FLED D I RECTOR OF THE ARKANSAS PUBLIC SERVICE COMMISSION BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION

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1 BEFORE THE ARKANSAS PUBLC SERVCE COMMSSON FLED N THE MAlTER OF THE APPLCATON OF ) SOUTHWESTERN ELECTRC POWER 1 COMPANY FOR APPROVAL OF A GENERAL ) CHANGE N RATES AND TARFFS 1 SURREBUTTAL TESTMONY OF DONNA GRAY D RECTOR FNANCAL ANALYSS SECTON ON BEHALF OF THE GENERAL STAFF OF THE ARKANSAS PUBLC SERVCE COMMSSON AUGUST,0

2 SOUTHWESTERN ELECTRC POWER COMPANY DOCKET NO SURREBUTTAL TESTMONY OF DONNA GRAY -1- NTRODUCTON Please state your name and business address. My name is Donna Gray. My business address is Arkansas Public Service O 11 j Commission (Commission or APSC), 1000 Center Street, Little Rock, Arkansas,. What is your present position with the Arkansas Public Service Commission General Staff (Staff)? am Director of financial Analysis. Please describe your education and experience. 1 have over twentyeight years experience in utility regulation and rate matters. joined the Staff as a Financial Analyst in 11, and was promoted to Financial Analyst Supewisor in 1. My duties included various economic and financial analyses, most specifically, the determination of the required rate of return for jurisdictional utilities. n 1, was promoted to Manager of the Electric Utilities Section and was responsible for the development of Staffs case in electric utility rate cases and other rate-related matters before the Commission, including the cost of capital for electric utilities. was promoted to Director of Operations in 1 and assumed responsibility for Management Audits, Fiscal Audits, Compliance Audits, Capital Recovery, Quality of Service, and Gas Pipeline Safety. My responsibilities were later expanded to include Consumer Services. assumed my current position in ' sewing as Staff Project Manager in various cases and assisting in the development of Staffs positions in other cases; serving as an expert witness on various capital requirement, revenue requirement, policy and ratemaking issues;

3 SOUTHWESTERN ELECTRC POWER COMPANY SURREBUTTAL TESTMONY OF DONNA GRAY -- O A and overseeing the development of Staffs position on finance, capital recovery, and decommissioning issues. My educational qualifications include a Bachelor of Science in Finance from Missouri State University and a Master of Business Administration from the University of Arkansas at Fayetteville. have attended numerous regulatory training seminars, including the National Association of Regulatory Utility Commissioners' two-week Annual Regulatory Studies Program at Michigan State University, the University of Toronto's Workshop on Public Utility Regulation - Cost of Capital to Public Utilities under the direction of Dr. Myron Gordon, and Standard & Poor's Corporation's Electric Utilities Bond Ratings and Risks. am a member of the Society of Utility and Regulatory Financial Analysts (SURFA) and have sewed on the Board of Directors. 1 have been awarded the professional designation Certified Rate of Return Analyst (CRRA) by SURFA, a designation awarded on the basis of experience and successful completion of a written examination. have testified in numerous cases before the Commission concerning the cost of capital, company-proposed debt and equity issuances, acquisitions, and various other capital requirement, revenue requirement, policy, and ratemaking issues, and have assisted in the development of Staffs position in many more cases. A list of the regulatory proceedings in which have filed testimony is provided in my Surrebuttal Exhibit DG-. PURPOSE OF TESTMONY What is the purpose of your testimony?

