BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION

BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION IN THE MATTER OF THE APPLICATION OF ) OKLAHOMA GAS & ELECTRIC COMPANY FOR ) DOCKET NO. 0-0-U APPROVAL OF A GENERAL CHANGE IN RATES ) AND TARIFFS ) DIRECT TESTIMONY OF GAYLE FREIER, CDP SENIOR CAPITAL RECOVERY ANALYST FINANCIAL ANALYSIS SECTION ON BEHALF OF THE GENERAL STAFF OF THE ARKANSAS PUBLIC SERVICE COMMISSION MARCH, 0

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 0 INTRODUCTION Q. Please state your name and business address. A. My name is Gayle Freier. My business address is Arkansas Public Service Commission (Commission or APSC), 000 Center Street, P.O. Box 00, Little Rock, Arkansas 0-000. Q. In what capacity are you employed at the Commission? A. I am employed by the Commission General Staff (Staff) as Senior Capital Recovery Analyst in Staff s Financial Analysis Section. In that capacity, I perform analyses of utility companies information and utility company filings, develop Staff s positions as they relate to the utility filings, present those positions when necessary in written and oral testimony before the Commission, and perform other duties as assigned. My primary area of responsibility involves capital recovery issues including reviewing and developing depreciation rates for the regulated utilities in Arkansas. Q. Briefly describe your education and experience. A. I graduated from Middle Tennessee State University with a Bachelor of Business Administration with a minor in Economics and Finance. I obtained my Master of Business Administration from the University of Arkansas at Little Rock. Before joining Staff, I held analytical positions at increasingly progressive levels in the healthcare industry for ten years where I was responsible for creating, evaluating, analyzing, and researching financial and quantitative data

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 0 for physicians and hospitals, as well as negotiating, investigating, and resolving provider contracting issues. Since joining Staff in 00 as a Public Utility Analyst, I have focused primarily on financial and depreciation issues and have over eight years experience in depreciation administration. In 00, I was promoted to Senior Capital Recovery Analyst and assumed responsibility for reviewing and conducting comprehensive depreciation studies for jurisdictional utility companies, including review of utility requests to maintain or change depreciation rates and evaluating the basis for such requests, as well as developing Staff s case in response. I have regularly participated in utility regulatory training opportunities including the Utility Regulatory Training seminar sponsored by New Mexico State University, as well as the National Association of Regulatory Utility Commissioners (NARUC) Annual Regulatory Studies Program at Michigan State University. My training also includes nine programs sponsored by the Society of Depreciation Professionals (SDP) in conjunction with the Society s Annual Meetings. I am a senior member of the SDP, have served on its Nominating Committee, and have served on the NARUC Staff Subcommittee on Depreciation and Technology. Q. Do you hold any certification as a depreciation expert? A. Yes, the SDP has established minimum standards for depreciation professionals. Along with those, the SDP administers an examination and has required

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 0 qualifications to become certified in the field as a Certified Depreciation Professional (CDP), including a minimum of five years of full-time professional depreciation experience. I have met all the requirements and have been awarded the credential of CDP. I regularly pursue professional development and education in the field of depreciation to maintain the CDP designation. Q. Have you previously filed testimony before this Commission on depreciation matters? A. Yes, I have testified in a number of gas, electric, water, and telephone utility dockets addressing this topic. PURPOSE OF TESTIMONY Q. What is the purpose of your testimony? A. My testimony addresses Oklahoma Gas & Electric Company s (OG&E or Company) proposed change in depreciation rates as set forth in its Application Schedule F- filed on September, 00, and revised on October, 00, and responds to the Direct Testimony of Company witness John J. Spanos who addresses this issue. I recommend depreciation rates as presented in Direct Exhibit GF-, as derived from the parameters presented in Direct Exhibit GF-. Additionally, I make recommendations regarding over-accrued accounts and record keeping and reporting requirements. SUMMARY OF COMPANY S PROPOSAL Q. Please summarize the impact of OG&E s request pertaining to depreciation rates.

