BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION ) ) ) ) DIRECT TESTIMONY JAMES I. WARREN MILLER & CHEVALIER CHARTERED ON BEHALF OF

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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 JAMES I. WARREN MILLER & CHEVALIER CHARTERED ON BEHALF OF ENTERGY ARKANSAS, INC. APRIL, 0

2 I. BACKGROUND AND INTRODUCTION Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. A. My name is James I. Warren. My business address is Fifteenth Street, N.W., Washington, D.C Q. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY? A. I am a member of the law firm of Miller & Chevalier Chartered ( M&C ), which has leading practices in tax, international, litigation, employee benefits, and governmental affairs. 0 Q. PLEASE DESCRIBE YOUR CURRENT RESPONSIBILITIES AT M&C. A. I am engaged in the general practice of tax law. I specialize in the taxation of and the tax issues relating to regulated public utilities. Included in this area of specialization is the treatment of taxes in regulation. Q. ON WHOSE BEHALF ARE YOU SUBMITTING THIS TESTIMONY? A. I am submitting this testimony on behalf of ( EAI or the Company ). 0 Q. PLEASE DESCRIBE YOUR PROFESSIONAL BACKGROUND. A. For more than years, I have been involved in the provision of tax services almost exclusively to companies in various segments of the utility industry. I joined M&C in February of 0. For the three years prior, I

3 0 0 was a partner in the law firm Winston & Strawn LLP and for the five years prior to that, I was a partner in the law firm of Thelen Reid Brown Raysman & Steiner LLP. Before that, I was affiliated with the international accounting firms of Deloitte LLP (October 000 September 00), PricewaterhouseCoopers LLP (January September 000) and Coopers & Lybrand (March June ) and the law firm Reid & Priest LLP (July December ). At each of these professional services firms, I provided tax services primarily to electric, gas, telephone and water industry clients. My practice has included tax planning for the acquisition and transfer of business assets, operational tax planning and the representation of clients in tax controversies with the Internal Revenue Service ( IRS ) at the audit and appeals levels. I have often been involved in procuring private letter rulings or technical advice from the IRS National Office. On several occasions, I have represented one or more segments of the utility industry before the IRS and/or the Department of Treasury regarding certain tax positions adopted by the federal government. I have testified before Congressional committees and subcommittees and at Department of Treasury hearings regarding legislative and administrative tax issues of significance to the utility industry. I am a member of the New York, New Jersey and District of Columbia Bars and also am licensed as a Certified Public Accountant in New York and New Jersey. I am a member of the American Bar Association, Section of Taxation where I am a past chair of the Committee on Regulated Public Utilities.

4 0 Q. HAVE YOU PREVIOUSLY TESTIFIED IN ANY REGULATORY PROCEEDINGS? A. Yes I have. I have testified regarding tax, tax accounting and regulatory tax matters before a number of regulatory bodies including the Federal Energy Regulatory Commission and the utility commissions in Florida, Arkansas, Louisiana, Nevada, Delaware, West Virginia, Virginia, Arizona, New Jersey, New York, Connecticut, Ohio, California, Maryland, Pennsylvania, Missouri, Illinois, Kentucky, Vermont, Tennessee, Indiana, Texas, the District of Columbia and the City of New Orleans. A list of all of my prior testimonies and the jurisdictions in which they were filed is attached to my direct testimony as EAI Direct Exhibit JIW-. Q. PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND. A. I earned a B.A. (Political Science) from Stanford University, a law degree (J.D.) from New York University School of Law, a Master of Laws (LL.M.) in Taxation from New York University School of Law and a Master of Science (M.S.) in Accounting from New York University Graduate School of Business Administration. 0 Q. WHAT IS THE PURPOSE OF YOUR DIRECT TESTIMONY? A. The purpose of my direct testimony is to support two particular aspects of the Company s treatment of income taxes in its filing in this proceeding.

5 0 The first is its treatment of its Financial Accounting Standards Board ( FASB ) Interpretation No. ( FIN ) amount, that is, the amount of its tax liability it has been determined is likely currently owed to the taxing authorities. The second is the treatment of the tax deduction allowed under Section of the Internal Revenue Code, generally referred to as the domestic production activities deduction ( DPAD ) (and also as the manufacturing tax deduction or the Section deduction) and its implications for the revenue conversion factor ( RCF ). I will further address a somewhat broader tax-related issue. This is the issue of whether or not accumulated deferred income taxes ( ADIT ) can be specifically associated with specific assets and liabilities or whether, instead, they are fungible. II. THE TREATMENT OF THE COMPANY S FIN AMOUNT Q. HOW DOES THE COMPANY TREAT ITS FIN AMOUNT? A. The Company removes its FIN amount from its calculation of the ADIT which it includes in its capital structure. 0 Q. SO THE COMPANY DOES NOT TREAT ITS FIN AMOUNT IN THE SAME WAY IT TREATS ITS REGULAR ADIT BALANCE? A. No it does not.

6 0 Q. ON WHAT BASIS DOES THE COMPANY DISTINGUISH BETWEEN ITS FIN AMOUNT AND ITS REGULAR ADIT? A. The Company treats its FIN amount differently from its regular ADIT balance because they are very different things. Their differing treatment under generally accepted accounting principles ( GAAP ) testifies to this fact. This separate identification and treatment is based on a robust process of evaluation and analysis by tax experts both inside and outside the Company. As a consequence, the Company s treatment of its FIN amount represents the very best information the Company possesses as to the nature of the amounts at issue. Failing to make the distinction would result in an inappropriate economic mischaracterization because, by virtue of the FIN process, the Company has the necessary information to properly characterize the amounts. Q. IS ADIT IMPORTANT TO UTILITIES AND THEIR CUSTOMERS? A. ADIT is very important to both. It represents a source of funds zero-cost funds - for utilities. Without it, utilities would have to procure funds for which they would have to pay. This incremental financing cost would increase customer rates. 0 Q. AS A THRESHOLD MATTER, WHAT PRODUCES ADIT? A. Deferred taxes are produced when an item of income or expense is recognized for regulatory purposes in a period that is different from the

