20230308Walker Rebuttal Testimony.PDF

Preston N. Carter, ISB No. 8462
Blake W. Ringer, ISB No. 11223
Givens Pursley LLP
601 W. Bannock St.
Boise, ID 83702
Telephone: [phone]
Facsimile: [phone]
[e-mail]
[e-mail]

Attorneys for Veolia Water Idaho, Inc.

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION
OF VEOLIA WATER IDAHO, INC. FOR
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR WATER SERVICE IN
THE STATE OF IDAHO

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Case No. VEO-W-22-02

REBUTTAL TESTIMONY OF HAROLD WALKER, III FOR
VEOLIA WATER IDAHO, INC.
MARCH 8, 2023

RECEIVED
2023 March, 8 4:42PM
IDAHO PUBLIC
UTILITIES COMMISSION
WALKER, Di Reb
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Veolia Water Idaho, Inc.

TABLE OF CONTENT

INTRODUCTION .......................................................................................................................... 3
SUMMARY .................................................................................................................................... 3
AREAS OF AGREEMENT ............................................................................................................ 6
COMPARABLE GROUPS ............................................................................................................ 6
RISK FACTORS .......................................................................................................................... 11
MR. TERRY’S AND MR. GORMAN’S RECOMMENDED COST OF EQUITY .................... 21
RESPONSE TO MR. TERRY’S CRITIQUE OF MR. WALKER’S TESTIMONY................... 42
RESPONSE TO MR. GORMAN’S CRITIQUE OF MR. WALKER’S TESTIMONY .............. 43

WALKER, Di Reb
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Veolia Water Idaho, Inc.
INTRODUCTION 1
Q. Please state your name, occupation and business address. 2
A. My name is Harold Walker, III. I am employed by Gannett Fleming Valuation and Rate 3
Consultants, LLC as Manager, Financial Studies. My business address is 1010 Adams 4
Avenue, Audubon, Pennsylvania 19403. 5
Q. Are you the same Harold Walker who previously submitted Direct Testimony in this 6
proceeding? 7
A. Yes. 8
SCOPE OF TESTIMONY 9
Q. What is the purpose of your Rebuttal Testimony? 10
A. Veolia Water Idaho, Inc. (“VWID” or the “Company”) asked me to respond to and 11
comment on the Direct Testimony submitted by Idaho Public Utilities Commission 12
(“Staff”) witness Joseph Terry and the Direct Testimony submitted by Micron Technology, 13
Inc. (“Micron”) witness Michael P. Gorman. My rebuttal testimony is supported by 14
Exhibit No. 15, which is composed of 6 Schedules. 15
SUMMARY 16
Q. Please summarize your comments on Mr. Terry and Mr. Gorman’s Direct 17
Testimonies. 18
A. I respectfully disagree with Mr. Terry’s proposed return on equity (“ROE”) of 9.00% and 19
Mr. Gorman’s proposed ROE of 9.35% for VWID. I also disagree with Mr. Terry’s 20
proposed overall rate of return (“ROR”) of 6.77% and Mr. Gorman’s proposed ROR of 21
6.97% for VWID. 22
WALKER, Di Reb
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Veolia Water Idaho, Inc.
I do not believe Idaho Public Utilities Commission (“Commission”) should accept 1
Mr. Terry’s or Mr. Gorman’s proposals because: 2
 Mr. Terry’s and Mr. Gorman’s recommended returns on equity and related overall 3
rates of return do not afford VWID the opportunity to earn a fair rate of return. 4
5
 Capital cost rates are higher today than they have been for several years. For 6
example, the last year that yields on long-term treasury bonds exceeded the current 7
rate was 2011, or 12 years ago. 8
9
 The last year yields on A rated public utility bonds exceeded the current rate was 10
2009, or 14 years ago. 11
12
 The current yield on A rated public utility bonds are substantially higher than they 13
have been over the last three years. Therefore, the required return on equity for a 14
water utility should also exceed returns authorized over the last three years. 15
16
 The water comparison companies used by Mr. Terry and Mr. Gorman earn 17
significantly higher returns of equity and are projected to earn considerably higher 18
returns on equity than Mr. Terry and Mr. Gorman propose for VWID. 19
20
 If other water utilities are earning returns noticeably higher than Mr. Terry and Mr. 21
Gorman advocate for VWID, adoption of either Mr. Terry’s or Mr. Gorman’s 22
recommendations will place VWID at a competitive disadvantage in the 23
competition to attract capital. 24
Based upon the results of my entire analysis contained in my Direct and Rebuttal 25
Testimonies, my recommendation is that VWID be permitted an overall fair rate of return 26
of 7.77%, including a 10.80% cost of common equity that reflects VWID’s unique risk 27
characteristics. My recommended fair rate of return is equal to the return of other similar 28
risk water utilities, will permit VWID access to capital on reasonable terms and will assure 29
confidence in VWID’s financial integrity. 30
WALKER, Di Reb
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Veolia Water Idaho, Inc.
FAIR RATE OF RETURN 1
Q. Do the recommendations of Mr. Terry and Mr. Gorman provide the Company a fair 2
rate of return? 3
A. No. Under Bluefield1, a fair rate of return is defined as: (1) equal to the return on 4
investments in other business undertakings with the same level of risks (the comparable 5
earnings standard); (2) sufficient to assure confidence in the financial soundness of a utility 6
(the financial integrity standard); and (3) adequate to maintain and support its credit, 7
enabling the utility to raise or attract additional capital necessary to provide reliable service 8
(the capital attraction standard). 9
Mr. Terry and Mr. Gorman’s rate of return recommendations are flawed and do not 10
produce a fair rate of return for VWID. Throughout this Rebuttal Testimony I highlight 11
the numerous flaws contained in their Direct Testimonies. Mr. Terry and Mr. Gorman’s 12
proposals show a lack of understanding of the precepts of a fair rate of return, including 13
the comparable earnings standard, and the capital attraction standard. Mr. Terry and Mr. 14
Gorman’s Direct Testimonies are couched with innuendos that Veolia Utility Resources 15
LLC’s (“VUR”) ownership of VWID reduces the risk of providing water service to 16
customers in parts of Ada County, Idaho. I do not believe it is reasonable that VWID 17
should be afforded something less than a fair rate of return because they are owned by a 18
larger company such as VUR. 19
Mr. Terry and Mr. Gorman’s testimonies violates the precepts of a fair rate of 20
return, including the comparable earnings standard, and the capital attraction standard. 21

1 Bluefield Water Works & Improvement Company v. P.S.C. of West Virginia, 262 U.S. 679 (1923).
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Veolia Water Idaho, Inc.
Their recommendations violate all two aforementioned fair rate of return precepts as 1
demonstrated by their own testimonies. VWID is entitled to a return that will enable it to 2
attract additional capital, not only capital provided by VUR. The credit that enables VUR 3
bonds to be issued is the issuing entity, VUR. A fair rate of return for VWID is the credit 4
that should enable the VWID to attract capital regardless of VUR. The risk of VWID 5
providing service to customers is not mitigated simply because the VUR provides capital 6
or because VUR owns other water utilities. Risk does not change with ownership, and the 7
price or cost of bearing risk is a fair rate of return. Mr. Terry and Mr. Gorman’s 8
recommendations offer no incentive to investors to invest in VWID water assets when 9
higher returns are available from other less risky water assets or higher retuning assets of 10
similar risk. Investors will not provide capital and should not be forced to provide capital 11
when higher risk-adjusted returns are available. 12
AREAS OF AGREEMENT 13
Q. Are there any areas of agreement in the fair rate of return testimonies presented in 14
these proceedings? 15
A. Yes. Mr. Terry, Mr. Gorman, and I agree regarding the appropriate capital structure and 16
debt cost rate. We all recommend a capital structure which includes 44.43% debt and 17
55.57% common equity, and an embedded debt cost rate of 3.99%. 18
COMPARABLE GROUPS 19
Q. What companies did Mr. Terry and Mr. Gorman use to estimate the cost of common 20
equity for VWID? 21
A. Mr. Terry included the same seven water utility comparison companies that I used. 22
Additionally, Mr. Terry added Veolia Environnement S.A, the ultimate parent company of 23
WALKER, Di Reb
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Veolia Water Idaho, Inc.
VWID, to his comparison group.2 I refer to Mr. Terry’s comparison group as “Terry’s 1
Proxy Group” in my rebuttal testimony. 2
Mr. Gorman used six of the seven water utility comparison companies that Mr. 3
Terry and I used.3 In addition, Mr. Gorman used a second comparison group, a gas utility 4
comparison group. I refer to Mr. Gorman’s water comparison group as “Water Proxy” 5
and his gas comparison group as “Gas Proxy” in my rebuttal testimony. 6
It should also be noted that I use the phrase “Proxy Groups” in my rebuttal 7
testimony to refer to all the comparison groups used by Mr. Terry and Mr. Gorman. 8
Q. Do you agree with Mr. Terry and Mr. Gorman’s selection of companies used in their 9
Proxy Groups? 10
A. No. I do not agree with Mr. Terry’s inclusion of Veolia Environnement S.A as part of 11
Terry’s Proxy Group. Veolia Environnement S.A. is a French transnational company with 12
operations around the world, providing different services than VWID provides. Veolia 13
Environnement S.A.’s financial records and financial reporting requirements differ from 14
US practice and requirements. As such, I do not believe the use of Veolia Environnement 15
S.A. as a comparison company to VWID is beneficial, meaningful or proper. 16
I do not agree with Mr. Gorman’s use of his Gas Proxy as a comparison to VWID. 17
Mr. Gorman’s Gas Proxy companies provide different services than VWID and operate in 18
a different industry. Mr. Gorman’s Gas Proxy companies primarily deliver a product 19

