by electronic filing electronic filing ms. kimberly d. bose, secretary federal energy regulatory...

SCOTT B. GROVER t: (205) 226-8781 f: (205) 488-5660 e: [email protected]

July 29, 2016

BY ELECTRONIC FILING Ms. Kimberly D. Bose, Secretary Federal Energy Regulatory Commission 888 First Street, N.E. Washington, DC 20426

Re: Southern Company Services, Inc., Docket No. ER16-________ Filing of Updated Depreciation Rates for Southern Electric Generating Company

Dear Secretary Bose, In accordance with Order No. 6181 of the Federal Energy Regulatory Commission (the “Commission”) and Section 205 of the Federal Power Act,2 Southern Company Services, Inc. (“SCS”), as agent for Southern Electric Generating Company (“SEGCO”), hereby submits the enclosed materials in support of a request for authorization to use the updated depreciation rates of SEGCO in the calculation of charges for service under the Open Access Transmission Tariff of Alabama Power Company, Georgia Power Company, Gulf Power Company and Mississippi Power Company (Southern Companies), Tariff Volume No. 5 (“OATT”). Specifically, SCS seeks Commission authorization to use SEGCO’s updated depreciation rates for billing purposes effective January 1, 2017, in connection with actual cost recovery under the OATT. SCS is enclosing a depreciation study and other materials that form the basis upon which SEGCO has adopted such depreciation rates for accounting purposes. As discussed below, SCS also is amending OATT Attachment S to include SEGCO’s updated depreciation rates. As Alabama Power Company is the designated filer for Southern Companies’ OATT, this amendment to OATT Attachment S is being filed in its database entitled:

OATT and Associated Service Agreements, Tariff Volume No. 5, Southern Companies OATT

1 Depreciation Accounting, FERC Stats. & Regs. ¶ 31,104, n.25 (2000). 2 16 U.S.C. § 824d (2006).

Ms. Kimberly D. Bose, Secretary July 29, 2016 I. Background and Description of Filing

The Commission has recognized that utilities should use appropriate methods of depreciation so as to “allocate the cost of utility property over its useful service life in a systematic and rational manner.”3 The Commission has determined that utilities need not seek approval before changing depreciation rates for accounting purposes, but that they must obtain authorization before changing “prices charged for power sales or transmission services (whether determined by stated rates or formula rates) to reflect a change in depreciation.”4 To effect such a change, utilities must make a filing with the Commission pursuant to Section 205 of the Federal Power Act.5 Although depreciation rate changes frequently arise in the context of more comprehensive rate cases, filings made solely to update depreciation rates used in the calculation of charges under jurisdictional formula rates, without implicating other elements of the formula rate, are not uncommon.6 Consistent with the foregoing precedent, SCS is submitting materials associated with SEGCO’s updated depreciation rates, for which it requests permission to implement for billing purposes to wholesale customers under the OATT, beginning as of January 1, 2017. These materials and the proposed depreciation rates were developed using industry-accepted methodologies and principles consistent with those utilized as part of SEGCO’s 2014 and 2011 filings of updated depreciation rates.7 Likewise, this filing provides (in addition to this transmittal) the direct testimony of Ms. Anita Allcorn-Walker, Comptroller for SEGCO, along with corresponding exhibits. Ms. Allcorn-Walker offers testimony from a ratemaking and accounting perspective that explains the need for utilities to periodically update their depreciation rates. She also discusses the most recent depreciation study performed at the direction of SEGCO by Alliance Consulting Group, which was conducted using industry-accepted methodologies and principles to develop the revised depreciation rates. Ms. Allcorn-Walker also discusses the impact of SEGCO’s updated depreciation rates on affected wholesale customers. Included among Ms. Allcorn-Walker’s exhibits are the depreciation study mentioned above, supporting testimony from Mr. Dane Watson of Alliance Consulting Group, and a comparison of OATT rates using the current and updated depreciation rates.

3 FERC Stats. & Regs. ¶ 31,104, p. 31,694 (2000). 4 Id. at n.25. 5 Id. 6 See e.g., Southern Company Servs., Inc., FERC Docket No. ER14-2665, Letter Order dated October 2, 2014; Southern Company Servs., Inc., FERC Docket No. ER11-4283, Letter Order dated September 16, 2011. 7 See n.6, supra.

Ms. Kimberly D. Bose, Secretary July 29, 2016 II. Effect on Southern Companies’ Open Access Transmission Tariff8 In accordance with the OATT, SCS submits an informational filing to the Commission on or about November 1 of each year that uses projected data inputs to calculate the charges applicable for OATT service for the upcoming January 1 through December 31 period (“OATT Rate Year”).9 By this request for authorization to use SEGCO’s updated depreciation rates in the calculation of charges for services provided under the OATT, SCS intends (subject to appropriate authorization from the Commission) to use the updated depreciation rates in the informational filing that will be submitted on or about November 1, 2016. In this regard, and as demonstrated in Exhibit AAW-2, the updated depreciation rates will cause a decrease in OATT billing rates. III. Amendment of OATT Attachment S Southern Companies are amending OATT Attachment S to include SEGCO’s updated depreciation rates that, upon Commission-approval, will be used in the calculation of actual charges under Southern Companies’ OATT formula rate, effective January 1, 2017. Because Alabama Power Company is the designated filer for Southern Companies’ OATT (including any amendments thereto), the amended tariff records containing SEGCO’s updated depreciation rates are being submitted in the Alabama Power Company database and will be included in Southern Companies’ OATT at Attachment S, Southern Electric Generating Company. IV. Waiver Requests This filing is being made to seek authorization for Southern Companies to recover their costs to provide jurisdictional OATT services on the basis of SEGCO’s updated depreciation rates beginning January 1, 2017 and is being submitted electronically pursuant to the Commission’s abbreviated filing requirements.10 Through the testimony and other evidentiary materials filed hereunder, SCS has provided the relevant information supporting its recovery based on the updated depreciation rates. In any event, should the enclosed information not satisfy any portion of the Commission’s regulations, SCS respectfully requests a waiver of that portion of the Commission’s regulations. In addition, as the Commission’s filing regulations require not less than 60 days but no more than 120 days prior notice of such updated depreciation rates, SCS respectfully requests 8 Alabama Power Company, Tariff Volume No. 5, Southern Companies’ OATT. 9 OATT Attachment N, § 1(d). In addition, Southern Companies’ make a true-up informational filing on or about May 1 of the year immediately following each OATT Rate Year that reconciles the charges based on projected costs to actual costs in accordance with the Formula Rate Manual. Id. at § 2(a). True-up informational filings form the basis upon which Southern Companies calculate over- or under-collection of the actual charges as determined in accordance with the formula rate and, to the extent necessary, pays refunds to or collect surcharges from certain OATT customers. 10 18 C.F.R. § 35.13(a)(2)(iii) (2016); 18 C.F.R. 35.7 (2016).

Ms. Kimberly D. Bose, Secretary July 29, 2016 a waiver of that portion of the Commission’s regulations, as the timing of this submission is influenced by SCS’s intent to use the updated depreciation rates, subject to appropriate Commission authorization, in the upcoming annual OATT informational filing that will be submitted on or about November 1, 2016.11 V. Documents Submitted with this Filing The following is a list of documents submitted with this filing:

1. Attachment S, Southern Electric Generating Company, to Southern Companies’ OATT in RTF format with metadata attached;

2. A clean copy of Attachment S, Southern Electric Generating Company, to

Southern Companies’ OATT in PDF format for publishing in eLibrary;

3. A redline copy of Attachment S, Southern Electric Generating Company, to Southern Companies’ OATT in PDF format for publishing in eLibrary;

4. Exhibit AAW-1: Direct Testimony of Ms. Anita Allcorn-Walker on behalf of

Southern Electric Generating Company and Southern Company Services, Inc.;

5. Exhibit AAW-2: Comparison of rates under Southern Companies’ OATT

reflecting current and updated depreciation rates of Southern Electric Generating Company;

6. Exhibit AAW-3: Report from Alliance Consulting Group presenting the results

of the 2015 Depreciation Study for Southern Electric Generating Company; 7. Exhibit AAW-4: Testimony of Dane Watson of Alliance Consulting Group; and

VI. Miscellaneous As indicated below, service has been made on all affected entities. If there are

any questions regarding any of the materials being provided, please do not hesitate to contact the undersigned.

Sincerely, /s/ Scott B. Grover Scott B. Grover

Attorney for Southern Company Services, Inc.

11 18 C.F.R. § 35.2, 35.11 (2013).

Ms. Kimberly D. Bose, Secretary July 29, 2016 OF COUNSEL: Scott B. Grover Balch & Bingham LLP 1710 Sixth Avenue North Birmingham, Alabama 35203 (205) 226-8781 (telephone) (205) 488-5660 (fax) [email protected]

cc (with enclosures): Network Integration Transmission Service Customers (via e-mail) Long-Term Firm Point-to-Point Transmission Customers (via e-mail) Conditional Long Term Firm Point-to-Point Transmission Customers (via e-mail)12

12 A copy of this filing also will be posted on Southern Companies’ OASIS

Southern Companies Attachment S

Open Access Transmission Tariff Southern Electric Generating Company, Page 1

Southern Electric Generating Company

Category/

FERC Account No.

Rate of Depreciation

(%)

Steam

Other Production

Transmission

General Plant

5.27%

6.13 %

2.57%

2.41%

Southern Companies Attachment S

Open Access Transmission Tariff Southern Electric Generating Company, Page 1


Category/

FERC Account No.

Rate of Depreciation

(%)

Steam

Other Production

Transmission

General Plant

4.145.27%

2.696.13 %

2.722.57%

2.482.41%

Exhibit AAW-1 Page 1 of 7

UNITED STATES OF AMERICA 1 BEFORE THE 2

FEDERAL ENERGY REGULATORY COMMISSION 3 4 5

Southern Company Services, Inc. ) Docket No. ER-___________ 6 7 8 9

DIRECT TESTIMONY OF ANITA ALLCORN-WALKER 10 ON BEHALF OF SOUTHERN ELECTRIC GENERATING COMPANY AND 11

SOUTHERN COMPANY SERVICES, INC. 12 13 14 Q. Would you please state your name, position and business address? 15

A. My name is Anita Allcorn-Walker. I am employed by Alabama Power Company 16

(“Alabama Power”) as Vice President and Comptroller. I also serve as Comptroller of 17

Southern Electric Generating Company (“SEGCO”). My business address is 600 North 18

18th Street, Birmingham Alabama 35203. 19

Q. Describe your educational and professional experience. 20

A. I hold a Bachelor of Science Degree in commerce and business administration with a 21

major in accounting from the University of Alabama and a master’s degree in business 22

administration from Samford University. I am a licensed Certified Public Accountant in 23

the state of Alabama. I have over 26 years of experience in the utility industry. 24

I began my career at Alabama Power in 1990 in the internal audit division. Since that 25

time, I have held a variety of positions in the Company’s accounting, treasury and finance 26

departments. Before moving into my current position, I served as Assistant Comptroller 27

with oversight for financial statements, internal controls over financial reporting, and 28

accounting research. Prior to that position, I served as the Asset Accounting Manager 29


1465677.1

with responsibility for fixed assets, materials accounting, and accounts payable. In 1

August 2010, I assumed my current positions with Alabama Power and SEGCO. 2

Q. Briefly describe SEGCO. 3

A. SEGCO is a wholly owned subsidiary of Alabama Power and Georgia Power Company 4

(“Georgia Power”), each of which owns an equal share of SEGCO’s common stock. 5

SEGCO owns four (4) generating units located in Alabama at Plant E.C. Gaston. The full 6

output of these units is sold to Alabama Power and Georgia Power in accordance with the 7

Power Contract between SEGCO, Alabama Power and Georgia Power (“SEGCO 8

Contract”) that is on file with the Commission.1 In addition, SEGCO owns limited 9

transmission facilities that were constructed for the purpose of delivering Georgia 10

