I c*- 1 DOCKET NO U APPROVAL OF CHANGES IN RATES FOR RETAIL ELECTRIC SERVICE OF ENTERGY ARKANSAS, INC. FOR DIRECT TESTIMONY

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1 BEFORE THE [ -+: D ARKANSAS PUBLIC SERVICE COMMISSION I c*- IN THE MATER OF THE APPLICATION OF ENTERGY ARKANSAS, INC. FOR ) DOCKET NO U APPROVAL OF CHANGES IN RATES FOR RETAIL ELECTRIC SERVICE ) DIRECT TESTIMONY OF JON A. MAJEWSKI SENIOR CUSTOMER SERVICE SPECIALIST ENTERGY SERVICES, INC. ON BEHALF OF ENTERGY ARKANSAS, INC. SEPTEMBER 4,0

2 Docket No U I. Q. BACKGROUND AND INTRODUCTION PLEASE STATE YOUR NAME, BUSINESS ADDRESS, EMPLOYER AND JOB TITLE. 4 A. My name is Jon Majewski. My business address is 40 Jefferson 6 Highway, Jefferson, Louisiana. I am employed by Entergy Services, Inc. ( ESI ) as Senior Customer Service Specialist, Credit and Collections. Q. A. 0 ON WHOSE BEHALF ARE YOU TESTIFYING? I am testifying on behalf of ( MIn or the Company ). Q. 4 A. PLEASE STATE YOUR EDUCATION, PROFESSIONAL AND WORK EXPERIENCE. I received a Bachelors degree in Business Administration in from Loyota University in New Orleans, LA and a Juris Doctorate in from 6 Loyola Law School. I have been employed by ESI in its Credit and I Collections Department since 0. Prior to joining ESI, I worked as the Credit Manager for Reagan Equipment Company from 6 to 0 and as a private attorney from to 6. After serving as a U.S. Army Captain for four years following my undergraduate studies, I was ESI is a subsidiary of Entergy Corporation that provides technical and administrative services to all the Operating Companies. --

3 Docket No lJ employed by Halliburton Company as a Senior Area Credit Manager from to. 4 Q. 6 A. PLEASE DESCRIBE YOUR CURRENT RESPONSIBILITIES AS SENIOR CUSTOMER SERVICE SPECIALIST, CREDIT AND COLLECTIONS. I supervise the residential and non-residential customer bankruptcy processes for the Entergy Operating Companies. My primary focus is to negotiate the Adequate Assurance Deposit allowed by the Bankruptcy Code for nan-residentiallcommercial customers that have filed bankruptcy. 0 I also review and analyze non-bankruptcy customer risk profiles of new 4 and existing customers in an effort to secure appropriate deposit coverage. EA Exhibit JAM-I provides an overview of the approach used by ESl's Credit & Collections Department to examine the financial statementslfinancial ratios of a new or existing customer, and to assign risk categories to the Company's customers. 6 Q. A. I WHAT IS THE PURPOSE OF YOUR TESTIMONY? The purpose of my testimony is to describe proposed revisions to Rate Schedule No., Charges Related to Customer Activity, related to Arkansas Public Sewice Commission ("APSC" or the "Commission") General Service Rules ("GSR" or collectively, the "Rules") 4.0 and 4.0, The Entergy Operating Companies include EAI; Entergy Gulf States Louisiana, L.L.C.; Entergy Louisiana, LLC; Entergy Mississippi, Inc.; Entergy New Orleans, Inc.; and Entergy Texas, Inc. --

4 Docket No U Deposits from Applicants and Deposits from Customers, respectively, and Rate Schedule No., Collective Billing Rider. The proposed rate 4 schedules are included in Schedule I of the Minimum Filing Requirement (IIMFR ) schedules attached to the Company s Application. 6. Q. io A. I 4 6 PROPOSED CHANGES TO CHARGES RELATED TO CUSTOMER ACTIVITY PLEASE DESCRlBE THE COMPANY S REASONS FOR THE PROPOSED CHANGES DISCUSSED BELOW. Under the Commission s current Rules and the Company s current rate schedules, where a maximum deposit is not required of the customer when the customer first establishes service, EA and ultimately its customers are unprotected against large losses from bankruptcies or nonpayment upon closure by its non-residential customers (many of whom have never paid a bill late prior to their decisions to file for bankruptcy or closure}. These losses are ultimately paid by all other customers through an increase in bad debt expense. However, at times the Company must balance the desire to accommodate a new customer s request to pay less than the maximum amount of the deposit in order to foster economic development in the state with the Company s desire to obtain the maximum deposit. While EA has the flexibility under GSR 4.0.A. to require or waive a deposit from applicants, consistent with the limitations on deposit amounts specified in the Rules, the Company lacks the ability -4-