7 period in which it is recognized for tax purposes. In the context of utility regulation, this treatment is often referred to as normalization. Q. WHAT IS THE SOURCE OF MOST UTILITY ADIT? A. The vast preponderance of ADIT is attributable to accelerated tax depreciation (including bonus depreciation). 0 0 Q. CAN YOU PROVIDE AN EXAMPLE OF HOW DEPRECIATION- RELATED ADIT WORKS? A. Yes. A $ million electric distribution line is a good asset to illustrate the principle. Assume Utility X places the line in service in Year and it is assigned a 0-year life for regulatory purposes. Its book depreciation rate would, therefore, be. percent and rates would be set to allow Utility X to collect $,000 ($ million X. percent) for depreciation from its customers each year for 0 years. For tax purposes, however, the line is depreciated over 0 years on a straight line basis. Thus, considering only depreciation on the line, in Year the utility would take in $,000 of taxable revenue and claim a tax deduction of $00,000 ($ million/0). Thus, it would produce a net tax deduction of $,000 ($00,000 - $,000) which, if it offsets the utility s other taxable income (and assuming a percent tax rate), would produce incremental cash (i.e., a reduction in the amount of tax otherwise payable) of $,0 ($,000 X percent). The same thing would happen each year for the subsequent

8 years. Thus, as of the end of year 0, Utility X would have reduced its tax payments by $,00 ($,0 X 0). These annual tax reductions allowed Utility X to retain an equivalent amount of extra cash. Q. WHAT IS THE NATURE OF THIS CASH? A. This cash represents funds presently available to the utility. However, these funds will have to be paid back to the government over time. 0 Q. HOW WILL THE FUNDS BE PAID BACK TO THE GOVERNMENT? A. In each of the next 0 years, Utility X will collect $,000 from its customers to fund the depreciation on the distribution line. This will all be taxable income. However, the utility has already claimed all the tax depreciation to which it is entitled during Years -0 and, hence, can claim no further depreciation tax deductions. Thus, in each of the subsequent 0 years, the utility will include on its tax return $,000 of taxable income upon which it will pay $,0 ($,000 X percent) of tax. Over the 0 years, it will pay a total tax of $,00 ($,0 X 0) an amount precisely equal to the cash benefit it accumulated during the first 0 years. 0 Q. SO THE REPAYMENT TO THE GOVERNMENT IS EFFECTED BY FILING FUTURE TAX RETURNS? A. Exactly.

9 Q. WHAT ARE THE CONSEQUENCES OF THE FUNDS BEING REPAID IN THIS WAY? A. Because the funds are repaid by the filing of future tax returns, there is no interest cost associated with them. They are interest-free. 0 Q. HOW DOES THIS RELATE TO ADIT? A. The balance still to be repaid is reflected as an ADIT credit. In essence, it is posted as a deferred tax liability ( DTL ). This DTL balance is at its maximum at the end of Year 0 and then diminishes each year for the next 0 years as the loan is repaid. Q. IS THERE ANOTHER TYPE OF GOVERNMENTAL LOAN THAT, LIKE ADIT, IS CREATED BY THE FILING OF TAX RETURNS? A. Yes there is. I will refer to this type of loan as a non-adit governmental loan. 0 Q. PLEASE DESCRIBE THE NATURE OF A NON-ADIT GOVERNMENTAL LOAN. A. Let us change the Utility X example slightly. Assume the same facts as in the preceding illustration except that Utility X decides to deduct the entire cost of the distribution line in the year it is placed in service notwithstanding that the tax law assigns that asset a 0 year life. The $ million tax deduction will reduce its tax liability for that year by $,0

10 (($ million - $,000) X percent). Although this would be an aggressive tax position, it would also produce a governmental loan one larger than the loan created by "merely" claiming accelerated depreciation. Upon audit, the IRS will disallow the tax deduction to the extent it exceeds the permissible level of depreciation ($ million - $00,000 or $00,000) and require Utility X to pay back $,000 ($00,000 X percent) of the loan (i.e., the non-adit portion) immediately. 0 Q. HOW DOES THE REPAYMENT OF THIS NON-ADIT LOAN DIFFER FROM THE REPAYMENT OF AN ADIT LOAN? A. Unlike the ADIT loan, the mechanism for repaying the non-adit loan has nothing to do with future tax returns. It depends on an IRS assessment after an audit of an already-filed tax return. And, unlike the ADIT loan where scheduled repayment is triggered by timing difference reversals, the repayment of this loan can come at any time. There is no embedded reversal device. Finally, as with all IRS assessments, interest is charged on the amount due. 0 Q. PLEASE SUMMARIZE THE CRITICAL DISTINCTIONS BETWEEN THE TWO TYPES OF GOVERNMENTAL LOANS? A. Though both loans are extended through the tax system, they are very different. The first loan, the depreciation-related loan, is a creature of the tax law. It is a conventional ADIT loan. It is the result of a conscious 0

11 0 decision by Congress to subsidize the cost of capital assets by the extension of interest-free loans. The benefit of that subsidy is clearly one that needs to be reflected in the ratemaking process and it is. The loan is reflected in the Company s ADIT balance and that balance is used to reduce the cost of capital. The second loan, the entire-deduction loan, is not part of a Congressional subsidization scheme and the utility will be charged a carrying cost with respect to it. In fact, by reflecting an aggressive tax position on its tax return, the utility simply borrowed money from the government in the same way it could have from a bank (though, clearly, the formalities are quite different). Q. IN THE ENTIRE-DEDUCTION LOAN SITUATION, IS THE LOAN INTEREST-FREE UP UNTIL THE IRS REQUIRES REPAYMENT? A. No. It is never interest-free. The IRS will charge interest on its assessment not from the date of the assessment, but from the date Utility X filed its tax return that is, from the date of the loan itself. In short, there is no period during which such a loan is interest-free. 0 Q. WHAT IS FIN? A. FIN is an accounting pronouncement issued in 00 by the FASB, the body that establishes the rules that constitute GAAP. FIN prescribes the way in which companies must analyze, quantify, and display the

