BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION

BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION IN THE MATTER OF THE APPLICATION OF ) FOR APPROVAL ) OF CHANGES IN RATES FOR RETAIL ) ELECTRIC SERVICE ) DIRECT TESTIMONY OF RONALD G. GARNER, CDP SENIOR CAPITAL RECOVERY ANALYST FINANCIAL ANALYSIS SECTION ON BEHALF OF THE GENERAL STAFF OF THE ARKANSAS PUBLIC SERVICE COMMISSION AUGUST, 0

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 INTRODUCTION Q. Please state your name and business address. A. My name is Ronald G. Garner. My business address is Arkansas Public Service Commission (APSC or Commission), 000 Center Street, Post Office 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 a Senior Capital Recovery Analyst in the Financial Analysis Section. In that capacity, I perform analyses of utility companies information; 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 which include reviewing and developing depreciation rates for the regulated utilities in Arkansas. Q. Briefly describe your education and experience. A. I graduated from the University of Arkansas with a Bachelor of Science Degree in Business Administration with a major in Accounting. I also hold a Certified Public Accountant license in the State of Arkansas. Prior to joining the Staff in December 00, I held accounting and business analyst positions in private industry. I was employed for three years by a company in Houston, Texas, with extensive energy sector operations, including oil and gas exploration and natural gas pipeline operations. My responsibilities included financial statement

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 preparation for management and external reporting to the Securities and Exchange Commission and shareholders. I was employed for twenty-three years by an Arkansas-based company which is a global leader in marketing services and marketing database information technology solutions. During that time I held various financial positions including accounting supervisor, group accounting leader and business analyst. I joined Staff as a Public Utility Auditor in the Audits Section in 00. In that capacity, I analyzed utility company filings, conducted field audits, identified and evaluated accounting issues, developed positions on those issues and presented those positions in written testimony before the Commission. In 00, I was promoted to Capital Recovery Analyst. In that position, I focused on the review of depreciation studies. In 0, I was promoted to the Senior Capital Recovery Analyst position with responsibility for reviewing and conducting comprehensive depreciation studies for utility companies subject to the Commission s jurisdiction. I also review utility requests to maintain or change depreciation rates and evaluate 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 Basics Regulatory Training Seminar sponsored by the Center for Public Utilities, a branch of the College of Business Administration and Economics at New Mexico State University, in conjunction with the National Association of Regulatory Utility Commissioners. My training also includes the

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 Depreciation Basics, Life and Net Salvage Analysis, and Preparing & Defending A Depreciation Study courses sponsored by the Society of Depreciation Professionals (SDP) in conjunction with the Society s Annual Meetings. I am a member of the SDP. Q. Do you hold 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 qualifications to become certified in the field as a Certified Depreciation Professional (CDP). 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? A. Yes, I have. PURPOSE OF TESTIMONY Q. What is the purpose of your testimony? A. My testimony addresses the proposal by Entergy Arkansas, Inc. (EAI or Company) to change depreciation rates as set forth in its Application Schedule F-. updated and filed on March, 0 (F-.) and responds to the Direct Testimony of Company witness Donald J. Clayton who addresses this issue. In support of the depreciation rates developed by Mr. Clayton, the Company submitted a dismantlement cost study and Direct Testimony of William R. Crean. My testimony presents specific recommendations regarding the dismantlement costs. Additionally, I address EAI s proposal to recoup unrecovered costs for

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 specific plants which will be retired by the end of the pro forma year and I make a recommendation regarding EAI s proposed recovery of certain general plant amounts. I also am sponsoring Staff s recommended depreciation rates as presented in Direct Exhibit RG- derived from the parameters presented in Direct Exhibit RG-. In Direct Exhibit RG-, I provide Staff s calculations regarding the retiring plants unrecovered costs. Direct Exhibit RG- is submitted in support of the general plant unrecovered costs. SUMMARY OF COMPANY REQUEST Q. Please identify the major components of EAI s request pertaining to capital recovery. A. In its application EAI s capital recovery request is comprised of two components: recovery through new depreciation rates for plant in service at the end of the pro forma year and recovery through amortization over a specific time frame for generating plants proposed to be retired before the end of that same period as well as certain general plant items. Q. Please summarize the impact of EAI s request pertaining specifically to depreciation rates. A. Most of EAI s current depreciation rates were established in Docket No. 0-0- U. The depreciation rate for the Hot Spring Plant was approved in Docket No. -0-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. Clayton s Depreciation Study, Exhibit DJC- on pages - through -. Using EAI s proposed pro forma plant balances from that same

