in northwest Arkansas. The Mattison Plant is

5 a relatively simple design. There have been dozens of this type built in the last

6 decade. The schedules for such projects are relatively short. Therefore, it is not

7 unreasonable for a contractor to be expected to agree to perform the work on a full

8 turn-key basis for a single lump sum price and not impose a high risk premium in the

9 contract price.

10 Q. WHO ARE THE MAJOR CONTRACTORS THAT HAVE BEEN SELECTED FOR

11 THE TURK PROJECT?

12 A. Roughly 81 percent of the total contracted scope of the project is attributable to

13 contracts with three contractors:

14 1) Alstom Power Inc. (Alstom) - The Alstom supply contract, which was signed15 in August 2006, is for the turbine-generator and the boiler feed pump turbine16 and related auxiliaries. It represents 4 percent of the total project cost.

17 2) Babcock & Wilcox Construction Company, Inc. (B&W) - The B&W contract,18 which was signed in September 2006, is a supply and construct contract for19 the boiler (also known as the steam generator) and air quality control system20 and related auxiliaries. This contract represents 24 percent of the total project21 costs.

22 3) Shaw Constructors, Inc. (Shaw) - The largest contract is the Shaw23 engineering, procurement and construction contract, which was signed in24 April 2007 and represents about 53 percent of the total project cost. The25 Shaw engineering, procurement and construction contract includes the26 engineering, design, procurement, and construction of the balance of the plant,27 (including the erection of the turbine-generator but not the erection of the28 boiler and air quality control system), interfacing with the connection points29 of the boiler and air quality control systems, and commissioning and testing30 the completed plant.


367

1 CONFIDENTIAL EXHIBIT CTB-9 provides a contract view summary chart

2 showing the breakdown of project expenses. These expenses are estimated

3 completion costs for the total plant.

4 Q. WHAT ADDITIONAL CONTRACTS ARE IN PLACE FOR THE TURK

5 PROJECT?

6 A. Additional contracts include those related to: environmental consulting; engineering,

7 design, and construction of the rail access from the Union Pacific mainline; and

8 contracts with interfacing utilities for natural gas, water, sewer, etc. Finally,

9 AEPSC/SWEPCO has, and will have, various other smaller contracts for items such

10 as capital spares and permanent plant fixtures not included in the above contracts.

11 These additional contracts represent approximately 4 percent of the total project costs.

12 The remaining 15 percent of project costs are unrelated to contracts.

13 Q. WHAT ARE CAPITAL SPARES?

14 A. Capital spares are major replacement parts that have a long manufacturing duration,

15 and are maintained in inventory to minimize plant down time should a component

16 failure occur. As the types of spares are an owner's decision, the need for capital

17 spares was identified in the self-build proposal but not included in the cost estimate

18 submitted with the self-build proposal.

19 Q. DESCRIBE HOW SHAW, ALSTOM, AND B&W WERE SELECTED AND THE

20 PRINCIPAL FEATURES OF THE CONTRACTS WITH THEM.

21 A. I will provide this information for each of the three contractors as follows:


368

1 Shaw

2 Q. WHAT PROCESS WAS USED TO SELECT SHAW?

3 A. AEPSC, as agent for SWEPCO, undertook a competitive negotiation strategy after

4 being notified that SWEPCO had selected the proposal to build the Turk project in

5 August 2006. Engineering, procurement and construction construction companies

6 were surveyed nationwide, and then a qualified subgroup was selected for invitation

7 to discuss the engineering, procurement and construction opportunity. The areas of

8 focus for contractor consideration were recent experience in building power plants,

9 the ability to attract construction craft labor in the southwest Arkansas area, the

10 alliance between the architect/engineer and the constructor, the contractor personnel

11 identified for key positions, and the fees and rate structure that would be used as the

12 basis of the development of a firm price. Additionally, AEPSC requested a firm,

13 lump sum pricing arrangement to cap escalation, labor, and other risk. Of the

14 engineering, procurement and construction finalists being considered, only Shaw

15 agreed to a firm lump sum pricing arrangement for the engineering, procurement and

16 construction contract. Shaw's engineering, procurement and construction price was

17 within the relevant criteria, and as such Shaw was ultimately selected as the

18 engineering, procurement and construction contractor for the balance of plant work.

