20250131Direct S. Thompson_Exhibits.pdf

RECEIVED
Friday, January 31, 2025
IDAHO PUBLIC
UTILITIES COMMISSION
DAVID J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY& GOVERNMENTAL AFFAIRS
AVISTA CORPORATION
P.O. BOX 3727
1411 EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220-3727
TELEPHONE: [phone]
[e-mail]
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION ) CASE NO. AVU-E-25-01
OF AVISTA CORPORATION FOR THE ) CASE NO. AVU-G-25-01
AUTHORITY TO INCREASE ITS RATES )
AND CHARGES FOR ELECTRIC AND )
NATURAL GAS SERVICE TO ELECTRIC ) DIRECT TESTIMONY
AND NATURAL GAS CUSTOMERS IN THE ) OF
STATE OF IDAHO ) JOHN S. THOMPSON, PHD
FOR AVISTA CORPORATION
(ELECTRIC AND NATURAL GAS)

DIRECT TESTIMONY OF JOHN S. THOMPSON
TABLE OF CONTENTS
I. INTRODUCTION ..............................................................................................1
A. Overview.......................................................................................................I
B. Summary of Conclusions..............................................................................3
II. AVISTA'S RELATIVE RISKS ..........................................................................5
A. Operating Risks.............................................................................................5
B. Regulatory Mechanisms..............................................................................I I
C. Other Factors...............................................................................................12
D. Support for Avista's Credit Standing ..........................................................15
E. Outlook for Capital Costs ...........................................................................20
F. Capital Structure .........................................................................................31
III. CAPITAL MARKET ESTIMATES.................................................................35
A. Quantitative Analyses.................................................................................35
B. Flotation Costs ............................................................................................37
C. Recommended ROE for Avista...................................................................43
D. Benchmark Analyses...................................................................................44
Exhibit No. 3
Schedule 1 Qualifications of John S. Thompson
Schedule 2 Description of Quantitative Analyses
Schedule 3 ROE Analysis— Summary of Results
Schedule 4 Regulatory Mechanisms—Utility Group
Schedule 5 Capital Structure
Schedule 6 DCF Model—Utility Group
Schedule 7 br+sv Growth Rate—Utility Group
Schedule 8 CAPM—Utility Group
Schedule 9 Utility Risk Premium
Schedule 10 Flotation Cost Adjustment
Schedule 11 Expected Earnings Benchmark—Utility Group
Schedule 12 DCF Model—Non-Utility Group

I. INTRODUCTION
1 Q. Please state your name and business address.
2 A. John S. Thompson, 3907 Red River,Austin, Texas, 78751.
3 Q. In what capacity are you employed?
4 A. I am an independent consultant in regulatory finance and economics. I am
5 affiliated with FINCAP, Inc., a firm providing financial, economic, and policy consulting
6 services to business and government.
7 Q. Please describe your educational background and professional experience.
8 A. A description of my background and qualifications, including a resume
9 containing the details of my experience, is attached as Exhibit No. 3, Schedule 1.
10 A. Overview
11 Q. What is the purpose of your direct testimony in this case?
12 A. The purpose of my direct testimony is to present to the Idaho Public Utilities
13 Commission (the "Commission" or "IPUC") my independent evaluation of the fair rate of
14 return on equity ("ROE") for the jurisdictional electric and natural gas utility operations of
15 Avista Corp. ("Avista" or "the Company"). In addition, I also examine the reasonableness of
16 Avista's capital structure, considering both the specific risks faced by the Company and other
17 industry guidelines.
18 Q. Please summarize the information and materials you rely on to support the
19 opinions and conclusions contained in your testimony.
20 A. To prepare my testimony, I use information from a variety of sources that would
21 normally be relied upon by a person in my capacity. In connection with the present filing, I
Thompson, Di 1
Avista Corporation

I consider and rely upon corporate disclosures, publicly available financial reports and filings,
2 and other published information relating to Avista. My evaluation also relies upon information
3 relating to current capital market conditions and specifically to current investor perceptions,
4 requirements, and expectations for electric and natural gas utilities. These sources, coupled
5 with my experience in the fields of economics, finance and utility regulation, have given me a
6 working knowledge of the issues relevant to investors'required return for Avista, and they form
7 the basis of my analyses and conclusions.
8 Q. How is your testimony organized?
9 A. My testimony begins with a summary of my findings and conclusions. I then
10 briefly review Avista's operations and finances. Following that,I discuss Avista's relative risks,
11 which include risks related to hydroelectric generation, climate change, wildfires, high capital
12 expenditures, and Avista's relatively small size. Next, I discuss regulatory mechanisms,
13 regulatory lag, and Avista's risk level relative to the industry. I then discuss current conditions
14 in the capital markets and their implications in evaluating a just and reasonable return for the
15 Company. My testimony then moves into a discussion of capital structure. With this as a
16 background, I summarize the results of well-accepted quantitative analyses to estimate the
17 current cost of equity for the proxy group of utilities. These include the DCF model,the CAPM,
18 and an equity risk premium approach based on allowed equity returns, which are all methods
19 that are commonly relied on in regulatory proceedings. I touch on flotation costs, and then
20 discuss Avista's requested ROE in the context of my findings. I conclude that the 10.4% ROE
21 requested by Avista is conservative. This determination takes into account the specific risks for
22 the Company's utility operations in Idaho and its requirements for financial strength. I then
23 corroborate the results of my utility quantitative analyses with reference to an expected earnings
Thompson, Di 2
Avista Corporation

I benchmark. Further, consistent with the fact that utilities must compete for capital with firms
2 outside their own industry, I apply the DCF model to a group of low-risk non-utility firms,
3 B. Summary of Conclusions
4 Q. Please summarize the results of your analyses.
5 A. My ROE analyses focus on a proxy group of eighteen electric utilities with
6 comparable investment risks to Avista. Because investors' required return on equity is
7 unobservable and no single method should be viewed in isolation, I apply the DCF, CAPM and
8 risk premium methods to estimate a fair ROE for Avista. The results of my analyses are
9 presented on Schedule 3.
10 Q. What are your findings regarding the fair ROE for Avista?
11 A. Based on the results of my analyses, the economic requirements necessary to
12 support continuous access to capital under reasonable terms, and consideration of Avista's risk
13 relative to my proxy group, I determined that 10.27%to 11.27%represents a reasonable return
14 on equity range for the Company,' and I conclude that Avista's ROE request of 10.4% is a
15 conservative estimate of investors'required ROE for the Company.
16 Q. How did you reach that conclusion?
17 A. In estimating a fair ROE for Avista, my analyses focused on a proxy group of
18 eighteen publicly traded electric utilities. As discussed in my testimony:
19 • In order to reflect the risks and prospects associated with Avista's jurisdictional
20 utility operations, my analyses begin by focusing on a proxy group of firms in
21 Value Line's "Electric Utility" industry.
' This range is inclusive of a 7 basis point flotation cost adjustment.
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Avista Corporation

1 • Because investors'required return on equity is unobservable and no single
2 method should be viewed in isolation, I applied the DCF, CAPM and risk
3 premium methods to estimate a just and reasonable ROE.
4 • Based on the results of these analyses, and giving less weight to extremes at
5 the high and low ends of the range, I conclude that the cost of equity for the
6 large,publicly traded electric utilities in the proxy group fall in the 10.2%to
7 11.2%range.
8 • Accounting for issuance costs specific to Avista's historical sales of common
9 stock supports a flotation cost adjustment of 7 basis points.
10 • After making a flotation cost adjustment, my recommended ROE range is
11 10.27% to 11.27%, with a midpoint of 10.77%.
12 • As reflected in the testimony of Company witness Christie,Avista is requesting
13 a fair ROE of 10.4%, which falls below the 10.77% midpoint of my
14 recommended range. An ROE at the midpoint of my recommended range is
15 fully justified for Avista given the results of my proxy group financial analyses.
16 Based on the results outlined above, I conclude that the 10.4% ROE requested
17 by the Company represents a conservative estimate of investors'current
18 requirements.
19 Q. What did your expected earnings benchmark and the DCF results for your
20 select group of non-utility firms indicate with respect to your evaluation?
21 A. An expected earnings analysis for the proxy group of electric utilities yields an
22 11.0% ROE, and this analysis can be referenced in Schedule 11. Meanwhile, average DCF
23 estimates for a low-risk group of firms in the competitive sector of the economy ranged from
24 10.5% to 10.8%.2 A summary of these DCF method results is shown in Schedule 12.
25 Considering the clear risk differences between Avista and this low-risk group of firms in the
26 competitive sector,these results confirm that a 10.4%ROE request for Avista is not overstated.
2 As discussed in my testimony,these non-utility companies,which include household names such as Coca-Cola,
McDonalds, Proctor&Gamble, and Walmart, have long corporate histories, well-established track records, and
an overall risk profile that is more conservative than Avista or the gas utilities in the proxy group.
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Avista Corporation

I Q. What is your conclusion as to the reasonableness of Avista's capital
2 structure?
3 A. Based on my evaluation, I conclude that the existing common equity ratio of
4 50.0% represents a reasonable basis on which to establish the Company's return. This
5 conclusion is supported by these findings:
6 • Avista's requested capitalization is consistent with the Company's need to
7 support its credit standing and financial flexibility as it seeks to raise additional
8 capital to fund significant system investments, refinance maturing debt
9 obligations, and meet the requirements of its service territory.
10 • Avista's proposed common equity ratio is consistent with the range of
11 capitalizations for the proxy utilities,both for the most recent calendar year
12 and also based on near-term expectations of Value Line. It is also consistent
13 with recently awarded equity ratios for electric utility operating companies in
14 other jurisdictions.
II. AVISTA'S RELATIVE RISKS
15 Q. What is the purpose of this section?
16 A. As a predicate to my capital market analyses, this section examines the
17 investment risks that investors consider in evaluating their required rate of return for Avista.
18 A. Operating Risks
19 Q. How does Avista's generating resource mix affect investors' risk
20 perceptions?
21 A. Because approximately 48% of Avista's total energy requirements are provided
22 by hydroelectric facilities,' the Company is exposed to a level of uncertainty not faced by most
23 utilities. While hydropower confers advantages in terms of fuel cost savings and diversity,
s Avista Corp. SEC Form 10-K for fiscal year ended Dec.31,2023 at 9.
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Avista Corporation

I reduced hydroelectric generation due to below-average water conditions forces Avista to rely
2 more heavily on wholesale power markets or more costly thermal generating capacity to meet
3 its resource needs. As S&P has recently observed, "The company's electricity generation mix
4 consists of approximately 48%hydro generation, exposing it to potential fuel replacement risks
5 during periods of unfavorable hydro flows." Another S&P report explained:
6 A reduction in hydro generation typically increases an electric utility's costs by
7 requiring it to buy replacement power or run more expensive generation to serve
8 customer loads. Low hydro generation can also reduce utilities' opportunity to
9 make off-system sales. At the same time, low hydro years increase regional
10 wholesale power prices, creating potentially a double impact—companies have
11 to buy more power than under normal conditions,paying higher prices.5
12 Similarly, Moody's Investors Service ("Moody's") recently observed that, "hydro generation
13 can experience high annual resource variability as it is dependent on water availability."6
14 Investors recognize that volatile energy markets, unpredictable stream flows, and
15 Avista's reliance on wholesale purchases to meet a significant portion of its resource needs can
16 expose the Company to the risk of reduced cash flows and unrecovered power supply costs.
17 Avista's reliance on purchased power to meet shortfalls in hydroelectric generation magnifies
18 the importance of strengthening financial flexibility, which is essential to guarantee access to
19 the cash resources and interim financing required to cover inadequate operating cash flows.
4 S&P Global Ratings,Avista Corp.,RatingsDirect(Dec. 5,2024).
5 Standard & Poor's Corporation, Pacific Northwest Hydrology And Its Impact On Investor-Owned Utilities'
Credit Quality,RatingsDirect(Jan.28,2008).
6 Moody's Ratings,Credit Opinion:Avista Corp. —Update to credit analysis(Aug.28,2024).
Thompson, Di 6
Avista Corporation

I Q. How has global climate change impacted investors' assessment of Avista's
2 risk exposure?
3 A. The risk posed by climate-related weather events has served to magnify concerns
4 over Avista's exposure to below-average water conditions. S&P concluded that "water-
5 intensive assets like power plants [are] especially vulnerable in the absence of adaptation,"and
6 concluded that"water stress is also a serious threat"for Avista.7 More recently, S&P explained
7 how climate change could weaken the Company's financial position:
8 In recent years, the northwestern states have experienced hotter temperatures
9 and dryer conditions affecting water availability resulting in utilities with larger
10 hydro portfolios having to rely on other generating assets including natural gas,
11 coal or market purchases. Although we expect Avista to recover its purchase
12 power and fuel costs through its authorized mechanisms, utilities must first file
13 to recover costs with its regulator. A substantial increase in purchase power or
14 fuel costs could drive an increase in deferrals that could pressure financial
15 metrics over the short-term, as experienced in 2022.8
16 Q. Does the prospect of wildfires also add to Avista's risk exposure?
17 A. Yes. Rising temperatures and reduced rainfall have led to increasing exposure
18 to wildfires, particularly for utilities in the western U.S. In this regard, S&P classified Avista
19 as one of the top 10 utilities with the highest average exposure to wildfires.' At the end of 2023,
20 S&P stated that, "Avista's service territory is highly susceptible to wildfire risks, and the
21 company faces litigation risks."10 S&P also recently confirmed that utilities operating in Idaho
7 S&P Global Ratings,Keeping The Lights On: U.S. Utilities'Exposure To Physical Climate Risks,RatingsDirect
(Sep. 16,2021).
8 Id.
9 Id.
10 S&P Global Ratings,Avista Corp.,RatingsDirect(Dec.5,2024).
Thompson, Di 7
Avista Corporation

I and various other states "are all experiencing increasing wildfire risks, raising the industry's
2 credit risks.""
3 Moody's has also taken note of Avista's wildfire risk, and recently listed"High wildfire
4 risk with ongoing litigation from 2020 wildfire season" as one of the Company's credit
5 challenges.12 Moody's added further context around Avista's wildfire risk:
6 Heightened wildfires risk for the Western states
7 Wildfire risk in the US has been rising over the past few decades,regardless the
8 source of ignition. State and federal efforts to suppress wildfires have
9 inadvertently led to the significant accumulation of grasses, shrubs, dead trees
10 and fallen leaves and pine needles,which can fuel wildfires. Meanwhile,climate
11 change has increased wildfire risk by making it easier for fires to start and spread
12 and by making trees more vulnerable to diseases and insect infestation. These
13 elements are further heightened by severe windstorm events that cannot only
14 cause branches, whole trees or poles to fall on to power lines causing a spark
15 and ignition, and quickly cause a fire to spread over a larger territory if the fire
16 is not contained. The increase in the number and intensity of wildfires is well
17 documented in California, and damages caused by wildfires are also growing in
18 Washington, Oregon, and Idaho.13
19 Q. Do financial pressures associated with Avista's planned capital
20 expenditures also impact investors'risk assessment?
21 A. Yes. Avista will require capital investment to meet customer growth, provide
22 for necessary maintenance and replacements of its natural gas utility systems, as well as fund
23 new investment in electric generation, transmission and distribution facilities. Utility capital
24 additions are expected to total approximately $500 million, $525 million and $575 million for
25 2024, 2025 and 2026, respectively.14 This represents a substantial investment given Avista's
11 S&P Global Ratings, Regulated Utilities: Credit risks are rising, Industry Credit Outlook Update I North
America(Jul. 18,2024).
12 Moody's Ratings, Credit Opinion:Avista Corp.—Update to credit analysis(Aug.28,2024).
13 Id.
14 Avista Corp. SEC Form 10-K for fiscal year ended Dec. 31,2023 at 59.
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Avista Corporation

I current rate base of approximately $4.6 billion. In addition, as discussed in the testimony of
2 Mr. Christie, the Company remains obligated to repay maturing long-term debt. Continued
3 support for Avista's financial integrity and flexibility will be instrumental in attracting the
4 capital necessary to fund these projects and debt repayments in an effective manner.
5 Q. Are Avista's substantial planned capital investments consistent with
6 industry trends?
7 A. Yes. For example, Fitch recently reported that "Utility capital expenditure
8 (capex) is expected to grow at a double-digit rate, driven by investments needed to make the
9 electric infrastructure more resilient against extreme weather events, accommodate renewable
10 generation, and meet the coming surge in power demand from data centers."15
11 Q. Has the industry taken note of financial pressures associated with capital
12 spending?
13 A. Yes. For example, S&P recently reported"record-breaking capital spending [of
14 $200 billion] that is leading to high cash flow deficits, which are not sufficiently funded in a
15 credit-supportive manner."16 Investors are clearly aware of the financial pressures associated
16 with unprecedented levels of capital expenditures in the utility industry.
17 Q. Would investors consider Avista's relative size in their assessment of the
18 Company's risks and prospects?
19 A. Yes. A firm's relative size has important implications for investors in their
20 evaluation of alternative investments,and it is well established that smaller firms are more risky
is Fitch Ratings,Inc.,North American Utilities Outlook 2025(Dec. 5,2024).
16 S&P Global Ratings, Regulated Utilities: Credit risks are rising, Industry Credit Outlook Update — North
America(Jul. 18,2024).
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Avista Corporation

I than larger firms. Avista's market capitalization is compared with the publicly traded electric
2 utilities followed be Value Line in the following figure:
3 FIGURE 1
4 COMPARISON OF MARKET CAPITALIZATION
140
120
100
c 80
vi
60
40
Avista$2.9
20
0 F c�
x9 WcC oA � zz�zwwaw � U� wAu� UA �aw °w
� ¢ Dw � Oad .aUUd °" Awww >C W aa. �� A Z
Source: The Value Line Investment Survey(Oct. 18, Nov. 8 and Dec. 6,2024).
5 As shown above, within this universe of publicly traded utilities,Avista is the second smallest
6 firm in terms of market capitalization.
7 The magnitude of the size disparity between Avista and other firms in the utility industry
8 has important practical implications with respect to the risks faced by investors. All else being
9 equal, it is well accepted that smaller firms are more risky than their larger counterparts, due in
10 part to their relative lack of diversification and lower financial resiliency.17 These greater risks
17 It is well established in the financial literature that smaller firms are more risky than larger firms. See, e.g.,
Eugene F.Fama and Kenneth R. French, The Cross-Section of Expected Stock Returns,Journal of Finance(June
1992); George E. Pinches, J. Clay Singleton, and Ali Jahankhani, Fixed Coverage as a Determinant of Electric
Utility Bond Ratings,Financial Management(Summer 1978).
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Avista Corporation

I imply a higher required rate of return, and there is ample empirical evidence that investors in
2 smaller firms realize higher rates of return than in larger firms." Accepted financial doctrine
3 holds that investors require higher returns from smaller companies, and unless that
4 compensation is provided in the rate of return allowed for a utility, the legal tests embodied in
5 the Hope and Bluefield cases cannot be met.
6 B. Regulatory Mechanisms
7 Q. What regulatory mechanisms are applicable to Avista's electric utility
8 operations in Idaho?
9 A. In addition to mechanisms that account for changes in the cost of power and
10 natural gas,Avista operates under the Fixed Cost Adjustment mechanism ("FCA"), which is a
11 form of decoupling that is designed to sever the link between a utility's revenues and consumers'
12 energy usage. The IPUC has also authorized the establishment of a regulatory asset accounting
13 to capture and track for wildfire resiliency costs and for insurance expense, mainly due to
14 increases in wildfire premiums, and multi-year rate plans ("MYRP")in the prior two Company
15 proceedings.
16 Q. Did you consider the implications of these regulatory mechanisms in your
17 evaluation?
18 A. Yes. As demonstrated in Schedule 4, adjustment mechanisms, cost trackers, and
19 future test years have been increasingly prevalent in the utility industry in recent years, along
20 with alternatives to traditional ratemaking such as formula rates and MYRPs. While investors
18 See for example Rolf W.Banz, The Relationship Between Return and Market Value of Common Stocks,Journal
of Financial Economics(September 1981)at 16.
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Avista Corporation

I would consider Avista's regulatory mechanisms to be supportive of the Company's financial
2 integrity and credit ratings, there is no evidence to conclude that the mechanisms approved for
3 Avista in Idaho distinguish the Company's risks relative to the utilities in my proxy group.
4 Utilities across the U.S. that the Company competes with for new capital routinely benefit from
5 similar adjustments. As a result, the impact of utilities' ability to mitigate the risk of cost
6 recovery is already reflected in the cost of equity estimates determined in this case, and no
7 separate adjustment to Avista's ROE is necessary or warranted.
8 C. Other Factors
9 Q. Would investors consider the potential impact of Avista's exposure to
10 earnings shortfalls?
11 A. Yes. The deterioration of actual return below the allowed return that occurs
12 when the relationships between revenues,costs,and rate base used to establish rates(e.g.,using
13 a historical test year without adequate adjustments) do not reflect the actual costs incurred to
14 serve customers can lead to earnings shortfalls. Investors are concerned with what they can
15 expect in the future,not what they might expect in theory if a historical test year were to repeat.
16 To be fair to investors and to benefit customers, a regulated utility must have a reasonable
17 opportunity to actually a return that will maintain financial integrity, facilitate capital
18 attraction, and compensate for risk. In other words, it is the end result in the future that
19 determines whether or not the Hope and Bluefield standards are met.
20 Ratemaking practices that allow the utility an opportunity to actually earn its authorized
21 ROE are consistent with fundamental regulatory principles. The Supreme Court has reaffirmed
22 that the end result test must be applied to the actual returns that investors expect if they put their
Thompson, Di 12
Avista Corporation

I money at risk to finance utilities.19 That end result would maintain the utility's financial
2 integrity, ability to attract capital and offer investors fair compensation for the risk they bear.
3 S&P recently cited Avista's ongoing risk of earnings shortfalls, noting their "expectation that
4 Avista's weakening financial performance will cause its metrics to fall below [their] downgrade
5 thresholds because of... regulatory lag," among other factors.20
6 Q. Has Avista experienced attrition in recent years with respect to its Idaho
7 operations?
8 A. Yes. Regulatory lag and attrition have been consistent issues for Avista. Figure
9 2 below compares the Company's actual earned ROE attributable to its Idaho jurisdictional
10 utility operations with its authorized ROE over the 2021-2024 period:
i9 Verizon Communications, et al v.Federal Communications Commission, et al,535 U.S.467(2002).
20 S&P Global Ratings,Avista Corp.,RatingsDirect,Ratings Score Snapshot(Dec. 5,2024).
Thompson, Di 13
Avista Corporation

I FIGURE 2
2 ACTUAL VS.AUTHORIZED ROE
10.0%
■--
9.0%
40,
8.0%
i
� A
i
7.0% lop
6.0%
2021 2022 2023 2024
—� Avista Idaho Earned ROE
}Avista Idaho Authorized ROE
Note:Avista Idaho Earned ROE for2024 is through September.
3 As shown above,Avista's earned ROE has fallen below its authorized ROE in each of
4 the past four years, and sometimes by a substantial margin. At least one credit rating agency
5 has recognized the negative implications of attrition for the Company. For example, S&P
6 recently reported the prospect of lowering Avista's ratings over the next 12 to 24 months if
7 financial metrics are pressured by"regulatory lag."2I
21 S&P Global Ratings,Avista Corp.,RatingsDirect,Ratings Score Snapshot(Dec. 5,2024).
Thompson, Di 14
Avista Corporation

I D. Support for Avista's Credit Standing
2 Q. What credit ratings have been assigned to Avista?
3 A. Moody's has set Avista's long-term issuer rating at Baa2. S&P has assigned
4 Avista an issuer credit rating of BBB. However,on November 11,2022 S&P revised its outlook
5 for Avista to "Negative," warning investors of the potential for a future downgrade to the
6 Company's credit standing.22 S&P cited an "expectation for a weakening of financial
7 performance below our downgrade threshold because of inflation, rising interest rates, and
8 regulatory lag."23 As was already mentioned, S&P's most recent review of the company in
9 December of 2024 affirmed their sentiment from 2022, citing to a current expectation of
10 "weakening financial performance ... because of inflation, rising interest rates, and regulatory
11 lag. ,24
12 Q. What considerations impact investors'assessment of the firms in the utility
13 industry?
14 A. Numerous factors impact investors' perceptions of relative risks in the utility
15 industry and the financial standing of the utilities themselves. These include the possibility of
16 volatile fuel or purchased power costs,uncertain environmental mandates and associated costs,
17 the implications of declining demand associated with economic weakness or structural changes
18 in usage patterns. Apart from these considerations, utilities may face increasing costs of
22 S&P Global Ratings, Avista Corp. Outlook Revised To Negative On Weaker Financial Measures; Ratings
Affirmed,Research Update(Nov. 11,2022).
23 Id.
Za S&P Global Ratings,Avista Corp.,RatingsDirect,Ratings Score Snapshot(Dec. 5,2024).
Thompson, Di 15
Avista Corporation

I operating their systems, as well as the financial pressures associated with large capital
2 expenditure programs, which are magnified during periods of turmoil in capital markets.
3 Q. What are the implications for Avista?
4 A. The pressures of significant capital expenditure requirements reinforce the
5 importance of supporting improvement in Avista's credit standing. Investors understand from
6 past experience in the utility industry that large capital needs can lead to significant
7 deterioration in financial integrity that can constrain access to capital, especially during times
8 of unfavorable capital market conditions. Considering the potential for financial market
9 instability, competition with other investment alternatives, and investors' sensitivity to the
10 potential for market volatility, greater credit strength is a key ingredient in maintaining access
11 to capital at reasonable cost. As Mr. Christie confirms in his testimony, ongoing regulatory
12 support will be a key driver in maintaining and enhancing Avista's financial health.
13 Q. Throughout your testimony you refer repeatedly to the concepts of
14 "financial strength," "financial integrity," and "financial flexibility." Would you briefly
15 describe what you mean by these terms?
16 A. These terms are generally synonymous and refer to the utility's ability to attract
17 and retain the capital that is necessary to provide service at reasonable cost, consistent with the
18 U.S. Supreme Court standards. Avista continues to make capital investments to preserve and
19 enhance service reliability for its customers. The Company must generate adequate cash flow
20 from operations to fund these requirements and for repayment of maturing debt, together with
21 access to capital from external sources under reasonable terms, on a sustainable basis.
22 Rating agencies and potential debt investors tend to place significant emphasis on
23 maintaining strong financial metrics and credit ratings that support access to debt capital
Thompson, Di 16
Avista Corporation