12 consequences of tax positions that are technically uncertain. It applies to calendar year 00 and years thereafter. 0 Q. WHAT IS THE PURPOSE OF FIN? A. Each taxpayer has the responsibility both for filing tax returns to report how much tax it owes and for paying that amount. This self-reporting is subject to review (i.e., audit) by the relevant taxing authorities. The tax law is exceedingly complex and contains many provisions that are subject to more than one interpretation. Moreover, it is often possible to view business transactions in more than one way. It is not uncommon for a taxpayer to, either knowingly or unknowingly, interpret the tax law in a way that could be disputed by the taxing authorities. It is similarly not uncommon for a taxpayer to view a transaction, and, hence, the tax consequences of the transaction, in a way that could be disputed by the taxing authorities. FIN prescribes a single standard, a single process, and a single disclosure regime for uncertain tax positions taken by a taxpayer, i.e., tax positions taken by a taxpayer that may be disputed by the tax authorities. 0 Q. WHAT HAPPENS AS A RESULT OF THE APPLICATION OF FIN? A. FIN requires that a taxpayer identify all of its "tax positions." The definition of a tax position is very broad. It really goes to the way in which an economic action is reflected on a tax return. With respect to those tax

13 positions that are uncertain (i.e., subject to dispute by the tax authorities), the extent of the uncertainty must be evaluated. 0 Q. WHAT IS THE NATURE OF THIS EVALUATION? A. The evaluation process is extremely rigorous. Not only does the Company's internal tax department analyze the positions and assess the risk levels, the Company's external auditors, most especially their auditor s tax experts, thoroughly review the results of the Company's process and often challenge its conclusions. At the end of the process, the Company and its external auditors generally reach a consensus as to the amount of tax at risk with respect to each uncertain tax position (i.e., how much incremental tax is it likely will be paid or recovered). Q. WHAT WOULD FIN MEAN IN TERMS OF YOUR EXAMPLE INVOLVING UTILITY X WHERE IT BUILDS A DISTRIBUTION LINE AND DEDUCTS THE ENTIRE COST ALL IN ONE YEAR? A. In the context of that example, one might say that the purpose of FIN is precisely to distinguish between depreciation-related (i.e., ADIT) loans ($,0) and the entire-deduction (i.e., non-adit) loan ($,000). 0 Q. HOW IS THE AMOUNT AT RISK DETERMINED? A. As a general proposition, the amount of tax that it is more likely than not will be paid to the taxing authorities in connection with the uncertain

14 position must be reflected by the Company on its balance sheet as a tax liability. FIN does not permit this amount to be reflected as ADIT. Interest must be accrued on any amount recorded as a liability under FIN at the interest rates imposed by the relevant taxing authorities on tax underpayments. In addition, where appropriate, any applicable penalties must be accrued. 0 Q. DOES THIS MAKE SENSE TO YOU? A. It does. ADIT balances are interest-free loans with all of the other characteristics I previously described. By contrast, FIN amounts are not interest-free loans and have starkly different features. It is, therefore, entirely logical that FIN amounts not be treated as ADIT balances. Q. WHAT, THEN, DO FIN AMOUNTS ECONOMICALLY REPRESENT? A. FIN amounts represent the incremental quantity of tax that the Company and its auditors have concluded that it will most likely owe with respect to previously filed tax returns. These amounts will be payable with interest when they are assessed. 0 Q. IS THERE A CHECK ON THE VERACITY OF THE AMOUNTS DETERMINED TO BE FIN AMOUNTS? A. I would note again that the FIN analysis involves a rigorous review process for assessing the likelihood of having to make additional tax

15 0 payments (with interest and penalties) to taxing authorities. In the case of all companies with publicly traded securities, the independent auditors review the Company s conclusions. Because of the adverse earnings implications of designating amounts FIN amounts (that is, the necessity to accrue incremental interest expense, to provide a financial statement disclosure and to include a Schedule UTP (Uncertain Tax Position) as part of the Company s federal tax return), no company has an incentive to designate a larger FIN amount than it has to. Finally, the purpose of the auditor review is to ensure that the financial statements the investing public relies upon provide information that is as accurate as possible about the true nature of the Company s liabilities. The result of the review is reflected in the Company s filings with the Securities and Exchange Commission ( SEC ). The adverse consequences of misreporting to the SEC can be significant. 0 Q. ISN'T IT TRUE THAT THE COMPANY AND ITS OUTSIDE AUDITORS MIGHT BE WRONG AND THE COMPANY MIGHT EITHER WIN OUTRIGHT OR, AT LEAST, WIN A PORTION OF THE UNCERTAIN TAX ISSUES? A. Admittedly, it is not absolutely certain that the Company will lose all of the tax benefits reflected in its FIN amount. It may lose less than it has reflected. If this were the case, then the Company would reclassify the

16 portion it won as an ADIT loan and use it to reduce the cost of capital in a future proceeding. 0 Q. WHAT WOULD HAPPEN IF THE IRS DISALLOWS MORE THAN THE AMOUNT THE EXPERTS PREDICT? A. At that point, the non-adit loan as well as the portion of the ADIT loan associated with those disallowed deductions would be repaid. A portion of the Company s ADIT balance would thereby be eliminated, resulting in higher cost of capital. In other words, what would transpire if the Company did worse than the experts predicted would be precisely the converse of what would transpire if the Company did better than the experts predicted. It works the same both ways. 0 Q. ARE YOU SUGGESTING THAT THERE IS UNCERTAINTY REAGARDLESS OF HOW THE COMPANY TREATS ITS FIN AMOUNTS? A. Yes I am. Thus, there will be a degree of uncertainty regardless of how those amounts are treated. The Company has chosen, and I believe properly so, to adopt the more likely of the two alternatives to respect the FIN characterization. This makes far more sense than ignoring FIN characterization which, in effect, assumes that the Company will prevail on every uncertain tax position it has taken even on those with respect to which the experts have determined it is likely that the Company will not

17 prevail. It makes the most sense to utilize the best information available and that is what the Company has done. III. THE COMPANY S DPAD 0 Q. WHAT IS THE DPAD? A. The DPAD is a tax incentive Congress provides to manufacturers. The tax law permits a business to claim a tax deduction, the DPAD, equal to percent of the lesser of () certain qualified net income (referred to as QPAI ), () the taxpayer s taxable income or () 0 percent of the W- wages associated with the production of the QPAI. To qualify as QPAI, the net income has to be derived from specified activities associated with manufacturing. The generation of electricity is an eligible activity. Under the tax law, the DPAD is computed on a consolidated basis. Q. HOW DOES THE COMPANY TREAT ITS DPAD FOR RATEMAKING PURPOSES? A. The Company reflects a DPAD in its tax expense computation when and to the extent it is entitled to a DPAD. 0 Q. WHAT DPAD DEDUCTION DOES THE COMPANY S FILING REFLECT? A. The Company s filing reflects a $0 DPAD. Q. WHY DOES THE COMPANY S FILING REFLECT A $0 DPAD?