2 VWID is a wholly-owned subsidiary of VUR. VUR is a subsidiary of Veolia Utility Parent, Inc., which is a
subsidiary of Veolia North America, Inc. Veolia North America, Inc. is a wholly-owned subsidiary of Veolia
Environnement S.A. Veolia Environnement S.A. is a French transnational company with activities in three main
service and utility areas: water management, waste management and energy services.
3 Mr. Gorman did not include The York Water Company in his six company water comparison group.
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Veolia Water Idaho, Inc.
(natural gas) that many do not own.4 Conversely, VWID acquires a product (water), VWID 1
owns a product (water), treats and/or purifies a product, transports their product, and then 2
delivers their product. In a sense, VWID is an integrated company while Mr. Gorman’s 3
Gas Proxy companies are in the transportation and delivery business. As such, I do not 4
believe the use of Gas Proxy as comparison companies to VWID is beneficial, meaningful 5
or proper. 6
Mr. Gorman’s Gas Proxy group is better suited for use in estimating the cost of capital 7
for a natural gas utility since it is comprised of only natural gas utility companies. In 8
financial literature, the terms “barometer group”, “comparable group”, “peer group” and 9
“proxy group” are used interchangeably and they are defined as: 10
In investment research, peer group analysis is a vital part of 11
establishing a valuation for a particular stock. The emphasis here is 12
on comparing “apples to apples,” which means that the constituents 13
of the peer group should be fairly similar to the company being 14
researched, particularly in terms of their main areas of business 15
and market capitalization.5 16
Q. Do investors view Mr. Gorman’s Water Proxy group and Gas Proxy group 17
substantially different from one another? 18
A. Yes. As shown on Schedule 1, the market values water companies differently than natural 19
gas companies because each type of utility (water versus natural gas) has a unique business 20
and financial profile. Schedule 1 shows recent price-earnings multiples (“P-E Multiples”), 21
and market-to-book multiples (“Market/Book Multiples”). As shown, Mr. Gorman’s 22
Water Proxy group’s P-E Multiples is currently 34.0-times while Mr. Gorman’s Gas Proxy 23

4 In states with gas deregulation, the utility company is responsible for maintaining the pipes that deliver gas
products to customers, but customer can choose which gas supply company provides the commodity supplied, or
actual natural, that the local utility then delivers.
5 (Emphasis added), https://www.investopedia.com/terms/p/peer-group.asp .

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Veolia Water Idaho, Inc.
group’s P-E Multiples is 18.8-times. The difference in the P-E Multiples indicate the 1
market values Mr. Gorman’s Water Proxy companies 80% more than their valuation of 2
Mr. Gorman’s Gas Proxy companies. Similarly, the Market/Book Multiples for Mr. 3
Gorman’s Water Proxy group are 87% higher than Mr. Gorman’s Gas Proxy group. The 4
difference between Mr. Gorman’s Water Proxy group Market/Book Multiples of 3.18-5
times indicates the market values the Mr. Gorman’s Water Proxy group at 318% relative 6
to their book value but only values the Mr. Gorman’s Gas Proxy group at 170% relative 7
to their book value, which proves that investors view Mr. Gorman’s Water Proxy group 8
and his Gas Proxy group substantially different from one another. 9
According to page 1 of Mr. Gorman’s Exhibit No. 405 (Column 2), security analysts 10
project Mr. Gorman’s Water Proxy group’s earnings to grow 96-basis points (6.69% - 11
5.73%) faster than they project for his Gas Proxy group. On page 1 of Mr. Gorman’s 12
Exhibit No. 407 Mr. Gorman’s Water Proxy group’s projected return on equity is shown 13
to average 10.41% to 10.64% (columns 5 and 7), while his Gas Proxy group’s projected 14
return on equity is shown to average 9.34% to 9.66%, a difference of more than 100-basis 15
points.6 16
These comparisons prove the difficulties in relying on Mr. Gorman’s Gas Proxy group 17
to estimate the cost of capital for a water utility since the market values water companies 18
and natural gas companies considerably different. The evidence is clear, the market does 19
not assess Mr. Gorman’s Water Proxy and his Gas Proxy group similarly. Mr. Gorman has 20
not provided evidence that natural gas utilities present risk comparable to regulated water 21

6 A basis point is a common unit of measure for interest rates and other percentages in finance. In percentage form,
ten basis points would appear as 0.10%. A measure of 100 basis points is equal to 1%.
WALKER, Di Reb
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Veolia Water Idaho, Inc.
companies generally, or VWID specifically. Investors do not evaluate water utilities by 1
looking at natural gas utilities and neither should Mr. Gorman or the Commission. 2
Q. Do you have any other comments regarding Mr. Terry and Mr. Gorman’s proxy 3
groups? 4
A. Yes. In addition to using a comparison group (or proxy group) to estimate the cost of 5
equity, proxy groups are used as a benchmark to satisfy the long-established guideline of 6
providing a utility the opportunity to earn a return equal to that of similar risk enterprises. 7
However, neither Mr. Terry nor Mr. Gorman presented any evidence regarding the 8
similarity, or dissimilarity, of risk between their Proxy Groups and VWID. A risk analysis 9
of VWID and my comparison companies was discussed in my Direct Testimony in the 10
sections titled “Financial Analysis” and “Risk Analysis.” A risk analysis of VWID and the 11
Proxy Groups is essential in determining a fair rate of return because risk and return 12
counterbalance one another. That is, the greater the risk, the higher the required return and 13
vice versa. However, as stated, neither Mr. Terry or Mr. Gorman provided any risk 14
analyses of their Proxy Groups and VWID. Additionally, neither Mr. Terry or Mr. Gorman 15
provided any risk analysis of VUR and VWID. In a sense, Mr. Terry’s and Mr. Gorman’s 16
common equity cost rate recommendation reflect a “one size fits all” approach since no 17
risk reconciliation was done between their Proxy Groups and VWID. Accordingly, I do 18
not believe the Commission can or should rely upon either Mr. Terry’s or Mr. Gorman’s 19
recommendations. 20
WALKER, Di Reb
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Veolia Water Idaho, Inc.
RISK FACTORS 1
Q. Besides the aforementioned required risk comparison between VWID and the Proxy 2
Groups, which neither Mr. Terry nor Mr. Gorman presented, is there other evidence 3
concerning risk that they failed to consider? 4
A. Yes, water utilities face increased risks, which Mr. Terry and Mr. Gorman did not consider. 5
For example, the Federal Reserve’s monetary and fiscal stimulus, which included artificial 6
and historically low interest rates, have produced some of the highest inflation rates in the 7
last 40 years. Over the last 12 months, January 2022 through January 2023, inflation was 8
6.4% and was a cumulative 14.4% over the last 24 months, January 2021 through January 9
2023.7 To put the latest 24 month price change (inflation) of 14.4% into perspective, the 10
entire change in prices (inflation) over the prior 106 month period, March 2012 through 11
January 2021, was only 14.0%. The current unusual and extremely high inflation rate has 12
results in higher capital cost rates. 13
Q. What proof do you have that the current unusual and extremely high inflation rate 14
has results in higher capital cost rates? 15
A. Mr. Gorman’s Exhibit Nos. 414 and 415 show bond yields. According to Mr. Gorman, the 16
current yield on long-term treasury bonds is 3.81%.8 Looking at Mr. Gorman’s Exhibit 17
No. 414, it is apparent that the last time the yield on long-term treasury bonds exceeded 18
3.81% was 2011, or 12 years ago. The current yield on long-term treasury bonds is 69-19
basis points higher than it was in 2022, 176-basis points higher than it was in 2021, and 20
225-basis points higher than it was in 2020. 21

7 Based on the consumer price index, or CPI for All Urban Consumers (CPI-U) found at
https://www.bls.gov/cpi/data.htm.
8 Gorman, Di 62.
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Veolia Water Idaho, Inc.
Further, the current yield on A rated public utility bonds is 5.47% according to Mr. 1
Gorman.9 Mr. Gorman’s Exhibit No. 414 shows the last time that the yield on A rated 2
public utility bonds exceeded 5.47% was 2009, or 14 years ago. The current yield on A 3
rated public utility bonds is 75-basis points higher than it was in 2022, 237-basis points 4
higher than it was in 2021, and 242-basis points higher than it was in 2020. 5
The increased capital cost rates for long-term treasury bonds and A rated public 6
utility bonds have similarly resulted in higher common equity cost rates today, than existed 7
over the last several years. 8
Q. Does the information shown on Mr. Gorman’s Exhibits Nos. 414 and 415 provide any 9
additional evidence regarding risks which Mr. Terry and Mr. Gorman did not 10
consider? 11
A. Yes. Mr. Gorman’s Exhibit No. 414 shows yield spread between long-term treasury bonds 12
and A rated public utility bonds bond yields. This difference, or spread in yield, measures 13
the risk of default between long-term treasury bonds and A rated public utility bonds and 14
provides direct measurement of risk. The current yield spread between long-term treasury 15
bonds and A rated public utility bonds is 1.66% according to Mr. Gorman’s Exhibit No. 16
415. 17
Mr. Gorman’s Exhibit No. 414 shows the last time that the yield spread between 18
long-term treasury bonds and A rated public utility bonds exceeded 1.66% was 2009, or 14 19
years ago. The current yield spread between long-term treasury bonds and A rated public 20
utility bonds is 40-basis points higher than it has averaged over the last five years. The 21
current widening of the yield spread between long-term treasury bonds and A rated public 22