I markets under reasonable terms. This emphasis on financial metrics and credit ratings is shared
2 by equity investors who also focus on cash flows, capital structure and liquidity,much like debt
3 investors. Investors understand the important role that a supportive regulatory environment
4 plays in establishing a sound financial profile that will permit the utility access to debt and
5 equity capital markets on reasonable terms in both favorable financial markets and during times
6 of potential disruption and crisis.
7 Q. What role does regulation play in ensuring that Avista has access to capital
8 under reasonable terms and on a sustainable basis?
9 A. Regulatory signals are a major driver of investors' risk assessment for utilities.
10 Investors recognize that constructive regulation is a key ingredient in supporting utility credit
11 ratings and financial integrity, particularly during times of adverse conditions. As Moody's
12 noted, "the regulatory environment is the most important driver of our outlook because it sets
13 the pace for cost recovery, ,25 Similarly, S&P observed that, "Regulatory advantage is the most
14 heavily weighted factor when S&P Global Ratings analyzes a regulated utility's business risk
15 profile. ,26 Value Line summarizes these sentiments:
16 As we often point out,the most important factor in any utility's success,whether
17 it provides electricity, gas, or water, is the regulatory climate in which it
18 operates. Harsh regulatory conditions can make it nearly impossible for the best
19 run utilities to earn a reasonable return on their investment.27
25 Moody's Investors Service,Regulation Will Keep Cash Flow Stable As Major Tax Break Ends,Industry
Outlook(Feb. 19,2014). See also,Moody's Investors Service,Regulated Electric and Gas Networks,Rating
Methodology(Apr. 13,2022)(noting that,"the predictability and supportiveness of the regulatory framework in
which a network operates,as well as the legal and political framework that underpins it,are key credit
considerations.").
26 S&P Global Ratings,Assessing U.S. Investors-Owned Utility Regulatory Environments,RatingsExpress(Aug.
10,2016).
27 Value Line Investment Survey, Water Utility Industry(Jan. 13,2017)at p. 1780.
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Avista Corporation

I Q. Is Avista's ability to achieve supportive regulatory outcomes important for
2 investors?
3 A. Yes. Investors are keenly aware of regulatory actions and their implications for
4 the risks they face. For example, S&P recently cited regulatory lag as one of several reasons it
5 expects Avista's metrics to fall below S&P's downgrade thresholds.21 In their recent review of
6 the Company, S&P echoed their earlier identification of regulatory lag as a key contributor
7 supporting the decision to revise the Avista's outlook, reaffirming their "Negative" outlook in
8 December of 2024.29 Moody's also recently cited "Recent history of pressured cash flow
9 recovery due to regulatory lag" as one of the Company's credit challenges.30
10 Further strengthening Avista's financial integrity is necessary to ensure that the
11 Company has the capability to maintain an investment grade rating while confronting large
12 capital expenditures and other potential challenges. Credit ratings for other utilities are
13 predominantly in the A- or BBB+categories, as shown in Figure 3, below:
28 S&P Global Ratings,Avista Corp.,RatingsDirect,Ratings Score Snapshot(Dec. 5,2024).
29 S&P Global Ratings, Research Update: Avista Corp. Outlook Revised To Negative On Weaker Financial
Measures;Ratings Affirmed,RatingsDirect(Nov. 11,2022);Avista Corp.,RatingsDirect(Dec. 5,2024)(noting,
"The negative outlook reflects our expectation that Avista's weakening financial performance will cause its metrics
to fall below our downgrade thresholds because of inflation,rising interest rates,and regulatory lag.").
so Moody's Ratings, Credit Opinion:Avista Corp.—Update to credit analysis(Aug.28,2024).
Thompson, Di 18
Avista Corporation

I FIGURE 3
2 S&P CORPORATE CREDIT RATINGS—UTILITIES
90
80
70
60
50 Avlsta
40 /
30 Y/
20
10
0
��x��,��q��X
Source: S&P Global Ratings,Issuer Ranking:North American Electric, Gas,And Water
Regulated Utilities,Strongest To Weakest (Sep. 10,2024).
3 In the report that supports the data in the figure above, S&P detailed that of the 242
4 regulated utilities covered in its survey, only 18 had a weaker credit profile than Avista.31
5 Continued regulatory support will be instrumental in achieving Avista's objective of a BBB+
6 rating from S&P, which is consistent with the average credit standing in the electric utility
7 industry.
8 Q. Do customers benefit when a utility's financial flexibility is enhanced?
9 A. Yes. Providing an ROE that is sufficient to maintain Avista's ability to attract
10 capital under reasonable terms, even in times of financial and market stress, is not only
11 consistent with the economic requirements embodied in the U.S. Supreme Court's Hope and
" S&P Global Ratings,Issuer Ranking:North American Electric, Gas,And Water Regulated Utilities, Strongest
To Weakest,(Sep. 10,2024).
Thompson, Di 19
Avista Corporation

I Bluefield decisions, but also in customers' best interests. Customers enjoy the benefits that
2 come from ensuring that the utility has the financial wherewithal to take whatever actions are
3 required to ensure safe and reliable service.
4 E. Outlook for Capital Costs
5 Q. Please summarize current economic and capital market conditions.
6 A. Following the economic contraction stemming from the COVID-19 pandemic
7 in 2020, U.S. real GDP improved significantly in 2021,with GDP growing at a pace of 6.1%.32
8 Growth in 2022 and 2023 was more subdued at 2.5% and 2.9%,respectively.33 More recently,
9 growth in real GDP declined to 1.6% in Q1 2024, before rising to 3.0% in Q2 2024 and 2.8%
10 in Q3 2024.34 Meanwhile, indicators of employment have been weakening somewhat,with the
11 national unemployment rate being 4.2% in November 2024.35
12 The underlying risk and price pressures associated with the COVID-19 pandemic were
13 overshadowed by a dramatic increase in geopolitical risks following Russia's invasion of
14 Ukraine in February 2022. These risks have been compounded by heightened uncertainties
15 prompted by the resurgence of conflict in the Middle East. Apart from disrupting global trade,
16 the potential for further escalation has prompted concerns over constraints to crude oil supplies
17 and resulting supply-side price shocks that could reignite inflation. More recently, president-
18 elect Trump's threats to impose tariffs on major U.S. trading partners have sparked concerns
32 https://www.bea.gov/sites/default/files/2024-10/gdp3g24-adv.xlsx(last visited Jan.6,2025).
33 Id.
34 Id.
35 Economic News Release,U.S.Dep't of Labor,Bureau of Labor Statistics,Employment Situation Summary(Dec.
6,2024),https://www.bls.gov/news.release/empsit.nrO.htm(last visited Jan.6,2025).
Thompson, Di 20
Avista Corporation

I over additional inflationary pressures, and have generally added to the level of economic
2 uncertainty.
3 Stimulative monetary and fiscal policies, coupled with supply-chain disruptions and
4 rapid price rises in the energy and commodities markets, led to increasing concern that inflation
5 would remain significantly above the Federal Reserve's longer-run benchmark of 2%. CPI
6 inflation peaked in June 2022 at 9.1%, its highest level since November 1981. Since then, CPI
7 inflation has moderated significantly, but remained at 2.7% in November 2024, which exceeds
8 the Federal Reserve's target.36 The so-called"core"price index, which excludes more volatile
9 energy and food costs, rose at an annual rate of 3.3% in November 2024.37 PCE inflation rose
10 2.4% in November 2024, or 2.8% after excluding more volatile food and energy costs.38
11 Q. Have these developments impacted the risks faced by utilities and their
12 investors?
13 A. Yes. S&P revised its outlook for the utility sector to "negative" in February
14 2024, noting that:
15 Credit quality for North American investor-owned regulated utilities has
16 weakened over the past four years, with downgrades outpacing upgrades by
17 more than three times. We expect downgrades to again surpass upgrades in 2024
18 for the fifth consecutive year.39
36 Economic News Release, U.S. Dep't of Labor, Bureau of Labor Statistics, Consumer Price Index Summary
(Dec. 11,2024),https://www.bls.gov/news.release/cpi.nr0.htm(last visited Jan. 6,2025).
37 Id.
38 News Release,Bureau of Economic Analysis,Personal Income and Outlays,November 2024,BEA 24-62(Dec.
20, 2024), https://www.bea.gov/news/2024/personal-income-and-outlays-november-2024 (last visited Jan. 6,
2025).
39 Standard& Poor's, Rising Risks: Outlook For North American Investor-Owned Regulated Utilities Weakens,
Criteria Corporates(Feb. 14,2024).
Thompson, Di 21
Avista Corporation

I More recently, S&P affirmed their negative outlook, citing to rising wildfire risks, as
2 well as weakening financial measures due to "record-breaking capital spending" and cash flow
3 deficits, and noting "the industry's high percentage of companies ... that operate with only
4 minimal financial cushion from their downgrade threshold. ,41
5 Q. Do recent bond yield trends indicate that the cost of equity has increased?
6 A. Yes. While the cost of equity is unobservable, the yields on long-term bonds
7 provide a widely referenced benchmark for the direction of capital costs, including required
8 returns on common stocks. Table 1 below shows the average yields on Treasury securities and
9 Baa-rated public utility bonds from 2020 to 2024.
10 TABLE 1
11 CAPITAL MARKET BENCHMARKS
2020 to 2024
Change
Series 2020 2021 2022 2023 2024 (bps)
10-Year Treasury Bonds 0.89% 1.44% 2.95% 3.96% 4.19% 330
30-Year Treasury Bonds 1.56% 2.05% 3.12% 4.09% 4.39% 283
Baa Utility Bonds 3.39% 3.35% 5.03% 5.84% 5.76% 237
Average 283
Note:2024 average values are based on January to November.
Source:https://fred.stlouisfed.org/series/GS30;Moody's Credit Trends.
12 As shown above,trends in bond yields document a substantial increase in the returns on
13 long-term capital demanded by investors in recent years. With respect to utility bond yields—
4o S&P Global Ratings, Regulated Utilities: Credit risks are rising, Industry Credit Outlook Update — North
America(Jul. 18,2024).
Thompson, Di 22
Avista Corporation

I which are the most relevant indicator in gauging the implications for the Company's common
2 equity investors—average yields in 2024 are 237 basis points above 2020 levels.
3 Q. How has Avista's allowed ROE for its Idaho utility operations trended over
4 this same time period?
5 A. Avista's allowed ROE was 9.50% in 2020, decreased to 9.40% in 2021, and has
6 remained at that level since then. In other words, as utility and Treasury yields increased an
7 average of 283 basis points from 2020 to 2024,Avista's allowed ROE decreased 10 basis points
8 over this same time period. These trends are further illustrated in Figure 4 below.
Thompson, Di 23
Avista Corporation

I FIGURE 4
2 BOND YIELD AND ROE TRENDS
10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
2020 2021 2022 2023 2024
t 10-Year Treasury Bondst 30-Year Treasury Bonds
--e—Baa Utility Bonds tAvista's Allowed ROE
Note:2024 average values are based on January to November.
Source:https://fred.stlouisfed.org/series/GS30;Moody's Credit Trends.
3 Q. How have allowed ROES for electric utilities trended over this time period?
4 A. The average ROES authorized for vertically integrated electric utilities from
5 2020 to 2024 are shown in the table below.
Thompson, Di 24
Avista Corporation

I TABLE 2
2 AUTHORIZED ELECTRIC ROES
Ye ar ROE
2020 9.55%
2021 9.53%
2022 9.75%
2023 9.80%
2024 9.80%
2020 to 2024 25
Change (bp)
Note: Data for 2024 is for the first three quarters of the year. The
average ROE data is for vertically integrated utilities.
Source: S&P Global Market Intelligence,Major energy rate case
decisions in the US:January-September 2024,RRA Regulatory
Focus (Oct.30,2024).
3 As the table above shows, allowed electric ROES have trended upward 25 basis points from
4 2020 to 2024, while Table 1 documents that Baa utility bond yields have increased 237 basis
5 points over this same time period.
6 Q. Are rate case outcomes likely an important consideration for investors,
7 especially given the recent increase in capital costs?
8 A. Yes. For example, Fitch recently highlighted a potential disconnect between
9 allowed ROEs and higher capital costs:
10 Rate case outcomes will be key to watch as regulators balance a higher level of
11 rate requests against increases in customer bills. Authorized ROES may remain
12 sticky despite an increase in cost of capital.41
13 To the extent that rate case outcomes do not adequately reflect the current capital cost
14 environment,this would send a negative signal to investors.
41 Fitch Ratings,Inc.,North American Utilities Outlook 2025(Dec. 5,2024).
Thompson, Di 25
Avista Corporation

I Q. What ROE was recently approved for Avista's Washington electric and gas
2 operations?
3 A. The Washington Utilities and Transportation Commission ("WUTC") recently
4 approved an increase of Avista's allowed ROE to 9.80%.42 The WUTC added further context
5 to their decision:
6 ...we recognize that upward adjustment is needed to address the challenges the
7 Company faces and to ensure it remains a viable entity able to provide reliable
8 and adequate service to its customers.The challenges of remaining credit worthy
9 and acquiring capital for continued operation are very real. In fact, these
10 challenges go to the heart of the Commission's responsibility,which is to assure
11 confidence in the financial integrity of the utility company,to maintain its credit
12 rating and to attract capital, so that it can continue to provide service for the
13 public convenience.43
14 Q. Do investors anticipate that the higher bond yields documented in Table 1
15 will be sustained?
16 A. Yes. As illustrated in Figure 5 below, the most recent long-term consensus
17 projections from top economists published by Blue Chip document that long-term bond yields
18 are expected to remain elevated when compared to recent historical levels.
41 Washington Utilities and Transportation Commission,Washington Utilities and Transportation Commission,
Complainant,v.Avista Corporation,d/b/a Avista Utilities,Respondent,Corrected Order—Order 08/Final Order,
Dockets UE-240006&UG-240007(Consolidated)(Dec.23,2024).
43 Id. at¶517.
Thompson, Di 26
Avista Corporation

I FIGURE 5
2 INTEREST RATE TRENDS
5.8%
4.8%
3.8%
2.8%
1.8%
0.8%
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
t Baa Utility +Aaa Corporate t 30-Yr.Treasury �10-Yr.Treasury
(a) 2020 to 2023 fromMoody's Investors Service;https://fred.stlouisfed.org/. 2024 to 2030fromMoody's Investors
Service;https://fred.stlouisfed.org/;Wolters Kluwer,Blue Chip Financial Forecasts(Nov.27,2024).
(b) 2020 to 2023 from Moody's Credit Trends. 2024 to 2030 based on yields on Aaa corporate bonds(Moody's Investors
Service;https://fred.stlouisfed.org/;Wolters Kluwer,Blue Chip Financial Forecasts(Nov.27,2024)),adjusted for six-
month average yield spreads at Nov.2024(Moody's Credit Trends).
3 This evidence shows that long-term capital costsincluding the ROE—have increased
4 substantially since 2020, and that investors expect these higher capital costs to be sustained at
5 least through 2030.
6 Q. Do the Federal Reserve's recent decisions to lower the target range for the
7 federal funds rate change your conclusion that the cost of equity is now significantly
8 higher than it was in recent years?
9 A. No. Bond yields embody the market's expectations of future events, including
10 Federal Reserve monetary policy and inflation trends, and there is substantial evidence that the
Thompson, Di 27
Avista Corporation

I Federal Reserve's recent rate cuts were expected. For example, a Forbes.com article from
2 several weeks before the rate cut characterized the market's expectations:
3 Fixed income markets expect the Federal Open Market Committee to cut interest
4 rates at its next meeting on September 18. There is a lot of evidence for this view
5 based on both the FOMC's own minutes and public statements.44
6 Meanwhile, a Reuters.com article on the day of the Federal Reserve's September 2024
7 rate action confirmed that it, along with future cuts to the federal funds rate, were anticipated:
8 The U.S. central bank on Wednesday kicked off an anticipated series of interest
9 rate cuts with a larger-than-usual half-percentage-point reduction that Federal
10 Reserve Chair Jerome Powell said was meant to show policymakers'
11 commitment to sustaining a low unemployment rate now that inflation has
12 eased.45
13 Consistent with the expectations documented in the reporting above, bond yields
14 showed no signs of substantial movement around the time of the rate cuts, as would otherwise
15 be expected if the Federal Reserve's actions were not anticipated. For example,Figure 6 below
16 shows trends in utility and Treasury yields at the time of the Federal Reserve's announced rate
17 cuts on September 18, 2024 and November 7, 2024.
44 Forbes.com, Markets Firmly Expect The Fed To Cut Interest Rates On September 18 (Aug. 18, 2024),
https://www.forbes.com/sites/simonmoore/2024/08/27/markets-firmly-expect-the-fed-to-cut-rates-on-september-
18/(last visited Oct. 12,2024).
4s Reuters.com, Fed unveils oversized rate cut as it gains 'greater confidence'about inflation (Sep. 18, 2024),
https://www.reuters.com/markets/rates-bonds/with-feds-rate-cut-hand-debate-swirls-over-how-big-move-2024-
09-18/(last visited Oct. 12,2024)(emphasis added).
Thompson, Di 28
Avista Corporation

I FIGURE 6
2 BOND YIELDS AND ANNOUNCED RATE CUTS
6.00%
............ .......
5.50%
5.00% Federal Reserve
Rate Cuts
4.50%
4.00%
3.50%
�eQ
tiff tiw ti`' C' ti� tip' ,,o ti3
---30-Yr.Treasury t10-Yr.Treasury —0---Baa Utility
Source:Moody's Investors Serivice;https://fred.stlouisfed.org/.
3 As evidenced above, bond yields actually trended higher after the Federal Reserve's
4 policy announcement on September 18, 2024 and continued their upward trend in anticipation
5 of, and also following, the Federal Reserve's November 7, 2024 rate action.
6 This evidence supports the conclusion that the Federal Reserve's rate cuts were
7 anticipated by the bond markets. It follows that current bond yields, such as the November
8 2024 yield averages referenced in Table 1, already reflect expectations of future Federal
9 Reserve actions. Similarly, the earlier Figure 5 demonstrates that recent forecasts of leading
10 economists employed by large U.S. banks, insurance companies, brokerage firms, and
11 manufacturers—which consider their expectations for future Federal Reserve actions—do not
12 support a conclusion that long-term bond yields are expected to decrease significantly.
Thompson, Di 29
Avista Corporation

I Figure 6 documents that since the Federal Reserve's initial rate cut in September 2024,
2 long-term bond yields have actually increased. This trend has also been impacted by investors'
3 expectations concerning the likely economic, fiscal, and other policy changes of the incoming
4 administration. Moody's concluded that higher broad-based tariffs on imports, deficit-financed
5 tax cuts, and increasingly restrictive immigration policies"will thus result in some combination
6 of higher inflation and interest rates."46
7 Moreover, the impact of the Federal Reserve's moves to a more accommodative
8 monetary policy is likely to have a more pronounced effect on yields for shorter duration
9 instruments, as the yield curve normalizes from the inverted pattern that has characterized
10 financial markets. Morningstar advised investors that while "yields on cash and shorter-
11 maturity products will drop rapidly" in response to the Federal Reserve's policy change, "a
12 stronger-than-expected economy could push longer-term bond yields higher and pose a risk to
13 investors in those assets."47 As Morningstar concluded:
14 Analysts say forecasts for a strong economy mean that yields aren't likely to fall
15 further, even if it's widely agreed among investors and analysts that more rate
16 cuts are coming through the end of the year and into 2025. Much of the impact
17 of rate cuts has already been priced into the market,they say, and it wouldn't be
18 surprising to see yields rise as a result.48
19 This is consistent with the forecasts of leading economists illustrated in Figure 5 above.
46 Moody's Investors Service, Trump Take Two (Take Two),Economic View(Nov. 19,2024).
47 Sarah Hansen, What the Fed's Rate Cut Means for Bond Investors, Morningstar (Sep. 20, 2024),
https://www.momingstar.com/markets/what-feds-rate-cut-means-bond-investors(last visited Dec.4,2024).
4s Id.
Thompson, Di 30
Avista Corporation

I Q. What implications do these trends have in evaluating a just and reasonable
2 ROE for Avista?
3 A. The upward move in interest rates suggests that long-term capital costs-
4 including the cost of equity—have increased significantly in recent years. Current capital
5 market conditions reflect the reality of the situation in which Avista must attract and retain
6 capital. The standards underlying a fair rate of return require an authorized ROE for the
7 Company that is competitive with other investments of comparable risk and sufficient to
8 preserve its ability to maintain access to capital on reasonable terms. These standards can only
9 be met by considering the current requirements of investors. If the upward shift in investors'
10 risk perceptions and required rates of return for long-term capital is not incorporated in the
11 allowed ROE,the results will fail to meet the comparable earnings standard that is fundamental
12 in determining the cost of capital. From a more practical perspective, failing to provide
13 investors with the opportunity to earn a rate of return commensurate with Avista's risks will
14 weaken its financial integrity and undermine its ability to attract necessary capital on reasonable
15 terms.
16 F. Capital Structure
17 Q. Is an evaluation of the capital structure maintained by a utility relevant in
18 assessing its return on equity?
19 A. Yes. Other things equal, a higher debt ratio and lower common equity ratio,
20 translates into increased financial risk for all investors. A greater amount of debt means more
21 investors have a senior claim on available cash flow, thereby reducing the certainty that each
22 will receive their contractual payments. This increases the risks to which lenders are exposed,
Thompson, Di 31
Avista Corporation

I and they require correspondingly higher rates of interest. From common shareholders'
2 standpoint, a higher debt ratio means that there are proportionately more investors ahead of
3 them, thereby increasing the uncertainty as to the amount of cash flow that will remain.
4 Q. What common equity ratio is implicit in Avista's requested capital
5 structure?
6 A. As supported in the testimony of Company witness Christie,Avista is requesting
7 that its rates be set using its projected test year capital structure ending December 31, 2025,
8 with a common equity ratio of approximately 50.0%.
9 Q. What is the average capitalization maintained by the Utility Group's
10 operating companies?
11 A. As shown on pages 1 and 2 of Schedule 5, average common equity ratios for the
12 operating subsidiaries of the Utility Group companies range from 37.9% to 64.9% at year-end
13 2023, and averaged 51.8%. Meanwhile, page 3 of Schedule 5 shows that the Utility Group
14 maintained equity ratios ranging from 31.1% to 63.7%, with an average of 42.2%, while the
15 three-to-five year forecasts published by Value Line result in common equity ratios ranging
16 from 28.5% to 57.5%, with an average of 41.9%. Avista's requested common equity ratio of
17 50.0% falls well within these ranges of recent historic and projected equity ratios for the proxy
18 group and their operating companies.
19 Q. What other evidence supports the reasonableness of the Company's
20 requested capital structure?
21 A. Reference to recent findings for electric and gas utilities in other regulatory
22 proceedings also supports the reasonableness of Avista's 50.0%common equity ratio. The table
Thompson, Di 32
Avista Corporation

I below presents the range of common equity ratios approved for electric and gas utilities over
2 the past eight quarters, as reported by RRA:
3 TABLE 3
4 ELECTRIC AND GAS UTILITY ALLOWED COMMON EQUITY RATIOS
Electric Gas
Low High Average Low High Average
Q4-22 45.07% -- 58.22% 51.45% Q4-22 45.00% -- 58.22% 51.75%
Q1-23 42.50% -- 52.50% 50.90% Q1-23 45.16% -- 59.74% 53.89%
Q2-23 49.00% -- 52.50% 51.69% Q2-23 50.00% -- 62.20% 56.18%
Q3-23 48.00% -- 60.70% 51.89% Q3-23 48.00% -- 59.63% 52.88%
Q4-23 48.00% -- 56.06% 51.55% Q4-23 48.00% -- 56.06% 51.27%
Q1-24 41.25% -- 53.72% 50.14% Q1-24 50.87% -- 59.07% 53.11%
Q2-24 44.36% -- 52.26% 50.64% Q2-24 50.00% -- 60.61% 52.99%
Q3-24 45.57% -- 52.83% 50.78% Q3-24 48.00% -- 62.38% 52.78%
Average 45.47% -- 54.85% 51.13% Average 48.13% -- 59.74% 53.11%
Source:S&P Global Market Intelligence,Major Rate Case Decisions,RRA Regulatory Focus(Feb.2023;Feb.6 and Oct.
30,2024). Excludes capital structures that include cost-free items.
5 As demonstrated in the table above, the Company's requested 50.0% common equity ratio is
6 within the range of capital structures recently approved for other utilities, and is below the
7 average allowed common equity ratios of 51.13% for electric utilities and 53.11% for gas
8 utilities.
9 Q. Do ongoing economic and capital market uncertainties also influence the
10 appropriate capital structure for Avista?
11 A. Yes. Financial flexibility plays a crucial role in ensuring the wherewithal to meet
12 funding needs, and utilities with higher financial leverage may be foreclosed or have limited
13 access to additional borrowing, especially during times of stress. As Moody's observed:
14 Utilities are among the largest debt issuers in the corporate universe and
15 typically require consistent access to capital markets to assure adequate sources
16 of funding and to maintain financial flexibility. During times of distress and
Thompson, Di 33
Avista Corporation

I when capital markets are exceedingly volatile and tight, liquidity becomes
2 critically important because access to capital markets may be difficult.49
3 As a result, the Company's capital structure must maintain adequate equity to preserve
4 the flexibility necessary to maintain continuous access to capital even during times of
5 unfavorable market conditions.
6 Q. What does this evidence suggest with respect to the company's proposed
7 capital structure?
8 A. Based on my evaluation, I conclude that Avista's requested capital structure
9 represents a reasonable mix of capital sources from which to calculate the Company's overall
10 rate of return. While industry averages provide one benchmark for comparison, each firm must
11 select its capitalization based on the risks and prospects it faces, as well its specific needs to
12 access the capital markets. A public utility with an obligation to serve must maintain ready
13 access to capital under reasonable terms so that it can meet the service requirements of its
14 customers. Financial flexibility plays a crucial role in ensuring the wherewithal to meet the
15 needs of customers, and utilities with higher leverage may be foreclosed from additional
16 borrowing under reasonable terms, especially during times of stress.
17 Avista's capital structure is consistent with the range of equity ratios maintained by the
18 parent firms in the Utility Group and their operating subsidiaries, and reflects the challenges
19 posed by its resource mix, the burden of significant capital spending requirements, and the
20 Company's ongoing efforts to strengthen its credit standing and support access to capital on
21 reasonable terms. The reasonableness of a 50.0% common equity capital structure for Avista is
"Moody's Investors Service,FAQ on credit implications of the coronavirus outbreak,Sector Comment(Mar.26,
2020).
Thompson, Di 34
Avista Corporation