18 A. Simply, it reflects a $0 DPAD because the Company does not qualify for a DPAD in the relevant tax period. 0 Q. WHY IS THE COMPANY NOT ENTITLED TO A DPAD? A. A DPAD cannot exceed a taxpayer s taxable income. As explained by Company witness Gregory R. Zakrzewski, neither the consolidated group of which EAI is a member (Entergy Corporation and subsidiaries) nor EAI on its own will produce taxable income in the test period or pro forma year. Therefore, under any possible view of how the DPAD should be computed (i.e., consolidated or stand alone ), EAI will not be entitled to a DPAD. Q. WHAT WILL PREVENT THE CONSOLIDATED GROUP AND/OR EAI FROM PRODUCING TAXABLE INCOME IN THE TEST PERIOD? A. There are two major contributing factors. The first is that, on December, 0, the President signed into law an extension of bonus depreciation. 0 Q. WHAT IS BONUS DEPRECIATION? A. Bonus depreciation allows a taxpayer to claim as a tax deduction in the year it places an asset in service one-half of its cost in addition to claiming regular depreciation on the remaining non-deducted portion of its cost. Bonus depreciation was available through the end of 0 until the

19 President signed the extension. It is now available and applies retroactively through the end of 0. Q. WHAT WILL THE IMPACT OF THIS EXTENSION BE ON EAI S TEST PERIOD TAXABLE INCOME? A. EAI will be able to claim bonus depreciation on its fixed asset additions placed in service during the first nine months of the test period. This will significantly depress taxable income (not to mention, QPAI) during the that portion of the test period. 0 Q. WHAT IS THE SECOND CONTRIBUTING FACTOR? A. The second contributing factor, and the major one, is that both the consolidated group of which EAI is a member and EAI itself have significant net operating loss carryovers ( NOLCs ). For purposes of determining the taxable income which the DPAD cannot exceed, NOLCs are taken into account. Consequently, even if the consolidated group or EAI were to generate positive taxable income during the test period, NOLCs would zero-out the income such that the DPAD (on either a consolidated or an EAI-only basis) would be $0. 0 Q. HOW WOULD YOU CHARACTERIZE ANY REFLECTION OF A DPAD IN THIS RATE CASE?

20 A. I would characterize it as including a fictional tax benefit that is not reflective of test period operations and is, therefore, unfair and inappropriate. Q. ARE YOU AWARE THAT IN EAI S LAST RATE CASE THE DPAD WAS INCORPORATED INTO THE RCF? A. Yes I am. 0 Q. WHY DID THE COMPANY NOT TREAT THE DPAD THAT SAME WAY IN ITS FILING IN THIS CASE? A. As stated above, the Company had no DPAD that should be considered in this case regardless of the mechanism. Incorporating a DPAD into the RCF doesn t make the DPAD tax benefit any more real than does incorporating it into the tax expense element of cost of service. In either case, the likely outcome is that customers will be provided a tax benefit that the Company will never actually receive. I do not believe this would be proper - or fair. 0 Q. DESCRIBE A TYPICAL DEFICIENCY CALCULATION ABSENT INCORPORATION OF THE DPAD INTO THE RCF? A. Let s start with the mechanics of the RCF assuming a corporate statutory income tax rate of percent. A $00 earnings deficiency will require increased revenues equal to a gross-up factor applied to the deficiency. 0

21 The factor is equal to the inverse of the tax rate. On these facts, the necessary increase in revenue would be: Earnings deficiency $00 Statutory Income Tax Rate Inverse of Tax Rate Calculation of Revenue Increase percent percent 00/ percent 0 Revenue Increase $ The $ of additional revenue would all be taxable income and, consequently, produce a tax liability of $ ($ X percent). After paying the tax, the utility would have $00 exactly the amount necessary to eliminate its earnings deficiency. 0 Q. WHAT WOULD THE IMPACT BE IF THE DPAD WAS INCORPORATED INTO THE RCF? A. The impact can be seen by slightly modifying the example above. The mechanism for incorporating the DPAD into the RCF is merely to reduce the corporate statutory income tax rate by some assumed level of benefit associated with a DPAD deduction. If we assume the level of that benefit is percent, then the calculation of the necessary increase in revenue would change as follows:

22 Earnings deficiency $00 Adjusted Income Tax Rate Inverse of Tax Rate Calculation of Revenue Increase percent percent 00/ percent Revenue Increase $ Q. WHAT DO THESE TWO EXAMPLES INDICATE WILL HAPPEN AS A RESULT OF INCORPORATING THE DPAD INTO THE RCF? A. The necessary revenue increase is diminished by $. 0 Q. WHAT DOES THIS $ REDUCTION REPRESENT? A. This $ reduction in revenue represents the provision to customers of a tax benefit associated with a DPAD deduction that the Company will irrefutably not produce during the test period. 0 Q. IF IT IS CLEAR THAT THE COMPANY WILL NOT PRODUCE THIS BENEFIT DURING THE TEST PERIOD, WHEN WILL IT PRODUCE THE BENEFIT? A. In my view, the answer is Who knows when or if such a benefit will ever be produced. But as a threshold matter, under any view, customers are, at the very least, being fronted the money.

23 0 Q. WHAT DO YOU MEAN BY YOUR USE OF THE PHRASE UNDER ANY VIEW? A. I do not believe the DPAD is the type of tax benefit that should be viewed as a standard deferred tax item (as I will explain hereafter). However, even if it were a tax benefit that, as a result of book/tax timing differences, will be received at some point in the future, continuing with my previous example described above, the $ reduction in current rates can only be seen as providing current customers with a benefit the Company will only enjoy in the future. That is, the Company is advancing money to its customers prior to the time it gains possession of the tax benefit by virtue of paying less tax. 0 Q. WHAT SHOULD THE CONSEQUENCES BE OF FRONTING CUSTOMERS MONEY FOR A TAX BENEFIT THE COMPANY HAS NOT RECEIVED? A. If it were simply a matter of providing customers a tax benefit that the Company will not receive until some later point in time, it would be appropriate to reflect a rate base addition equal to the amount that is fronted. This is because the Company would have expended its own resources to fund the customer benefit until the tax return benefit is actually received and the Company should rightfully be compensated for the use of those funds.

