F

ILE 

iWC 

BEFORE 1 1 ) 1I (I)LCOMMISSION OF I) i .1 

IN THE MATTER OF THE APPLICATION OF 

OKLAHOMA GAS AND ELECTRIC COMPANY 

FOR AN ORDER OF THE COMMISSION 

AUTHORIZING APPLICANT TO MODIFY ITS 

RATES, CHARGES, AND TARIFFS FOR RETAIL 

ELECTRIC SERVICE IN OKLAHOMA 

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CAUSE NO. PUD 201100087 

Testimony Summary 

of 

Jesse B. Langston 

on behalf of 

Oklahoma Gas and Electric Company 

December 12, 2011 
Jesse B. Langston 

Direct Testimony Summary 

On July 28, 2011, Mr. Jesse B. Langston after establishing his credentials, work 

experience, and qualifications, testified that be is Vice President of Retail Energy at Oklahoma 

Gas and Electric Company ("OG&E" or "Company").' Mr. Langston testified that the purpose 

of his testimony is to identify each of the Company witnesses in this proceeding, outline the 

relief requested in this cause and generally explain why OG&E is seeking a rate increase at this 

time. 

Mr. Langston testified that OG&E is requesting authorization to increase its rates by 

$73.3 million. He stated that this represents a 1.68% annual increase in rates since OG&E' s last 

rate case and equates to an increase of approximately $6.60 per month for the average residential 

customer. He stated that the proposed tariff modifications include changes to the Renewable 

Transmission System Additions Rider ("RTSA") and extended funding for OG&E's System 

Hardening program. Mr. Langston testified that the rate relief OG&E is requesting is necessary 

to pay for investments that the Company has already made and expenses that the Company is 

already experiencing. He also stated that this rate relief will ensure that the Company continues 

to provide reliable electric service at the lowest reasonable cost. 

Mr. Langston then explained why it is important for the Commission to grant the relief 

requested. He explained that the rate increase is driven by investments in distribution, 

transmission and generation facilities needed to serve those customers and the increased cost of 

operating and maintaining OG&E's system. He testified that, across OG&E's service territory, 

since March of 2009, the Company will have invested well over $1 billion in capital 

improvements by January 2012 and experienced at least a $65 million increase in the cost of 

operations, including property taxes. Mr. Langston stated that, during that same period, the 

Company will invest approximately $263 million in its Oklahoma distribution system alone. He 

testified that the investment for facilities and equipment used to provide service to Oklahoma 

customers is $895 million higher in this case than the amount reflected in OG&E's last case; and 

less than one-half of that cost is being recovered through riders. He explained that all those 

investments benefit OG&E customers, but the rates currently paid by customers do not include 

Between filing his Direct Testimony and his Rebuttal Testimony, Mr. Langston's job title changed from 

Vice President of Utility Commercial Operations to Vice President of Retail Energy. 

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compensation for many of those investments or the Oklahoma share of the increased operating 

costs. 

Mr. Langston then testified about how OG&E's cost of operations compares to other 

electric utilities and explained how OG&E ranks as one of the most efficiently run electric 

utilities in the country. Mr. Langston cited as an example OG&E's commitment to more than 

$20 million in O&M reductions associated with smart grid deployment and its effort to trim 

more than $20 million from the Company's pension and benefits costs. Mr. Langston testified 

that, even with continuous focus on efficiency, the cost of providing quality and reliable electric 

service has gone up and, as OG&E focuses on managing costs, it is equally important that 

OG&E receive timely recovery of its cost of providing service so it can address customer needs 

in the future. 