19 On balance, Shaw's proposal best satisfied the criteria AEPSC considered.

20 Q. WHAT ARE THE PRINCIPAL FEATURES OF THE CONTRACT WITH SHAW?

21 A. The Shaw engineering, procurement and construction contract is a firm price contract

22 except that the rates for commodity materials, structural steel, and labor rate are

23 subject to escalation. This was an appropriate approach to risk management by


369

1 SWEPCO. This contract was developed during a period of unprecedented escalation

2 of labor rates and material prices. To have these items priced on a firm basis would

3 likely have resulted in SWEPCO being charged an unacceptable risk premium by the

4 contractor to cover its risk. Instead, the risks are placed with a contractor when that

5 contractor is in the better position to manage those risks.

6 Q. PLEASE EXPAND ON HOW THE RISKS WERE ADDRESSED.

7 A. Risks are not necessarily placed with a contractor when that contractor is in no better

8 position than the owner to manage that risk. Quantities of materials, labor man-hours

9 and productivity are more within the control of a contractor, so the contractor should

10 bear a significant portion of the risk associated with those items. The risks posed by

11 volatile market pricing for labor rates, commodities and manufacturing are not within

12 a contractor's control, nor are they necessarily predictable on a longer duration

13 project. Therefore, it would not be justifiable for SWEPCO to pay a contractor to

14 take on such risk, and SWEPCO did not do so with Shaw.

15 Q. HAS THERE BEEN ANY RECENT AMENDMENT OF THE CONTRACT WITH

16 SHAW?

17 A. Yes. Concurrent with the filing of this testimony, the contract was being amended to

18 convert some aspects of the fixed price contract to a time and materials contract as of

19 July 16, 2012. While the purpose of the amendment is to help ensure the timely and

20 efficient completion of the Turk plant, it is my understanding that it has no effect on

21 the post-test year adjustment being requested in this case, which is based on

22 SWEPCO's investment in the Turk plant as of December 31, 2011.


370

I Alstom

2 Q. WHAT PROCESS WAS USED TO SELECT ALSTOM?

3 A. Firm price proposals were solicited from qualified bidders. These proposals were

4 evaluated based on initial capital costs of the purchased equipment and for the total

5 operating costs considering the heat rate performance differential of the generating

6 technology and routine overhaul costs. After an initial screening of proposals

7 followed by more in-depth analysis, it was determined that Alstom's proposal was

8 superior to the others received, resulting in Alstom being selected as the preferred

9 supplier for the components.

10 Q. WHAT ARE THE PRINCIPAL FEATURES OF THE CONTRACT WITH

11 ALSTOM?

12 A. The Aistom contract is fixed-price contract which includes the supply of the turbine-

13 generator, boiler feed pump turbine, and associated equipment. The only non-fixed

14 portion of the Alstom contract is the cost for Technical Field Advisors during the

15 construction, startup, and testing of the unit.

16 Babcock & Wilcox

17 Q. WHAT PROCESS WAS USED TO SELECT B&W?

18 A. AEPSC personnel approached various approved vendors to supply firm price bids for

19 a new steam generator and/or air quality control system equipment. Specifications

20 for the equipment supply were developed and issued to these vendors. Proposals

21 were solicited from the qualified vendors during the 4th quarter of 2005 and updated

22 during the spring of 2006. These proposals were evaluated based on the technical

23 merits, pricing basis, schedule, and commercial terms offered by each prospective


371

1 supplier. B&W provided the most competitive bid based on its technical and

2 commercial offering, and was therefore chosen by AEPSC.

3 Q. WHAT ARE THE PRINCIPAL FEATURES OF THE CONTRACT WITH B&W?

4 A. The B&W contract is a design, supply, and erect contract for the boiler and air quality

5 and control system. The erection work is on a target price basis; that is, the ultimate

6 price paid is subject to cost changes from escalation effects as well as productivity.

7 However, there is' cost sharing by B&W and SWEPCO for underruns as well as

8 overruns of the final cost as compared to the target price. This arrangement provides

9 an incentive for both parties to work collaboratively to minimize cost. This

10 contracting strategy has been successfully employed on a number of large

11 environmental retrofit projects between AEP and B&W.

