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

20091231-0037 FERC PDF (Unofficia1) 12/29/2009
Direct Testimony of Michael J. Vilbert
Docket ER 1O-~-OOO
Page 14 of35
EXHIBIT
NO. SCE-13
Q27. What evidence do you have that market risk and/or investors' risk aversion has
2 increased?
3 A27. A number of readily observable factors indicate an increase in either market risk or
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investors' risk aversion (or both). Unprecedented defaults in debt instruments that had
previously been highly rated (AA or A), such as collateralized debt obligations and
mortgage-backed securities, and the fall in value of most securities caused investors to
seek investments that would preserve the value of their investments. As a result, there
has been a "flight to safety" by investors seeking to maintain the value of their
investments. In general, investors perceive bonds as less risky (safer) than equity and
government bonds as safer than corporate bonds. The demand for bonds, particularly
government debt, increased substantially during the crisis. In fact, at what may have been
the height of the crisis, the yield on U.S. Treasury bills actually fell below zero!21
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The flight to safety had two other results. First, the yield spread between corporate bonds
and government bonds increased dramatically during the crisis. Though they are now
returning to their historical levels, as investors return to the market (see Table 1), the
losses from the crisis are nevertheless still fresh in people's minds. Investors' confidence
is likely to stay vulnerable into the foreseeable future.
21 "Treasury Bills Trade at Negative Rates as Haven Demand Surges", by Daniel Kruger and Cordell Eddings,
Bloomberg, December 9, 2008.