Mr. Langston testified that the Commission has approved riders that have allowed the 

Company to recover some of its costs. For example, Mr. Langston stated that, of the $895 

million in capital investments added to the Oklahoma rate base since March 2009, $397 million 

was funded through riders. Mr. Langston then explained that OG&E is not being compensated 

in riders for the other $498 million of that investment. Mr. Langston then testified that cost 

recovery is important to ensure that OG&E is a financially sound utility when it faces future 

customer needs and expectations and current and future challenges 

Mr. Langston then testified about the steps the Company has taken to position itself to 

address future challenges. He discussed the Company's 2020 Goal of no new fossil fuel 

generation before 2020 and explained how a number of generation, transmission and energy 

efficiency initiatives that contribute to reaching the 2020 Goal are on-going or have been 

completed. He explained how initiatives, such as the System Hardening program which includes 

enhanced vegetation management, physical and cyber-security improvements, Smart Grid 

implementation and other programs not generally detailed in the 2020 Goal discussion are also 

contributing to overall system improvements and are partially or largely complete. Mr. Langston 

testified that OG&E continues to work hard at being strategically positioned to deal with 

environmental and economic uncertainties as they come up. He explained that the rate relief 

OG&E requested helps ensure that OG&E, its customers and shareowners are positioned to meet 

future challenges. 
Mr. Langston then testified how OG&E has recently been recognized as a leader in 

customer satisfaction by J.D. Power and Associates. He also testified about recent initiatives that 

the Company has undertaken that has lead to this customer satisfaction, including new customer 

payment options, improved its customer service processes and field activities, and paperless 

billing. Mr. Langston then testified about the Company's various billing options to assist its 

customers during these difficult economic times. Such billing options include delayed payment 

agreements to help customers during hardship situations, the extension of a payment due date for 

fixed income customers who need to align their payment due dates with the receipt of their fixed 

income, and a series of programs and policies to provide assistance to low income customers. 

Mr. Langston also testified about OG&E's recognition by the Edison Electric Institute for its 

excellence in storm restoration and the Company's improvements in its quality of service 

performance measures. 

Mr. Langston concluded his direct testimony by asking the Commission to increase rates 

to fairly compensate the Company for the increased investments and O&M expenses it has 

experienced since the current rates were approved more than two years ago. He stated that the 

Company was putting dollars to good use for customers and making prudent investments in 

system expansion and reliability that have improved the quality of our service, provided 

customers with tools and information to better manage their energy use and earned best-in-class 

distinction for customer satisfaction. 

Jesse B. Langston 

Rebuttal Testimony Summary 

On November 29, 2011, Mr. Langston filed testimony to provide the Company's overall 

reaction to the rate recommendations filed in the responsive testimony of Commission Staff, the 

Attorney General and the OIEC in this proceeding. He testified regarding management's 

perspective on some of the key contributors to those rate recommendations, including (i) ROE 

recommendations that are unreasonably low compared to other utilities, particularly when you 

consider the Company's exceptional service to our customers; (ii) misguided use of a 

hypothetical capital structure to artificially reduce the Company's revenues; and (iii) decreased 

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depreciation expenses based on inappropriate assumptions about the Company's Integrated 

Resource Plan ("IRP"). 

Mr. Langston stated that the Company was surprised and somewhat dismayed to learn 

that the Commission Staff and the Attorney General had recommended a rate decrease for 

OG&E. He stated that OG&E's employees were uncharacteristically vocal about the news of the 

parties calling for a rate reduction. He testified that OG&E employees had just ended perhaps 

the most demanding year of their careers with an extreme winter followed by extreme spring 

storms, an unbelievable heat wave this summer and then wildfires. Mr. Langston explained that 

the OG&E system held up extremely well throughout it all and the Company's employees have 

been nationally recognized and praised for storm restoration and customer service efforts. 

Therefore, Mr. Langston stated that the suggestion that the Company should be paid less for the 

services they provide is tough for our employees to comprehend. 

Mr. Langston also testified that Company's senior management also strongly disagrees 

with the appropriateness of a rate decrease. He stated that no one disputes the level of 

investment or the fact that the Company is not being compensated for a significant portion of its 

investment even though these facilities are providing benefits to OG&E customers. He also 

stated that no one questions that OG&E's O&M costs have increased since 2008. Mr. Langston 

stated that a recommendation for a rate reduction simply flies in the face of these facts. 

