BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION ) ) ) ) DIRECT TESTIMONY GREGORY R. ZAKRZEWSKI REGULATORY PROJECT COORDINATOR, REGULATORY ACCOUNTING

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1 BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION IN THE MATTER OF THE APPLICATION OF ENTERGY ARKANSAS, INC. FOR APPROVAL OF CHANGES IN RATES FOR RETAIL ELECTRIC SERVICE ) ) ) ) DOCKET NO. -0-U DIRECT TESTIMONY OF GREGORY R. ZAKRZEWSKI REGULATORY PROJECT COORDINATOR, REGULATORY ACCOUNTING ENTERGY SERVICES, INC. ON BEHALF OF ENTERGY ARKANSAS, INC. MARCH, 0

2 I. BACKGROUND AND INTRODUCTION Q. PLEASE STATE YOUR NAME, TITLE AND BUSINESS ADDRESS. A. My name is Gregory R. Zakrzewski. My business address is West Capitol, Little Rock, Arkansas 0. I am employed by Entergy Services, Inc. ( ESI ) as a Regulatory Project Coordinator in the Regulatory Accounting Department. 0 Q. ON WHOSE BEHALF ARE YOU TESTIFYING? A. I am testifying on behalf of ( EAI or the Company ). 0 Q. PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND AND PROFESSIONAL WORK EXPERIENCE. A. I graduated in from the University of Central Arkansas with a Bachelor of Business Administration degree in Accounting. In November, I passed the Certified Public Accountant ( CPA ) Examination. I am a member of the Arkansas Society of Certified Public Accountants and the American Institute of Certified Public Accountants. Upon graduation from college and continuing through February, I was employed by a local public accounting firm in Little Rock, Arkansas. In February, I joined ESI is a subsidiary of Entergy Corporation that provides technical and administrative services to the Entergy Operating Companies. The Entergy Operating Companies include EAI.; Entergy Gulf States Louisiana, L.L.C.; Entergy Louisiana, LLC ( ELL ); Entergy Mississippi, Inc.; Entergy New Orleans, Inc.; and Entergy Texas, Inc. - -

3 0 Arkansas Power & Light Company (now EAI) as a Staff Accountant in the General Accounting Department. I progressed through different positions in this department and was promoted to Accounting Supervisor in January 0. During the transition period in which the accounting departments of the Operating Companies were being consolidated, I was named acting Manager of EAI s General Accounting Department until completion of the consolidation. My job duties in these positions included the preparation and recording of accounting data in compliance with the Federal Energy Regulatory Commission ( FERC ) and other regulatory guidelines. My duties also included providing direction and supervision for these accounting operations encompassing planning, scheduling, reviewing and analyzing data for reporting purposes as well as for making financial, operating and ratemaking decisions. At the completion of the consolidation of the Operating Companies accounting departments in, I assumed my current position in Regulatory Accounting for ESI. 0 Q. PLEASE DESCRIBE YOUR CURRENT RESPONSIBILITIES. A. In my present position, I am responsible for gathering, preparing, and analyzing accounting data for the Operating Companies for use in preparing rate filings. This includes the preparation and coordination of accounting-related schedules and testimony filed with the various regulatory commissions exercising jurisdiction over the Operating Companies. - -

4 0 Q. HAVE YOU PREVIOUSLY TESTIFIED BEFORE A REGULATORY COMMISSION? A. Yes. I testified before the Arkansas Public Service Commission ( APSC or the Commission ) in Docket Nos. 0--U and 0-0-U, in which I discussed the accounting and ratemaking treatment of the costs involved with the transmission interconnection of new generating plants; in Docket No. 0--U, in which I addressed various fuel accounting issues; and in Docket No. 0-0-U, EAI s last rate case. I have also testified on fuel issues in rate proceedings before the Public Utility Commission of Texas, and I have filed affidavits before the Louisiana Public Service Commission regarding the flow through of certain non-fuel amounts to retail rates. 0 Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY? A. The purpose of my testimony is to support certain test year financial information used in preparing the Company s cost-of-service study. Specifically, I will present the Company s capital structure and embedded cost of capital calculations as shown in EAI Exhibit GRZ-. I also present the test year accounting data which includes rate base and operating expenses which will serve as the starting point in preparing this cost-ofservice study. I also sponsor certain pro forma adjustments to these test year amounts and explain why these adjustments are appropriate. Finally, I describe the accounting and regulatory requirements for the creation of a - -

5 regulatory asset associated with the Company s request that the APSC approve regulatory asset treatment for certain costs. II. CAPITAL STRUCTURE AND EMBEDDED COST OF CAPITAL Q. PLEASE DESCRIBE IN GENERAL THE COMPANY S REQUESTED CAPITAL STRUCTURE. A. EAI is requesting a capital structure based on the actual level of externally financed capital and ratemaking liabilities, adjusted for known and measurable changes through December, 0. 0 Q. DOES EAI S REQUESTED CAPITAL STRUCTURE COMPLY WITH THE APSC STANDARD PRINCIPLE OF A MODIFIED BALANCE SHEET APPROACH? A. Yes. EAI followed the APSC standard principle of the modified balance sheet approach by including liabilities in the capital structure. This practice was set forth in Order No. in Docket No. --U, and the Company s requested capital structure complies with this practice. 0 Q. PLEASE DESCRIBE THE COMPONENTS OF THE COMPANY S REQUESTED CAPITAL STRUCTURE UNDER THE MODIFIED BALANCE SHEET APPROACH. - -