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 Schedule F-., the requested change in depreciation rates yields a decrease in depreciation expense of approximately $. million annually. 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-., EAI is recommending decreases in all functional categories (transmission, distribution, and general) with the exception of production, where the Company is recommending an increase. The proposed lower overall rates for the transmission, distribution, and general functions are driven largely by longer estimated average service lives, which are offset to some extent by higher estimated net salvage values. The rate increase in the production function is attributed mainly to higher estimated net salvage and a higher depreciation rate for the Hot Spring Plant based on parameters specific to that plant instead of the currently approved composite reference rate. Q. Is the Company proposing to retire certain generating facilities by the end of the pro forma year? A. Yes. The Company provided a listing of generating plants which it has either retired or intends to retire before the end of the pro forma year. Subsequent to the Application, the Company has identified two more units that it intends to retire by the end of the pro forma year. Q. Did the Company include any cost recovery for these plants in its Application?

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 A. Yes. The Company made calculations of the unrecovered amounts for the generating plants described in its Application and proposed to recover those amounts over a 0-year period.. The calculations resulted in a request for $. million annually. Q. Please elaborate on the requested recovery of general plant unrecovered balances. A. In Docket No. 0-0-U, Staff recommended a change to fixed-life amortization for all of EAI s general plant accounts, except account 0. As part of implementing this change, EAI identified adjustments needed to synchronize accumulated depreciation and plant balances with the life used to establish the amortization rate. EAI proposed recovering the adjustment amount over a 0- year period. EAI s requested recovery is $,0 annually. EAI S PROPOSED CHANGE IN DEPRECIATION MODEL Q. What are the components of a complete depreciation model? A. According to Public Utility Depreciation Practices (August ) published by the National Association of Regulatory Utility Commissions, a complete depreciation model is composed of a Method, a Procedure, and a Technique. Q. Please describe the Method component of the depreciation model. A. The Method determines how depreciation charges are spread over the life of the plant. For example, in the straight-line method, an even amount of depreciation is charged each period. The straight-line method of depreciation is the method used by Staff and has been approved repeatedly by the Commission.

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 Q. Did Mr. Clayton use the straight-line method in developing its proposed rates? A. Yes. Q. Did you use the straight-line method in developing your recommended rates? A. Yes. Q. Please describe the Procedure component of the depreciation model. A. The Procedure refers to how the units of plant are grouped within a particular category or account. Staff uses the average life procedure under which all units of plants within a particular account are considered to be one group. Q. What Procedure did Mr. Clayton use? A. Mr. Clayton used the average life procedure. Q. Did you use the same Procedure in developing your recommended rates in this matter as was used in Docket 0-0-U to develop the currently approved rates? A. Yes, I used the average life group procedure, the same grouping procedure that Staff used in developing the currently approved rates. Q. Please describe the Technique component of the depreciation model. A. The Technique refers to the portion of the average life used in the calculation of depreciation. Generally either the whole life or remaining life technique is used. The Commission has repeatedly approved rates derived using the remaining life technique since the mid-0 s. Q. What Technique did Mr. Clayton use?