Mr. Langston addressed the issue of return on equity ("ROE"). He explained why ROE 

is an important element of any recommendation for a rate increase or decrease and detailed the 

ROE recommendations made by Commission Staff (9.8% to 10.1%), Attorney General (9.818%) 

and the OIEC (9.5%). He testified that the difference between the 11.0% ROE recommended by 

OG&E and the 9.81% filed by the Commission Staff is approximately $35 million. 

Mr. Langston then testified that the ROEs recommended by Commission Staff, the 

Attorney General and OJEC were not consistent with the ROEs recently granted other utilities 

around the country. Mr. Langston then provided some detail regarding recent ROEs granted 

throughout the country and testified that, of the 95 recent rate orders, only sixteen (16) of those 

orders included a ROE lower than 10 percent. Mr. Langston also stated that the large majority of 

those 16 utilities with ROEs below 10 percent are "wires only" transmission and distribution 

("T&D") companies. He testified that because these T&D companies do not have generation, 

they have entirely different risk profiles and should not be used as a valid comparison. Mr. 
Langston then testified that even with these T&D companies included in the calculation, the 

average ROE granted in 2010 and 2011 is 10.33 percent. It is also worth noting that if you 

remove the T&D companies from the list of ROEs and only focus on the more recent past, ROEs 

authorized in 2011, the average ROE granted is 10.4 percent. 

Mr. Langston further testified that Company witnesses Robert Hevert and Julie Cannell 

provide a detailed response to the Commission Staff, Attorney General and OIEC ROE 

recommendations, addressing both the technical aspects of an appropriate ROE calculation and 

investor expectations regarding authorized ROEs. Mr. Langston testified that from his 

perspective, it just doesn't make sense for OG&E to receive an ROE at the bottom of those 

granted recently, or even an ROE below the average of those granted recently. He stated his 

belief that the 11 percent ROE recommended by Company witness Hevert is appropriate, but he 

also testified that he believes strongly that, at a minimum, any ROE determination by the 

Commission should reflect an authorized ROE well above the average ROE granted in recent 

orders. Mr. Langston stated that that determination would at least recognize our employees' 

industry-leading performance and commitment to customers. 

Mr. Langston then testified how OG&E Witness Hevert had used the exact ROE 

calculation formula of Commission Staff witness Fiegel, but then simply corrected some minor 

errors and updated two specific data inputs to reflect current market data. Mr. Langston testified 

that these changes apply to the Constant Growth DCF analysis and the CAPM analysis and that 

Witness Hevert made no changes to other analyses conducted by witness Fiegel. Mr. Langston 

stated that, when these changes are made, Commission witness Fiegel's updated recommended 

range changes to 10.28 percent to 10.46 percent, an increase of more than 40 basis points. Mr. 

Langston testified that with this change, the midpoint of the Commission Staff's recommended 

ROE range becomes 10.37 percent and this changes Staffs revenue requirement from a $4.4 

million rate decrease to a $10.6 million rate increase. In addition, Mr. Langston testified that 

applying OG&E's recommended 11 percent ROE increases Commission Staffs revenue 

requirement to an approximate $30 million rate increase. 

Mr. Langston then testified that the Company does not agree with the Commission Staff, 

the Attorney General and the OIEC that OG&E's overall ROE should be reduced because of 

previous riders and preapprovals. He testified that those parties reduced the ROE by an arbitrary 

amount and provided no mathematical calculation or formula justifying the amount of the 

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proposed reduction related to riders. Mr. Langston explained that the impact of riders has 

already been taken into consideration in the ROE analysis conducted by witness Hevert, as well 

as the formal analysis of the witnesses for the Staff, Attorney General and OIEC. Mr. Langston 

testified that an additional reduction, arbitrary or otherwise, is incorrect. Mr. Langston also 

stated that the Company believes witness Hevert's approach is consistent with the 

recommendations of Scott Hempling, a well-known expert on rate regulatory principles. He 

explained that, at OG&E's request, Mr. Hempling independently prepared a white paper on how 

preapprovals/riders should impact the cost of equity decisions made by Public Utility 

Commissions. Mr. Langston testified that one of Mr. Hempling's conclusions is that if a proxy 

group is composed of companies with riders similar to the utility at issue, the risk reduction 

would already have been captured in the ROE range established by the proxy group. Mr. 