6 A. The capital components included in the requested capital structure are long-term debt, U.S. Department of Energy ( DOE ) obligation, preferred stock, common equity, customer deposits, accumulated deferred income taxes ( ADIT ), accumulated deferred investment tax credits, and working capital liabilities. The working capital liabilities are based on a -month average. 0 Q. DID THE COMPANY EXCLUDE CERTAIN ADIT BALANCES FROM ITS CAPITAL STRUCTURE? A. Yes. The Company has excluded certain ADIT balances related to uncertain tax positions accounted for in accordance with FIN from the ADIT included in its capital structure. This exclusion is consistent with the Settlement Agreement approved by the APSC resolving the issues in EAI s last general rate case in Docket No. 0-0-U. Q. WHAT METHODOLOGY WAS USED IN THE DETERMINATION OF EMBEDDED COST RATES FOR LONG-TERM DEBT AND PREFERRED STOCK? The DOE obligation refers to the one-time fee plus interest that EAI must pay to the DOE for disposal of pre-april, spent nuclear fuel. The payment must be made prior to the first delivery of spent nuclear fuel from Arkansas Nuclear One to the DOE. FIN is an accounting pronouncement issued in 00 by the Financial Accounting Standards Board... that establishes the rules that constitute generally accepted accounting principles. FIN prescribes the way in which companies must analyze, quantify, and display the consequences of tax positions that are technically uncertain. Docket No. 0-0-U, Rebuttal Testimony of James I. Warrant at p.. - -

7 0 A. EAI applied an embedded cost of net proceeds methodology to determine the cost rates for long-term debt and preferred stock as required in the Minimum Filing Requirements ( MFR ) for Schedules D- and D-. The DOE obligation cost rate is based on the average interest rates of - week Treasury Bill issues projected for 0. Customer deposits carry the interest rate set by the APSC in its Order No. in Docket No. -0-U. The Unamortized Post-0 Investment Tax Credit is a weighted average of the long-term debt, preferred stock, and common equity cost rates. ADIT, working capital liabilities and Unamortized Pre- Investment Tax Credit are all zero cost rate components. The cost rate for common equity is not an embedded cost rate. The cost rate for common equity used in the overall cost of capital return on rate base calculation is 0. percent, as explained in the direct testimonies of Company witnesses Hugh T. McDonald, Samuel C. Hadaway, and Julie M. Cannell. 0 Q. ARE YOU SPONSORING ANY EXHIBITS SUPPORTING THE REQUESTED RATE OF RETURN ON RATE BASE CALCULATIONS? A. Yes, EAI Exhibit GRZ- summarizes the Company s requested weighted average rate of return on rate base by component, including the embedded cost rates and the projected capital structure as of December, 0, as discussed above. Details supporting this calculation are shown in MFR Schedules, Section D - Cost of Capital, for the adjusted period ending December,

8 III. TEST YEAR DATA Q. HOW DO THE APSC RULES OF PRACTICE AND PROCEDURE ( RPPs ) DEFINE A TEST YEAR? A. The APSC RPPs Section, Rule.0(rr) defines a test year as: a historical test period of twelve () consecutive calendar months or a forward-looking test period of twelve () consecutive calendar months consisting of six () months actual historical data derived from the books and records of the utility and six () months of projected data. 0 Q. WHAT TEST YEAR IS THE COMPANY USING IN THIS FILING? A. The Company is utilizing a forward-looking test period that consists of the -month period that ends December, 0, as its test year. This period reflects actual historical amounts on the Company s books and records (per book amounts) for the six months ended June 0, 0, and projected amounts for the six months ended December, 0. 0 Q. DO THE DATA YOU PRESENT ADDRESS THE TWO DIFFERENT SCENARIOS DISCUSSED BY COMPANY WITNESS HUGH T. MCDONALD IN HIS DIRECT TESTIMONY? A. Yes. Mr. McDonald describes that the Company s rate request is structured in two scenarios: ) the base case, which assumes that EAI has implemented the move to the Midwest Independent Transmission System Operator, Inc. ( MISO ) Regional Transmission Organization ( RTO ), the MISO Scenario, and ) also reflects the implementation of the proposed - -