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 A. OG&E s current depreciation rates were established in Docket No. 0-00-U. The Company is seeking approval in this case of new depreciation rates as shown in Column of Application Schedule F-. These rates are also presented in Mr. Spanos Exhibit JJS- on pages III- through III- for OG&E Electric Plant and pages III- through III- of Exhibit JJS- for Holding Company Plant. Based on a comparison of the proposed depreciation rates to the present depreciation rates, as presented on the Application Schedule F-, the Company s requested change in depreciation rates amounts to an increase, on a total company basis, in excess of $ million in depreciation expense annually. Based on Staff s adjusted pro forma plant balances, I calculated that the Company s proposed depreciation rates produce a composite rate of.%, as compared to the current rates which yield a composite rate of.%. Q. What is the primary difference between the depreciation rates the Company is proposing and the currently-approved depreciation rates? A. Per its Application Schedule F-, OG&E is recommending decreases in all functional categories (transmission, distribution, general, and Holding Company) with the exception of production, where the Company is recommending an increase. I would note, however, that Company Witness Howard Motley states in his Direct Testimony on page at lines - that the Company is developing a Although OG&E proposed a depreciation rate for each subaccount, it failed to include both present and proposed expense on its Application Schedule F- for Accounts 0.-Meters and 0.-Meters-Equipment, which would have added an additional $ million in proposed expense, but would have lowered the Company s requested depreciation expense increase from $ million to $ million compared to current rates. Composite rate calculations are exclusive of intangibles and Holding Company amounts.

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 Mechanical Integrity Plan ( MIP ) to maintain and extend the life of the Company s fossil-fueled generation fleet. To lend perspective in this regard, assuming all other depreciation rate inputs were constant, asset life extension would tend to lower the depreciation rate. Since none of the projected, or estimated, life spans of the production facilities have decreased since the last study, the requested increase in the production function is attributable to changes in the other depreciation rate inputs - the net salvage factor and the reserve ratio. OVERVIEW OF STAFF S RECOMMENDATION Q. Please summarize your recommendation as it relates to depreciation rates in this docket. A. I recommend that OG&E s proposed depreciation rates as filed in Application Schedule F- be denied. Instead, I recommend my proposed depreciation rates presented in Direct Exhibit GF- be approved. These rates are derived from the parameters presented in Direct Exhibit GF- and were produced by a detailed, comprehensive depreciation study of OG&E s plant accounts. As shown in Table, my recommendations are directionally similar to the Company; i.e., decreases in all functions except production, as compared to current rates:

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- Table Composite Rate Comparison* Line Function Current OG&E Proposed Staff Proposed Production.%.%.% Transmission.0%.%.% Distribution.%.%.% General.%.%.% Total.%.%.% *Based on Staff s adjusted pro forma plant balances. Excludes intangibles and Holding Company. 0 My recommended depreciation rates, when applied to Staff s pro forma year end plant balances, produce a composite rate of.%, a decrease of basis points resulting from the composite rate produced by the currently-approved rates, and a decrease of points resulting from the Company s depreciation rate proposal. In conducting a detailed depreciation study, I used the depreciation method (straight line), procedure (average life group or ALG), and technique (remaining life) that have been used repeatedly by Staff in the determination of depreciation rates for Arkansas-jurisdictional utilities and as approved by this Commission. I performed a statistical analysis of OG&E s Company-specific individual account histories, including additions, vintaged retirements, and surviving plant balances by year on every account possible. I also examined gross salvage, cost of removal, and net salvage for each account possible to aid in the determination of my recommended net salvage percentages. The underlying formula upon which I relied, and a detailed explanation of the selected

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 0 parameters or inputs, as well as how my proposed depreciation rates were developed, are presented in subsequent portions of this testimony. Q. Where do your recommended depreciation rates appear as an adjustment in the determination of Staff s revenue requirement? A. Using my proposed depreciation rates and Staff s adjusted plant balances, Staff witness Rick Dunn calculated depreciation expense which is addressed in his Direct Testimony as Adjustment IS-. Q. Please discuss the differences between your end result and that of the Company. A. Much of the difference between my end result and that of the Company is due to differences in reserve ratio, which is an input in the depreciation rate calculation. I used accumulated depreciation balances which recognize the additional depreciation expense attributable to higher depreciation rates allowed in Arkansas than the Oklahoma depreciation rates booked by the Company. Additionally, there are some differences in net salvage and service life parameter selections, as well a difference in my use of a 0 retirement year for three of OG&E s generating plants due to lack of support for the 0 and 0 retirement years inherent in the Company s depreciation study. DESCRIPTION OF STAFF DEPRECIATION STUDY APPROACH Q. What was the nature of the depreciation study you conducted for OG&E s plant accounts? A. My study consisted of an analysis of the parameters comprising the depreciation