12 The design and supply scope of the contract is fixed price, with provisions that

13 allow for foreign exchange rate variances, escalation associated with fabricated raw

14 materials such as tubing, piping, and other materials requiring shop fabrication, and

15 transportation and import tariff costs at time of delivery. The details regarding these

16 escalation factors are clearly defined in the contract. This pricing structure reflects

17 prudent risk management as it avoids pricing an unreasonable risk premium into the

18 items covered during a very volatile market at the time the contract was signed.

19 Q. YOU JUST REFERRED TO FOREIGN EXCHANGE RATES AND IMPORT

20 TARIFF COSTS. HAS EQUIPMENT OR MATERIALS BEEN PROCURED

21 FROM OTHER COUNTRIES?

22 A. Yes. The market for industrial equipment is global. Significant amounts of materials

23 and equipment for the plant are sourced from outside the United States. For example,


372

1 all boiler pressure parts have been fabricated by B&W's joint venture company in

2 China. The structural steel for the plant was fabricated in China. The steam turbine

3 was manufactured in Germany and the generator in China. This procurement of

4 materials and equipment on a world-wide basis allows realizing the lowest possible

5 cost for those items.

6 Q. DID SWEPCO PRESENT INFORMATION ABOUT THESE CONTRACTORS IN

7 THE CCN CASE?

8 A. Yes, it did. In particular, the April 2008 testimony that SWEPCO filed for the

9 Commissioners themselves to hear the case identified these contractors and described

10 the contracts with them.

11 Q. DOES THE SELECTION OF THESE CONTRACTORS AND THE CONTRACTS

12 WITH THEM REFLECT AND HELP PROVIDE FOR REASONABLE AND


14 A. Yes, it does. The contracts secured for the Turk project have been executed on the

15 most reasonable and appropriate cost and management basis available at the time.

16 The contracts identify ownership and responsibility aspects for the various areas of

17 scope associated with the project. This division of work provides a clear outline of

18 who is responsible for each specified area of scope and will perform the associated

19 execution. This provides an appropriate balance of cost and risk taken on by

20 SWEPCO.


373

1 Project Organization

2 Q. HOW IS THE TURK PROJECT ORGANIZED INTERNALLY IN AEPSC?

3 A. The Turk project is organized under a Project Director and a Project Manager who

4 provided oversight to the planning efforts and continued to do so during the project

5 initiation phase and the engineering and construction efforts of the execution phase.

6 Attached as EXHIBIT CTB-10 is the Turk project organizational chart and reporting

7 hierarchy.

8 Q. WHAT ARE THE MAJOR FUNCTIONAL GROUPS COMPRISING THIS TEAM?

9 A. These functional groups are:

10 • Project Management - The Project Director, Project Manager, and Project11 Administrators are responsible for establishing and maintaining adherence to12 project procedures, monitoring and reporting status and variances in regard to13 safety, quality, cost and schedule. They also have primary responsibility for14 overseeing contract compliance and negotiating contract issues.

15 • Engineering - This group is responsible for establishing design basis and16 reviewing engineering deliverables for adherence to AEPSC design criteria17 for civil, mechanical, instrumentation and controls, and electrical engineering18 disciplines.

19 • Construction - This group has direct oversight of the various contractors on20 site to implement our construction standards and achieve the highest possible21 levels of quality and safety; and provides timely resolution of issues/conflicts22 between contractors.

23 • Project Controls - This group is responsible for monitoring and reporting on24 schedule and budget adherence.

25 • Business Services - This group is responsible for contract administration and26 management.

27 Q. EXPLAIN THE NATURE OF EXECUTIVE OVERSIGHT PROVIDED TO THE

28 PROJECT TEAM.

29 A. Executive oversight has been significant throughout the Turk project. The Turk

30 project team conducts monthly project review meetings, with participation from


374

I AEPSC's Senior Vice President - Engineering, Projects, and Field Services; the Vice

2 President - SWEPCO Generation; the President and Chief Operating Officer of

3 SWEPCO; Turk Plant Manager; and myself. These reporting processes provide the

4 executive team timely notification of project activities, status and issues. Additional

5 oversight is provided via the weekly/monthly project status meetings. Additional