9 Gorman, Di 62.
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Veolia Water Idaho, Inc.
utility bonds proves VWID’s investors face increased risk from what they faced over the 1
last five years. 2
Q. Is there other evidence concerning risk which Mr. Terry and Mr. Gorman did not 3
consider? 4
A. Yes. The beta of a security is a measure of volatility or market risk relative to the market. 5
The beta for the market is always equal to 1.00; therefore, a company whose stock has a 6
beta greater than 1.00 is considered riskier than the market, and a company with a beta less 7
than 1.00 is considered less risky than the market. Changes in beta provide a measure of 8
the change in risk. The Water Proxy currently has a beta which averages 0.78.10 Over the 9
last eight and half years, the Water Proxy’s beta has ranged from 0.65 to 0.78 as depicted 10
in Figure 1.11 As is evident from the information shown in Figure 1, the Water Proxy’s 11
risk, as measure by beta, has increased and should be incorporated into VWID cost of 12
equity. 13

10 Mr. Gorman’s Exhibit No. 416, page 1.
11 Derived from Mr. Gorman’s Exhibit No. 416, pages 1-3.
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Veolia Water Idaho, Inc.
Figure 1 1
2
On a relative basis, the Water Proxy’s current beta indicates their current level of risk is 3
2% to 3% higher than existed during 2020 to 2022. Further, the current level of risk is 20% 4
higher than 2019 and 11% higher than 2018. The increased level of risk should similarly 5
be reflected in VWID’s cost of capital. 6
Q. Is VWID similar in size to Mr. Terry’s or Mr. Gorman’s Proxy Groups? 7
A. No. My Direct Testimony detail the large size difference between the VWID and my 8
Comparable Group. Company size is an indicator of business risk and was discussed in 9
my Direct Testimony (pages 23-29). The finance literature supports the fact that, as the 10
size of a firm decreases, its risk and, hence, its required return increases. 11
When scholars have tried to explain actual security returns, 12
several anomalies (i.e., deviations from what is considered 13
normal) have become evident. One is a small-firm, or size, 14
effect. It has been found that common stocks of firms with 15
small market capitalizations (price per share times the 16
number of shares outstanding) provide higher returns than 17
0.60
0.62
0.64
0.66
0.68
0.70
0.72
0.74
0.76
0.78
0.80
Water Proxy Beta
Trend line
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common stocks of firms with high capitalizations, holding 1
other things constant.12 2
Further, since size is a recognized and meaningful element of risk, it is appropriate to reflect 3
that risk in a company’s cost of equity. 4
Recent studies have provided strong evidence that the degree 5
of risk and corresponding cost of capital increase with 6
decreasing size of company. The studies show that this 7
addition to the equity risk premium is over and above the 8
amount that would be warranted just as a result from a 9
company’s systematic risk.13 10
Two independent sets of empirical studies provide strong 11
support for the proposition that cost of capital tends to 12
increase with decreasing size. Users of cost of capital data 13
should make themselves aware of updates of these and 14
possibly other similar studies in order to incorporate the 15
latest current size effect data in cost of capital estimates, 16
whether using build-up models, CAPM, or other cost of 17
capital models.14 18
Dr. Thomas Zepp presented research on water utilities that supports a small firm 19
effect in the utility industry.15 Moreover, Professor Brigham has indicated that smaller 20
firms have higher capital costs than otherwise similar but larger firms.16 Standard & Poors, 21
documents that relationship between size and credit rating, 22
Company size and diversification often plays [a] role. While 23
we have no minimum size criterion for any given rating 24
level, company size tends to be significantly correlated to 25
rating levels. This is because larger companies often benefit 26
from economies of scale and/or diversification, translating 27
into a stronger competitive position. Small companies are, 28
almost by definition, -more concentrated in terms of product, 29
number of customers, and geography. To the extent that 30

12 James C. Van Horne, John M. Wachowicz. Fundamentals of Financial Management, 13th ed. (Pearson Education
Limited), 2008, at 114.
13 Shannon P. Pratt. Cost of Capital: Estimation and Applications, (Wiley), 1998, at 64.
14 Id. at 95.
15 See Zepp (2002), “Utility Stocks and the Size Effect: Revisited”, Economics and Finance Quarterly, 43, 578-582.
16 See Fundamentals of Financial Management, 5th Edition, page 623.
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markets and regional economies change, a broader scope of 1
business affords protection.17 2
While we have no minimum size criterion for any given 3
rating level, size and ratings do end up being correlated, 4
given that size often provides a measure of diversification, 5
and/or affects competitive positioning.18 6
Further, since size is a recognized and meaningful element of risk, it is appropriate 7
to reflect that risk in a company’s cost of equity. Credit rating agencies recognize that size 8
impacts credit rating. The authors Brealey, Myers and Allen discuss the “firm size” and 9
the size premium.19 Additional support for the use of the size premium for utilities is also 10
found in a 1995 article by M. Annin.20 Because firm size plays a role in the pricing of 11
securities in the unregulated financial markets, it is necessary to reflect this fact when 12
determining capital cost rates for utilities. Otherwise, a smaller utility, such as VWID, is 13
at a competitive disadvantage in the money market when competing for capital as 14
compared to larger utilities, such as the larger Proxy Groups’ companies. 15
Q. On pages 16 to 17 of Mr. Gorman’s Direct Testimony he discusses authorized returns 16
on equity for electric and gas utilities during the period 2010 to 2022. Do you have 17
any comments concerning Mr. Gorman’s discussion of authorized returns on equity 18
for electric and gas utilities? 19
A. Yes. I believe Mr. Gorman discussed authorized returns on equity for electric and gas 20
utilities from 2010 to 2022 to support his opinion that investors’ expectation of returns is 21

17 Standard & Poor’s, Corporate Ratings Criteria 2008; pg. 22 (emphasis added).
18 Id. at 23 (emphasis added).
19 Brealey, Myers and Allen, Principles of Corporate Finance, 10th edition, page 198.
20 See Annin (1995), “Equity and the Small Stock Effect”, Public Utilities Fortnightly, October 15, 1995, at 42-43.
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lower today.21 However, as mentioned previously, the current yield on A rated public 1
utility bonds is 5.47%. The last time that the yield on A rated public utility bonds exceeded 2
5.47% was 2009, or prior to the period discussed by Mr. Gorman. Accordingly, the 3
required return on equity for electric and gas utilities today exceeds the returns cited by 4
Mr. Gorman since interest rates are higher today than during the period discussed by Mr. 5
Gorman. 6
According to the source of information relied upon by Mr. Gorman, Regulatory 7
Research Associates (RRA), the average authorized returns on equity for electric cases 8
was 9.52% in 2022 versus 9.39% in 2021, while average authorized returns on equity for 9
gas utilities was 9.53% in 2022, slightly lower than the 9.56% average observed in 2021.22 10
The average authorized returns on equity for water utilities trended upward to 9.61% in 11
2022, an increase over the 9.46% authorized in 2021.23 Since the current yield on A rated 12
public utility bonds is 75-basis points higher than it was in 2022 and 237-basis points 13
higher than it was in 2021, the required return on equity for water utilities today exceeds 14
the returns authorized in 2021 and 2022. 15
Q. On pages 7 and 8 of Mr. Terry’s Testimony, he claims VWID’s small size is not an 16
issue due to their ownership by Veolia North America. Is this opinion relevant to this 17
case and to a fair rate of return? 18
A. No. Mr. Terry claims that if you included the totality of the Veolia North America’s 19

