200407141st Response of Staff to Potlatch.pdf

SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
BAR NO. 1895
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
HECE1VED
iLED
2DD~ JUt 14 Pi, J: : I
I i.if...
. ;,,!
. ICUTILfTIES
u CDf1-
"1/SSI0N
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF A VISTA CORPORATION FOR THE
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR ELECTRIC AND
NATURAL GAS SERVICE TO ELECTRIC
AND NATURAL GAS CUSTOMERS IN THE
STATE OF IDAHO.
CASE NOS. A VU-O4-
A VU -O4-
COMMISSION STAFF
RESPONSE TO THE
FIRST PRODUCTION REQUEST
0 F POTLATCH CO RPO RA TI 0 N
The Staff of the Idaho Public Utilities Commission, by and through its attorney of record
Scott Woodbury, Deputy Attorney General, hereby responds to Potlatch Corporation s (Potlatch;
Company) First Request for Production to the Idaho Public Utilities Commission Staff filed June 28
2004.
Regarding Potlatch's Production Request Nos. 2 through 13 , Staff regrets that owing to
unforeseen circumstances it is unable to provide responses to the Company at this time. The
referenced Production Requests pertain to the filed testimony of Staff s Cost of Capital witness Terri
Carlock. Ms. Carlock was in an unfortunate accident on Saturday, July 3, and sustained a severely
fractured ankle (spiral fracture, tom ligaments and tendons, and bone chips). She had surgery July 7
and is still on pain medications. Ms. Carlock is expected to be flat on her back with her foot above
her heart until July 21. Because of the severity of the break and the recovery time, it is anticipated
that Ms. Carlock will be out of the office for up to 5 weeks. On July 9 2004 Staff filed a Notice of
STAFF RESPONSE TO THE FIRST
PRODUCTION REQUEST OF POTLATCH JULY 14, 2004
Witness Unavailability and Motion to Delay Witness Testimony for the scheduled technical hearing
the week of July 19. Staff will supply supplemental responses on a best efforts basis.
REQUEST NO.1: Please provide all testimony, exhibits and working papers in their
original computer formats on CD-ROM.
RESPONSE NO.1: The testimony and exhibits of Terri Carlock in "original computer
format" were provided to all parties of record on June 21 , 2004 in pdfformat via e-mail, hard copy
via regular mail, and are also available on the Commission s website. Staff witness Carlock'
one-page workpaper was provided via e-mail to all parties of record on July 9 2004.
REQUEST NO.2: Page 5 at 1 to 3: Please describe Ms. Carlock's understanding of the
three standards.
REQUEST NO.3: Page 5 at 8 to 12: Please explain how Ms. Carlock considered the
standards in her analysis.
REQUEST NO.4: Page 6 at 8 through page 10 at 6:
(a)Please exactly describe the Comparable Earnings Method and how Ms. Carlock
applied it.
Please describe exactly how Ms. Carlock calculated her 10% to 11 % cost of
equity range using the Comparable Earnings Method.
(b)
(c)Please describe exactly how Ms. Carlock used the consumer price index, the
prime interest rate, the Dow Jones Utility Average, and the Dow Jones Industrial
Average to arrive at the 10% to 11 % cost of equity range.
Please provide evidence that "The lower risk level associated with utilities is(d)
attributable to many factors even though the difference is not as great as it used to
be (see page 8 at 7 to 9). Does Ms. Carlock believe that utility risk has been
increasing and over what time period does she believe any such increase has
occurred?
ST AFF RESPONSE TO THE FIRST
PRODUCTION REQUEST OF POTLATCH JULY 14, 2004
(e)Please describe the measure of risk Ms. Carlock used in her Comparable Earnings
method and how she used it (see page 8 at 23 through page 9 at 1).
Ms. Carlock indicates that many of the risks experienced by Avista (Corp.) have(f)
been and continue to be primarily due to non-regulated operations and decisions
that were made to expand those affiliate activities (see page 8 at 21 to 24). She
also indicates that due to various risk components, A vista Utilities continues to
experience a high cost of debt. To what extent did Ms. Carlock account for
A vista Utilities' additional risk due to the risks caused by A vista Corporation
non regulated operations?
REQUEST NO.5: Page 11 at 17 to 19: Please provide the evidence on which Ms. Carlock
relied to calculate the 4% figure for A vista Corporation and explain how she derived a 2% figure for
the utility operations.
REQUEST NO.6: Page 11 at 17 to 19: Please indicate whether Ms. Carlock considered
flotation costs incurred under any Employee Stock Ownership Plan or Dividend Reinvestment Plan
Issuances.
REQUEST NO.7: Page 12 at 1 to 2: Please provide the theoretical derivation and support
for treating the flotation costs in the manner employed by Ms. Carlock. Please provide any journal
articles or texts supporting any derivation.
REQUEST NO.8: Page 12 at 6 to 8: Please explain how Ms. Carlock calculated the 8% to
11.3% range. Please explain what Ms. Carlock means by "during various time intervals" and indicate
what those intervals were. Please demonstrate exactly how Ms. Carlock calculated the dividend
yield.
REQUEST NO.9: Page 12 at 8 to 11: Please describe how the need for ongoing capital
requirements including refinancing maturities affected Ms. Carlock's belief that the projected
dividend yield is 3.5% to 3.7% and the growth rate is 6%.
STAFF RESPONSE TO THE FIRST
PRODUCTION REQUEST OF POTLATCH WL Y 14, 2004
REQUEST NO. 10: Page 12 at 13 to 19: Please describe how Ms. Carlock calculated the
5% expected growth rate for the DJUA and indicate by reference to the working papers how the
Value Line West and DJUA expected dividend yields were calculated.
REQUEST NO. 11: Page 13 at 3 to 9: Please describe exactly what historical and projected
growth indicators were used, what their figures were, and how the 6% to 6.5% expected growth rate
range was calculated from them.
REQUEST NO. 12: Page 14 at 11 to 13: Please explain how the 9.5% to 10.9% range was