Power’s share of the units’ output to its service territory. 11

Q. Briefly describe Southern Company Services, Inc. 12

A. The Southern Company (“Southern Company”) was registered as a public utility holding 13

company organized in accordance with the Public Utility Holding Company Act of 1935 14

(“PUHCA”), as amended, until its repeal on February 8, 2006. Southern Company 15

Services, Inc. (“SCS”) is a service company organized under PUHCA that acts as agent 16

for the five subsidiary operating companies of Southern Company and provides various 17

services (such as contract administration and accounting). Since SEGCO is owned by 18

Alabama Power and Georgia Power (two of the operating companies), SCS acts as agent 19

in connection with the activities of SEGCO as well. 20

Q. What are your primary areas of responsibility for SEGCO? 21

1 See Southern Company Servs., Inc., FERC Docket No. ER11-4314.


1465677.1

A. As Comptroller, I am responsible for the financial and regulatory accounting functions 1

for SEGCO. My duties include overseeing the corporate accounting records in 2

accordance with generally accepted accounting principles and applicable regulatory 3

requirements, and the preparation and filing of financial reports and regulatory filings. 4

Q. What is the purpose of your testimony? 5

A. The Commission’s Order No. 618 states that utilities must seek approval from the 6

Commission before “chang[ing] prices charged for power sales or transmission services 7

(whether determined by stated rates or formula rates) to reflect a change in depreciation 8

….”2 In compliance with this requirement, SCS, on behalf of SEGCO, is requesting 9

approval to update the depreciation rates currently on file with the Commission and to 10

use the updated rates in billings to wholesale customers under Southern Companies’ 11

Open Access Transmission Tariff (“OATT”). Specifically, portions of SEGCO’s 12

depreciation expenses are used as inputs in the calculation of charges under the OATT 13

formula rate. 14

Q. Are you sponsoring any exhibits? 15

A. Yes. Exhibit AAW-2 sets forth the difference in charges under the OATT that would 16

result from the utilization of the updated depreciation rates in the OATT formula rate. 17

Specifically, the updated depreciation rates result in a decrease in OATT charges. 18

Exhibit AAW-3 is the report from Alliance Consulting Group (“Alliance Consulting”), 19

which includes the results of its depreciation study along with its supporting report. 20

Exhibit AAW-4 reflects the testimony of Dane Watson, Managing Partner of Alliance 21

Consulting, who participated in and directed all work performed by Alliance Consulting 22

2 Depreciation Accounting, Order No. 618, FERC Stats. & Regs. ¶ 31,104, at 31,695 n.25 (July 27, 2000).


1465677.1

in connection with the depreciation study. Together, my testimony and the associated 1

exhibits reflect the basis for SEGCO’s request to put in place the updated depreciation 2

rates determined by the work of Alliance Consulting and Mr. Watson and confirmed by 3

SEGCO. 4

Q. Briefly explain the purpose of depreciation. 5

A. In the accounting sense, depreciation is the recovery of the capital cost of property, 6

allowing for net salvage (which is also referred to in industry as “net removal”), at an 7

orderly rate over the life of the property. In this context, the term “capital recovery” is 8

frequently used in place of the term depreciation. A principal reason for recognizing 9

depreciation is the need for a systematic and rational reflection of the consumption of 10

capital in cost-of-service or expenses when determining net income. Under basic 11

ratemaking principles, utilities are entitled to recover the costs associated with 12

investments made to provide jurisdictional services. In cost-of-service ratemaking, 13

depreciation rates are applied to investments in plant in service to derive the depreciation 14

expense components for each primary functional group (e.g., steam production, 15

transmission, distribution). Depreciation expenses are recovered over the life of an asset, 16

thereby allowing utilities to recover their investments in those assets. 17

Q. Why is it necessary for SEGCO to update its depreciation rates? 18

A. Depreciation expense is an accepted element of utility cost of service, and it is standard 19

industry practice to update depreciation rates on a periodic basis to account for changes 20

such as additions to assets, changes in average service lives, and changes in costs of 21

removal or dismantlement. Updating depreciation rates to reflect such changes better 22


1465677.1

enables a utility to recover plant investment, adjusted for net salvage, over its remaining 1

useful life in a systematic and rational manner. 2

Q. How were SEGCO’s proposed depreciation rates developed? 3

A. At my direction, Alliance Consulting performed a depreciation study using industry-4

accepted methodologies and principles to derive the proposed depreciation rates, which 5

reflect investment and reserve balances as of December 31, 2015 (the most current and 6

complete set of information available for use by Alliance Consulting at the time of its 7

study). The approach utilized by Alliance Consulting is generally consistent with that 8

employed in support of SEGCO’s 2013 depreciation filing,3 but has been updated to 9

reflect the most current and complete set of information available, as noted above. The 10

study and changes in rates identified also have been presented to and reviewed by the 11

Alabama Public Service Commission (“APSC”) Staff for reflection in Alabama Power’s 12

retail rates. 13

Q. Has any decision been made with respect to SEGCO’s production plant or 14

equipment as a result of finalized environmental regulations that affects the updated 15

depreciation study? 16

A. Yes. As part of its environmental compliance strategy, SEGCO added natural gas as the 17

primary fuel source at Plant E.C. Gaston Units 1-4 in 2015. Those units continue to have 18

coal as a backup fuel source; thus, no equipment is planned for retirement. The estimated 19

useful lives of the units are unchanged from the prior study, and at this time, the life of 20

the plant is not expected to increase or decrease as a result of the fuel source change. 21

3 See Southern Company Servs., Inc., FERC Docket No. ER14-2665, Accession No. 20140815-5135.


1465677.1

Q. Does this study reflect the costs associated with the closure of certain coal 1

combustion residuals (“CCR”) disposal facilities in accordance with the new CCR 2

disposal rule issued by the Environmental Protection Agency? 3

A. Yes. This study reflects the inclusion of the estimated total cost for the closure in place 4

of SEGCO’s CCR facilities, including the groundwater monitoring required by the rule. 5

SEGCO expects to recover these costs over the remaining plant life. 6

Q. What impact does the inclusion of these CCR rule-related costs have on the 7

depreciation rates and billings to wholesale customers under Southern Companies’ 8

OATT? 9

A. There is no impact. The depreciation rates used in billings associated with the OATT 10

relate to depreciation for transmission function equipment, and SEGCO’s compliance 11

with the CCR rule does not involve costs associated with transmission facilities. 12

Q. Why is SEGCO proposing to update the depreciation rates for wholesale 13

jurisdictional customers? 14

A. The updated depreciation rates are required to recover the total cost of SEGCO’s 15

depreciable electric plant, allowing for net salvage, over the remaining useful life of the 16

plant. Upon approval by the Commission, these updated depreciation rates will be 17

reflected in billings to wholesale customers under the OATT. The proposed rates, based 18

on an accepted capital recovery method, are the result of Alliance Consulting’s analysis 19

and study of the facts and conditions known to be in existence at the time of the study. 20

Furthermore, the proposed depreciation rates have been reviewed by the APSC Staff. 21

These updated depreciation rates are just and reasonable, and their use in the 22

determination of the wholesale rates will better ensure the recovery of investment by 23


1465677.1

SEGCO, along with Alabama Power and Georgia Power, in a systematic and rational 1

manner. 2

Q. Does this conclude your testimony? 3

A. Yes. 4

Exhibit AAW-2

Original Updated Difference In Charges2017 Billing Charges (a) 2017 Billing Charges (b) (c)

Non-Firm / Network $2.97645 $2.97632 ($0.00013) Firm Point-to-Point $2.88175 $2.88161 ($0.00014) Subtransmission $2.15624 $2.15624 $0.00000

(a)

(b) (c)

FERC on or before May 1, 2018.

Changes to Rates under Southern Companies' OATTresulting from updated SEGCO depreciation rates

filing and the updated depreciation rates were used to develop the projected 2017 OATT charges.All charges are subject to a true-up based on a filing that will be made with

(Dollars/KW-Month)

The original charges applicable to services in 2017 are based on projected costs and load data thatwould be expected to be shown in an informational filing to be filed with FERC on or aboutNovember 1, 2016, absent appropriate Commission authorization as reported in this filing.The updated charges represent the charges that would be filed with FERC on or about November1, 2016 if appropriate authorization had been received from the Commission as requested in this

EXHIBIT AAW-3


Depreciation Rate Study as of December 31, 2015

SOUTHERN ELECTRIC GENERATING COMPANY Depreciation Rate Study As of December 31, 2015 Prepared for


http://www.utilityalliance.com

Exhibit AAW-3

Table of Contents INTRODUCTION ......................................................................................................................................... 1

DEPRECIATION RATE STUDY PROCEDURES ................................................................................................ 2

Assembly of Property Accounting Data ........................................................................................... 2 Computerized Processing ................................................................................................................ 2 Evaluation of Statistical Data ........................................................................................................... 4 Life Span Analysis ............................................................................................................................ 4 Determination of Remaining Lives ................................................................................................... 5 Net Salvage Analysis ....................................................................................................................... 6 Depreciation Rate Calculation ......................................................................................................... 6 Four Phases of the Depreciation Study Process ............................................................................. 6

ANALYSIS ................................................................................................................................................. 9

Southern Electric Generating Company .......................................................................................... 9 CONCLUSION……………………………………………………………………………………………………………………….12

EXHIBITS

A Proposed Depreciation Rates and Comparison with Present Rates of Production Plant - SEGCO

B Proposed Depreciation Rates and Comparison with Present Rates of Transmission Plant and General Plant - SEGCO

C Comparison of Depreciation Factors - SEGCO

Exhibit AAW-3

July 28, 2016 Southern Electric Generating Company Birmingham, Alabama

INTRODUCTION At your request, Alliance Consulting Group has conducted a study of the annual depreciation (capital recovery) rates for the depreciable electric assets of Southern Electric Generating Company (“SEGCO”) or (“Company”), a jointly owned subsidiary of Alabama Power and Georgia Power, to assist the Company in establishing depreciation rates for the Company’s’ depreciable electric property for regulatory and financial reporting purposes as of December 31, 2015 (“study date”). The study procedures and results are summarized in this report. The study was made to determine the appropriate book depreciation factors and rates to be applied to the electric property in service to enable recovery of the investment, adjusted for net salvage, over their remaining useful lives. The scope of the study included a review and analysis of the average service lives and remaining lives of the property. Also included in the study were a determination of net salvage and other factors relating to depreciation. The definition of depreciation used in this study is the same as that used by the Federal Energy Regulatory Commission for electric companies and the same as that employed by the National Association of Regulatory Utility Commissioners. The definition of depreciation used is as follows:

Depreciation, as applied to depreciable electric plant, means the loss in service value not restored by current maintenance, incurred in connection with the consumption or prospective retirement of electric plant in the course of service from causes which are known to be in current operation and against which the utility is not protected by insurance. Among the causes to be given consideration are wear and tear, decay, action of the elements, inadequacy, obsolescence, changes in art, changes in demand, and requirements of public authorities.

It is recommended that depreciation rates should continue to be calculated using the remaining life method, which is the method currently used by the Company. A generally accepted straight-line method for calculating depreciation rates, the remaining life method is the most frequently used method within the utility industry for calculating depreciation rates. In addition to the remaining life method, another straight-line method for calculating depreciation rates is the whole life method, which recovers the original cost, adjusted for net salvage, over the average service life of the assets. The basic assumptions used in determining depreciation rates by the whole life method are that the assets will be retired after a specific average life and the future amount of net salvage, based on

Exhibit AAW-3

gross salvage and cost of removal, is known. Neither assumption can be verified until all of the property units have been retired. Consequently, when the whole life method is used without modification in an environment in which either service lives or net salvage is changing, full capital recovery on a timely basis is not assured. The remaining life method compensates for these two assumptions by recovering the original cost of the assets, net of the depreciation reserve and adjusted for net salvage, over the average remaining life of the assets according to the following formula:

Depreciation Rate = 100% - Net Salvage % - Depreciation Reserve % Average Remaining Life

While the average remaining life, like the average service life, is an informed estimate, it can be estimated with increased accuracy as the assets grow older and approach retirement. Because the remaining life method is superior to the whole life method with respect to the objectives of capital recovery and because it is the current practice, it is recommended that depreciation rates continue to be calculated using the remaining life method.