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 A. Mr. Clayton developed his rates using the whole life technique. In his Direct Testimony on page, lines -, he states in this study whole life rates were developed for each depreciable group. Q. What Technique did you use in developing your recommended rates? A. I used the remaining life technique. Q. Are there additional steps involved when using the whole life technique? A. Yes and those steps introduce additional judgment from the depreciation analyst. First, since the whole life technique does not rely solely on the actual book accumulated depreciation balance, the analyst must calculate what he or she believes is the correct balance. This is referred to as the calculated accumulated depreciation (CAD) and is not a precise measurement. Next, after calculating the CAD and comparing it to the actual book accumulated depreciation, the analyst must decide how to adjust for the difference. The choices include a lump sum adjustment, an amortization period less than the remaining life, or the remaining life. In this particular docket, Mr. Clayton chose to use the remaining life to amortize his computed difference. He added this difference to the annual depreciation provided by his whole life rates, thus allowing him to refer to the resulting combined rates as remaining life rates on page, line, of his Direct Testimony. Q. What is the advantage of the remaining life technique? Frank K. Wolfe and W. Chester Fitch, Depreciation Systems, First Edition (Ames, Iowa: Iowa State University Press, ),.

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 A. The remaining life technique gives consideration not only to the average service life and survival characteristics plus the net salvage, but also recognizes the level of depreciation which has been accrued to date. This technique seeks to recover the undepreciated balance over the remaining life. Any over- or under-recovery due to previous estimates are automatically addressed over the remaining life of the asset. By relying on per book plant and reserve and automatically addressing past excess or shortfall in recovery, the remaining life technique removes the judgment and decisions needed to derive a CAD and the amortization period for differences between CAD and per book accumulated balances. OVERVIEW OF STAFF S RECOMMENDATION Q. Please provide an overview of Staff s recommended depreciation rates. A. I recommend that the depreciation rates submitted on Schedule F-. of the Application be denied. Instead, I recommend that the proposed depreciation rates presented in Direct Exhibit RG- be approved. These rates are derived from the parameters presented in Direct Exhibit RG- and were produced by a detailed, comprehensive depreciation study of EAI s plant accounts. Q. Are your proposed rates directionally consistent with those proposed by the Company? A. Yes. Table below compares the composite rates for each function yielded by applying my recommended rates, the Company's proposed rates and the currently approved rates to the Company s F-. pro forma test year end balances.

DIRECT TESTIMONY OF RONALD G. GARNER - 0 - Table Composite Rate Comparison Function Staff EAI Current Production*.%.%.% Transmission.%.%.0% Distribution.%.%.0% Regional Transmission & Market Operation.%.% 0.00% General*.%.%.0% Retired Plants Amortization 0.00% 0.00% N/A General Plant Reserve Amortization 0.00% 0.00% N/A Overall Composite Rate.%.%.% *excludes retiring plants and general plant unrecovered reserve amortization 0 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 William L. Matthews calculated depreciation expense which is addressed in his Direct Testimony, and included as a component of Adjustment IS-. Q. Do you have a recommendation regarding the amortization of the unrecovered balances of the generating plants that EAI plans to retire? A. Yes. My Direct Exhibit RG- reflects my calculated annual amortization of $,,0. To arrive at this amount, I updated the plant and accumulated depreciation balances included in Company Adjustment AJ Part based on the responses in Addendum to Staff Data Request APSC-00. (attached as Direct Exhibit RG-). I also corrected certain future net salvage factors based on the responses to Staff Data Request APSC-0. (attached as Direct Exhibit RG-). Additionally, I have added Mabelvale Units and based on response to

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 Staff Data Request APSC-. (attached as Direct Exhibit RG-). Q. Is a 0-year amortization period appropriate for recovering these amounts? A. Yes. Based on the estimated probable retirement dates used to establish the currently approved depreciation rates in Docket No. 0-0-U, all of these units were expected to retire by 00. Therefore, a 0-year amortization period appears adequate. Q. Where does your recommended amortization expense appear as an adjustment in determining Staff s revenue requirement? A. Staff witness William L. Matthews included my calculated amortization expense in his Direct Testimony as part of Adjustment IS-. Q. Do you have a recommendation regarding the recovery of the general plant unrecovered balances? A. Yes. My Direct Exhibit RG- reflects a calculated amortization of $,0, which is the same amount requested by the Company in its Application. Using rates approved in Docket No. 0-0-U, EAI has implemented fixed-life amortization for assets in accounts -. As part of the implementation, the Company identified assets that should be retired based on the life inherent in the amortization rate that was approved for each account. These assets have a net unrecovered balance of $,,00. I am recommending approval of the Company s request to treat the unrecovered balance a regulatory asset with recovery allowed over a 0-year period. Q. Is a 0-year amortization period appropriate for recovering these amounts? A. Yes. A 0-year amortization period results in 0% recovery each year. This