9 spin-off and merger of its transmission facilities with the independent transmission company, ITC Holdings, Corp. ( the ITC Transaction ), the MISO/ITC Scenario. All of the test year accounting data is applicable to both scenarios. All of the pro forma adjustments I sponsor, discussed in more detail below, support both Scenario s except for pro forma adjustments and. Pro Forma Adjustment Interest 0 Synchronization is applicable to both scenarios but is different for each scenario because of the removal of transmission investment from Rate Base in the MISO/ITC version of Pro Forma Adjustment. Pro Forma Adjustment ITC is only applicable to the MISO/ITC Scenario. 0 Q. PLEASE DESCRIBE THE SYSTEM OF ACCOUNTS USED IN MAINTAINING THE COMPANY S BOOKS AND RECORDS. A. The Company complies with Title of the Code of Federal Regulations Section 0, Uniform System of Accounts Prescribed for Public Utilities And Licensees Subject to the Provisions of the Federal Power Act ( USOA ). The Company also applies Generally Accepted Accounting Principles ( GAAP ) as promulgated by the Financial Accounting Standards Board and the accounting regulations and guidance promulgated by the Securities and Exchange Commission. Q. WHAT STEPS ARE TAKEN TO ENSURE THAT THE ACCOUNTS ARE KEPT IN THE PROPER MANNER? - -

10 0 A. The Company s financial processes and systems are designed, controlled, and operated by trained professionals to ensure reliable and accurate financial reporting. The financial statements of the Company and its affiliates are audited annually by an independent external audit firm that renders an opinion on whether the Company s financial statements are fairly presented and comply with the USOA and GAAP. Additionally, the external auditor conducts tests of the system of internal financial controls, as required by the Sarbanes-Oxley Act of 00, and has expressed unqualified opinions since the implementation of this legislation as to the effectiveness of the Company s system of internal controls over financial reporting. 0 Q. WHAT REPRESENTATION DO YOU MAKE AS TO THE TEST YEAR ACCOUNTING DATA IN THIS PROCEEDING? A. The financial information (rate base and operating expenses) supporting this filing, excluding retail rate revenues, was compiled under my direction and control. Retail rate revenues were compiled under the direction and control of Company witness Corey A. Pettett. To the best of my knowledge, information, and belief, the financial information included in this filing presents fairly the rate base of the Company on the date indicated and the results of its operations for the period indicated. The actual per book financial information included in this filing for the six months ended June 0, 0, was taken from the Company s books and - 0 -

11 records. The projected financial information for the six months ended December, 0, was developed from the Company s forecasts prepared in the regular course of business and/or trended from the actual per book amounts. IV. PRO FORMA ADJUSTMENTS 0 Q. HOW DO THE APSC RPPS DEFINE PRO FORMA ADJUSTMENTS? A. The APSC RPPs Section, Rule.0(ee) defines Pro Forma Adjustments as: adjustments to any test year so utilized to reflect the effects on an annualized basis of any and all changes in circumstances which may occur within twelve () months after the end of the test year where such changes are both reasonably known and measurable. 0 0 Q. PLEASE DESCRIBE THE DIFFERENT TYPES OF PRO FORMA ADJUSTMENTS THAT ARE TYPICALLY MADE TO TEST YEAR DATA. A. Pro Forma adjustments will generally fall within one of the following categories: Normalization adjustments which are made to adjust any unusual activity or event which had a material effect on the test year amounts and which is not expected to recur in the future. These adjustments are an attempt to make test-year operating amounts representative of the results of normal operations. An example of this type of adjustment would be a weather normalization adjustment to adjust for the effect of variations in weather. Annualization adjustments which are made to recognize some condition or activity that existed only during a portion - -

12 0 of the test year or will be a known and measurable change that will occur during the month period following the test year. An example of this type of adjustment would be a wage increase adjustment to adjust for increased wage costs that will occur because of the wage increase. Out-of-period adjustments which are made to remove an amount that was recorded during the test year but applies to a different period of time. An example of this type of adjustment would be an adjustment to remove expenses which were paid during the test year but were the result of litigation due to some activity or event which occurred in a prior period. Regulatory adjustments which are made to adjust costs that have been recorded in compliance with accounting guidelines or regulatory directives but are not allowed or require special treatment by some regulatory commissions. An example of this type of adjustment would be to remove service club dues, which are not allowed by some regulatory commissions. 0 Q. DID THE COMPANY MAKE ANY PRO FORMA ADJUSTMENTS TO ITS TEST YEAR FINANCIAL DATA? A. Yes. I made pro forma adjustments where needed to test year financial data to arrive at adjusted test year amounts so that the amounts to be included in the Company s rates would represent a normal level of annual costs. These adjusted test year amounts are the basis for the cost-ofservice study, which is presented by Company witness Phillip B. Gillam. 0 Q. DO ALL OF THE COMPANY S PRO FORMA ADJUSTMENTS IN THIS PROCEEDING FIT INTO ONE OF THE CATEGORIES YOU HAVE DESCRIBED ABOVE? - -

13 A. Yes. All the Company s Pro Forma adjustments fit into one of the categories described above (i.e., normalization, annualization, out-of- period, or regulatory). 0 Q. DO ALL OF THE COMPANY S PRO FORMA ADJUSTMENTS IN THIS PROCEEDING FIT WITHIN THE DEFINITION OF PRO FORMA ADJUSTMENTS AS DEFINED BY THE APSC RPPS? A. Yes. All of the Company s adjustments to its test year data reflect the effects on an annualized basis of the various changes in circumstances, which will occur within months after the end of the test year. The changes are both reasonably known and measurable. Q. WHAT WITNESSES ARE SPONSORING THESE ADJUSTMENTS?. A. Table in Mr. Gillam s direct testimony provides a complete list of the Pro Forma adjustments. I will provide a summary description of each adjustment that I sponsor in the following testimony as well as additional detail as necessary to explain the adjustments and refer to additional witnesses who provide additional supporting data for an adjustment. 0 Q. PLEASE EXPLAIN ADJUSTMENT 0D. A. Adjustment 0D Return Check Fees o Adjusts miscellaneous service revenues to reflect the updated returned check fee which became effective March,