derived from the results of Ms. Carlock's Comparable Earnings Method and DCF method results.
REQUEST NO. 13: Page 14 at 16 to 25: Please explain how the 10.4% point estimate was
chosen based on the 9.5% to 10.9% range and exactly how Ms. Carlock based it on a review of the
market data and comparables, including the past and current impact from non-regulated operations
and the capital structure to select her 10.4% point estimate.
REQUEST NO. 14: Please provide all rate of return testimony filed by Ms. Carlock within
the last five years.
RESPONSE NO. 14: All rate of return testimony filed by Ms. Carlock within the last five
years is attached. The cases are Case No. WWP-98-11; Case No. UWI-OO-l; and Case No.
IPC-03-13.
Dated at Boise, Idaho, this 1'7day of July 2004.
~~.
Scott Woodbury
Deputy Attorney General
Technical Staff:
i:umisc:prodreq/response/avueO4.- avugO4.1 sw staff response 1 to pot
STAFF RESPONSE TO THE FIRST
PRODUCTION REQUEST OF POTLATCH JULY 14, 2004
r~'
::-:('
;Jr-r,; , . ,- v I ~ L.-, U .
;:-
! f F:)
. . --
99 APR 23 PPl Y
BEFORE THE
;: ' j \-'~~'
- 1'1
'-'"
.I.,....v !\./I'j"llv'_I'
',~
IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF THE WASHINGTON WATER POWER
COMPANY FOR AN ORDER APPROVING
INCREASED RATES AND CHARGES
' )
FOR ELECTRIC SERVICE IN THE
STATE OF IDAHO.
lA)/
CASE NO.WWP-98-
DIRECT TESTIMONY OF TERRI CARLOCK
IDAHO PUBLIC UTILITIES COMMISSION
APRIL 23 , 1999
Please state your name and address for the
record.
My name is Terri Carlock.My business
address is 472 West Washington Street Boise Idaho.
By whom are you employed and in what
capaci ty?
I am employed by the Idaho Public Utilities
Commission as the Accounting Section Supervisor.
Please outline your educational background
and, experience.
I graduated from Boise State University in
May 1980 with a B. B.A. Degree in Accounting and in
Finance.I have attended the annual regulatory studies
program sponsored by the National Association of
Regulatory Utility Commissioners (NARUC) a~ Michigan
State University.I chaired the NARUC Staff Subcommittee
on Economics and Finance for over 3 years.Under this
subcommi t tee I al so chaired the Ad Hoc Committee on
Diversification.I have also attended various finance
conferences including the Public Utilities
Finance/Advance Regulation Course at the University of
Texas at Dallas National Society of Rate of Return
Analysts' Financial Forums Regulatory Economics and Cost
of Capi tal Conference and Standard & Poor's Corporation
Telecommunications Ratings Seminar.Since joining the
WWP-E- 98 -114/23/99 CARLOCK (D Staf f
Commission Staff in May 1980 , I have participated in
several audits, performed financial analysis on various
companies and have presented testimony before this
Commission on numerous occasions.
What is the purpose of your testimony in
this proceeding?
The purpose of my testimony is to present
Staff I S recommendation related to the overall cost of
capital for Avista Corporation dba Avista Utilities -
Washington Water Power Division (Avista) to be used in
the revenue requirement in this case, WWP-E-98-11.
will address the appropriate capital structure, cost
rates and the overall rate of return.I will also
address the recommended equity adder.
Please summarize your recommendations.
I am recommending a return on common equity
in the range of 10.25% - 11.25% with a point estimate of
11.0%.The recommended overall weighted cost of capi tal
is in the range of 8.792% - 9.166% with a point estimate
of 9.073% to be applied to the rate base for the test
year.The point estimate includes an adder above the
midpoint.
Are you sponsoring any exhibits to accompany
your testimony?
Yes, I am sponsoring Exhibit No. 122
WWP - E - 9 8 - 114/23/99 CARLOCK (Di)Staff
consisting of 14 schedules.
COST OF CAPITAL
What legal standards have been established
for determining a fair and reasonable rate of return?
The legal test of a fair rate of return for
a utility company was established in
the, Bluefield Water
Works decision of the United States Supreme Court and
repeated specifically in Hope Natural Gas.
In Bluefield Water Works and Improvement Co.
v. West Virginia Public Service Commission, 262 U.
679, 692 , 43 S.Ct. 675, 67 L.Ed. 1176 (1923), the Supreme
Court stated:
A public utility is entitled to such
rates as will permit it to earn a returnon the value of the property which
employs for the convenience of the public
equal to that generally being made at the
same time and in the same general part of
the country on investments in otherbusiness undertakings which are attended
by corresponding risks and uncertainties;
but it has no constitutional right to
profits such as are realized or
anticipated in highly profitable
enterprises or speculative ventures. Thereturn should be reasonably sufficient toassure coni idence in the financial
soundness of the utility and should beadequate, under efficient and economical
management, to maintain and support itscredi t and enable it to raise the money
necessary for the proper discharge of itspublic duties. A rate of return may be
reasonable at one time and become too
high or too low by changes affecting
opportunities for investment, the moneymarket and business conditions generally.
WWP-E- 98 -114/23/99 CARLOCK (Di)Staff
The Court stated in FPC v. Hope Natural Gas Company, 320
u . S. 91, 6 03, 64 S. Ct. 2 81, 8 8 L. Ed . 3 3 3 1944)
From the investor or company point ofview it is important that there be enough
revenue not only for operating expenses
but also for the capital costs of thebusiness. These include service on the
debt and dividends on the stock.
. .
. By that standard the return to the
equity owner should be commensurate with
returns on investments in other
enterprises having corresponding risks.That return, moreove~, should be
sufficient to a~sure confidence in the
financial integrity of the enterprise, so
as to maintain its credit and to attractcapital. (Citations omitted.