Exhibit AAW-3

DEPRECIATION RATE STUDY PROCEDURES In addition to discussions with personnel and representatives of the Company, several major steps were important to the completion of the depreciation rate study, as follows: Assembly of property accounting data, including annual additions and retirements, aged

investment, dated retirements, and salvage and cost of removal amounts

Computerized processing of the data to establish historical retirement experience patterns

Evaluation of the statistical retirement experience to determine average service lives and retirement patterns (mortality dispersion curves)

Life span analysis of generating plant units

Determination of the remaining lives of the depreciable electric assets

Analysis of net salvage experience and determination of future net salvage

Conclusion of depreciation factors and calculation of annual depreciation amounts and depreciation rates

The study procedures outlined above - collection of data, analysis of data, application of informed judgment, and calculation of depreciation rates - are the generally accepted practice within the utility industry. The major procedural steps are discussed in the following sections.

Assembly of Property Accounting Data To study the historical characteristics of average service life, average remaining life, and retirement dispersion pattern, property accounting data was gathered for each property account. For location-type accounts, such as production and certain transmission and general property, the property accounting data included aged investment and dated retirements. For mass-type accounts, such as most transmission, and general assets, the property accounting data included annual additions and retirements. Historical salvage and cost of removal experience for each functional group also were collected. The basic accounting data was furnished by the Company from its property accounting records and depreciation study data, consistent with prior studies.

Computerized Processing The accounting history of additions, retirements, and balances is used to study service life experience and trends for various electric property accounts. When the dates of installation and retirements are known and appropriately compiled, study procedures known as actuarial methods can be used. When such data is not available in a reliable form, techniques are available to simulate actual vintages of retired assets. These simulated techniques, sometimes called semiactuarial methods, are commonly used and generally accepted life analysis techniques. As in prior studies of the Company’s depreciation, both actuarial and simulated methods were utilized in this study, based on accounting data availability.

Exhibit AAW-3

The actuarial method used was the retirement rate method, which is based on the rate at which retirements occur from various age groups. Specifically, for this technique, dated retirements, which are annual retirements arrayed by age at retirement, and aged investment, which is the study date investment balance arrayed by year of placement, are used. This data is combined to develop the rate of retirements by age for a band of retirement years. The observed survivor curve is determined from the retirement rates. Using standard curve-fitting practices and standard survivor curves, such as the Iowa-type survivor curves, the observed survivor curve is smoothed and extended to a concluded survivor curve of retirement dispersion and service life. For the simulated method, the specific technique of the simulated plant record (“SPR”) method used was the simulated plant balance (“Balances”) technique. Both historical service life and the pattern of retirement dispersion, as given by the system of Iowa-type survivor curves, are indicated through the use of the SPR method. For the SPR method, the input data consists of the annual additions and the annual retirements, along with standard mortality curves. In the Balances technique, a balance period is selected for analysis - for example, the last 10 years. The total of book balances for the last 10 years is then summed from the input data and becomes an amount to be matched. An Iowa-type survivor curve mortality table, expressed in terms of expected retirements, is applied to the additions. The simulated balances for each of the last 10 years are then computed. To ensure the simulated balances exactly equal the actual book balances in total for the 10-year period, a service life is developed in connection with the specified Iowa-type curve. The actual balances and simulated balances will vary in any one of the 10 years. This calculation is repeated for each of the several Iowa-type survivor curves and for different bands of balance years and study dates. In this life method, the measure of how well the balances fit is called the index of variation, which is based on a sum of the least squares technique. A survivor curve is a plot of the percent surviving at the beginning of each age interval, which is typically one year. The survivor curve starts at 100% for new assets and decreases to zero at the maximum life. The survivor curve represents the probability of surviving to a particular age. The average service life of the group of assets is the area under the complete survivor curve. The average remaining life at any age is the area under the curve to the right of the age divided by the percent surviving at that age. The standard survivor curves most often used with utility property are known as Iowa-type survivor curves. This family of empirical curves was developed nearly 100 years ago. The Iowa curves are classified as S, L, and R curves based on whether their retirement mode is found to be at (i.e., symmetrical with) the average service life, or to the left or right of the average service life. The family of R survivor curves (right modal) is shown in the following chart:

Exhibit AAW-3

Source: Public Utility Depreciation Practices, August 1996, NARUC

Evaluation of Statistical Data The computerized studies of past service lives are important to the depreciation rate study but are not conclusive by themselves. The depreciation analyst must study the results and may exercise significant judgment in selecting the best measure of past average service life and retirement dispersion. A purely mathematically driven procedure is not the correct approach to life analysis of utility property. The results of the statistical analyses are indications of past experience and are studied to establish trends in historical service life, retirement dispersion patterns as given by Iowa-type curves, and net salvage. Indicators of goodness-of-fit, a review of recorded accounting data, knowledge of the type of assets involved, and the experience of others with similar assets, including the depreciation parameters of the previous study prepared for the Company using information available as of December 31, 2013 (“last study”), are used as aids in these determinations. Historical service lives and Iowa-type curves also are modified, if appropriate, to reflect future service conditions.

Life Span Analysis A depreciation rate study includes two broad categories of assets: mass property and life span property. Due to the nature of the equipment in the Production Plant function groups, the retirements that occur within these functional groups reflect life span property. Life characteristics of life span property are summarized as follows:

Exhibit AAW-3

A large percentage of total investment is attributable to a few locations.

Annual retirements, until the ultimate retirement of the location, are small when compared with total investment at the location.

Annual retirements are interim in nature and do not represent life characteristics of the total investment at the location.

For the preceding reasons, the standard statistical analyses of life, actuarial or simulated, cannot be relied on to give accurate life indications for life span property. Both the life and net salvage of production, the generating facilities, were developed using the life span method, sometimes called the forecast method, of analysis. In the life span method, the total life span of the investment at each generating facility is determined. For study purposes, the life span of a generating facility is the time from the original investment to the time of ultimate or final retirement. Remaining life as of the study date is derived from the estimated retirement date of the investment by subtracting the study date from the estimated retirement date of each generating facility. In addition, remaining life must be adjusted for future interim retirement activity, because such activity precludes the total existing investment from remaining in service until the ultimate retirement date. Future interim retirements were developed from the application of interim retirement rates, which were generally based on Company historical data. Net salvage of interim retirements was developed based on historical net salvage from interim retirements. In the case of the generating facilities in the Production Plant functional groups, the Company’s dismantling study was updated as of December 31, 2015, and was used to estimate the net salvage costs of the ultimate retirement. The retirement dates of the generating facilities used in the study were provided by the Company. These provided retirement dates were reviewed considering Alliance Consulting Group’s experience with production life spans used in the electric utility and power generation industries and were concluded to be reasonable and appropriate for purposes of SEGCO depreciation. For the Steam Production functional group, the retirement dates remained the same as the retirement dates used in the last study, to calculate present rates. For Other Production, the retirement date of the Company’s CT unit was changed from 2040 to 2027, concurrent with the Company’s steam production units.

Determination of Remaining Lives To calculate the depreciation rate as described previously, the average remaining life of each property account must be determined. The remaining life for each property account can be readily calculated from the age distribution of the property investment once the average service life is determined and the Iowa-type survivor curve of retirement dispersion is established. As noted, the

Exhibit AAW-3

average remaining lives of the production plant locations are readily calculated in the life span analysis.

Net Salvage Analysis Salvage and cost of removal actually experienced by the Company are the basis for the net salvage analysis. In a typical depreciation rate study, this historical information is examined for trends together with knowledge of the assets in order to arrive at recommended future net salvage, stated as a percent of original cost of the assets retired. For this study, consistent with the results of prior studies of the Company and accepted industry practice, historical salvage and cost of removal actually experienced by SEGCO on a functional group basis were studied as a percent of the original cost of the assets retired. SEGCO’s specific historical information was examined for trends, together with knowledge of the nature of the assets and the experience of others in the industry, in order to arrive at recommended future net salvage, stated as a percent of original cost of the assets retired. For the Company’s capital recovery, as well as for the electric utility industry, net salvage continues to be an important factor in the depreciation rate calculation.

Depreciation Rate Calculation The final necessary element of the rate calculation is the accumulated provision for depreciation (“depreciation reserve”) for each property account. Depreciation reserve is maintained by the Company at the generating facility or unit level for the Production Plant functional groups. This depreciation reserve was allocated to its account level on a pro rata basis using the theoretical reserve, or reserve requirement, as of the study date. For the Transmission Plant accounts, the functional group depreciation reserve level also was allocated to the account level using the theoretical reserve. Depreciation reserve by account is maintained by the Company for the depreciable General Plant. When all elements of the depreciation rate calculation are known, the annual depreciation for each account or location is calculated by dividing the amount to be recovered by the average remaining life. The amount to be recovered is the total future accruals as of the study date and is the original cost investment, adjusted for net salvage, less the depreciation reserve. The depreciation rate is calculated by dividing the annual depreciation by the asset investment, which is equivalent to the formula shown in the Introduction section.

Four Phases of the Depreciation Study Process The customary depreciation study process, including that employed for this study, encompasses four distinct phases. The first phase involves data collection and field interviews. The second phase is where the initial data analysis occurs. The third phase is where the information and analysis is evaluated. Once the first three stages are complete, the fourth phase begins. This fourth phase involves the calculation of depreciation rates and documentation of the corresponding recommendations.

Exhibit AAW-3

During the Phase 1 data collection process, historical data is compiled from property records and general ledger systems. Data is validated for accuracy by extracting and comparing to multiple financial system sources. Audit of this data is validated against historical data from prior periods, historical general ledger sources, and field personnel discussions. This data is reviewed extensively to put it in the proper format for the study. For the purposes of this study, further discussion on data review and adjustment is found in the Net Salvage Analysis section. Also as part of the Phase I data collection process, numerous discussions are conducted with engineers and field operations personnel to obtain information that assists in the formulations of life and net salvage recommendations. One of the most important elements of performing a proper depreciation study is to understand how the subject company utilizes assets and the environment of those assets. Interviews with engineering and operations personnel are important ways to allow the analyst to obtain information that is beneficial when evaluating the output from the life and net salvage programs in relation to the Company’s actual asset utilization and environment. Information regarding these discussions is found in in the workpapers. Phase 2 is where the actuarial analysis is performed. Phase 2 and 3 overlap to a significant degree. The detailed property records information obtained in Phase 1 is used in Phase 2 to develop observed life tables for life analysis. These tables are then compared to industry standard tables to determine historical life characteristics. During Phase 2, a net salvage analysis also is performed. Net salvage analysis consists of compiling historical salvage and removal data by functional group to determine values and trends in gross salvage and removal cost. This information is then carried forward into Phase 3 for the evaluation process. Phase 3 is the evaluation process, which synthesizes analyses, interviews, and operational characteristics into a final selection of asset lives and net salvage parameters. The historical analysis from Phase 2 is further enhanced by the incorporation of recent or future changes in the characteristics or operations of assets that were revealed in Phase 1. Phases 2 and 3 allow the depreciation analyst to validate the asset characteristics as seen in the accounting transactions with actual operational experience of the subject company. Finally, Phase 4 involves the calculation of accrual rates, making recommendations and documenting the conclusions in the depreciation study. The calculation of accrual rates is found in Exhibits A and B. The depreciation study flow diagram shown as Figure 11 also documents the steps used in conducting this depreciation study. DEPRECIATION SYSTEMS2, at page 289, documents the same basic processes in performing a depreciation study which are: statistical analysis, evaluation of statistical analysis, discussions with management, forecast assumptions, and document recommendations.