14 0 0 Q. PLEASE EXPLAIN ADJUSTMENTS 0 THROUGH 0. A. Adjustment 0 Month Average Balance Adjustment o Adjusts the test year end balances of Working Capital Assets to - month averages. Adjustment 0A Reclassifications Eliminate Future Use Property o Removes amounts related to plant held for future use and the associated depreciation reserves from rate base. Adjustment 0B Reclassifications Remove Independence Steam Electric Station ( ISES ) Unit Synchronization o Removes the amortization recorded during the test year in Regulatory Debits and Credits associated with the ISES Unit synchronization adjustment. This amortization is recorded in compliance with APSC Order No. in Docket No. --U. In that proceeding, the Commission allowed EAI to defer certain capitalrelated costs during the time period when ISES Unit went into commercial operation but before those costs were included in rates. This deferral will be fully amortized when new rates go into effect. Adjustment 0 Fuel Inventory o Adjusts the Company s -month fuel inventory balance included in rate base to a -day average operational inventory level consistent with the Company s Coal Inventory Policy and the Commission s Order No. 0 in Docket No. 0-0-U. - -

15 Adjustment 0 Decommissioning and Asset Retirement Obligations o Eliminates the effects of Decommissioning, Asset Retirement Obligations, and Accretion Expense from rate base and expenses. These amounts are recorded on the Company s books in compliance with Financial Accounting Standards ( FAS ) Accounting for Asset Retirement Obligations. The amounts 0 recorded for accretion and depreciation expense in accordance with FAS are a financial representation of the Company s future obligation for the removal costs of certain facilities at the termination of their useful life. These amounts do not represent the current allowed cost of removal of those facilities in retail rates. The amounts included in retail rates for removal costs are included in the Company s depreciation expense. 0 Q. PLEASE EXPLAIN ADJUSTMENT 0. A. Adjustment 0 Miscellaneous Adjustments This Pro Forma adjustment has subparts lettered A K which adjust various revenues and operating expenses. Each of these subparts is discussed below. o 0A Eliminate Provision for Rate Refund - Removes amounts recorded in Account which are related to prior year Rate Refunds. o 0B Eliminate Regulatory Debits/Credits - -

16 0 - Removes amounts recorded in Account 0 related to a wholesale customer. o 0C Eliminate Construction Work In Progress - Eliminates Construction Work In Progress from rate base. o 0D - Reclassify Interest Expense - Reclassifies ESI/Entergy Operations, Inc. ( EOI ) Inter- Company interest expense from below-the-line to operating expense to be consistent with including the accounts payable balance to ESI/EOI in the cash working capital liabilities included in the capital structure and reclassifies credit facility fees. EOI is the nuclear management company for the nuclear plants owned by the Entergy Operating Companies and System Energy Resource, Inc., which includes EAI s Arkansas Nuclear One ( ANO ) Units and. - -

17 0 0 o 0E Postage Pro Forma - Annualizes increase in postage rates which took effect January, 0. o 0F Economic Development Rider - Reclassifies the Economic Development Rider Credit. o 0G Eliminate Non-Utility Property Expenses - Removes operating expenses associated with non-utility property. o 0H Eliminate Energy Efficiency Program Costs - Removes expenses in various accounts associated with Energy Efficiency Program costs which are recovered in a separate rate rider. o 0I Eliminate Federal Litigation Fees - Removes expenses in Account associated with federal litigation fees which are recovered in a separate rate rider. o 0J Eliminate the FAS Change in Reserve - Removes certain amounts associated with contingencies recorded in compliance with FAS Accounting for Contingencies. o 0K Miscellaneous D&O Liability Insurance - Adjusts directors and officers liability insurance expense. Q. PLEASE EXPLAIN ADJUSTMENT

18 A. Adjustment 0 Income Taxes o Adjusts current and deferred income taxes including tax eliminations for items not appropriate for ratemaking purposes and other tax normalizations and adjusts for amounts recorded during the test year but that originated during prior periods. 0 Q. PLEASE DISCUSS THE COMPANY S INCOME TAX CALCULATION AND THE SWITCH TO FULL NORMALIZATION, WHICH OCCURRED IN DOCKET NO. 0-0-U. A. In Docket No. 0-0-U, the Commission approved income tax normalization to be applied prospectively. The Company started fully normalizing all new income tax timing differences when rates from Docket No. 0-0-U went into effect in June 00. Previously, the Commission ordered the Company to use the flow-through methodology for income taxes in Order No. in Docket No. --U. The Company s income tax calculation must include adjustments for amounts that were previously flowed through and are currently reversing which were not affected by the order to switch to normalization prospectively. 0 Q. PLEASE EXPLAIN ADJUSTMENTS 0 through 0. A. Adjustment 0 Removal of Grand Gulf Expenses - -

