BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION

BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION IN THE MATTER OF THE APPLICATION ) OF LIBERTY UTILITIES (PINE BLUFF WATER), ) INC. FOR GENERAL CHANGE OR ) MODIFICATION IN RATES, CHARGES, AND ) TARIFFS ) 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 NOVEMBER, 0 - -

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 (Commission), 000 Center Street, Little Rock, Arkansas 0. 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. After graduation from college I have held accounting and business analyst positions with a company with extensive energy sector operations and with a global leader in marketing services and marketing database information technology solutions. 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 - -

0 0 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 previously filed testimony before the Commission. 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 Depreciation Basics, Life and Net Salvage Analysis, Preparing & Defending A Depreciation Study, and Analyzing The Life of Real-World Property 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 - -

0 0 credential of CDP. I regularly pursue professional development and education in the field of depreciation to maintain the CDP designation. PURPOSE OF TESTIMONY Q. What is the purpose of your testimony? A. My testimony addresses the proposal by Liberty Utilities (Pine Bluff Water), Inc. (Company or Pine Bluff Water) to change depreciation rates as set forth in Schedule F-. (F-.) included in its Application for a General Change or Modification in Rates and Tariffs filed on July, 0, as amended on July, 0, and including additional schedules filed by the Company on July, 0 in Response to Staff s Notice of Deficiencies (Application). I recommend depreciation rates as presented in Direct Exhibit RG- derived from the parameters presented in Direct Exhibit RG-. My Direct Exhibit RG- contains a representative example of the workpapers supporting my analysis of the Company s plant accounts. Additionally, I discuss depreciation data concerns and recommended reporting requirements. 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. The recommended rates are derived from the parameters presented in Direct Exhibit RG- and were produced by a detailed, comprehensive depreciation study performed by Staff of Pine Bluff Water s plant accounts. - -

Q. Have you compared the composite rates from your proposal 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 December, 0, plant in service balances. Table Composite Rate Comparison Function Staff Company Current Source of Supply Plant 0.%.%.% Pumping Plant.%.0%.% Water Treatment Plant.%.%.% Transmission & Distribution Plant.%.0%.0% General Plant.%.%.% Total Plant.%.%.% 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 amortization amounts and Staff's adjusted plant balances, Staff witness Claude Robertson calculated depreciation expense which is addressed in his Direct Testimony, and included as a component of Adjustment IS-. DISCUSSION OF COMPANY DEPRECIATION STUDY Q. Was the Company required to submit a depreciation study with this request for a change in rates and tariffs? A. Yes. In Order of Docket No. 0-0-U the Commission approved the settlement agreement in which United Water Arkansas, Inc. (UWA) agreed to - -

0 0 provide a more current depreciation study with its next general rate case application. Pine Bluff Water agreed to comply with this previously issued Commission order in the Joint Stipulation and Settlement Agreement filed November, 0, in Docket No. -0-U, which was later approved in Order No. of the same docket. Q. Did the Company meet this requirement? A. Yes. As part of the application in this docket, the Company submitted a depreciation study that had been prepared by the consulting firm Gannett Fleming on behalf of UWA using data through December, 0. The depreciation rates derived in that study were proposed by the Company to replace the currently approved depreciation rates. Q. Did any Company witness file testimony with a supporting discussion of the depreciation study? A. No. Company Witness Bourassa merely states that the Company is proposing depreciation rates based upon the study. Q. Do you recommend approval of the depreciation rates derived from the Company-submitted depreciation study? A. No. First, I performed a comprehensive depreciation study which supports my recommended depreciation rates. Second, the study submitted by the Company was based on data through December, 0, and Gannett Fleming stated that the application of those rates was reasonable only for a period of three to five subsequent years. Three years will have passed by the end of the pro forma year. My study uses data - -

0 0 through the most recently completed calendar year end, December, 0. Finally, my study considers recent management decisions to purchase AMR meters and the CNG facilities. DESCRIPTION OF STAFF DEPRECIATION STUDY APPROACH Q. What was the nature of the depreciation study you conducted for Pine Bluff Water s plant accounts? A. 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 Arkansas-jurisdictional utilities. My testimony provides support for the underlying formula and the selected parameters and inputs upon which I relied, and explains how my proposed depreciation rates were developed. My depreciation study workpapers are being made available to the Company and all other parties. My Direct Exhibit RG- contains the workpapers supporting the analysis underlying my recommended depreciation rate for three of Pine Bluff Water s accounts: 0.0 Water Treatment Plant Structures and Improvements;.0 Transmission and Distribution Mains; and.0 Services. The workpapers for the accounts provided 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. As I stated earlier, my study covered historical plant account data through December, 0. Depreciation studies are based on annual data. At the - -