As a result of these Supreme Court
decisions, three standards have evolved for determining a
fair and reasonable rate of return:(1) the Financial
Integrity or Credit Maintenance Standard;(2) the Capi tal
Attraction Standard , and (3) the Comparable Earnings
Standard.If the Comparable Earnings Standard is met,
the Financial Integrity or Credit Maintenance Standard
and the Capital Attraction Standard will also be met , as
they are an integral part of the Comparable Earnings
Standard.
Have you considered these standards in your
recommendation?
Yes.These criteria have been seriously
considered in the analysis upon which my recommendations
WWP-E- 98 -114/23/99 CARLOCK ( D i )Staff
are based.It is also important to recognize that the
fair rate of return that allows the utility company to
maintain its financial integrity and to attract capital
is established assuming efficient and economic
management, as specified by the Supreme Court in
Bluefield Water Works.
What approach have you used to determine the
cost of equity for Avista specifically?
I have presented two methods: the Discounted
Cash Flow (DCF) method and the Comparable Earnings method
for industrial companies and utilities.
Please explain the Comparable Earnings
method and how the cost of equity is determined us ing
this approach.
The Comparable Earnings method for
determining the cost of equi ty is based upon the premise
that a given investment should earn its opportunity
costs.In competitive markets , if the return earned by a
firm is not equal to the return being earned on other
investments of similar risk, the flow of funds will be
toward those investments earning the higher returns.
Therefore , for a utili ty to be competi ti ve in the
financial markets, it should be allowed to earn a return
on equity equal to the average return earned by other
firms of similar risk.The Comparable Earnings approach
WWP - E - 9 8 - 114/23/99 CARLOCK. (Di)Staff
is supported by the Bluefield Water Works and Hope
Na tural Gas decisions as a basis for determining those
average returns.
I have analyzed the returns for utilities
and industrial companies in order to determine a fair
return for Avista.When determining the comparable
earnings rate, it is important that a cross-section of
various companies and industries be utilized in the
sample so that any possible effects of unusual
occurrences or monopoly powers are limited.It is also
important that any risk differentials between the
comparable earnings sample and Avista be resolved.
In my comparable earnings analysis, the
rates of return on common equity historically earned by
industrial firms were examined.The historical returns
earned by electric and gas utilities were also studied.
Then , based upon current economic conditions, the current
cost of equity capital for industrial firms on the
average was estimated.Taking into consideration the
risk differentials between industrial companies and
utilities and those differentials as they specifically
relate to Avista , I estimated the current cost of equi
range utilizing the Comparable Earnings approach.
Please explain your schedules reflecting the
historical rate of return earned for industrial firms.
WWP-E- 98 -114/23/99 CARLOCK ( D i )Staff
Schedules 1 through 4 of Exhibit No. 122
show the returns on common equity for the Business Week
Corporate Scoreboard over the last 11 years.Schedule
reflects the returns earned for periods ending the First
Quarter of each year; Schedule 2 reflects the returns for
periodp ending the Second Quarter; Schedule 3 reflects
the returns for periods ending the Third Quarter; and
Schedule 4 reflects the returns for periods ending the
Fourth Quarter of each year.
Industrial returns tend to fluctuate with
business cycles, increasing as the economy improves and
decreasing as the economy declines.I have utilized a
three -year moving average to smooth the business cycle
effects and yearly fluctuations in the industrial rate of
return.Utility returns are not as sensitive to
fluctuations in the business cycle because the demand for
utility services generally tends to be more stable and
predictable.
For years ending the First Quarter
(Schedule 1 of Exhibit No. 122), the five-year average
return from 1994 through 1998 was 16.0%.The three -year
average from 1996 through 1998 was 16.8%, the same as the
all industry composite in 1998 and similar to the 1997
three -year moving average.The five -year moving average
for 1997 of 14.9% is substantially less than the
WWP-E- 98 -114/23/99 CARLOCK (Di Staff
five-year moving average of 16.0% in 1998.
For years ending the Second Quarter
(Schedule 2 of Exhibit No. 122), the five-year average of
16.0% for 1998 is greater than the five-year average of
15.0% for 1997.The three-year moving average decreases
from 16.7% in 1997 to 16.4% in 1998.
For years ending the Third Quarter
(Schedule 3 of Exhibit No. 122), the five -year average
from 1994 through 1998 was 15., increasing from 15.
in 1997.The three-year moving average from 1996 through
1998 was 16., reflecting a decrease from 16.6% in 1997.
The all industry average of 15.5% is lower than the
three-year moving averages reflecting somewhat slower
conditions in 1998 than in 1995 through 1997.
For years ending the Fourth Quarter
(Schedule 4 of Exhibit No. 122), the five-year average
and the three-year average returns are 16.2% for 1998.
This is a slight decrease from the three-year average of
16.5% in 1997.The all industry average of 15.3% is
lower than the five-year average and again lower than the
three -year moving averages.
Schedule 5 of Exhibi t No. 122 depicts the
returns for the years ending each quarter from 1988
through the 1998 for the Corporate Scoreboard composite
return , the three-year moving average industrial return
WWP - E - 9 8 - 114/23/99 CARLOCK (D i Staff
, 6
and the utilities return as reflected in Schedules
through 4.This graph shows the increase and decrease of