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 0 rates, primarily through a statistical evaluation of OG&E s individual account histories of additions, retirements, and surviving plant balances for each account by vintage, where possible. I also examined Company-specific data to determine net salvage values for each account. My study workpapers are being made available to the Company and all other parties consistent with Rule.0 of the Commission s Rules of Practice and Procedure. The inclusion of my entire depreciation analysis, however, would burden this docket s record with hundreds of additional pages. My Direct Exhibit GF- contains the workpapers supporting the analysis underlying my recommended depreciation rate for one of OG&E s production accounts, Turbogenerator Units, and one of OG&E s mass property accounts, Distribution Poles, Towers, and Fixtures. These workpapers are a representative example of my analyses of the Company s other plant accounts. Q. Did you use the same ending point in time as the Company for your study? A. No. My study covered historical plant account data through the period of December, 00. The Company s depreciation study was based on historical data covering the period through December, 00. Depreciation studies are based on annual data, and at the point in time that my study began, the most current data available was December, 00. Commission Order No. in Docket No. 0-0-U required the Company to submit its historical data, including additions, retirements, and plant balances necessary to conduct a depreciation study to Staff by October, 00, with each

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 0 annual update by March, thereafter. On March, 00, Staff received OG&E s annual 00 data to append to the historical data it had received on September, 00. The data from these two Company submissions was used to conduct Staff s depreciation study in this docket. Depreciation Method, Procedure, and Technique Q. Describe the method, procedure, and technique used in calculating your recommended depreciation rates. A. As I noted earlier, my recommended rates for OG&E s plant accounts are developed with the approach repeatedly used by Staff in the determination of depreciation rates for other Arkansas-jurisdictional utilities and approved by this Commission. I used the straight line method, ALG procedure, and remaining life technique, which applies a constant annual accrual rate to the cost of the unit, thus yielding a constant annual depreciation accrual over the remaining life of the asset. Under this approach, the plant-in-service balance for a given account is treated as 00%. The accumulated depreciation as a percentage of plant-inservice is the reserve ratio. The net salvage value is also stated as a percentage of the plant-in-service for that account. The depreciation rate is calculated by subtracting the reserve ratio and the net salvage value from the plant-in-service balance (00%) and dividing the remainder by the estimated remaining life in years, as shown in the following formula: Depreciation Rate = (Plant-In-Service Reserve Ratio Net Salvage) Remaining Life

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -0-0 0 As an example, assume that the percentage plant-in-service balance for a given account is 00%, the reserve ratio is 0%, the net salvage value is %, and the remaining life is 0 years. The depreciation rate for this account would be (Plant-In-Service Reserve Ratio Net Salvage) / Remaining Life or (00% - 0% - %) / 0 =.%. Q. Is this the same method, procedure, and technique employed by the Company in calculating its depreciation rates in this case? A. Yes. Mr. Spanos also used the straight line method, ALG procedure, and remaining life technique in the calculation of his proposed depreciation rates for the Company in this docket. Depreciation Parameters Q. Describe the parameters underlying your proposed depreciation rates. A. When using the remaining life technique, the principal components in the depreciation rate formula are the reserve ratio, net salvage value, and remaining life. The remaining life is developed from two parameters, the curve shape and the service life. The parameters used in the calculation of my recommended depreciation rates are presented in Direct Exhibit GF-, and a discussion of the relevant parameters follows. The reserve ratio is the accumulated depreciation balance stated as a percentage of plant-in-service and is calculated for each account. The reserve ratio represents the percentage of plant investment that has been recovered through the annual depreciation accruals.

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 0 The net salvage value is the difference between gross salvage value and cost of removal. Gross salvage is the value of the plant retired resulting from the sale, reuse, or disposal of the materials. The cost of removal is the cost incurred to remove the property from service. If the gross salvage value is greater than the cost of removal, the net salvage value is positive (income). If the gross salvage value is less than the cost of removal, the net salvage value is negative (expense). The remaining life of a unit is the remaining years of service or the expected life minus the age. The remaining life of a group of assets is the average remaining life of all units in that group. The remaining life is calculated by applying a particular curve shape and average service life to a given account history. The curve shape is based on a selected Iowa curve and represents the dispersion of plant surviving at each age for a particular account. The curve shape for each account is selected through a comparison of standard curve shapes and actual account histories. The curve shape and service life, in turn, are used in the calculation of the average service life and the remaining life. The service life is the total life, from installation to retirement, expected for a particular asset placed into service. This life, combined with a particular curve shape and account history, is used in the determination of the remaining life. The average service life represents the average number of years of service provided by all of the units in a particular account.

