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

20091231-0037 FERC PDF (Unofficia1) 12/29/2009
Direct Testimony of Michael 1. Vilbert
Docket ER 10- -000
Page 33 of35
EXHIBIT
NO_ SCE-13
I Q53_ Are you saying that higher growth rates could be sustainable forever?
2 A53. No. Growth rates for all companies vary over time, and no company can maintain a high
3 growth rate forever. Nor is it likely that some of the very low current estimated growth
4 rates would stay low forever. For purposes of the DCF analysis, the growth rate
5 estimates are the best available estimates for the next five years. There is a danger of bias
6 if some growth rate estimates are arbitrari ly judged not to be sustainable because it
7 encourages efforts to delete the companies with the highest cost of equity estimates while
8 leaving the lower estimates in the sample. For a small sample this becomes a serious
9 problem because the removal of one or two companies has a larger effect.
10 Q54. What about the growth rates for year six and later?
II A54. To my knowledge, there is no infonnation available on the likely growth rate of earnings
12 and dividends available for time periods more than five years in the future. Use of the
13 DCF model is necessarily subject to this limitation. Analysts sometimes attempt to
14
15
16
address this problem by making various assumptions about the likely growth path of
dividends for the period beginning in year six. However, there is no recognized source of
individual company data upon which to rely in order to make these assumptions.
17 Q55. What is your conclusion about the growth rates used in your application of the
18 FERC DCF model?
19 A55. In my judgment, the question of whether the individual growth rates are sustainable is not
20 a matter of concern in the current proceeding for two reasons. First, I believe that the
21 five-year growth rate estimates used in the model come from widely recognized sources
22 and are the best estimates currently available. Second, the FERC DCF methodology
23
24
25
attempts to address the lack of data on long-tenn dividend growth rates by estimating the
five-year growth rate in the two ways discussed above. The method then creates a range
of reasonableness by looking to the highest and lowest estimates from the two growth
26 rates and two dividend yield estimates. The likely motivation for this approach is the
27 belief that the companies with high estimates are balanced by the companies with low
28 estimates so that the estimation errors cancel out. If the sample is large enough, the