19 o Eliminates Grand Gulf Nuclear Station demand related expenses from purchased power costs because these amounts are recovered through a separate rate rider. Adjustment 0 ETC Revenue Adjustment Revenues o Includes imputed revenues from Entergy Technology Company ( ETC ) in miscellaneous revenues in accordance with the 0 Commission s Order No. in Docket No. --U. Adjustment 0 Eliminate Working Cash Assets Not Included in Rate Base o Eliminates various accounts which are not included in Rate Base. Q. PLEASE EXPLAIN ADJUSTMENT. A. Adjustment Storm Damage o Adjusts the annual storm damage expense accrual based on the past five years of historical charges to the storm reserve, excluding the Company s December 0 Winter Storm costs and previously securitized storm costs. Adjustment, described below, addresses the December 0 Winter Storm costs. 0 Q. PLEASE EXPLAIN ADJUSTMENT. ETC, an Entergy Corporation subsidiary, is an exempt telecommunications company formed pursuant to Section of the Public Utility Holding Company Act of, as amended by Section 0 of the Telecommunications Act of. See Docket No U, Order No. (June, 00). - -

20 A. This adjustment is applicable to both the MISO Scenario and the MISO/ITC Scenario. However, the adjustment will be different in the two scenarios because the adjusted rate base amount included in the calculations is different in each scenario due to the removal of the transmission investment from the MISO/ITC Scenario adjustment. Adjustment Interest Synchronization o Synchronizes the interest expense deduction in the income tax calculation with the adjusted rate base and the embedded longterm debt rate in the cost of capital. 0 0 Q. PLEASE EXPLAIN ADJUSTMENTS and. A. Adjustment is the Depreciation Annualization adjustment and Adjustment is the Plant Transfers adjustment. I will first provide a summary of the adjustments and then I will provide an overview as to how these adjustments were prepared. Adjustment Depreciation Annualization o Annualizes depreciation expense based on the end of test year Plant-in-Service balances and annualizes depreciation expense using the Company s proposed depreciation rates as presented in the Company s Depreciation Study, which is included in this filing and sponsored by Company witness Donald J. Clayton. The estimated dismantlement cost of various EAI production assets adjusted to reflect EAI s ownership can be found in my workpapers

21 Adjustment Plant Transfers o Recognizes the additions to and retirements of Plant-in-Service and related changes in Accumulated Provision for Depreciation and Depreciation Expense projected to occur in the test year, between December, 0 and December, 0. 0 Q, PLEASE PROVIDE AN OVERVIEW OF HOW ADJUSTMENT WAS PREPARED. A. New depreciation rates are expected to go into effect and be reflected in compliance tariffs approved in this proceeding effective on or about January, 0. Therefore, the Company calculated plant-related rate base changes between the end of the test year, December, 0, and December, 0. First, expected changes to plant in service balances over that -month period were calculated using projected plant additions, estimated interim plant retirements, and expected retirements of production units. Next the impacts on the accumulated provision for depreciation balances were calculated using currently approved depreciation rates, estimated interim plant retirements, and expected retirements of production units. 0 Q. WERE ALL DEPRECIATION RATES UTILIZED AS PRESENTED IN MR. CLAYTON S DEPRECIATION STUDY? - -

22 A. No. As discussed in Mr. Clayton s depreciation study, some generating units are reflected as retired in the depreciation study in 0. As a practical matter, the service value of those facilities will not be fully amortized in 0. Adjustment reflects those assets as retired at the end of 0 to allow for the calculation in Adjustment of the amortization of the unrecovered investment over 0 years beginning in 0. 0 Q. WHICH GENERATING UNITS ARE REFLECTED AS RETIRED IN ADJUSTMENT? A. The generating units reflected as retired in Adjustment are as follows: Harvey Couch Units and ; Lake Catherine Units,, and ; Cecil Lynch Units and ; Hamilton Moses Units and ; Robert Ritchie. 0 Q. WILL THOSE GENERATING UNITS BE FULLY DEPRECIATED AS OF December, 0? A. No. As shown in Adjustment, the units will have an unrecovered service value of $ million at that date. Service value is defined in the USOA as the difference between original cost and net salvage value (Definition ). - -

23 Q. DID MR. CLAYTON HAVE OTHER RECOMMENDATIONS THAT AFFECTED THIS ADJUSTMENT? A. Yes. In the EAI depreciation study he prepared, Mr. Clayton recommends segregation and amortization of the reserve deficiency for general plant unrecorded retirements. The reserve deficiency is proposed to be amortized over a 0-year period, which represents a reasonable period that will not unduly burden customers while allowing the Company a return of its general plant investment. 0 Q. WHAT IS YOUR UNDERSTANDING OF THE CHARACTER OF THE DISMANTLEMENT COST PRESENTED BY COMPANY WITNESS WILLIAM R. CREAN FOR THOSE FACILITIES THAT THE COMPANY JOINTLY OWNS? A. The Company jointly owns the Independence Steam Electric Station ( ISES ) and White Bluff Steam Electric Stations ( White Bluff ). My understanding is that the dismantlement costs reflect the estimated cost to dismantle the facility without regard to co-ownership with the exception of the estimated cost to dismantle the common facilities at ISES. 0 Q. WHAT ADJUSTMENT DID EAI MAKE TO MR. CREAN S DISMANTLEMENT STUDY TO REFLECT CO-OWNERSHIP OF THE COMPANY S PRODUCTION ASSETS? - -