24 Q. BUT IS THIS A CASE WHERE IT IS SIMPLY A MATTER OF TIME UNTIL THE COMPANY RECEIVES A DPAD BENEFIT? A. No it is not. 0 Q. PLEASE EXPLAIN. A. The best way to analyze the DPAD in this regard is to contrast it with a normal book/tax timing difference. Take accelerated depreciation, for example. At the end of the life of any given asset, the aggregate book and tax deductions will be the same. The only difference is the pattern of those deductions over time. The more tax deductions that may be claimed early in the useful life of an asset, the fewer the tax deductions that may be claimed later on. The situation is binary. 0 Q. CAN YOU ILLUSTRATE THIS EFFECT? A. It is a mathematical certainty that, if a company places an asset in service and claims 00 percent bonus depreciation on it in that year, it will have greater taxable income over the remaining life of that asset than if it had depreciated the asset ratably over its life regardless of what else happens. More now must mean less later. Less now must mean more later. Q. IS THIS THE CASE WITH THE DPAD?

25 0 A. No it is not. A depreciation deduction is a function of only a single thing basis or cost. By contrast, the DPAD is not a direct deduction it is a derived deduction. It is a function of at least four independent variables: () revenues produced by qualified activities in any given year, () all deductions attributable to the production of those revenues in that same year, () wages paid to employees who worked in connection with the qualified activity in that same year and () taxable income of the taxpayer in that year. As I said, less depreciation claimed in one year invariably means more depreciation in later years regardless of what else happens. However, a smaller DAPD in one year in no way leads necessarily to a greater DPAD later on. Each year stands alone. A change in the revenues or deductions that go into calculating QPAI, W- wages or taxable income or any combination of the four can have a dramatic impact on the later year s DPAD. 0 Q. WHAT IS THE CONSEQUENCE OF THIS LACK OF A DIRECT RELATIONSHIP BETWEEN ANY ONE FACTOR AND THE DPAD? A. Whereas the presumption that more depreciation deductions now will mean fewer depreciation deductions in the future is mathematically and logically sound, a presumption that any particular level of DPAD will be available in the future is the purest speculation.

26 Q. WHAT DOES THIS HAVE TO DO WITH INCORPORATING THE DPAD INTO THE RCF? A. Incorporating the DPAD into the RCF makes exactly that presumption: There is no DPAD in the test period but it can be factored into rates anyway because, as a result of a lower DPAD in the test period, there will be an increased DPAD at some future date. It is on this basis that rates in the example I used earlier in this testimony are reduced by $ which 0 represents some presumed future DPAD benefit. presumption is simply not warranted. However, that Q. HAS THE FASB HAD OCCASION TO CHARACTERIZE THE DPAD? A. It has. Back in 00, soon after the tax provision that established the DPAD was enacted into law, the FASB staff considered how to properly reflect the DPAD for financial reporting purposes. One of the alternatives they considered was to reflect the impact of the DPAD as a tax rate reduction exactly as would the incorporation of the DPAD into the RCF. 0 Q. WHAT DID THE FASB CONCLUDE AND WHY? A. The FASB adopted its staff s recommendation that the DPAD not be treated as an adjustment to the income tax rate but that, instead, it be treated as a special deduction. A special deduction is recognized only in the year in which it is deductible on the tax return. The reason for this

27 conclusion was that the DPAD is contingent upon the future performance of specific activities, including the level of wages. 0 Q. IS THIS CONCLUSION CONSISTENT WITH YOUR POSITION REGARDING THE DPAD? A. Perfectly consistent. I have argued that the amount or even the existence of any future year s DPAD deduction will be a function of the level of QPAI-related revenues and deductions that occur in that future year, the Company s taxable income in that year and the level of QPAIrelated wages it pays in that year. These cannot reasonably be assumed or estimated based on the existence in the current year of any particular book/tax timing difference. I, therefore, maintain that treating the DPAD as an adjustment to the tax rate, as does incorporating it into the RCF, will, with virtual certainty, provide to customers a level of tax benefit that is quite different than that which will ever be received by the Company. As a consequence, I strongly support the Company s approach to the DPAD.

28 IV. THE FUNGIBILITY OF ADIT 0 Q. EARLIER IN YOUR TESTIMONY YOU DESCRIBED THE NATURE OF ADIT. WILL YOU SUMMARIZE YOUR CONCLUSION REGARDING ITS NATURE? A. Yes I will. ADIT represents the quantity of incremental cash a utility possesses as a result of differences between the treatment of an item of income or expense for regulatory purposes and its treatment for income tax purposes. The cash is ultimately paid back to the government upon the filing of subsequent tax returns upon which the reversal of the item is reflected as a result of which the utility pays additional income tax. During the period between the time the utility reduces its tax liability as a result of claiming the favorable tax deduction on its tax return and the time it pays the increased tax liability due to the reversal of the item, it has in its possession a quantity of cost-free capital that is available to be reflected in the rate-setting process. Q. SO ADIT REPRESENTS THE CASH CONSEQUENCES OF FAVORABLE TAX DEDUCTIONS? A. Exactly. 0 While I recognize that ADIT can also represent a pre-payment of tax, in the case of every utility of which I am aware, the net ADIT balance is a tax savings (i.e., a liability or credit) which is later paid back to the government.

29 Q. HOW DOES THE COMPANY CALCULATE THE ADIT BALANCE WHICH IT INCLUDES AS AN ELEMENT OF ITS CAPITAL STRUCTURE? A. When the Company calculates the ADIT balance which forms an element of its capital structure, it includes the ADIT associated with the assets and liabilities included in rate base and excludes the ADIT associated with assets and liabilities that are not included in rate base. I will refer to this practice as the attributed method of calculating ADIT. 0 Q. IS THERE AN ALTERNATIVE TO THE ATTRIBUTED METHOD OF CALCULATING ADIT? A. Yes there is. An alternative method is the fungibility method. 0 Q. WHAT IS YOUR UNDERSTANDING OF THE FUNGIBILITY METHOD? A. As I understand it, the theory underlying the fungibility method is that the incremental cash (represented by the ADIT balance) which the Company possesses as a result of being able to claim favorable tax deductions is available for any purpose and, therefore, cannot be definitively attributed to any specific assets or liabilities. Therefore, all ADIT should be included in the computation of the ADIT balance which forms an element of the Company s capital structure. Q. WHAT IS YOUR OPINION REGARDING THE PROPRIETY OF THE TWO ALTERNATIVE METHODS?