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 0 Q. Please describe the Iowa curves referenced above. A. The Iowa curves, developed at Iowa State University, are a set of curves representing the relationship between age and the percentage of plant investment surviving for various types of property. These curves are widely used in the study of utility property lives for depreciation determination and are similar in nature to the mortality curves used by the insurance industry. In analyzing lives, existing patterns of retirement for each plant account are compared to these curves in order to find the best fit, and thereby calculate future retirements. Method of Life Analysis Q. What method of life analysis was used to determine your recommended life parameters? A. For the production plant accounts, I used the life span method along with actuarial analysis to determine my life parameters. Only since has the Company maintained aged retirements for all its accounts, and at the level necessary for a plant unit-based production study. My mass property life parameters were determined through the simulated plant record (SPR) method in order to utilize the entire account history of data, instead of the years of vintaged data the Company has maintained. I also do not take exception with the Company s use of amortization accounting for all but two general plant accounts in OG&E s Electric and Holding Company Plant, as well as for certain other limited accounts. Q. Provide a description of life span analysis.

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 0 A. In a life span analysis, the average remaining life is based upon the period of time between the study date and the projected, or estimated, retirement date of a particular asset. Using the forecasted retirement dates, interim additions, and interim retirements, the weighted remaining life is calculated for each life span account. Q. How did you use life span analysis to determine the remaining lives for OG&E s generating plant accounts? A. My life span analysis relied upon OG&E s histories of initial additions, interim additions, interim retirements, and final retirement dates by location for each generating plant account. In most cases, I relied upon OG&E s life expectancies and the resultant retirement date for the applicable generating facilities in my life span analysis. My analysis incorporated the actual initial and annual interim additions and retirements to construct an interim survivor curve. The interim survivor curve illustrates the rate of retirement related to the replacement of components of the facility; for example, the retirement of the roof that occurs during the life of the building. The interim survivor curves estimated for OG&E s production plant were based on actuarial analysis. When aged retirements (retirements by vintage) are maintained, the actuarial method is used to determine a survivor curve and average service life that best represent the life characteristics of property. Once I selected the interim survivor curve for each plant location, I relied upon a computer-based life span program to calculate the average

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 0 remaining lives for each location and plant account. Q. Describe the actuarial method that was used to determine your life parameters. A. The life parameters were determined through a statistical analysis of the Company s property records. The curve shape selections were made by fitting the Company data to the Iowa curves. After selecting an appropriate curve shape, a corresponding service life was chosen. The Iowa curve shape, service life, and account history were combined to determine the average service life and average remaining life for each plant account. My analysis took into account the Company s individual account histories including additions, retirements, and surviving plant balances by vintage for each activity year. I evaluated numerous bands of account experience covering different time spans to reveal any trending that might be occurring in this data, as well as smoothing any resulting irregularities in a particular activity or vintage year. I analyzed a full band, ten-year rolling bands (i.e., -000, -00,..., 000-00), twenty-year rolling bands, and thirty-year rolling bands, in the determination of an appropriate Iowa curve shape and service life for each plant account. I evaluated the fit of Company-specific data to the Iowa curve shapes and service lives generated by a computer-based curve matching program across all bands. The optimal Iowa curve shape and average service life estimates were then selected utilizing the results of this statistical analysis along with my knowledge of these accounts. An example of my lifespan actuarial