industrial returns through good and slower economic times
of business cycles.
What is your estimate of the current and
near-future equity returns for industrial companies?
Based upon the three -year moving average
trend in industrial earnings and actual earnings since
1995 (Schedules 1 through 5, Exhibit No. 122) along with
current economic conditions, I believe industrial returns
will decrease through 2000.
The 1998 inflation rate is 1.6% for the
consumer price index and
- .
1% for the producer price
index.The change in the inflation rate can be seen by
looking at the consumer and producer price indexes as
shown in Schedule 6 of Exhibit No. 122.The change in
bond rates is illustrated in Schedule 7 of Exhibit
No. 122 , Moody's Average for Public Utility Bond Yields.
The yields are shown for "Aa"
, "
A" and "Baa" bonds from
1977 through January 1999.Prime interest rates as shown
in Schedule 8 of Exhibi t No. 122 decreased from 9.0% in
1995 to 7.75%, effective 11/17/98, where they currently
remain.
The Dow Jones Industrial Average Index
(DJIA) has fluctuated widely since the 1982 low of 776.
WWP-E- 98 -114/23/99 CARLOCK (Di)Staff
on August 12, but the long-run rising trend has
con t inued The DJIA closed at a record high of 10,581.
on April 21, 1999.The DJIA was between 7500 and 8200
August 27 through October. 15, 1998.The Dow J one s
Utility Average (DJUA) reached a high of 320 on October
8, 1998 and closed at 302.35 on April 21 " 1999.
I made a review of the actual earned returns
on equity for industrial companies, the decline and start
of improvement in the economy, changing inflation
and stock market conditions.Based upon these
considerations my estimate of the near future earned
equity capital returns for industrial companies is in the
range of 15.0% - 16.0%.The Value Line Data Base of 1798
stocks as of March 3, 1999 reflects the following
statistics: Percent Earned Common Equity 15.52%, Total
Return 3-year 12.21%, Total Return 5-year 12.30%
Dividend Yield 2.36%, Dividend Growth 5-year 6.75% and
proj ected Dividend Growth 8. 12% .
How does the trend in utility returns
compare wi th the trend in industrial returns?
Schedule 9 of Exhibit No. 122 shows the
returns for the Moody's Electric Utilities since 1970.
The returns in individual years may increase or decrease
from the prior year , but the three-year moving averages
show general movements in earned returns.The three -year
WWP-E- 98 -114/23/99 CARLOCK (Di)Staff
moving average return was 12.0% for 1996, the highest
since 1987.In 1998 the 8.8% three-year moving average
return is the lowest for any period shown on this
schedule.The area of 10. 7% and 10.9% reflects the mode
range of earned return.
The return on common equity for the Moody'
Gas Distribution Companies is shown in Schedule 10 of
Exhibit No. 122.The three-year average return in 1998
is 12.8%.The annual returns and the three -year average
returns for the gas utili ties reflect decreases since
1996.
A review of electric and gas utility returns
provides a record of actual utility returns earned in the
past.The required return for electric utili ties, and
Avista specifically, can then be estimated by reviewing
current market changes and considering any risk
differentials between the different types of utilities.
Please explain the risk differentials
between industrial companies and utilities.
Risk is a degree of uncertainty relative to
a company.The lower risk level associated with
utilities is attributable to many factors even though the
difference is not as great as it used to be.The
competitive risks for gas and electric utilities have
changed with the increase in non-utility generation and
WWP-E- 98 -114/23/99 CARLOCK (Di)Staff
open transmission access.
Competi ti ve risks are less for Avista than
for most other electric companies primarily because of
the low cost source of power and the low retail rates.
The investment risk for Avista is less than the level
reflected before the Power ,Cost Adj ustment mechanism
(PCA) was implemented.The risk differential between
Avista and other electric utilities is based on the
resource mix and the cost of those resources.All
resource mixes have risks specific to resources chosen.
The demand for electric utility services of Avista is
relatively stable compared to that of unregulated firms
and even other electric utili ties.This low demand risk
is partially due to the low cost power and the customer
mix of the pow~r users.
Under regulation , utilities are generally
allowed to recover , through rates , reasonable, prudent
and justifiable cost expenditures.Unregulated firms
have no such assurance.Utilities in general are
sheltered from risk by regulation allowing reasonable
cost recovery thus making the average utility less risky
than the average unregulated industrial firm.Avista'
regulatory risk is low compared to many other regulated
utilities.The Idaho Public Utilities Commission has
shown overall support for Avista during drought years by
WWP - E - 9 8 - 114/23/99 CARLOCK (Di)Staff
providing for surcharges and approving the PCA.Avista
does not have substantial plant investment or expenses
that are at risk in this case.This makes the regulatory
risk in Idaho low for Avista.
Have you compared Avista directly with other
utility companies?
Yes.Schedule 9 of Exhibit No. 122 shows
the returns for Moody'electric utili ty companies of
10.0% for the three-year average return in 1997 and 8.
for the three-year average return in 1998.I have
compared Avista with this electric utility average and
financial statistics for other companieS that meet the
following Value Line Investment Survey criteria:
1 .Beta of . 50 . 70 where the market
equals 1.00 (Avista' s Beta is .60)
2 .Safety of 2 - 3 on a scale of 1 - 5
where 1 is the highest rating and 3 is average
(Avista's safe ty rating is 2); and
3 .Timeliness of 2 - 4 on a scale of 1 - 5
where 1 is the highest rating and 3 is average