30 A. For the reasons I will describe below, the attributed method more accurately produces an ADIT balance which is appropriately reflected in the Company s capital structure. 0 Q. WILL YOU SET OUT THE CENTRAL ISSUE IN EVALUATING THE TWO METHODS? A. Yes I will. As a threshold matter, let me observe that each of the two methods is based on a fundamental premise. Moreover, in each case, the fundamental premise is correct. However, being based on a correct fundamental premise is not enough. The true measure of which of the two methods is preferable is which of the two methods achieves the most appropriate and equitable ratemaking results. Q. STARTING WITH FUNGIBILITY, WHAT IS ITS UNDERLYING PREMISE? A. I alluded to it above. The basic premise is that ADIT represents incremental cash and cash is fungible. 0 Q. WHAT IS THE FOLLOW ON LOGIC THAT IS APPLIED TO THIS PREMISE? A. The logic that is applied to this premise is that, because a utility has in its possession an amount of tax-derived cash equal to its ADIT balance, its 0

31 capital structure should reflect that amount irrespective of which assets are or are not included in rate base. Q. WHAT IS THE PREMISE UNDERLYING THE ATTRIBUTED METHOD? A. The premise underlying the attributed method is that almost every individual item of income and expense has a tax consequence. Therefore, ADIT can be directly and accurately attributed to each asset or liability that gives rise to it. 0 Q. WHAT IS THE FOLLOW ON LOGIC THAT IS APPLIED TO THIS PREMISE? A. The logic is that the only ADIT that should be reflected in ratemaking is the ADIT attributable to items that are, themselves, reflected in ratemaking. 0 Q. WHAT IS THE ESSENTIAL DIFFERENCE BETWEEN THE TWO METHODS? A. They are both based on correct premises. However, they focus on different things. The attributed method focuses on the source of ADIT funds. The fungibility method focuses on the use of ADIT funds. The question is, therefore, not which is right and which is wrong but which of the two better accomplishes appropriate regulatory results.

32 Q. YOU STATED THAT YOU SUPPORT THE ATTRIBUTED METHOD. WHY? A. The attributed method is consistent with an important regulatory principle: the benefits follow burdens principle. Insofar as the fungibility method is not consistent with this principle, I do not believe it produces equitable regulatory results. Further, the fungibility method has the capacity to produce results that are inconsistent with the normalization rules of the Internal Revenue Code. 0 Q. PLEASE DESCRIBE THE BENEFITS FOLLOWS BURDENS PRINCIPLE. A. As I mentioned above, almost every individual item of expense has a tax consequence. The benefits follows burdens principle provides that whoever bears the cost of an expense is entitled to the tax benefit produced by that cost. 0 Q. CAN YOU PROVIDE A SIMPLE EXAMPLE OF THE APPLICATION OF THIS PRINCIPLE? A. Certainly. If a utility incurs a $,000 advertising cost for which a commission allows recovery, then the federal tax consequences of that expenditure, a $0 tax benefit (assuming a percent tax rate), is reflected in ratemaking as a reduction in tax expense. By contrast, if the

33 commission disallows the advertising cost, then the $0 tax benefit is not reflected in ratemaking 0 Q. WHAT DOES THIS EXAMPLE ILLUSTRATE? A. It illustrates two points. First, it illustrates that the tax consequences of any given expenditure can be, and commonly are, specifically associated with the underlying expenditure for regulatory purposes. But, further, it depicts what I believe is the universal regulatory practice that, where shareholders absorb a cost which has a tax consequence, the tax consequence is allocated to them and not to ratepayers. The tax benefit follows the cost burden. Q. HOW DOES THIS APPLY IN THE CONTEXT OF ADIT? A. The principle is the same. The best way to understand this is to consider a transformer. A depreciable asset such as a transformer generally produces two types of tax benefits for its owner. The first is a cash tax benefit due to being able to depreciate the cost of the asset over its life. This is equal to percent of the cost of the asset. The second benefit is 0 the governmental loan produced by being able to claim that depreciation on an accelerated basis for tax purposes (i.e., the accelerated receipt of the cash tax benefit). This is the benefit that gives rise to ADIT. Both benefits are directly attributable to the transformer. If the transformer is Again, this assumes a percent tax rate.

34 included in rate base and its depreciation is included in cost of service, then the benefits follows burdens principle dictates that ratepayers enjoy both benefits. However, if the cost of the transformer is disallowed, the benefits follows burdens principle would dictate that ratepayers be allocated neither benefit. Since, under those circumstances, the cost of the transformer is absorbed by shareholders, all tax benefits it produces should be allocated there. 0 0 Q. WHAT IS THE PROBLEM WITH FUNGIBILITY IN THIS REGARD? A. Fungibility allows the tax benefits of costs that are not being supported by ratepayers to benefit ratepayers. The fungibility approach would suggest the following logic:. A utility s tax liability is an element of its cost of service;. A disallowed cost nevertheless reduces a utility s tax liability; therefore,. The tax benefit of a disallowed cost ought to be reflected in a utility s cost of service. I do not see how this can be squared with the treatment of disallowed costs specifically and the benefits follows burdens principle in general. In this context, fungibility produces an improper regulatory result and, as I mentioned earlier, no commission of which I am aware would apply fungibility in this way.