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 compares favorably to the average of the currently approved depreciation rates approved for accounts - which is.%, and also to the slightly higher average rate of 0.0% that Staff is recommending in this docket. Q. Where does your recommended amortization expense appear as an adjustment in determining Staff s revenue requirement? A. Staff witness William L. Matthews included my calculated annual amortization expense of $,0 in his Direct Testimony as part of Adjustment IS-. DESCRIPTION OF STAFF DEPRECIATION STUDY APPROACH Q. What was the nature of the depreciation study you conducted for EAI s plant accounts? A. The Company provided per book plant and accumulated depreciation balances as of December, 0, as well as transactional data, including additions, vintage retirements, and surviving plant balances through December, 0. Using this data, I performed a statistical analysis of EAI s individual account histories for each account by vintage, where possible. The Company also provided gross salvage and cost of removal, which I analyzed along with related retirements and net salvage for each account possible. In conducting my comprehensive depreciation study, I used the depreciation method (straight line), procedure (average life group), and technique (remaining life) that have been approved by the Commission and used repeatedly by Staff in the determination of depreciation rates for Arkansasjurisdictional utilities. My testimony provides support for the underlying formula and the selected parameters and inputs upon which I relied, and explains how

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 my proposed depreciation rates were developed. My depreciation 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. My Direct Exhibit RG- contains the workpapers supporting the analysis underlying my recommended depreciation rate for one of EAI s production accounts,.0 Reactor Equipment, and one of EAI s mass property accounts,.0 Poles and Fixtures. The workpapers for the accounts provided are a representative example of my analyses of the Company s other plant accounts. Q. Did you conduct a site visit of EAI s plant as a part of your comprehensive depreciation study? A. Yes. Beginning in January 0 as a part of my review for this case, I visited the following EAI plant locations: White Bluff coal generating plant Arkansas Nuclear One nuclear generating plant Lake Catherine natural gas generating plant Remmel and Carpenter hydraulic generating plants Hot Spring combined cycle gas generating plant Holland Bottoms transmission substation Cabot distribution substation. These site visits allowed me to observe representative portions of EAI s plant at the locations and gain valuable insight into the operations of these assets. Q. Did you use the same ending point in time as the Company for your study? A. Yes. My study covered historical plant account data through the same period ending December, 0. Depreciation studies are based on annual data. At the point in time that my study was begun, the most current data available was

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 for the period ending December, 0. DEPRECIATION METHOD, PROCEDURE, AND TECHNIQUE Q. Describe the method, procedure, and technique used in calculating your recommended depreciation rates. A. As noted earlier, my recommended depreciation rates for EAI s plant accounts were developed with the approach repeatedly used by Staff in the determination of depreciation rates for other Arkansas-jurisdictional utilities and approved by the Commission. I used the straight line method, average life group procedure, and remaining life technique. This approach 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 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

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 be (Plant-In-Service Reserve Ratio Net Salvage) / Remaining Life or (00% - 0% - %) / 0 =.%. 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 RG-, 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. 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 single unit is the remaining years of service or the expected life minus the age. The remaining life for a group of assets is the

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 average remaining life of all units in that group. The remaining life is calculated by applying a particular curve shape and 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. 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?

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 A. I used the life span method of analysis for EAI s production accounts, which includes generation assets, and I used actuarial analysis for the mass property accounts, which includes transmission, distribution and general plant assets. I am also recommending fixed-life amortization for general accounts -. As I stated earlier, Direct Exhibit RG- contains examples of the analyses supporting the life span and actuarial life parameters. Q. Please describe life span analysis. A. In a life span analysis, the average remaining life is based upon the period of time between the study date and the projected 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 EAI s generating plant accounts? A. My life span analysis relied upon EAI s histories of initial additions, interim additions, interim retirements, and final retirements by location for each generating plant account. I relied upon the projected retirement dates provided in EAI Exhibit DJC-, pages - through - for each generating facility in my life span analysis. My analysis incorporated the actual annual initial and 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 EAI s production plant were