1INTRODUCTION TO DEPRECIATION FOR PUBLIC UTILITIES & OTHER INDUSTRIES, AGA EEI (2013). 2 W. C. Fitch and F.K.Wolf, DEPRECIATION SYSTEMS, Iowa State Press, at page 289 (1994).

Exhibit AAW-3

Data Collection Analysis* Evaluation Calculation

Additions, retirements, survivors, and

plant/reserve balances

Account content

Other

Discussions with accounting,

engineering, planning and operations personnel

Retirements, gross salvage, and cost of

removalNet salvage

Life

Evaluation of analysis results and selection

of mortality characteristics

Calculateaccrual rates

Calculate theoreticalReserve (required for

whole life, recommended for other

options)

Recommendations

*Although not specifically noted, the mathematical analysis may need some level of input from other sources (for example, to determine analysis bands for life and adjustments to data used in all analysis).

Source: Introduction to Depreciation for Public Utilities and Other Industries, AGA EEI , 2013.

Figure 1

SEGCO DEPRECIATION STUDY PROCESS

Exhibit AAW-3

ANALYSIS


SEGCO Steam Production Plant The SEGCO Steam Production Plant functional group (“SEGCO Steam Production Plant”) consists of Units 1-4 of the Plant E.C. Gaston generating facility which is operated and maintained by Alabama Power. The in-service dates of these units were between 1960 and 1962. In 2015, the Company added a Gas Lateral to bring natural gas to Gaston 1-4. The gross plant for Gaston 1-4 is $480 million and $101 million for the Gas Lateral. As the gas lateral is jointly owned by SEGCO and Alabama Power, the terminal retirement date of Alabama Power’s Gaston Unit 5 was used to set depreciation rates. At the study date, total depreciable investment of this functional group was $582 million, with a depreciation reserve position of 51.7%. The ultimate costs associated with the new Environmental Protection Agency’s Coal Combustion Residuals Rule (“CCR Rule”) were included in the 2015 study. The estimated costs included in the study relate to the closure in place of the Company’s ash pond as well as the post closure groundwater monitoring of the pond. These costs are to be recovered over the remaining plant life. SEGCO depreciation rates have been developed using the life span method, which is discussed in the Life Span Analysis section. The life span used in this analysis was 65 years. The composite average service life of this functional group was 31.5 years. The remaining life of SEGCO Steam Production Plant was adjusted for future interim retirement activity, which precludes the total existing investment from remaining in service until the ultimate retirement date. The concluded IRRs are as follows, by account:

Account IRR (%)

311 0.22

312 0.53

314 1.39

315 0.26

316 0.86

The composite average remaining life of this functional group was 13.2 years. Net salvage of interim retirements was developed based on historical Alabama Power net salvage from interim retirements. The concluded net salvage percentage of negative 25% was then applied to the calculated future interim retirements. The updated production plant dismantling study was used to estimate the net salvage costs of the ultimate plant unit retirement.

Exhibit AAW-3

Comparisons of study date retirement dates, interim retirement rates and net salvage, and dismantling costs with those of the last study are shown in Exhibit C. The summary of recommended depreciation rates from the life span method for SEGCO Steam Production Plant and a comparison with present rates are shown in Exhibit A.

SEGCO Other Production Plant The SEGCO Other Production Plant functional group (“SEGCO Other Production Plant”) consists of the Gaston combustion turbine. At the study date, total depreciable investment of this functional group was approximately $3.27 million, with a depreciation reserve position of 34.3%. For this study, depreciation rates have been developed for this generating facility using the life span method, which was discussed the Life Span Analysis section. The basic life span used in this analysis was 57 years, which has been reduced 13 years from the last study. The composite average service life of this functional group was 34.22 years. Just as for Steam Production Plant, the remaining life of SEGCO Other Production Plant was adjusted for future interim retirement activity, which precludes the total existing investment from remaining in service until the ultimate retirement date. The concluded IRRs are as follows, by account:

Account IRR (%)

341 0.56

342 1.16

343 2.20

344 0.43

345 0.73

The composite average remaining life of this functional group was 10.95 years. Net salvage of interim retirements for SEGCO Other Production Plant was based on historical net salvage from interim retirements and was developed in the same manner as that described for Steam Production Plant. The concluded net salvage percentage of negative 10% was applied to the calculated interim retirements. The rates of this functional group do not directly include any allowance for dismantling costs at ultimate facility retirement. Comparisons of retirement dates, interim retirement rates and net salvage, and dismantling costs with those of the last study are shown in Exhibit C. The summary of recommended depreciation rates from the life span method for SEGCO Other Production Plant and a comparison with present rates are shown in Exhibit A.

SEGCO Transmission Plant SEGCO’s depreciable asset investment in the Transmission Plant functional group (“SEGCO Transmission Plant”) was approximately $37.7 million, with a depreciation reserve position of 28.8%, as of the study date.

Exhibit AAW-3

The simulated techniques did not provide a reasonable basis for life analysis because of limited historical retirement experience of this relatively small investment. The recommended lives and dispersion curves were concluded considering the nature of the property, industry experience and trends, and the average service lives concluded for similar Alabama Power property. The net salvage data was also limited for SEGCO Transmission Plant. Net salvage, as generally experienced by the electric utility industry, is the starting point of an analysis of future net salvage. Net salvage experience is studied as a percent of the cost of the plant retired. The industry experience of net salvage of similar property was primarily relied upon for SEGCO Transmission Plant. Net salvage for SEGCO Transmission Plant was concluded at negative 40%, which was the same as that of the last study. Comparisons of study date curve shape, average service life, and net salvage with those of the last study are shown in Exhibit B. The recommended depreciation factors and rates for SEGCO Transmission Plant and comparison with present rates are shown in Exhibit C.

SEGCO General Plant SEGCO’s depreciable asset investment in one General Plant account (“SEGCO General Plant”) was approximately $21.5 million, with a depreciation reserve position of 78.8%, as of the study date. The recommended life and dispersion curve for this railroad-related equipment were concluded considering the nature of the property. The average service life remained the same as compared with the life used in the last study. Net salvage was concluded at negative 10%, respectively. Comparisons of study date curve shape, average service life, and net salvage with those of the last study are shown in Exhibit C. The recommended depreciation factors and rates for SEGCO General Plant and comparison with present rates are shown in Exhibit C.

Summary of the Study

Southern Electric Generating Company The recommended depreciation factors of average remaining life, average service life, and net salvage and the resulting annual depreciation and rates by SEGCO Production Plant functional group, based on assets and depreciation reserve balances as of December 31, 2015, are presented in Exhibit A. The recommended depreciation factors by account of SEGCO Transmission Plant and SEGCO General Plant are presented in Exhibit B. The recommended depreciation rates result in composite SEGCO functional group rates, based on asset and depreciation reserve balances as of December 31, 2015, as follows:

Exhibit AAW-3

Functional Group Recommended

Depreciation Rate (%) Present

Depreciation Rate (%)

SEGCO Steam SEGCO Other Production Plant SEGCO Transmission Plant SEGCO General Plant Total SEGCO

5.27 6.13 2.57 2.41

5.02

4.14 2.69

2.72 2.48

3.95

Total SEGCO annual depreciation based on the rates resulting from the recommended depreciation factors of average remaining life, average service life, and net salvage, as applied to the asset balances as of December 31, 2015, are summarized as follows:

Recommended Annual Depreciation ($)

Present Annual Depreciation ($)

Annual Depreciation Difference ($)

Total SEGCO 32,365,454 25,729,938 6,635,516

The difference in SEGCO annual depreciation using the recommended rates is approximately a 25% increase based on balances as of December 31, 2015. Depreciation rates of SEGCO Steam Production Plant compared with those of the last study are primarily affected by the additional investment and the inclusion of the CCR Rule cost, partially offset by a decrease in the estimated dismantling cost.

Exhibit AAW-3

CONCLUSION The depreciation factors recommended in this report are designed to recover, through the depreciation expense provision, the total cost of the electric assets, allowing for net salvage, over the remaining useful lives of the assets based on the facts and conditions known at the time of the study. Based on the study, it is our opinion that the depreciation factors and rates as recommended are reasonable and appropriate for SEGCO capital recovery. We recommend that SEGCO continue its practice of periodic studies of depreciation rates and practices.

Exhibit AAW-3

Exhibit A Proposed Depreciation Rates and Comparison with

Present Rates of Production Plant - SEGCO

Exhibit AAW-3

Exhibit APage 1 of 2

12/31/2015 12/31/2015 Average Amount Average

Plant Depreciation Curve Service to be Remaining Annual Depreciation Removal Recovery Accrual Annual Depreciation

Account Account Name Balance Reserve Type Life Costs Percent Recovered Life Depreciation Rate Cost Period Amount Depreciation Rate

$ $ Years $ % $ $ % $ Years $ $ %STEAM PRODUCTION PLANTGaston Units 1‐4

311.0 Structures and Improvements 38,163,782 40,501,115 Forecast 50.33 (1,673,458) ‐4.38% (663,875) 11.36 (58,428) ‐0.15%312.0 Boiler Plant Equipment 299,530,708 165,206,391 Forecast 30.51 (15,161,646) ‐5.06% 149,485,963 11.17 13,381,086 4.47%314.0 Turbogenerator Units 83,051,827 53,140,288 Forecast 37.24 (5,691,879) ‐6.85% 35,603,418 10.66 3,339,783 4.02%315.0 Accessory Electric Equipment 48,784,692 34,553,631 Forecast 31.42 (2,182,248) ‐4.47% 16,413,309 11.34 1,447,702 2.97%316.0 Miscellaneous Power Plant Equipment 10,952,955 5,245,517 Forecast 26.15 (631,331) ‐5.76% 6,338,769 10.97 577,714 5.27%

Subtotal 480,483,964 298,646,942 33.24 (25,340,563) ‐5.27% 207,177,585 11.11 18,687,857 3.89% 83,507,066 11.00 7,591,551 26,279,408 5.47%

Gas Lateral311.0 Structures and Improvements 98,474,510 1,465,447 Forecast 23.41 (1,112,703) ‐1.13% 98,121,766 22.91 4,283,151 4.35%

Total Gas Lateral 98,474,510 1,465,447 23.41 (1,112,703) ‐1.13% 98,121,766 22.91 4,283,151 4.35% 0 0 0 4,283,151 4.35%

310.1 Easements 2,752,830 109,747 Forecast 23.41 ‐ 0.00% 2,643,083 22.91 115,368 4.19% 0 0 0 115,368 4.19%

Total Depreciable Production Excluding Easements 578,958,473 300,112,388 31.57 (26,453,266) ‐4.57% 305,299,351 13.12 22,971,007 3.97% 83,507,066 11.00 7,591,551 30,562,559 5.28%

Total Depreciable Production 581,711,303 300,222,136 31.53 (26,453,266) ‐4.55% 307,942,434 13.16 23,086,376 3.97% 83,507,066 11.00 7,591,551 30,677,927 5.27%

OTHER PRODUCTION PLANT

Gaston CT341.0 Structures and Improvements 222,814 42,002 Forecast 20.81 (1,098) ‐0.49% 181,909 11.15 16,310 7.32%342.0 Fuel Holders, Producers, and Accessories 126,344 96,021 Forecast 53.84 (1,259) ‐1.00% 31,582 10.79 2,926 2.32%343.0 Prime Movers 643,730 55,715 Forecast 14.70 (11,680) ‐1.81% 599,695 10.20 58,776 9.13%344.0 Generators 1,245,995 866,152 Forecast 56.73 (4,740) ‐0.38% 384,583 11.23 34,238 2.75%345.0 Accessory Electric Equipment 1,034,255 63,532 Forecast 19.73 (6,600) ‐0.64% 977,323 11.05 88,444 8.55%