35 Q. YOU STATE THAT THE FUNGIBILITY APPROACH CAN PRODUCE RESULTS THAT ARE INCONSISTENT WITH THE TAX NORMALIZATION RULES. WHY IS THIS? A. In the circumstances to which they apply, the tax normalization rules require that the attributed approach be used. The use of the fungibility approach would be inconsistent with these rules, thereby potentially denying the Company access to accelerated tax depreciation (including bonus depreciation). Such a denial would be very costly to the Company and its ratepayers. 0 0 Q. WHAT ARE THE TAX DEPRECIATION NORMALIZATION RULES? A. Accelerated depreciation is a creature of tax law. It was enacted for the purpose of promoting investment by businesses in plant and equipment. The legislative focus was on providing investment incentives to promote capital investment. However, Congress was concerned that, in the case of regulated utilities whose rates are set by reference to their costs, these incentives could be extracted through the rate-setting process and flowed through to utility customers. If this were to occur, then the benefits Congress had provided to promote investment by taxpayers (including utilities) in plant and equipment would be stripped from utilities and converted into consumption incentives for other taxpayers (utility customers) who did not make the desired investments. Because this was not Congress s intent, it included in the tax law a set of rules to prevent

36 this from happening the depreciation normalization rules. These rules 0 were designed to allow access to accelerated depreciation only to utilities whose ratemaking is consistent with Congressional intent that is, where regulators permit the incremental cash produced by accelerated depreciation to remain as a utility capital investment incentive. This is, very generally, accomplished by mandating deferred accounting for the tax benefit a procedure commonly referred to as normalization. By means of this accounting process, the additional cash resulting from the reduction in a utility s tax liability is retained at the utility level (i.e., the utility keeps the loan proceeds and repays the loan when it is due), thereby providing the intended subsidy. It should be noted that the depreciation normalization rules only apply to the benefits of accelerated depreciation claimed with respect to property that is subject to rate-ofreturn regulation. 0 Q. WHAT ARE THE CONSEQUENCES OF VIOLATING THE DEPRECIATION NORMALIZATION RULES? A. As a condition for claiming accelerated tax depreciation, a utility must use a normalization method of accounting. If the utility does not use a normalization method of accounting, it simply cannot use accelerated methods of tax depreciation (including bonus depreciation). Instead, it These rules are established by (i)() and (0) of the Internal Revenue Code of and Treasury Regulations.(l)- through. Internal Revenue Code section (f)().

37 can use only its regulatory methods of depreciation for tax purposes. The normalization rules are binary. A utility's jurisdictional operation either does or does not use a normalization method. There is no partial compliance. 0 Q. WHAT WOULD A VIOLATION OF THESE RULES MEAN ECONOMICALLY? A. The penalty for violating the depreciation normalization rules is draconian. A non-compliant utility would forgo all future interest-free, governmental loans. Moreover, its governmental loans outstanding as of the date of the violation would have to be paid back more rapidly than they would otherwise have been. The lack of these loans would be reflected in the ratemaking process in the form of dramatically reduced ADIT balances and, consequently, higher cost of capital. Clearly, customers would be adversely impacted. 0 Q. HOW DO THE DEPRECIATION NORMALIZATION RULES OPERATE? A. The normalization rules prescribe () how to implement the required tax benefit deferral (i.e., normalization), () what can be done with the deferred tax benefit once it is deferred, and () under what circumstances the deferred tax benefit can be reversed.

38 Q. WHAT ASPECT OF THE NORMALIZATION RULES IN PARTICULAR IS RELEVANT TO THE USE OF THE FUNGIBILITY APPROACH? A. The aspect of these rules that implicates fungibility is the second of the above-mentioned operating components what can be done with the deferred tax benefit once it is deferred. Specifically relevant is a part of the normalization rules commonly referred to as the consistency rules. 0 0 Q. WHERE ARE THE CONSISTENCY RULES FOUND AND WHAT DO THEY SAY? A. The consistency rules are found in (i)()(b) of the Internal Revenue Code. That section provides: (B) Use of inconsistent estimates and projections, etc. (i) In general. One way in which the requirements of subparagraph (A) are not met is if the taxpayer, for ratemaking purposes, uses a procedure or adjustment which is inconsistent with the requirements of subparagraph (A). (ii) Use of inconsistent estimates and projections. The procedures and adjustments which are to be treated as inconsistent for purposes of clause (i) shall include any procedure or adjustment for ratemaking purposes which uses an estimate or projection of the taxpayer's tax expense, depreciation expense, or reserve for deferred taxes under subparagraph (A)(ii) unless such estimate or projection is also used, for ratemaking purposes, with respect to the other such items and with respect to the rate base. Q. WHAT DOES THIS PROVISION MEAN? A. This provision requires that four items be handled consistently: tax expense, depreciation expense, ADIT and rate base. For example, the

39 same conventions must be applied to all four. If a particular test year is used for one of the four, it must be used for the other three as well. If year-end rate base is used, then year-end ADIT must also be used. 0 Q. HOW DOES THIS IMPACT FUNGIBILITY? A. On a number of occasions, the IRS has applied the consistency rules to situations in which specific assets were not included in rate base. These occasions consisted of requests by utility taxpayers for private letter rulings ( PLRs ) seeking guidance from the IRS National Office regarding the normalization consequences of specific ratemaking proposals. In each case, the IRS concluded the consistency rules require that, if the asset is not included in rate base, the federal ADIT ( ADFIT ) associated with the asset must be removed from the utility s regulated books of account (i.e., in those situations, it could not be used to reduce rate base). In essence, the fungibility approach is not permissible. I have attached three such PLRs (PLRs 0000 (Apr., 00), 00 (Feb., ) and 00 (Apr., )) to my direct testimony as EAI Direct Exhibit JIW-. 0 Q. PLEASE DESCRIBE THE MOST RECENT OF THE PLRS, PLR A. Due to the inadequacy of its record keeping, a utility s recorded transmission and distribution plant was found to exceed its actual plant in

40 0 service. An agreement was reached whereby the utility would exclude the excess (the Excluded Property) from rate base and also not reflect any depreciation of that plant in its cost of service. The question put to the IRS was whether or not the normalization rules required the ADFIT reserve associated with the excluded plant to be removed from the utility s rate base calculation. The IRS ruled: In the present situation, Taxpayer s rate base, tax expense, and depreciation expense for ratemaking purposes will be determined without the cost of the Excluded Property. If the ADFIT reserve associated with the Excluded Property is not removed from Taxpayer s regulated books of account and is used to reduce Taxpayer s rate base, the consistency requirement of section (i)()(b) will be violated because Taxpayer will not include the cost of the Excluded Property in its rate base or include the amount of related depreciation in its computation of tax expense and depreciation expense for ratemaking. The other two PLRs arrive at the same conclusion in their situations using similar logic and analysis. 0 Q. IS IT YOUR TESTIMONY THAT THE USE OF THE FUNGIBILITY APPROACH IS PROHIBITED BY THE NORMALIZATION RULES? A. It is my testimony that, where depreciable regulated plant is not included in rate base, the reflection of the related ADIT in rate-setting, including in determining a utility s cost of capital, would be inconsistent with the requirements of the normalization rules. 0