6 periodic reporting is provided to the AEP Executive Council and the AEP Board of

7 Directors. Example excerpts of weekly and monthly internal reports are provided as'

8 EXHIBIT CTB-11.

9 Q. EXPLAIN THE INFORMATION FLOW BETWEEN THE PROJECT TEAM AND

10 EXECUTIVE MANAGEMENT.

11 A. Every month, the project team creates a monthly project review meeting presentation.

12 This presentation is distributed to all monthly project review meeting attendees.

13 Additionally, the project team submits a weekly update letter to key SWEPCO and

14 AEPSC representatives. A sample list of action items which arose from the March

15 2012 meeting is provided as EXHIBIT CTB- 12 for informational purposes.

16 Q. WHAT PROJECT-SPECIFIC INFORMATION DO THE CONTRACTORS

17 ROUTINELY PROVIDE TO THE AEPSC PROJECT TEAM?

18 A. Each of the main contractors provides a formal monthly report. These reports outline

19 the current status of work progress in the areas of engineering, procurement and

20 construction; current safety statistics; schedule for work remaining; near-term work

21 plans; outstanding commercial issues, such as change order requests; and a discussion

22 of issues and constraints affecting the contractor's work.


375

I Additionally, contractors performing work on the project site provide a daily

2 report to the Site Manager, detailing numbers of workers, work performed, work

3 planned and specific issues. Examples of a daily report (in whole) and a monthly

4 report (in part) from Shaw have been attached as EXHIBIT CTB-13.

5 Q. DOES ALSTOM SUPPLY MONTHLY PROGRESS REPORTS?

6 A. Alstom did supply such reports. However, Alstom has fulfilled its contractual

7 obligations with the exception of startup support, and no longer files monthly

8 progress reports.

9 Q. HAS THE PROJECT BEEN ORGANIZED TO PROMOTE REASONABLE AND


11 A. Yes, it has. The internal project organization has allowed AEPSC to prudently and

12 reasonably plan and manage all aspects of the project, specifically the massive

13 engineering, procurement, and construction efforts of our various contractors.

14 Consistent project oversight is performed by individuals from the aforementioned

15 functional groups of project management, engineering, construction, project controls,

16 and business services. This oversight, as well as the project communication plan

17 consisting of monthly, weekly, and daily reporting from the major contractors,

18 provides AEPSC with the appropriate level of monitoring and oversight to effectively

19 manage the project.

20 Q. YOU MENTIONED ABOVE THAT AEPSC IS PROVIDING SERVICES. WERE

21 THOSE COSTS PRUDENTLY INCURRED?

22 A. Yes. The costs incurred by AEPSC to support the project have been reasonable and

23 necessary. SWEPCO witness Jeffrey W. Hoersdig shows the direct costs costs


376

I expended as of December 31, 2011 and also explains the method in which these costs

2 are allocated.

3 As discussed above, AEPSC has played an integral part in project

4 management. Further, AEPSC has provided engineering design criteria for civil,

5 mechanical, electrical, and controls engineering disciplines. This is support that

6 SWEPCO would not have access to without the corporate structure that exists today.

7 Each category of service provided by AEPSC was an appropriate and necessary

8 service and the resulting costs are reasonable and necessary.

9 Q. PLEASE DISCUSS THE AEPSC PERSONNEL BUDGET.

10 A. The overall AEPSC personnel budgets were developed at the initial stages of the

11 project. These budgets are monitored biweekly in order to track any variances, and

12 staffing levels are reviewed monthly by the project team. Any anomalies in staffing

13 levels are reviewed to assure that they are understood and have been properly charged

14 to the correct project work orders. Any increase in the staff level and/or AEPSC

15 budget must be reviewed and approved by the Project Manager and Project Director.

16 This includes all AEPSC personnel including, engineering, construction, project

17 management, project controls, and plant support staff.