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 based on the actuarial method. Once I determined the interim survivor curve for each plant location, I relied upon a computer-based life span model to calculate the average remaining lives for each location and plant account. To calculate the average remaining lives for each location and plant account, the model produced 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. Q. Describe how the life parameters were developed using actuarial analysis. A. The life parameters were determined through a statistical analysis of the Company s property records. For certain accounts where there was not sufficient data, I relied on the Company s response to Staff Data Request APSC-0. (attached as Direct Exhibit RG-). 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.

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 Q. What steps were followed in the determination of appropriate Iowa curve shapes and service lives for EAI s mass property plant accounts? A. 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 to smooth any resulting irregularities in a particular activity or vintage year. I analyzed a full-band, rolling ten-year bands of data (i.e., -000, -00,..., 000-00), as well as rolling twenty-year and thirty-year bands, as appropriate, 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. Q. Once the curve shape and service life were selected, how was the average remaining life determined for each plant account? A. The average remaining life was determined by applying a particular curve shape and service life to an account history 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 was determined, the remaining life at each age was calculated. To calculate the average remaining life for the account, the surviving investment at each age was multiplied by the

DIRECT TESTIMONY OF RONALD G. GARNER - 0-0 0 remaining life at each age to calculate a weight for each age; then the weights were summed and divided by the sum of the surviving investments. SALVAGE ANALYSIS Q. Please describe the determination of the net salvage values included in the calculation of your recommended production depreciation rates. A. The production net salvage values are made up of two components, interim net salvage and terminal net salvage. For interim net salvage, I first analyzed actual historical gross salvage and cost of removal for the years -0, the same years analyzed by the Company's witness, Donald J. Clayton. My analysis confirmed that the Company s interim salvage recommendations were reasonable. The Company's proposed terminal net salvage values, are based upon the Dismantlement Cost Study of EAI s generating units performed by Black and Veatch. Staff did an extensive analysis of the dismantlement cost study and EAI responded to multiple data requests and questions by telephone from Staff. Based on this analysis, Staff concluded that the terminal net salvage values were reasonable. As such, I am accepting the Company s proposed net salvage values for production accounts. Q. How did you determine the net salvage values included in the development of your depreciation rates for the mass property accounts? A. In my analysis of the Company s net salvage values, I relied upon Companyspecific historical retirement, gross salvage and cost of removal data for each plant account. I also relied upon Staff s experience with similar property,

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 including other Arkansas jurisdictional electric utilities, the Company s response to Staff Data Request APSC-0. for specific accounts (attached as Direct Exhibit RG-), and knowledge of these accounts. Salvage and removal cost 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 RG-, my evaluation of net salvage was based on an analysis of the years of data spanning through 0. 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 Nuclear Production on pages through and Account.0 on page of Direct Exhibit RG-. RETIRING PLANT REPORTING Q. Do you have other recommendations that you are proposing as a result of this case? A. Yes. EAI has begun to retire some of its older units and proposes to retire more upon entry into MISO. The Company submitted a Dismantlement Cost Study specific to EAI s units and asked that a 0-year period be established to complete the recovery of all investment and dismantlement costs for the plants it

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 expects to retire by the end of 0. As such, it is timely to establish reporting and other requirements designed to evaluate the results of EAI s proposal. Q. Are you recommending any reporting requirements regarding the retiring plants? A. Yes, I recommend that by the effective date of the depreciation rates approved in this docket, for each of the units that the Company plans to retire by the end of 0, EAI provide a report showing the anticipated start date for dismantlement and within six months of the start date for each unit, EAI provide a complete dismantlement plan. I also recommend that, at least 0 days prior to beginning the dismantlement, EAI provide a copy of the selected winning bid from the Request For Proposal process along with the key factors used to select the winning bid. Upon completion of each plant s dismantlement, I recommend that EAI provide a report that compares the actual costs to the costs estimated in the dismantlement study by major cost category along with an explanation of variances greater than five percent of the total category cost. Q. Are you proposing that EAI submit an updated dismantlement cost study in support of future depreciation studies it files with the Commission? A. Yes. As a continued improvement to the inputs into the depreciation rate calculation, I recommend that EAI provide an updated dismantlement cost study in support of each depreciation study submitted by the Company and explain variances greater than five percent of the total category cost from the previous dismantlement cost study.