4 SOUTHWESTERN ELECTRC POWER COMPANY SURREBUTTAL TESTMONY OF DONNA GRAY -- O A1 The purpose of my testimony is to address the request of Southwestern Electric Power Company (SWEPCO) for approval of a Generation Recovery (GR) Rider for its J. Lamar Stal (Stall) plant as presented in the Rebuttal Testimony of Donald R. Moncrief and further discussed in the Rebuttal Testimonies of Company witnesses Thomas P. Brice and Renee V. Hawkins, and the Direct Testimony of Arkansas Attorney General (AG) witness William B. Marcus. SUMMARY OF COMPANY'S PROPOSAL Please summarize the Company's proposed GR Rider as reflected in its RebuttaJ Testimonies. The Company has significantly revised its initial request. The Company's initial request included a proposed GR Rider for recovery of new generation facility costs 1 through two phases. Phase was to provide concurrent recovery of the financing A costs associated with new generation facility construction expenditures before their commercial operation, specifically the John W. Turk, Jr. (Turk) and Stall generation projects. Phase was to provide recovery of depreciation expense and a return on these facilities after commercial operation was commenced, but before being included in base rates. As noted in Mr. rice's Rebuttal Testimony, the Company will defer its request for concurrent recovery of financing costs associated with the Turk plant until the Arkansas Supreme Court has the opportunity to consider and rule upon SWEPCO's pending petition for review. Mr. Brice further outlined that there is merit in implementing a recovery mechanism like Entergy Arkansas, m's Capacity Acquisition Rider (Rider CA) for the Stall plant once it comes into service as

5 SOUTHWESTERN ELKTRG POWER COMPANY SURREBUTTAL TESTMONY OF DONNA GRAY - a O j A ia 1 recommended by AG witness Marcus, and that the Company has incorporated this approach in its Rebuttal request. What primary reasons did the Company suggest in support of its request? Mr. Brice identifies that approval of the GR Rider as proposed would eliminate the need to file a costly new rate case soon after completing this proceeding. He indicated that the Stall plant will be in service approximatejy six months following the imprementation of new rates resulting from this proceeding. He suggests that the Stall plant will bring significant benefits to customers in the form of lower fuel costs, and notes that no party challenged the Commission's Certificate of Convenience and Necessity for the Stall plant granted in Order No. issued June 1, 0, in Docket No. 0-1-U, and that the time for doing so has expired. STAFF SUMMARY POSTON ON GR RDER Does Staff support as reasonable the concept of a GR Rider for SWEPCO, as proposed in its Rebuttal Testimonies, based on the facts specific to this Company at this time? Yes. However, my testimony develops and supports certain revisions to the GR Rider proposed by the Company and certain conditions for ratepayer protections which must be present before Staff can offer full support. Was the proximity of the Stall in-sewice date to the implementation date for rates resulting from this proceeding a factor influencing StaWs support? Yes. As Mr. Brice points out, Stall construction is underway with an anticipated in- service date of approximately six months after the statutory order deadline in this case.

6 SOUTHWESTERN ELECTRC POWER COMPANY SURREBUTTAL TESTMONY OF DONNA GRAY -- 1 O RATEPAYER PROTECTONS n conjunction with the recovery of Stall costs through the GR Rider, how can ratepayers best be protected in terms of any future disallowance of costs upon fu review? Mr. Brice acknowledged on page A of his Rebutta Testimony that the Commission "must issue a final prudence determination to include the Stall-related investment in rate base," and suggests the timing of such can be delayed until the Company files its next rate case. He also provides that the Company would agree to refund the return and depreciation amounts collected under the GR Rider if some portion of the plant investment is found imprudent. Staff supports that ratepayers can best be protected by the Commission explicitly reserving a finding of value for the Stall plant for ratemaking purposes until a future case when base rate recovery is sought. Staff further supports that all collections under GR Rider should be subject to refund, and with interest, after notice and hearing to determine prudence. These provisions are specifically designed to limit ratepayer exposure from overcollection of costs which could subsequently be disallowed in a prudence determination. Do you also recommend that language be added to the GR Rider reflecting that all coections are subject to refund with interest? Yes. recommend that the GR Rider be revised to reflect that all collections are subject to refund, with interest, after notice and hearing to determine prudence as discussed above.