I reinforced by the importance of supporting continued investment in system improvements even
2 during times of adverse capital market conditions.
III. CAPITAL MARKET ESTIMATES
3 Q. What is the purpose of this section?
4 A. This section presents capital market estimates of the ROE. First, I discuss the
5 results of the DCF, CAPM and risk premium analyses I conducted to estimate the cost of
6 common equity for the Utility Group. Next, I comment on expected earnings and non-utility
7 DCF benchmarks.
8 A. Quantitative Analyses
9 Q. How do you implement quantitative methods to estimate the cost of
10 common equity for Avista?
11 A. Application of quantitative methods to estimate the cost of common equity
12 requires observable capital market data, such as stock prices and beta values. Moreover, even
13 for a firm with publicly traded stock, the cost of common equity can only be estimated. As a
14 result, applying quantitative models using observable market data only produces an estimate of
15 investors'expected return. Thus, the accepted approach to increase confidence in the results is
16 to apply quantitative methods to a proxy group of publicly traded companies that investors
17 regard as risk comparable. While the proxy group provides a starting point in evaluating the
18 cost of equity for Avista, as noted earlier, economic and regulatory standards require that the
19 Company's unique circumstances and specific risks must be considered. Accordingly, the cost
20 of equity determined for the proxy group must be adjusted to properly reflect differences in risk
21 when evaluating a fair ROE for Avista.
Thompson, Di 35
Avista Corporation

I Q. What ROE estimates are implied by your DCF results for the Utility
2 Group?
3 A. As shown on page 3 of Schedule 6 and summarized in Table 4, below,
4 application of the constant growth DCF model resulted in the following cost of equity estimates:
5 TABLE 4
6 DCF RESULTS—UTILITY GROUP
Growth Rate Average Midpoint
Value Line 9.3% 9.6%
IBES 9.7% 10.2%
Zacks 10.3% 10.1%
br+ sv 8.7% 9.1%
7 Q. How do you apply the CAPM to estimate the cost of equity?
8 A. Like the DCF model, the CAPM is an ex-ante, or forward-looking model based
9 on expectations of the future. As a result,in order to produce a meaningful estimate of investors'
10 required rate of return, the CAPM is best applied using estimates that reflect the expectations
11 of actual investors in the market, not with backward-looking, historical data. Accordingly, I
12 apply the CAPM to the Utility Group based on a forward-looking estimate for investors'
13 required rate of return from common stocks. Because this forward-looking application of the
14 CAPM looks directly at investors' expectations in the capital markets, it provides a more
15 meaningful guide to the expected rate of return required to implement the CAPM.
16 Q. What is the implied ROE for the Utility Group using the CAPM approach?
17 A. As shown on Schedule 8, the CAPM approach implies an average ROE for the
18 Utility Group of 11.7%, or 12.2% after adjusting for the impact of firm size.
Thompson, Di 36
Avista Corporation

I Q. How did you implement the risk premium method?
2 A. Estimates of equity risk premiums for utilities are based on surveys of previously
3 authorized ROEs. Authorized ROEs presumably reflect regulatory commissions'best estimates
4 of the cost of equity, however determined, at the time they issued their final order. Such ROEs
5 should represent a balanced and impartial outcome that considers the need to maintain a utility's
6 financial integrity and ability to attract capital. Moreover, allowed returns are an important
7 consideration for investors and have the potential to influence other observable investment
8 parameters, including credit ratings and borrowing costs. Thus,when considered in the context
9 of a complete and rigorous analysis,this data provides a logical and frequently referenced basis
10 for estimating equity risk premiums for regulated utilities.
11 Q. What ROE is implied by the risk premium method using surveys of allowed
12 returns?
13 A. Based on a regression study which analyzed the relationship between interest
14 rates and equity risk premiums, I developed a current equity risk premium for electric utilities.
15 As shown on page 1 of Schedule 9, this equity risk premium is combined with a current utility
16 bond yield to arrive at a risk premium ROE of 10.54%.
17 B. Flotation Costs
18 Q. What other considerations are relevant in setting the ROE for a utility?
19 A. The common equity used to finance the investment in utility assets is provided
20 from either the sale of stock in the capital markets or from retained earnings not paid out as
21 dividends. When equity is raised through the sale of common stock, there are costs associated
22 with "floating" the new equity securities. These flotation costs include services such as legal,
Thompson, Di 37
Avista Corporation

I accounting, and printing, as well as the fees and discounts paid to compensate brokers for
2 selling the stock to the public. Also, some argue that the "market pressure"from the additional
3 supply of common stock and other market factors may further reduce the amount of funds a
4 utility nets when it issues common equity. While Avista's Idaho utilities division has no
5 publicly traded stock and does not incur flotation costs directly, equity capital is provided by
6 investors through Avista's sale of common shares. Thus,these expenses are also relevant when
7 evaluating the fair and reasonable ROE for Avista's Idaho jurisdictional utility operations.
8 Q. Is there an established mechanism for a utility to recognize equity issuance
9 costs?
10 A. No. While debt flotation costs are recorded on the books of the utility and
11 amortized over the life of the issue, and thus increase the effective cost of debt capital, there is
12 no similar accounting treatment to ensure that equity flotation costs are recorded and ultimately
13 recognized. No rate of return is authorized on flotation costs necessarily incurred to obtain a
14 portion of the equity capital used to finance plant. In other words, equity flotation costs are not
15 included in a utility's rate base because neither that portion of the gross proceeds from the sale
16 of common stock used to pay flotation costs is available to invest in plant and equipment, nor
17 are flotation costs capitalized as an intangible asset. Unless some provision is made to
18 recognize these issuance costs, a utility's revenue requirements will not fully reflect all of the
19 costs incurred for the use of investors' funds. Because there is no accounting convention to
20 accumulate the flotation costs associated with equity issues, they must be accounted for
21 indirectly, with an upward adjustment to the cost of equity being the most appropriate
22 mechanism.
Thompson, Di 38
Avista Corporation

I Q. Is there academic evidence that supports a flotation cost adjustment?
2 A. Yes. The financial literature and evidence in this case provides a sound
3 theoretical and practical basis to include consideration of flotation costs for Avista. An
4 adjustment for flotation costs associated with past equity issues is appropriate, even when the
5 utility is not contemplating any new sales of common stock. The need for a flotation cost
6 adjustment to compensate for past equity issues has been recognized in the financial literature.
7 In a Public Utilities Fortnightly article, for example, Brigham, Aberwald, and Gapenski
8 demonstrated that even if no further stock issues are contemplated, a flotation cost adjustment
9 in all future years is required to keep shareholders whole, and that the flotation cost adjustment
10 must consider total equity, including retained earnings.50 Similarly, New Regulatory Finance
11 contains the following discussion:
12 Another controversy is whether the flotation cost allowance should still be
13 applied when the utility is not contemplating an imminent common stock issue.
14 Some argue that flotation costs are real and should be recognized in calculating
15 the fair rate of return on equity, but only at the time when the expenses are
16 incurred. In other words, the flotation cost allowance should not continue
17 indefinitely,but should be made in the year in which the sale of securities occurs,
18 with no need for continuing compensation in future years. This argument
19 implies that the company has already been compensated for these costs and/or
20 the initial contributed capital was obtained freely, devoid of any flotation costs,
21 which is an unlikely assumption, and certainly not applicable to most utilities.
22 The flotation cost adjustment cannot be strictly forward-looking unless all past
23 flotation costs associated with past issues have been recovered.51
so E. F. Brigham, D. A.Aberwald, and L. C. Gapenski, Common Equity Flotation Costs and Rate Making,Pub.
Util. Fortnightly (May 2, 1985). See also Roger A. Morin, New Regulatory Finance, Pub. Util. Reports, Inc.
(2006)at 335.
51 Roger A.Morin,New Regulatory Finance,Pub.Util.Reports,Inc. (2006)at 335.
Thompson, Di 39
Avista Corporation

I Q. Can you illustrate why investors will not have the opportunity to earn their
2 required ROE unless a flotation cost adjustment is included?
3 A. Yes. Assume a utility sells $10 worth of common stock at the beginning of
4 year 1. If the utility incurs flotation costs of$0.48 (5% of the net proceeds), then only $9.52 is
5 available to invest in rate base. Assume that common shareholders' required rate of return is
6 10.5%, the expected dividend in year 1 is $0.50 (i.e., a dividend yield of 5%), and that growth
7 is expected to be 5.5% annually. As developed in Table 5, if the allowed rate of return on
8 common equity is only equal to the utility's 10.5% "bare bones" cost of equity, common
9 stockholders will not earn their required rate of return on their $10 investment, since growth
10 will really only be 5.25%, instead of 5.5%:
11 TABLE 5
12 NO FLOTATION COST ADJUSTMENT
Common Retained Total Nbrket M!B Allowed Payout
Year Stock Eaivings Equty Price Ratio ROE EPS DPS Ratio
1 $ 9.52 $ - $ 9.52 $10.00 1.050 10.50% $ 1.00 $ 0.50 50.0%
2 $ 9.52 $ 0.50 $10.02 $10.53 1.050 10.50% $ 1.05 $ 0.53 50.0%
3 $ 9.52 $ 0.53 $10.55 $11.08 1.050 10.50% $ 1.11 $ 0.55 50.0%
Growth 5.25% 5.25% 5.25% 5.25%
13 The reason that investors never really earn 10.5% on their investment in the above
14 example is that the $0.48 in flotation costs initially incurred to raise the common stock is not
15 treated like debt issuance costs (i.e., amortized into interest expense and therefore increasing
16 the embedded cost of debt), nor is it included as an asset in rate base.
17 Including a flotation cost adjustment allows investors to be fully compensated for the
18 impact of these costs. One commonly referenced method for calculating the flotation cost
19 adjustment is to multiply the dividend yield by a flotation cost percentage. Thus, with a 5%
20 dividend yield and a 5% flotation cost percentage, the flotation cost adjustment in the above
Thompson, Di 40
Avista Corporation

I example would be approximately 25 basis points. As shown in Table 6 below, by allowing a
2 rate of return on common equity of 10.75% (a 10.5% cost of equity plus a 25 basis point
3 flotation cost adjustment),investors earn their 10.5%required rate of return,since actual growth
4 is now equal to 5.5%.
5 TABLE 6
6 INCLUDING FLOTATION COST ADJUSTMENT
Common Retained Total Market NFB Allowed Payout
Year Stock Earnings Equity Price Ratio ROE EPS DPS Ratio
1 $ 9.52 $ - $ 9.52 $10.00 1.050 10.75% $ 1.02 $ 0.50 48.8%
$ 9.52 $ 0.52 $10.05 $10.55 1.050 10.75% $ 1.08 $ 0.53 48.8%
3 $ 9.52 $ 0.55 $10.60 $11.13 1.050 10.75% $ 1.14 $ 0.56 48.8%
Gro«rth 5.50% 5.50% 5.50% 5.50%
7 The only way for investors to be fully compensated for issuance costs is to include an
8 ongoing adjustment to account for past flotation costs when setting the return on common
9 equity. This is the case regardless of whether or not the utility is expected to issue additional
10 shares of common stock in the future.
11 Q. Have other regulators recognized flotation costs in evaluating a fair ROE?
12 A. Yes. In Case No. INT-G-16-02 the staff of the Idaho Public Utilities
13 Commission supported consideration of flotation costs52 More recently, the Wyoming Office
14 of Consumer Advocate, an independent division of the Wyoming Public Service Commission,
15 recommended a 10 basis point flotation cost adjustment for a gas utility.53 Similarly, the South
16 Dakota Public Utilities Commission has recognized the impact of issuance costs, concluding
17 that, "recovery of reasonable flotation costs is appropriate."54 Another example of a regulator
52 Case No.INT-G-16-02,Direct Testimony of Mark Rogers(Dec. 16,2016)at 18.
53 Docket No.30011-97-GR-17,Pre-Filed Direct Testimony of Anthony J. Ornelas(May 1,2018)at 52-53.
54 Northern States Power Co,EL11-019,Final Decision and Order at P 22(2012).
Thompson, Di 41
Avista Corporation

I that approves common stock issuance costs is the Mississippi Public Service Commission,
2 which routinely includes a flotation cost adjustment in its Rate Stabilization Adjustment Rider
3 formula.55 The Public Utilities Regulatory Authority of Connecticut,56 the Minnesota Public
4 Utilities Commission,57 and the Virginia State Corporation Commission'have also recognized
5 that flotation costs are a legitimate expense worthy of consideration in setting a fair and
6 reasonable ROE.
7 Q. What is the magnitude of the adjustment to the "bare bones" cost of equity
8 to account for Avista's issuance costs?
9 A. The most common method used to account for flotation costs in regulatory
10 proceedings is to apply an average flotation-cost percentage to a utility's dividend yield. Rather
11 than developing a generic flotation cost adjustment based on industry-wide data,my analysis is
12 predicated on actual issuance costs incurred by Avista. Specifically, Schedule 10 documents
13 the flotation costs associated with the Company's sales of common stock,including those under
14 its Dividend Reinvestment Plan. As shown there, this results in an issuance expense factor of
15 1.461%. Applying this expense percentage to Avista's 5.1%dividend yield produces a flotation
16 cost adjustment on the order of 7 basis points, which I recommend the Commission add to the
17 cost of equity in arriving at a fair ROE for Avista.
55 See,e.g.,Entergy Mississippi Formula Rate Plan FRP-7,
https://cdn.entergy-mississippi.com/userfiles/content/price/tariffs/eml_ftp.pdf(last visited Oct. 14,2024).
56 See, e.g.,Docket No. 14-05-06,Decision(Dec. 17,2014)at 133-134.
57 See, e.g., Docket No.E001/GR-10-276,Findings of Fact,Conclusions,and Order at 9.
58 Roanoke Gas Company,Case No.PUR-2018-00013,Final Order,(Jan.24,2020)at 6.
Thompson, Di 42
Avista Corporation

I C. Recommended ROE for Avista
2 Q. Please summarize the ROE recommendation that results from your
3 analyses.
4 A. Based on the results of the DCF, CAPM and risk premium analyses discussed
5 above, and also a flotation cost adjustment based on Avista's actual equity issuance costs, I
6 conclude that 10.27% to 11.27% represents a reasonable ROE range for the Utility Group.
7 Given that objective risk indicators suggest comparable risk for Avista as compared to the
8 Utility Group, I consider Avista's requested ROE of 10.4%to be conservative.
9 Q. Earlier you discussed Avista's relatively small size. How does this affect
10 your assessment of Avista's return on equity?
11 A. Avista's ability to withstand financial and operating pressures,which is lessened
12 to some extent due to its relatively small size,would likely increase the Company's risk profile
13 in the eyes of investors. While my recommended ROE range does not explicitly incorporate a
14 size adjustment, consideration of Avista's relatively small size adds further weight to my
15 conclusion that the Company's requested ROE of 10.4% is conservative.
16 Q. Please summarize the results of your quantitative analyses.
17 A. The results of my various quantitative analyses, which can be referenced in
18 detail in the schedules attached to my direct testimony, are summarized in Table 7 below.
Thompson, Di 43
Avista Corporation

I TABLE 7
2 SUMMARY OF RESULTS
Method Result
D CF
Value Line 9.3%
IBES 9.7%
Zacks 10.3%
Internal br+ sv 8.7%
CAPM 11.7% -- 12.2%
3 Utility Risk Premium 10.5%
4 Q. What other factors should be considered in evaluating a fair ROE for the
5 company?
6 A. Apart from the results of the quantitative methods summarized above, it is
7 crucial to recognize the importance of supporting Avista's financial position so that Avista
8 remains prepared to respond to unforeseen events that may materialize in the future. Past
9 challenges in the capital markets and ongoing economic uncertainties highlight the benefits of
10 continuing to support the Company's financial strength to ensure that Avista can attract the
I I capital needed to maintain reliable service at a lower cost for customers.
12 D. Benchmark Analyses
13 Q. Do you also reference an expected earnings benchmark in evaluating an
14 ROE for Avista?
15 A. Yes. Reference to rates of return available from alternative investments of
16 comparable risk can provide an important benchmark in assessing the return necessary to assure
17 confidence in the financial integrity of a firm and its ability to attract capital. This expected
Thompson, Di 44
Avista Corporation

I earnings approach is consistent with the economic underpinnings for a just and reasonable rate
2 of return established by the U.S. Supreme Court in Bluefield and Hope.59
3 Q. What ROE benchmark is indicated for Avista based on the expected
4 earnings approach?
5 A. For the firms in the proxy group, as shown on Schedule 11, Value Line's
6 projections suggest an average ROE of 11.0% for the Utility Group.
7 Q. What other proxy group do you consider in evaluating a ROE for Avista?
8 A. Consistent with underlying economic and regulatory standards, I also apply the
9 DCF model to a reference group of low-risk companies in the non-utility sector of the economy.
10 I refer to this group as the "Non-Utility Group." Like the expected earnings benchmark, this
11 analysis is not relied on to arrive at my recommended ROE range of reasonableness.
12 Q. What are the results of your DCF analysis for the Non-Utility Group?
13 A. The results of my DCF analysis for the Non-Utility Group are presented in
14 Schedule 12. As summarized in Table 8, after eliminating illogical values, application of the
15 constant growth DCF model resulted in the following cost of equity estimates:
59 Bluefield Water Works&Improvement Co. v.Pub. Serv. Comm'n,262 U.S.679(1923);Fed.Power Comm'n v.
Hope Natural Gas Co.,320 U.S. 591 (1944).
Thompson, Di 45
Avista Corporation

I TABLE 8
2 DCF RESULTS—NON-UTILITY GROUP
3
Growth Rate Average Midpoint
Value Line 10.5% 11.6%
IBES 10.8% 11.2%
Zacks 10.5% 11.3%
4 Q. Does this conclude your Direct Testimony?
5 A. Yes, it does.
Thompson, Di 46
Avista Corporation

DAVID J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY& GOVERNMENTAL AFFAIRS
AVISTA CORPORATION
P.O. BOX 3727
1411 EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220-3727
TELEPHONE: [phone]
[e-mail]
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION ) CASE NO. AVU-E-25-01
OF AVISTA CORPORATION FOR THE ) CASE NO. AVU-G-25-01
AUTHORITY TO INCREASE ITS RATES )
AND CHARGES FOR ELECTRIC AND )
NATURAL GAS SERVICE TO ELECTRIC ) EXHIBIT NO. 3
AND NATURAL GAS CUSTOMERS IN THE ) OF
STATE OF IDAHO ) JOHN S. THOMPSON, PHD
FOR AVISTA CORPORATION
(ELECTRIC AND NATURAL GAS)

Qualifications of John S. Thompson Schedule 1
Page 1 of 13
JOHNS. THOMPSON Ph.D.
[e-mail]
SUMMARY
John Thompson holds a Ph.D. in Economics and a B.S. in Accounting. He has been
consulting for approximately twelve years, including at the firms Thompson Advisory, LLC and
as an independent contractor to FINCAP, Inc. and EmployStats, in addition to his previous
employment at Econ One Research. He consults on economic and financial topics such as cost of
capital, utilities regulation, reasonable rates of return, and the application of generally accepted
financial models to the issue of return on equity for regulated utilities. In this regard, John has
performed quantitative analyses and prepared testimony in numerous proceedings before state and
federal regulatory agencies. Outside the regulated utility sector, John has also performed
numerous economic damages analyses in the context of business and employment disputes,as well
as antitrust matters. This work has involved various analyses across a broad range of industries
and labor markets, including the estimation of lost wages and lost business profits, present value
discounting, and the development of discount rates. John has also provided live deposition and
hearing testimony in various business and employment matters.
Previously, John taught for approximately seventeen years at the university level, most
recently in the McCombs School of Business and the Department of Economics at the University
of Texas,where he taught in the MBA and executive MBA programs. As part of this teaching, he
lectured on economic topics including revenue and cost structure, contribution margins, market
structure and competition,economic and accounting profits; financial topics such as present value,
discount rates and the cost of capital; and econometric topics such as sampling, OLS regression,
and econometric modeling. John also taught undergraduates and MBAs in the Krannert School of
Management at Purdue University.
EDUCATION and TRAINING
•Ph.D. in Economics,Auburn University, 1998. Specializations in Industrial Organization
and International Economics. Dissertation on empirical methods in antitrust economics.
• B.S. in Accounting, Kansas University, 1994.
• Certified Valuation Analyst,National Association of Certified Valuation Analysts, 2010.
CONSULTING
Thompson Advisory, LLC • Principal, 2024—present. Preparation of testimony concerning
business damages and return on equity for regulated utilities. Clients have included an
international electricity producer, and regulated North American gas and electric utilities.
Exhibit No. 3
Case Nos. AVU-E-25-01/AVU-G-25-01
J. Thompson, Avista
Schedule 1, Page 1 of 13

Qualifications of John S. Thompson Schedule 1
Page 2 of 13
FINC,4P, Inc. • Consultant, 2019—present. Preparation and support of direct and rebuttal
testimony concerning return on equity for regulated utilities in approximately 78 proceedings (as
of December 2024) before state regulatory commissions and the Federal Energy Regulatory
Commission. Clients have included regulated gas and electric utilities.
EmployStats • Consultant,2015—present. Preparation and support of direct and rebuttal testimony
in approximately 42 proceedings (as of December 2024), focusing primarily on damages analyses
related to business disputes such as breach of contract, covenants not to compete, and lost earnings
capacity from employment disputes. Has also assisted with impact studies and class certification
cases. Industries have included apartment complexes, real estate development, oilfield services,
medical devices and physician services.
Corporate Sciences • Senior Manager and Economist, 2005-2006. Worked with managing
principal to analyze damages and value privately held businesses.
Econ One Research • Economist, 2002-2005. Worked with managing principal, senior
economists and analysts to analyze damages from antitrust and intellectual property disputes.
TEACHING
University of Texas • Lecturer (finance and economics), 2015-2020. Taught microeconomic
theory, microeconomic theory for business, MBA microeconomics and introduction to
microeconomics.
Purdue University • Continuous Term Lecturer (economics), 2012-2014. Taught intermediate
microeconomics, MBA macroeconomics, principles of macroeconomics and game theory. Area
Coordinator for principles of macroeconomics. Visiting Assistant Professor (economics), 2009-
2010. Taught labor, intermediate and advanced microeconomics.
Fu Jen Catholic University, ONPS International Summer School • Instructor(economics), 2013.
Taught principles of microeconomics and macroeconomics, and econometrics.
Kansas State University • Visiting Assistant Professor (economics), 2010-2011. Taught
intermediate microeconomics and principles of macroeconomics.Observed,evaluated and advised
teaching GTAs.
University College of the Cayman Islands • Director of Graduate Studies and Executive Training
(department), 2007-2008. Worked with the President and Dean to manage the inception of a new
academic department and profit center. Chair of Business Studies (department), 2006-2007.
Managed staff of twelve faculty members, responsible for hiring, academic scheduling, and
strategic planning. Associate Professor (economics), 2006-2008. Taught numerous economics
courses including labor, econometrics, international, and managerial economics.
Louisiana State University • Visiting Assistant Professor (economics), 1999-2002. Taught
numerous economics courses including intermediate microeconomics, industrial organization and
Exhibit No. 3
Case Nos. AVU-E-25-01/AVU-G-25-01
J. Thompson, Avista
Schedule 1, Page 2 of 13

Qualifications of John S. Thompson Schedule 1
Page 3 of 13
managerial (MBA) economics. Instructor (economics), 1997-1999. Taught survey of economics
and principles of economics.
TEACHING AWARDS and HONORS
Distinguished Teacher, Purdue University (Krannert School of Management), 2012, 2013
and 2014.
Excellence in Teaching, Louisiana State University(College Freshmen), 1999.
Instructor of the Year, Louisiana State University(College of Business), 1998.
Graduate Teaching Assistant of the Year, Auburn University (Department of Economics),
1996.
RESEARCH
"Measures of Central Tendency for Cost of Equity Estimates," (co-authored), filed with
the Federal Energy Regulatory Commission(2019).
"After the fall: Stock price movements and the deterrent effect of antitrust enforcement,"
(co-authored),Review oflndustrial Organization, vol. 19, no. 3 (2001).
"Joint supply and modern economic theory: An historical perspective," (co-authored),
History of Political Economy, vol. 33, no. 3 (2001).
"A note on multiple choice exams,with respect to students'risk preference and confidence,
(co-authored),Assessment&Evaluation in Higher Education, vol. 26, no. 3 (2001).
Exhibit No. 3
Case Nos. AVU-E-25-01/AVU-G-25-01
J. Thompson, Avista
Schedule 1, Page 3 of 13

Qualifications of John S. Thompson Schedule 1
Page 4 of 13
Utility Regulatory Cases
Utility Case Agency Docket Date Nature of Case
Appalachian Power West Virginia 18-0646-E-42T Jun-18 Rate of Return on
Co. PSC Oct-18 Equity
Baltimore Gas & Maryland PSC 9406 Jun-18 Rate of Return on
Electric Co. Oct-18 Equity
Midwest FERC EL14-12 Feb-19 Rate of Return on
Independent System Apr-19 Equity
Operator, et al.
Avista Corp. Washington UE-190334 UG- Apr-19 Rate of Return on
UTC 190335 Equity
NorthWestern FERC ER19-1756 May-19 Rate of Return on
Energy Equity
Avista Corp. Idaho PUC AVU-E-19-04 Jun-19 Rate of Return on
Equity
Florida Power& FERC ER19-2585-000 Aug-19 Rate of Return on
Light Co. Equity
Jersey Central Power FERC ER20-227 Oct-19 Rate of Return on
& Light Co. Equity
New Mexico Gas New Mexico 19-00317-UT Dec-19 Rate of Return on
Co. PRC Jul-20 Equity
DATC Path 15, LLC FERC ER20-1006 Feb-20 Rate of Return on
Equity
Dayton Power and FERC ER20-1150 Mar-20 Rate of Return on
Light Co. Equity
Baltimore Gas & Maryland PSC 9645 Mar-20 Sep- Rate of Return on
Electric Co. 20 Oct-20 Equity
Black Hills Nebraska Nebraska PSC NG-109 Jun-20 Rate of Return on
Gas, Inc. Oct-20 Equity
Ohio Power Co. Ohio PUC 20-585-EL-AIR Jun-20 Rate of Return on
Jan-21 Equity
Pacific Gas & FERC ER20-2878 Sep-20 Rate of Return on
Electric Co. Equity
Black Hills Colorado Colorado PUC 20AL-038OG Sep-20 Rate of Return on
Gas, Inc. Equity
Exhibit No. 3
Case Nos. AVU-E-25-01/AVU-G-25-01
J. Thompson, Avista
Schedule 1, Page 4 of 13