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 Q. Please describe your recommendations regarding the determination of any over- or under-recovery for the plant balances for which EAI requested establishment of regulatory assets. A. I recommend that EAI maintain records that will allow any over- or underrecovery to be determined, and reviewed by Staff. Q. Do you have a recommendation regarding potential gains that could occur from the future disposition of land at these locations? A. Yes. EAI should be required to apply any gain from the future sale or disposition of the land at each retired generating unit location as an offset to the dismantlement costs. Any gain from the future sale or disposition of the land in excess of the dismantlement costs would then be available to shareholders. The ultimate use of the land after dismantlement is not known at this time; however the value of the property will likely be enhanced by the dismantlement included in my recommended depreciation rates. Therefore, it is reasonable to first apply any gain as an offset to the dismantlement costs. FULLY-RESERVED AND OVER-ACCRUED ACCOUNTS Q. Does EAI have any plant accounts that are fully-reserved or over-accrued as of the end of the test year? A. Yes. Based on per book, test year end plant balances and accumulated reserve balances as adjusted for allowance for funds used during construction computations in accordance with Docket No. 0-0-U, there are sixteen depreciable plant accounts that are fully-reserved or over-accrued as shown in Table below.

DIRECT TESTIMONY OF RONALD G. GARNER - - Account Plant Table Fully-Reserved and Over-Accrued Accounts Description Plant-In- Service Accumulated Reserve Reserve Ratio Reserve Ratio Maximum Threshold _0 Lake Catherine U* Turbogenerator Units $,, $,,0 % 0% _ Carpenter U Structures & Improvements $, $0, 0% 0% _0 Carpenter U Accessory Electric Equip $, $, % 0% Miscellaneous Power Plant _ Carpenter U Equipment, $0, 0% 00% _ Carpenter U Structures & Improvements $, $0,0 0% 0% Miscellaneous Power Plant _ Carpenter U Equipment $00, $, 0% 00% _ Remmel U Structures & Improvements $,0 $, % 0% Miscellaneous Equipment- _ Remmel U Recreation $ $ % 00% _ Remmel U Structures & Improvements $,00 $, % 0% _0 Remmel U Accessory Electric Equipment $, $,0 0% 0% Miscellaneous Equipment- _ Remmel U Recreation $ $ % 00% _ Remmel U Structures & Improvements $, $, % 0% _0 Remmel U Accessory Electric Equipment $, $, 0% 0% _ Remmel U Miscellaneous Equipment- Recreation $ $ % 00% _0 Mabelvale Gas Turbine U Generators $,0, % 0% _0 Mabelvale Gas Turbine U Miscellaneous Power Plant Equipment $, $, % 00% * Amounts for Lake Catherine U are based on //0. For this unit, if the requested depreciation rates are approved, a lower negative net salvage rate will result in this account being fully-reserved. 0 For those accounts, the accumulated depreciation reserve amount is greater than or equal to the 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 Matthews has excluded depreciation expense amounts for each of those sixteen accounts for the pro forma year. Because investment could be added to these accounts after the pro forma year end, I am recommending the depreciation rates as shown in Table be approved for future possible use.