(Avista's safety rating is 4) .
There are 180 companies meeting these
criteria but only 13 Electric Utilities - West meeting
the cri teria The Electric Utilities - West are shown on
Schedule 11 of Exhibi t No. 122.The financial statistics
WWP - E - 9 8 - 114/23/99 CARLOCK (D i )Staff
shown on Schedule 11 of Exhibit No. 122 include annual
statistics for a~erage annual price/earnings ratio,
average annual di viderid yield
, '
common equity ratio,
percent earned on common equity, percent payout ratio and
market to book ratio.The financial statistics shown on
Schedule 12 of Exhibit No. 122 show the 'group average
compared to Avista.
Based upon your analysis of industrial
returns, utility returns, and current economic
condi tions, what is your estimate of the cost of equi
capi tal for Avista Company based upon the Comparable
Earnings method?
When utilizing the Comparable Earnings
method , the risk differentials between industrial
companies and utilities particularly Avista , must be
considered.Utility returns , in comparison to industrial
returns , may be ranked by classifying the utili ty
services according to risk levels.Utility groups are
less risky than industrial companies.Because an average
utility company is less risky than an average industrial
company, its cost of equity capi tal range would be less.
I believe Avista is less risky than an
average utility company due to lower competitive risks
and regulatory risks as discussed previously.These
lower risks produce a lower business risk for Avista than
WWP-E- 98 -114/23/99 CARLOCK (Di)Staf f
for other companies.Therefore, the cost of equi
capital would be less for Avista than that of both an
average utility and that of an industrial company.When
considering the risk differentials between Avista and
other companies, ,the lower risk for Avista due to
implementing the PCA compared to its risks before the PCA
must be considered along with the current competitive
position related to. low cost resources and low rates.
The comparable group of Value Li~e Electric
Utilities - West shows an average earned return on equity
of 11.4%.The average earned return on equity for 1998
was 11.6% for the comparable group of Value Line Electric
Utilities - Central and 10.9% for the Electric Utilities
- East.The proj ected ~ - 5 year average returns for the
comparable group of Value Line Electric Utilities are
5% West and 8.33% for both Central and East.
Using the Comparable Earnings approach, my
estimate of the current cost of equity capital for Avista
is in the range of 10.5% ,- 11.5%.This range is
developed by reviewing the most recent and proj ected
utility returns shown for the Value Line comparable
electrics above; electric returns as shown in the
Corporate Scoreboard of 10.1% for the First Quarter of
1998, 9.5% for the Second Quarter of 1998 , 9.4% for the
Third Quarter of 1998 and, 10.1% for the Fourth Quarter
WWP-E- 98 -114/23/99 CARLOCK ( D i )Staf f
of 1998 (Ex. 122 , Sch. 1-4, respectively) three-year
average return of 8.8% ending 1998 and a 10.7% annual
return in 1998 for the Moody's Electric Utilities
(Ex. 122 , Sch. 9) and three-year average return of 12.
ending 1998 and a 10.0% annual return in 1998 for the
Moody's Gas Distribution Utilities (Ex. ,122, Sch. 10)
These returns were then analyzed along wi th the
comparable earnings shown on Schedule 11, the market
indicators (Schedules 6 - 8 of Ex. 122) and the
industrial returns (Schedules 1 - 5 of Ex. 122) to
predict a reasonable required return.
You indicated that the Discounted Cash Flow
method is utilized in your analysis.Please explain this
method.
The Discounted Cash Flow (DCF) method is
based upon the theory that (1) stocks are bought for the
income they provide i . e ., both dividends and/or gains
from the sale of the stock), and (2) the market price of
stocks equals the discounted value of all future incomes.
The discount rate ,or cost of equity, -equates the present
value of the stream of income to the current market price
of the stock.The formula to accomplish this goal is:
WWP - E - 9 8 - 114/23/99 CARLOCK (Di)Staff
--------------------------
( 1 + k ) 1 (1 +k ):2 (l+k ) N ( 1 +k ) N
o =Current Price
D =Dividend
s =Capitalization Rate, Discount Rate, orRequired Rate of Return
N =Latest Year Considered
The pattern of the future income stream
the key factor that must be estimated in this approach.
Historically some simplifying assumptions for ratesetting
purposes can be made without sacrificing the validity of
the results.Two such assumptions are:(1) dividends per
share grow at a constant rate in perpetuity; and,(2 )
prices track earnings.These assumptions lead to the
simplified DCF formula, where the required return is the
dividend yield plus the growth rate (g)
s = -
- + g
Please summarize your understanding of Avista
wi tness Avera's argument against the constant growth DCF
method?
Avista witness Avera states that the constant
growth DCF method produces unreasonable resul ts
argues that deregulation trends in the electric industry
WWP - E - 9 8 - 114/23/99 CARLOCK (D i )Staff
dictate that even a two- stage DCF method should not be
used because of the transition of electric utilities to a
competitive industry.Wi tness Avera uses projected
annual revenue streams for his group of comparables.
Do you agree with Avista witness Avera'
evaluation on the feasibility of using the DCF method?
I agree that the constant growth DCF method
is not reasonable to use for Avista.The primary reasons
inc 1 ude :(1) the dividend change for Avista minimizes the
benefit of historical trends , and (2) growth projections
for the next three years are not representative of
ongoing growth due to the Common Stock Exchange Offer
where Return-Enhanced Convertible Securities (RECONS)
will be converted to common shares within three years
(Dec. 2001)
I do not agree that the two-stage DCF method
should not be used.While it may not be appropriate for