Qualifications of John S. Thompson Schedule 1
Page 5 of 13
Potomac Electric Co. Maryland PSC 9655 Oct-20 Rate of Return on
Mar-21 Equity
Avista Corp. Washington UE-200900 UG- Oct-20 Rate of Return on
UTC 200901 May-21 Equity
Kentucky Utilities Kentucky PSC 2020-00349 Nov-20 Rate of Return on
Co. Apr-21 Equity
Louisville Gas & Kentucky PSC 2020-00350 Nov-20 Rate of Return on
Electric Co. Apr-21 Equity
Dayton Power and Ohio PUC 20-1651-EL-AIR Dec-20 Rate of Return on
Light Co. PSC Aug-21 Equity
Avista Corp. Idaho PUC AVU-E-21-01; Jan-21 Rate of Return on
AVU-G-21-01 Equity
Public Service Co. of Oklahoma CC 202100055 Apr-21 Rate of Return on
Oklahoma Aug-21 Equity
Black Hills/Kansas Kansas SCC 21-BHCG-418- May-21 Rate of Return on
Gas Utility Co. LLC RTS Oct-21 Equity
NorthWestern Montana PSC D2021.02. 022 May-21 Rate of Return on
Energy Equity
Black Hills Colorado Colorado PUC 21AL-0236G Jun-21 Rate of Return on
Gas, Inc. Equity
Avista Corp. FERC ER21-2198 Jun-21 Rate of Return on
Equity
Black Hills/Iowa Gas Iowa UB RPU-2021-0002 Jun-21 Rate of Return on
Utility Co., LLC Oct-21 Equity
Kentucky Utilities Virginia SCC PUR-2021- Aug-21 Rate of Return on
Company d/b/a Old 00171 Mar-22 Equity
Dominion Power Co.
Delmarva Power Co. Maryland PSC 9670 Aug-21 Rate of Return on
Dec-21 Equity
El Paso Electric Co. FERC ER22-282 Oct-21 Rate of Return on
Equity
Portland General FERC ER22-233 Oct-21 Rate of Return on
Electric Co. Equity
Avista Corp. Oregon PUC UG-433 Oct-21 Rate of Return on
Equity
Exhibit No. 3
Case Nos. AVU-E-25-01/AVU-G-25-01
J. Thompson, Avista
Schedule 1, Page 5 of 13

Qualifications of John S. Thompson Schedule 1
Page 6 of 13
Ohio Power Co. Ohio PUC 21-1166-EL- Nov-21 Application of
UNC Significantly
Excessive
Earnings Test
Black Hills Energy Arkansas PSC 21-097-U Dec-21 Jun- Rate of Return on
Arkansas, Inc. 22 Aug-22 Equity
Avista Corp. Washington UE-220053 UG- Jan-22 Rate of Return on
UTC 220054 Aug-22 Equity
Rockland Electric FERC ER22-910 Jan-22 Rate of Return on
Co. Equity
Niagara Mohawk FERC ER22-1201 Mar-22 Rate of Return on
Power Co. Equity
Delmarva Power Co. Maryland PSC 9681 May-22 Rate of Return on
Sep-22 Equity
Cheyenne Light, Wyoming PSC 17072 Jun-22 Rate of Return on
Fuel and Power Co. Equity
Black Hills Colorado FERC ER22-2185 Jun-22 Rate of Return on
Electric, LLC Equity
Alaska Electric Light RC of Alaska U-22-078 Jul-22 Rate of Return on
and Power Co. Equity
NorthWestern Montana PSC D2022.07. 078 Aug-22 Rate of Return on
Energy Equity
Westfield Gas Corp. Indiana URC Cause No. 45761 Aug-22 Rate of Return on
d/b/a Citizens Gas of Jan-23 Equity
Westfield
Rocky Mountain Colorado PUC 22AL-0426G Oct-22 Rate of Return on
Natural Gas LLC Equity
Public Service Co. of Oklahoma CC PUD 2022- Nov-22 Rate of Return on
Oklahoma 000093 Equity
Public Service Co. of New Mexico 22-00270-UT Dec-22 Rate of Return on
New Mexico PRC Equity
Avista Corp. Idaho PUC AVU-E-23-01; Jan-23 Rate of Return on
AVU-G-23-01 Equity
Ohio Power Co. Ohio PUC 23-23-EL-SSO Jan-23 Rate of Return on
Equity
Upper Peninsula Michigan PSC U-21286 Oct-22 Rate of Return on
Power Company Feb-23 Equity
Exhibit No. 3
Case Nos. AVU-E-25-01/AVU-G-25-01
J. Thompson, Avista
Schedule 1, Page 6 of 13

Qualifications of John S. Thompson Schedule 1
Page 7 of 13
Baltimore Gas & Maryland PSC 9692 Feb-23 Rate of Return on
Electric Co. Equity
Mountaineer Gas West Virginia 23-0280-G-42T Feb-23 Rate of Return on
PSC Equity
Avista Corp. Oregon PUC UG-461 Feb-23 Rate of Return on
Equity
Appalachian Power Virginia SCC PUR-2023- Mar-23 Rate of Return on
Co. 00001 Equity
Potomac Electric Co. DC PSC 1176 Apr-23 Rate of Return on
Equity
Black Hills Colorado Colorado PUC 23AL-0231G May-23 Rate of Return on
Gas, Inc. Equity
Black Hills Wyoming PSC 30026-78-GR-23 May-23 Rate of Return on
Wyoming Gas, Inc. Equity
Potomac Electric Co. Maryland PSC 9702 May-23 Rate of Return on
Equity
Idaho Power Co. Idaho PUC IPC-E-23-11 Jun-23 Rate of Return on
Equity
Consolidated Edison FERC ER23-2212 Jun-23 Rate of Return on
Co. of New York Equity
NorthWestern South Dakota EL23-016 Jun-23 Rate of Return on
Energy PUC Equity
Kentucky Power Co. Kentucky PSC 2023-00159 Jun-23 Rate of Return on
Equity
Indianapolis Power Indiana URC Cause No. 45911 Jun-23 Rate of Return on
&Light Co. Nov-23 Equity
Entergy Louisiana, Louisiana PSC U-36959 Aug-23 Rate of Return on
LLC Equity
Florida Power& FERC ER24-268 Oct-23 Rate of Return on
Light Co. Equity
Viridon Mid-Atlantic FERC ER24-506 Nov-23 Rate of Return on
LLC Equity
Avista Corp. Washington UE-240006 UG- Jan-24 Rate of Return on
UTC 240007 Equity
Public Service Co. of Oklahoma CC PUD 2023- Jan-24 Rate of Return on
Oklahoma 000086 Equity
Upper Peninsula Michigan PSC N/A Feb-24 Rate of Return on
Power Company Equity
Exhibit No. 3
Case Nos. AVU-E-25-01/AVU-G-25-01
J. Thompson, Avista
Schedule 1, Page 7 of 13

Qualifications of John S. Thompson Schedule 1
Page 8 of 13
Appalachian Power PSCWV N/A Feb.-24 Rate of Return on
Co. Equity
Duke Energy Florida PSC 20240025-EI Apr.-24 Rate of Return on
Florida, LLC Equity
Duke Energy Indiana URC 46038 Apr.-24 Rate of Return on
Indiana, LLC Equity
Kentucky Utilities PUR-2024- Apr.-24 Rate of Return on
Company d/b/a Old Virginia SCC 00052 Equity
Dominion Power
Co.
Black Hills/Iowa Gas Iowa UB RPU-2024-0001 Apr.-24 Rate of Return on
Utility Co., LLC Equity
Black Hills Colorado Colorado PUC 24AL-0275E Jun-24 Rate of Return on
Electric, LLC Equity
Dayton Power& Ohio PUC N/A Aug.-24 Rate of Return on
Light dba AES Ohio Equity
Cross Texas Texas PUC N/A Aug.-24 Rate of Return on
Transmission Equity
Rockpand Electric FERC N/A Aug.-24 Rate of Return on
Co. Equity
Avista Corp. Oregon PUC UG-519 Sep.-24 Rate of Return on
Equity
Exhibit No. 3
Case Nos. AVU-E-25-01/AVU-G-25-01
J. Thompson, Avista
Schedule 1, Page 8 of 13

Qualifications of John S. Thompson Schedule 1
Page 9 of 13
Business and Employment Cases
Case State Docket Date Nature of Case
District Court of
Schlumberger Tech v. Fort Bend County, 14-DCV- Apr.-15 Business
Parker Texas, 268th 218252 Damages
Judicial District
Texas District
Court of Tarrant
Employment
Mark Virant v. Encana Oil County, Texas, 153-266960-13 Jun.-15
153rd Judicial Damages
District
Brenda Theriot v. Health & US Court of Personal Injury
Human Services Federal Claims, 13-778V Jun.-15 Damages
Washington, D.C.
Superior Court of
37-2011-
the State of Product Liability
Lucas v. Breg California, County 00092818-CU- Mar.-16 Damages
of San Diego AT-CTL
Texas District
Kimberly Trimmer-Davis v. Court of Harris Employment
County, Texas, 2010-11410 May-16
COH 295th Judicial Damages
District
US District Court,
Western District of 5:15-CV- Employment
Nudelman MD v. Volk MD Sep.-16 Damages, Real
Texas, San Antonio 00923-FB
Estate Valuation
Division
US District Court,
Rowell v. Attorney General Western District of 1:14-CV- Nov.-17 Economic
of the State of Texas, et. al. Texas, Austin 00190-LY Damages
Division
US District Court,
Huntsman v. Southwest Northern District of 3:17-CV- Mar.-18 Employment
Airlines California, San 03972-JD Damages
Francisco Division
Texas District
Court of Travis D-1-GN-18- Employment
Mulcahy v. Cielo Nov.-18 Damages, Real
County, Texas, 003429
Estate Valuation
250th Judicial
Exhibit No. 3
Case Nos. AVU-E-25-01/AVU-G-25-01
J. Thompson, Avista
Schedule 1, Page 9 of 13

Qualifications of John S. Thompson Schedule 1
Page 10 of 13
District
US District Court,
Business
C2 Education v. Lee Northern District of 3:18-02920-SI Jul.-19
California Damages
Texas District
Gallagher v. Webster and Court of Travis D-1-GN-20- Business
Epic Insurance Brokers County, Texas, 004823 Jul.-21 Damages
345th Judicial
District
Pappas Harris Capital v. Texas District
Advance Hydrocarbon Court, 295th 202010778 Feb.-22 Business
Corp. et al.
District Court, Valuation
Harris County
State of Texas and Texas US District Court,
Economic Impact
HSC v. Chiquita Brooks- Eastern District of 6:21-CV-00191 Feb.-22 Study
Lasure et al. Texas, Tyler
US District Court Wrongful
Townsley et al. v. IBM 1:20-CV-
Co Western District of 00969-LY Mar.-22 Termination
Texas, Austin Damages
Georgann Oglesby v. US District Court, Personal Injury
Medtronic, Inc. Western District of 5:20-CV-1267 Jun.-22 Damages
Texas, San Antonio
Beadles,Newman& Lawler Texas District
v. Newman and James Court, 96th District 096-283896-16 Jan.-23 Business
Court, Tarrant Valuation
Lawler et al. County
Xoticas Rio Grande Valley US District Court, Business
v. City of Pharr, Texas et al. Southern District of 5:21-CV-00120 Jan.-23 Damages
Texas, Laredo
Reloj v. Government US District Court, �21 CV 1751 L
Employees Insurance Southern District of AGS May-23 Wage and Hour
Company Inc. California
Exhibit No. 3
Case Nos. AVU-E-25-01/AVU-G-25-01
J. Thompson, Avista
Schedule 1, Page 10 of 13

Qualifications of John S. Thompson Schedule 1
Page 11 of 13
Texas District
Clark v. Freeport LNG Court, 295th Wrongful
2022-25093 Jun.-23 Termination
Development, L.P. District Court,
Harris County Damages
Mullings v. Sam Houston
US District Court, Wrongful
State University Southern District of 4:22cvl366 Jun.-23 Termination
Texas, Houston Damages
Stapleton v. Prince
US District Court, 22-CV- Wrongful
Carpentry, Inc. Eastern District of 04044(JS)(JM Jun.-23 Termination
New York W) Damages
Texas District
Gomez v. Willacy County Jun.-23
Court District 2022-CV- Wrongful Death
Court, Willacy 0092-A Damages
County
Loftin v. Credit Human
US District Court, Wrongful
FCU Western District of 5:22-cv-1343 Jun.-23 Termination
Texas, San Antonio Damages
Wrongful
Moot v. LinkedIn JAMS Arbitration N/A Aug.-23 Termination
Damages
US District Court, Wrongful
Matthew v. TCPA Southern District of N/A Aug.-23 Termination
New York Damages
US District Court,
Business
Valentin v. Town of Natick District of N/A Aug.-23
Massachusetts Damages
Harris v. Ascend
US District Court, Wrongful
Performance Materials
Southern District of 3:22-cv-178 Aug.-23 Termination
Texas, Galveston Damages
US Bankruptcy
Hart v TRIARC Systems Court,Northern 23-41996-mxm Aug.-23 Business
District of Texas, Damages
Fort Worth
US District Court, Wrongful
1:22-cv-01284-
Contreras v. RBFCU Western District of LY Sep.-23 Termination
Texas Damages
District Court, 98th
Casis Village Shell v. Judicial District, D-1-GN-23- Sep.-23 Business
Malone et al. Travis County, 001481 Damages
Texas
Exhibit No. 3
Case Nos. AVU-E-25-01/AVU-G-25-01
J. Thompson, Avista
Schedule 1, Page 11 of 13

Qualifications of John S. Thompson Schedule 1
Page 12 of 13
American Wrongful
Mowen v. USAA Arbitration 01-23-0000-8763 Sep.-23 Termination
Association Damages
FBCC CityPoint v. City of US District Court, Business
Austin et al. Western District of 1:22-cv-01272 Sep.-23 Damages
Texas, Austin
Washington v. Raytheon
US District Court, Wrongful
Company Eastern District of 4:22-cv-514 Sep.-23 Termination
Texas, Sherman Damages
Robert Fisherkeller v BASF US District Court, Wrongful
Northern District of N/A Jan.-24 Termination
Corp. Texas, Fort Worth Damages
Nickel Bridge Capital v US District Court, Business
Hendrickson Southern District of 4:23-cv-1047 Jan.-24 Damages
Texas, Houston
US District Court, Wrongful
Connolly v BioMarin Southern District of N/A Jan.-24 Termination
Texas, Houston Damages
US District Court, Wrongful
Guerra v Castillo Southern District of 7:20-CV-0401 Feb.-24 Termination
Texas, McAllen Damages
Texas District
Craig Box v Get Fresh Court, 295th Personal Injury
Produce District Court, 2023-27667 Mar.-24 Damages
Harris County
American Wrongful
01-23-0001-
Graham v USAA Arbitration 8901 Mar.-24 Termination
Association Damages
American Wrongful
01-23-0001-
Klinkenberg v USAA Arbitration 6872 Mar.-24 Termination
Association Damages
American Wrongful
Mow v USAA Arbitration 01-23-0001-7931 Mar.-24 Termination
Association Damages
Texas District
Court 368th Personal Injury
Johnson v Duecker 23-0405-C368 Apr.-24
Judicial District, Damages
Williamson County
Ariza and Streck v Amegy American Wrongful
Bank Arbitration N/A Apr.-24 Termination
Exhibit No. 3
Case Nos. AVU-E-25-01/AVU-G-25-01
J. Thompson, Avista
Schedule 1, Page 12 of 13

Qualifications of John S. Thompson Schedule 1
Page 13 of 13
Association Damages
Texas District
Lennar Homes v Black Court, 433rd Business
Castle Judicial District, C2022-1153D Apr.-24 Damages
Comal County
Texas District
Amarillo UA v Dallas Court, 181 t Business
111542-B-CV Jun.-24
Commercial Builders Judicial District, Damages
Potter County
Texas District
Court 295th Personal Injury
Lobaugh v. HYTORC 2023-31758 Jun.-24
District Court, Damages
Harris County
US District Court,
Wrongful
Western District of 1:17-cv-1194
Goldstein v Forcepoint Aug.-24 Termination
Texas, Austin 1:23-cv-1484
Division Damages
Novum v Orazul International Court 28608/PDP Sep.-24 Business
of Arbitration Damages
Exhibit No. 3
Case Nos. AVU-E-25-01/AVU-G-25-01
J. Thompson, Avista
Schedule 1, Page 13 of 13

I. DESCRIPTION OF QUANTITATIVE ANALYSES
1 Q. What is the purpose of this schedule?
2 A. Schedule 2 presents capital market estimates of the cost of equity for the
3 jurisdictional electric and natural gas utility operations of Avista Corp. ("Avista" or "the
4 Company"). First, I will briefly summarize the concept of the cost of equity, along with the risk-
5 return tradeoff principle fundamental to capital markets. Next, I describe my applications of the
6 Discounted Cash Flow ("DCF") model, the Capital Asset Pricing Model ("CAPM"), and a risk
7 premium analysis based on allowed equity returns for electric utilities. This exhibit also presents
8 two benchmarks for comparison with my utility quantitative analyses, including reference to
9 expected rates of return for electric utilities, and a DCF model applied to a group of low risk non-
10 utility firms.
11 A. Overview
12 Q. What is ROE, and how does it relate to utilities?
13 A. The ROE is the cost to a firm of attracting and retaining common equity investment
14 in that firm. Like most firms, utilities require common equity investment in order to partially
15 finance their assets.' This investment is necessary to finance the asset base the utility requires in
16 order to provide utility service. A given utility competes with other firms for equity capital in
17 capital markets, and these firms make up the demand side of these markets. Investors commit
18 capital in capital markets only if they expect to earn a return on their investment commensurate
19 with returns available from alternative investments with comparable risks,and such investors make
' It is also common for firms to partially finance their assets through debt. Utilities are no exception, as almost all
utilities finance their assets through a blend of various debt and equity sources.
Exhibit No.3
1 Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2, Page 1 of 36

I up the supply side of these markets. In well-functioning capital markets, the ROE is akin to a
2 market clearing price, as it ensures that the supply of equity capital is equal to the demand, and
3 that there is no surplus or shortage of equity capital.
4 Q. Please characterize the cost structure of a typical utility.
5 A. Utilities are generally characterized by very high fixed costs coming from an
6 installed base of assets such as the generation, transmission and distribution infrastructure Avista
7 operates to supply electricity and natural gas from upstream sources to the utility's
8 customers. Compared to these high fixed costs, utilities' marginal costs tend to be relatively
9 low.2 In standard economic theory, high fixed costs coupled with low marginal costs creates
10 "economies of scale" in which the average cost to a firm tends to fall over a large range of
11 output. If the average cost falls over the entire output that the market demands, monopolies will
12 naturally form because it will always be more efficient for a single firm to serve the entire market
13 as compared to two or more firms. If they are not regulated, such "natural monopolies" would
14 tend to price their output significantly higher than what would occur in an otherwise competitive
15 market, creating monopoly profits for the natural monopoly and a"deadweight"efficiency loss for
16 the market as a whole.
17 Q. Generally speaking, how are utilities regulated?
18 A. Utilities are regulated such that they ultimately are required to price their utility
19 service based on their cost of service, earning a return that is competitive with other similar risk
20 enterprises. Because direct price regulation is unfeasible, utility regulation allows for a"just and
21 reasonable" (i.e., competitive) ROE to attract capital for utility investment. Under accepted
2 The utilities'marginal costs are their per-unit cost of delivering electricity or natural gas to their customers.
Exhibit No.3
2 Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2, Page 2 of 36

I regulatory standards, utilities are allowed to price their utility service such that they recover the
2 cost to serve their customers and have the opportunity to earn competitive ROES, allowing for
3 differences in risk.
4 Q. What fundamental economic principle underlies the cost of equity concept?
5 A. The fundamental economic principle underlying the cost of equity concept is the
6 notion that investors are risk averse. In capital markets where relatively risk-free assets are
7 available(e.g.,U.S.Treasury securities),investors can be induced to hold riskier assets only if they
8 are offered a premium, or additional return, above the rate of return on a risk-free asset. Because
9 all assets in capital markets compete with each other for investor funds,riskier assets must yield a
10 higher expected rate of return than safer assets to induce investors to invest and hold them.
11 Given this risk-return tradeoff,the required rate of return(k)from an asset(i)can generally
12 be expressed as:
13 ki = Rf+RPM
14 where: Rf = Risk-free rate of return, and
15 RPZ = Risk premium required to hold riskier asset i.
16 Thus, the required rate of return for a particular asset at any time is a function of. (1)the yield on
17 risk-free assets, and (2) the asset's relative risk, with investors demanding correspondingly larger
18 risk premiums for bearing greater risk.
19 Q. Is there evidence that the risk-return tradeoff principle actually operates in
20 capital markets?
21 A. Yes. The risk-return tradeoff can be readily documented in segments of the capital
22 markets where required rates of return can be directly inferred from market data and where
23 generally accepted measures of risk exist. Bond yields, for example, reflect investors' expected
24 rates of return, and bond ratings measure the risk of individual bond issues. Comparing the
Exhibit No.3
3 Case Nos.AW-E-25-01/AW-G-25-01
J.Thompson,Avista
Schedule 2, Page 3 of 36

I observed yields on government securities, which are considered free of default risk, to the yields
2 on bonds of various rating categories demonstrates that the risk-return tradeoff does, in fact, exist.
3 Q. Does the risk-return tradeoff observed with fixed income securities extend to
4 common stocks and other assets?
5 A. It is widely accepted that the risk-return tradeoff evidenced with long-term debt
6 extends to all assets. Documenting the risk-return tradeoff for assets other than fixed income
7 securities, however, is complicated by two factors. First, there is no standard measure of risk
8 applicable to all assets. Second, for most assets, including common stock, the required rates of
9 return cannot be directly observed. Yet, there is every reason to believe that investors exhibit risk
10 aversion in deciding whether or not to hold common stocks and other assets,just as when choosing
11 among fixed-income securities.
12 Q. Is this risk-return tradeoff limited to differences between firms?
13 A. No. The risk-return tradeoff principle applies not only to investments in different
14 firms, but also to different securities issued by the same firm. The securities issued by a utility
15 vary considerably in risk because they have different characteristics and priorities. As noted
16 earlier, long-term debt is senior among all capital in its claim on a utility's net revenues and is,
17 therefore, the least risky. The last investors in line are common shareholders: they receive only
18 the net revenues, if any,remaining after all other claimants have been paid. As a result,the rate of
19 return that investors require from a utility's common stock, the most junior and riskiest of its
20 securities,must be considerably higher than the yield offered by the utility's senior,long-term debt.
Exhibit No.3
4 Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2, Page 4 of 36

I Q. What is the foundation for a just and reasonable ROE?
2 A. A just and reasonable ROE is integral in meeting sound regulatory economics and
3 the standards set forth by the U.S. Supreme Court in two landmark cases,Bluefield and Hope. The
4 Bluefield case set the standard against which just and reasonable rates are measured:
5 A public utility is entitled to such rates as will permit it to earn a return on the value
6 of the property which it employs for the convenience of the public equal to that
7 generally being made at the same time and in the same general part of the country
8 on investments in other business undertakings which are attended by corresponding
9 risks and uncertainties.... The return should be reasonable, sufficient to assure
10 confidence in the financial soundness of the utility, and should be adequate, under
11 efficient and economical management,to maintain and support its credit and enable
12 it to raise money necessary for the proper discharge of its public duties.3
13 The Hope case expanded on the guidelines as to a reasonable ROE, reemphasizing the findings in
14 Bluefield and establishing that the rate-setting process must produce an end-result that allows the
15 utility a reasonable opportunity to cover its capital costs. The Court stated:
16 From the investor or company point of view it is important that there be enough
17 revenue not only for operating expenses but also for the capital costs of the
18 business. These include service on the debt and dividends on the stock.... By that
19 standard, the return to the equity owner should be commensurate with returns on
20 investments in other enterprises having corresponding risks. That return,moreover,
21 should be sufficient to assure confidence in the financial integrity of the enterprise,
22 so as to maintain credit and attract capital.4
23 In summary, the Supreme Court's findings in Bluefield and Hope established that a just and
24 reasonable ROE must be sufficient to 1) fairly compensate the utility's investors, 2) enable the
25 utility to offer a return adequate to attract new capital on reasonable terms, and 3) maintain the
26 utility's financial integrity. These standards should allow the utility to fulfill its obligation to
27 provide reliable service while meeting the needs of customers through necessary system
'Bluefield Water Works&Improvement Co. v.Pub.Serv. Comm'n,262 U.S. 679(1923).
'Fed.Power Comm'n v.Hope Natural Gas Co.,320 U.S. 591 (1944).
Exhibit No.3
5 Case Nos.AW-E-25-01/AW-G-25-01
J.Thompson,Avista
Schedule 2, Page 5 of 36

I replacement and expansion, but the Supreme Court's requirements can only be met if the utility
2 has a reasonable opportunity to actually earn its allowed ROE.
3 Q. How does a utility's authorized ROE help to maintain regulatory standards?
4 A. The authorized ROE acts like a price signal in capital markets, and it informs
5 investors about the return they may receive if they allocate equity capital to a particular investment,
6 allowing them to make informed judgements about how best to allocate their capital. Investors
7 will commit money to a particular investment only if they expect it to produce a return at least
8 commensurate with those from other investments with comparable risks. To maintain regulatory
9 standards,the ROE must be sufficient to compensate common equity investors for the use of their
10 capital and support the utility's financial integrity and ongoing ability to finance the plant and
11 equipment necessary to provide utility service.
12 Q. Is it widely accepted that a utility's ability to attract capital must be considered
13 in establishing a fair rate of return?
14 A. Yes. This is a fundamental standard underlying the regulation of public utilities.
15 The Supreme Court's Bluefield and Hope decisions established that a regulated utility's authorized
16 returns on capital must be sufficient to assure investors' confidence and that, if the utility is
17 efficient and prudent on a prospective basis, it will be able to maintain and support its credit and
18 have the opportunity to raise necessary capital.'
'Bluefield Water Works&Improvement Co. v.Pub.Serv. Comm'n,262 U.S. 679(1923)(`Bluefield");FPC v.
Hope Natural Gas Co.,320 U.S. 591 (1944)("Hope").
Exhibit No.3
6 Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2, Page 6 of 36

I Q. What are the challenges in determining a just and reasonable ROE for a
2 regulated enterprise?
3 A. The actual return required by common equity investors is unobservable. Different
4 methodologies have been developed to estimate investors'expected and required return on capital,
5 but all such methodologies are merely theoretical tools and generally produce a range of estimates,
6 based on different assumptions and inputs. The DCF method, which is frequently referenced and
7 relied on by regulators at least in part, is only one theoretical approach to gain insight into the
8 return investors require; there are numerous other methodologies for estimating the cost of capital
9 and the ranges produced by the different approaches can vary widely.
10 Q. Do Bluefield and Hope require a particular method to be followed in order to
11 establish a just and reasonable ROE?
12 A. No. While the Bluefield and Hope decisions did not establish a particular method
13 to be followed in determining the allowed ROE (or in fixing rates),6 these and subsequent cases
14 enshrined the importance of an end result that meets the opportunity cost standard of finance.
15 Under this doctrine,the required return is established by investors in the capital markets based on
16 expected returns available from other comparable risk investments. Coupled with modern
17 financial theory, which has led to the development of formal risk-return models (e.g., DCF and
18 CAPM),practical application of the Bluefield and Hope standards involves the independent, case-
19 by-case consideration of a firm's risk along with current capital market data in order to evaluate a
20 ROE that will produce a balanced and fair end result for investors and customers.
6 Id. at 602(finding,"the Commission was not bound to the use of any single formula or combination of formulae in
determining rates."and,"[I]t is not theory but the impact of the rate order which counts.")
Exhibit No.3
7 Case Nos.AW-E-25-01/AW-G-25-01
J.Thompson,Avista
Schedule 2, Page 7 of 36