0 0 point in time that my study was begun, the most current data available was for the period ending December, 0. The Company study uses data only through 0 which will be more than three years old by the end of the pro forma year. Q. Did you request historical account data from the Company in order to perform your depreciation study? A. Yes. For the life analysis portion of my study, I requested plant account histories for each account including by vintage, additions, retirements, transfers and adjustments, and surviving plant balances for each activity year since plant inception through December, 0. The data provided in response was problematic, which I will discuss in more detail later. For the net salvage analysis portion of my study, I requested salvage and cost of removal history for each water utility plant account through 0. I also requested per book plant balances and accumulated depreciation balances for each plant account as of December, 0. These balances are used in the computation of the depreciation rate and to reconcile the detail historical data balances. Q. Please discuss Staff s concerns with the life analysis data provided. A. The first problem identified was that the account number provided with the historical data did not correspond to the correct NARUC account number that was used in the Company s F-.. Without a matching account number, the data was not usable. In addition, the historical data provided by the Company only included () - -

0 0 a listing of assets that were on the books on the date the Company acquired the assets from UWA; () subsequent additions, retirements, transfers and adjustment transactions related to those assets; and () newly acquired assets subsequent to February, 0. Transactions occurring in 0 were partially missing. The Company also provided a data file that had been used by Gannett Fleming to prepare the depreciation study submitted by the Company. However, due to the acquisition of the Company from the previous owner, confirmation that the file did not contain alterations made as part of the Gannet Fleming study was not readily available. Therefore, I was unable to rely on that file in support of my study. Additionally, the file did not contain 0 or 0 data. Q. Did you rely on the responses to the other portions of your request? A. Yes. I was able to rely on both the salvage data and the December, 0 plant and accumulated depreciation balances provided by the Company. Q. How was the life analysis data that you used in your depreciation study compiled? A. Staff compiled the account level historical additions, retirements, and adjustments using the data from the last depreciation study Staff had prepared for the Company in Docket No. --U and data from the Arkansas Annual Reports filed subsequently by the Company. The data was compiled through December, 0, and reconciled to the plant balances that had been provided in response to APSC-0. Q. Do you have a recommendation concerning the life analysis data to be - -

0 0 used in future depreciation studies? A. Yes. I recommend that the Company maintain a copy of the data file which Staff compiled and add to it the activity for each account annually. I also recommend that the Company submit the updated file to Staff by April 0 th of each year until the next request for new depreciation rates is made. Q. Have you discussed with the Company the data that you compiled and these recommendations? A. Yes. Staff and representatives of the Company held a teleconference in October 0 and discussed all of these issues. Additionally, Staff met with the Company in Pine Bluff that same month and reviewed the data compiled by Staff and discussed the annual reporting recommendation. To ensure that sufficient data can be provided to the Commission and Staff in support of requests for future depreciation rate changes, Staff also reviewed the Company s plant accounting procedures and made recommendations to assist Pine Bluff Water in complying with the Commission s rules and regulations regarding the maintenance of appropriate plant accounting records. The Company was receptive to the recommendations made in those discussions. Q. Did you conduct a site visit of Pine Bluff Water s plant as a part of your comprehensive depreciation study? A. Yes. Over a period of two days, I visited the Company s offices in Pine Bluff and three of its major plant locations. I observed source of supply wells and equipment, power pumping equipment, water treatment equipment, and one of the distribution water towers. This site visit allowed me to observe representative - 0 -

0 0 portions of the Company s plant at these locations and gain valuable insight into the operations of these assets through observation and discussion with Company personnel. 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 Pine Bluff Water 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 - -

0 0 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 =.%. 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). - -

0 0 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 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 retirements 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 - -

0 0 Q. What method of life analysis was used to determine your recommended life parameters? A. I used the Simulated Plant Record Analysis (SPR), a semi-actuarial method of analysis, for Pine Bluff Water s accounts to the greatest extent possible. I am recommending fixed-life amortization for certain general plant accounts. As I stated earlier, Direct Exhibit RG- contains examples of the analyses supporting the life parameters developed through my analysis. Q. How were the life parameters developed 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 actual annual amounts. Staff utilizes a depreciation study module designed for this analysis developed by PowerPlan. Q. What steps were followed in the determination of appropriate Iowa curve shapes and service lives for Pine Bluff Water s plant accounts? A. I evaluated numerous bands of account experience covering different time spans using the individual histories of additions, retirements, and surviving plant balances by year 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 and, depending on the specific account, bands of five, ten, fifteen, twenty, twenty-five and thirty years, as well as rolling 0-year, - -

0 0 0-year and 0-year bands, in the determination of an appropriate Iowa curve shape and service life for each plant account. I evaluated the fit of Companyspecific data to the Iowa Curve shapes and services lives generated by the 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 remaining life at each age to calculate a weight for each age, and then the weights were summed and divided by the sum of the surviving investment. Q. Please discuss your life recommendations for account.0. A. Account.0 holds the Company s investment in non-amr meters and meter installations. The Company stated that it follows Commission guidelines for testing meters and that its current procedure is to replace these meters when they are removed for testing. Based on this information, I used a listing of meters by size and manufacture date to calculate the average service life as shown in Direct Exhibit RG-. The remaining life was calculated as discussed previously - -