21 The 2022 authorized returns on equity for electric and gas utilities discussed by Mr. Gorman only include the
period January through September 2022. The 2022 authorized returns on equity for the full year were higher than the
returns cited by Mr. Gorman.
22 S&P Global Market Intelligence, RRA Regulatory Focus, Average Authorized ROE For Electric Nudges Up But
Drops For Gas In 2022, February 3, 2023.
23 S&P Global Market Intelligence, RRA Regulatory Focus, Water ROEs Trend Higher on Small Dataset, February
15, 2023.
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footprint, “the size and diversity issue” of VWID “becomes moot.” He further states, “if 1
you look at the next level up, Veolia Environnement S.A., where all the stock is purchased 2
and sold, the size and diversity risk is eliminated.” I believe these statements undercut Mr. 3
Terry’s recommendation. The risk of providing service to areas outside of VWID is 4
irrelevant to the current proceeding since the Commission only has jurisdiction over the 5
rates of service for VWID customers. Therefore, the Commission should only be interested 6
in the risk of providing service to those customers for which it has jurisdiction. In essence, 7
Mr. Terry advocates for cross subsidization by suggesting that VWID should be afforded 8
something less than a fair rate of return because their customers’ rates can be subsidized 9
by non-jurisdictional customers. 10
Additionally, the precepts of a fair rate of return, including the comparable 11
earnings standard, capital attraction standard, and the financial integrity standard relate to 12
business enterprises, or VWID, not its investors. The investment risk of VWID is not 13
dependent on who its investors are. The investment risk of a business enterprise does not 14
change based on the geographic distribution of its investors, the wealth of its investors, or 15
the nationality of its investors. Likewise, a fair rate of return for a business enterprise 16
should not change based on the composition of its investors either. 17
18
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Veolia Water Idaho, Inc.
Q. On page 34 of Mr. Gorman’s Testimony he states, “Veolia Utility Resources, LLC 1
(“VUR”) provides all the external capital needed for VWID utility operations in the 2
state of Idaho. Therefore, the market assessment of VWID’s investment risk is 3
described by credit rating analysts’ reports for VUR.” Do you agree with Mr. 4
Gorman? 5
A. No. The credit rating analysts’ reports for VUR only assess the credit risk of VUR, not 6
VWID. Mr. Gorman’s rationale is analogous to claiming the credit rating of a child is 7
described by the credit rating of their parent. 8
Q. On page 88 of Mr. Gorman’s Testimony he states, “[t]his total investment risk 9
assessment of VWID, in comparison to a proxy group, is fully absorbed into the 10
market’s perception of the Company’s risk. The use of my proxy group fully captures 11
the investment risk of VWID.” Do you agree with Mr. Gorman? 12
A. No. Mr. Gorman did not provide a risk assessment of VWID, nor did he provide a risk 13
analysis between VWID and his proxy groups. Therefore, I believe his statement is 14
incorrect, or at the very least has not been proven by Mr. Gorman. 15
Q. On page 88 of Mr. Gorman’s Testimony he states, “[b]usiness risks, among others, 16
include a company’s size, competitive position, generation portfolio, and capital 17
expenditure programs, as well as consideration of the regulatory environment, 18
current state of the industry, and the economy as whole.” Do you agree with Mr. 19
Gorman? 20
A. Yes. In regard to VWID and my comparison group, their competitive position, regulatory 21
environment, current state of the industry, and the economy as whole are the same for 22
VWID and my comparison group. However, VWID’s small size and their larger capital 23
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Veolia Water Idaho, Inc.
expenditure program relative to the comparison companies indicates higher risk relative to 1
my comparison group. These same observations apply to Mr. Gorman’s Water Proxy 2
group since his group is a subset of my comparison group. 3
Q. On page 7 of Mr. Terry’s Testimony he states, “[i]n troubled economic times investors 4
tend to move their money to safer investment vehicles. This would be things like 5
treasuries, dividend producing stocks like utilities, Exchange Traded Funds, and the 6
like.” Do you agree with Mr. Terry? 7
A. No, not exactly. I agree investors tend to move their money to safer investment vehicles, 8
but I do not agree that utilities and Exchange Traded Funds are their preferred choice. 9
Further down on page 7 Mr. Terry justifies his statement and states, 10
While this will not have a direct impact on the quantification of ROE, with 11
more demand for these types of investments it will tend to support lower 12
ROE recommendations. Some of these effects are already being seen. Some 13
of the comparable utilities used in the analysis are at or near their 52-week 14
high. While the Dow Jones and S&P 500 are not.24 15
Table 1 shows a comparison of the percentage difference between the current stock price 16
and the 52-week high for Terry’s Proxy Group, the Dow Jones, and the S&P 500.25 As 17
shown in Table 1, the Dow Jones’ price is 6% below and the S&P 500’s price is 13% below 18
their 52-week high. The price changes for Terry’s Proxy Group’s stocks have decreased 19
between 7% to 24%, with an average price drop of 12%, and with a median decrease of 20
10% below their 52-week high. Accordingly, the price drop from their 52-week high for 21
Terry’s Proxy Group, the Dow Jones, and the S&P 500 are similar, contrary to Mr. Terry’s 22

24 TERRY J. (Di) 7.
25 The date of the current stock price and the 52-week high, 1/30/23, is the same date footnoted by Mr. Terry.
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Veolia Water Idaho, Inc.
contention. Therefore, a lower return on equity is not justified based on Mr. Terry’s 1
rationale. 2
3
MR. TERRY’S AND MR. GORMAN’S RECOMMENDED COST OF EQUITY 4
Q. What methods or models did Mr. Terry and Mr. Gorman use to determine their 5
recommended cost of common equity? 6
A. Mr. Terry used the comparative earnings method, the DCF model and the CAPM model to 7
determine his recommended cost of common equity. Mr. Gorman used DCF model, Risk 8
Premium model and the CAPM model to determine his recommended cost of common 9
equity. 10
11
1/30/2023
Company
Last Sale
Price
52 Week
High Price
Percentage
From The High
Price
American States Water Co 92.79 100.51 -8%
American Water Works Co Inc 155.00 173.87 -11%
California Water Service Gp 59.89 66.12 -9%
Essential Utilities, Inc.46.10 52.62 -12%
Middlesex Water Co 82.99 109.51 -24%
SJW Corp 75.95 83.88 -9%
York Water Co 44.52 47.95 -7%
Veolia Environnement 27.39 33.33 -18%
Average -12%
Max -7%
Min -24%
Median -10%
Dow Jones Industrial Average 33,717.09 35,768.06 -6%
S&P 500 4,017.77 4,631.60 -13%
Source of Information: S&P Capital IQ
Table 1
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Veolia Water Idaho, Inc.
Q. What were the results of Mr. Terry’s comparative earnings method? 1
A. Mr. Terry determined a cost of equity of 9.25% to 10.26% using the comparative earnings 2
method. In reviewing his method, I found considerable difference between the returns on 3
equity Mr. Terry used and the returns on common equity reported by Standard & Poor’s 4
(“S&P”).26 Schedule 2 replicates Mr. Terry’s comparative earnings method but shows the 5
returns on common equity (“ROE”) reported by S&P for the same time period used by Mr. 6
Terry. 7
As shown on Schedule 2, the 2021 results average 10.50%. The 2020 results 8
average 9.54% and the 2019 results average 9.84%. The average of all the results together 9
is a ROE of 9.96% with a median of 10.71%. When Veolia Environnement S.A. is 10
removed from Mr. Terry’s comparative earnings method, the 2021 results average 11.25%. 11
The 2020 results average of 10.48% and the 2019 results average 9.49%. The average of 12
all the results together is a ROE of 10.41% with a median of 11.06% as shown on Schedule 13
2. 14
Q. What market value DCF estimate do Mr. Terry and Mr. Gorman recommend for the 15
VWID? 16
A. Mr. Terry recommends a market value DCF of 7.91 to 9.04% and Mr. Gorman 17
recommends a market value DCF of 9.00%. I have numerous concerns relating to Mr. 18
Terry’s and Mr. Gorman’s DCF models. 19
Q. What concerns do you have regarding Mr. Terry’s DCF models? 20
A. My concerns regarding Mr. Terry’s DCF models relate to his incorrect application of the 21
DCF model and his use of historic growth rates. The DCF model is a forward looking 22

26 Mr. Terry’s source of information was Yahoo Finance while I used S&P Capital IQ.
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Veolia Water Idaho, Inc.
model that calculates the present value (cost of equity) of discounted future dividends (cash 1
flow). The dividend yield used in the model is based on next year’s dividend, or D1, that 2
is determined by taking the current annualized dividend, or D0, and multiplying it by the 3
assumed growth, “g”, in dividends (cash flow), or D0 x (1+g) = D1, which is then divided 4
by the current price to produce next year’s dividend yield. However, Mr. Terry did not 5
account for next year’s dividend in his DCF calculation. 6
I believe Mr. Gorman would agree with me on this point since Mr. Gorman’s 7
testimony explained his determination of next year’s dividend used in his DCF calculation 8
as, 9
I used the most recently paid quarterly dividend as reported in Value Line. 10
This dividend was annualized (multiplied by 4) and adjusted for next year’s 11
growth to produce the D1 factor for use in Equation 2 above. In other words, 12
I calculate D1 by multiplying the annualized dividend (D0) by (1+G).27 13
To be conservative, when I calculate next year’s dividend in my DCF I only use D1/2, not 14
the full D1. I do so because quarterly dividends are typically increased at least one time per 15
year, and therefore I use “one-half the assumed growth in value” to estimate the timing of 16
the dividend increase. Use of “one-half the assumed growth” assumes the dividend rate is 17
increased at the midpoint of the next year because it (D1/2) falls midway between the current 18
dividend, D0, and the future dividend, D1. On Schedule 3, I correct Mr. Terry’s oversight, 19
and include next year’s dividend yield in his DCF model. 20
My second concern regarding Mr. Terry’s DCF model is his use of historic growth 21
rates. Published projected EPS growth rates are used primarily by investors. Academic 22

