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

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20091231-0037 FERC PDF (Unofficia1) 12/29/2009 Direct Testimony of Michael J. Vilbert Docket ER 10- -000 Page 9 of35 EXHIBIT NO. SCE-13 I 2 3 4 5 same time, an expected return below the cost of capital does a disservice not just to investors but, importantly, to customers as well. In the long run, such a return denies the company the ability to attract capital, to maintain its financial integrity, and to expect a return commensurate with that of other enterprises attended by corresponding risks and uncertainties. 6 7 8 9 10 II 12 13 14 15 16 17 18 19 20 21 More important for customers, however, are the economic issues an inadequate return raises for them. In the short run, deviations of the expected rate of return on the rate base from the cost of capital may seemingly create a "zero-sum game" -- investors gain if customers are overcharged, and customers gain if investors are shortchanged. But in fact, in the short run, such actions may adversely affect the utility's ability to provide stable and favorable rates because some potential efficiency investments may be delayed or because the company is forced to file more frequent rate cases. In the long run, inadequate returns are likely to cost customers -- and society generally -- far more than is gained in the short run. Inadequate returns lead to inadequate investment, whether for maintenance or for new plant and equipment. The costs of an undercapitalized industry can be far greater than the short-run gains from shortfalls in the cost of capital. Moreover, in capital-intensive industries (such as the electric utility industry), systems that take a long time to decay cannot be fixed overnight. Thus, it is in the customers' interest not only to make sure the return investors expect does not exceed the cost of capital, but also to make sure that the return does not fall short of the cost of capital, either. 22 23 24 25 26 27 Of course, the cost of capital cannot be estimated with perfect certainty, and other aspects of the way the revenue requirement is set may mean investors expect to earn more or less than the cost of capital, even if the allowed rate of return equals the cost of capital exactly. However, a commission that sets rates so investors expect to earn the cost of capital on average treats both customers and investors fairly, and acts in the long-run interests of both groups.
20091231-0037 FERC PDF (Unofficia1) 12/29/2009 Direct Testimony of Michael J. Vilbert Docket ERIO- -000 Page 10 of35 B. INVESTMENT IN THE TRANSMISSION GRID EXHIBIT NO. SCE-13 2 Q18. 3 A18. 4 5 6 7 8 9 10 II 12 Has investment in the U.S transmission grid generally been seen as adeqnate? No: Although investment in the transmission system has increased substantially over the last few years, the need for additional investment in the transmission acknowledged. Senate that: grid is widely In July of 2008, Chairman Kelliher testified before the United States The United States is just coming out of a long period of sustained underinvestment in the power grid. Investment in transmission facilities in real terms declined significantly between 1975 and 1998. While investment increased somewhat after 1998, expansion of the interstate transmi~si~n grid in ~erms of ~ircuit ,?iles i~ 2005 was only 0.5Ifercent. <strong>Transmission</strong> expansIOn was stIlllaggmg behmd demand growth. 13 Q19. Do you have any other evidence on the need for additional investment in electric 14 transmission? 15 A19. Yes. According to the North American Electric Reliability Corporation's ("NERC") 16 2008 Long-Term Reliability Assessment ("LTRA"), 15 the need for transmission 17 infrastructure is among the most important issues facing electric reliability in North 18 19 America over the coming ten years. The LTRA acknowledged the longstanding concern about lagging transmission investment, and concluded that more transmission is required 20 to maintain reliability and integrate new generation. 16 Another key finding of the LTRA 21 is that wind capacity is expected to increase significantly; NERC recommended that 22 regulators and policy makers support the development of cost effective transmission 23 24 resources for the delivery of remotely located wind resources to demand centers. l7 NERC also summarized the reliability impacts of inadequate transmission investment: 14 Testimony of The Honorable Joseph T. Kelliher, Chairman Federal Energy Regulatory Commission, Before the Committee on Energy and Natural Resources, United States Senate, July 31. 2008 (available at http://www.ferc.gov/eventcalendarlFiles/2008073 II 02 I23-Chairmantestimony .<strong>pdf</strong>). 15 Also see, North American Electric Reliability Corporation, 2008 Long-Term Reliability Assessment 2008- 2017 (October 2008). 16 LTRA, pp. 15-16. l'LTRA,p.14.
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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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