0 0 using my calculated average service life and the currently approved Iowa Curve. Q. How did you determine the life of accounts. and.0? A. Account. is a new account where the Company will record the cost of the AMR meters it plans to install. I have used a 0 year life for the meters, consistent with the Company s response to data request AG--. Account.0 is also a new account. The Company will record the cost of the Compressed Natural Gas (CNG) equipment that it is installing in this account. I have used a 0 year life for this equipment based on the vendor design life information provided by Company management. FIXED-LIFE AMORTIZATION Q. Are you recommending fixed-life amortization for certain general plant accounts? A. As I mentioned earlier, I am recommending fixed-life amortization for eleven of the general plant accounts. The accounts are 0.0; 0.0; 0.0;.0;.0;.0;.0;.0;.0;.0; and.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 my recommendation for these accounts. Q. Has this Commission previously approved fixed-life amortization accounting for the general plant accounts? A. Yes. The Commission has approved amortization accounting, or fixed-life - -

0 0 amortization, when recommended by Staff. Recent examples include Docket No. 0-00-U, Docket No. 0-0-U, and Docket No. 0-0-U. Q. Did the Company request an amortization rate for any of these accounts? A. Yes. The Company requested amortization for nine of these accounts. Q. How did you determine the estimated life to be used for each of these accounts? A. For the nine accounts for which the Company requested an amortization rate, I have used the life proposed by the Company. Before accepting this life, I compared it to similar accounts of other Arkansas-jurisdictional utilities and found the proposed life to be reasonable and comparable. Account.0, Transportation Equipment, contains a variety of pickup trucks, vans, and several heavy duty dump trucks. Per discussions with the Company, the pickup trucks are traded after reaching approximately 00,000 miles and the 00 models are reaching that point. The dump trucks last longer. Based on this information, I arrived at a 0 year average service life. For Account.0, Power Operated Equipment, I am recommending a year average service life based on the life approved by the Commission for similar equipment in the latest Entergy Arkansas, Inc. general rate case, Docket No. -0-U. This is comparable and slightly shorter than the currently approved. year average service life for this account. 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. Investments made after fixed-life - -

0 0 amortization takes effect will be fully reserved and retired upon maturing to the stated life for the account. SALVAGE ANALYSIS Q. How did you determine the net salvage values included in the development of your depreciation rates? 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, including other Arkansas jurisdictional utilities, 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 0 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 Account 0.0 Water Treatment Plant Structures and Improvements in Direct Exhibit RG-. FULLY-RESERVED AND OVER-ACCRUED ACCOUNTS Q. Does Pine Bluff Water have any plant accounts that are fully-reserved or - -

0 over-accrued as of your study date? A. Yes. Based on per book plant balances and accumulated reserve balances on service balances that are fully-reserved or over-accrued as shown in Table below. Account Description Table Fully-Reserved and Over-Accrued Accounts December, 0, there are four depreciable plant accounts with plant-in- Plant-In- Service Accumulated Reserve Reserve Ratio Reserve Ratio Maximum Threshold.0 Stores Equipment,, 00% 00%.0 Laboratory Equipment,, 00% 00%.0 Power Operated Equipment,, 00% 00%.0 Other Tangible Equipment,, 00% 00% 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. Subsequent to December, 0, the Company added plant to account.0. Staff witness Robertson has excluded depreciation expense amounts for the remaining three 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 shown in Table be approved for possible future use. - -

Account Description Table Fully-Reserved and Over-Accrued Accounts Future Depreciation Rates Recommended Depreciation Rate.0 Stores Equipment.00%.0 Laboratory Equipment.%.0 Power Operated Equipment.%.0 Other Tangible Equipment.00% 0 RECOMMENDATIONS Q. Please summarize your recommendations in this Docket. 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 Pine Bluff Water and other Arkansas-jurisdictional utilities which were approved by the Commission, and are based on a detailed, statistical analysis of Companyspecific 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 Pine Bluff Water s proposed depreciation rates as presented in its Application Schedule F-.; Approve the depreciation rates presented in Direct Exhibit RG- for each of Pine Bluff Water s plant accounts (including the application of the rates as - 0 -

specified in the footnotes with regard to fully-reserved accounts), using the parameters reflected in Direct Exhibit RG-; Require the Company to maintain a copy of the data file which Staff compiled and add to it each year the activity for each account for that year; and Require the Company to submit the updated data file to Staff by April 0th each year until the next request for new depreciation rates is made. Q. Does this conclude your Direct Testimony? A. Yes. - -

CERTIFICATE OF SERVICE I, Dawn Kelliher Guthrie, hereby certify that a copy of the foregoing has been served on all parties of record by electronic mail via the Electronic Filing System this th day of November, 0. /s/ Dawn Kelliher Guthrie Dawn Kelliher Guthrie - -