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 0 analysis is included on pages - of Direct Exhibit GF-. Q. Once the curve shape and service life were selected, how was the average remaining life determined for each plant account? A. To calculate the average remaining lives for each location and plant account, I utilized generation arrangements. When using life span analysis, a generation arrangement applies a particular interim curve shape, average service life, and projected retirement date to each account history by location to calculate the percentage surviving at each age from the earliest age group to the oldest age group (i.e., 0.,.,.,., x.). After the percentage surviving at each age is determined, the remaining life at each age is calculated. The surviving investment at each age is then multiplied by the remaining life at each age to calculate a weight for each age. The weights are summed and divided by the sum of the surviving investment to calculate the average remaining life for the location and plant account. An example of the remaining life for my lifespan account can be found in Direct Exhibit GF- on pages -. Q. Describe how the life parameters were developed for the mass property accounts analyzed using SPR analysis. A. SPR matches the actual account histories to the Iowa curves and calculates simulated plant balances for each Iowa curve shape. The selection of a curve shape and average service life is dependent upon the closeness of the match between the actual and simulated amounts as measured by an index of variation, which is based upon the sum of squared differences between the simulated and

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 0 actual annual amounts. Q. What steps were followed in the determination of your curve shape and service life analysis of the SPR accounts? A. As with the accounts evaluated using the lifespan actuarial analysis, I evaluated several bands of account experience using the individual histories of additions, retirements, and surviving plant balances by year. Particularly, I relied upon a full band, and thirty-year, twenty-year, and ten-year rolling bands of data in the determination of an appropriate Iowa curve and service life for each plant account. Utilizing a computer software program, I evaluated the fit of the Company-specific data to each of the Iowa curve shapes and service lives over all the bands examined, seeking any trends that might be occurring. I then selected the Iowa curve shape and service life that best represented the bands analyzed, utilizing the results of this statistical analysis along with my knowledge of these accounts. An example of my SPR analysis is included on pages -0 of Direct Exhibit GF-. For the SPR accounts, I also relied upon generation arrangements to determine the remaining lives for each account. Using the curve shape and service life resulting from the process above, the average remaining life was calculated in the same manner as occurs in the lifespan actuarial analysis process. SALVAGE ANALYSIS Q. How did you determine the net salvage values included in the development

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 0 of your recommended depreciation rates? A. In my analysis of the Company s net salvage values, I relied primarily upon Company-specific historical retirement, gross salvage, and cost of removal data for each plant account where available, as well as Staff s experience with similar property, including other Arkansas-jurisdictional electric utilities, and knowledge of these accounts. Salvage and cost of removal amounts are divided by retirements each year to arrive at annual percentages. The cost of removal is subtracted from the gross salvage to arrive at a net salvage amount for each year as well. This net salvage amount, divided by the retirements for a particular year, produces a net salvage percentage on an annual basis. To arrive at the net salvage values presented in Direct Exhibit GF-, my evaluation of net salvage was based on an analysis of the years of data spanning through 00. I examined the magnitude of the retirements and the associated net salvage and identified any apparent trend in the salvage values for each account, using five- and three-year rolling bands to aid in this analysis. I have included an example of my salvage analysis for Account Turbogenerator Units on page and Account Distribution Poles, Towers, and Fixtures on page of Direct Exhibit GF-. OVER-ACCRUED ACCOUNTS Q. Does OG&E have any plant accounts that are fully-reserved or overaccrued as of the end of the pro forma year? A. Yes. Based on the per book end of pro forma year plant balances and

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- accumulated depreciation balances as adjusted to Arkansas-jurisdictional levels, accrued as shown in Table : Line Account Plant Description Table Over-Accrued Accounts there are forty-three depreciable plant accounts that are fully-reserved or over- Plant-In- Service Accumulated Depreciation Reserve Ratio Reserve Ratio Maximum Threshold 0.00 Muskogee U (Gas) Land Rights $,0 $00, 0% 00%.0 Muskogee U (Gas) CEM $, $,,0 % 00% Muskogee U (Gas) Turbogenerator Units $,, $,,0 0% 0% Muskogee U (Gas) Accessory Electric Eq $,, $,, 0% 00% Muskogee U (Gas) Misc Power Plant Eq $0,0 $, % 0%.0 Horseshoe Lake U CEM $,0 $,0 % 00%.0 Horseshoe Lake U CEM $, $,0 % 00%.0 Horseshoe Lake U CEM $, $, % 00% 0.00 Mustang U Land Rights $, $,0 0% 00% 0 Mustang U Turbogenerator Units $,, $,,0 % 0% Mustang U Accessory Electric Eq $, $, % 00% Mustang U Misc Power Plant Eq $0 $,0 n/a 0% Mustang U Boiler Plant Equipment $,00,0 $,, % 0%.0 Mustang U CEM $0,0 $, 0% 00% Mustang U Turbogenerator Units $,,00 $,, % 0% Mustang U Accessory Electric Eq $,0, $,,0 % 00% Mustang U Misc Power Plant Eq $, $0,00 % 0%.0 Mustang U CEM $,, $,0, % 00% Mustang U Accessory Electric Eq $,, $,, 0% 00% 0.0 Seminole U CEM $, $,0, % 00%.0 Seminole U CEM $, $,0, % 00%.0 Seminole U CEM $,00 $,0,00 % 00% Seminole U GT Turbogenerator Units $,, $,0, % 0%.0 Muskogee U CEM $,0,0 $,, % 00%.0 Muskogee U CEM $, $,,0 % 00%.0 Muskogee U CEM $,0,0 $,, % 00%.0 Sooner U CEM $,, $,, % 00%.0 Sooner U CEM $,, $,,0 % 00%.0 McClain Gas LTSA - year $,, $,,00 % 00% 0 McClain Gas Generators $0 ($,0) n/a 00%