5 Docket No. 044-U under the current Rules to negotiate a new or additional deposit with such customers based on an assessment of the financial risk of these customers after they have established service. Large losses from bankruptcies or closure must be written off and will uitimatefy impact the 6 IO 4 6 rates of a broader customer base by increasing the bad debt expense applied across the rate class. Absent a policy revision to protect against such losses, future bad debt expense for all members of the class will remain higher than necessary. These iosses can be prevented in large part by monitoring and reacting to publicly available financial information about customers. Companies with locations in multiple service territories of the Entergy Operating Companies provide a vivid example of the need for increased deposit protection due to deterioration in a customer s financial health. Other Operating Companies have the flexibility to obtain additional deposits such as EA is currently seeking. These Operating Companies were able to negotiate increased deposits from large customers having properties in each of these utilities service territories, even without any history of late payment. The decision by these Operating Companies to negotiate additional deposits was the result of monitoring public information about the customers financial condition and resulted in lower costs for all other customers in the respective customer class. One of these customers also is a customer of EAI, but the Company was precluded from negotiating an additional deposit by the current Rules. --

6 Docket No U I 4 That customer filed for bankruptcy in the second quarter of 0. EA could have avoided a loss, as the other Operating Companies did, by monitoring and reacting to publicfy available information if the Rules had given EA that same flexibility. Table i Losses Incurred Or Prevented By Monitoring And Reacting To Public Financial Information 0 Using publicly available information would allow EA to identify an enhanced risk of default by non-residential customers, ultimately reducing EAl s and its customers write-off exposure. Q. 4 A. % - WHAT ARE THE PROPOSED CHANGES TO THE CHARGES RELATED TO CUSTOMER ACTIVITY RATE SCHEDULE? AI proposes revisions to its current exemptions from GSR 4.0 and GSR 4.0 related to collecting new and additional deposits from non-residential customers with combined monthly billing amounts on all accounts of $ 0,000 or greater. GSR 4.0 provides utilities with the option to require a deposit from applicants for new service subject to certain conditions set forth in the rule. EA is currently exempted from GSR 4.0.A. by the addition of the following after 4.0.A.(Z)f.: -6-

7 Docket No () If any of the conditions in GSR 4.0.A.p) above apply, the Company may waive all or a portion of a deposit based on the applicant s credit score as returned by a credit scoring se~vice.~ The Company proposes the following revision, shown in italics, to its current exemption by adding the italicized language below: If any of the conditions in GSR 4.0.A.() above apply, the Company may waive all or a portion of a deposit based on the applicant s credit score as returned by a credit scoring service. For any nonresidential applicant with an estimated combined monthly billing amount for all accounts of $0,000 or greater, or a credit rating of BBB- or higher from the S&P Rating Group, BBB- or higher from Fitch Ratings or Baa from Moody s Investor Sewice, or their successors, the Company may negotiate a waiver of ail or a pottion of a deposit subject to the applicant s entry into the Deposit Agreement contained in EA/ Policy Schedule,., beginning at Sheet No. P.. I. A similar exemption is requested for GSR 4.0, which allows utilities to colfect a new deposit or an increase in the amount of a deposit from existing customers only when certain conditions are met. EA is currently exempted from 4.0.A.() by replacing 4.0.A.() with the language befow and deleting 4.0.A.(): (I) The customer s account appears more than one time in a twelve month period on the list of customers eligible to be disconnected following the mailing of a Disconnect Notice which contained notification of the deposit billing.4 Docket No. --TF, Order No. 4 at (February, 00). Id. --

8 Docket No U The Company seeks to modify its current exemption by adding the italicized language below to Q 4.0.A.(6): (6) The customer used more senrice than the estimate on which the utility based the deposit. The utility may not charge any additional deposit under Subsection A46) after the first twelve months of service unless the customer moves the service to a new location or expands the business or scope of operation at the original location, unless the customer is subject to 4.0.A. (). and by adding a new section as follows: () The non-residential customer whose combined monthly billing amount for all accounts is $0, or greater fails to maintain a Credit Rating of at least BBB- as determined by the SP Rating Group, BBBfrom Fitch Ratings or Baa from Moody's Investor Senrice, or their successo~s. The customer shall be notified in writing of the intent to obtain or increase a deposit, noting the information and the source of that information that supported the decision to obtain the deposit or deposit increase. The Company may negotiate a waiver of all or a portion of a deposit subject to the customer's entry into the Deposit Agreement contained in EA Policy Schedule,., beginning at Sheet No. P... The use of the above-referenced Deposit Agreement contained in EA Policy Schedule, which is included in Schedule I of the MFR schedules, would provide EA the flexibility to negotiate a reduced deposit with an applicant that presents a relatively low risk of default based on its current credit ratings. At the same time, EA and all other customers will be protected from potentially large losses associated with commercial bankruptcies by allowing EA to obtain an additional deposit from an --