27 Gorman, Di 42.
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Veolia Water Idaho, Inc.
studies28 verify the superiority of analysts’ EPS growth forecasts over derived growth rates 1
in predicting stock prices. The market required cost of equity represents what the market 2
will pay for a stock based on investors’ expectations of expected future growth. For this 3
reason, analysts’ projections of future growth prospects for water utilities are required 4
because analysts’ forecasts are relied upon by investors when they price utility stocks. I 5
believe Mr. Gorman would also agree with me on this point since Mr. Gorman’s testimony 6
explains essentially the same viewpoint and even footnotes the same published study that 7
I have, 8
As predictors of future returns, securities analysts’ growth estimates have 9
been shown to be more accurate than growth rates derived from historical 10
data. That is, assuming the market generally makes rational investment 11
decisions, analysts’ growth projections are more likely to influence 12
investors’ decisions, which are captured in observable stock prices, than 13
growth rates derived only from historical data.29 14
Mr. Terry compounded his mistake of using historic growth rates by removing 15
those companies with negative historical growth rates from his second DCF calculation 16
that was based on projected growth rates. On Schedule 3, I correct Mr. Terry’s removal of 17
companies which have negative historical growth rates and recalculate his DCF model. 18
The average of all the results is a DCF of 9.60% with a median of 9.59%. After the highest 19
and lowest DCF results were removed, average DCF is 9.57% with a median of 9.59%, as 20
shown on Schedule 3.30 21

28 Gordon, David, A., Gordon, Myron, J., and Gould, Lawrence, I.A Choice Among Methods of Estimating Share
Yield, The Journal of Portfolio Management, 50-55, Spring 1989.
29 Gorman, Di 42 and 43.
30 Besides removing companies with negative historic growth rates, Mr. Terry also removed Veolia Environnement
S.A. because he thought its growth was too high. See TERRY J. (Di) 15.
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Veolia Water Idaho, Inc.
Q. What DCF models did Mr. Gorman use to determine his recommendation for the 1
VWID? 2
A. Mr. Gorman used three DCF models: the Constant Growth DCF Model, the Sustainable 3
Growth DCF Model and a Multi-Stage Growth DCF Model. Mr. Gorman’s Constant 4
Growth DCF Model reflects analysts growth forecasts, and is the same model I 5
recommended using. I previously discussed Mr. Terry’s use of a constant growth model. 6
My concerns regarding Mr. Gorman’s DCF models only relate his use of the Sustainable 7
Growth DCF Model and a Multi-Stage Growth DCF Model. 8
Q. What concerns do you have regarding Mr. Gorman’s Sustainable Growth DCF 9
Model? 10
A. My concerns regarding Mr. Gorman’s Sustainable Growth DCF Model relate to his unique 11
method of calculating the growth rate he used in his model. Instead of using analysts’ 12
growth forecasts he improperly relied upon growth rates that he calculated. That is, he 13
subjectively ignored the investor influencing published growth rates of security analysts 14
and instead, calculated his own growth rates. Specifically, Mr. Gorman’s Sustainable 15
Growth DCF Model relied upon internal growth rates. Internal growth measures growth 16
in book value, not stock price. Growth in book value is meaningless given today’s 17
relatively high Market/Book Multiples and therefore, internal growth is not a good proxy 18
for investors’ growth expectations. Published projected EPS growth rates are used 19
primarily by investors. The market-required cost of equity represents what the market will 20
pay for a stock based on investors’ expectations of expected future growth. Investors’ 21
expectations of expected future growth are not based upon Mr. Gorman’s unique internal 22
growth rate, they are based on investors’ expectations of expected future growth. 23
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Veolia Water Idaho, Inc.
For this reason, analysts’ projections of future growth prospects for utilities are 1
required. Analysts’ EPS growth projections are not required because they will necessarily 2
prove correct. Rather, analysts’ EPS projections of future growth prospects are required 3
because real investors rely on them more than any other source. It is irrelevant whether 4
analysts growth projections are over or under optimistic or pessimistic. The analysts’ 5
forecasts are relied upon by investors when they price utility stocks. 6
Even if Mr. Gorman’s judgments concerning future growth were superior to the 7
analysts’ forecasts, there still would be no justification for using Mr. Gorman’s unique 8
growth rate in a DCF formula because investors that price stocks are totally unaware of 9
Mr. Gorman’s analysis (even if hypothetically it were better). Instead, investors rely upon 10
analysts’ forecasts, which are widely available and used by investors. 11
Mr. Gorman’s calculation of his unique internal growth rate is shown on page 1 of 12
Exhibit No. 407. On page 1 of Mr. Gorman’s Exhibit No. 407 Mr. Gorman’s Water Proxy 13
group’s projected return on equity is shown to average 10.41% to 10.64%, while his 14
Gas Proxy group’s projected return on equity is shown to average 9.34% to 9.66%. 15
However, Mr. Gorman’s Sustainable Growth DCF Model, shown on Exhibit No. 408, only 16
determined a return on equity (cost of equity) of 7.45% to 7.50% for his Water Proxy group 17
and a 9.08% to 9.30% return on equity (cost of equity) for his Gas Proxy group. 18
Comparing the results of Mr. Gorman’s Sustainable Growth DCF Model to its 19
inputs highlights the problem with Mr. Gorman’s Sustainable Growth DCF Model. 20
Specifically, Mr. Gorman’s Water Proxy group’s projected return on equity of 10.41% 21
to 10.64% is between 291-basis points higher to 319-basis points higher than Mr. 22
Gorman’s Sustainable Growth DCF Model’s results of 7.45% to 7.50%, thus highlighting 23
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Veolia Water Idaho, Inc.
the inadequacy of Mr. Gorman’s Sustainable Growth DCF Model.31 1
Q. Is there a difference between earned returns, or “Accounting ROEs,” and the ROE 2
to be determined in this case? 3
A. No, not really. I agree there is a distinction between a market return and an accounting 4
return. The ROE that the Commission will determine in this case will become VWID’s 5
accounting ROE benchmark by which under-earning and over-earning will be measured. 6
If Mr. Gorman’s Water Proxy group is earning an accounting return of 10.41% to 10.64% 7
while VWID earns only 7.45% to 7.50%, it places VWID at a competitive disadvantage in 8
the competition to attract capital. 9
Q. What concerns do you have regarding Mr. Gorman’s Multi-Stage Growth DCF 10
Model? 11
A. My concerns regarding Mr. Gorman’s Multi-Stage Growth DCF Model relate to his unique 12
method of calculating the growth rate that he used in his model. The primary measure of 13
growth used in Mr. Gorman’s Multi-Stage Growth DCF Model is based on the nominal 14
growth in the value of the economic output (“GDP”) for the overall national economy as 15
measured by the nominal GDP growth.32 To justify his unique selection of GDP growth 16
Mr. Gorman compared GDP growth and electric utility sales growth since 1988. He 17
explained, 18
The U.S. Department of Energy, Energy Information Administration 19
(“EIA”) has observed utility sales growth tracks U.S. GDP growth, albeit at 20
a lower level, as shown in Exhibit No. 409. Utility sales growth has lagged 21
behind GDP growth for more than a decade. As a result, nominal GDP 22
growth is a very conservative proxy for utility sales growth, rate base 23

31 A similar comparison of the Gas Proxy group’s results highlights the same flaws in Mr. Gorman’s Sustainable
Growth DCF Model, but the magnitude of the difference is smaller.
32 Mr. Gorman explained, “[f]or the long-term growth period, I assumed each company’s growth would converge to
the maximum sustainable long-term growth rate, which is the projected long-term GDP growth rate.” Gorman, Di
48.
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Veolia Water Idaho, Inc.
growth, and earnings growth. Therefore, the U.S. GDP nominal growth rate 1
is a reasonable proxy for the highest sustainable long-term growth rate of a 2
utility.33 3
However, contrary to Mr. Gorman’s hypothesis, the growth in the value of GDP for 4
the overall national economy does not provide a reasonable measure for the growth of Mr. 5
Gorman’s Water Proxy group as evidence by the information shown on Schedule 4. As 6
shown, since 1988 nominal GDP increased by 345% while Mr. Gorman’s Water Proxy 7
group’s revenues increased 748%, or 117% more than GDP. Similarly, over the past 30 8
years (1991-2021), the Water Proxy group’s revenues increased 172% more than GDP, the 9
Water Proxy group’s revenues increased 110% more than GDP over the past 20 years 10
(2001-2021) and increased 61% more than GDP over the past 10 years (2011-2021). As 11
shown on Schedule 4, Mr. Gorman’s Water Proxy group’s revenue growth has been about 12
2-times higher than GDP growth. 13
A similar significant difference in growth between GDP and the Water Proxy 14
group’s revenues will continue to occur prospectively because of water utility industry 15
fundamentals. At a minimum, the investor owned water industry will continue to grow 16
faster than the overall economy for the next several decades, if not for the next century. 17
The Water Proxy group’s growth strategy focuses on the acquisition of water and 18
wastewater companies and operations which expands their market share. Government 19
controlled establishments such as municipalities, public service districts and other local 20
governmental entities dominate the water and wastewater industry. Currently, 21
government-controlled establishments manage or own about 86% of all water supplies and 22
80% of all domestic wastewater systems. The percentage of all water supplies that are 23