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- Line Account Plant Description Plant-In- Service Accumulated Depreciation Reserve Ratio Reserve Ratio Maximum Threshold McClain Gas Misc Power Plant Eq $, $,0, % 00% McClain Steam Misc Power Plant Eq $,0 $,,0 0% 00% McClain HRSG Misc Power Plant Eq $0, $0, % 00%.0 Red Bud U LTSA - year ($0) ($,0) n/a 00%.0 Red Bud U LTSA - year $,0, $,0, 00% 00%.0 Red Bud U LTSA - year ($0) ($,000) n/a 00%.0 Mustang Step Up Transformers $, $, % 00% General Plant Miscellaneous Eq-Amortized $,,0 $,, 0% 00%. General Plant Heavy Trucks - Power Supply $0,0 $, % % 0. General Plant Trailers -Power Delivery $,, $,, 00% %. General Plant Pickup Trucks-Trans Fleet ($0) ($0,0) n/a % 0.00 Intangibles - HC Software $,, $,, 00% 00%.0 General Plant - HC Copiers $0, $0, 00% 00% 0 For these accounts, the pro forma accumulated depreciation amount is greater than or equal to the pro forma gross plant-in-service amount minus the allowance for net salvage. For ratemaking purposes, depreciation expense should not be calculated on any account with a reserve ratio equal to or exceeding 00%, unless the account has a negative salvage value. Staff witness Dunn has excluded depreciation expense amounts for each of these forty-three accounts for the pro forma year. However, because investment could be added to these accounts after the pro forma year end, I am also recommending in this case that a rate for these accounts be approved, as reflected in my Direct Exhibit GF-. This rate is based on either an average of my proposed unit-level rates for that account or a straight line rate derived from the service life for amortization accounts.

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -0-0 0 Q. Did the Company also reduce its calculation of depreciation expense for ratemaking purposes by excluding fully-reserved or over-accrued accounts from its requested level of depreciation expense? A. Yes; however, it appears duplicative adjustments were made. In addition to the adjustments Mr. Spanos made to set a 0% rate for accounts he identified as being fully-reserved or over-accrued, the Company further reduced gross plant on its Application Schedule F- Column, albeit on a different basis. As noted previously, Staff s recommendations reflect the exclusion of depreciation expense for the accounts I identified in the above table as fully-reserved or overaccrued. Staff witness Dunn appropriately omitted the additional reduction as made on the Company Schedule F-. OTHER DIFFERENCES BETWEEN COMPANY AND STAFF Q. In this case, what was the predominate factor influencing the difference between you and the Company? A. The predominate factor was my use of an adjusted accumulated depreciation amount reflecting the higher depreciation rates allowed in Arkansas than the Oklahoma depreciation rates as booked by the Company during the -00 period. My inclusion of this adjustment is consistent with Staff witness Dunn s Adjustment RB-. While the Company also proposed this rate base adjustment in its adjustment B -, the Company confirmed that its depreciation study did not include the adjustment. As a result, there are differences in accumulated depreciation amounts which in some cases result in significant differences in