24 A. The Company reduced the estimated cost to dismantle ISES and White Bluff to reflect the costs related to the investment on the Company s books for these coal plants and provided the adjusted amounts to Mr. Clayton for use in the Tangibl depreciation study. The amounts provided to Mr. Clayton are provided on EAI Exhibit GRZ Q. WERE ANY ADJUSTMENTS NECESSARY TO ALIGN PLANT IN SERVICE WITH THE PROPOSED ITC TRANSACTION? A. Yes. Pro Forma Adjustment includes various reclassification adjustments necessary to conform to the separation agreement with ITC (the Separation Agreement ). The Separation Agreement provides criteria for the determination of what will and will not be transferred to ITC in the event the transaction occurs. The following reclassification adjustments are incorporated into Pro Forma Adjustment : Batteries accounted for in FERC plant account (Distribution Substation Equipment) that serve a transmission function are reclassed to FERC plant account (Transmission Substation Equipment). Meters and metering equipment accounted for in FERC plant account that do not serve a transmission function were reclassed to FERC plant account 0 (Distribution Meters). Fiber optic equipment accounted for in FERC plant account and a portion of the shield wire that supports the - -

25 0 0 communications function of the Company accounted for in FERC plant account (Overhead Conductor and Devices) was reclassed to FERC plant account (Communication Equipment). General plant equipment (FERC plant accounts -) that serves a transmission function were segregated and identified to allow for removal in Adjustment. Common substation equipment accounted for in FERC transmission plant accounts (0-) that served a distribution function were reclassed to FERC distribution plant accounts (0-). Common substation equipment accounted for in FERC distribution plant accounts (0-) that served a transmission function were reclassed to FERC transmission plant accounts (0-). Certain transmission substation assets that will be retained by EAI to comply with the point of interconnection definition of the Separation Agreement were segregated to avoid inclusion in Pro Forma Adjustment. In each instance, both the plant in service and the accumulated provision for depreciation are adjusted as appropriate. The effect of the adjustments is reflected in Pro Forma Adjustment. - -

26 0 Q. PLEASE EXPLAIN ADJUSTMENT THROUGH. A. Adjustment Eliminate MSS- and MSS- o Removes amounts from various accounts associated with the Entergy System Agreement Service Schedules MSS-, MSS-, MSS-, and MSS-. Adjustment Adjustment O&M Payroll o Annualizes wages and benefits expenses for known and measurable changes due to wage increases and changes in employee levels. Adjustment Adjust O&M expenses due to changes with FAS 0 and Pensions o Annualizes employee pension and FAS 0 (Other Post- Retirement Employee Benefits) costs based on the latest actuarial data. Q. PLEASE EXPLAIN ADJUSTMENTS AND. A. Adjustment Hot Spring Energy Facility ( Hot Spring Plant ) Adjustment MSS-, MSS-, MSS-, and MSS- are service schedules which are part of the Entergy System Agreement ( System Agreement ). The System Agreement is a rate schedule approved by the FERC and contract entered into among ESI and the Operating Companies under which the Operating Companies jointly plan and operate their generation and bulk transmission facilities as a single, integrated electric system. On December, 00, EAI gave notice that it will terminate its participation in the System Agreement effective December,

27 0 o Recognizes the estimated annual costs associated with the operation of the Hot Spring Plant, which closed during November 0 and was not included in the projected amounts used in developing the test year amounts. Adjustment Ouachita Power Facility ( Ouachita Plant ) Adjustment o Adjusts Ad Valorem taxes associated with the Ouachita Plant due to the expiration of its property tax exemption; normalizes maintenance costs associated with the Ouachita Plant and recognizes an annual payment which will be made pursuant to Reimbursement Agreements between EAI and ELL and EAI and EMI filed with FERC in Docket Nos. ER- and ER-0. 0 Q. PLEASE EXPLAIN ADJUSTMENTS 0 AND. A. Adjustment 0 Operation & Maintenance ( O&M ) Adjustments, Officer Perks, & Edison Electric Institute ( EEI )/ Nuclear Energy Institute ( NEI ) Lobbying Expenses Adjusts various operating expenses as follows: o Removes EEI and NEI dues associated with lobbying activities, as explained by Company witness S. Brady Aldy in his direct testimony. o Removes officer perquisites and certain aircraft travel expenses not allowed for ratemaking purposes as identified in the Commission s Order No. 0 in Docket No. 0-0-U. - -