33 Gorman, Di 49.
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Veolia Water Idaho, Inc.
managed or owned by larger investor owned utilities (“IOU”), and the percentage of 1
wastewater systems managed or owned by larger IOUs, will increase over time as the cost 2
of infrastructure replacement and regulatory compliance becomes prohibitive for 3
Government-controlled establishments and small IOUs. Clearly, there are ample new 4
growth opportunities available for IOUs to grow faster than the national economy through 5
acquisition of Government controlled water/wastewater establishments and small IOUs. 6
The water utility industry’s and wastewater utility industry’s increased compliance 7
with state and federal water purity levels and large infrastructure replacements are driving 8
consolidation of the wastewater utility and water utility industries. Because many 9
wastewater utility and water utility operations do not have the means to finance the 10
significant capital expenditures needed to comply with these requirements, many have been 11
selling their operations to larger, financially stronger IOU operations. 12
The larger IOUs have been following an aggressive acquisition program to expand 13
their operations by acquiring smaller wastewater and water systems. Generally, they enter 14
a new market by acquiring one or several wastewater or water utilities. After their initial 15
entry into a new market, the larger investor-owned water utility companies continually seek 16
to expand their market share and services through the acquisition of wastewater and water 17
utility businesses and operations that can be integrated with their existing operations. Such 18
acquisitions may allow a company to expand market share and increase asset utilization by 19
eliminating duplicate management, administrative, and operational functions. 20
Acquisitions of small, independent utilities can often add earning assets without necessarily 21
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Veolia Water Idaho, Inc.
incurring the costs associated with the SDWA or CWA if such acquisitions are contiguous 1
to the potential purchaser.34 2
Q. Do you have any other comments regarding Mr. Gorman’s Multi-Stage Growth DCF 3
Model? 4
A. Yes. I believe Mr. Gorman improperly relied upon a GDP growth rate. GDP growth 5
measures growth in national economy, not water utility stock price. Mr. Gorman’s Multi-6
Stage Growth DCF Model produces an unrealistically low result through the use of a low 7
GDP growth estimate. For example, Mr. Gorman’s Water Proxy group’s projected return 8
on equity is shown page 1 of Mr. Gorman’s Exhibit No. 407 to average 10.41% to 9
10.64%, while Mr. Mr. Gorman’s Multi-Stage Growth DCF Model, shown on Exhibit No. 10
410, only determined a return on equity (cost of equity) of 6.23% to 6.31% for his Water 11
Proxy group. Comparing the results of Mr. Gorman’s Multi-Stage Growth DCF Model to 12
the Water Proxy group’s projected return on equity underscores the problem with Mr. 13
Gorman’s Multi-Stage Growth DCF Model. Specifically, Mr. Gorman’s Water Proxy 14
group’s projected return on equity of 10.41% to 10.64% is between 410-basis points 15
higher to 441-basis points higher than Mr. Gorman’s Multi-Stage Growth DCF Model’s 16
results of 6.23% to 6.31%, thus proving the inadequacy of Mr. Gorman’s Multi-Stage 17
Growth DCF Model. Therefore, adopting Mr. Gorman’s recommended 6.23% to 6.31% 18

34 The SDWA, or Safe Drinking Water Act, is the principal federal law in the United States intended to ensure safe
drinking water for the public. Pursuant to the act, the EPA is required to set standards for drinking water quality and
oversee all states, localities, and water suppliers who implement these standards. The CWA, or Clean Water Act, is
the primary federal law in the United States governing water pollution. The CWA’s objective is to restore and
maintain the chemical, physical, and biological integrity of the nation’s waters by preventing point and nonpoint
pollution sources, providing assistance to publicly owned treatment works for the improvement of wastewater
treatment, and maintaining the integrity of wetlands.
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Veolia Water Idaho, Inc.
Multi-Stage Growth DCF Model’s results would place VWID at a competitive 1
disadvantage in the competition to attract capital. 2
Q. Do you have any other comments regarding Mr. Gorman’s market value DCF 3
estimates? 4
A. Yes. Based upon my analyses discussed above regarding Mr. Gorman’s Sustainable 5
Growth DCF Model and Multi-Stage Growth DCF Model, I believe those models should 6
not be relied upon. If the Commission is going to consider the results of any of Mr. 7
Gorman’s DCF models, I believe Mr. Gorman’s Constant Growth DCF Model is his only 8
meaningful DCF model. 9
Q. Do current market conditions impact Mr. Terry’s and Mr. Gorman’s cost of equity 10
methodologies more so today than in previous periods? 11
A. Yes. The basic proposition of financial theory regarding the economic value of a company 12
is based on market value. That is, a company’s value is based on its market value 13
weighted average cost of capital.35 The American Society of Appraisers, ASA Business 14
Valuation Standards, 2009, and the National Association of Certified Valuation Analysts, 15
Professional Standards, 2007, use the same definition: 16
Weighted Average Cost of Capital (WACC). The cost of 17
capital (discount rate) determined by the weighted average, 18
at market values, of the cost of all financing sources in the 19
business enterprise’s capital structure. (Emphasis added) 20
Accordingly, the market value derived cost rate reflects the financial risk or leverage 21
associated with capitalization ratios based on market value, not book value. 22
As shown in Schedule 5, there is a large difference in Mr. Terry’s and Mr. Gorman’s 23

35 For other examples, see http://www.investinganswers.com/financial-dictionary/financial-statement-
analysis/weighted-average-cost-capital-wacc-2905. Also see http://www.wallstreetmojo.com/weighted-average-
cost-capital-wacc/ , or http://accountingexplained.com/misc/corporate-finance/wacc .
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Veolia Water Idaho, Inc.
proxy groups market capitalization ratios and their recommended book capitalization 1
ratios. This difference in market values and book values results in debt/equity ratios based 2
on market value of 25%/75% (debt/equity) verses book value of 50%/50% (debt/equity) 3
for Terry’s Proxy Group and market value of 27%/73% (debt/equity) verses book value 4
of 52%/48% (debt/equity) for the Water Proxy group as shown on Schedule 5. The larger 5
the difference between market values and book values, the less reliable the models’ results 6
are because the models provide an estimate of the cost of capital of market value, not 7
book value. 8
Financial theory concludes capital structure and firm value are related. Since 9
capital structure and firm value are related, a leverage adjustment (Hamada adjustment) is 10
required when a cost of common equity model is based on market value and if its results 11
are then applied to book value. As explained previously, the market value derived cost rate 12
reflects the financial risk or leverage associated with capitalization ratios based on 13
market value, not book value. The authors Brealey, Myers and Allen provide a similar 14
definition of the cost of capital being based on market capitalization, not book value, 15
The values of debt and equity add up to overall firm value 16
(D + E = V) and firm value V equals asset value. These 17
figures are all market values, not book (accounting) 18
values. The market value of equity is often much larger than 19
the book value, so the market debt ratio D/V is often much 20
lower than a debt ratio computed from the book balance 21
sheet.36 22
The work of Modigliani and Miller concludes that the market value of any firm is 23
independent of its capital structure, and this is precisely the reason why the leverage 24

36 Brealey, Myers and Allen, Principles of Corporate Finance, 10th edition, at 216 (emphasis added).
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Veolia Water Idaho, Inc.
adjustment (Hamada adjustment) is appropriate.37 The only way for the market value of a 1
firm to remain independent of its capital structure is if the capital cost rates change to offset 2
changes in the capital structure. If the capital cost rates do not change to offset changes in 3
the capital structure, then the value of the firm will change. Clearly a leverage adjustment 4
(Hamada adjustment) is required when a cost of common equity model is based on market 5
value and if its results are then applied to book value because the capital structure is 6
changed from market value capitalization to book value capitalization. 7
Referring to Schedule 5, Mr. Terry’s and Mr. Gorman’s proxy groups’ cost of 8
capital is based on debt/equity ratios based on market value of 25%/75% (debt/equity) 9
and 27%/73% (debt/equity), respectively. Therefore, Mr. Terry’s and Mr. Gorman’s 10
market value equity cost rates reflect an equity ratio of between 73% and 75%. That is not 11
just my opinion, but it is a cornerstone of financial theory.38 Mr. Terry’s and Mr. Gorman’s 12
market value DCF cost rates of 7.91% to 9.04% and 9.00%, respectively, reflect a 73% to 13
75% equity ratio and yet they recommend their 7.91% to 9.04% and 9.00% cost of equity 14
be applied to VWID 56% equity ratio based on book value. Even if Mr. Terry’s 7.91% to 15
9.04% or Mr. Gorman’s 9.00% cost of equity were appropriate for a 73% to 75% equity 16
ratio, it cannot simultaneously be appropriate for VWID’s 56% equity ratio without 17
violation of Modigliani and Miller’s precept. 18
Q. What market value Risk Premium estimate does Mr. Gorman recommend for the 19
VWID? 20
A. Mr. Gorman recommends a market value Risk Premium of 9.60% based on the midpoint 21