Subtotal 3,273,137 1,123,422 34.22 (25,377) ‐0.78% 2,175,093 10.95 200,694 6.13% 0 0 0 200,694 6.13%

Total Depreciable Other Production 3,273,137 1,123,422 34.22 (25,377) ‐0.78% 2,175,093 10.95 200,694 6.13% 0 0 0 200,694 6.13%

Total Depreciable Production and Other Production 584,984,441 301,345,557 31.54 (26,478,644) ‐4.53% 310,117,527 13.15 23,287,070 3.98% 83,507,066 11.00 7,591,551 30,878,621 5.28%

Non CCR

SOUTHERN ELECTRIC GENERATING COMPANY

FOR PRODUCTION AND OTHER PRODUCTION PLANT

AT DECEMBER 31, 2015

Recommended Recommended

Non CCRCCR

Total

PROPOSED DEPRECIATION RATES

Net Salvage

Incl Dismantling

Exhibit AAW-3


Comparison of Recommended Rates with Present Rates

For Production and Other Production Plant

Exhibit AAW-3

Exhibit APage 2 of 2

12/31/2015

Plant Annual Depreciation Depreciation Annual

Account Account Name Balance Depreciation Rate Rate Depreciation Difference

$ $ % % $ $STEAM PRODUCTION PLANTGaston Units 1‐4

311.0 Structures and Improvements 38,163,782312.0 Boiler Plant Equipment 299,530,708314.0 Turbogenerator Units 83,051,827315.0 Accessory Electric Equipment 48,784,692316.0 Miscellaneous Power Plant Equipment 10,952,955

Subtotal 480,483,964 26,279,408 5.47% 4.14% 19,892,036 6,387,372

Gas Lateral311.0 Structures and Improvements 98,474,510

Total Gas Lateral 98,474,510 4,283,151 4.35% 4.14% 4,076,845 206,306

310.1 Easements 2,752,830 115,368 4.19% 4.14% 113,967 1,401

Total Depreciable Production Excluding Easements 578,958,473 30,562,559 5.28% 4.13% 23,968,881 6,593,678

Total Depreciable Production 581,711,303 30,677,927 5.27% 4.13% 24,082,848 6,595,079

OTHER PRODUCTION PLANTGaston CT

341.0 Structures and Improvements 222,814342.0 Fuel Holders, Producers, and Accessories 126,344343.0 Prime Movers 643,730344.0 Generators 1,245,995345.0 Accessory Electric Equipment 1,034,255

Subtotal 3,273,137 200,694 6.13% 2.69% 88,047 112,647

Total Depreciable Other Production 3,273,137 200,694 6.13% 2.69% 88,047 112,647

Total Depreciable Production and Other Production 584,984,441 30,878,621 5.28% 4.13% 24,170,895 6,707,726


PROPOSED DEPRECIATION RATES AND COMPARISON WITH PRESENT RATES

FOR PRODUCTION AND OTHER PRODUCTION PLANT

TotalRecommended Present Rates


Exhibit AAW-3

Exhibit B Proposed Depreciation Rates and Comparison with

Present Rates of Transmission Plant and General Plant - SEGCO

Exhibit AAW-3

Exhibit BPage 1 of 1

12/31/2015 12/31/2015 Average Amount Average

Plant Depreciation Curve Service to be Remaining Annual Depreciation Depreciation Annual

Account Account Name Balance Reserve Type Life Percentage Amount Recovered Life Depreciation Rate Rate Depreciation Difference

$ $ Years % $ $ Years $ % % $ $

TRANSMISSION PLANT350.1 Easements 278,127 4,696 R5 65 0% ‐ 273,431 13.06 20,929 7.53% 7.00% 19,474 1,455

352.0 Structures and Improvements 67,369 22,655 R4 65 ‐40% (26,948) 71,661 53.53 1,339 1.99%353.0 Station Equipment 14,339,696 7,689,281 R1 50 ‐40% (5,735,878) 12,386,293 35.94 344,684 2.40%

Subtotal 14,407,065 7,711,936 50 ‐40% (5,762,826) 12,457,954 36.02 346,023 2.40% 2.47% 355,566 (9,544)

354.0 Towers and Fixtures 17,812,349 1,978,180 S2.5 62 ‐40% (7,124,940) 22,959,109 54.93 417,948 2.35%355.0 Poles and Fixtures 2,967,012 107,815 R0.5 45 ‐40% (1,186,805) 4,046,002 43.32 93,394 3.15%356.0 Overhead Conductors and Devices 2,265,348 1,056,777 L2.5 45 ‐40% (906,139) 2,114,710 23.45 90,164 3.98%

Subtotal 23,044,709 3,142,772 58 ‐40% (9,217,884) 29,119,821 50.34 601,506 2.61% 2.82% 650,552 (49,046)

Total Depreciable Transmission Plant 37,729,901 10,859,405 55 ‐40% (14,980,709) 41,851,206 44.60 968,458 2.57% 2.72% 1,025,593 (57,135)

GENERAL PLANT398.0 Misc Eqmt ‐ Locomotive 21,475,460 16,917,033 R4 36 ‐10% (2,147,546) 6,705,973 12.94 518,376 2.41% 2.48% 533,450 (15,074)

Total Depreciable General Plant 21,475,460 16,917,033 36 ‐10% (2,147,546) 6,705,973 12.94 518,376 2.41% 2.48% 533,450 (15,074)

Net SalvageRecommended


PROPOSED DEPRECIATION RATES AND COMPARISON WITH PRESENT RATES

FOR TRANSMISSION PLANT AND GENERAL PLANT


Present Rates

Exhibit AAW-3

Exhibit C Comparison of Depreciation Factors - SEGCO

Exhibit AAW-3

Exhibit C

2013 Study

Retirement DateIn-Service

YearRetirement

DateLife Span

(Yrs) Steam Production PlantGaston Unit 1 2025 1960 2025 65Gaston Unit 2 2025 1960 2025 65Gaston Unit 3 2026 1961 2026 65Gaston Unit 4 2027 1962 2027 65

Other Production PlantGaston CT 2040 1970 2027 57

Production Plant Retirement Dates

2015 Study

Comparison of Depreciation Factors - SEGCO

Southern Electric Generating CompanyAs of December 31, 2015

Exhibit AAW-3

Exhibit C

Interim Retirement

Ratio

Interim Net

SalvageDismantling

Costs

Interim Retirement

Ratio

Interim Net

SalvageDismantling

Costs % $ % $ Steam Production PlantGaston Units 1-4

311 Structures and Improvements 0.20% -35% 0.22% -25%312 Boiler Plant Equipment 0.70% -35% 0.53% -25%314 Turbogenerator Units 0.65% -35% 1.39% -25%315 Accessory Electric Equipment 0.30% -35% 0.26% -25%316 Misc. Power Plant Equipment 0.50% -35% 0.86% -25%

Total Steam Production Plant 49,700,726 102,218,414

Other Production PlantGaston CT

341 Structures and Improvements 0.03% -5% 0.56% -10%342 Fuel Holders 0.30% -5% 1.16% -10%343 Prime Movers 0.30% -5% 2.20% -10%344 Generators 0.30% -5% 0.43% -10%345 Accessory Electric Equipment 0.40% -5% 0.73% -10%

Total Other Production Plant - -

Factors in Present Rates Factors in Recommended Rates

Interim Retirement Rate and Interim Net Salvage


Comparison of Depreciation Factors - SEGCO

Exhibit AAW-3

Exhibit C

Iowa

Curve

Average Service

LifeNet

Salvage Iowa

Curve

Average Service

LifeNet

Salvage Yrs % Yrs % Transmission Plant

350.1 Easements R5 65 0% R5 65 0%352.0 Structures and Improvements R4 55 -40% R4 65 -40%353.0 Station Equipment R2 52 -40% R1 50 -40%354.0 Towers and Fixtures R4 55 -40% S2.5 62 -40%355.0 Poles and Fixtures R1 38 -40% R0.5 45 -40%356.0 Overhead Conductors S2 45 -40% L2.5 45 -40%

General Plant398.0 Misc Equipment -Locomotive R4 36 -10% R4 36 -10%


Comparison of Depreciation Factors - SEGCOTranmission Plant and General Plant

Factors in Recommended RatesFactors in Present Rates

Exhibit AAW-3

EXHIBIT AAW-4

Alabama Power Company

Testimony of Dane A. Watson1

1 Note that the Exhibit DAW-2 referenced in Mr. Watson’s testimony is the Depreciation Study (with its own set of additional exhibits), all of which are contained in Exhibit AAW-3.


Witness: Dane A. Watson

SOUTHERN ELECTRIC GENERATING COMPANY 1

Before the Federal Energy Regulatory Commission 2 Prepared Direct Testimony of

Dane A. Watson 3 Docket No. ___________

4 Date of Filing: July 29, 2016

5

I. POSITION, QUALIFICATIONS, AND PURPOSE 6

7

Q. Please state your name and business address. 8

A. My name is Dane A. Watson. My business address is 1410 Avenue K, 9

Suite 1105B, Plano, TX 75074. 10

11

Q. What is your position? 12

A. I am the Managing Partner in Alliance Consulting Group (Alliance). 13

14

Q. What are your responsibilities as Managing Partner? 15

A. As the Managing Partner of Alliance, I am responsible for performing and 16

defending depreciation studies for clients across the United States in a 17

variety of regulatory proceedings. My duties include the assembly and 18

analysis of historical and simulated data, conducting field reviews, 19

determining service life and net salvage estimates, calculating annual 20

depreciation, presenting recommended depreciation rates to utility 21

management, and supporting such rates before regulatory bodies. I have 22

performed more than 150 depreciation studies in my career, appeared in 23

more than 125 cases, and testified before 30 regulatory bodies as an expert 24

witness on the subject of depreciation. 25



Q. Please state your prior work experience and responsibilities. 1

A. Since graduating from college in 1985, I have worked in the areas of 2

depreciation and valuation. I founded Alliance in 2004, and I am 3

responsible for conducting depreciation, valuation, and certain other 4

accounting-related studies for utilities in various regulated industries. 5

My prior employment from 1985 to 2004 was with Texas Utilities and 6

successor companies (TXU). During my tenure with TXU, I was responsible 7

for, among other things, conducting valuation and depreciation studies for 8

the domestic TXU companies. During that time, in addition to my 9

depreciation responsibilities, I also served as Manager of Property 10

Accounting Services and Records Management. 11

12

Q. What is your educational background? 13

A. I hold a Bachelor of Science degree in Electrical Engineering from the 14

University of Arkansas at Fayetteville and a Master’s Degree in Business 15

Administration from Amberton University. I am a registered Professional 16

Engineer in the State of Texas. 17

18

Q. Do you hold any special certification as a depreciation expert? 19

A. Yes. The Society of Depreciation Professionals (the Society) has 20

established national standards for depreciation professionals. The Society 21

administers an examination and has certain required qualifications to 22

become certified in this field. I met all requirements and have become a 23

Certified Depreciation Professional (CDP). 24

25



Q. Please describe your other professional activities. 1

A. I have twice been Chair of the Edison Electric Institute (EEI) Property 2

Accounting and Valuation Committee and have been Chairman of EEI’s 3

Depreciation and Economic Issues Subcommittee. I am a Senior Member 4

of the Institute of Electrical and Electronics Engineers (IEEE) and have held 5

numerous offices on the Executive Board of the Dallas Section of IEEE as 6

well as national and worldwide offices. I have served as President of the 7

Society of Depreciation Professionals twice, most recently in 2015. 8

9

Q. Have you previously testified before the Federal Energy Regulatory 10

Commission (FERC or the Commission) or other state and/or federal 11

regulatory commissions? 12

A. Yes. I have testified before numerous state and federal agencies in my 31 13

year career in performing depreciation studies. Exhibit DAW-1 lists the 14

regulatory proceedings in which I have conducted depreciation studies, filed 15

written testimony, or testified. 16

17

Q. What was your responsibility and participation in the conduct of the 18

Depreciation Rate Study (the Study) for Southern Electric Generating 19

Company (SEGCO or the Company)? 20

A. I was personally responsible for, participated in, and directed all aspects of 21

the work performed by Alliance resulting in the recommendations contained 22

in Exhibit DAW-2. 23

24

Q. What is the purpose of your direct testimony? 25



A. The purpose of my direct testimony is to: (1) discuss the recent depreciation 1

study conducted for SEGCO’s electric depreciable assets based on plant 2

and reserve balances as of December 31, 2015; and (2) support and justify 3

the recommended depreciation rates for the Company’s assets. 4

5

Q. Are you sponsoring any exhibits? 6

A. I sponsor Exhibits DAW-1 and DAW-2. 7

8

9

II. TESTIMONY STRUCTURE, DEPRECIATION DEFINITION 10

AND STUDY PURPOSE 11

12

Q. How is the remainder of your direct testimony structured? 13

A. My direct testimony is structured as follows: 14

In this Section II, I provide a general overview of depreciation, along with a 15

