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 ERIO-_-OOO Page 31 of35 EXHIBIT NO_ SCE-13 bottom estimate rising to 8.76 percent, and the top unchanged at 16.16 percent. The 2 3 Restricted Sample has a higher midpoint at 12.46 percent, a median of 11.04 percent (unchanged), and a mean of 11.37 percent. 30 Table 5 Full Sample Restricted Sample Implied Cost of Equity Implied Cost of Equity Bond Company Rating High Low High Low [II [2] [3] [4] [5] American Electric Power Co Inc BBB 11.07% 10.49% 11.07% 10.49% Cleco Corp BBB 16.16% 8.76% 16.16% 8.76% En1ergy Corp BBB 12.59% 10.33% 12.59% 10.33% OGE Energy Corp BBB+ 11.71% 10.00"10 11.71% 10.00% Centerpoint Energy In:: BBB 14.28% 13.32% 14.28% 13.32% Progress Energy Inc BBB+ 12.48% 9.09% 12.48% 9.09% DominionResources InC/VA A- 13.75% 10.75% - - FPL Group Inc A 12.73% 12.23% - - <strong>SCANA</strong> Corp BBB 11.05% 10.43% 11.05% 10.43% SouthemCo A 11.32% 10.00% - - TECO Energy Inc BBB 12.55% 10.04% 12.55% 10.04% Duke Energy Corp A- 10.20% 7.72% - - Xcel Energy Inc BBB+ 11.04% 9.26% 11.04% 9.26% Range 16.16% 7.72% 16.16% 8.76% Midpoint 11.94% 12.46% Median 11.04% 11.04% Mean 11.28% 11.37% Number of Companies 13 9 Sources and Notes: Excluded from tre sample are companies with growth rates greater than 13.3% and cost of equity lower than its cost of debt plus 100 bps. See Tables and Workpapers accompanying Dr. Vilbert's testimony. 4 Q51. Has the Commission relied on the midpoint or the median as the appropriate 5 estimate of the cost of equity for the sample? 6 A51. In the past, the Commission has consistently relied upon the midpoint of the sample as 7 the appropriate measure of the cost of equity for the sample. 3 ! In recent decisions, such 30 Note the range of estimates excludes those from Empire Electric Company since its growth rate exceeds 13.3 percent. 31 See Appendix B for a discussion of the decisions utilizing the midpoint in determining the allowed return.
20091231-0037 FERC PDF (Unofficia1) 12/29/2009 Direct Testimony of Michael J. Vilbert Docket ERIO- -000 Page 32 of35 EXHIBIT NO. SCE-13 2 3 4 5 6 as "Golden Spread',32 the Commission detennined that the median is the appropriate measure for central tendency when setting an ROE for a single utility and when the distribution of sample company returns is skewed. 33 The Commission, without comment,34 again set the allowed return based upon the midpoint in the PSE&G decision issued September 30, 2008, so the Commission's policy on this point does not appear to be settled. 7 Q52. In Table 5 above, the estimated growth rates for the sample companies are 8 9 10 displayed. Companies with growth rate estimates greater than 13.3 percent have been eliminated from the sample, but are all of the remaining growth rate estimates sustainable? 11 A52. The question of sustainability depends critically on the length of time over which the 12 13 14 IS 16 17 18 19 20 21 22 23 growth rates would apply. Consistent with the Commission's recent "PATH" decision, I excluded growth rates that are above the threshold of 13.3 percent as being unsustainable as specified in that decision. Security analysts generally limit their earnings growth rate forecasts to a five-year period, and clearly they believe that the estimates they provide are sustainable over that period. Forecasts made during volatile economic times are going to be more uncertain than what is necessary for a completely reliable use of a DCF model, which should be kept in mind when evaluating the results. The other set of growth rates used in the FERC DCF method are labeled "sustainable" growth rates because they are the product of the amount of earnings retained times the average return on equity. Growth rates estimated by application of the sustained growth rate methodology can be sustained as long as the company continues to retain earnings on which it earns the same average return on equity. 32 123 FERC ~ 61,047. 33 If the distribution were perfectly symmetric, all three measure of central tendency (the mean, median and mid-point) would be identical. 34 In the PSE&G decision, the Commission accepted my recommend ROE which was based upon the midpoint of the sample, but the Commission did not otherwise comment on the relevance of the midpoint or the median.
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64 FERC ER07-169 Ameren Energy Mark
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