18 Q. WHAT MEASURES DOES AEPSC USE TO CONTROL THE COSTS OF THE

19 CONSTRUCTION SUPPORT SERVICES IT PROVIDES TO SWEPCO?

20 A. AEPSC uses a variety of cost control processes. A budget has been established that

21 prescribes the number of personnel required for each area of support. If additional

22 support is needed that has not been previously identified, then a Project Change

23 Request is developed for approval so that additional funding can be established. In


377

1 addition, AEPSC leverages the centralized services of its construction support

2 departments to provide services to SWEPCO and other AEP Operating Companies

3 with a smaller staff and lower associated costs than would be the case if each

4 Operating Company had its own dedicated staff. Every two weeks a trend report is

5 produced showing how many personnel are working on the project. In addition, a

6 tracking report is produced that shows each individual's hours worked over the

7 preceding pay period. From this report the project controls and project management

8 team can assess the level of participation from each department. If additional support

9 is needed, contact is made by the project team to the department head to assure

10 adequate support personnel are provided. No additions to the AEPSC budget are

11 allowed without the approval of the project management staff. Many key personnel

12 who support AEP's system-wide fleet have high-level skills and expertise. These

13 personnel are available to provide support to the Turk project on an `as needed' basis

14' allowing for efficient access to expertise without needing to hire third party

15 contractors or consultants.

16 En 'neering

17 Q. HOW HAS ENGINEERING FOR THE TURK PROJECT BEEN PLANNED AND

18 MANAGED?

19 A. Upon initiation of the project, an AEPSC engineering team was formed which

20 developed an Engineer, Procure and Construct Scope of Work specification that

21 defined the project work and the codes and standards for the work. The design

22 document review methodology was developed by AEPSC, inserted in the Turk

23 Project Plan, and included as part of the engineering, procurement and construction


378

I contract with Shaw. The engineering scope of work included the requirement that

2 Shaw make design document submittals and present detailed design reviews in

3 defined periodic meetings. The engineering team then reviewed, monitored and

4 approved design document submittals required per the engineering, procurement and

5 construction contract throughout the engineering process to assure that Shaw's

6 engineering met the codes, standards and requirements of the engineering,

7 procurement and construction contract. The design review methodology was

8 consistent with the AEPSC Engineering and the Projects and Field Services Quality

9 Assurance Program discussed in Section III of this testimony, and it provided AEPSC

10 with the level of oversight and control needed to successfully manage the engineering

11 effort.

12 Q. WHAT SPECIFIC PROVISIONS DID THE ENGINEERING, PROCUREMENT

13 AND CONSTRUCTION CONTRACT CONTAIN RELATED TO ENGINEERING?

14 A. The engineering, procurement and construction contract defined the requirements of

15 Shaw's engineering responsibility and included an AEPSC-prepared technical

16 specification, which defined scope and engineering methodology, as well as AEPSC

17 design guidelines including all relevant engineering codes and standards; procedure

18 for processing drawings, documentation, and manuals; and design criteria for civil,

19 mechanical, electrical, and instrumentation and controls engineering disciplines.

20 Q. HOW WAS COMPLIANCE OF SHAW ENGINEERING DELIVERABLES WITH

21 THE ENGINEERING, PROCUREMENT AND CONSTRUCTION CONTRACT

22 ASSURED?


379

I A. AEPSC's engineering team reviewed design document submittals to ensure that they

2 met the requirements of the engineering, procurement and construction contract. The

3 AEPSC engineering team, along with AEPSC construction and AEP plant operations

4 representatives, also conducted periodic detailed reviews with Shaw's engineering

5 team to assess the constructability, operability, and maintainability of the Turk Plant

6 from an engineering perspective. These reviews occurred when engineering for the

7 project was approximately 15, 30, 60, and 90 percent complete.

8 These periodic reviews have been supplemented with on-site reviews by the

9 AEPSC engineering team during construction. After Turk is completed, an as-built

10 audit will be performed by the project team as a final review to verify that the plant

11 was built according to the design and conformed with all applicable AEPSC technical

12 specifications.

13 Q. HOW MUCH OF THE ENGINEERING HAS BEEN COMPLETED?

14 A. As of March 31, 2012, engineering was approximately 99 percent completed. The

15 engineering effort has been able to support the construction and startup schedule and

16 currently Turk is on schedule to begin service in December, 2012.