37 The Nobel Prize winning professors Franco Modigliani and Merton Miller’s proposition on firm value and capital
structure is well-established in academic literature and common knowledge among finance practitioners.
38 Ibid.
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Veolia Water Idaho, Inc.
of a range of 9.41% to 9.73%. I have concerns relating to Mr. Gorman’s Risk Premium 1
models. 2
Q. Please explain Mr. Gorman’s Risk Premium models. 3
A. Mr. Gorman’s Risk Premium model is based on two estimates of an equity risk premium. 4
First, on Exhibit No. 412 Mr. Gorman calculated the difference (i.e., risk premium) 5
between regulatory commission authorized returns on equity and U.S. Treasury bond yields 6
on an annual basis from 1986 through September 2022. Second, on Exhibit No. 413 Mr. 7
Gorman calculated the difference, or risk premium, between regulatory commission 8
authorized returns on equity and A rated public utility bond yields on an annual basis from 9
1986 through September 2022. Ultimately, Mr. Gorman selected the average of his 5-year 10
rolling average risk premium for both his Treasury bond yield and his A rated public utility 11
bond yield analyses as being the appropriate measure. 12
Using information from Exhibit No. 412 Mr. Gorman derived a 5.61% risk 13
premium based on Treasury bond yields. He added the 5.61% risk premium to his 14
projected 30-year Treasury bond yield of 3.80% and generated a Risk Premium result of 15
9.41% (5.61% + 3.80%). Utilizing Exhibit No. 413 Mr. Gorman developed a 4.26% risk 16
premium based on A rated public utility bond yields. He added the 4.26% risk premium 17
to his A rated public utility bond yield of 5.47% and produced a Risk Premium result of 18
9.73% (4.26% + 5.47%). 19
Q. What concerns do you have regarding Mr. Gorman’s Risk Premium models? 20
A. My concern regarding Mr. Gorman’s Risk Premium models is based on the fact risk 21
premiums are interest rate sensitive and tend to increase with lower interest rates and vice 22
versa. Mathematically, Mr. Gorman’s Risk Premium model based on Treasury bond yield 23
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Veolia Water Idaho, Inc.
reflects a 5-year rolling average Treasury bond yield of 5.16%. However, he used a 1
projected 3.81% Treasury bond yield in his Risk Premium model, a difference of 135-basis 2
points in yields (5.16% - 3.81%). Similarly, Mr. Gorman’s Risk Premium model based on 3
A rated public utility bond yield reflects a 5-year rolling average A rated public utility bond 4
yield of 6.51%. However, he used a 5.47% A rated public utility bond yield in his Risk 5
Premium model, a difference of 104-basis points (6.51% - 5.47%). 6
To measure the sensitivity and accuracy of Mr. Gorman’s risk premiums, I 7
calculated two simple linear regressions to determine the relationship between a dependent 8
variable and an independent variable. The simple linear regression equation is: 9
Y = a + bX + ϵ 10
Where: 11
Y – Dependent variable 12
X – Independent (explanatory) variable 13
a – Intercept 14
b – Slope 15
ϵ – Residual (error) 16
I calculated two simple linear regressions separately for each Treasury bond yields and for 17
A rated public utility bond yields. 18
Using the information from Exhibit No. 412 I calculated a simple linear regression 19
using Treasury bond yields as the independent variable and authorized return on equity as 20
the dependent variable. I also calculated a second simple linear regression using Treasury 21
bond yields as the independent variable and risk premium as the dependent variable. The 22
results of these equations are show in Table 2. 23
WALKER, Di Reb
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Veolia Water Idaho, Inc.
As shown in Table 2, the correct risk premium is 6.30% using Mr. Gorman’s data 1
from Exhibit No. 412. Adding the 6.30% risk premium to Mr. Gorman’s projected 2
Treasure Bond yield of 3.81% produces a cost of equity of 10.11% based on Mr. Gorman’s 3
Risk Premium model’s data. I tested the results of the models shown in Table 2 compared 4
to Mr. Gorman’s recommended risk premium of 5.61% and found his model’s simple 5
prediction error (actual result minus prediction) was almost 4-times higher than produced 6
by the models shown in Table 2.39 7
I also calculated a simple linear regression using A Rated Public Utility bond yields 8
as the independent variable and authorized return on equity as the dependent variable using 9
the information from Exhibit No. 413. Then, I calculated a second simple linear regression 10
using A Rated Public Utility bond yields as the independent variable and risk premium as 11
the dependent variable. The results of these equations are show in Table 3. 12

39 The residual (error) of Mr. Gorman’s method was 10-time greater than that of the models shown in Table 2.
Table 2
Equation Results Using Treasury Bond Yields
Dependent Variable ROE Dependent Variable Risk Premium
Slope 0.518367868 Slope -0.481775827
Intercept 0.081395395 Intercept 0.081405545
R2 0.91 R2 0.90
Recent Yield 3.81%Recent Yield 3.81%
Calculated ROE 10.11%Calculated Risk Premium 6.30%
Derived Risk Premium 6.30%Derived ROE 10.11%
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Veolia Water Idaho, Inc.
As shown in Table 3, the correct risk premium is 4.81% using Mr. Gorman’s data 1
from Exhibit No. 413. Adding the 4.81% risk premium to Mr. Gorman’s A Rated Public 2
Utility bond yield of 5.47% shows a cost of equity of 10.28% based on Mr. Gorman’s Risk 3
Premium model. I tested the results of the model shown in Table 3 compared to Mr. 4
Gorman’s recommended risk premium of 4.26% and found his model’s simple prediction 5
error (actual result minus prediction) was almost 4-times higher than produced by the 6
model shown in Table 3.40 7
Based on the results of the Risk Premium model analysis described above, Mr. 8
Gorman’s recommended market value Risk Premium should be 10.20% based on the 9
midpoint of a range of 10.11% to 10.28%. 10
Q. What market value CAPM estimate do Mr. Terry and Mr. Gorman recommend for 11
the VWID? 12
A. Mr. Terry recommends a market value CAPM of 8.98% to 9.33% and Mr. Gorman 13
recommends a market value CAPM of 9.70%. I have several concerns relating to Mr. 14
Terry’s and Mr. Gorman’s CAPM models. 15

40 The residual (error) of Mr. Gorman’s method was 11-time greater than that of the models shown in Table 3.
Equation Results Using A Rated Public Utility Bond Yields
Dependent Variable ROE Dependent Variable Risk Premium
Slope 0.505957239 Slope -0.494042761
Intercept 0.075146609 Intercept 0.075146609
R2 0.91 R2 0.91
Recent Yield 5.47%Recent Yield 5.47%
Calculated ROE 10.28%Calculated Risk Premium 4.81%
Derived Risk Premium 4.81%Derived ROE 10.28%
Table 3
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Veolia Water Idaho, Inc.
Q. What concerns do you have regarding Mr. Terry’s CAPM models? 1
A. I have three areas of concern regarding Mr. Terry’s CAPM; beta, risk-free rate, and his 2
market risk premium. First, the betas Mr. Terry used (Exhibit No. 119) are considerably 3
lower than Mr. Gorman’s current betas (Exhibit No. 416) for the same companies. As 4
shown in Table 4, on average, Mr. Gorman’s current betas are 35% higher than Mr. Terry’s 5
betas, and the median difference is 40%.41 Substituting Mr. Gorman’s current betas in 6
place of Mr. Terry’s betas produces results from Mr. Terry’s CAPM that range from 8.76% 7
to 13.11% with an average of 10.82% and a median of 10.66% as shown on Schedule 6. 8
9
My concern with Mr. Terry’s risk-free rate is his use of a short-term 1-month 10
Treasury bill. Financial theory indicates the term matching of the risk-free rate should be 11
based on the life of the asset, not the time horizon of the investor. In this case, water assets 12
have a much longer life than the 1-month that results from using 1-month bills. Besides 13

41 Comparison excludes Veolia Envronnement because they are not part of Mr. Gorman’s proxy companies, nor are
they covered by Value Line. Comparison includes Value Line’s 0.80 beta reported for York Water Co.
Company
Mr. Terry's
Beta
Mr. Gorman's /
Value Line Beta
Percentage
Differnce
American States Water Co 0.42 0.65 55%
American Water Works Co Inc 0.55 0.90 64%
California Water Service Gp 0.49 0.70 43%
Essential Utilities, Inc.0.80 0.95 19%
Middlesex Water Co 0.74 0.70 -5%
SJW Corp 0.63 0.80 27%
York Water Co 0.57 0.80 40%
Veolia Envronnement 1.06 NA -
Average 35%
Median 40%
Table 4
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Veolia Water Idaho, Inc.
matching the life of the asset, another mistake of using 1-month Treasury bills is that they 1
are more sensitive to monetary policy activities taken by the Federal Open Market 2
Committee, whereas the 30-year Treasury bonds are more of an indication of investor 3
sentiment of their required returns. 4
The last area of concern I have with Mr. Terry’s CAPM is he did not reflect the 5
required CAPM size premium. The size premium reflects the risks associated with 6
Mr. Terry’s proxy group’s small size and its impact on the determination of their beta. This 7
adjustment is necessary because beta (systematic risk) does not capture or reflect the proxy 8
group’s small size. According to Brealey, Myers, and Allen, “the relationship among stock 9
returns and firm size and book-to-market ratio has been well documented.”42 Brealey, 10
Myers, and Allen also state, that “between 1926 and 2008 the difference between the 11
annual returns on small and large capitalization stocks averaged 3.6%”43 which should be 12
included in Mr. Terry’s CAPM and similarly be included in Mr. Gorman’s CAPM.44 13
Investors prefer liquidity to lack of liquidity. Accordingly, a share in a business is 14
worth more if it is easily marketable or, conversely, worth less if it is not. Privately held 15
water utilities such as VWID are worth less than publicly traded water utilities. Further, 16
publicly traded water utilities are not as marketable as the large companies which comprise 17
the S&P 500. The size premium used in the CAPM accounts for some of these differences. 18
Q. What concerns do you have regarding Mr. Gorman’s CAPM models? 19
A. I have two areas of concern regarding Mr. Gorman’s CAPM, his beta and his market risk 20
premium. Regarding beta, Mr. Gorman’s recommended CAPM is based on “normalized” 21