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 0 reserve ratios and depreciation rates. Q. What other areas of difference exist between you and the Company? A. The functional area with the most significant difference is production. Reserve ratio differences are the primary driver in this function, and another key area of difference is in net salvage parameter selections. There are four accounts in production where we differ in our net salvage selections, and given the investment in production is a large portion of OG&E s plant, differences in parameter selection have a relatively large impact. My net salvage selections for these accounts are supported by my analysis of the Company data, as well as what the other Arkansas-jurisdictional utilities are experiencing, and my general knowledge of the accounts. To a lesser degree, interim curve shape and service life selections and over-accrued accounts contributed to the difference between me and the Company in the production function. In transmission, there are no material differences. The distribution function difference is largely attributable to one account, 0.0 Standard Meters. My rate recommendation is supported by a detailed, statistical analysis of Company-specific data. Our depreciation parameters are similar for this account and our proposed average service life of 0 years is identical. However, the Company s proposed rate is much higher than other Arkansas jurisdictional and industry depreciation rates, while my proposed rate is more comparable with other state and industry experience. The primary difference in our rate recommendation is the average remaining life resulting from the

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- Company s study which makes the assumption that all standard meters currently in service will be retired in. years. My analysis does not reflect this assumption. Neither the Company s testimonies nor depreciation study addressed the basis for this assumption. To the extent the Company s pending request in Docket No. 0-0-U regarding approval for the deployment of smart meters is a consideration, the Direct Testimony of Staff witness Dunn addresses this. As a result, I am not recommending a depreciation rate for smart meters 0 0 in this instant docket, and any Staff-recommended depreciation rate for this account will be addressed in Docket No. 0-0-U. While our composite rate difference is more notable in the general function than in production, the impact is much less because of the small investment in general plant assets. Our differences in the general function are attributable to either my use of the Arkansas-adjusted accumulated depreciation amounts, overaccrued accounts, or differences in the application of the amortization period where I recommend a straight-forward application of the amortization period using one divided by the life in each instance. Q. Explain the differences between you and the Company regarding retirement years used for the Company s generating plants. A. According to OG&E s depreciation study, there are two plants estimated to retire this year, Enid and Woodward, and one estimated to retire in 0, Muskogee Unit. Because one of the inputs in a lifespan study is the Company s probable or estimated year of retirement, I attempted to gather Company-specific

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- correspondence and planning documentation to support its plans for retiring these units, in particular information supporting these impending years for the three plants in question. One potential source came from Company witness Howard Motley s Direct Testimony. On page lines - he states: 0 0 Q. Please explain the plan to extend the life of OG&E s fossil-fueled generation fleet. A. The Company is currently analyzing and developing a Mechanical Integrity Plan ( MIP ) to maintain and extend the life of the Company s fossil-fueled generation fleet. The MIP will not be finalized until November 00 and will then be provided in this docket. In Staff Data Request APSC-0.0 issued December 0, 00, I asked when the MIP would be provided to Staff, or if it was complete, that it be provided to Staff in response. Mr. Motley responded that the document was not complete, but a preliminary draft would be provided. A draft was provided on February, 0, and the document did not specifically address the lives of particular generating plants. Based on the Company s most recent Integrated Resource Plan (IRP), filed in Docket No. 0-00-U on February, 00, it is not evident that the Company intends to retire these three plants in the near term. Considering this information and more recent statements by the Company that OG&E plans to file another general rate case in August 0, I used 0 as a reasonable year of Docket No. 0-0-U Direct Testimony of Bryan J. Scott at page, lines - (filed December, 00).

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 0 retirement for Enid, Woodward, and Muskogee Unit for the purposes of this case. Without these revisions, the depreciation rates for these three plants/units would have been as much as three times the rates for the other production accounts. Therefore, absent specific support from the Company that plans were in place to retire these three plants/units, 0 is the year of retirement I support as reasonable for the Enid, Woodward, and Muskogee Unit generating plants. AMORTIZATION ACCOUNTING Q. Do you oppose OG&E s request to continue amortization accounting for certain accounts in this case? A. No. The Company s study used amortization accounting for most of its general plant accounts, as well as its continuous emissions monitoring (CEM), long term service agreement (LTSA), and security accounts. The general plant accounts typically contain numerous items which in this case represent less than one percent of OG&E s depreciable plant. The CEM, LTSA, and security accounts are likewise small investment accounts that are relatively new with little retirement activity to analyze. Given these specific considerations and the lack of historical data for the accounts, I do not take exception with the continuation of amortization accounting for this group of accounts. Q. Has this Commission previously approved amortization accounting for the general plant accounts? A. Yes. The Commission has approved amortization accounting, or fixed-life amortization, when requested by the utility and recommended by Staff.