I Q. How do you approach the task of evaluating a just and reasonable ROE for
2 Avista in the context of Bluefield and Hope?
3 A. The goal is to generate the best estimate of Avista's ROE in today's capital markets.
4 My testimony presents an analysis of investors' expectations and requirements using commonly
5 referenced and theoretically sound financial models, reasonable assumptions about rational
6 investor behavior, and data inputs that are consistent with the assumptions underlying financial
7 models that I utilize, all within a consideration of broader capital market conditions and recent
8 economic trends. Each of the approaches I use to estimate Avista's ROE has its own strengths and
9 weaknesses, and all involve some degree of judgment. None of the models I use are inherently
10 superior to any of the other models, and all of them are accepted methodologies for estimating the
11 cost of equity in today's capital markets.
12 Q. Is it customary to consider the results of multiple approaches when evaluating
13 a just and reasonable ROE?
14 A. Yes. In my experience, financial analysts and regulators routinely consider the
15 results of alternative approaches in determining allowed ROES. It is widely recognized that no
16 single method can be regarded as failsafe; with all approaches having advantages and
17 shortcomings. As FERC has noted, "[t]he determination of rate of return on equity starts from the
18 premise that there is no single approach or methodology for determining the correct rate of
19 return. ,7 Similarly, a publication of the Society of Utility and Regulatory Financial Analysts
20 concluded that:
21 Each model requires the exercise of judgment as to the reasonableness of the
22 underlying assumptions of the methodology and on the reasonableness of the
23 proxies used to validate the theory. Each model has its own way of examining
24 investor behavior, its own premises, and its own set of simplifications of reality.
7 Northwest Pipeline Co.,Opinion No.396-C, 81 FERC¶61,036 at 4(1997).
Exhibit No.3
8 Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2, Page 8 of 36

I Each method proceeds from different fundamental premises, most of which cannot
2 be validated empirically. Investors clearly do not subscribe to any singular method,
3 nor does the stock price reflect the application of any one single method by
4 investors.$
5 As this treatise succinctly observed, "no single model is so inherently precise that it can be relied
6 on solely to the exclusion of other theoretically sound models."9 Similarly, New Regulatory
7 Finance concluded that:
8 There is no single model that conclusively determines or estimates the expected
9 return for an individual firm. Each methodology possesses its own way of
10 examining investor behavior, its own premises, and its own set of simplifications
11 of reality. Each method proceeds from different fundamental premises that cannot
12 be validated empirically. Investors do not necessarily subscribe to any one method,
13 nor does the stock price reflect the application of any one single method by the
14 price-setting investor. There is no monopoly as to which method is used by
15 investors. In the absence of any hard evidence as to which method outdoes the
16 other, all relevant evidence should be used and weighted equally, in order to
17 minimize judgmental error, measurement error, and conceptual infirmities.10
18 Meanwhile, the Maryland Public Service Commission echoed this sentiment, stating "We have
19 repeatedly stated that we are unwilling to rule that there can be only one correct method for
20 calculating ROE."11
21 The evidence presented above supports consideration of results from multiple ROE
22 models. With regard to the DCF model in particular,state and federal commissions have expressed
23 reluctance to place disproportionate weight on DCF results. For example, the Indiana Utility
24 Regulatory Commission recognized this principle:
25 There are three principal reasons for our unwillingness to place a great deal of
26 weight on the results of any DCF analysis. One is. . . the failure of the DCF model
27 to conform to reality. The second is the undeniable fact that rarely if ever do two
28 expert witnesses agree on the terms of a DCF equation for the same utility — for
29 example, as we shall see in more detail below, projections of future dividend cash
$David C.Parcell, The Cost of Capital—A Practitioner's Guide, Society of Utility and Regulatory Financial
Analysts(2010)at 84.
9 Id.
i0 Roger A.Morin,New Regulatory Finance,Pub.Util.Reports,Inc. (2006)at 429.
ii Maryland Public Service Commission Order 88033,Case No.9424(ML No. 16 212676).
Exhibit No.3
9 Case Nos.AW-E-25-01/AW-G-25-01
J.Thompson,Avista
Schedule 2, Page 9 of 36

I flow and anticipated price appreciation of the stock can vary widely. And,the third
2 reason is that the unadjusted DCF result is almost always well below what any
3 informed financial analysis would regard as defensible, and therefore require an
4 upward adjustment based largely on the expert witness's judgment. In these
5 circumstances, we find it difficult to regard the results of a DCF computation as
6 any more than suggestive.12
7 More recently, FERC recognized the potential for any application of the DCF model to produce
8 unreliable results.13 Thus, while the DCF model is a recognized approach to estimating the ROE,
9 it is not without shortcomings and does not otherwise eliminate the need to ensure that the "end
10 result"is fair.
1 1 As this discussion indicates, consideration of the results of alternative approaches reduces
12 the potential for error associated with any single quantitative method. Just as investors inform
13 their decisions using a variety of methodologies, my evaluation of a fair ROE for the Company
14 considered the results of multiple financial models.
15 Q. What does the above discussion imply with respect to estimating the ROE for
16 a utility?
17 A. Although the ROE cannot be observed directly, it is a function of the returns
18 available from other investment alternatives and the risks to which the equity capital is exposed.
19 Because it is not readily observable,the ROE for a particular utility must be estimated by analyzing
20 information about capital market conditions generally, assessing the relative risks of the company
21 specifically, and employing various quantitative methods that focus on investors'required rates of
22 return. These various quantitative methods typically attempt to infer investors' required rates of
23 return from stock prices, interest rates, or other capital market data. Consistent with FERC's
24 conclusion that"[t]here is significant evidence indicating that combining estimates from different
12Ind. Oregon Power Co.,Cause No. 38728, 116 PUR4th, 1, 17-18 (IURC 8/24/1990).
13 Coakley v.Bangor Hydro-Elec. Co.,Opinion No. 531, 147 FERC¶61,234 at P 41 (2014).
Exhibit No.3
10 Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2,Page 10 of 36

I models is more accurate than relying on a single model,"14 my evaluation of a fair ROE for the
2 Company considers the results of multiple financial models, including the DCF, CAPM (and the
3 related ECAPM), risk premium, and expected earnings approaches.
4 B. Comparable Risk Proxy Group
5 Q. How do you identify the proxy group of electric utilities relied on for your
6 analyses?
7 A. To reflect the risks and prospects associated with Avista's utility operations, I
8 examine quantitative estimates of investors'required ROE for a group of eighteen electric utilities.
9 To identify this group,I begin with those companies included in the Electric Utility industry groups
10 compiled by Value Line. Value Line is one of the most widely available sources of investment
11 advisory information, and its industry groups provide an objective source to identify publicly
12 traded firms that investors would regard to be similar in operations.
13 Q. What other criteria do you consider in evaluating your proxy group?
14 A. To winnow down Value Line's broad ranging group of electric utilities into a proxy
15 group that is similar in risk to Avita and suitable for ROE analysis, I further applied the following
16 criteria:
17 1. Paid common dividends over the last six months and have not announced a
18 dividend cut since that time.
19 2. No ongoing involvement in a major merger or acquisition that would distort
20 quantitative results.
14 Coakley v. Bangor Hydro-Elec. Co., 165 FERC¶61,030 at P 38 (2018);Assn of Bus.Advocating Tariff Equity v.
Midcontinentlndep. Sys. Operator,Inc., 165 FERC¶61,118 at P 40(2018).
Exhibit No.3
11 Case Nos.AW-E-25-01/AW-G-25-01
J.Thompson,Avista
Schedule 2,Page 11 of 36

1 3. S&P corporate credit rating of BBB+, BBB or BBB-.
2 4. Moody's issuer rating of Baal, Baal or Baa3.
3 5. Value Line Safety Rank of"2" or "I"
4 These criteria result in the proxy group of eighteen companies listed on page 1 of Schedule 4 which
5 I refer to as the "Utility Group."
6 Q. How do you evaluate the investment risks of the Utility Group?
7 A. My evaluation of relative risk considers five published benchmarks that are widely
8 relied on by investors; namely, credit ratings from Moody's and S&P, along with Value Line's
9 Safety Rank, Financial Strength Rating, and beta values. Credit ratings are assigned by
10 independent rating agencies for the purpose of providing investors with a broad assessment of the
11 creditworthiness of a firm. Ratings generally extend from triple-A(the highest) to D (in default).
12 Other symbols (e.g., "+" or"- ') are used to show relative standing within a category. Because the
13 rating agencies' evaluation includes virtually all of the factors normally considered important in
14 assessing a firm's relative credit standing, corporate credit ratings provide a broad, objective
15 measure of overall investment risk that is readily available to investors. Widely cited in the
16 investment community and referenced by investors, credit ratings are also frequently used as a
17 primary risk indicator in establishing proxy groups to estimate the cost of common equity.
18 While credit ratings provide the most widely referenced benchmark for investment risks,
19 other quality rankings published by investment advisory services also provide relative assessments
20 of risks that are considered by investors in forming their expectations for common stocks. Value
21 Line's primary risk indicator is its Safety Rank, which ranges from"1" (Safest) to "5" (Riskiest).
22 This overall risk measure is intended to capture the total risk of a stock, and incorporates elements
23 of stock price stability and financial strength. Given that Value Line is perhaps the most widely
Exhibit No.3
12 Case Nos.AW-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2,Page 12 of 36

I available source of investment advisory information, its Safety Rank provides useful guidance
2 regarding the risk perceptions of investors.
3 The Financial Strength Rating is designed as a guide to overall financial strength and
4 creditworthiness, with the key inputs including financial leverage, business volatility measures,
5 and company size. Value Line's Financial Strength Ratings range from "A++" (strongest) down
6 to "C" (weakest) in nine steps. These published indicators incorporate consideration of a broad
7 spectrum of risks, including financial and business position, relative size, and exposure to firm-
8 specific factors.
9 Finally,beta measures a utility's stock price volatility relative to the market as a whole and
10 reflects the tendency of a stock's price to follow changes in the market. A stock that tends to
11 respond less to market movements has a beta less than 1.00, while stocks that tend to move more
12 than the market have betas greater than 1.00. Beta is the only relevant measure of investment risk
13 under modern capital market theory and is widely cited in academics and in the investment industry
14 as a guide to investors' risk perceptions. Moreover, in my experience, Value Line is the most
15 widely referenced source for beta in regulatory proceedings. As noted in New Regulatory Finance:
16 Value Line is the largest and most widely circulated independent investment
17 advisory service, and influences the expectations of a large number of institutional
18 and individual investors. ... Value Line betas are computed on a theoretically sound
19 basis using a broadly based market index, and they are adjusted for the regression
20 tendency of betas to converge to 1.00.15
21 Q. How do the overall risks of the Utility Group compare to Avista?
22 A. Table 1 below compares Avista to the average risk indicators for the Utility Group.
15 Morin,Roger A.,New Regulatory Finance,Pub.Utils.Reports,Inc. (2006)at 71.
Exhibit No.3
13 Case Nos.AW-E-25-01/AW-G-25-01
J.Thompson,Avista
Schedule 2,Page 13 of 36

I TABLE 1
2 COMPARISON OF RISK INDICATORS
Value Line
Safety Financial
Moody's S&P Rank Strength Beta
Avista Baal BBB 3 A 0.95
Utility Group Baa2 BBB+ 2 B++ 0.97
3 As displayed above in Table 1,Avista is assigned a corporate credit rating Baa2 from Moody's,
4 identical to the Utility Group, while Avista's BBB rating from S&P indicates slightly more risk
5 than the Utility Group. The Company's Value Line Safety Rank indicates slightly more risk than
6 the Utility Group, while their Financial Strength rating and beta value indicate somewhat lower
7 risk. Considered together, this comparison of objective measures, which incorporate a broad
8 spectrum of risks, including financial and business position and exposure to company specific
9 factors, indicates that investors would likely conclude that the overall investment risks for Avista
10 are comparable to those of the Utility Group.
11 C. Discounted Cash Flow Analyses
12 Q. How is the DCF model used to estimate the cost of common equity?
13 A. DCF models assume that the price of a share of common stock is equal to the
14 present value of the expected cash flows (i.e., future dividends and stock price) that will be
15 received while holding the stock, discounted at investors' required rate of return. Rather than
Exhibit No.3
14 Case Nos.AW-E-25-01/AW-G-25-01
J.Thompson,Avista
Schedule 2,Page 14 of 36

I developing annual estimates of cash flows into perpetuity, the DCF model can be simplified to a
2 "constant growth" form:16
_ D1
3 Po ke g
4 where: Po = Current price per share;
5 D1 = Expected dividend per share in the coming year;
6 ke = Cost of equity; and,
7 g = Investors' long-term growth expectations.
8 The cost of common equity (ke) can be isolated by rearranging terms within the equation:
ke =P' +g
9 0
10 This constant growth form of the DCF model recognizes that the rate of return to
11 stockholders consists of two parts: 1) dividend yield (Di/Po); and 2) growth (g). In other words,
12 investors expect to receive a portion of their total return in the form of current dividends and the
13 remainder through price appreciation.
14 Q. What steps are required to apply the constant growth DCF model?
15 A. The first step in implementing the constant growth DCF model is to determine the
16 expected dividend yield (Di/Po) for the firm in question. This is usually calculated based on an
17 estimate of dividends to be paid in the coming year divided by the current price of the stock. The
"The constant growth DCF model is dependent on a number of strict assumptions,which in practice are never met.
These include a constant growth rate for both dividends and earnings;a stable dividend payout ratio;the discount rate
exceeds the growth rate; a constant growth rate for book value and price; a constant earned rate of return on book
value;no sales of stock at a price above or below book value;a constant price-earnings ratio;a constant discount rate
(i.e.,no changes in risk or interest rate levels and a flat yield curve);and all the above extend to infinity. Nevertheless,
the DCF method provides a workable and practical approach to estimate investors' required return that is widely
referenced in utility ratemaking.
Exhibit No.3
15 Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2,Page 15 of 36

I second, and more controversial, step is to estimate investors' long-term growth expectations (g)
2 for the firm. The final step is to add the firm's dividend yield and estimated growth rate to arrive
3 at an estimate of its cost of common equity.
4 Q. How do you determine the dividend yields for the Utility Group?
5 A. Estimates of dividends to be paid by each of these utilities over the next twelve
6 months, obtained from Value Line, served as Di. This annual dividend is then divided by a 30-day
7 average stock price for each utility to arrive at the expected dividend yield. The expected
8 dividends, stock prices, and resulting dividend yields for the firms in the Utility Group are
9 presented on Schedule 6. As shown on the first page of this exhibit, dividend yields for the firms
10 in the Utility Group range from 2.3% to 5.1% and average 3.8%.
11 Q. What is the next step in applying the constant growth DCF model?
12 A. The next step is to evaluate long-term growth expectations, or "g", for the firm in
13 question. In constant growth DCF theory, earnings, dividends, book value, and market price are
14 all assumed to grow in lockstep, and the growth horizon of the DCF model is infinite. But
15 implementation of the DCF model is more than just a theoretical exercise; it is an attempt to
16 replicate the mechanism investors used to arrive at observable stock prices. A wide variety of
17 techniques can be used to derive growth rates, but the only "g" that matters in applying the DCF
18 model is the value that investors expect.
19 Q. What are investors most likely to consider in developing their long-term
20 growth expectations?
21 A. Implementation of the DCF model is solely concerned with replicating the forward-
22 looking evaluation of real-world investors. In the case of utilities, dividend growth rates are not
23 likely to provide a meaningful guide to investors' current growth expectations. Utility dividend
Exhibit No.3
16 Case Nos.AW-E-25-01/AW-G-25-01
J.Thompson,Avista
Schedule 2,Page 16 of 36

I policies reflect the need to accommodate business risks and investment requirements in the
2 industry, as well as potential uncertainties in the capital markets. As a result, dividend growth in
3 the utility industry has lagged growth in earnings as utilities conserve financial resources.
4 A measure that plays a pivotal role in determining investors'long-term growth expectations
5 is future trends in EPS,which provide the source for future dividends and ultimately support share
6 prices. The importance of earnings in evaluating investors' expectations and requirements is well
7 accepted in the investment community, and surveys of analytical techniques relied on by
8 professional analysts indicate that growth in earnings is far more influential than trends in DPS.
9 The availability of projected EPS growth rates also is key to investors relying on this
10 measure as compared to future trends in DPS. Apart from Value Line,investment advisory services
11 do not generally publish comprehensive DPS growth projections, and this scarcity of dividend
12 growth rates relative to the abundance of earnings forecasts attests to their relative influence. The
13 fact that securities analysts focus on EPS growth, and that DPS growth rates are not routinely
14 published, indicates that projected EPS growth rates are likely to provide a superior indicator of
15 the future long-term growth expected by investors.
16 Q. What are security analysts currently projecting in the way of growth for the
17 firms in the Utility Group?
18 A. The earnings growth projections for each of the firms in the Utility Group reported
19 by Value Line, IBES,17 and Zacks are displayed on page 2 of Schedule 6.
17 Formerly I/B/E/S International,Inc.,IBES growth rates are now compiled and published by Refinitiv and presented
at,for instance,https:Hfinance.yahoo.com.
Exhibit No.3
17 Case Nos.AW-E-25-01/AW-G-25-01
J.Thompson,Avista
Schedule 2,Page 17 of 36

I Q. How else are investors' expectations of future long-term growth prospects
2 often estimated when applying the constant growth DCF model?
3 A. In constant growth theory, growth in book equity will be equal to the product of the
4 earnings retention ratio(one minus the dividend payout ratio)and the earned rate of return on book
5 equity. Furthermore,if the earned rate of return and the payout ratio are constant over time,growth
6 in earnings and dividends will be equal to growth in book value. Even though these conditions are
7 never met in practice,this"sustainable growth"approach may provide a rough guide for evaluating
8 a firm's growth prospects and is frequently proposed in regulatory proceedings.
9 The sustainable growth rate is calculated by the formula, g=br+sv, where "b" is the
10 expected retention ratio, "r" is the expected earned return on equity, "s" is the percent of common
11 equity expected to be issued annually as new common stock, and "v" is the equity accretion rate.
12 Under DCF theory,the"sv"factor is a component of the growth rate designed to capture the impact
13 of issuing new common stock at a price above, or below, book value. The sustainable, "br+sv"
14 growth rates for each firm in the proxy group are summarized on page 2 of Schedule 6, with the
15 underlying details being presented on Schedule 7.
16 The sustainable growth rate analysis shown on Schedule 7 incorporates an "adjustment
17 factor"because Value Line's reported returns are based on year-end book values. Since earnings
18 is a flow over the year while book value is determined at a given point in time, the measurement
19 of earnings and book value are distinct concepts. It is this fundamental difference between a flow
20 (earnings) and point estimate (book value) that makes it necessary to adjust to mid-year in
21 calculating the ROE. Given that book value will increase or decrease over the year, using year-
22 end book value (as Value Line does) understates or overstates the average investment that
23 corresponds to the flow of earnings. To address this concern, earnings must be matched with a
Exhibit No.3
18 Case Nos.AW-E-25-01/AW-G-25-01
J.Thompson,Avista
Schedule 2,Page 18 of 36

I corresponding representative measure of book value, or the resulting ROE will be distorted. The
2 adjustment factor determined in Schedule 7 is solely a means of converting Value Line's end-of-
3 period values to an average return over the year, and the formula for this adjustment is supported
4 in recognized textbooks and has been adopted by other regulators.18
5 Q. Are there significant shortcomings associated with the "br+sv" growth rate?
6 A. Yes. First, in order to calculate the sustainable growth rate, it is necessary to
7 develop estimates of investors' expectations for four separate variables; namely, "b", "r", "s", and
8 "v." Given the inherent difficulty in forecasting each parameter and the difficulty of estimating
9 the expectations of investors, the potential for measurement error is significantly increased when
10 using four variables, as opposed to referencing a direct projection for EPS growth. Second,
11 empirical research in the finance literature indicates that sustainable growth rates are not as
12 significantly correlated to measures of value, such as share prices, as are analysts' EPS growth
13 forecasts.19 The "sustainable growth" approach is included for completeness, but evidence
14 indicates that analysts' forecasts provide a superior and more direct guide to investors' growth
15 expectations. Accordingly, I give less weight to cost of equity estimates based on br+sv growth
16 rates in evaluating the results of the DCF model.
17 Q. What cost of common equity estimates are implied for the Utility Group using
18 the DCF model?
19 A. After combining the dividend yields and respective growth projections for each
20 utility, the resulting cost of common equity estimates are shown on page 3 of Schedule 6.
"See,Roger A.Morin,New Regulatory Finance,Pub.Utils.Reports,Inc.(2006)at 305-306;Bangor Hydro-Electric
Co. et al., 122 FERC¶61,265 at n.12(2008).
19 Roger A.Morin,New Regulatory Finance,Pub.Util.Reports,Inc. (2006)at 307.
Exhibit No.3
19 Case Nos.AW-E-25-01/AW-G-25-01
J.Thompson,Avista
Schedule 2,Page 19 of 36

I Q. In evaluating the results of the constant growth DCF model, is it appropriate
2 to eliminate illogical estimates?
3 A. Yes. It is essential that the cost of equity estimates produced by quantitative
4 methods pass fundamental tests of reasonableness and economic logic. Accordingly, DCF
5 estimates that are implausibly low or high should be eliminated.
6 Q. How do you evaluate DCF estimates at the low end of the range?
7 A. I base my evaluation of DCF estimates at the low end of the range on the
8 fundamental risk-return tradeoff, which holds that investors will only take on more risk if they
9 expect to earn a higher rate of return to compensate them for the greater uncertainly. Because
10 common stocks lack the protections associated with an investment in long-term bonds, a utility's
11 common stock imposes far greater risks on investors. As a result, the rate of return that investors
12 require from a utility's common stock is considerably higher than the yield offered by senior,long-
13 term debt. Consistent with this principle,DCF results that are not sufficiently higher than the yield
14 available on less risky utility bonds must be eliminated.
15 Q. Have similar tests been applied by regulators?
16 A. Yes. FERC has noted that adjustments are justified where applications of the DCF
17 approach produce illogical results. FERC evaluates DCF results against observable yields on long-
18 term public utility debt and has recognized that it is appropriate to eliminate estimates that do not
19 sufficiently exceed this threshold.20 FERC's current practice is to exclude low-end cost of
20 estimates that fall below the six-month average yield on Baa-rated utility bonds, plus 20% of the
21 See, Assn of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., 169 FERC ¶ 61,129 at
PP 387,388(2019).
Exhibit No.3
20 Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2,Page 20 of 36

1 CAPM market risk premium.21 In addition, FERC also excludes estimates that are"irrationally or
2 anomalously high. ,22 Similarly, the Staff of the Maryland Public Service Commission has also
3 eliminated DCF values where they do not offer a sufficient premium above the cost of debt to be
4 attractive to an equity investor.23
5 Q. Do you exclude any estimates at the low or high end of the range of results?
6 A. Yes. As highlighted on page 3 of Schedule 6, I eliminate low-end DCF estimates
7 of 6.5 and 6.8%. Based on my professional experience and the risk-return tradeoff principle that
8 is fundamental to finance, it is inconceivable that investors are not requiring a substantially higher
9 rate of return for holding common stock. As a result, these values provide little guidance as to the
10 returns investors require from utility common stocks,and they should be excluded. I also eliminate
11 high-end DCF estimates of 18.2% and 25.0%.
12 After excluding illogical estimates, the upper end of the remaining DCF results for the
13 Utility Group is set by a cost of equity estimate of 12.6%. While a 12.6% cost of equity estimate
14 may exceed the majority of the remaining values, low-end DCF estimates in the 7.3% to 7.8%
15 range are assuredly far below investors' required rate of return. Taken together and considered
16 along with the balance of the results, the remaining values provide a reasonable basis on which to
17 frame the range of plausible DCF estimates and evaluate investors'required rate of return.
2' Based on the six-month average yield at November 2024 of 5.68% and the 7.6%market risk premium shown on
Schedule 8,this implies a current low-end threshold of approximately 7.2%.
22 Ass'n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., 171 FERC¶ 61,154 at P 152
(2020).
23 See, e.g.,Maryland Public Service Commission, Case No. 9702,Direct Testimony and Exhibits of Anson R. Justi
(Dec. 15,2023)at 33.
Exhibit No.3
21 Case Nos.AW-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2,Page 21 of 36

I Q. What ROE estimates are implied by your DCF results for the Utility Group?
2 A. As shown on page 3 of Schedule 6 and summarized in Table 2, below, application
3 of the constant growth DCF model resulted in the following cost of equity estimates:
4 TABLE 2
5 DCF RESULTS—UTILITY GROUP
Growth Rate Average Midpoint
Value Line 9.3% 9.6%
IBES 9.7% 10.2%
Zacks 10.3% 10.1%
br+ sv 8.7% 9.1%
6 D. Capital Asset Pricing Model
7 Q. Please describe the CAPM.
8 A. The CAPM is a theory of market equilibrium that measures risk using the beta
9 coefficient. Assuming investors are fully diversified, the relevant risk of an individual asset(e.g.,
10 common stock) is its volatility relative to the market as a whole, with beta reflecting the tendency
11 of a stock's price to follow changes in the market. A stock that tends to respond less to market
12 movements has a beta less than 1.0, while stocks that tend to move more than the market have
13 betas greater than 1.0. The CAPM is mathematically expressed as:
14 Rj = Rf+oj(Rm- Rf)
15 where: Rj = required rate of return for stock j;
16 Rf = risk-free rate;
17 Rm= expected return on the market portfolio; and,
18 P1 = beta, or systematic risk, for stock j.
19 Under the CAPM formula above, a stock's required return is a function of the risk-free rate
20 (Rf), plus a risk premium that is scaled to reflect the relative volatility of a firm's stock price, as
21 measured by beta (P). Like the DCF model, the CAPM is an ex-ante, or forward-looking model
Exhibit No.3
22 Case Nos.AW-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2,Page 22 of 36