7 SOUTHWESTERN ELECTRC POWER COMPANY SURREBUTTAL TESTMONY OF DONNA GRAY -- 1 RATE OF RETURN WTHN GR RDER Does the Company s GR Rider as proposed equitably balance the interests of ratepayers and shareholders in terms of allowed return on equity? The GR Rider SWEPCO proposes provides considerable certainty to the Company with regard to the collection of the revenue requirement specific to the Stall investment. Given the significant benefits to the Company of this additional rate recovery provision, absent a general rate case proceeding, 1 support that a slightly lower return on equity is appropriate in calculating the Stall revenue requirement and will result in a more equitable balancing of the interests of ratepayers and shareholders. What is your return on equity recommendation to accomplish this sharing of b en efi t? recommend that an equitable balancing of ratepayer and shareholder interests can best be accomplished by a reduced return on equity in the GR Rider, and recommend the return on equity in the GR Rider be set at O%, the bottom end of the range supported by Staff witness Jo Ann Sterling whose recommended range of reasonableness is 10% to 10.%. The resultant pre-tax cost of capital recommend is.0%, as shown in Surrebuttal Exhibit DG-, based on Staffs capital structure, other capital component cost rates, and gross conversion factor athibutable to income taxes. 1 Consistent with Rider CA, the bad debt and forfeited discount percentages within the gross conversion factor would be separatety applied in the GR Rider. Based on Stars recommendation, the gross conversion factor attributable to income taxes for use in developing the before-tax return is 1., and the respective bad debt and forfeited discount percentages are.1% and.%.

8 SOUTHWESTERN ELECTRC POWER COMPANY SURREBUTTAL TESTMONY OF DONNA GRAY A OTHER CALCULATON NPUTS WTHN G? RDER What are your specific recommendations regarding the language and procedures outlined in the GR Rider reff ected as Mr. Moncrief s Exhibit DRM- R? recommend the definitions of the GR factors or inputs be revised slightly, primarily for clarity and consistency. The accumulated depreciation balance factor (ADEP) definition should be revised to reflect use of the depreciation rates in effect for the Arkansas jurisdiction, consistent with the depreciation expense input (DEPX) definition. The rate of return factor (ROR) definition should be revised to reflect the overall rate of return specific to the GR Rider as approved by the Commission in this case, with the weighted equity component rates grossed-up by the gross conversion factor specific to income taxes. Consistent with Rider CA, the revenue requirement formula should provide for bad debt expense and forfeited discounts as separate factors to be applied as a last step in the development of the revenue requirement. Definitions for these additional factors should also reflect the same language regarding use of the percentages as approved by the Commission in this docket. The stated rate class percentage allocators reflected in Exhibit DRM-R should not necessarily be approved, rather the compliance tariff should reflect the use of the allocators as approved by the Commission in this case. Lastly, the language in the Annual Determination section describing the true-up should be consistent with the definition for this factor (TU). What are your recommendations regarding Staff review of the GR Rider? recommend that the Company s proposed 0-day period for Staff review be

9 SOUTHWESTERN ELECTRC POWER COMPANY SURREBUAL TESTMONY OF DONNA GRAY -- 1 O 11 A revised to 0 days, which is consistent with the terms of Rider CA and should allow for a more comprehensive review. ALLOCATON AND RATE DESGN What are your comments on the production allocation factor, RBAF input, proposed in the GR Rider and the rate development? As Staff witness Tom D. Stevens addresses, Staff agrees in principle with the use of the approved production allocation factors for allocation to Arkansas and among the rate classes, and the rate development based on a kwh charge for residential and a percentage of base rates for the other classes. The current language in the GR Rider reflects that the allocation factors as approved shall be used. ESTMATED MPACTS Has the Company provided estimated annua impacts of its proposed GR Rider? Yes. While consistent with my recommendation Staff will be afforded 0 days to review the Company's calculations prior to implementation, the Company provided estimated annual impacts in Mr. Moncriefs Exhibit DRM-R which he revised in 1 response to Staff Data Request APSC-. have included this response as Surrebuttal Exhibit DG-. As shown, the Company currently estimates the plant will be in operation by mid-year 10 with annual rate impacts of between 1. and 1. million dollars. Stated on an annualized basis, the order of magnitude of the increase at initial implementation, as compared to Staffs recommended revenue requirement inclusive of fuel, is less than.% with no significant rate level changes anticipated for the remaining periods. Based on my rate of return