Langston stated that by failing to recognize the impact of riders on the performance of their 

proxy group, witnesses for the Commission Staff, Attorney General and OIEC are effectively 

double-counting the impact of riders in making their recommendations for OG&E's ROE. 

Mr. Langston then addressed how riders impact the Company's overall risk. He testified 

that he shares the belief of Mr. Hempling that preapprovals and/or riders do not improve the 

utility's overall risk profile; they simply mitigate some or all of the new risk which arises when 

OG&E engages in a major construction project. Mr. Langston stated that, essentially, 

preapproval and riders allowed OG&E to go forward with the project knowing OG&E's risk 

profile would remain substantially where it was before the project was undertaken. 

Mr. Langston also testified that it was not necessarily true that preapprovals or riders 

mitigate 100% of the new risk associated with a new investment. He stated that the level of risk 

mitigation depends on the amount of incremental recovery risk retained by the utility and/or the 

amount of new risk assigned to the utility as a requirement for authorizing the rider. Mr. 

Langston stated that, in agreeing to pre-approve some major investments, the Commission has 

been inclined to leave OG&E with what I like to call "skin in the game." For example, Mr. 

Langston testified that OG&E has taken on -- or been left with -- additional risks related to 

guaranteeing savings associated with the Smart Grid program, risks associated with capping the 

level of pre-approved investment for particular projects, risks associated with subjecting the 

Company to true-up adjustments; risks associated with heightened reporting requirements and 

auditing procedures; and risks associated with guaranteeing capacity factors and the amount of 
production tax credits (regardless of OG&E's tax appetite) for new wind farms. He stated that, 

in these circumstances, the Company's risk profile actually increases from what it would have 

been if the incremental investment had never been made. Mr. Langston testified that he saw no 

evidence that the Commission Staff, Attorney General and OIEC considered that the 

Commission orders approving some riders actually increase the Company's overall risk profile—

whether through failure to remove all incremental risk or the creation of new risk. 

Mr. Langston then testified against using a hypothetical capital structure for ratemaking 

purposes. Instead, Mr. Langston explained why using the Company's actual capital structure 

(which is 46.93 percent debt and 53.07 percent equity) was more appropriate and consistent with 

recent OG&E rate orders. Mr. Langston then testified about how much the capital structure 

could move the recommendation in a rate case. He stated that, if the Commission continues to 

follow its previous approach, as recommended by the Commission Staff and the Company, 

OIEC's proposed revenue requirement would be increased by approximately $14 million. Also, 

by applying OG&E's actual capital structure to the Attorney General witness' recommendation, 

the Attorney General's revenue requirement would be increased by approximately $10.9 million. 

Mr. Langston testified that OG&E witnesses Hevert and Cannell address why a 

hypothetical capital structure is ill-advised from both an analytical and investor perspective. Mr. 

Langston provided a practical example as how this short-sighted hypothetical capital structure 

recommendation would impact the Company. He explained that OG&E is in the middle of a 

major investment phase and the nearly $1 billion in previous capital expenditures is expected to 

be followed by an estimated $2.5 billion in expenditures over the next 4 years—and that number 

could go higher if OG&E is forced to make additional environmental expenditures. Mr. 

Langston testified that OG&E's management has targeted a debt to equity ratio that we believe 

best positions the Company and our customers when it comes to funding those projects at the 

lowest reasonable cost. He stated that, in 2009, during the depths of the recession, credit was 

available to OG&E when many other utilities could not borrow. He also stated that, in 2011, 

OG&E issued $250 million in bonds at an all time low rate. Mr. Langston testified that, if the 

recommendation to override management's judgment by imposing a hypothetical capital 

structure were to be accepted, the amount of dollars available to OG&E's equity investors will be 

artificially reduced, lowering their effective return. He testified that this would have an 

immediate, detrimental impact on OG&E's ability to access low cost capital, at the worst 

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possible time. Mr. Langston also added that witnesses for the Attorney General or the OIEC 

have not argued that OG&E acted imprudently by allowing the Company's capital structure to 

reflect a higher level of equity than proposed in their recommendation. 