particular companies, I believe it can reasonably be used
for the industry.The combination of growth estimates
with the two-stage DCF method' can be just as accurate as
the proj ection of revenue streams and stock prices
significantly into the future for use in the non-constant
DCF method.It is the possible variability of these
projections used by Avista witness Avera that causes
concern.
WWP - E - 9 8 - 114/23/99 CARLOCK ( D i )Staff
What DCF method have you utilized?
I have used the two-stage DCF method with the
growth with the two stages averaged for the groups of
electric utility comparables.I have not relied on the
DCF calculation for Avista, although it is calculated,
due to the instability of current market prices and
, growth estimated immediately following a dividend cut.
also compare these DCF variables with those used by Mr.
Avera to establish his comparable DCF spectrum of 11.1% -
11.8% with an average of 11.5%.
What is your estimate of the current cost of
capital for comparable electric utilities of Avista
Company using the Discounted Cash Flow method?
The Current cost of equity capital for Avista
comparables using the Discounted Cash Flow method is
between 8.5% - 10.1% with projected growth in dividends
and proj ected growth in earnings averaged to use for the
growth rate.The cast of equity capital using the
average annual dividend yield for the electric comparable
groups produces a range of 10.1% - 11.2%.I believe a
10.0% to 11.0% range as the most appropriate estimate
under the Discounted Cash Flow method for use in this
case.
You have utilized an adjusted dividend yield
to determine the required return with the DCF method.
WWP - E - 9 8 - 114/23/99 CARLOCK (D i )
Staf f
Please explain.
The adj ustment I have made to arrive at the
adjusted dividend yield for the DCF method recognizes
direct issuance or flotation costs for stock issuances.
Market pressure should not be reflected in the flotation
cost adj ustment I have used a 4% flotation cost rate
based on the range of 3%-5% as a reasonable flotation
cost over time to be included in the DCF analysis.This
3%-5% range for flotation costs is the same range used by
Mr. ,Avera.
Please explain the adjustment to reflect a 4%
issuance expense or flotation cost factor to calculate
the dividend yield in the DCF calculation?
The 4% is based on the issuance expenses
based on an acceptable range of 3%-5% incurred for
issuances.Issuance costs are relevant expenditures to
consider in the cost of equi ty determination for new
issuances.Direct issuance or flotation costs impact the
actual price received by the Company for stock sold.The
funds received amount to the stock price less the
issuance costs.To reflect these costs, the dividend
yield is adj usted in the DCF method.
A specific allowance for market pressure
not appropriate.Investors determine the price they are
willing to pay for stock at the time of issuance.I do
WWP-E- 98 -114/23/99 CARLOCK (Di)Staf f
not believe it is appropriate to make an allowance
for price fluctuations as a result of this competitive
process. ,I have used the 4 % allowance as reasonable over
time.
What is the capital structure you have used
for Avista Company to determine the overall cost of
capi tal?
I have utilized a capital structure
consisting of 51.988% debt , 10.588%preferred securities
and 37.424% common equity as shown on Schedule 14 of
Exhibi t No. 122.This capi tal structure is appropriate
to use for ratemaking purposes in this case and is the
same capital structure presented by Avista wi tness Avera.
What are the costs related to the capi tal
structure for debt and the preferred securities?
The embedded cost long-term debt is 8.011%
the embedded cost of short-term debt is 6.255%, the
embedded cost of preferred trust securities is 8.113%
the embedded cost of preferred stock is 8.151%.I have
accepted the methodolqgy and cost rates used by Avista
witness Avera in his exhibits to calculate the cost of
debt and preferred.
You indicated the cost of common equity range
for Avista is 10.5% - 11.5% under the Comparable Earnings
, method and 10.0% - 11.0% under the Discounted Cash Flow
WWP-E- 98 -114/23/99 CARLOCK (Di)Staff
method.What is the cost of common equity capital you
are recommending?
The fair and reasonable cost of common equi ty.
capi tal I am recommending for Avista is in the range of
10.25% - 11.25%.Although any point within this range is
reasonable, the return on equity granted would not
normally be at either extreme of the fair -and reasonable
range.The mid-point is 10. 75%.This is a reasonable
return of equity for Avista based on a review of the
market data and comparables shown on the schedules in
Exhibi t No. 122.
EQUITY ADDER
Avista witness Dukich discusses and
recommends that an equity adder of 25 basis points be
added to the equi ty return of Avista to recognize and
reward Avista for its innovative management and strategic
ini tiati ves.Please discuss the rationale for this
incentive.
Staff has recommended equity adders in other
cases and the Commission has awarded equity adders and
imposed equity penalties in the past.In the Idaho Power
Company case (Case No. IPC-E-94-5 , Order No. 25880) the
Commission did not specifically decide on an equity adder
but took the circumstances into account when deciding the
return on equi ty point authorized.
WWP-E- 98 -114/23/99 CARLOCK (D i Staff
The equity adder is not necessarily a reward
for past exemplary performance but is an incentive to
continue programs and processes that lead to the noted
qualities and initiatives.Continued betterment of
performance is an ongoing goal.
Do you agree with the proposed method of
quantifying and structuring a bonus incentive?
Yes.I believe the best way to recognize
improvement in management policies or programs through
innovative management and strategic initiatives is
through the rate of return.In cases where exemplary
performance was recognized by the Commission , a bonus of