9 Docket No. 044-U existing customer should its credit metrics deteriorate such that the risk of the customer s default increases. 4 Q. HOW WOULD THE PROPOSED REVISIONS ALLOW EA TO SECURE APPROPRIATE COVERAGE? A. Changes to Paragraph () would allow EA the flexibility to negotiate a lower than two month deposit with new service applicants with a lower risk profile (BBB- or higher ratings) and thereby encourage business growth and development opportunities. Changes to paragraph (6) and () would give EA the opportunity to negotiate appropriate deposit coverage with existing customers that are considered higher risk (BBB- or lower ratings) by allowing the Company to require an additional deposit after a review of the customers financial strength and written notice of such additional deposit requirement. EAl s general policy is to collect the maximum deposit, which GSR 4.0 defines as the total of two average bills, from new applicants. Therefore, the more critical need is the ability of the Company to obtain an additional deposit from an existing customer with deteriorating credit metrics. Without this flexibility, which is not currently permitted under the Rules, EA and its customers will continue to be unprotected from potentially large losses associated with bankruptcies or closure. Future bad debt expense, which is paid by all customers, will remain higher than necessary. --

10 Docket No U Q. 4 A. WHAT IS THE JUSTIFICATION FOR USING A CREDIT RATING OF BBB- AS A BENCHMARK? Any rating below an S&P rating of BBB- is considered below investment grade (speculative). 6. Q. IO A. 4 6 I PROPOSED CHANGES TO COLLECTIVE BILLING RIDER PLEASE DESCRIBE THE COMPANY'S REASONS FOR THE PROPOSED CHANGES DISCUSSED BELOW. The billing mechanics associated with collecttive billing increase credit risk exposure to the Company's othenrvise typical invoice billing process. Under collective billing, several accounts (from three to three hundred) are bundled and billed under one parent account with one monthly invoice. That process of bundling multiple billing cycles under one monthly invoice delays the normal cycle billing process of all the sub-accounts until the last of all the sub-acoounts is billed. When all the sub-accounts have been billed, one collective bill is issued to the customer. In practical terms, the accounts with cycle billing at the first of the month are held by the Company to be invoiced with accounts billed on the cycle bill at the end of the month. The delay created by holding the release of the earlier cycled invoices increases by as much as 0 days the period of credit risk exposure (typically 60 days) experienced by EAI. -0-

11 Docket No Consequently, the collective billing option should be limited to those customers that maintain a strong credit rating. 4 Q. 6 A % WHAT ARE THE PROPOSED CHANGES TO THE COLLECTIVE BILLING RIDER? The Company proposes to modify Rate Schedule No., Collective Billing Rider, Q 4., beginning at Sheet No. Pl.., by adding the italicized language below: Available to any eligible customer receiving year-round, full requirements electric service under any of Entergy Arkansas, Inc. ( EAI or the Company ) Rate Schedules and who enters into an agreement which is in substantially the same form as the Agreement For Collective Billing shown in Policy Schedule No., Q.. \igjbi/ity is determined by the Company. Customers having and maintaining a credit rating of BBB- or higher hm the S&P Rating, BBB- or higher from Fitch Ratings or Baa or higher from Moody s Investor Setvice, or their successors, may be considered eligible. The Company may also consider, among other things, the number of accounts customer is requesting to be summarized, the type of metering on the account and customer s payment record. Individually metered apartment accounts that are automatically transferred upon vacancy to the complex account rather than being disconnected may not be included in a Collective Bill for the apartment complex. Q. 0 HOW WOULD THE PROPOSED REVISIONS R.DUCE THE COMPANY S CREDIT RISK EXPOSURE ASSOCIATED WITH COLLECTIVE BILLING? - -

12 Docket No A. The proposed changes to the Collective Billing Rider would establish objective eligibility criteria for customers seeking to receive collective billing. Using an S&P BBB- credit rating (or comparable) as a benchmark, only those customers maintaining such a rating would remain eligible for collective billing. Upon approval of the proposed changes by the 6 0 Commission, all customers currently receiving collective bills would receive notice of the change requiring that they maintain certain minimum credit metrics to remain on collective billing. By removing customers demonstrating a higher credit risk from collective billing, EA and its customers are further protected against potentially large losses associated with bankruptcy or closure. 4 6 Q. WHAT IS THE JUSTIFICATION FOR USING A CREDIT RATING OF BBB- AS A BENCHMARK? A. Any rating below an S&P rating of BBB- is considered below investment grade (speculative). - -

13 Docket No U IV. Q. A. 4 6 CONCLUSION COULD YOU BRIEFLY SUMMARIZE YOUR TESTIMONY? EA is proposing exemptions to certain General Service Rules that would provide it the ability to negotiate lower deposits with non-residential applicants demonstrating a relatively low level of credit risk, and still obtain appropriate security based on publicly available financial information. Under the Company's proposed changes, EA would also have the ability to negotiate additional deposits with non-residential customers that demonstrate a relatively high level of credit risk based on publicly 0 available financial information. These exemptions would allow EA to 4 6 protect itself and its other customers from potential lost revenue due to a customer's bankruptcy or closure and to protect other customers from rate increases based on increased bad debt expense. With these exemptions, EA would be better positioned to link costs to those customers that are actually responsible for the ultimate revenue loss. Finally, as discussed in more detail above, EA is also seeking to restrict collective billing eligibility to those customers that maintain a good credit rating. Q. A. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? Yes. --

14 CERTl FICATE OF SERVICE I, Steven K. Strickland, do hereby certify that a copy of the foregoing has been sewed upon all parties of record this 4th day of September 0. Steven K. Strickland