10 SOUTHWESTERN ELECTRC POWER COMPANY SURREBUlTAL TESTMONY OF DONNA GRAY recommendations, the rate impact would correspondingly approximate 0. to -l million dollars, or less than.%. What did the Company provide with regard to when it would likely file its next general rate case? n response to Staff Data Request APSC-1, the Company stated that it will need to implement new rates in the last quarter of 1 based on its expected commercial operation of October 1 for Turk. This response is included as my Surrebuttal Exhibit DG-. The likely period of operation for the GR Rider is therefore the last six months of 1 0 through the last quarter of 1. OTHER CONSDERATONS Are there other considerations specific to SWEPCO's request in this rate case which were a consideration influencing Staffs support on this issue? Yes. t is significant to note that SWEPCO undertook a depreciation study in this case and is requesting a significant reduction in depreciation expense on its existing power plants. As noted on page 1 of Mr. Chodak's Direct Testimony: Prudent management of the existing power plants has led to increased life expectancies for these plants as reflected in the extension of the depreciable lives of solid fuel plants from approximately to 0 years and natural gas plants from approximately to years. As discussed by SWEPCO witness Davis, SWEPCO is proposing an increase of approximately 11% in the depreciable lives of its sold-fuel power plants along with other depreciation changes. This depreciation proposal alone reduces SWEPCO's calculated Arkansas retail annual cost of service by approximately $10 million. The results of Staff's analysis are directionally consistent with this overall level of reduction, white producing a slightly greater reduction. Staff commends SWEPCO

11 SOUTHWESTERN ELECTRC POWER COMPANY SURREBUTTAL TESTMONY OF DONNA GRAY -jo- for its willingness to propose significant changes which ensure base rates for existing plant assets are set consistent with the increased life expectancies of those assets, especially during a time of significant construction expenditures. Mr. Chodak pointed to this effort and willingness on page 1 of his Direct Testimony: While the depreciation proposal reduces customers rates, the timing of this change seriously reduces the amount of cash to support SWEPCO s construction program. SWEPCO respectfully requests that the Commission recognize SWEPCOs sejf-imposed reduction in cash flow when considering the request for concurrent recovery of construction financing costs discussed later in this testimony. Ensuring base rates for existing plant assets are reasonably set, significantly 1 reduced in this instance, is especially important for ratepayers during a time period 1 when new plant assets will be added. CONCURRENT RECOVERY OF CONSTRUCTON FJNANCNG COSTS What are your comments regarding Mr. Brice s conclusion that as a matter of policy concurrent recovery is appropriate for investments in new generation? 1 continue to support the position Staff advocated in Docket No. 0-1-U, that being: 0 1 The inclusion of CWP on major electric construction projects may well present the greatest opportunity for the Commission to consider a key risk driver via a special rate recovery mechanism. Given significant differences with regard to construction and construction period among plants, as well as differences in other factors facing utilities and their ratepayers, such a determination can best be made based not on a generic move to foundationaly change regulation in Arkansas, but on the specific circumstances facing a particular utility and its ratepayers.

12 SOUTHWESTERN ELECTRC POWER COMPANY SURREBUlTAL TESTMONY OF DONNA GRAY -' - O Staff continues to support consideration of this key issue on a case-by-case basis and does not oppose SWEPCO's proposal to defer its request for concurrent recovery of financing costs associated with the Turk plant until the Arkansas Supreme Court has the opportunity to consider and rule on SWEPCO's pending petition for review with the Company's stated intent to pursue concurrent recovery in a separate future proceeding. RECOMMENDATONS SUMMARY Please summarize your recommendations. Based on the facts specific to this Company at this time, Staff supports as reasonable the concept of a GR Rider for SWEPCO, as proposed in its Rebuttal Testimonies and modified to reflect each of the revisions and ratepayer protections outlined in my testimony. Does this conclude your testimony? Yes.

13 CERTFCATE OF SERVCE 1 hereby certify that a copy of the foregoing has been served on all parties of record by fotwarding the same.by postage prepaid first class mail, hand delivery andlor electronic mail on August, 0. QtacQ/ Lori L. Burrows