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 19 of35 EXHIBIT NO. SCE-13 Spread Between Moody's Utility and 20-yr US Treasury Yields 6.00 ,---c----c::-----:---~-_:_=-_c_c____::____,_----------_, -- Spread Between Moody's A-rated Utility and US 20-yr Bond 5.00 4.00 ~ '" 3.00 '"-0- C/O 2.00 ~~~~-----------~ .1 . " - .. Spread Between Moody's BBB-rated Utility and US 20-yr .... _ Bond I' - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - t - -i-:~- - - , l -- -if"\. - - - -- -- - -. - - -.- - -- - - - - - --- -- - - - - - - -- -- - -- -- - - -. - IJ"-' ·,t 'I /' ,I or.' - - - - - - - - - - - - - - - - - - - - - - - -...... - - - - - - - - - - 1.00 - - - - - - - - - - ., - - - - - - 0.00 +--__:-~---:-_~-~-_~-_- _ __:-_-__:__:-_,J ~\:J'\; b ~'\ # r.;:.,r,;:.,% -§>'t! r§>Ot r,;:.,r,;:.,Ot ",\~" ~\~" ",\~" ~\~" ",\~" ~\~\'V",\~" ~\~" ",\~" ~\~" ",\~" ~\~" ",\~" o,\~" ",\~" ~\~" Source: Data pulled from Bloomberg as of September 30, 2009. Figure 5 Moody's Utility and US Treasury Bond Yields 10.0 9.0 I A-rated Utility ...... BBB-rated Utility Gov. Bond I .....", . " 8.0 ~~"" ~f\ "". " '., 7.0 ~ 6.0 ~.~,J ..' ,"p' ".A-,' ._ •• -0.~~!ir~ • " ~".. " ty.."" ~ "" ~ ~;v.... 5.0 0; , vy V .,.~' 'V '" ;;:; 4.0 , "'. 'V V'~ 3.0 1£ 2.0 1.0 0.0 ~~~#~~~#~~~~~~~~~~~#~~ ",,,,~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ G G G G G G ~~~~~~~~~~~~~~~~~~~~~~~ "\ f\,1. ,.;s ,.,,'i.. ,\'i. ,.:s ,,'i.. ,\\ ,v ...,'i. ,\\ ,'$ ...,'\,,'i.. ,..:s ...,'i.. ,\\ ... :,'\ ,,\ ,\\ ,:V ..:j. '\\ " .AA. FIgure 6 Source: Data pulled from Bloomberg as of September 29, 2009.
20091231-0037 FERC PDF (Unofficia1) 12/29/2009 Direct Testimony of Michael J. Vilbert Docket ER 10· ·000 Page 20 of35 EXHIBIT NO. SCE-13 Q29. Is the increase in investors' risk aversion from current economic conditions likely to 2 be a temporary or permanent change? 3 A29. It is likely that some of the increase in risk aversion stems from the chaotic market 4 5 6 7 conditions and will, I hope, be transitory in nature. But there is a strong possibility that there will also be a longer-term and perhaps permanent effect as market participants draw conclusions from the crisis on the fundamental risk-return characteristics of investment alternatives. 8 Q30. Why do you believe that some of the increase investors' risk aversion is likely to be 9 permanent? \0 A30. Investors as a group lost substantial wealth as a result of the crisis with the result that II some investors have been forced to make unpleasant life-style changes. For example, 12 some have lost their homes or are no longer able to retire as soon as hoped. Life-style 13 14 changes such as these are not likely to be soon forgotten and will affect investors long after the turmoil in the markets has receded. 15 Q31. 16 17 A31. 18 19 20 21 22 23 24 25 Aren't the low realized returns on the market index a clear indication that market participants are willing to accept a lower expected return on their investments? Absolutely not. To the contrary - market values fell in order to allow an increase in the expected returns on investment. As risk aversion and/or market risk increases, expected returns must increase in order to induce investors to buy, so prices must fall. In other words, realized returns over the last few months are not indicative of investors' required rate of return. Investors have undoubtedly been disappointed recently. This process is well known to bond investors. As the general level of interest rates in the economy increases, the market price of a bond will decrease so that the yield-to-maturity increases to the level required by the market. The same phenomenon occurs with equities as well. When the required return on investment increases, market prices must fall. 26 Q32. Please summarize this section of your testimony. 27 A32. The cost of capital increased during the turmoil as investors reacted to the increased
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"0 0 '" .... Exhibit No. seE· 7 ..
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Exhibit No. SCE-9 Page 2 of 10 8 FE
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"0 0 '" .... .... I 0 0 Exhibit No.
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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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88 Illinois Commerce Commission ER0
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Page 307 and 308: EXHIBIT NO. SCE-16 "o o '" .... "w
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Table No. MJV·4 Panel B Commission
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Workpaper Commission #2 to Table No
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Company American Electric Power Co
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Company Workpaper #9 to Table No. M
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Date Workpaper # 11 to Table No. MJ
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