17 Q. HAS THE ENGINEERING OF TURK BEEN REASONABLY AND PRUDENTLY


19 A. Yes. The engineering requirements were included in the engineering, procurement

20 and construction contract as part of the scope of work, which stipulated that Shaw

21 perform the work using methods and equipment accepted as prudent engineering and

22 construction practices. The periodic engineering reviews during the design phase of

23 the project provided SWEPCO with the necessary oversight for any issues arising


380

I from engineering reviews to be expeditiously identified and resolved, minimizing

2 impact to the schedule and assuring compliance with AEPSC technical specifications

3 and pertinent design criteria.

4 Procurement

5 Q. WHO HAS THE RESPONSIBILITY TO SUPPLY EQUIPMENT FOR THE TURK

6 PROJECT?

7 A. Each of the major contractors - Alstom, B&W, and Shaw - has responsibility to

8 supply equipment within the scope of its contract with SWEPCO. Alstom is

9 responsible for supplying the turbine-generator and related auxiliaries, as well as the

10 boiler feed pump turbine; B&W is responsible for supplying the steam generator and

11 air quality control systems and related auxiliaries; and Shaw is responsible for

12 supplying the balance of plant.

13 Q. PLEASE DISCUSS THE STATUS OF PROCUREMENT FOR MAJOR

14 EQUIPMENT THROUGH MARCH 31, 2012.

15 A. Despite the delays in receipt of the Air Permit that SWEPCO witness John C.

16 Hendricks discusses, the procurement efforts of Alstom, B&W, and Shaw have

17 proceeded for long-lead time and critical items to support the construction schedule.

18 A brief summary of each contractor's accomplishments through March 2012 is given

19 below:

20 n Alstom - completed manufacturing of the High Pressure turbine, inner and21 outer casing; the Intermediate Pressure turbine rotor inner and outer casing;22 the Low Pressure 1 and 2 turbine rotors and inner casings; and the generator23 stator. All engineered equipment is on site and being installed.

24 n B&W - completed fabrication of many steam generator components and25 continued to fabricate boiler pressure parts and air quality control systems


381

I support steel. As of March 31, 2012, 1,300 truckloads of material had been2 received at the Turk site. All material is on site and being installed.

3 • Shaw - completed procurement efforts to support requirements of4 construction and long-lead time delivery items. All planned bid packages5 have been completed, all Letters of Award have been issued for major6 equipment, and all engineered equipment and long lead commodities are on7 site and being installed. Some items, such as seeding and paving will occur8 after the plant is placed in-service.

9 Q. HAS PROCUREMENT FOR TURK BEEN REASONABLY AND PRUDENTLY


11 A. Yes it has. Procurement of equipment is proceeding on schedule to support Turk's

12 projected in-service date of December, 2012.

13 D. Project Execution

14 Construction

15 Q. PLEASE DESCRIBE THE STATUS OF THE TURK PROJECT AS OF

16 MARCH 31, 2012.

17 A. Site development work began in January of 2008. Construction on the generating

18 facility began in November 2008, after receipt of the Air Permit from the Arkansas

19 Department of Environmental Quality. As of March 31, 2012, the project's overall

20 engineering was 99 percent complete and construction was 90 percent complete. The

21 plant is scheduled to be in-service in December, 2012.

22 Q. WAS THE PROJECT ENGINEERING AND MATERIAL PROCUREMENT

23 SUFFICIENTLY FAR ALONG SO THAT CONSTRUCTION COULD BEGIN

24 EFFICIENTLY AND PRUDENTLY?

25 A. Yes, it was. The Turk Monthly Project Reports detail the contractors' and project

26 team's status in regard to engineering, procurement and material deliveries. Due to


382

1 delays in receiving the Air Permit, the majority of material and equipment was

2 delivered to the site and staged for construction in advance of when it would be

3 needed for construction. The staging of material, along with the higher level of

4 completed engineering, positioned the construction of Turk to proceed efficiently

5 when it began in December 2008. This reduced the risk of late deliveries of material,

6 equipment or engineering that is commonly a factor in projects of this nature.

7 Q. HAS THE CONSTRUCTION OF THE TURK PLANT BEEN SAFELY

8 EXECUTED?

9 A. Yes. The Turk Plant is currently enjoying a world class safety record. AEPSC and

10 SWEPCO hold the belief that every aspect of our construction and operations of

11 facilities can be performed without people getting injured. As such, we have set very

12 high standards for the selection of our contractors based on their past safety

13 performance, and we set even higher standards while they work at our facilities. All

14 injuries and significant near misses on the site trigger reviews with the respective

15 contractor to identify root causes, lessons learned and corrective actions.

