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

20091231-0037 FERC PDF (Unofficia1) 12/29/2009
Direct Testimony of Michael J. Vilbert
Appendix B
Docket No. ERIO-_-OOO
EXHIBIT
NO. SCE-IS
Page B-7
Q9.
2 A9.
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II
12
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Please describe the Commission's preferred DCF model.
The Commission's
preferred DCF model is a modification of the standard DCF model
that uses a constant growth of dividends.
pp. 61,262-63: 10
The model is articulated in Opinion No. 445, at
[n the past, we have consistently applied a one-step, constant growth DCF
model for calculating ROEs for electric utilities. The DCF methodology
determines the ROE by summing the dividend yield (with an adjustment
for the quarterly payment of dividends) and expected growth rate. The
resulting formula is DIP (I+.5g) + g = k, where "DIP" is the dividend
yield, "g" is the sustainable growth rate of dividends per share, and "k" is
the resulting ROE. The sustainable growth rate is calculated by the
following formula: g = br + sv, where "b" is the expected retention ratio,
"r" is the expected earned rate of return on common equity, "s" is the
percent of common equity expected to be issued annually as new common
stock, and "v" is the equity accretion rate.
Thus, the Commission has specified the single-stage DCF model as being its preferred
estimation method for electric utilities.
The procedure has been used more recently by
the Commission in Bangor Hydro and Midwest ISO, and its continued status as the
Commission's preferred method is reaffirmed in Order No. 679 11 and Order No. 679-A. 12
I disagree with the use of the 0.5 multiplier for the initial growth rate as a matter of
economic principle because it violates the basic assumptions of the DCF model.
Nonetheless, I present results of the Commission's
DCF method as described in Opinion
No. 445 because the Commission has specified this version of the single-stage DCF
model as its preferred estimation method for electric utilities.
However, I must note that
this approach will tend to underestimate the true cost of capital, all else equal.
10 The Commission also calculates growth rates using analysts' earnings growth forecasts from IIBIE/S, using
the same procedure to adjust the dividend yield. I use analogous growth rate forecasts from Bloomberg
termed their BEst forecasts.
11 Promoting Transmission Investment Through Pricing Reform, Order No. 679, 71 Fed. Reg. 43,294 (July 31,
2006), FERC Stats. & Regs. ~ 31,222, at PP 92, 102 (2006).
12 Promoting Transmission Investment Through Pricing Reform, Order No. 679-A, 72 Fed. Reg. 1,152 (Jan.
10, 2007), FERC Stats. & Regs. ~ 31,236, at P 63 (2006).