28 0 o Removes Chamber of Commerce expenditures not allowed for ratemaking purposes as identified in the Commission s Order No. 0 in Docket No. 0-0-U. o Removes various advertising, dues, donation, membership, and other event expenditures not allowed for ratemaking purposes as identified in the Commission s Order No. 0 in Docket No. 0-0-U. Adjustment Rate Case Expenses o The Company expects to incur approximately $. million in costs associated with this rate case for consultants, external legal support, and ESI support services directly related to this rate case. The Company is seeking to recover these costs over a three-year period and has included the $. million associated with the amortization of these costs in expense. 0 Q. PLEASE EXPLAIN ADJUSTMENTS THROUGH. A. These adjustments are all directly related to the significant structural changes that are occurring during 0 for EAI. Adjustment Lake Catherine Unit Sustainability / Reliability Expenses o The Company will be spending approximately $. million during the next four years to keep Lake Catherine Unit in service in its designated role in EAI s generation portfolio supply plan as further - -

29 0 0 explained in the Direct Testimony of Kurtis W. Castleberry. The Company is seeking to record these expenditures as a regulatory asset along with associated carrying costs and to amortize these costs over a ten year period, which is the time period during which customers are expected to benefit from these expenditures. Adjustment Capacity Adjustment o This adjustment removes third-party related capacity payments from test year expenses consistent with the treatment of capacity costs as described by Mr. Gillam. Adjustment MISO o Adjusts base rate operating expenses to reflect the Company s joining MISO RTO and the Company s accompanying proposal for recovery of MISO costs. The adjustment includes an expense decrease for the elimination of payments to the Independent Coordinator of Transmission, revenue reductions for the elimination of the Entergy Open Access Transmission Tariff ( OATT ) revenues, which will be replaced by MISO Attachment O revenues, an expense increase for additional personnel in the System Planning and Operations organization ( SPO ) to support MISO operations, removal of the effects of deferred MISO implementation costs during the test year, and an expense increase for letter of credit fees necessary to operate in MISO. Further support and explanation of operations and ratemaking treatment related to the - -

30 Company joining MISO is provided in the direct testimony of Company witnesses Jay A. Lewis, Mr. Castleberry, and Mr. Gillam. o Adjustment Generation Resource Planning o This adjustment removes the costs included in the test year for expenses associated with SPO s resource planning and operations services which were billed to EAI under the System Agreement and adds back expenses which will be billed to EAI under a new, costbased services agreement more fully described by Mr. Castleberry. 0 Q. PLEASE EXPLAIN ADJUSTMENT. A. Adjustment Revenues from Wholesale Base Load Units o This adjustment adds the revenues received from the sale of a portion of the ANO, ISES, and White Bluff to various third parties to test year revenues, as described by Mr. Castleberry in his direct testimony 0 Q. PLEASE EXPLAIN ADJUSTMENT. A. Adjustment December 0 Winter Storm Costs o This adjustment includes in the projected test year the costs associated with the December 0 winter storm restoration. EAI is seeking to recover the non-capital costs associated with this storm over a five-year period by including one year s amortization of these costs in expense. EAI also has included the estimated - 0 -

31 capital costs and depreciation expense associated with this storm in the projected test year costs. Mr. Aldy further explains this adjustment in his direct testimony. 0 0 Q. PLEASE DISCUSS ADJUSTMENT. A. Adjustment MOARK Adjustment o This adjustment requests a regulatory asset and associated expenses associated with the Amended and Restated Interchange Agreement between EAI, Associated Electric Cooperative, Inc. ( AECI ) and Union Electric Company dated July, 0. Under the agreement AECI will procure, engineer, own, operate and maintain a 00/ kv (0 MVA) transformer and associated facilities. Each party to the agreement will equally share the costs of these new facilities. EAI's projected share of these costs is $. million, which the Company is seeking to record as a regulatory asset. The Company proposes to amortize these costs over the 0-year term of the agreement at the rate of $0. million per year. This adjustment also adds $0. million for the annual fee to compensate AECI for maintenance fees associated with these new facilities. The expected commercial operation date of the new facilities is mid to late 0. The payment for the new facilities and the initial maintenance fee payment is due at that time. - -

32 Q. PLEASE DISCUSS ADJUSTMENT. A. Adjustment Vegetation Management o Adjusts vegetation management expenses to new trim cycles as explained by Mr. Aldy. This adjustment also normalizes the vegetation management expenses based on the past three years of historical vegetation management expenses. 0 Q. PLEASE DISCUSS ADJUSTMENT 0. A. Adjustment 0 ITC Transaction costs. o Removes certain external ITC Transaction costs related to the Company s work on the ITC Transaction from test year expenses. The ITC Transaction is currently pending before the APSC in Docket No. -0-U. Mr. Lewis provides additional discussion on the ITC Transaction transition costs in his direct testimony. 0 Q. PLEASE DISCUSS ADJUSTMENT. A. Adjustment ITC o Adjusts rate base and operating income to reflect closing of the ITC Transaction. A Commission decision in Docket No. -0-U is expected before the end of this rate case. - -