I based on expectations of the future. As a result, to produce a meaningful estimate of investors'
2 required rate of return, the CAPM must be applied using estimates that reflect the expectations of
3 actual investors in the market, not with backward-looking, historical data.
4 Q. Why is the CAPM approach a relevant component when evaluating the cost of
5 equity for Avista?
6 A. The CAPM approach generally is considered to be the most widely referenced
7 method for estimating the cost of equity among academicians and professional practitioners, with
8 the pioneering researchers of this method receiving the Nobel Prize in 1990. Because this is the
9 dominant model for estimating the cost of equity outside the regulatory sphere,the CAPM provides
10 important insight into investors'required rate of return for utility stocks, including the Company.
I I Q. How do you apply the CAPM to estimate the ROE?
12 A. Application of the CAPM to the proxy group is based on a forward-looking estimate
13 for investors'required rate of return from common stocks presented in Schedule 8. To capture the
14 expectations of today's investors in current capital markets,the expected market rate of return was
15 estimated by conducting a DCF analysis on the dividend paying firms in the S&P 500.
16 The dividend yield for each firm is obtained from Value Line, and the growth rate is equal
17 to the average of the earnings growth projections for each firm published by IBES, Value Line,
18 and Zacks, with each firm's dividend yield and growth rate being weighted by its proportionate
19 share of total market value. After removing companies with growth rates that were negative or
20 greater than 20%, the weighted average of the projections for the individual firms implies an
21 average growth rate over the next five years of 10.3%. Combining this average growth rate with
22 a year-ahead dividend yield of 1.6% results in a current cost of common equity estimate for the
23 market as a whole (Rm) of 11.9%. Subtracting a 4.3%risk-free rate based on the average yield on
Exhibit No.3
23 Case Nos.AW-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2,Page 23 of 36

I 30-year Treasury bonds for the six month period ending November 2024 produced a market equity
2 risk premium of 7.6%.
3 Q. What is the source of the beta values you used to apply the CAPM?
4 A. As indicated earlier in my discussion of risk measures for the proxy group, I rely
5 on the beta values reported by Value Line, which in my experience is the most widely referenced
6 source for beta in regulatory proceedings. As noted in New Regulatory Finance:
7 Value Line is the largest and most widely circulated independent investment
8 advisory service, and influences the expectations of a large number of institutional
9 and individual investors. ... Value Line betas are computed on a theoretically sound
10 basis using a broadly based market index, and they are adjusted for the regression
11 tendency of betas to converge to 1.00.24
12 Q. What else should be considered in applying the CAPM?
13 A. Financial research indicates that the CAPM does not fully account for observed
14 differences in rates of return attributable to firm size. Accordingly, a modification is required to
15 account for this size effect. As explained by Morningstar:
16 One of the most remarkable discoveries of modern finance is that of a relationship
17 between company size and return. ... The relationship between company size and
18 return cuts across the entire size spectrum; it is not restricted to the smallest stocks.
19 ... This size-rated phenomenon has prompted a revision to the CAPM, which
20 includes a size premium.25
21 According to the CAPM, the expected return on a security should consist of the riskless
22 rate, plus a premium to compensate for the systematic risk of the particular security. The degree
23 of systematic risk is represented by the beta coefficient. The need for the size adjustment arises
24 because differences in investors' required rates of return that are related to firm size are not fully
25 captured by beta. To account for this, researchers have developed size premiums that need to be
"Roger A.Morin,New Regulatory Finance,Pub.Util.Reports(2006)at 71.
25 Morningstar,Ibbotson SBBI 2015 Classic Yearbook,at pp.99, 108.
Exhibit No.3
24 Case Nos.AW-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2,Page 24 of 36

I added to account for the level of a firm's market capitalization in determining the CAPM cost of
2 equity.26 Accordingly,my CAPM analyses also incorporates an adjustment to recognize the impact
3 of size distinctions, as measured by the market capitalization for the firms in the Utility Group.
4 Q. What is the basis for the size adjustment?
5 A. The size adjustment required in applying the CAPM is based on the finding that
6 after controlling for risk differences reflected in beta, the CAPM overstates returns to companies
7 with larger market capitalizations and understates returns for relatively smaller firms. The size
8 adjustments utilized in my analysis are sourced from Kroll, who now publish the well-known
9 compilation of capital market series originally developed by Professor Roger G. Ibbotson of the
10 Yale School of Management, and latterly published by Duff& Phelps. Calculation of the size
11 adjustments involve the following steps:
12 1. Divide all stocks traded on the NYSE, NYSE MKT, and
13 NASDAQ indices into deciles based on their market
14 capitalization.
15 2. Using the average beta value for each decile, calculate the
16 implied excess return over the risk-free rate using the CAPM.
17 3. Compare the calculated excess returns based on the CAPM to
18 the actual excess returns for each decile, with the difference
19 being the increment of return that is related to firm size, or"size
20 adjustment."
21 New Regulatory Finance observed that"small market-cap stocks experience higher returns
22 than large market-cap stocks with equivalent betas," and concluded that "the CAPM understates
26 Originally compiled by Ibbotson Associates and published in their annual yearbook entitled, Stocks, Bonds, Bills
and Inflation, these size premia are now developed by Kroll and presented in its 2022 Supplementary CRSP Decile
Size Study Data.
Exhibit No.3
25 Case Nos.AW-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2,Page 25 of 36

I the risk of smaller utilities, and a cost of equity based purely on a CAPM beta will therefore
2 produce too low an estimate."27
3 Q. Is the size adjustment incorporated in your analysis consistent with how FERC
4 applies the CAPM?
5 A. Yes. FERC has observed that"[t]his type of size adjustment is a generally accepted
6 approach to CAPM analyses,"28 and includes the size adjustment in the CAPM under its ROE
7 methodology for electric utilities and natural gas and oil pipelines.29 More recently, FERC
8 affirmed its practice of including a size adjustment, concluding that "the size adjustment is
9 necessary to correct for the CAPM's inability to fully account for the impact of firm size when
10 determining the cost of equity. ,30
11 Q. Is this size adjustment related to the relative size of Avista as compared with
12 the proxy group?
13 A. No. The size adjustments used in my application of the CAPM do not relate to
14 Avista; rather, they are based on the market capitalization of the firms in the Utility Group. The
15 size adjustments are specific to the CAPM and merely correct for an observed inability of the beta
16 measure to fully reflect the risks perceived by investors for the firms in the proxy group.
17 Q. What is the implied ROE for the Utility Group using the CAPM approach?
18 A. As shown on Schedule 8, the CAPM approach implies an average ROE for the
19 Utility Group of 11.7%, or 12.2% after adjusting for the impact of firm size.
27 Roger A.Morin,New Regulatory Finance 187(Pub.Utils.Reports,Inc.,2006).
28 Coakley v.Bangor-Hydro-Elec. Co.,Opinion No. 531-B, 150 FERC¶61,165 at P 117(2015).
29 Ass'n of Bus.Advocating Tariff Equity v.Midcontinent Indep. Sys. Operator,Inc.,Opinion No. 569-A, 171 FERC
¶61,154(2020);Policy Statement on Determining Return on Equity for Natural Gas and Oil Pipelines, 171 FERC¶
61,155(2020).
3o Assn of Bus. Advocating Tariff Equity v.Midcontinent Indep. Sys. Operator, Inc., Opinion No. 569-B, 173 FERC
¶61,159 at P 100(2020).
Exhibit No.3
26 Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2,Page 26 of 36

I E. Utility Risk Premium
2 Q. Briefly describe the risk premium method.
3 A. The risk premium method extends the risk-return tradeoff observed with bonds to
4 estimate investors' required rate of return on common stocks. The cost of equity is estimated by
5 first determining the additional return investors require to forgo the relative safety of bonds and to
6 bear the greater risks associated with common stock, and by then adding this equity risk premium
7 to the current yield on bonds. Like the DCF model, the risk premium method is capital market
8 oriented. However,unlike DCF models, which indirectly impute the cost of equity, risk premium
9 methods directly estimate investors' required rate of return by adding an equity risk premium to
10 observable bond yields.
11 Q. Is the risk premium approach a widely accepted method for estimating the cost
12 of equity?
13 A. Yes. The risk premium approach is based on the fundamental risk-return principle
14 that is central to finance, which holds that investors will require a premium in the form of a higher
15 return to assume additional risk. This method is routinely referenced by the investment community
16 and in academia and regulatory proceedings and provides an important tool in estimating a just
17 and reasonable ROE for Avista.
18 Q. How did you implement the risk premium method?
19 A. Estimates of equity risk premiums for utilities are based on surveys of previously
20 authorized ROEs. Authorized ROES presumably reflect regulatory commissions' best estimates
21 of the cost of equity, however determined, at the time they issued their final order. Such ROEs
22 should represent a balanced and impartial outcome that considers the need to maintain a utility's
23 financial integrity and ability to attract capital. Moreover, allowed returns are an important
Exhibit No.3
27 Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2,Page 27 of 36

I consideration for investors and have the potential to influence other observable investment
2 parameters, including credit ratings and borrowing costs. Thus,when considered in the context of
3 a complete and rigorous analysis, this data provides a logical and frequently referenced basis for
4 estimating equity risk premiums for regulated utilities.
5 Q. How did you calculate the equity risk premiums based on allowed returns?
6 A. The ROES authorized for electric utilities by regulatory commissions across the
7 U.S. are compiled by S&P Global Market Intelligence and published in its RRA Regulatory Focus
8 report. On pages 2 of Schedule 9, the average yield on public utility bonds is subtracted from the
9 average allowed ROE for electric utilities to calculate equity risk premiums for each year between
10 1974 and 2023.31 As shown there, over this fifty year period the equity risk premiums for electric
11 utilities average 3.89%, and the yields on public utility bonds average 7.78%.
12 Q. Is there any capital market relationship that must be considered when
13 implementing the risk premium method?
14 A. Yes. The magnitude of equity risk premiums is not constant and equity risk
15 premiums tend to move inversely with interest rates. In other words, when interest rate levels are
16 relatively high, equity risk premiums narrow, and when interest rates are relatively low,equity risk
17 premiums widen. The implication of this inverse relationship is that the cost of equity does not
18 move as much as, or in lockstep with, interest rates. Accordingly, for a 1%increase or decrease in
19 interest rates, the cost of equity may only rise or fall some fraction of 1%. Therefore, when
20 implementing the risk premium method, adjustments may be required to incorporate this inverse
si My analysis encompasses the entire period for which published data is available.
Exhibit No.3
28 Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2,Page 28 of 36

I relationship if current interest rate levels have diverged from the average interest rate level
2 represented in the data set.
3 Current bond yields are lower than those prevailing over the risk premium study period.
4 Given that equity risk premiums move inversely with interest rates, these lower bond yields also
5 imply an increase in the equity risk premium. In other words,higher required equity risk premiums
6 offset the impact of declining interest rates on the ROE.
7 Q. Is this inverse relationship confirmed by published financial research?
8 A. Yes. There is considerable empirical evidence that when interest rates are relatively
9 high,equity risk premiums narrow,and when interest rates are relatively low,equity risk premiums
10 are greater. This inverse relationship between equity risk premiums and interest rates has been
11 widely reported in the financial literature. As summarized by New Regulatory Finance:
12 Published studies by Brigham, Shome, and Vinson (1985), Harris (1986), Harris
13 and Marston (1992, 1993), Carleton, Chambers, and Lakonishok (1983), Morin
14 (2005), and McShane (2005), and others demonstrate that, beginning in 1980, risk
15 premiums varied inversely with the level of interest rates — rising when rates fell
16 and declining when rates rose.32
17 Other regulators have also recognized that, while the cost of equity trends in the same
18 direction as interest rates,these variables do not move in lockstep.33 This relationship is illustrated
19 in the figure on page 3 of Schedule 9.
32 Roger A.Morin,New Regulatory Finance,Pub.Util.Reports(2006)at 128.
33 See, e.g.,California Public Utilities Commission,Decision 08-05-035 (May 29,2008);Entergy Mississippi
Formula Rate Plan FRP-7,https://cdn.entergy-mississippi.com/userfiles/content/price/tariffs/eml_frp.pdf(last
visited Oct. 12,2024);Martha Coakley et al., 147 FERC¶61,234 at P 147(2014).
Exhibit No.3
29 Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2,Page 29 of 36

I Q. What ROE is implied by the risk premium method using surveys of allowed
2 returns?
3 A. Based on the regression output between the interest rates and equity risk premiums
4 displayed on page 3 of Schedule 9, the equity risk premium for electric utilities increases by
5 approximately 42 basis points for each percentage point drop in the yield on public utility bonds.
6 As illustrated on page 1 of Schedule 9 with an average yield on public utility bonds for the six
7 month period ending November 2024 of 5.50%, this implies a current equity risk premium of
8 4.86% for electric utilities. Adding this equity risk premium to the average yield on Baa utility
9 bonds for the six-month period ending November 2024 implies a current ROE of 10.54%.
10 F. Expected Earnings Benchmark
11 Q. Do you also reference an expected earnings benchmark in evaluating an ROE
12 for Avista?
13 A. Yes. Reference to rates of return available from alternative investments of
14 comparable risk can provide an important benchmark in assessing the return necessary to assure
15 confidence in the financial integrity of a firm and its ability to attract capital. This expected
16 earnings approach is consistent with the economic underpinnings for a just and reasonable rate of
17 return established by the U.S. Supreme Court in Bluefield and Hope.34 Moreover, it avoids the
18 complexities and limitations of capital market methods and instead focuses on the returns earned
19 on book equity,which are readily available to investors. This analysis is not relied on to arrive at
"Bluefield Water Works &Improvement Co. v. Pub. Serv. Comm'n, 262 U.S. 679 (1923); Fed. Power Comm'n v.
Hope Natural Gas Co.,320 U.S.591 (1944).
Exhibit No.3
30 Case Nos.AW-E-25-01/AW-G-25-01
J.Thompson,Avista
Schedule 2,Page 30 of 36

I my recommended ROE range of reasonableness; however, it is my opinion that this is a relevant
2 consideration in evaluating a just and reasonable ROE for Avista's utility operations.
3 Q. What economic premise underlies the expected earnings approach?
4 A. The simple,but powerful concept underlying the expected earnings approach is that
5 investors compare each investment alternative with the next best opportunity. If the utility is
6 unable to offer a return similar to that available from other opportunities of comparable risk,
7 investors will become unwilling to supply the capital on reasonable terms. For existing investors,
8 denying the utility an opportunity to earn what is available from other similar risk alternatives
9 prevents them from earning their opportunity cost of capital. While I am not a lawyer and do not
10 offer a legal opinion, from my position as a financial economist such an outcome would violate
11 the Hope and Bluefield standards and undermine the utility's access to capital on reasonable terms.
12 Q. How is the expected earnings approach typically implemented?
13 A. The traditional comparable earnings test identifies a group of companies that are
14 believed to be comparable in risk to the utility. The actual earnings of those companies on the
15 book value of their investment are then compared to the allowed return of the utility. While the
16 traditional comparable earnings test is implemented using historical data taken from the accounting
17 records,it is also common to use projections of returns on book investment,such as those published
18 by recognized investment advisory publications (e.g.,Value Line). Because these returns on book
19 value equity are analogous to the allowed return on a utility's rate base,this measure of opportunity
20 costs results in a direct, "apples to apples" comparison.
21 Moreover,regulators do not set the returns that investors earn in the capital markets,which
22 are a function of dividend payments and fluctuations in common stock prices - both of which are
23 outside their control. Regulators can only establish the allowed ROE,which is applied to the book
Exhibit No.3
31 Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2,Page 31 of 36

I value of a utility's investment in rate base, as determined from its accounting records. This is
2 analogous to the expected earnings approach, which measures the return that investors expect the
3 utility to earn on book value. As a result, the expected earnings approach provides a meaningful
4 guide to ensure that the allowed ROE is similar to what other utilities of comparable risk will earn
5 on invested capital. This expected earnings test does not require theoretical models to indirectly
6 infer investors'perceptions from stock prices or other market data. As long as the proxy companies
7 are similar in risk,their expected earned returns on invested capital provide a direct benchmark for
8 investors'opportunity costs that is independent of fluctuating stock prices, market-to-book ratios,
9 debates over DCF growth rates, or the limitations inherent in any theoretical model of investor
10 behavior.
11 Q. What ROE benchmark is indicated for Avista based on the expected earnings
12 approach?
13 A. For the firms in the proxy group, the year-end returns on common equity projected
14 by Value Line over its forecast horizon are shown on Schedule 11. As I explained earlier in my
15 discussion of the br+sv growth rates used in applying the DCF model, Value Line's returns on
16 common equity are calculated using year-end equity balances, which understates the average
17 return earned over the year.35 Accordingly, these year-end values were converted to average
18 returns using the same adjustment factor discussed earlier and developed on Schedule 7. As shown
19 on Schedule 11,Value Line's projections suggest an average ROE of 11.0% for the Utility Group.
15 For example,to compute the annual return on a passbook savings account with a beginning balance of$1,000 and
an ending balance of$5,000,the interest income would be divided by the average balance of$3,000. Using the$5,000
balance at the end of the year would understate the actual return.
Exhibit No.3
32 Case Nos.AW-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 2,Page 32 of 36

I G. Non-Utility DCF Benchmark
2 Q. What other proxy group do you consider in evaluating a ROE for Avista?
3 A. Consistent with underlying economic and regulatory standards, I also apply the
4 DCF model to a reference group of low-risk companies in the non-utility sector of the economy. I
5 refer to this group as the "Non-Utility Group." Like the expected earnings benchmark, this
6 analysis is not relied on to arrive at my recommended ROE range of reasonableness.
7 Q. Do utilities have to compete with non-regulated firms for capital?
8 A. Yes. The cost of capital is an opportunity cost based on the returns that investors
9 could realize by putting their money in other alternatives. Clearly, the total capital invested in
10 utility stocks is only the tip of the iceberg of total common stock investment,and there is a plethora
11 of other enterprises available to investors beyond those in the utility industry. Utilities must
12 compete for capital, not just against firms in their own industry, but with other investment
13 opportunities of comparable risk. Indeed, modern portfolio theory is built on the assumption that
14 rational investors will hold a diverse portfolio of stocks, not just companies in a single industry.
15 Q. Is it consistent with the Bluefield and Hope cases to consider investors'
16 required ROE for non-utility companies?
17 A. Yes. The cost of equity capital in the competitive sector of the economy forms the
18 very underpinning for utility ROEs because regulation purports to serve as a substitute for the
19 actions of competitive markets. The Supreme Court has recognized that it is the degree of risk,
20 not the nature of the business, which is relevant in evaluating an allowed ROE for a utility. The
21 Bluefield case refers to "business undertakings attended with comparable risks and uncertainties."
22 It does not restrict consideration to other utilities. Similarly, the Hope case states:
Exhibit No.3
33 Case Nos.AW-E-25-01/AW-G-25-01
J.Thompson,Avista
Schedule 2,Page 33 of 36

I By that standard the return to the equity owner should be commensurate with
2 returns on investments in other enterprises having corresponding risks.36
3 As in the Bluefield decision, there is nothing to restrict "other enterprises" solely to the utility
4 industry.
5 Q. Does consideration of the results for the Non-Utility Group improve the
6 reliability of DCF results?
7 A. Yes. The estimates of growth from the DCF model depend on analysts' forecasts.
8 It is possible for utility growth rates to be distorted by short-term trends in the industry, or by the
9 industry falling into favor or disfavor by analysts. Such distortions could result in biased DCF
10 estimates for utilities. Because the Non-Utility Group includes low risk companies from more
11 than one industry, it helps to insulate against any possible distortion that may be present in results
12 for a particular sector.
13 Q. What criteria do you apply to develop the Non-Utility Group?
14 A. My comparable risk proxy group was composed of those United States companies
15 followed by Value Line that satisfy these criteria:
16 1. Pay common dividends.
17 2. Have a Safety Rank of"I".
18 3. Have a Financial Strength Rating of"A"or greater.
19 4. Have a beta value of 0.95 or less.
20 5. Have investment grade credit ratings from Moody's and S&P.
s6 Federal Power Comm'n v.Hope Natural Gas Co.,320 U.S. 391 (1944).
Exhibit No.3
34 Case Nos.AW-E-25-01/AW-G-25-01
J.Thompson,Avista
Schedule 2,Page 34 of 36

I Q. How do the overall risks of this Non-Utility Group compare with the Utility
2 Group?
3 A. Table 3 compares the Non-Utility Group with the Utility Group and with Avista
4 across the measures of investment risk discussed earlier.
5 TABLE 3
6 COMPARISON OF RISK INDICATORS
Value Line
Safety Financial
Moody's S&P Rank Strength Beta
Avista Baa2 BBB 3 A 0.95
Utility Group Baa2 BBB+ 2 B++ 0.97
Non-Utility Group A2 A- 1 A+ 0.80
7 As shown above,the risk indicators for the Non-Utility Group suggest less risk than for the Utility
8 Group and Avista.
9 The companies that make up the Non-Utility Group are representative of the pinnacle of
10 corporate America. These firms, which include household names such as Coca-Cola, Procter &
11 Gamble, and Walmart, have long corporate histories, well-established track records, and
12 exceedingly conservative risk profiles. Many of these companies pay dividends on a par with
13 utilities, with the average dividend yield for the group of 2.1%.37 Moreover, because of their
14 significance and name recognition, these companies receive intense scrutiny by the investment
15 community, which increases confidence that published growth estimates are representative of the
16 consensus expectations reflected in common stock prices.
37 Schedule 12,page 1.
Exhibit No.3
35 Case Nos.AW-E-25-01/AW-G-25-01
J.Thompson,Avista
Schedule 2,Page 35 of 36

I Q. What are the results of your DCF analysis for the Non-Utility Group?
2 A. I applied the DCF model to the Non-Utility Group using the same analysts' EPS
3 growth projections described earlier for the Utility Group. The results of my DCF analysis for the
4 Non-Utility Group are presented in Schedule 12. As summarized in Table 4, after eliminating
5 illogical values, application of the constant growth DCF model resulted in the following cost of
6 equity estimates:
7 TABLE 4
8 DCF RESULTS—NON-UTILITY GROUP
Growth Rate Average Midpoint
Value Line 10.5% 11.6%
IBES 10.8% 11.2%
Zacks 10.5% 11.3%
9 As discussed earlier, reference to the Non-Utility Group is consistent with established
10 regulatory principles. Required returns for utilities should be in line with those of non-utility firms
11 of comparable risk operating under the constraints of free competition. Because the actual cost of
12 equity is unobservable, and DCF results inherently incorporate a degree of error, cost of equity
13 estimates for the Non-Utility Group provide an important benchmark in evaluating a just and
14 reasonable ROE for Avista.
Exhibit No.3
36 Case Nos.AW-E-25-01/AW-G-25-01
J.Thompson,Avista
Schedule 2,Page 36 of 36

ROE ANALYSIS Schedule 3
Page 1 of 1
SUMMARY OF RESULTS
Method Result
DCF
Value Line 9.3%
IBES 9.7%
Zacks 10.3%
Internal br+ sv 8.7%
CAPM 11.7% -- 12.2%
Utility Risk Premium 10.5%
ROE Recommendation
Cost of Equity
Range 10.2% -- 11.2%
Flotation Cost Adiustment 0.07%
Recommended ROE Range
Range 10.27% -- 11.27%
Midpoint 4 0.77%
Exhibit No.3
Case Nos.AW-E-25-01/AW-G-25-01
J.Thompson,Avista
Schedule 3,Page 1 of 13

REGULATORY MECHANISMS Schedule 4
Page 1 of 4
UTILITY GROUP
Type of Adjustment Clause(a) (b) (c)
Conserv. New Capital Future Formula
Program Decoupling Trad. Renewables/ Delivery Environ. Trans. Test Rates/
Company Fuel/PPA Expense Full Partial Generation Non-Trad. Infra. Compliance Costs Year MRP
1 Avista Corp. ✓ ✓ ✓ -- -- -- -- -- - P ✓
2 Black Hills Corp. ✓ ✓ -- ✓ ✓ ✓ -- ✓ ✓ O ✓
3 CenterPoint Energy ✓ ✓ -- ✓ -- -- ✓ ✓ ✓ ✓
4 CMS Energy Corp. ✓ ✓ -- -- -- ✓ -- -- ✓ C --
5 Dominion Energy ✓ ✓ -- -- ✓ ✓ ✓ ✓ ✓ ✓
6 DTE Energy Co. J ✓ -- -- -- ✓ -- -- ✓ C --
7 Duke Energy Corp. ✓ ✓ -- ✓ ✓ ✓ ✓ ✓ ✓ CAP ✓
8 Edison International ✓ -- ✓ -- -- -- -- -- C ✓
9 Evergy Inc. J J J -- J J J ✓ P --
10 Exelon Corp. D ✓ ✓ ✓ -- ✓ ✓ ✓ ✓ O,P ✓
11 FirstEnergy Corp. J J ✓ -- J J J ✓ O,P J
12 NorthWestern Corp. ✓ ✓ -- -- -- -- -- --
13 OGE Energy Corp. ✓ ✓ -- ✓ J J J ✓ ✓ P J
14 Otter Tail Corp. ✓ ✓ -- -- J ✓ ✓ ✓ ✓ C,O ✓
15 Pinnacle West Capital ✓ ✓ -- ✓ -- ✓ -- ✓ ✓ ✓
16 Sempra Energy ✓ ✓ ✓ -- -- -- ✓ -- ✓ C ✓
17 TXNM Energy ✓ ✓ -- -- -- ✓ ✓ ✓ ✓ O ✓
18 Xcel Energy Inc. ✓ ✓ -- ✓ J ✓ ✓ ✓ ✓ C,O ✓
Notes
D-Delivery-only utility.
C-Fully-forecasted test years commonly used in the state listed for this operating company.
O-Fully-forecasted test years occasionally used in the state listed for this operating company.
P-Partially-forecasted test years commonly or occasionally used in the state listed for this operating company.
Source:Schedule 4,pages 2-4,contain operating company data that are aggregated into the parent company data on this page.
Exhibit No.3
Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 4,Page 1 of 4