16 Q. DID THE EFFECTIVE MANAGEMENT OF PROJECT SAFETY EVER REQUIRE

17 A GREATER LEVEL OF CORRECTIVE ACTION?

18 A. Yes. On two occasions, corrective actions failed to reverse trends associated with

19 increasingly severe and frequent safety issues.

20 In the first instance, which took place in February, 2010, a contractor had a

21 third falling object safety incident when an iron worker was struck on the top of his

22 hard hat by a falling steel bar. This resulted in a fourth serious recordable injury for

23 the contractor.


383

I The second instance, which took place in May and June of 2011, consisted of

2 another contractor experiencing an increasing trend in safety-related incidents. This

3 trend culminated with two recordable injuries taking place within one week of one

4 another.

5 After assessment of both of these instances, AEPSC came to the conclusion

6 that the potential for a severe and perhaps fatal event was unacceptably high. To

7 address these trends, multi-day safety stand-downs were instituted to develop

8 corrective action plans, and also to refocus the workforce on safety being a top

9 priority.

10 Q. WERE THE SAFETY STAND-DOWNS EFFICIENT AND PRUDENT?

11 A. Yes. In both instances, the incident rates for the the respective contractors declined in

12 the months following the safety stand-downs. This can be seen in Figures 2 & 3

13 below, which clearly show the negative safety trends in the months leading up to the

14 stand down, and the positive correction which followed.


384

I

Figure 2. Contractor #1 Incident Rate(Cumulative to-date)

1.20

1.W

0.80

l0 ho

Safety Stand-down

,_.0.40

020

OM :...._ ... _. ._. .„._. ._ .._._. .._..- -- ---_.._...., , .._...., w..._..,__,__...,.._.._....,..._,.._- .....__..,._._. ..

( Dec-08 Iu1-04 tan-10 mg-10 Feb-11 Sep-11 Apr-12 Oct-12

Figure 3. Contractor #2 Incident Rate(Cumulative to-iiate)

1 20

iW

2

080 -

0.60 .: _

0.40

0 20 , , _.._. _.

0.WSep-10 lnn-11

PUC DOCKET NO. 40443

Safety Stand-down

^pr-I1 7u1-11 Nov-I1 Feb-12 3iay-12

59DIRECT TESTIMONYCHRISTIAN T. BEAM

385

1 Avoiding serious injuries or fatalities is of immense personal importance to all

2 those who work on the facility, as well as their loved ones. To SWEPCO's

3 customers, the reduction in these incidents has provided a benefit by avoiding

4 significant lost time, lost productivity, and distractions from the execution of the

5 project.

6 Q. SWEPCO WITNESS VENITA McCELLON-ALLEN DESCRIBES AN

7 INJUNCTION CONCERNING THE CORPS OF ENGINEERS SECTION 10/404

8 PERMIT. WHAT HAVE YOU DONE TO MANAGE THIS ISSUE?

9 A. As Ms. McCellon-Allen discusses, the legal proceedings surrounding this injunction

10 have been in flux. At each step of the way, we assessed our options surrounding the

11 disposition of on-site contract labor and selected the option which would have the

12 least impact on cost and schedule. At times, contractors were placed on standby,

13 while at other times, they were given leave. Another issue dealt with during the

14 injunction was the need for a reliable source of on-site water. The Company was able

15 to address this issue by securing ample water for startup and testing purposes from

16 neighboring Hope Water and Light. I'll describe the costs incurred as a result of

17 these issues later in my testimony.

18 Q. THROUGH MARCH 31, 2012, WAS CONSTRUCTION PRUDENTLY AND

19 EFFICIENTLY PLANNED AND MANAGED?

20 A. Yes, it was. As the project has progressed, authorizations for construction have been

21 prudently controlled by SWEPCO. The number of workers on site has been managed

22 such that we only employ the number of workers required to perform the scheduled

23 work. Close coordination among contractors and SWEPCO has been maintained


^1-11

i summary of the self-build proposal, which conveys the

Documents