33 0 Q. WHAT ELEMENTS OF THE COST OF SERVICE WERE ADJUSTED TO REFLECT COMPLETION OF THE ITC TRANSACTION? A. Rate base was adjusted to remove intangible, transmission, and general plant assets identified as transferring to ITC along with the related accumulated depreciation and amortization balances and ADIT. Materials and supplies for the transmission function were also removed from rate base. Operating income was adjusted by eliminating all transmission O&M expenses, transmission-related administrative and general ( A&G ) expenses, A&G expenses for shared services employees expected to transfer to ITC, ad valorem taxes related to the transferring plant assets, and payroll taxes associated with transferring employees. Maintenance expense for step up transformers that are not transferring to ITC was reclassed to a production O&M account. Transmission-related facilities charges were removed from other revenue and will be reflected in the MISO Rider attached to EAI Exhibit PBG- in Mr. Gillam s direct testimony. The remaining effects of the implementation of the Separation Agreement between ITC and the Company and resulting pro forma adjustments are further explained in my discussion of Pro Forma Adjustment. 0 V. REGULATORY ASSET REQUEST Q. WHAT IS A REGULATORY ASSET? - -

34 0 0 A. A regulatory asset is an accounting mechanism that is unique to the costbased ratemaking environment of the utilities industry. The recording of a regulatory asset involves the deferral of an incurred cost, which would normally be recorded as an expense, as an asset on the balance sheet because it is probable that such cost will be included in a future period for ratemaking purposes. The requirements of GAAP for recording a regulatory asset are found in Accounting Standards Codification No. 0 ( ASC 0 ), Accounting for the Effects of Certain Types of Regulation. 0 The two primary tests in ASC 0 for recording a regulatory asset are: It is probable (as defined in ASC 0) that future revenues in an amount at least equal to the capitalized cost will result from inclusion of that cost in allowable costs for ratemaking purposes. Based on available evidence, the future revenue will be provided to permit recovery of the incurred cost rather than to provide for the expected levels of similar future costs. If the revenue will be provided through an automatic rateadjustment clause, this criterion requires that the regulator s intent clearly be to permit recovery of the previously incurred cost. The FERC USOA also provides similar guidance regarding the recording of a regulatory asset. 0 ASC 0 was formerly referenced as Statement of Financial Accounting Standard No. ( SFAS ). In 00, the Financial Accounting Standards Board implemented a new structure of accounting and reporting standards that also modified how the standards were referenced. This change in nomenclature did not modify the SFAS requirements. - -

35 Q. WHICH ADJUSTMENTS CONTAIN THE COSTS THAT MR. CASTLEBERRY REQUESTS THAT THE APSC APPROVE AS A REGULATORY ASSET? A. Adjustment Lake Catherine Unit Sustainability / Reliability Expenses and Adjustment MOARK Adjustment include the costs for which the Company is seeking regulatory asset treatment. 0 0 Q. IS EAI REQUESTING A SPECIFIC RECOVERY TREATMENT FOR THESE COSTS? A. Yes. EAI proposes to record the Lake Catherine Unit Sustainability / Reliability Expenses, as a regulatory asset in Account. Other Regulatory Assets. The Company is also seeking to include in expense the amortization of these costs over a 0-year period. If the Commission decides not to include this 0-year amortization in rates at this time, the Company requests that the Commission allow deferral of these costs as regulatory asset including carrying costs, for recovery in a future rate case. In addition, the Company proposes to record the MOARK Adjustment costs as a Regulatory Asset in Account. Other Regulatory Assets. EAI also is seeking to include in expense the amortization of these costs over a 0-year period. The costs associated with the MOARK Adjustment will all be incurred during the Pro Forma period. - -

36 Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? A. Yes, it does. - -

37 CERTIFICATE OF SERVICE I, Steven K. Strickland, do hereby certify that a copy of the foregoing has been served upon all parties of record by forwarding the same by electronic mail and/or first class mail, postage prepaid, this st day of March, 0. /s/ Steven K. Strickland Steven K. Strickland

38 BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION IN THE MATTER OF THE APPLICATION OF ENTERGY ARKANSAS, INC. FOR APPROVAL OF CHANGES IN RATES FOR RETAIL ELECTRIC SERVICE ) ) ) ) DOCKET NO. -0-U EAI EXHIBIT GRZ- COST OF CAPITAL

39 EAI Exhibit GRZ- APSC FILED Time: //0 :0: PM: Recvd //0 :: PM: Docket -0-u-Doc. Docket 0 No. -0-U Page of ENTERGY ARKANSAS, INC. COST OF CAPITAL FOR COST OF SERVICE FILING PROJECTED AS OF DECEMBER, 0 () () () () () Weighted Average Rate of Return Ln Amount Proportion Rate on Rate Base $ % % % Long-Term Debt,,,.%.%.% Preferred Stock,,.0%.% 0.% Common Equity,,, 0.% 0.0%.% Accumulated Deferred,0,,0.% 0.00% % Income Taxes Pre- Accumulated Deferred % 0.00% 0.00% Investment Tax Credits Post-0 Accumulated Deferred,, 0.0%.% 0.0% Investment Tax Credits 0 Customer Deposits,0,0.% 0.0% 0.0% Short-Term/Interim Debt % 0.00% 0.00% Current, Accrued, and Other Liabilities Working Capital Liabilities,,.% 0.00% 0.00% DOE Obligation,,.% 0.0% 0.00% Totals,,, %.0%