REGULATORY MECHANISMS Schedule 4
Page 2 of 4
UTILITY GROUP OPERATING SUBSIDIARIES
Type of Adjustment Clause(a) (b) (c)
Conserv. New Capital Future Formula
Program Decoupling Trad. Renewables/ Delivery Environ. Trans. Test Rates/
Company State Fuel/PPA Expense Full Partial Generation Non-Trad. Infra. Compliance Costs Year MRP
1 AVISTA CORP.
Alaska Electric Light&Power Co. AK ✓ -- -- -- -- -- -- -- -- -- -
Avista Corp. ID J * J J * -- -- -- -- -- -- P -
Avista Corp. WA ✓ * ✓ ✓ -- * -- -- -- -- -- -- ✓
2 BLACK HILLS CORP.
Black Hills Colorado Electric Inc. CO ✓ ✓ -- -- ✓ * ✓ -- -- ✓ - ✓
Black Hills Power Inc. SD J -- -- -- -- -- -- J * J * --
Cheyenne Light Fuel&Power Co. WY ✓ ✓ -- J * -- -- -- -- -- O --
3 CENTERPOINT ENERGY
Southern Indiana Gas&Electric Co. IN ✓ J -- J * -- -- J * J * J - ✓
CenterPoint Energy Houston Electric LLC TX - * ✓ -- -- -- -- ✓ -- ✓ -- ✓
4 CMS ENERGY
Consumers Energy Co. MI ✓ ✓ -- * -- J ✓ * C --
5 DOMINION ENERGY
Virginia Electric&Power Co. NC ✓ ✓ * -- - * J * J -- --
Dominion Energy South Carolina SC ✓ ✓ -- -- ✓ * ✓ J
Virginia Electric&Power Co. VA ✓ ✓ -- - ✓ ✓ ✓ ✓ ✓ ✓
6 DTE ENERGY CO.
DTE Electric Co. MI J ✓ -- * ✓ ✓ * C
7 DUKE ENERGY
Duke Energy Florida LLC FL ✓ ✓ ✓ * ✓ * * ✓ C J
Duke Energy Indiana LLC IN ✓ ✓ -- ✓ * ✓ ✓ * ✓ * ✓ ✓
Duke Energy Kentucky Inc. KY ✓ ✓ -- J * ✓ O
Duke Energy Carolinas LLC NC ✓ ✓ * -- -- * ✓ * ✓ --
Duke Energy Progress LLC NC ✓ ✓ * -- -- * ✓ * ✓
Duke Energy Ohio Inc. OH D * ✓ * -- ✓ * ✓ ✓ * ✓ P J
Duke Energy Progress LLC SC ✓ ✓ -- -- * ✓ -- ✓
Duke Energy Carolinas LLC SC ✓ ✓ -- -- * ✓ -- ✓
8 EDISON INTERNATIONAL
Southern California Edison Co. CA ✓ -- ✓ -- C ✓
Exhibit No.3
Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 4,Page 2 of 4

REGULATORY MECHANISMS Schedule 4
Page 3 of 4
UTILITY GROUP OPERATING SUBSIDIARIES
Type of Adjustment Clause(a) (b) (c)
Conserv. New Capital Future Formula
Program Decoupling Trad. Renewables/ Delivery Environ. Trans. Test Rates/
Company State Fuel/PPA Expense Full Partial Generation Non-Trad. Infra. Compliance Costs Year MRP
9 EVERGY,INC.
Evergy Kansas Central Inc. KS ✓ ✓ * -- ✓ * -- ✓ -- ✓ ✓ -- --
Evergy Kansas South Inc. KS J ✓ * -- ✓ * -- ✓ -- ✓ ✓ -- --
Evergy Metro Inc. KS ✓ ✓ * -- -- -- -- ✓ * -- ✓ -- --
Evergy Metro Inc. MO J ✓ * -- ✓ * -- -- * ✓ * -- * ✓ * P --
Evergy Missouri West Inc. MO ✓ ✓ * -- ✓ * -- ✓ * ✓ * -- * ✓ * P -
10 EXELON CORP.
Delmarva Power&Light Co. DE D * J -- -- -- -- ✓ * -- J P
Potomac Electric Power Co. DC D * -- -- ✓ * -- J * J * -- P ✓
Commonwealth Edison Co. IL D * J -- -- ✓ ✓ * ✓ * ✓ O J
Baltimore Gas&Electric Co. MD D * J J -- -- -- -- -- -- P ✓
Delmarva Power&Light Co. MD D * J J -- -- -- -- -- -- P ✓
Potomac Electric Power Co. MD D * J J -- -- -- ✓ * - - P ✓
Atlantic City Electric Co. NJ D * J * -- J * -- -- ✓ * J * P
PECO Energy Co. PA D * J -- ✓ * ✓ O
11 FIRSTENERGY CORP.
Potomac Edison Co. MD D * J -- -- P
Jersey Central Power&Light Co. NJ D * J * J * -- * ✓ * P
Cleveland Elec.Illum./Ohio Ed./Toledo Ed. OH D * J * J ✓ ✓ * ✓ P J
Metropolitan Edison Co. PA D * J -- ✓ * J O -
Pennsylvania Electric Co. PA D * J -- J * J O -
Pennsylvania Power Co. PA D * ✓ J * J O -
West Penn Power Co. PA D * J -- J * -- -- O
Monongahela Power Co. WV J J -- * J --
Potomac Edison Co. WV ✓ --
12 NORTHWESTERN CORP.
NorthWestern Corp. MT ✓ * J --
NorthWestern Corp. SD ✓ J --
13 OGE ENERGY CORP.
Oklahoma Gas&Electric Co. AR J ✓ J * J J J J ✓ P -
Oklahoma Gas&Electric Co. OK J J * J * J J ✓ * -- ✓
Exhibit No.3
Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 4,Page 3 of 4

REGULATORY MECHANISMS Schedule 4
Page 4 of 4
UTILITY GROUP OPERATING SUBSIDIARIES
Type of Adjustment Clause(a) (b) (c)
Conserv. New Capital Future Formula
Program Decoupling Trad. Renewables/ Delivery Environ. Trans. Test Rates/
Company State Fuel/PPA Expense Full Partial Generation Non-Trad. Infra. Compliance Costs Year MRP
14 OTTER TAIL CORP.
Otter Tail Power Co. MN ✓ ✓ -- -- -- ✓ -- ✓ ✓ C --
Otter Tail Power Co. ND ✓ -- -- -- ✓ * ✓ * J * J * ✓ * O ✓
Otter Tail Power Corp. SD ✓ ✓ -- -- ✓ * -- J J -- -- -
15 PINNACLE WEST CAPITAL
Arizona Public Service Co. AZ ✓ ✓ -- ✓ * -- ✓ J ✓ -- ✓
16 SEMPRA ENERGY
San Diego Gas&Electric Co. CA ✓ -- ✓ -- -- -- -- -- C ✓
Oncor Electric Delivery Co. TX D * J -- -- -- -- J J -- ✓
17 TXNM ENERGY
Public Service Co.of New Mexico NM ✓ ✓ -- -- - J -- O -
Texas-New Mexico Power Co. TX D * J -- -- J ✓ - ✓
18 XCEL ENERGY,INC.
Public Service Co.of Colorado CO ✓ ✓ -- ✓ * J ✓ - ✓
Northern States Power Co.-Minnesota MN ✓ ✓ -- ✓ * J J ✓ C ✓
Southwestern Public Service Co. NM ✓ ✓ -- -- -- J -- -- -- O --
Northern States Power Co.-Minnesota ND ✓ -- -- -- -- J * ✓ * -- * ✓ * O ✓
Northern States Power Co.-Minnesota SD J J * -- J * J --
Southwestern Public Service Co. TX ✓ * ✓ -- -- -- * - - -- ✓ -- ✓
Northern States Power Co.-Wisconsin WI J * -- * -- -- -- * -- -- * -- -- C --
(a) S&P Global Market Intelligence,Adjustment clauses:A state by state overview,Regulatory Focus Topical Special Report(Jul.18,2022).
(b) Edison Electric Institute,Alternative Regulation for Emerging Utility Challenges: 2015 Update (Nov.11,2015).
(c) Formula rates and Multiyear Rate plans approved in the state listed for this operating company. See,U.S.Department of Energy,State Performance-Based Regulation Using Multiyear Rate Plans for U.S.
Electric Utilities,GRID Modernization Laboratory Consortium(Jul.2017);The Brattle Group,Exploring the Use of Alternative Regulatory Mechanisms to Establish New Base Rates,Joint Utilities of Maryland
(Mar.29,2018).
Notes
D-Delivery-only utility.
C-Fully-forecasted test years commonly used in the state listed for this operating company.
O-Fully-forecasted test years occasionally used in the state listed for this operating company.
P-Partially-forecasted test years commonly or occasionally used in the state listed for this operating company.
*For additional context around the specific recovery mechanisms available to the particular operating companies in each state,see the source document.
Exhibit No.3
Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 4,Page 4 of 4

CAPITAL STRUCTURE Schedule 5
Page 1 of 3
ELECTRIC GROUP OPERATING SUBSIDIARIES
Common
Operating Company Debt Preferred Equity
1 AVISTA CORP.
Avista Corp. 49.3% 0.0% 50.7%
Alaska Electric Light&Power 39.1% 0.0% 60.9%
2 BLACK HILLS CORP.
Black Hills Power(South Dakota Elec.) 49.9% 0.0% 50.1%
Cheyenne Light Fuel&Power(Wyo Elec.) 57.2% 0.0% 42.8%
Black Hills/Colorado Electric Utility Co 52.1% 0.0% 47.9%
3 CENTERPOINT ENERGY
Centerpoint Energy Houston Electric 55.4% 0.0% 44.6%
4 CMS ENERGY
Consumers Energy Co. 51.0% 0.2% 48.9%
5 DOMINION ENERGY
Virginia Electric &Power 44.7% 0.0% 55.3%
Dominion Energy South Carolina 45.2% 0.0% 54.8%
6 DTE ENERGY CO.
DTE Electric Co. 51.9% 0.0% 48.1%
7 DUKE ENERGY
Duke Energy Carolinas 48.6% 0.0% 51.4%
Duke Energy Florida 50.9% 0.0% 49.1%
Duke Energy Indiana 47.3% 0.0% 52.7%
Duke Energy Ohio 40.8% 0.0% 59.2%
Duke Energy Progress 52.0% 0.0% 48.0%
Duke Energy Kentucky 47.0% 0.0% 53.0%
8 EDISON INTERNATIONAL
Southern California Edison Co. 57.1% 5.0% 37.9%
9 EVERGY,INC.
Evergy Metro 47.8% 0.0% 52.2%
Evergy Kansas Central 48.4% 0.0% 51.6%
10 EXELON CORP.
Delmarva Power and Light 49.8% 0.0% 50.2%
Baltimore Gas &Electric Co. 45.6% 0.0% 54.4%
Commonweath Edison Co. 44.9% 0.0% 55.1%
PECO Energy Co. 46.7% 0.0% 53.3%
Potomac Electric Power Co. 49.7% 0.0% 50.3%
Atlantic City Electric Co. 50.3% 0.0% 49.7%
Exhibit No.3
Case Nos.AW-E-25-01/AW-G-25-01
I Thompson,Avista
Schedule 5,Page 1 of 3

CAPITAL STRUCTURE Schedule 5
Page 2 of 3
ELECTRIC GROUP OPERATING SUBSIDIARIES
Common
Operating Company Debt Preferred Equity
11 FIRSTENERGY CORP.
Cleve. Elec. Illum./Ohio Ed./Toledo Ed. 43.7% 0.0% 56.3%
Jersey Central Power&Light Co. 35.1% 0.0% 64.9%
Metropolitan Edison Co. 48.2% 0.0% 51.8%
Monongahela Power Co. 50.8% 0.0% 49.2%
Pennsylvania Electric Co. 49.0% 0.0% 51.0%
The Potomac Edison Co. 46.6% 0.0% 53.4%
West Penn Power Co. 51.2% 0.0% 48.8%
Pennsylvania Power 45.2% 0.0% 54.8%
12 NORTHWESTERN CORP.
NorthWestern Corporation 50.1% 0.0% 49.9%
13 OGE ENERGY CORP.
Oklahoma G&E 46.3% 0.0% 53.7%
14 OTTER TAIL CORP.
Otter Tail Power Co. 45.1% 0.0% 54.9%
15 PINNACLE WEST CAPITAL
Arizona Public Service Co. 49.8% 0.0% 50.2%
16 SEMPRA ENERGY
San Diego Gas &Electric 50.0% 0.0% 50.0%
Oncor Electric Delivery 43.3% 0.0% 56.7%
17 PNM RESOURCES
Public Service Company of New Mexico 52.9% 0.3% 46.8%
Texas-New Mexico Power Co. 50.5% 0.0% 49.5%
18 XCEL ENERGY,INC.
Northern States Power Co. (MN) 47.2% 0.0% 52.8%
Northern States Power Co. (WI) 46.6% 0.0% 53.4%
Public Service Co. of Colorado 42.8% 0.0% 57.2%
Southwestern Public Service Co. 45.7% 0.0% 54.3%
Minimum 35.1% 0.0% 37.9%
Maximum 57.2% 5.0% 64.9%
Average 48.1% 0.1% 51.8%
(a) Data from most recent SEC Form 10-K Reports and FERC Form 1 Reports.
Exhibit No.3
Case Nos.AW-E-25-01/AW-G-25-01
I Thompson,Avista
Schedule 5,Page 2 of 3

CAPITAL STRUCTURE Schedule 5
Page 3 of 3
UTILITY GROUP
At Year-end 2023 (a) Value Line Projected(b)
Common Common
Company Debt Preferred Equity Debt Preferred Equity
1 Avista Corp. 50.4% 0.0% 49.6% 48.5% 0.0% 51.5%
2 Black Hills Corp. 57.1% 0.0% 42.9% 56.0% 0.0% 44.0%
3 CenterPoint Energy 65.8% 0.0% 34.2% 61.0% 0.0% 39.0%
4 CMS Energy Corp. 65.6% 0.9% 33.5% 62.5% 1.0% 36.5%
5 Dominion Energy 59.1% 2.6% 38.2% 55.0% 2.0% 43.0%
6 DTE Energy Co. 63.9% 0.0% 36.1% 61.0% 0.0% 39.0%
7 Duke Energy Corp. 60.0% 1.6% 38.4% 61.0% 1.5% 37.5%
8 Edison International 64.8% 3.3% 31.9% 64.0% 7.5% 28.5%
9 Evergy Inc. 55.0% 0.0% 45.0% 53.5% 0.0% 46.5%
10 Exelon Corp. 61.5% 0.0% 38.5% 64.5% 0.0% 35.5%
11 FirstEnergy Corp. 68.9% 0.0% 31.1% 63.0% 0.0% 37.0%
12 NorthWestern Energy Grp. 49.2% 0.0% 50.8% 50.5% 0.0% 49.5%
13 OGE Energy Corp. 49.0% 0.0% 51.0% 50.0% 0.0% 50.0%
14 Otter Tail Corp. 36.3% 0.0% 63.7% 42.5% 0.0% 57.5%
15 Pinnacle West Capital 57.2% 0.0% 42.8% 52.0% 0.0% 48.0%
16 Sempra Energy 42.7% 1.3% 56.0% 55.0% 1.0% 44.0%
17 TXNM Energy 65.2% 0.2% 34.6% 69.0% 0.5% 30.5%
18 Xcel Energy Inc. 59.1% 0.0% 40.9% 62.5% 0.0% 37.5%
Minimum 36.3% 0.0% 31.1% 42.5% 0.0% 28.5%
Maximum 68.9% 3.3% 63.7% 69.0% 7.5% 57.5%
Average 57.3% 0.6% 42.2% 57.3% 0.8% 41.9%
(a) SEC Form 10-K Reports.
(b) The Value Line Investment Survey(Oct. 18,Nov. 8 and Dec.6,2024).
Exhibit No.3
Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 5, Page 3 of 3

DCF MODEL -UTILITY GROUP Schedule 6
Page 1 of 3
DIVIDEND YIELD
(a) (b)
Company Price Dividends Yield
1 Avista Corp. $ 37.86 $ 1.92 5.1%
2 Black Hills Corp. $ 61.74 $ 2.68 4.3%
3 CenterPoint Energy $ 30.77 $ 0.84 2.7%
4 CMS Energy Corp. $ 68.73 $ 2.06 3.0%
5 Dominion Energy $ 57.92 $2.67 4.6%
6 DTE Energy Co. $ 122.48 $4.08 3.3%
7 Duke Energy Corp. $ 113.96 $4.18 3.7%
8 Edison International $ 84.20 $ 3.25 3.9%
9 Evergy Inc. $ 62.70 $2.61 4.2%
10 Exelon Corp. $ 38.76 $ 1.52 3.9%
11 FirstEnergy Corp. $ 41.84 $ 1.78 4.3%
12 NorthWestern Energy Grp. $ 54.62 $2.63 4.8%
13 OGE Energy Corp. $ 42.34 $ 1.69 4.0%
14 Otter Tail Corp. $ 80.16 $ 1.87 2.3%
15 Pinnacle West Capital $ 90.70 $ 3.60 4.0%
16 Sempra Energy $ 89.79 $ 2.56 2.9%
17 TXNM Energy $ 46.45 $ 1.63 3.5%
18 Xcel Energy Inc. $ 68.67 $ 2.27 3.3%
Average 3.8%
(a) Average of closing prices for 30 trading days ended Dec. 6,2024.
(b) The Value Line Investment Survey, Summary&Index(Dec. 13,2024).
Exhibit No.3
Case Nos.AW-E-25-01/AW-G-25-01
I Thompson,Avista
Schedule 6,Page 1 of 3

DCF MODEL - UTILITY GROUP Schedule 6
Page 2 of 3
GROWTH RATES
(a) (b) (c) (d)
Earnings Growth br+sv
Company V Line IBES Zacks Growth
1 Avista Corp. 5.0% 3.9% 3.9% 3.2%
2 Black Hills Corp. 4.0% 3.5% 3.5% 4.0%
3 CenterPoint Energy 6.5% 7.4% 7.1% 5.2%
4 CMS Energy Corp. 6.0% 7.6% 7.5% 5.8%
5 Dominion Energy 3.0% 20.4% 13.6% 4.7%
6 DTE Energy Co. 4.5% n/a 8.0% 6.5%
7 Duke Energy Corp. 5.0% 6.7% 6.4% 4.8%
8 Edison International 6.5% 8.7% 8.5% 6.2%
9 Evergy Inc. 7.5% 6.2% 5.9% 3.6%
10 Exelon Corp. n/a 4.8% 5.7% 4.0%
11 FirstEnergy Corp. 6.0% n/a 6.9% 6.7%
12 NorthWestern Energy Grp. 4.0% n/a 6.1% 3.1%
13 OGE Energy Corp. 6.5% 5.3% 5.2% 3.3%
14 Otter Tail Corp. 4.5% n/a n/a 6.5%
15 Pinnacle West Capital 4.5% 7.2% 8.2% 4.1%
16 Sempra Energy 7.0% 5.9% 7.7% 6.2%
17 TX-NM Energy 5.0% 4.3% 3.0% 5.0%
18 Xcel Energy Inc. 6.0% 6.7% 6.9% 5.4%
(a) The Value Line Investment Survey(Oct. 18,Nov. 8 and Dec. 6,2024).
(b) research2.fidelity.com(retreived Dec. 8,2024).
(c) www.zacks.com(retrieved Dec. 8,2024).
(d) See Schedule 7.
Exhibit No.3
Case Nos.AW-E-25-01/AW-G-25-01
I Thompson,Avista
Schedule 6,Page 2 of 3

DCF MODEL - UTILITY GROUP Schedule 6
Page 3 of 3
COST OF EQUITY ESTIMATES
(a) (a) (a) (a)
br+sv
Company V Line IBES Zacks Growth
1 Avista Corp. 10.1% 9.0% 8.9% 8.3%
2 Black Hills Corp. 8.3% 7.8% 7.9% 8.3%
3 CenterPoint Energy 9.2% 10.1% 9.8% 7.9%
4 CMS Energy Corp. 9.0% 10.6% 10.5% 8.8%
5 Dominion Energy 7.6% 25.0% 18.2% 9.3%
6 DTE Energy Co. 7.8% n/a 11.4% 9.9%
7 Duke Energy Corp. 8.7% 10.4% 10.0% 8.5%
8 Edison International 10.4% 12.6% 12.3% 10.1%
9 Evergy Inc. 11.7% 10.4% 10.0% 7.8%
10 Exelon Corp. n/a 8.7% 9.6% 7.9%
11 FirstEnergy Corp. 10.3% n/a 11.2% 11.0%
12 NorthWestern Energy Grp. 8.8% n/a 11.0% 8.0%
13 OGE Energy Corp. 10.5% 9.3% 9.2% 7.3%
14 Otter Tail Corp. 6.8% n/a n/a 8.9%
15 Pinnacle West Capital 8.5% 11.2% 12.2% 8.1%
16 Sempra Energy 9.9% 8.8% 10.5% 9.0%
17 TX-NM Energy 8.5% 7.8% 6.5% 8.5%
18 Xcel Energy Inc. 9.3% 10.0% 10.2% 8.7%
Average (b) 9.3% 9.7% 10.3% 8.7%
(a) Sum of dividend yield(Schedule 6,p. 1)and respective growth rate(Schedule 6,p.2).
(b) Excludes highlighted values.
Exhibit No.3
Case Nos.AVU-E-25-01/AVU-G-25-01
I Thompson,Avista
Schedule 6,Page 3 of 3

BR+SV GROWTH RATE Schedule 7
Page 1 of 2
UTILITY GROUP
(a) (a) (a) (b) (c) (d) (e) (t) (g)
2028 Adjustment "sv"Factor
Company EPS DPS BVPS b r Factor Adiusted r br s v sv br+sv
1 Avista Corp. $3.00 $2.20 $35.50 26.7% 8.5% 1.0197 8.6% 2.3% 0.0265 0.3545 0.94% 3.2%
2 Black Hills Corp. $4.80 $3.00 $56.00 37.5% 8.6% 1.0268 8.8% 3.3% 0.0257 0.2533 0.65% 4.0%
3 CenterPoint Energy $1.90 $1.01 $20.00 46.8% 9.5% 1.0304 9.8% 4.6% 0.0128 0.4667 0.60% 5.2%
4 CMS Energy Corp. $4.00 $2.50 $30.00 37.5% 13.3% 1.0216 13.6% 5.1% 0.0119 0.6250 0.74% 5.8%
5 Dominion Energy $4.05 $2.67 $36.35 34.1% 11.1% 1.0253 11.4% 3.9% 0.0176 0.4408 0.77% 4.7%
6 DTE Energy Co. $8.90 $4.83 $63.10 45.7% 14.1% 1.0229 14.4% 6.6% (0.0009) 0.6056 -0.05% 6.5%
7 Duke Energy Corp. $7.60 $4.30 $70.00 43.4% 10.9% 1.0096 11.0% 4.8% 0.0019 0.4615 0.09% 4.8%
8 Edison International $6.75 $4.00 $48.50 40.7% 13.9% 1.0302 14.3% 5.8% 0.0068 0.5381 0.37% 6.2%
9 Evergy Inc. $4.75 $3.05 $47.50 35.8% 10.0% 1.0124 10.1% 3.6% 0.0004 0.4242 0.02% 3.6%
10 Exelon Corp. $3.10 $1.95 $29.75 37.1% 10.4% 1.0111 10.5% 3.9% 0.0021 0.4333 0.09% 4.0%
11 FirstEnergy Corp. $3.50 $2.17 $24.00 38.0% 14.6% 1.0312 15.0% 5.7% 0.0170 0.5826 0.99% 6.7%
12 NorthWestern Energy Grl $4.25 $2.76 $51.85 35.1% 8.2% 1.0174 8.3% 2.9% 0.0111 0.2023 0.22% 3.1%
13 OGE Energy Corp. $2.70 $1.85 $26.25 31.5% 10.3% 1.0126 10.4% 3.3% (0.0001) 0.3000 0.00% 3.3%
14 Otter Tail Corp. $4.25 $2.20 $34.25 48.2% 12.4% 1.0144 12.6% 6.1% 0.0082 0.5433 0.45% 6.5%
15 Pinnacle West Capital $6.10 $3.80 $71.00 37.7% 8.6% 1.0355 8.9% 3.4% 0.0222 0.3395 0.76% 4.1%
16 Sempra Energy $6.30 $3.26 $59.50 48.3% 10.6% 1.0359 11.0% 5.3% 0.0193 0.4591 0.88% 6.2%
17 TXNM Energy $3.35 $1.94 $33.50 42.1% 10.0% 1.0300 10.3% 4.3% 0.0171 0.3909 0.67% 5.0%
18 Xcel Energy Inc. $4.55 $2.72 $41.00 40.2% 11.1% 1.0311 11.4% 4.6% 0.0168 0.4710 0.79% 5.4%
Exhibit No.3
Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 7,Page 1 of 2

BR+SV GROWTH RATE Schedule 7
Page 2 of 2
UTILITY GROUP
(a) (a) (h) (a) (a) (h) (i) (a) (a) (j) (a) (a) (i)
2023 2028 Chg 2028 Common Shares
Company Ea Ratio Tot Can Corn Eq Ea Ratio Tot Cap Com Eg Eguity High Low Avg. M/B 2023 2028 Growth
1 Avista Corp. 48.8% $5,091 $2,485 51.5% $5,875 $3,026 4.0% $65.0 $45.0 $55.0 1.549 78.08 85.00 1.71%
2 Black Hills Corp. 45.8% $7,017 $3,214 44.0% $9,550 $4,202 5.5% $85.0 $65.0 $75.0 1.339 68.20 75.00 1.92%
3 CenterPoint Energy 35.5% $27,226 $9,665 39.0% $33,600 $13,104 6.3% $45.0 $30.0 $37.5 1.875 631.23 653.00 0.68%
4 CMS Energy Corp. 33.1% $22,114 $7,320 36.5% $24,900 $9,089 4.4% $90.0 $70.0 $80.0 2.667 294.40 301.00 0.44%
5 Dominion Energy 42.4% $60,777 $25,769 43.0% $77,150 $33,175 5.2% $75.0 $55.0 $65.0 1.788 838.00 880.00 0.98%
6 DTE Energy Co. 38.0% $26,282 $9,987 39.0% $32,200 $12,558 4.7% $185.0 $135.0 $160.0 2.536 206.36 206.00 -0.03%
7 Duke Energy Corp. 40.4% $121,564 $49,112 37.5% $144,100 $54,038 1.9% $150.0 $110.0 $130.0 1.857 771.00 775.00 0.10%
8 Edison International 28.7% $48,260 $13,851 28.5% $65,750 $18,739 6.2% $120.0 $90.0 $105.0 2.165 383.93 390.00 0.31%
9 Evergy Inc. 48.0% $20,019 $9,609 46.5% $23,400 $10,881 2.5% $95.0 $70.0 $82.5 1.737 229.73 230.00 0.02%
10 Exclon Corp. 39.1% $65,837 $25,742 35.5% $81,000 $28,755 2.2% $60.0 $45.0 $52.5 1.765 999.00 1005.00 0.12%
11 FirstEnergy Corp. 31.3% $33,322 $10,430 37.0% $38,500 $14,245 6.4% $70.0 $45.0 $57.5 2.396 574.34 595.00 0.71%
12 NorthWestern Energy Grl 50.9% $5,475 $2,787 49.5% $6,700 $3,317 3.5% $75.0 $55.0 $65.0 1.254 61.25 64.00 0.88%
13 OGE Energy Corp. 49.6% $9,238 $4,582 50.0% $10,400 $5,200 2.6% $45.0 $30.0 $37.5 1.429 200.30 200.20 -0.01%
14 Otter Tail Corp. 58.5% $2,148 $1,257 57.5% $2,525 $1,452 2.9% $85.0 $65.0 $75.0 2.190 41.71 42.50 0.38%
15 Pinnacle West Capital 45.0% $13,718 $6,173 48.0% $18,350 $8,808 7.4% $125.0 $90.0 $107.5 1.514 113.42 122.00 1.47%
16 Sempra Energy 49.2% $56,454 $27,775 44.0% $90,400 $39,776 7.4% $125.0 $95.0 $110.0 1.849 631.43 665.00 1.04%
17 TXNM Energy 35.6% $6,602 $2,350 30.5% $10,400 $3,172 6.2% $65.0 $45.0 $55.0 1.642 90.20 95.00 1.04%
18 Xcel Energy Inc. 41.4% $42,529 $17,607 37.5% $64,100 $24,038 6.4% $90.0 $65.0 $77.5 1.890 554.94 580.00 0.89%
(a) The Value Line Investment Survey(Oct.18,Nov.8 and Dec.6,2024).
(b) "b"is the retention ratio,computed as(EPS-DPS)/EPS.
(c) "r"is the rate of return on book equity,computed as EPSBVPS.
(d) Computed using the formula 2*(1+5-Yr.Change in Equity)/(2+5 Yr.Change in Equity).
(e) Product of average year-end"r"for 2028 and Adjustment Factor.
(f) Product of change in common shares outstanding and M/B Ratio.
(g) Computed as 1-B/M Ratio.
(h) Product of total capital and equity ratio.
(i) Five-year rate of change.
(j) Average of High and Low expected market prices divided by 2028 BVPS.
Exhibit No.3
Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 7,Page 2 of 2