DIRECT TESTIMONY OF RONALD G. GARNER - - Account Plant Table Fully-Reserved and Over-Accrued Accounts Future Depreciation Rates Description Recommended Depreciation Rate _0 Lake Catherine U * Turbogenerator Units 0.% Basis Lake Catherine composite rate using Staff s proposed rates _ Carpenter U Structures & Improvements 0.% Staff depreciation study _0 Carpenter U Accessory Electric Equip.% Carpenter U rate from Staff depreciation study _ Carpenter U Miscellaneous Power Plant Equipment 0.% Staff depreciation study _ Carpenter U Structures & Improvements 0.% Staff depreciation study _ Carpenter U Miscellaneous Power Plant Equipment 0.% Carpenter Urate from Staff depreciation study _ Remmel U Structures & Improvements 0.0% Remmel U rate from Staff depreciation study _ Remmel U Miscellaneous Equipment- Recreation.0% Carpenter U & U rate from Staff depreciation study _ Remmel U Structures & Improvements 0.0% Remmel U rate from Staff depreciation study _0 Remmel U Accessory Electric Equipment 0.% Remmel U rate from Staff depreciation study _ Remmel U Miscellaneous Equipment- Recreation.0% Carpenter U & U rate from Staff depreciation study _ Remmel U Structures & Improvements 0.0% Staff depreciation study _0 Remmel U Accessory Electric Equipment 0.% Staff depreciation study _ Remmel U Miscellaneous Equipment- Recreation.0% Carpenter U & U rate from Staff depreciation study _0 Mabelvale Gas Turbine U Generators.0% Mabelvale U rate from Staff depreciation study _0 Mabelvale Gas Turbine U Miscellaneous Power Plant Equipment.% Mabelvale U rate from Staff depreciation study FIXED-LIFE AMORTIZATION Q. Are you recommending that fixed-life amortization be continued for certain general plant accounts? A. Yes. The Company has requested to continue fixed-life amortization for accounts -, which was approved by the Commission in Docket No. 0-0-U. In addition, the Company proposed changes to the fixed-life amortization rate for two accounts, which Staff accepts. RECOMMENDATIONS Q. Please summarize your recommendations in this Docket.

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 A. My proposed depreciation rates were calculated using the depreciation method (straight line), procedure (ALG), and technique (remaining life) that have been used repeatedly by Staff in the determination of depreciation rates for EAI and other Arkansas-jurisdictional utilities and approved by the 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 RG- and the resulting rates presented in my Direct Exhibit RG-. Based on each of the concerns I have outlined in testimony and the results of my comprehensive depreciation study, I recommend the Commission: Deny EAI's proposed depreciation rates as presented in its Application Schedule F-., updated and filed on March, 0; Approve the depreciation rates presented in Direct Exhibit RG- for each of EAI's plant accounts (including the application of the rates as specified in the footnotes with regard to fully-reserved accounts), using the parameters reflected in Direct Exhibit RG-; Approve the regulatory asset and related recovery over ten years for the generating plants that the Company has retired or will retire upon entry into MISO as shown in Direct Exhibit RG-; Approve the recovery over ten years of the general plant assets unrecovered costs as calculated and shown in Direct Exhibit RG-; and Regarding the dismantlement of retired plants, order that the Company:

DIRECT TESTIMONY OF RONALD G. GARNER - - 0 0 By the effective date of the depreciation rates approved in this docket, for each of the units that the Company plans to retire by the end of 0, provide a report showing the anticipated start date for dismantlement; Within six months of the start date for each unit, provide a complete dismantlement plan; At least 0 days prior to beginning the dismantlement, provide a copy of the selected winning bid from the Request For Proposal process along with the key factors used to select the winning bid; Upon completion of each plant s dismantlement, provide a report that compares the actual costs to the costs estimated in the dismantlement study by major cost category along with an explanation of variances greater than five percent of the total category cost; Provide an updated dismantlement cost study in support of each depreciation study submitted by the Company and explain variances greater than five percent of the total category cost from the previous dismantlement cost study; Maintain records that will allow any over- or under-recovery to be determined, and reviewed by Staff; and Apply any gain from the future sale or disposition of the land at each retired generating unit location as a reduction in the

DIRECT TESTIMONY OF RONALD G. GARNER - - dismantlement costs. Any gain in excess of the dismantlement costs would then be available to shareholders. Q. Does this conclude your Direct Testimony? A. Yes.

CERTIFICATE OF SERVICE I certify that a copy of the foregoing has been delivered to all parties of record by electronic means or regular mail, postage prepaid, on August, 0. /s/ Valerie F. Boyce Valerie F. Boyce