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 0 Q. How is an amortization rate developed? A. Amortization provides a simple way to allocate costs on a straight line basis over the estimated accounting life of an asset. An amortization rate is typically derived by dividing one by the life, and this is Staff s recommendation in this case for these accounts. Q. Please describe how Staff s recommended rates should be recorded. A. Staff s rates should be applied to the balance of each account as applicable on the effective date of the Commission order. For plant investments already on the books at that time, when that net investment equals zero (accumulated depreciation equals original cost) the plant amount will be retired by removing the amount from both the plant account and the accumulated depreciation account. Individual retirements will not be recorded. The Company should continue to keep vintage balances for each plant account. Investments made after general amortization takes effect will be fully reserved and retired upon maturing to the stated life for the account. RECORD KEEPING AND REPORTING RECOMMENDATIONS Q. Are there any record keeping or reporting recommendations you are proposing as a result of this case? A. Yes. First, in this docket and past cases, the Company has allocated its accumulated depreciation balances to the level at which Staff determines depreciation rates; that is at the plant and unit level, then by Federal Energy Regulatory Commission (FERC) account within the plant and unit level.

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 0 Consistent with a change that the Company is making within its accounting system, I recommend that on a prospective basis, depreciation expense and likewise accumulated depreciation be kept on an individual FERC account level, by plant and unit, and reported in this manner in future rate applications. Second, the Arkansas accumulated depreciation adjustment that was performed by the Company, and used by Staff in developing its reserve ratios in this case, has been historically recorded on a functional level, and the Company then allocated it to the FERC account level. In order to be useful for depreciation studies, the adjustment must be further refined to the plant/unit level. In this case, Staff has used its plant/unit level refinement from OG&E s last rate application, Docket No. 0-0-U, to distribute OG&E s filed adjustment from a functional/ferc account allocation to a plant/unit level. Staff recommends that on a prospective basis, OG&E utilize the functional/ferc account/plant/unit allocation that Staff has performed in this case as the Arkansas adjustment to accumulated depreciation. As an alternative, the Company should agree to work with Staff between now and the next rate application to refine the way this allocation is performed in order to improve the final end-product. CONCLUSIONS AND RECOMMENDATIONS Q. Please summarize your conclusions and recommendations in this docket. A. My proposed depreciation rates were calculated using a depreciation method (straight line), procedure (ALG), and technique (remaining life) that have been used repeatedly by Staff in the determination of depreciation rates for other

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- 0 0 Arkansas-jurisdictional utilities and approved by this Commission, and are based on a detailed, statistical analysis of Company-specific individual account histories on every account possible. My analysis supports the parameters outlined in my Direct Exhibit GF- and the resulting rates presented in my Direct Exhibit GF-. Although differences exist in salvage and life parameters, as well as overaccrued accounts, the primary difference between my study and the Company s study is due to the Company s failure to include the Arkansas adjustment to accumulated depreciation in the development of its depreciation rates, resulting in a difference in reserve ratios. In conclusion, I recommend the Commission: Deny OG&E s proposed depreciation rates as presented in Application Schedule F- and Exhibit JJS- and JJS-. Approve the depreciation rates presented in Exhibit GF- for each of OG&E s plant accounts (including the application of the rates as specified in the footnotes with regard to the fully-reserved or over-accrued accounts), using the parameters reflected in Exhibit GF-. Require that on a prospective basis, depreciation expense and likewise accumulated depreciation be kept on an individual FERC account level, by plant and unit, and reported in this manner in future rate applications. Require that on a prospective basis, OG&E utilize the functional/ferc account/plant/unit allocation that Staff has performed in this case as the Arkansas adjustment to accumulated depreciation. As an alternative, require the Company to work with Staff between now and the next rate application to refine the way this allocation is performed in order to improve the final end-product.

DOCKET NO. 0-0-U DIRECT TESTIMONY OF GAYLE FREIER -- Q. Does this conclude your testimony? A. Yes, it does.

CERTIFICATE OF SERVICE I hereby certify that a copy of the foregoing has been served on all parties of record by forwarding the same by postage prepaid first class mail, hand delivery, or electronic mail, this th day of March, 0. /s/ Kevin Lemley Kevin Lemley