Mr. Langston then testified that OG&E does not agree with the OIEC's witness 

recommendations regarding depreciation rates. He stated that OG&E witness Spanos addresses 

in detail the problems with the OIEC's position and shows that the depreciation rates OG&E 

uses for its assets are standard and should not be changed. Mr. Langston stated that, as Mr. 

Spanos points out, the OJEC's witness's recommendation is based in large part on the 

assumption that it is appropriate to rely for depreciation purposes on the estimated lives of 

generating units as assumed in the most recent IRP. Mr. Langston testified that the OIEC 

witness' reliance on the Company's IRP to establish depreciation rates for generating units is 

misplaced and explained why it is inappropriate to use IRP planning assumptions to determine 

depreciable lives for generation assets. 

Mr. Langston also testified that he had reviewed the testimony of the Sierra Club. He 

stated that Sierra Club generally addresses items related to future investment and resource 

planning. Mr. Langston stated that OG&E acknowledges that it could grow its energy efficiency 

and demand response programs to meet its future planning needs, and should explore greater 

levels of wind energy and the acquisition of merchant generation. However, Mr. Langston stated 

that these issues are not a part of this proceeding. Mr. Langston noted that OG&E will be filing 

a new comprehensive Energy Efficiency and Demand Response program in 2012 and OG&E 

welcomes Sierra Club's participation in that proceeding. With regard to the success of OG&E's 

IRP process, Mr. Langston referred to Exhibit JBL-1 in his direct testimony, which shows the 

diligent efforts the Company has made and will continue to make toward finding the best 

solutions for OG&E customers. 

Mr. Langston then addressed the testimony of the AARP. He testified that AARP wants 

to add additional requirements to OG&E's smart grid reporting requirements. Mr. Langston 

testified that the Company believes the reports filed at the Department of Energy, the reporting 

requirements agreed to in the smart grid proceedings in Oklahoma and Arkansas, as well as the 

true-up of the smart grid rider are more than adequate to ensure that customers receive the 

benefits guaranteed by the Company. Mr. Langston explained that the additional reports that the 

AARP witness request are unnecessary and will require resources which are better used 
elsewhere. In addition, Mr. Langston stated that OG&E witness Sarah Staton will rebut AARP's 

recommendations regarding OG&E customer education initiatives. Mr. Langston testified that 

OG&E could, however, consider that an increase in the LIAP discount (from $10 to $12) is a 

reasonable action to take under the current economic environment. 

Mr. Langston concluded his rebuttal testimony with an explanation of why OG&E chose 

to file for a rate increase at this time and why it is important for the Commission to authorize 

recovery of OG&E's uncompensated for costs at this time. Mr. Langston also explained why 

credit ratings matter to the Commission and OG&E's customers. He stated that credit ratings 

determine the cost of borrowing funds for the utility, i.e., the stronger the rating, the lower the 

borrowing cost. He stated that reduced borrowing costs reduce costs to customers and credit 

ratings also determine the ability to access capital markets and define a company's overall risk 

profile. Mr. Langston testified that OG&E is facing the need for significant investment in the 

future and it will need to access capital markets and issue debt. He asked the question: why 

would an equity investor invest in OG&E at 9.8 percent ROE when most utilities in the United 

States are well above that ROE level? He also asked: why would a utility that can't readily 

access equity be a good place to loan money? 

Mr. Langston stated that OG&E is a high-performing, customer satisfaction-oriented 

utility that has spent hundreds of millions of dollars improving its system while being frugal with 

expenses and acting as a good corporate citizen. Mr. Langston then testified that many, if not all, 

the intervenors would agree with this description; yet in effect this Commission is being asked to 

reward OG&E's hard work by lowering what we are currently authorized to charge customers. 

Mr. Langston stated that the idea of denying the Company fair compensation for its services 

because of the recent economic downturn, no matter how well-intentioned, is short-sighted and 

should be rejected by this Commission.