SCEG OATT Formula Transmission Rate Filing.pdf - SCANA ...

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20091231-0037 FERC PDF (Unofficia1) 12/29/2009 Direct Testimony of Michael 1. Vilbert Docket ER I0-_-000 Page 3 of35 EXHIBIT NO. SCE-13 utilities that are located in the southeastern portion of the United States, which is the 2 same geographic and economic region in which SCE&G is located. 3 4 5 6 7 8 9 10 Next, I restricted the proxy group according to the Commission's guidelines articulated in Westar Energy, Inc., 122 FERC ~ 61,268 (2008) ("Westar"), Potomac-Appalachian Transmission Highline, L.L.C., 122 FERC ~ 61,188 (2008) ("PATH') and Atlantic Path 15, LLC, 122 FERC ~ 61,135 (2008). I applied the Commission's DCF method to two samples (explained below) selected from the universe of regulated electric utilities that are located in southeastern United States. After eliminating the results of some companies due to reliability concerns, consistent with established Commission guidelines, I then determine a "range of reasonableness" for the cost of equity. II Q7. Please describe the two samples you use. 12 A7. The first sample, which I call the Full Sample, consists of all regulated utility companies 13 in the southeastern United States that meet all of the standard FERC requirements for 14 inclusion in a sample. 6 The second sample, which I refer to as the Restricted Sample, 15 results from eliminating companies from the Full Sample whose Standard & Poor's 16 ("S&P") credit ratings are not within one notch of SCE&G's BBB corporate credit 17 rating'. A "range of reasonableness" for the cost of equity was established for each 18 sample by using the highest and lowest qualifying cost-of-equity estimates from that 19 sample.' 20 Q8. What are the results from the application of the Commission's preferred DCF 6 The standard criteria are that the sample company be a publicly traded company that pays dividends, has no dividend cuts or substantial merger or acquisition activity over the last six months, and has an investmentgrade bond rating. 7 SCE&G's corporate credit rating is based on its parent company's (SCANA Corporation) credit rating. SCANA's medium term, senior unsecured debt is currently rated Baa2 by Moody's and BBB by S&P (these are equivalent ratings). Fitch, however, currently assigns a slightly higher rating of BBB+. I use the BBB benchmark in my ranges since two out of the three ratings agencies have rated SCANA's debt as such, and this is not a substantial deviation ITom the BBB+ rating assigned by Fitch. 8 Sample company cost-of-equity estimates are included in the results if the sample company's cost-of-equity estimate exceeds its estimated market cost of debt by at least 100 basis points (bps), and the cost-of-equity estimate does not rely on an estimated growth in earnings per share that exceeds 13.3 percent.
20091231-0037 FERC PDF (Unofficia1) 12/29/2009 Direct Testimony of Michael J. Vilbert Docket ER I0- -000 Page 4 of35 EXHIBIT NO. SCE-13 2 A8. 3 4 5 6 methodology? When applied to the Full Sample, the Commission's preferred DCF methodology results in a "range of reasonableness" for the cost of equity of between 7.72 and 16.16 percent, with a median of 11.04 percent and a mid-point of 11.94 percent. The range of reasonableness for the sample restricted by bond rating becomes 8.76 to 16.16 percent, with the median unchanged at 11.04 percent and a higher midpoint of 12.46 percent. 7 Q9. Does SCE&G recover the revenue requirement for its transmission assets through a 8 formula rate? 9 A9. No, not at this time. However, in this proceeding, the Company is proposing a formula 10 II rate for recovery of its transmission revenue requirement. the testimony of company witness, Mr. Alan C. Heina. This proposal is discussed in 12 QI0. 13 14 AIO. 15 16 17 18 19 20 21 22 23 24 Are there other ways to estimate the cost of capital for a FERC regulated electric transmission company? Certainly. There are many different approaches, and I have used other methods in other proceedings. Moreover, the determination of the cost of capital requires the application of informed judgment as well as science. Of the several ways to estimate the cost of capital, I believe a "risk positioning" method is generally superior; but in the past the Commission has consistently not relied upon alternative estimation methods. In other testimony, I have been critical of some of the assumptions underlying the DCF method, and the FERC DCF method does not directly consider differences in financial risk among the sample companies or between the sample companies and the target company. While I believe that the Commission should not mechanically reject other methods of estimating the cost of capital, I also believe that whatever method the Commission ultimately chooses to use, the method should be consistent from proceeding to proceeding. 25 Qll. Why did you not implement alternative approaches in connection with this 26 proceeding'? 27 A II. The FERC prescribes the DCF method and has used it in many previous cases to
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Exhibit No. SCE-9 Page 6 of 10 ~. 4
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64 FERC ER07-169 Ameren Energy Mark
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EXHIBIT NO. SCE-16 "o o '" .... "w
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Table No. MJV·4 Panel B Commission
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Company American Electric Power Co
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