up to 25 basis points has been added to the authorized
return on equi ty .Avista is making improvements , and
deserves recogni tion for those improvements.
Avista witness Dukich lists numerous reasons
why Avista should be awarded an equity adder.Do you
agree with his characterizations?
Overall I agree that these accomplishments
are outstanding, placing Avista ahead of many if not most
other- utilities.The studies and facts supporting
management efficiency and innovation are consistent with
Staff's findings for these areas in this case.
There are areas of Staff concern explained in
the testimony of Staff witnesses Sterling, Maxwell , and
WWP-E- 98 ~114/23/99 CARLOCK (Di)Staff
Anderson that the Commission must weigh when determining
if an equity adder should be allowed and if so, by how
much.These concerns revolve around Avista not following
Commission Orders or requesting an exclusion or change in
the ordering directive.They include:(1) Line Extension
practices where the average cost has not been updated
since 1988 even though Mr. Dukich in a letter to the
Commission acknowledged that provision of the order and
stated Washington Water Power would be providing these
updates; and (2) No notices sent to customers related to
PCA surcharges, PCA rebates, DSM rider rate change or the
amount of the DSM rider included in rates.
I will let the Commission weigh these factors
to see if they should offset partially or cbmpletely the
exemplary performance of Avista management in the areas
referenced by Mr. Dukich.For purposes of calculating
the overall rate of return for use in the revenue
requirement, I have included an equity adder of 25 basis
points.The return on equi ty point is increased above
the mid-point of 10.75% to 11.0%.
What is the overall weighted cost of capital
you are recommending for Avista?
I am recommending an overall weighted cost of
capital in the range of 8.792% - 9.166% as shown on
Schedule 14 , Exhibit No. 122.For use in calculating the
WWP-E- 98 -114/23/99 CARLOCK (Di )Staff
revenue requirement , a point estimate consisting of a
return on equity of 11.0% and a r~sulting overall rate of
return of 9.073% was utilized.
Does this conclude your direct testimony in
this proceeding?
Yes, it does.
WWP-E- 98 -114/23/99 CARLOCK ( D i )Staff
CERTIFICA TE OF SERVICE
HEREBY CERTIFY THAT I HAVE TIllS 23RD DAY OF APRIL '1999SERVED THE FOREGOING DIRECT TESTIMONY OF TERRI CARLOCK, IN CASENO. WWP-98-, BY MAILING A COpy THEREOF POSTAGE PREPAIDTHE FOLLOWING:
THOMAS D DUKlCH, MANAGER
RATES & TARIFFS ADMINISTRATION
VISTA CORPORATION
PO BOX 3727
SPOKANE WA 99220-3727
GERALD MYERS
POTLATCH CORPORATION
PO BOX 1016
LEWISTON ID 83501
DAVID J MEYER, ESQ.
SENIOR VICE PRESIDENT
AND GENERAL COUNSEL
VISTA CORPORATIONPO BOX 3727
SPOKANE W A 99220-3727
CONLEY WARD
GIVENS PURSLEY LLP
PO BOX 2720
BOISE ID 83701-2720
M KARL SHURTLIFF
PIKE & SHURTLIFF
PO BOX 1652
BOISE ID 38701-1652
GEORGE R JOHNSON
VICE PRESIDENT-METAL MINING
HECLA MINING COMANY
6500 MlNIERAL DR
COEUR D' ALENE ID 83815-8788
MI CHAEL GLEE
GENERAL MANAGER
SILVER VALLEY RESOURCES CORP
PO BOX 440
WALLACE ID 83873-0440
ROBERT PETERSON
SR VICE PESt MARKETING
SUNSHINE MINING & REFINING CO
877 W MAIN ST STE 600
BOISE ID ,83702
CERTIFICA TE OF SERVICE
0::
0::
::::)
co I-
co en 0::
... u::
C) ~w. Z Qe( - Z0 ~ w
m - C) 0::0:: w0 m w
(,)
en
en ..Jw w ~
I- ID
e( e(
0:: ..J
::::)
0 ~ aa. 0:: w0:: 0 C) 0(,) wI- :!e( 0
(,) (,)
m Z
0::
0::
co ~ U) ~ ~ ~ ~ ~ ~ M ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
~ ~
U) U) ~ ~ ~ ~ ~ ~ m U) ~ 0 0 m N ~ m N M N ~ ~N ~
~ ~... ~~ ~ ~ ~ ~
U) 0 m M ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ Nen W ~ ~ N 0 ~ U) M ~ ~ ~ ~ ~ M 0 ~ ~ m ~ 0 M N U) ~en 'N ~
~ ~... ~~ ~
U) ~ U) ~ N ~ M ~ 0 ~ ~ ~ M M M ~ m m ~ ~ 0 M
~ ~ ~ ~
U) ~ ~ ~ m m ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ .
~ ~ ~ ~...~ ~~ ~~ ~
U) ~ M ~ N M M N ~ ~ U) ~ 0 N M M N ~ m ~ 0 ~ M~ 0 0 ~ ~ ~ ~ M ~ ~ ~ ~ ~ m ~ m ~ ~ ~ ~ ~ ~ m 0 ~~ ~ M ~ N N N ~ ~ ~ N ~ N ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
~ ~ ~ m U) ~
~ ~
~ ~ M ~ ~ ~ ~ ~ ~ ~ ~ 0 N m M ~ ~en ~ ~ ~ m ~ ~ N N U) N 0 0 M m ~ ~ ~ ~ N M M ~ m
~ ~~ ~
~ 1 I I
: ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~- ~
N N m N N ~ 0 N m 0 ~ M ~ 0 ~ N ~ ~ ~ ~ ~ ~ ~~ I
~ ~
N ~~ I I ~
N ~ ~ ~ ~ ~ m N ~ M ~ ~ ~ M ~ m U) ~
~ ~ ~ ~ ~
~ W ~ ~ ~ 0 0 ~ m ~ ~ ~ ~ 0 N U) M N ~ M U) ~ 0 N ml ~N N ~ I
~ ~... ~
m ~ ~ ~~ 0 ~ ~ ~ ~ ~ ~ ~ 0 ~ ~ 0 ~ ~ ~ ~ m N
~ ~ ~ ~ ~ ~ ~ 0 N m m ~ U) ~ M ~ ~ N ~ ~ ~ ~ ~ N m
...~ ~~ ~~ ~~ ~
0 ~ ~ 0 M ~ ~ ~ ~ M M ~ ~ ~ ~ ~ ~ ~ ~ m N ~ ~ ~ ~en 0 en ~ m ~ ~ ~ ~ U)~ ~ m m ~ N ~ ~ ~ m 0 ~ 0 ~ ~ ~ ~
...
~ N
~ ~
en ~ ~ 0 M ~ ~ ~ ~ ~ ~ ~ ~ 0 ~ m ~ ~ ~ ~ ~ ~ ~ ~ m
~ ~ ~ ~ ~ ~ N m ~ N M M ~ ~ ~ ~ M ~ ~ ~ M M m... N ~ ~ N ~ N ~ ~ ~ N ~ N N ~ ~ N ~ ~ ~ ~ ~ ~ ~
co ~ CD ~ ~ ~ m ~ ~ ~ CD CD 0 m ~ ~ ~ m m ~ ~ ~ ~ ~
~ ~
CD ~ ~ ~ m m ~ M ~ ~ ~ m CD M N M ~ ~ N M M ~ N
...
~ I
~ ~
en c
"C
cv u .ro ...c.. 0
00 0 0
...
cv :J
~ ~
0) 19
t)) c::: .
1:5::1 U ,-
...
ro .s=. 00 c.. 00 cv ro
00 2 0 ::1 .5: ::1 .~ E S 0
ro .s=. 0 0 0 ,~ ~ 0
cv ~
... ,-
19 =00 00W -5
ro .E
c::: ~ro ~ U 0)
.s=. 5: ~
:::
::1
:J cv 0 '
0) 'c c0).- c c c
~ ~
1:5
~ ~
ffi
19 c
~ ~ Z
...
c..
E 2
0 u
-5 ~~ e a..cv ... ~ "
E ~1i)9- 0 ~ :J 0) "Cu. c
.s=. cv
u ~
c.. a.. (/)
:;::; ~
ro u c ~,- 0
::-
C .- 0:J ... c..E ~ ~
E 0 c.. cvu ~ ,-cv a; ~ =
.- .- ::;)~ ~~ ~
U) U)
~ ~~ ~
~ m
~ ~~ ~
M N
CD
~ ~~ ~
U) M
~ ~~ ~
~ m~ 0
~ ~~ ~- ~
~ 0
~ ~~ ~~ ~~ ~~ ~
LO M
~ M
~ ~~ ~
N M
~ ~~ ~
LO m
~ N
~ ~~ ~
N ~N ~
~ ~
cv 0)... ro
,- ~
00 0 ~c.. ~
0 cu 'S:;~ 0
... ~
00
::1 ro"C c )-
- Moil
~ ~
0 ~
U) CD
~ ~
Q) cv0) 0)ro
~ ~
Q) Q)
~ ~
c:( c:(
co
Q) Q)
~ )-
~ M
~ ~
m mm m
~ ~
m mm m
~ ~
oil oil
"#. ~
m m
~ ~
Q) 0) 0)ro
~ ~
cv Q)
~ ~
c:(
~ ~
ro
Q) Q)
)- )-
LO M
~ ~
m mm m
~ ~
m mm m
~ ~
oil oil
c..
. - . - . - ,-
CX)
CX)CX)
...
oil
. - . - .-~ ~ ~ ~ ~
~ N ~ ~ ~
i:Jj ~
(/)
Exhibit No. 122
Case No. WWP-98-
T. Carlock, Staff
4/23/99 Schedule
CO
R
P
O
R
A
T
E