summary of the purpose of the Study and the conclusions that I have 16

reached based upon it. 17

In Section III, I explain the property included in the Study; the four-phase 18

approach I used to conduct the Study; and the depreciation system used for 19

the Study. 20

In Section IV, I explain how deprecation rates are determined, including 21

identifying the formula for depreciation rates. This portion of my direct 22

testimony also explains and fully discusses each portion of the depreciation 23

rate formula that is supported by my Study. Section IV is broken into the 24

following subparts, which align with the components of the depreciation rate 25



formula that the Study supports: (A) Depreciation Rate Formula; (B) Net 1

Salvage Amounts and Percentages; (C) Remaining Life Analysis; and 2

(D) Depreciation Rates and Depreciation Accrual Rates. 3

4

In Section V, I discuss the change in depreciation expense as a result of the 5

proposed depreciation rates. Specifically, I explain why SEGCO’s 6

depreciation expense is increasing. 7

8

Q. What definition of depreciation have you used for the purposes of 9

conducting a depreciation study and preparing your direct testimony? 10

A. The term “depreciation,” as used herein, is considered in the accounting 11

sense – that is, a system of accounting that distributes the cost of assets, 12

less net salvage (if any), over the estimated useful life of the assets in a 13

systematic and rational manner. Depreciation is a process of allocation, not 14

valuation. In other words, depreciation expense allocates the cost of the 15

asset, including any estimated net salvage (also known as net removal) 16

necessary to remove the asset, as an ongoing cost of operations over the 17

economic life of the asset. However, the amount allocated to any one 18

accounting period does not necessarily represent an actual loss or 19

decrease in value that will occur during that particular period. The 20

Company accrues depreciation on the basis of the original cost of all 21

depreciable property included in each functional property group. On 22

retirement, the full cost of depreciable property, less the net salvage value, 23

is charged to the depreciation reserve. 24

25



Q. Please generally describe the purpose of the Study. 1

A. The key functions of the Study are to: (1) determine the average service 2

lives for Transmission, and General Plant; (2) obtain terminal retirement 3

dates and determine the interim retirement ratios for Production and Other 4

Production Plant; (3) determine the interim net salvage amounts and the 5

terminal net salvage for all Production Plant and Other Production Plant, 6

supported by a Dismantlement Cost Study; (4) determine the net salvage 7

percentages for Transmission and General Plant; (5) calculate the 8

theoretical reserve of each property group based on the remaining life of the 9

group, the total life of the group and the estimated net salvage; (6) develop 10

depreciation rates, including the annual depreciation accrual. 11

12

Q. Based on the Study, what conclusions do you reach? 13

A. I conclude that the depreciation rates developed for SEGCO’s electric utility 14

accounts as set forth in the Study, which is sponsored by me and included 15

as Exhibit DAW-2, encompass the best and most recent information for 16

calculating SEGCO’s depreciation expense associated with these assets. 17

18

Based on life and net salvage parameters developed and applied to plant 19

assets and depreciation reserve balances as of December 31, 2015, the 20

depreciation rates in the Study will result in an increase in the annual 21

depreciation expense of approximately $6.6 million per year. This amount 22

was determined by comparing the depreciation expense difference between 23

the current depreciation rates and the proposed depreciation rates as of 24

December 31, 2015. A functional summary comparison of depreciation 25



expense is shown in Exhibit DAW-2 and a more detailed comparison is 1

shown in Exhibits A and B of Exhibit DAW-2. 2

3

4

III. SEGCO’S ELECTRIC DEPRECIATION RATE STUDY 5

6

Q. What is the purpose of this section of your direct testimony? 7

A. In this section of my direct testimony, I testify to the property included in the 8

Study; the four-phase approach I used to conduct the Study; and the 9

depreciation system (straight-line method, ALG procedure, remaining-life 10

technique) used for the Study. 11

12

Q. Did the Company give you any specific information for conducting the 13

depreciation rate study? 14

A. Yes. The Company gave me the following information for the Depreciation 15

Rate Study: 16

a. Terminal retirement dates for generating stations supplied by the 17

Company’s generation function; 18

b. Historical data from Alabama Power to use in the determination of 19

the interim retirement ratio and interim net salvage analysis for 20

generating stations as of December 31, 2015; 21

c. Dismantlement costs associated with dismantling each generating 22

unit for the Steam and Other Production functions were included in 23

the computations of the depreciation accrual rate; 24



d. Historical data to analyze for life and net salvage for Alabama Power 1

to assist in making recommendations for Transmission and General 2

Plant assets based on data as of December 31, 2015; and 3

e. Plant and reserve balances to calculate the theoretical reserves and 4

the recommended remaining life depreciation rates, including the 5

annual depreciation expense accrual, plant and reserve balance as 6

of December 31, 2015. 7

8

Q. What property is included in the depreciation study? 9

A. There are four general classes, or functional groups, of depreciable property 10

that are analyzed in the study: (1) Steam Production Plant, (2) Other 11

Production Plant, (3) Transmission Plant, and (4) General Plant property. 12

Steam Production assets in accounts 310-316 consist of generating units 13

that use fossil fuels. Other Production assets in accounts 340-346 consist 14

of generating units (such as combustion turbines) that use natural gas to 15

directly produce electricity. The Transmission Plant functional group 16

primarily consists of lines and associated facilities used to move power from 17

power plants and outside areas into the distribution system. General Plant 18

property owned by SEGCO consists of locomotives used in power 19

production. 20

Q. Please describe your depreciation study approach. 21

A. With the assistance of my staff, I conducted the SEGCO Depreciation Rate 22

Study in four phases as described Exhibit DAW-2. The four phases are: 23

Data Collection, Analysis, Evaluation, and Calculation. During the initial 24

phase of the Study, I collected historical data through December 31, 2015 to 25



be used in the analysis. After the data was assembled, I performed 1

analyses to determine the life and net salvage percentage for the different 2

property groups being studied. As part of this process, I conferred with field 3

personnel, engineers, and managers responsible for the installation, 4

operation, and removal of the assets to gain their input into the operation, 5

maintenance, and salvage of the assets. The information obtained from 6

field personnel, engineers and managerial personnel, combined with the 7

Study results, was then evaluated to determine how the results of the 8

historical asset activity analysis, in conjunction with the Company’s 9

expected future plans, should be applied. The final phase is calculation of 10

depreciation rates and the theoretical reserve. 11

12

The authoritative treatise, Depreciation Systems, documents the following 13

stages of a depreciation study: “statistical analysis, evaluation of statistical 14

analysis, discussions with management, forecast assumptions and 15

document recommendations”.1 My approach mirrors this process, and 16

following this approach ensures that Alliance comprehensively and 17

thoroughly projects the future expectations for the Company’s assets. 18

Exhibit DAW-2 demonstrates the four phases of the Depreciation Rate 19

Study conducted for SEGCO. 20

21

Q. What depreciation system did you use for the study? 22

A. The straight-line (method), the ALG (procedure), remaining-life (technique) 23

depreciation system was used for this Depreciation Rate Study. This is the 24 1 W.C. Fitch and F.K. Wolf, DEPRECIATION SYSTEMS, at page 289 (Iowa State Press, 1994).



same methodology used by SEGCO for the existing depreciation rates 1

accepted by the Commission in ER14-2662-000. 2

3

Q. What is a survivor curve? 4

A. A survivor curve represents the percentage of property remaining in service 5

at various age intervals. The Iowa Curves, the predominantly used survivor 6

curve method in the utility industry, are the result of an extensive 7

investigation of life characteristics of physical property made at Iowa State 8

College Engineering Experiment Station in the first half of the prior century. 9

Through common usage, revalidation and regulatory acceptance, the Iowa 10

Curves have become a descriptive standard for the life characteristics of 11

industrial property. For more detail on survivor curves see Exhibit DAW-2. 12

13

Q. How is a survivor curve used in this study? 14

A. Most property groups can be closely fitted to one Iowa Curve with a unique 15

average service life. The blending of judgment concerning current 16

conditions and future trends along with the matching of historical data 17

permits the depreciation analyst to make an informed selection of an 18

account’s average service life and survivor curve. When selecting an 19

average service life, a survivor curve is also selected. When recommending 20

depreciation rates, the depreciation analyst selects the average service life 21

and survivor curve that are used to compute remaining life and theoretical 22

reserve. 23

24

25



IV. DETERMINATION OF THE DEPRECIATION RATES 1

2


A. In this section of my direct testimony, I explain how deprecation rates are 4

determined, including identifying the formula for depreciation rates. This 5

portion of my direct testimony also explains and fully discusses each portion 6

of the depreciation rate formula that is supported by my Study. Section IV is 7

broken into the following subparts, which aligns with the components of the 8

depreciation rate formula that the Study supports: (A) the Depreciation Rate 9

Formula; (B) Theoretical Reserve; (C) Net Salvage Amounts or 10

Percentages; (D) Remaining Life Analysis; and (E) Depreciation Rates and 11

Depreciation Accrual Rates. 12

13

A. THE DEPRECIATION RATE FORMULA 14

Q. How are the depreciation rates determined? 15

A. The formula used to derive depreciation rates calculates annual 16

depreciation accrual amounts for each group by dividing the original cost of 17

the asset (gross plant), less book depreciation reserve, less estimated net 18

salvage, by the group’s respective remaining life. The resulting annual 19

accrual amounts for all depreciable property within an account are 20

accumulated, and the total is divided by the original cost (gross plant) of all 21

depreciable property within the account to determine the depreciation rate. 22

23

Q. What portion of the formula used to derive depreciation rates is supported 24

by the depreciation rate study? 25



A. The Depreciation Rate Study determines several pieces of the overall 1

formula used to derive depreciation rates. The portions of the formula 2

derived by the Study are: 3

• Depreciation Reserve Balance: The depreciation reserve was 4

provided by the Company with the gross plant balance amounts and 5

the depreciation reserve as of December 31, 2015. The Study 6

depreciation reserve balance is subtracted from gross plant. 7

• Net Salvage Amounts or Percentages: The Study supports the 8

overall net salvage percentages, but I rely upon the Company’s 9

Dismantlement Cost Study for a portion of the net salvage amount 10

determination. Specifically, for SEGCO’s Steam and Other 11

Production Plants, we used estimates reflected in the Dismantlement 12

Cost Study prepared by Southern Company Services. The Study 13

calculates and recommends the net salvage percentages for the 14

Transmission and General Plant accounts. For these plant accounts, 15

salvage and removal cost percentages are calculated by dividing the 16

current cost of salvage or removal, as supported by the Study, by the 17

original installed cost of the retired asset. 18

• Remaining Life: The Study supports the remaining life calculation by 19

determining the appropriate average service lives and retirement 20

survivor curve for each account within a functional group. 21

• Resulting Annual Depreciation Accrual and Depreciation Rates: As 22

discussed above, the Study calculates annual accrual amounts for 23

each depreciation group and then the annual depreciation accrual 24

rates are then derived from the proposed amounts. The computation 25



of the annual depreciation rates and annual accrual amounts is 1

shown in Exhibits A and B of Exhibit DAW-2. 2

3

I describe in more depth below how the Study determines each component 4

of the formula, as well as the Study results for each component. 5

6

7

B. NET SALVAGE AMOUNTS OR PERCENTAGES 8

Q. What is net salvage as determined for all the company’s plant assets? 9

A. While discussed more fully in the Study itself, net salvage is the difference 10

between the gross salvage (what the asset was sold for) and the cost of 11

removal (cost to remove and dispose of the asset) (COR). If the COR 12

exceeds gross salvage, net salvage is negative. Some plant assets can 13

experience significant negative removal cost percentages due to the 14

amount of removal cost and the timing of any capital additions versus the 15

retirement. 16

17

Salvage and removal cost percentages are calculated by dividing the 18

current cost of salvage or removal by the original installed cost of the assets 19

