I L E OG111 APR April 20, 2017 VIA CERTIFIED MAIL

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1 OGE Energy Corp. PO Box 321 Oklahoma City, Oklahoma April 20, 2017 VIA CERTIFIED MAIL Commissioner Dana Murphy Commissioner Bob Anthony Commissioner Todd Hiett Oklahoma Corporation Commission 2101 North Lincoln Blvd. Oklahoma City, OK RE: Cause No. PUD OG111 I L E APR COURT CLERK'S OFFICE - 0KG CORPORATION COMMISSION OF OKLAHOMA Dear Commissioners: As you are aware. I am the Chief Accounting Officer at Oklahoma Gas and Electric Company ("OG&E"). The purpose of this letter is to point out several issues with regard to the depreciation rates recently established in Cause No. PUD It is my hope that the Commission will study the issues discussed herein and work with the Company to address these issues in future rate proceedings. These issues are important to OG&E because the use of unreasonably long service lives for distribution and transmission assets unfairly burdens subsequent generations of customers by costing customers more in the long run. Much like extending the mortgage on a home, the longer lives ultimately increase the overall cost to customers; reducing the monthly payment, but dramatically increasing the financing costs. For distribution assets, OG&E has calculated that the longer lives adopted by the Commission will increase the cost to customers by about $800 million. For transmission assets, the longer lives adopted by the Commission will increase the cost to customers by about $1.35 billion. Together, the longer service lives for transmission and distribution accounts increases costs to customers by over $2.1 billion. And these numbers are only based on current assets and do not include the impact of assets we will put into service in future years. Not only do these longer lives increase costs to customers in the long run, but they also slow OG&E's cost recovery for Company investments. This decrease in the Company's cash flow makes it more difficult for the Company to fund future investments. Also, longer depreciable lives increases the risk of assets failing (or becoming functionally obsolete) prior to being recovered, thus creating potential stranded cost issues with which both the Company and the Commission will have to grapple down the road. Further, the overly long service lives chosen by the Commission for certain distribution and transmission assets is out of step with those adopted for the same asset classes by other

2 commissions. It should be noted that, compared to ten neighboring utilities. OG&E's new transmission account service lives are 30% longer than the regional average and OG&E's new distribution account service lives are 40% longer than the regional average. As an example, the new service life for Account 367 (Distribution Underground Conductors and Devices) is approximately 63% longer than the average of OG&E's neighboring utilities. Also, the new service life for Account 364 (Distribution Poles, Towers and Fixtures) is approximately 48% longer than the average of OG&E's neighboring utilities. Below are accounts where the new depreciation rates reflect especially long service lives and a discussion of why those service lives should be considered excessively long: Account 353 (Transmission Station Equipment) - the Commission adopted a curve (63- R2) recommendation from OIEC Witness Pous where 25% of the assets are assumed to last over 80 years. The reality is that none of the major assets in this account make it to 80 years. In fact, 98% of the assets in this Account 60 years ago have been retired. Plus, OG&E's estimated service life is already longer than the industry standard and is at the upper end of the industry range. The record shows that new substation equipment will not last as long as older equipment, since the new equipment is being designed with tighter design tolerances. This makes the assumption that such a high percentage of assets will have lives over 80 years even more unreasonable. By adopting Pous' curve for this account alone, the Commission will increase costs to customers by over $500 million. The annual impact of adopting Pous' recommendation for this account is a $3.4 million annual decrease in the annual amount of depreciation expense collected from customers.' That is, OG&E recovers $3.4 million less of its investment in transmission station equipment every year because of the new curve adopted by the Commission. Account 355 (Transmission Poles and Fixtures) - the Commission adopted a curve (65- S.5) recommendation from OIEC Witness Pous where 40% of the transmission poles and fixtures will last 80 years, 25% of the poles and fixtures will last 100 years, and some poles and fixtures will have a life of 130 years. In reality, 96% of the assets in this Account 60 years ago have been retired. Also, the record reflects that the Commission adopted these long lives despite evidence about severe weather in Oklahoma tending to support shorter lives. By adopting the Pous curve for this account alone, the Commission will increase costs to customers by over $520 million. The annual impact of adopting Pous' recommendation for this account is a $6 million annual decrease in the annual amount of depreciation expense collected from customers. That is, OG&E recovers $6 million less of its investment in transmission poles and fixtures every year because of the new curve employed by the Commission. Account 356 (Transmission Overhead Conductors and Devices) - the Commission adopted a curve (65-R3) recommendation from OIEC Witness Pous that would have a maximum life of overhead conductors and devices of 110 years. Also, Pous assumes that over 60% of these overhead conductors and devices will last over 60 years, 20% will last over 80 years and 5 percent over 100 years. In reality, 96% of the assets in this Account 60 years The calculated decrease in depreciation amounts for Accounts 353, 355, 356, 350.2, 368, and 371 reflect calendar year ending 2016 audited plant balances.