CAPM Schedule 8
Page 1 of 1
UTILITY GROUP
(a) (b) (c) (d) (e) (f)
Market Return (R.)
Div Proj. Risk-Free Risk Unadjusted Market Size Adjusted
Company Yield Growth R(-) Rate Premium Beta CAPM Cap Adjustment CAPM
1 Avista Corp. 1.6% 10.3% 11.9% 4.3% 7.6% 0.95 11.5% $2,900 1.21% 12.7%
2 Black Hills Corp. 1.6% 10.3% 11.9% 4.3% 7.6% 1.05 12.3% $4,100 0.95% 13.2%
3 CenterPoint Energy 1.6% 10.3% 11.9% 4.3% 7.6% 1.15 13.0% $21,200 0.46% 13.5%
4 CMS Energy Corp. 1.6% 10.3% 11.9% 4.3% 7.6% 0.85 10.8% $20,800 0.46% 11.2%
5 Dominion Energy 1.6% 10.3% 11.9% 4.3% 7.6% 0.90 11.1% $50,400 -0.06% 11.1%
6 DTE Energy Co. 1.6% 10.3% 11.9% 4.3% 7.6% 1.00 11.9% $25,800 0.46% 12.4%
7 Duke Energy Corp. 1.6% 10.3% 11.9% 4.3% 7.6% 0.90 11.1% $90,400 -0.06% 11.1%
8 Edison International 1.6% 10.3% 11.9% 4.3% 7.6% 1.05 12.3% $32,700 0.46% 12.7%
9 Evergy Inc. 1.6% 10.3% 11.9% 4.3% 7.6% 0.95 11.5% $13,600 0.61% 12.1%
10 Exelon Corp. 1.6% 10.3% 11.9% 4.3% 7.6% n/a n/a $40,300 -0.06% n/a
11 FirstEnergy Corp. 1.6% 10.3% 11.9% 4.3% 7.6% 0.90 11.1% $25,200 0.46% 11.6%
12 NorthWestern Energy Grp. 1.6% 10.3% 11.9% 4.3% 7.6% 1.00 11.9% $3,400 0.95% 12.9%
13 OGE Energy Corp. 1.6% 10.3% 11.9% 4.3% 7.6% 1.10 12.7% $8,000 0.61% 13.3%
14 Otter Tail Corp. 1.6% 10.3% 11.9% 4.3% 7.6% 0.95 11.5% $3,800 0.95% 12.5%
15 Pinnacle West Capital 1.6% 10.3% 11.9% 4.3% 7.6% 0.95 11.5% $9,900 0.61% 12.1%
16 Sempra Energy 1.6% 10.3% 11.9% 4.3% 7.6% 1.00 11.9% $51,600 -0.06% 11.8%
17 TXNM Energy 1.6% 10.3% 11.9% 4.3% 7.6% 0.90 11.1% $3,900 0.95% 12.1%
18 Xcel Energy Inc. 1.6% 10.3% 11.9% 4.3% 7.6% 0.85 10.8% $35,100 0.46% 11.2%
Average 11.7% 12.2%
(a) Weighted average for dividend-paying stocks in the S&P 500 based on data from www.valueline.com(retrieved Nov. 3,2024)
(b) Average of weighted average earnings growth rates from IBES,Value Line,and Zacks for dividend-paying stocks in the S&P 500 based on data from Refinitiv,as
provided by fidelity.com(retrieved Nov. 3,2024),www.valueline.com(retrieved Nov. 3,2024),and www.zacks.com(retrieved Nov. 3,2024). Eliminated growth
rates that were greater than 20%,as well as all negative values.
(c) Average yield on 30-year Treasury bonds for six-months ending Nov.2024 based on data from Moody's Investors Service.
(d) The Value Line Investment Survey, Summary&Index(Dec. 13,2024).
(e) The Value Line Investment Survey(Oct. 18,Nov. 8 and Dec. 6,2024). Exhibit No.3
(f) Kroll,2023 CRSP Deciles Size Premium,Cost of Capital Navigator(2024). Case Nos.AVID-E-25-01/AW-G-25-01
J.Thompson,Avista
Schedule 8,Page 1 of 1

UTILITY RISK PREMIUM Schedule 9
Page 1 of 3
COST OF EQUITY ESTIMATE
Current Equity Risk Premium
(a) Avg. Yield over Study Period 7.78%
(b) Average Utility Bond Yield 5.50%
Change in Bond Yield -2.28%
(c) Risk Premium/Interest Rate Relationship -0.4240
Adjustment to Average Risk Premium 0.97%
(a) Average Risk Premium over Study Period 3.89%
Adjusted Risk Premium 4.86%
Implied Cost of Equity
(b) Baa Utility Bond Yield 5.68%
Adjusted Equity Risk Premium 4.86%
Risk Premium Cost of Equity 10.54%
(a) Schedule 9,page 2.
(b) Average bond yield on all utility bonds and'Baa'subset for six-months ending Nov. 2024 based
on data from Moody's Investors Service at www.credittrends.com.
(c) Schedule 9,page 3.
Exhibit No.3
Case Nos.AVU-E-25-01/AVU-G-25-01
I Thompson,Avista
Schedule 9,Page 1 of 3

UTILITY RISK PREMIUM Schedule 9
Page 2 of 3
AUTHORIZED RETURNS
(a) (b) (a) (b)
Allowed Average Utility Risk Allowed Average Utility Risk
Year ROE Bond Yield Premium Year ROE Bond Yield Premium
1974 13.10% 9.27% 3.83% 1999 10.72% 7.55% 3.17%
1975 13.20% 9.88% 3.32% 2000 11.58% 8.09% 3.49%
1976 13.10% 9.17% 3.93% 2001 11.07% 7.72% 3.35%
1977 13.30% 8.58% 4.72% 2002 11.21% 7.53% 3.68%
1978 13.20% 9.22% 3.98% 2003 10.96% 6.61% 4.35%
1979 13.50% 10.39% 3.11% 2004 10.81% 6.20% 4.61%
1980 14.23% 13.15% 1.08% 2005 10.51% 5.67% 4.84%
1981 15.22% 15.62% -0.40% 2006 10.34% 6.08% 4.26%
1982 15.78% 15.33% 0.45% 2007 10.32% 6.11% 4.21%
1983 15.36% 13.31% 2.05% 2008 10.37% 6.65% 3.72%
1984 15.32% 14.03% 1.29% 2009 10.52% 6.28% 4.24%
1985 15.20% 12.29% 2.91% 2010 10.29% 5.56% 4.73%
1986 13.93% 9.46% 4.47% 2011 10.19% 5.13% 5.06%
1987 12.99% 9.98% 3.01% 2012 10.02% 4.26% 5.76%
1988 12.79% 10.45% 2.34% 2013 9.82% 4.55% 5.27%
1989 12.97% 9.66% 3.31% 2014 9.76% 4.41% 5.35%
1990 12.70% 9.76% 2.94% 2015 9.60% 4.37% 5.23%
1991 12.54% 9.21% 3.33% 2016 9.60% 4.11% 5.49%
1992 12.09% 8.57% 3.52% 2017 9.68% 4.07% 5.61%
1993 11.46% 7.56% 3.90% 2018 9.56% 4.34% 5.22%
1994 11.21% 8.30% 2.91% 2019 9.65% 3.86% 5.79%
1995 11.58% 7.91% 3.67% 2020 9.39% 3.07% 6.32%
1996 11.40% 7.74% 3.66% 2021 9.39% 3.14% 6.25%
1997 11.33% 7.63% 3.70% 2022 9.58% 4.76% 4.82%
1998 11.77% 7.00% 4.77% 2023 9.66% 5.60% 4.06%
Average 11.68% 7.78% 3.89%
(a) S&P Global Market Intelligence,Major Rate Case Decisions,RRA Regulatory Focus;UtilityScope Regulatory Service,Argus. Data for"general"rate cases
(excluding limited-issue rider cases)beginning in 2006(the first year such data presented by RRA).
(b) Moody's Investors Service. Exhibit No.3
Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 9,Page 2 of 3

UTILITY RISK PREMIUM Schedule 9
Page 3 of 3
REGRESSION RESULTS
Authorized Equity Risk Premiums vs.Utility Interest Rates
(1974-2023)
7%
6%
5%
sue. 4% ♦ N 4
3% �♦ • ♦♦
a '
�+ 2% '
w 1% y=-0.424x+0.0719
Rz=0.881
0%
-1%
3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16%
Average Utility Interest Rates
Exhibit No.3
Case Nos.AVU-E-25-01/AVU-G-25-01
I Thompson,Avista
Schedule 9,Page 3 of 3

FLOTATION COST ADJUSTMENT Schedule 10
Page 1 of 1
AVISTA CORP. EQUITY ISSUANCES
Expenses
Amount of as % of
Common Stock Gross
Issued Expenses Proceeds
2010 Beginning Balance $759,124,250 $13,859,828 1.826%
Dividend Reinvestment Plan
2023 $115,198,878 $1,593,061 1.312%
2022 $140,775,461 $1,847,393 1.312%
2021 $91,323,501 $1,325,573 1.452%
2020 $73,189,230 $1,041,036 1.422%
2019 $65,627,509 $1,055,064 1.608%
2018 $1,227,846 $21,112 1.719%
2017 $57,065,164 $684,740 1.200%
2016 $67,974,613 $1,029,592 1.515%
2015 $1,669,374 $27,449 1.644%
2014 $113,591,642 -$103,787 -0.091%
2013 $6,026,604 $14,798 0.246%
2012 $30,902,292 $602,816 1.951%
2011 $26,651,589 $300,124 1.126%
2010 $46,638,090 $26,505 0.057%
$1,596,986,042 $23,325,304 1.461%
Flotation Cost Adiustment based on Avista data
Avista Dividend Yield(a) 5.1%
Avista Issuance Expense Factor 1.461%
Flotation Cost Adjustment(basis points) 7
(a) Schedule 6,page 1.
Exhibit No.3
Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 10,Page 1 of 1

EXPECTED EARNINGS BENCHMARK Schedule 11
Page 1 of 1
UTILITY GROUP
(a) (b) (c)
Expected Return Adjustment Adjusted Return
Company on Common Equity Factor on Common Equity
1 Avista Corp. 8.5% 1.0197 8.7%
2 Black Hills Corp. 8.5% 1.0268 8.7%
3 CenterPoint Energy 9.5% 1.0304 9.8%
4 CMS Energy Corp. 13.5% 1.0216 13.8%
5 Dominion Energy 11.0% 1.0253 11.3%
6 DTE Energy Co. 12.5% 1.0229 12.8%
7 Duke Energy Corp. 9.0% 1.0096 9.1%
8 Edison International 13.5% 1.0302 13.9%
9 Evergy Inc. 10.0% 1.0124 10.1%
10 Exelon Corp. 10.0% 1.0111 10.1%
11 FirstEnergy Corp. 14.5% 1.0312 15.0%
12 NorthWestern Energy Grp. 8.0% 1.0174 8.1%
13 OGE Energy Corp. 13.0% 1.0126 13.2%
14 Otter Tail Corp. 11.5% 1.0144 11.7%
15 Pinnacle West Capital 8.5% 1.0355 8.8%
16 Sempra Energy 10.5% 1.0359 10.9%
17 TXNM Energy 10.0% 1.0300 10.3%
18 Xcel Energy Inc. 11.0% 1.0311 11.3%
Average (d) 10.7% 11.0%
(a) The Value Line Investment Survey(Oct. 18,Nov. 8 and Dec. 6,2024).
(b) Adjustment to convert year-end return to an average rate of return from Schedule 7.
(c) (a)x(b).
(d) Excludes highlighted values.
Exhibit No.3
Case Nos.AW-E-25-01/AW-G-25-01
J.Thompson,Avista
Schedule 11,Page 1 of 1

DCF MODEL-NON-UTILITY GROUP Schedule 12
Page 1 of 3
DIVIDEND YIELD
(a) (b)
Company Industry Group Price Dividends Yield
1 Abbott Labs. Med Supp Non-Invasive $116.39 $ 2.20 1.9%
2 AbbVie Inc. Drug $183.18 $ 6.20 3.4%
3 Air Products&Chem. Chemical(Diversified) $320.55 $ 7.08 2.2%
4 Alphabet Inc. Internet $174.38 $ 0.84 0.5%
5 Amdocs Ltd. IT Services $87.73 $ 1.92 2.2%
6 Amgen Biotechnology $298.71 $ 9.30 3.1%
7 Apple Inc. Computers/Peripherals $230.73 $ 1.00 0.4%
8 AptarGroup Packaging&Container $171.20 $ 1.80 1.1%
9 Becton,Dickinson Med Supp Invasive $228.66 $ 3.96 1.7%
10 Bristol-Myers Squibb Drug $56.95 $ 2.40 4.2%
11 Brown&Brown Financial Svcs.(Div.) $109.54 $ 0.60 0.5%
12 Brown-Forman'B' Beverage $42.57 $ 0.96 2.3%
13 Church&Dwight Household Products $107.12 $ 1.14 1.1%
14 Cisco Systems Telecom.Equipment $57.79 $ 1.60 2.8%
15 CME Group Brokers&Exchanges $229.62 $ 4.60 2.0%
16 Coca-Cola Beverage $63.95 $ 2.02 3.2%
17 Colgate-Palmolive Household Products $94.04 $ 2.00 2.1%
18 Comcast Corp. Cable TV $43.11 $ 1.24 2.9%
19 Conagra Brands Food Processing $27.98 $ 1.44 5.1%
20 Costco Wholesale Retail Store $931.64 $ 4.92 0.5%
21 Danaher Corp. Med Supp Non-Invasive $239.76 $ 1.17 0.5%
22 Electronic Arts Entertainment Tech $160.07 $ 0.80 0.5%
23 Gallagher(Arthur J.) Financial Svcs.(Div.) $295.91 $ 2.50 0.8%
24 Gen'l Mills Food Processing $65.84 $ 2.46 3.7%
25 Gilead Sciences Drug $91.28 $ 3.08 3.4%
26 Hershey Co. Food Processing $176.82 $ 5.72 3.2%
27 Home Depot Retail Building Supply $410.16 $ 9.00 2.2%
28 Hormel Foods Food Processing $30.93 $ 1.13 3.7%
29 IDEX Corp. Machinery $225.13 $ 2.85 1.3%
30 Int'l Business Mach. Computer Software $217.08 $ 6.71 3.1%
31 Johnson&Johnson Drug $155.51 $ 5.06 3.3%
32 Kimberly-Clark Household Products $135.51 $ 4.88 3.6%
33 Lilly(Eli) Drug $804.40 $ 5.20 0.6%
34 Lockheed Martin Aerospace/Defense $539.83 $ 13.20 2.4%
35 Marsh&McLennan Financial Svcs.(Div.) $225.03 $ 3.26 1.4%
36 McDonald's Corp. Restaurant $294.84 $ 7.08 2.4%
37 McKesson Corp. Med Supp Non-Invasive $586.66 $ 2.84 0.5%
38 Merck&Co. Drug $100.98 $ 3.08 3.1%
39 Microsoft Corp. Computer Software $423.00 $ 3.41 0.8%
40 Mondelez Int'l Food Processing $65.99 $ 1.88 2.8%
41 NewMarket Corp. Chemical(Specialty) $541.85 $ 10.00 1.8%
42 Northrop Grumman Aerospace/Defense $501.90 $ 8.65 1.7%
43 PepsiCo,Inc. Beverage $163.43 $ 5.50 3.4%
44 Procter&Gamble Household Products $170.53 $ 4.03 2.4%
45 Progressive Corp. Insurance(Prop/Cas.) $256.34 $ 0.40 0.2%
46 Republic Services Environmental $209.99 $ 2.32 1.1%
47 Roper Tech. Computer Software $556.59 $ 3.32 0.6%
48 Smucker(J.M.) Food Processing $114.43 $ 4.32 3.8%
49 Texas Instruments Semiconductor $204.30 $ 5.44 2.7%
50 Thermo Fisher Sci. Med Supp Non-Invasive $534.78 $ 1.56 0.3%
51 Travelers Cos. Insurance(Prop/Cas.) $256.83 $ 4.20 1.6%
52 UnitedHealth Group Medical Services $590.02 $ 8.40 1.4%
53 Verizon Communic. Telecom.Services $42.08 $ 2.71 6.4%
54 Walmart Inc. Retail Store $86.92 $ 0.83 1.0%
55 Waste Management Environmental $220.64 $ 3.00 1.4%
2.1%
Exhibit No.3
(a) Average of closing prices for 30 trading days ended Dec.6,2024. Case Nos.AVU-E-25-01/AVU-G-25-01
(b) The Value Line Investment Survey,Summary&Index(Dec.13,2024). J.Thompson,Avista
Schedule 12,Page 1 of 3

DCF MODEL-NON-UTILITY GROUP Schedule 12
Page 2 of 3
GROWTH RATES
(a) (b) (c)
Earnings Growth
Company Ticker V Line IBES Zacks
1 Abbott Labs. ABT 4.00% 8.30% 9.10%
2 AbbVie Inc. ABBV 4.00% 6.80% 7.99%
3 Air Products&Chem. APD 8.50% 6.30% 7.79%
4 Alphabet Inc. GOOG 13.50% 21.90% 17.83%
5 Amdocs Ltd. DOX 7.00% 8.00% 9.69%
6 Amgen AMGN 4.50% 5.60% 5.75%
7 Apple Inc. AAPL 8.50% 14.20% 13.74%
8 AptarGroup ATR 12.50% 10.80% 10.79%
9 Becton,Dickinson BDX 6.50% 8.70% 9.31%
10 Bristol-Myers Squibb BMY 1.00% -3.90% 4.00%
11 Brown&Brown BRO 12.50% 10.40% 11.62%
12 Brown-Forman'B' BF/B 14.00% -0.11% 3.78%
13 Church&Dwight CHD 6.50% 9.00% 7.93%
14 Cisco Systems CSCO 3.50% 4.00% 4.52%
15 CME Group CME 6.00% 4.60% 4.24%
16 Coca-Cola KO 7.00% 5.30% 5.77%
17 Colgate-Palmolive CL 11.50% 8.90% 7.80%
18 Comcast Corp. CMCSA 7.50% 7.90% 6.21%
19 Conagra Brands CAG 3.00% 1.60% 3.76%
20 Costco Wholesale COST 10.00% 9.80% 9.13%
21 Danaher Corp. DHR 2.00% 6.40% 7.25%
22 Electronic Arts EA 14.00% 12.90% 13.11%
23 Gallagher(Arthur J.) AJG 15.50% 11.20% 11.61%
24 Gen'l Mills GIS 4.50% 3.30% 4.27%
25 Gilead Sciences GILD 2.50% 6.20% 7.37%
26 Hershey Co. HSY 7.00% -1.80% 4.61%
27 Home Depot HD 5.50% 3.70% 9.52%
28 Hormel Foods HRL 5.00% 6.20% 5.61%
29 IDEX Corp. IEX 5.00% 12.00% 12.00%
30 Int'l Business Mach. IBM 5.00% 3.80% 4.40%
31 Johnson&Johnson JNJ 3.50% 3.00% 5.67%
32 Kimberly-Clark KMB 7.50% 7.20% 6.55%
33 Lilly(Eli) LLY 28.50% 71.70% 20.00%
34 Lockheed Martin LMT 9.50% 4.30% 4.55%
35 Marsh&McLennan MMC 10.00% 9.70% 9.57%
36 McDonald's Corp. MCD 8.50% 4.50% 6.39%
37 McKesson Corp. MCK 10.00% 14.40% 14.14%
38 Merck&Co. MRK 15.50% 90.30% 9.00%
39 Microsoft Corp. MSFT 14.50% 14.00% 14.58%
40 Mondelez Int'l MDLZ 7.50% 5.30% 6.36%
41 NewMarket Corp. NEU 7.50% n/a n/a
42 Northrop Grumman NOC 7.50% 8.40% 19.11%
43 PepsiCo,Inc. PEP 12.50% 6.40% 6.58%
44 Procter&Gamble PG 7.50% 6.50% 6.66%
45 Progressive Corp. PGR 5.00% 40.40% 27.36%
46 Republic Services RSG 24.50% 10.00% 10.48%
47 Roper Tech. ROP 11.00% 8.50% 10.50%
48 Smucker(J.M.) SJM 9.00% 4.50% 3.64%
49 Texas Instruments TXN 7.00% -2.70% 9.00%
50 Thermo Fisher Sci. TMO 3.00% 6.10% 6.98%
51 Travelers Cos. TRV 6.00% 16.40% 11.20%
52 UnitedHealth Group UNH 12.00% 11.70% 12.34%
53 Verizon Communic. VZ 11.50% 1.10% 2.98%
54 Walmart Inc. WMT 0.50% 10.70% 8.52%
55 Waste Management WM 9.50% 13.00% 12.98%
(a) www.valueline.com(retrieved Nov.26,2024).
(b) LSEG Stock Reports Plus,as provided by fidelity.com(retrieved Nov.26,2024). Exhibit No.3
(c) www.zacks.com(retrieved Nov.26,2024). Case Nos.AVU-E-25-01/AVU-G-25-01
J.Thompson,Avista
Schedule 12,Page 2 of 3

DCF MODEL-NON-UTILITY GROUP Schedule 12
Page 3 of 3
DCF COST OF EQUITY ESTIMATES
(a) (b) (c)
Company V Line IBES Zacks
1 Abbott Labs. 5.9% 10.2% 11.0%
2 AbbVie Inc. 7.4% 10.2% 11.4%
3 Air Products&Chem. 10.7% 8.5% 10.0%
4 Alphabet Inc. 14.0% 22.4% 18.3%
5 Amdocs Ltd. 9.2% 10.2% 11.9%
6 Amgen 7.6% 8.7% 8.9%
7 Apple Inc. 8.9% 14.6% 14.2%
8 AptarGroup 13.6% 11.9% 11.8%
9 Becton,Dickinson 8.2% 10.4% 11.0%
10 Bristol-Myers Squibb 5.2% 0.3% 8.2%
11 Brown&Brown 13.0% 10.9% 12.2%
12 Brown-Forman'B' 16.3% 2.1% 6.0%
13 Church&Dwight 7.6% 10.1% 9.0%
14 Cisco Systems 6.3% 6.8% 7.3%
15 CME Group 8.0% 6.6% womw
16 Coca-Cola 10.2% 8.5% 8.9%
17 Colgate-Palmolive 13.6% 11.0% 9.9%
18 Comcast Corp. 10.4% 10.8% 9.1%
19 Conagra Brands 8.1% F 6.7% 8.9%
20 Costco Wholesale 10.5% 10.3% 9.7%
21 Danaher Corp. 2.5% 6.9% 7.7%
22 Electronic Arts 14.5% 13.4% 13.6%
23 Gallagher(Arthur J.) 16.3% 12.0% 12.5%
24 Gen'l Mills 8.2% 7.0% 8.0%
25 Gilead Sciences F 5.9% 9.6% 10.7%
26 Hershey Co. 10.2% 1.4% 7.8%
27 Home Depot 7.7% 5.9% 11.7%
28 Hormel Foods 8.7% 9.9% 9.3%
29 IDEX Corp. 6.3% 13.3% 13.3%
30 Int'l Business Mach. 8.1% 6.9% 7.5%
31 Johnson&Johnson F 6.8% 6.3% 8.9%
32 Kimberly-Clark 11.1% 10.8% 10.2%
33 Lilly(Eli) 29.1% 72.3% 20.6%
34 Lockheed Martin 11.9% 6.7% 7.0%
35 Marsh&McLennan 11.4% 1 1.1% 11.0%
36 McDonald's Corp. 10.9% EE9 8.8%
37 McKesson Corp. 10.5% 14.9% 14.6%
38 Merck&Co. F 18.6% 93.4% 12.1%
39 Microsoft Corp. 15.3% 14.8% 15.4%
40 Mondelez Int'l 10.3% 8.1% 9.2%
41 NewMarket Corp. 9.3% n/a n/a
42 Northrop Grumman 9.2% 10.1% 20.8%
43 PepsiCo,Inc. 15.9% 9.8% 9.9%
44 Procter&Gamble 9.9% 8.9% 9.0%
45 Progressive Corp. 5.2% L 40.6% 27.5%
46 Republic Services 25.6% 11.1% 11.6%
47 Roper Tech. 11.6% 9.1% 11.1%
48 Smucker(J.M.) 12.8% 8.3% 7.4%
49 Texas Instruments 9.7% 0.0% 11.7%
50 Thermo Fisher Sci. M 6.4% 7.3%
51 Travelers Cos. 7.6% 18.0% 12.8%
52 UnitedHealth Group 13.4% 13.1% 13.8%
53 Verizon Communic. 17.9% 7.5% 9.4%
54 Walmart Inc. 1.5% 11.7% 9.5%
55 Waste Management 10.9% 14.4% 14.3%
Average(b) 10.5% 10.8% 10.5%
Exhibit No.3
(a) Sum of dividend yield(p.1)and respective growth rate(p.2). Case Nos.AVU-E-25-01/AVU-G-25-01
(b) Excludes highlighted figures. J.Thompson,Avesta
Schedule 12,Page 3 of 3