retired. 20

Q. How is net salvage determined for Steam and Other Production Plant in the 21

study? 22

A. The Study uses the interim net salvage for each generating unit. An interim 23

net salvage percentage is calculated and represents the estimated removal 24

cost for interim retirements that will occur annually over the remaining life of 25



each generating unit. The interim net salvage percentages proposed for 1

production plant accounts are shown in Exhibit DAW-2. The dismantlement 2

cost (terminal cost of removal) estimates for each generating unit are 3

included. The Study separately calculates the net salvage percentages for 4

the Transmission and General Plant accounts. 5

6

Q. How did you determine the net salvage percentages for each asset group in 7

Transmission and General plant? 8

A. Since there is limited data for SEGCO to analyze the data separately, I 9

reviewed the data for Alabama Power Company in each function. To 10

determine the appropriate net salvage percentages for each function, I start 11

by using an industry-standard method that divides the current cost of 12

salvage or removal by the original installed cost of the assets retired. 13

However, judgment also is applied to select a net salvage percentage that 14

represents the future expectations for each account. To apply this judgment, 15

historical salvage and removal data by functional group is compiled to 16

determine values and trends in gross salvage and removal cost. The 17

functional data for retirements, gross salvage, and COR is detailed in the 18

Study work papers. Moving averages are calculated with this data, with the 19

intent to remove timing differences between retirement and salvage and 20

removal cost. Considering the facts and circumstances regarding SEGCO, 21

I used judgment to retain the existing net salvage parameters for 22

Transmission and General Plant. 23

24



Q. Is it not sufficient to analyze historical data to form your life and net salvage 1

estimates? 2

A. No. Historic life and salvage data is one factor to consider in making life 3

and net salvage recommendations, but it is crucial to incorporate future 4

trends, changes in equipment and Company-specific operational 5

information before finally making life and net salvage recommendations. 6

Once all the calculations and data are prepared, I take into account my 7

judgment, Company expectations and trends to determine the appropriate 8

net salvage percentages. A comparison of the approved and proposed net 9

salvage percentages are shown in Exhibit DAW-2, Exhibit C. 10

11

Q. Did any of the net salvage percentages change for the various accounts? 12

A. The net salvage for Steam Production Plant increased based on updated 13

dismantling cost estimates and updated interim retirement removal costs. 14

For Other Production, there were minor changes in interim retirement 15

removal costs, but there was no change in the proposed accrual for Other 16

Production Plant. For Transmission and General assets, no change was 17

made in the proposed net salvage percentages. 18

19

C. REMAINING LIFE ANALYSIS 20

Q. Does the study conduct life analysis for production units? 21

A. Yes. The terminal retirement dates are inputs used in the Study to derive 22

the average remaining life depreciation rate for generation. These terminal 23

retirement dates were provided by the Company to me. These dates are 24

consistent with current operating expectations, environmental legislation, 25



and resource plans. Interim retirement ratios are also inputs used in the 1

Study to derive the average remaining life depreciation rate for generation 2

assets. 3

4

Q. Can you explain interim retirement ratios and what purpose they serve in 5

the Study? 6

A. Yes. As detailed in the Study, interim retirement ratios were used to model 7

the retirement of individual assets within primary plant accounts for each 8

generating unit prior to the terminal retirement of the facility. The life span 9

procedure assumes all assets are depreciated (straight-line) for the same 10

number of periods and will retire at the same time (the terminal retirement 11

date). Adding interim retirement ratios to this procedure reflects the fact 12

that some of the assets at a power plant will not survive to the end of the life 13

of the facility and should be depreciated (straight-line) more quickly and 14

retired earlier than the terminal life of the overall facility. By applying interim 15

retirements, recognition is given to the obvious fact that generating units will 16

have retirements of depreciable property before the end of their lives. The 17

interim retirement methodology reflected in the Study was used in the 18

development of the depreciation rates accepted in ER14-2662-000 and in 19

the calculation of the Company’s proposed production depreciation rates. 20

The interim retirement ratios proposed for production accounts are shown in 21

Exhibit DAW-2. 22

23

Q. What method does the study use to analyze historical data for 24

Transmission, and General plant to determine life characteristics? 25



A. All Transmission and General Plant accounts were analyzed using either 1

the actuarial analysis (retirement rate method) or the simulated plant record 2

balances (SPR) method to estimate the life of the property in each account. 3

In much the same manner as human mortality is analyzed by actuaries, 4

depreciation analysts use models of property mortality characteristics that 5

have been validated in research and empirical applications. 6

7

Q. How did you determine the average service lives for Transmission and 8

General plant? 9

A. As noted above, actuarial or SPR analysis for Alabama Power accounts 10

was used to determine the appropriate average service lives for each 11

account in Transmission and General. A summary comparison of the 12

approved and proposed depreciable lives is shown in Exhibit DAW-2, 13

Exhibit C. 14

15

Q. Please describe some of the changes in the average service lives for the 16

various Transmission and General accounts. 17

A. For Transmission and General Accounts, there are three accounts with 18

increasing lives; one account with a decreasing life; and three accounts 19

where no change in life is recommended. Examples of some of the 20

changes in average service lives for Transmission, and General Plant are 21

as follows: 22

• The largest increases, greater than five years, in life were in: 23

Transmission Account 352 Transmission Structures and 24

Improvements which increased by ten years; and Transmission 25



Account 354 Towers and Fixtures and FERC 355 Poles and Fixtures, 1

which both increased by seven years. 2

• The only decrease in life was Transmission Account 353, Station 3

Equipment which decreased by 2 years. All other accounts retained 4

the existing lives. 5

6

D. DEPRECIATION RATES AND DEPRECIATION 7

ACCRUAL RATES 8

Q. Having determined the theoretical reserve, the book reserve, calculated net 9

salvage and the remaining lives through the Study, please describe the final 10

steps in calculating the depreciation rates and annual depreciation accrual 11

expense? 12

A. To determine depreciation rates the following process occurred: 1) historic 13

data through December 31, 2015 and judgment were used to estimate life 14

and net salvage parameters; and 2) the vintage balances and reserves at 15

December 31, 2015 were used to compute the proposed depreciation 16

accrual expense and rates. 17

In the Study, calculation of the depreciation accrual rates is computed using 18

the same methodology as was used in developing the depreciation rates 19

from the aforementioned ER14-2662-000. The computation of accrual rates 20

are shown in Exhibits A and B of Exhibit DAW-2 21

22

23

V. CHANGE IN DEPRECIATION EXPENSE AS A RESULT 24

OF THE PROPOSED DEPRECIATION RATES 25



1


A. In this section of my direct testimony, I discuss the change in depreciation 3

expense as a result of the proposed depreciation rates. Specifically, I 4

explain why SEGCO’s depreciation expense is increasing, as well as detail 5

the change in depreciation expense. 6

7

Q. Please summarize the depreciation study results with respect to 8

depreciation changes in depreciation expense. 9

A. Based on the revised depreciation rates indicated in the Study, as applied to 10

plant balances as of December 31, 2015, the overall change in annual 11

depreciation expense is an increase of approximately $6.6 million. As 12

shown previously in Exhibit DAW-2 this increase reflects an increase of $6.7 13

million in Production, consisting of Steam Production of $6.6 million and 14

Other Production of $0.1 million. The change in Steam Production is driven 15

by the additional dismantling costs that have been identified in closing the 16

Company’s ash pond and the reflection of interim retirements. There is a 17

decrease of $0.1 million in Transmission, and no change in General Plant. 18

Detailed Production rates by plant and account are shown in Exhibit DAW-19

2, Exhibit A. Rates by account for Transmission and General are shown in 20

Exhibit DAW-2, Exhibit B. 21

22

Q. Mr. Watson, do you have any concluding remarks? 23

A. Yes. The Study and analysis performed under my supervision fully 24

supports setting depreciation rates at the level I have indicated in my 25



testimony. The Company should continue to periodically review the annual 1

depreciation rates for its property. In fact, the industry norm is to perform a 2