42 Brealey, Myers and Allen, Principles of Corporate Finance, 10th edition, page 198.
43 Id. at 202.
44 I used a small stock premium of 1.50% for the water companies included in Mr. Terry’s proxy group.
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Veolia Water Idaho, Inc.
betas, not actual current published betas. His “normalized” betas are an average of older 1
and lower betas. Specifically, he averaged 33 calendar quarters of older published betas, 2
using betas dating back to 2013. There is no academic or industry support for doing so. 3
Instead of using current published betas he improperly relied upon his own individual 4
preference and determined what he deemed to be “normalized.” That is, he subjectively 5
ignored the investor influencing published betas and instead, calculated his own betas. 6
Published betas are used by investors. Under CAPM, the market-required cost of equity 7
represents what the market will pay for a stock based, in part, on investors’ evaluation of 8
risk as measured by beta. Investors’ expectations of beta are not based upon Mr. Gorman’s 9
unique “normalized” beta, they are influenced by current published betas. 10
For this reason, current published betas for utilities are required. Current published 11
betas are not required because they will necessarily prove correct. Rather, current 12
published betas are required because real investors rely on them. It is irrelevant whether 13
current published betas are over or under stated because they are relied upon by investors 14
at the time they price utility stocks. 15
Even if Mr. Gorman’s judgments concerning “normalized” betas were superior to 16
current published betas, there still would be no justification for using Mr. Gorman’s unique 17
“normalized” betas in a CAPM formula because investors that price stocks are unaware of 18
Mr. Gorman’s “normalized” betas (even if hypothetically it were better). Instead, investors 19
rely upon current published betas, which are widely available and used by investors. By 20
using his “normalized” betas, Mr. Gorman reduced his calculated CAPM from 10.36% to 21
9.71% as shown on Exhibit No. 417. 22
WALKER, Di Reb
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Veolia Water Idaho, Inc.
The last area of concern I have with Mr. Gorman’s CAPM is he did not reflect the 1
required CAPM size premium, which I believe should be included in his CAPM for the 2
same reasons I articulated when I discussed Mr. Terry’s failure to reflect a CAPM size 3
premium above. 4
Q. Do you have any other comments regarding the market value CAPM estimates of Mr. 5
Terry and Mr. Gorman? 6
A. Yes. As I previously explained regarding the market value derived DCF cost rate, similarly 7
the market value derived CAPM cost rate reflects the financial risk or leverage associated 8
with capitalization ratios based on market value, not book value. The larger the 9
difference between market values and book values the less reliable the models’ results are 10
because the models provide an estimate of the cost of capital of market value, not book 11
value. 12
Q. What common equity cost rates do Mr. Terry and Mr. Gorman recommend for 13
VWID? 14
A. Mr. Terry recommends a common equity cost rate of 9.00% and Mr. Gorman recommends 15
a common equity cost rate of 9.35% for VWID. 16
Q. Do you have any additional comments regarding either Witness Terry’s 17
recommended common equity cost rate or Witness Gorman’s recommended common 18
equity cost rate? 19
A. Yes. As reference previously, page 1 of Mr. Gorman’s Exhibit No. 407 shows the Water 20
Proxy group’s average projected return on equity is 10.41% to 10.64%. The Water Proxy 21
group’s projected return on equity of 10.41% to 10.64% is between 141-basis points 22
higher to 164-basis points higher than Mr. Terry’s 9.00% recommendation and is 106-23
WALKER, Di Reb
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Veolia Water Idaho, Inc.
basis points higher to 129-basis points higher than Mr. Gorman’s 9.35% 1
recommendation. If other water utilities are earning returns of 10.41% to 10.64% while 2
VWID earns only 9.00% or 9.35%, it places VWID at a competitive disadvantage in the 3
competition to attract capital. 4
RESPONSE TO MR. TERRY’S CRITIQUE OF MR. WALKER’S TESTIMONY 5
Q. On pages 9 to 11 of his Direct Testimony, Mr. Terry discusses the Hamada formula. 6
Do you agree with Mr. Terry’s assessment? 7
A. No. The Hamada formula, the DCF and the CAPM have simplifying assumptions, just as 8
most financial models have.45 Despite having simplifying assumptions, financial 9
practitioners still use these financial models because the models are the best, and often the 10
only ones available to use. The default risk assumption mentioned by Mr. Terry is a 11
simplifying assumption. This simplifying assumption can be revised in the Hamada 12
formula, but doing so requires betas for debt, which are not widely available.46 13
Accordingly, most practitioners accept the simplifying assumption. 14
It is an accepted financial premise that market value derived cost rates reflect the 15
financial risk or leverage associated with capitalization ratios based on market value, not 16
book value. Consequently, Mr. Terry’s market value derived cost rate reflects a market 17
value debt/equity ratio of 25%/75% (debt/equity). However, Mr. Terry recommends 18
applying his market value derived cost rate to book value ratio of 44%/56% (debt/equity) 19
for VWID. In doing so, Mr. Terry did not account for the risk difference between the 20
25%/75% (debt/equity) market value ratios used to calculate the return which he advocates 21

45 For example, the DCF assumes a constant dividend payout ratio, yet dividend payout ratios change quarterly.
46 In the Hamada formula, the debt beta is assumed to be zero.
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Veolia Water Idaho, Inc.
be applied to 44%/56% (debt/equity) book value ratios. I recommend using the Hamada 1
formula to solve Mr. Terry’s quandary. Mr. Terry has offered no solutions for his 2
predicament. 3
RESPONSE TO MR. GORMAN’S CRITIQUE OF MR. WALKER’S TESTIMONY 4
Q. On pages 86 Mr. Gorman states, “Mr. Walker has not shown that the Public Utility 5
Index is an appropriate risk proxy for VWID.” Is Mr. Gorman correct? 6
A. Yes. However, I never testified that the “Public Utility Index was an appropriate risk proxy 7
for VWID.” Rather, I analyzed the Public Utility Index and my comparison group on pages 8
20 to 26 of my Direct Testimony in order to evaluate risk differences that may exist 9
between the Public Utility Index and my comparison group.47 This analysis assisted me in 10
evaluating the appropriate size of the risk premium used in my Risk Premium model. 11
Q. On pages 84 and 85 Mr. Gorman discusses your size premium estimate. Is Mr. 12
Gorman correct? 13
A. No. I estimated the size premium based on Kroll’s 2021 SBBI data and their related 14
research. This adjustment is necessary because beta (systematic risk) does not capture or 15
reflect the proxy group’s small size. Kroll advocates adding the entire size premium to the 16
CAPM, regardless of beta. They do so because their size premia are already “beta-17
adjusted”. 18
19
A common characteristic of “size premia” is that they are “beta-adjusted”. 20
In other words market risk as measured by “beta” has been controlled for, 21
or removed, leaving only the size effect’s contribution to excess return.48 22

47 Also see my Direct Testimony supporting Exhibit Schedules 4, 5, 6, 7, and 9.
48 Duff & Phelps, LLC, Risk Premium Report 2013; pg. 102. https://www.kroll.com/-
/media/assets/pdfs/publications/valuation/2013-risk-premium-report-excerpt-dp.pdf

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Veolia Water Idaho, Inc.
However, instead of including the entire size premia, I added only 60% of the size premia, 1
a very conservative approach. Additionally, Mr. Gorman criticisms of beta differences is 2
unfounded because the betas cited by Mr. Gorman are from different sources, and were 3
likely computed at different intervals (e.g., weeks, months) using different market indices 4
(e.g., NYSE, S&P 500) so the precision advocated by Mr. Gorman is not possible and more 5
important, not advocated for by Kroll. Accordingly, Mr. Gorman criticisms are unfounded. 6
Q. On pages 78 through 81 Mr. Gorman claims your leverage adjustment is a market-7
to-book ratio adjustment. Is Mr. Gorman correct? 8
A. No. My comparison group’s market-to-book ratio was 339% when my Direct Testimony 9
was prepared. I did not, and I do not recommend adjusting the comparison group’s market 10
value cost of equity by 339%. Mr. Gorman’s testimony is false and misleading because a 11
market-to-book ratio is a stock price metric and is not part of the leverage adjustment 12
contrary to Mr. Gorman’s testimony. 13
I previously explained the foundation for the required leverage adjustment in 14
responding to Mr. Terry’s critique and I will not repeat it here. However, Mr. Gorman 15
faces a similar quandary as Mr. Terry in that Mr. Gorman did not account for the risk 16
difference between the 27%/73% (debt/equity) market value ratios used to calculate the 17
return which he advocates be applied to 44%/56% (debt/equity) book value ratios of 18
VWID. 19
On page 83, in reference to my recommended leverage adjustment, Mr. Gorman 20
states, “Mr. Walker has failed to show that either of these adjustments is necessary to 21
produce a fair and reasonable return for VWID.” I recommend a 10.80% fair and 22
reasonable return for VWID, reflecting the required leverage adjustment. My 23
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Veolia Water Idaho, Inc.
recommended return for VWID is similar to the average 10.41% to 10.64% return on equity 1
projected for Mr. Gorman’s Water Proxy group, and thus is fair and reasonable. However, 2
Mr. Gorman has not shown how his recommended 9.35% return for VWID would be fair 3
and reasonable when his Water Proxy group companies are earning 10.41% to 10.64%. 4
Q. Does that conclude your rebuttal testimony? 5
A. Yes, it does. However, I reserve the right to supplement my rebuttal testimony as responses 6
to outstanding data requests become available or additional issues arise during this 7
proceeding. 8