3 ago have been retired. Also, the record reflects that the Commission adopted these long lives despite evidence about severe weather in Oklahoma tending to support shorter lives. By adopting the Pous curve for this account alone, the Commission will increase costs to customers by almost $140 million. The annual impact of adopting Pous' recommendation for this account is a $1.5 million annual decrease in the annual amount of depreciation expense collected from customers. That is, OG&E recovers $1.5 million less of its investment in transmission overhead conductors and devices every year because of the new curve adopted by the Commission. Account (Transmission Land and Land Rights) - the Commission adopted Mr. Pous' recommendation for a 100-year service life on these assets without any reasonable basis for the extension of the lives. The type and nature of these assets had not changed since the Company's last rate case. Also, the Commission adopted Pous' position despite his reasoning having been expressly rejected by other commissions. By adopting the Pous curve for this account alone, the Commission will increase costs to customers by over $180 million. The annual impact of adopting Pous' recommendation for this account is a $428,000 annual decrease in the annual amount of depreciation expense collected from customers. That is, OG&E recovers $428,000 less of its investment in transmission land and land rights every year because of the new curve adopted by the Commission. Account 371 (Programmable Thermostats) - the Commission adopted 20-year service lives for OG&E in-home programmable thermostats. This is a change from the present service lives of 5 years. There was no justification for this change. In fact, OG&E only services the thermostats for 5 years due to the evolving technology and the fact that they do not seem to last more than 5 years. In some cases, these thermostats have had to be replaced multiple times before the end of five years. These are new assets and the life characteristics are not the same as the assets previously in this account, which was the basis for Mr. Garrett's analysis. By adopting the Garrett curve for this account alone, the Commission will increase costs to customers by approximately $45 million. The annual impact of adopting Garrett's recommendation for this account is an $8.7 million annual decrease in the annual amount of depreciation expense collected from customers. That is, OG&E recovers $8.7 million less of its investment in programmable thermostats every year because of the new curve adopted by the Commission. Account 368 (Distribution Line Transformers) - the Commission adopted a curve (44-02) recommendation from PUD Witness Garrett that assumes a maximum life of 130 years. Also, the curve assumes that 25% of the assets will last longer than 60 years. The reality today is that 97% of the Line Transformers that OG&E had on its books 60 years ago have been retired. It makes little sense to assume 25% of Line Transformers will last past 60 years when 97% have been retired in that time. Also, the record reflects that the Commission adopted these long life cycles despite evidence about severe weather in Oklahoma tending to support shorter lives. This curve (44-02) adopted by the Commission is not used in the utility industry because a portion of the assets in the account are assumed to survive so much longer than the remainder of the account, and the life characteristics are not consistent with utility asset

4 mortality. The Spanos Rebuttal Testimony, including Figure 2 below, demonstrates how the exaggerated life "tail" of the curve skews the average. By adopting the Garrett curve for this account alone, the Commission will increase costs to customers by almost $150 million. The annual impact of utilizing a curve with the exaggerated life "tail" as demonstrated in the below figure is a $2.6 million annual decrease in the annual amount of depreciation expense collected from customers. That is, OG&E recovers $2.6 million less of its investment in distribution line transformers every year because of the new curve adopted by the Commission. Figure 2 (Spanos Rebuttal) 100 ORIGINAL CURVE EXPERIENCE ' PLACEMENTS so IOWA 40-01( )GM) a U 71 z > 60 UI IOM 44-02(PUD) (0 Z w C) Uj 0. 5( U AGE IN YEARS

5 Again, the purpose of this letter is to bring some of these issues to your attention. All of the examples above were addressed in expert testimony and included in various pleadings filed in Cause No. PUD However, I also understand how the Commission may have not realized the significance of how its depreciation ruling impacts future costs to customers, cost recovery, and cash flows. It is my hope that OG&E can work with the Commission to address these issues in future rate cases. If you have any questions or if I can be of any assistance on understanding this issue further, please do not hesitate to contact me at your convenience. Sincerely, Scott Forbes Chief Accounting Officer Oklahoma Gas and Electric Company CC: Judge Ben Jackson