41 Q. BUT WHAT ABOUT THE USE OF FUNGIBILITY WHERE DEPRECIABLE REGULATED PLANT ASSETS ARE NOT THE ASSETS BEING TREATED INCONSISTENTLY? A. This would not give rise to a violation of the normalization rules. 0 Q. THEN ARE THE NORMALIZATION RULES RELEVANT TO SUCH SITUATIONS? A. Yes they are. To my mind, the mandated use of the attributed approach by those rules represents an independent affirmation of the benefits follows burden principle. The fungibility approach simply fails to allocate tax benefits equitably. Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? A. Yes.

42 CERTIFICATE OF SERVICE I, Laura R. Landreaux, 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 th day of April, 0. /s/ Laura R. Landreaux Laura R. Landreaux

43 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 DIRECT EXHIBIT JIW- PRIOR TESTIMONIES

44 JAMES I. WARREN TESTIMONY -/0 APSC FILED Time: //0 :: PM: Recvd //0 :: PM: EAI Docket Direct -0-U-Doc. Exhibit JIW- Page of Date Jurisdiction Designation of Proceeding Nature of Testimony Jan- Missouri File No. ER-0-0 Rebuttal Testimony on behalf of Union Electric Company Sep- Illinois No - Surrebuttal Testimony on behalf of Ameren Illinois Company Aug- Illinois No. -0 Surrebuttal Testimony on behalf of Commonwealth Edison Company Aug- Illinois No. -0 Rebuttal Testimony on behalf of Ameren Illinois Company Jul- Illinois No. -0 Rebuttal Testimony on behalf of Commonwealth Edison Company Jun- West Virginia Case No. -00-T Direct Testimony on behalf of Monongahela Power Company and The Potomac Edison Company Apr- FERC Docket No. ER- Direct Testimony on behalf of Virginia Electric and Power Company Apr- New Orleans Docket No. UD--0 Rejoinder Testimony on behalf of Entergy Louisiana, LLC Mar- New Jersey BPU Docket No. ER00 Direct Testimony on behalf of Atlantic City Electric Company 0 Mar- Maryland Case No. Rebuttal Testimony on behalf of Potomac Electric Power Company Feb- New Orleans Docket No. UD--0 Rebuttal Testimony on behalf of Entergy Louisiana, LLC Feb- Maine Docket No Rebuttal Testimony on behalf of Central Maine Power Company Dec- Virginia Rebuttal Testimony on behalf of Virginia Electric and Power Company (Rider Case No. PUE B) Nov- Virginia Rebuttal Testimony on behalf of Virginia Electric and Power Company (Rider Case No. PUE S) Nov- Virginia Rebuttal Testimony on behalf of Virginia Electric and Power Company (Rider Case No. PUE W) Nov- New Jersey BPU Docket No. GR Direct Testimony on behalf of South Jersey Gas Company Sep- Pennsylvania Docket No. P-0- Rebuttal Testimony on behalf of Peoples TWP LLC Sep- District of Columbia Case No. 0 Rebuttal Testimony on behalf of Potomac Electric Power Company Sep- Pennsylvania Docket No. P-0- Rebuttal Testimony on behalf of Peoples Natural Gas Company 0 Aug- Pennsylvania Docket No. R-0- Rebuttal Testimony on behalf of Pennsylvania-American Water Company Aug- New Jersey BPU Docket No. ER0 Rebuttal Testimony on behalf of Jersey Central Power & Light Company Jul- Maryland Case No. Rebuttal Testimony on behalf of Delmarva Power & Light Company Jun- Case No. 0 District of Columbia Supplemental Direct Testimony on behalf of Potomac Electric Power Company Apr- West Virginia Case No. -0-G-PC Direct Testimony on behalf of PNG Companies LLC and Equitable Gas Company, LLC Apr- Pennsylvania Docket No. R-0- Direct Testimony on behalf of Peoples TWP LLC Apr- Pennsylvania Docket Nos. A-0-, & Direct Testimony on behalf of Joint Applicants Peoples Natural Gas and Equitable Gas Nov- New Jersey BPU Docket No. ER0 Direct Testimony on behalf of Jersey Central Power & Light Company Nov- Texas PUC Docket No. 00 Rebuttal Testimony on behalf of Cross Texas Transmission, LLC Oct- Kansas Docket No. -KGS-- RTS Rebuttal Testimony on behalf of Kansas Gas Service 0 Sep- Illinois Docket No. -0 Surrebuttal Testimony on behalf of Ameren Illinois Company Aug- Illinois Docket No. -0 Revised Rebuttal Testimony on behalf of Ameren Illinois Company Aug- Missouri Case No. ER-0-0 Rebuttal Testimony on behalf of Union Electric Company d/b/a/ Ameren Missouri Jul- Missouri Case No. ER-0-0 Direct Testimony on behalf of Empire District Electric Company Jul- Arizona Docket No. E-0A-- 0 Direct Testimony on behalf of Tucson Electric Power Company Jun- Illinois Docket No Surrebuttal Testimony on behalf of Ameren Illinois Company May- New Jersey BPU Docket No. ER00 Rebuttal Testimony on behalf of Atlantic City Electric Company May- Illinois Docket No Rebuttal Testimony on behalf of Ameren Illinois Company d/b/a Ameren Illinois May- Illinois Docket No. -0 Surrebuttal Testimony on behalf of Illinois-American Water Company Apr- Texas PUC Docket No. Rebuttal Testimony on behalf of Entergy Texas, Inc. 0 Mar- Illinois Docket No. -0 Rebuttal Testimony on behalf of Illinois-American Water Company Feb- Pennsylvania Docket No. R-0- Direct Testimony on behalf of Peoples Natural Gas Company LLC