depreciation study every three to five years, unless there are other factors 3

influencing the life and net salvage expectations of assets. Performing 4

depreciation studies on a regular basis and receiving approval of the 5

recommended depreciation rates softens intergenerational inequities for 6

customers. In this way, the Company’s depreciation expense will more 7

accurately reflect its cost of operations and the rates for all customers will 8

include an appropriate share of the capital expended for their benefit. 9

10

The Study for SEGCO’s electric depreciable property for actual plant assets 11

as of December 31, 2015 describes the extensive analysis performed and 12

the resulting rates that are now appropriate for Company property. 13

14

Q. Does this conclude your direct testimony? 15

A. Yes, it does. 16

17 18

Dane Watson Testimony Appearances

Exhibit DAW-1Page 1 of 11

Asset Location Commission Docket (If Applicable Company Year Description

MichiganMichigan Public

Service Commission

U-18127 Consumers Engergy 2016

Natural Gas Depreciation

Study

Iowa Iowa Utilities Board RPU-2016-0003 Liberty-Iowa 2016


Study

Illinois Illinois Commerce Commission GRM #16-208 Liberty-

Illinois 2016Natural Gas Depreciation

Study

Kentucky FERC RP16-097-000 KOT 2016Natural Gas Depreciation

Study

AlaskaRegulatory

Commission of Alaska

U-16-067Alaska

Electric Light and Power

2016Generating Unit

Depreciation Study

FloridaFlorida Public

Service Commission

160170-EI Gulf Power 2016Electric

Depreciation Study

ArizonaArizona

Corporation Commission

G-01551A-16-0107

Southwest Gas 2016 Gas Depreciation

Study

TexasPublic Utility

Commission of Texas

45414 Sharyland 2016Electric

Depreciation Study

Colorado Colorado Public Utilities Commission 16A-0231E Public Service

of Colorado 2016Electric

Depreciation Study

Multi-State NE US FERC 16-453-000

Northeast Transmission Development,

LLC

2015Electric

Depreciaiton Study

ArkansasArkansas Public

Service Commission

15-098-U CenterPoint Arkansas 2015

Gas Depreciation Study and Cost of Removal Study

New MexicoNew Mexico

Public Regulation Commission

15-00296-UT SPS NM 2015Electric

Depreciation Study

Atmos Energy Corporation

Tennessee Regulatory Authority

14-00146 Atmos Tennessee 2015


Study






15-00261-UTPublic Service Company of New Mexico

2015Electric

Depreciation Study

KansasKansas


16-ATMG-079-RTS Atmos Kansas 2015 Gas Depreciation

Study

TexasPublic Utility

Commission of Texas

44704 Entergy Texas 2015Electric

Depreciation Study

AlaskaRegulatory


U-15-089Fairbanks Water and

Wastewater2015

Water and Waste Water

Depreciation Study

Arkansas Arkansas Public Service Commission 15-031-U Source Gas

Arkansas 2015Underground Storage Gas

Depreciation Study



15-00139-UT SPS NM 2015Electric

Depreciation Study

TexasPublic Utility

Commission of Texas

44746Wind Energy Transmission

Texas2015

Electric Depreciation

Study

Colorado Colorado Public Utilities Commission 15-AL-0299G Atmos

Colorado 2015 Gas Depreciation Study


Arkansas 2015 Gas Depreciation Study

TexasRailroad

Commission of Texas

GUD 10432CenterPoint- Texas Coast

Division2015 Gas Depreciation

Study

KansasKansas


15-KCPE-116-RTS

Kansas City Power and

Light2015


Study

AlaskaRegulatory


U-14-120Alaska

Electric Light and Power

2014-2015


Study




TexasPublic Utility

Commission of Texas

43950 Cross Texas Transmission 2014


Study



14-00332-UTPublic Service

of New Mexico

2014Electric

Depreciation Study

TexasPublic Utility

Commission of Texas

43695 Xcel Energy 2014Electric

Depreciation Study

Multi State – SE US FERC RP15-101 Florida Gas

Transmission 2014Gas Transmission

Depreciation Study

California California Public Utilities Commission A.14-07-006 Golden State

Water 2014

Water and Waste Water

Depreciation Study

MichiganMichigan Public

Service Commission

U-17653Consumers

Energy Company

2014

Electric and Common

Depreciation Study

ColoradoPublic Utilities Commission of

Colorado14AL-0660E Public Service

of Colorado 2014 Electric Depreciation Study

Wisconsin Wisconsin 05-DU-102 WE Energies 2014

Electric, Gas, Steam and Common Depreciation

Studies

TexasPublic Utility

Commission of Texas

42469 Lone Star Transmission 2014


Study

NebraskaNebraska Public

Service Commission

NG-0079 Source Gas Nebraska 2014 Gas Depreciation

Study

AlaskaRegulatory


U-14-055TDX North

Slope Generating

2014 Electric Depreciation Study

AlaskaRegulatory


U-14-054Sand Point Generating

LLC2014 Electric

Depreciation Study




AlaskaRegulatory


U-14-045 Matanuska Electric Coop 2014 Electric Generation

Depreciation Study

Texas, New Mexico

Public Utility Commission of

Texas42004 Xcel Energy 2013-

2014

Electric Production,

Transmission, Distribution and

General Plant Depreciation

Study

New Jersey Board of Public Utilities GR13111137 South Jersey

Gas 2013 Gas Depreciation Study

Various FERC RP14-247-000 Sea Robin 2013 Gas Depreciation Study

Arkansas Arkansas Public Service Commission 13-078-U Arkansas

Oklahoma Gas 2013 Gas Depreciation Study


Arkansas 2013 Gas Depreciation Study

California California Public Utilities Commission

Proceeding No.: A.13-11-003

Southern California

Edison2013 Electric

Depreciation Study

North Carolina/South

CarolinaFERC ER13-1313

Progress Energy

Carolina2013 Electric

Depreciation Study

WisconsinPublic Service Commission of

Wisconsin4220-DU-108

Northern States Power-

Wisconsin2013

Electric, Gas and Common


General

TexasPublic Utility

Commission of Texas

41474 Sharyland 2013Electric

Depreciation Study

KentuckyKentucky Public

Service Commission

2013-00148 Atmos Energy Corporation 2013 Gas Depreciation

Study

Minnesota Minnesota Public Utilities Commission 13-252

Allete Minnesota

Power2013 Electric

Depreciation Study




New HampshireNew Hampshire Public Service Commission

DE 13-063 Liberty Utilities 2013

Electric Distribution and

General

TexasRailroad

Commission of Texas

10235 West Texas Gas 2013 Gas Depreciation

Study

AlaskaRegulatory


U-12-154Alaska

Telephone Company

2012 Telecommunications Utility

New MexicoNew Mexico Public

Regulation Commission

12-00350-UT SPS 2012 Electric Depreciation Study

Colorado Colorado Public Utilities Commission 12AL-1269ST Public Service

of Colorado 2012 Gas and Steam Depreciation Study

Colorado Colorado Public Utilities Commission 12AL-1268G Public Service

of Colorado 2012 Gas and Steam Depreciation Study

AlaskaRegulatory


U-12-149

Municipal Power and

Light City of Anchorage


TexasTexas Public

Utility Commission

40824 Xcel Energy 2012 Electric Depreciation Study

South CarolinaPublic Service Commission of South Carolina

Docket 2012-384-E

Progress Energy


Depreciation Study

AlaskaRegulatory


U-12-141Interior

Telephone Company

2012 Telecommunications Utility

Michigan Michigan Public Service Commission U-17104

Michigan Gas Utilities

Corporation2012 Gas Depreciation

Study

North CarolinaNorth Carolina

Utilities Commission

E-2 Sub 1025Progress Energy


Depreciation Study

TexasTexas Public

Utility Commission

40606Wind Energy Transmission

Texas2012 Electric

Depreciation Study




TexasTexas Public

Utility Commission

40604 Cross Texas Transmission


MinnesotaMinnesota Public

Utilities Commission

12-858Minnesota Northern

States Power2012

Electric, Gas and Common


General

TexasRailroad

Commission of Texas

10170 Atmos Mid-Tex

2012 Gas Depreciation Study

TexasRailroad

Commission of Texas

10174 Atmos West Texas


TexasRailroad

Commission of Texas

10182CenterPoint Beaumont/ East Texas


KansasKansas


12-KCPE-764-RTS

Kansas City Power and

Light2012 Electric

Depreciation Study

NevadaPublic Utility

Commission of Nevada

12-04005 Southwest Gas


TexasRailroad

Commission of Texas

10147, 10170 Atmos Mid-Tex


KansasKansas


12-ATMG-564-RTS Atmos Kansas 2012 Gas Depreciation

Study

Texas Texas Public Utility Commission 40020 Lone Star

Transmission 2012 Electric Depreciation Study


Consumers Energy

Company2011 Gas Depreciation

Study

ColoradoPublic Utilities Commission of

Colorado11AL-947E Public Service


Texas Texas Public Utility Commission 39896 Entergy Texas 2011 Electric

Depreciation Study




MultiState FERC ER12-212American

Transmission Company


California California Public Utilities Commission A1011015

Southern California

Edison2011 Electric

Depreciation Study

Mississippi Mississippi Public Service Commission 2011-UN-184 Atmos Energy 2011 Gas Depreciation

Study


Consumers Energy

Company2011 Wind Depreciation

Rate Study

TexasPublic Utility

Commission of Texas

38929 Oncor 2011 Electric Depreciation Study

TexasRailroad

Commission of Texas

10038 CenterPoint South TX 2010 Gas Depreciation

Study

AlaskaRegulatory


U-10-070Inside Passage

Electric Cooperative


TexasPublic Utility

Commission of Texas

36633City Public

Service of San Antonio


Texas Texas Railroad Commission 10000 Atmos Pipeline

Texas 2010 Gas Depreciation Study

Multi State – SE US FERC RP10-21-000 Florida Gas Transmission 2010 Gas Depreciation

Study

Maine/ New Hampshire FERC 10-896

Granite State Gas

Transmission2010 Gas Depreciation

Study

Texas Public Utility

Commission of Texas

38480 Texas New Mexico Power 2010 Electric

Depreciation Study


Commission of Texas

38339 CenterPoint Electric 2010 Electric

Depreciation Study

Texas Texas Railroad Commission 10041 Atmos

Amarillo 2010 Gas Depreciation Study




Georgia Georgia Public Service Commission 31647 Atlanta Gas

Light 2010 Gas Depreciation Study


Commission of Texas

38147 Southwestern Public Service 2010 Electric Technical

Update

AlaskaRegulatory


U-09-015Alaska Electric

Light and Power

2009-2010

Electric Depreciation Study

AlaskaRegulatory


U-10-043 Utility Services of Alaska

2009-2010

Water Depreciation Study


Consumers Energy/DTE

Energy

2009-2010

Ludington Pumped Storage

Depreciation Study

Michigan Michigan Public Service Commission U-16054 Consumers

Energy2009-2010



Michigan Gas Utilities

Corporation2009 Gas Depreciation

Study


Upper Peninsula

Power Company


TexasRailroad

Commission of Texas

9869 Atmos Energy 2009 Shared Services Depreciation Study

Mississippi Mississippi Public Service Commission 09-UN-334

CenterPoint Energy

Mississippi2009 Gas Depreciation

Study

TexasRailroad

Commission of Texas

9902CenterPoint

Energy Houston


Colorado Colorado Public Utilities Commission 09AL-299E Public Service


Tennessee Tennessee Regulatory Authority 11-00144 Piedmont

Natural Gas 2009 Gas Depreciation Study




Louisiana Louisiana Public Service Commission U-30689 Cleco 2008 Electric

Depreciation Study

TexasPublic Utility

Commission of Texas

35763 SPS 2008

Electric Production, Transmission,

Distribution and General Plant

Depreciation Study

Wisconsin Wisconsin 05-DU-101 WE Energies 2008

Electric, Gas, Steam and Common Depreciation

Studies

North Dakota North Dakota Public Service Commission PU-07-776 Northern States

Power 2008 Net Salvage

New MexicoNew Mexico Public

Regulation Commission

07-00319-UT SPS 2008 Testimony – Depreciation

Multiple StatesRailroad

Commission of Texas

9762 Atmos Energy 2007-2008

Shared Services Depreciation Study

Minnesota Minnesota Public Utilities Commission E015/D-08-422 Minnesota

Power2007-2008


TexasPublic Utility

Commission of Texas


TexasPublic Utility

Commission of Texas


Michigan Michigan Public Service Commission U-15629 Consumers

Energy2006-2009

Gas Depreciation Study

Colorado Colorado Public Utilities Commission 06-234-EG Public Service





Arkansas Arkansas Public Service Commission 06-161-U

CenterPoint Energy – Arkla

Gas2006

Gas Distribution Depreciation Study and Removal Cost

Study

Texas, New MexicoPublic Utility

Commission of Texas

32766 Xcel Energy 2005-2006

Electric Production, Transmission,

Distribution and General Plant

Depreciation Study

TexasRailroad

Commission of Texas

9670/9676 Atmos Energy Corp

2005-2006

Gas Distribution Depreciation Study

TexasRailroad

Commission of Texas

9400 TXU Gas 2003-2004


TexasRailroad

Commission of Texas

9313 TXU Gas 2002 Gas Distribution Depreciation Study

TexasRailroad

Commission of Texas

9225 TXU Gas 2002 Gas Distribution Depreciation Study

TexasPublic Utility

Commission of Texas

24060 TXU 2001 Line Losses

TexasPublic Utility

Commission of Texas

23640 TXU 2001 Line Losses

TexasRailroad

Commission of Texas

9145-9148 TXU Gas 2000-2001


TexasPublic Utility

Commission of Texas

22350 TXU 2000-2001

Electric Depreciation Study,

Unbundling

TexasRailroad

Commission of Texas

8976 TXU Pipeline 1999 Pipeline Depreciation Study

TexasPublic Utility

Commission of Texas

20285 TXU 1999 Fuel Company Depreciation Study




TexasPublic Utility

Commission of Texas

18490 TXU 1998 Transition to Competition

TexasPublic Utility

Commission of Texas

16650 TXU 1997 Customer Complaint

TexasPublic Utility

Commission of Texas

15195 TXU 1996 Mining Company Depreciaiton Study

TexasPublic Utility

Commission of Texas

12160 TXU 1993 Fuel Company Depreciation Study

TexasPublic Utility

Commission of Texas

11735 TXU 1993 Electric Depreciation Study

CERTIFICATE OF SERVICE

I hereby certify that I have this day served the foregoing documents on those individuals

indicated in the transmittal letter.

Dated at Birmingham, Alabama, this 29th day of July, 2016.

/s/ Scott B. Grover Scott B. Grover Attorney for Southern Company Services, Inc.