S
C
O
R
E
B
O
A
R
D
BY

C
A
T
E
G
O
R
Y

L
A
B
E
L
S

B
E
G
I
N
N
I
N
G

IN

1
9
9
8
RE
T
U
R
N
S

O
N

C
O
M
M
O
N

E
Q
U
I
T
Y

-

Y
E
A
R
S

E
N
D
I
N
G

S
E
C
O
N
D

Q
U
A
R
T
E
R
In
d
u
s
t
r
y
19
8
8
19
8
9
19
9
0
19
9
1
19
9
2
19
9
3
19
9
4
19
9
5
19
9
6
19
9
7
19
9
8
Ae
r
o
s
p
a
c
e

&

D
e
f
e
n
s
e
15
.
11
.
10
.
12
.
15
.
13
.
70
%
11
,
17
.
Au
t
o
m
o
t
i
v
e
16
,
17
.
11
,
27
.
24
.
18
.
21
,
49
,
Ba
n
k
s
11
.
16
,
13
.
4
16
.
15
.
16
.
16
.
15
,
Ch
e
m
i
c
a
l
s
19
.
22
.
17
.
10
.
23
.
26
.
22
.
17
.
Co
n
g
l
o
m
e
r
a
t
e
s
13
.
15
.
16
.
15
.
13
.
12
.
18
,
21
.
21
,
20
.
21
.
Co
n
s
u
m
e
r

P
r
o
d
u
c
t
s
21
.
23
.
22
.
20
.
20
.
23
.
20
.
4
24
.
23
.
26
.
25
.
Co
n
t
a
i
n
e
r
s

&

P
a
c
k
a
g
i
n
g
21
,
21
.
15
.
18
.
14
.
Di
s
c
o
u
n
t

&

F
a
s
h
i
o
n

R
e
t
a
i
l
i
n
g
13
.
15
.
13
.
11
.
10
.
11
.
12
.
10
.
13
.
15
.
El
e
c
t
r
i
c
a
l

&

E
l
e
c
t
r
o
n
i
c
s
13
.
4
12
.
13
.
14
.
16
.
18
.
17
.
17
,
Fo
o
d
18
.
23
.
22
.
22
.
20
.
17
.
23
.
19
.
18
.
17
.
19
.
Fu
e
l
14
.
10
.
4
13
.
11
.
12
.
13
.
17
.
4
14
.
He
a
l
t
h

C
a
r
e
18
.
23
.
23
,
26
.
4
25
.
24
,
22
.
25
.
4
23
,
21
.
23
.
Ho
u
s
i
n
g

&

R
e
a
l

E
s
t
a
t
e
17
,
21
,
21
.
12
.
13
.
19
.
12
.
22
.
4
16
.
le
i
s
u
r
e

Ti
m
e

I
n
d
u
s
t
r
i
e
s
18
.
17
.
14
.
11
.
13
.
14
.
15
.
17
,
13
.
13
.
10
.
Ma
n
u
f
a
c
t
u
r
i
n
g
13
.
17
.
14
.
10
.
12
.
17
.
4
19
.
19
.
19
,
18
.
Me
t
a
l
s

&

Mi
n
i
n
g
19
.
23
.
13
.
-4
.
20
.
14
.
11
.
11
.
No
n
b
a
n
k

F
i
n
a
n
c
i
a
l
14
,
1
'
12
.
10
.
13
.
11
.
13
.
13
.
16
,
16
.
16
.
Of
f
i
c
e

E
q
u
i
p
m
e
n
t

&

C
o
m
p
u
t
e
r
s
15
.
14
.
10
.
4
14
.
19
.
14
.
21
.
14
.
Pa
p
e
r

&

F
o
r
e
s
t

P
r
o
d
u
c
t
s
15
.
17
,
13
.
15
,
12
.
Pu
b
l
i
s
h
i
n
g

&

Br
o
a
d
c
a
s
t
i
n
g
20
,
18
.
11
,
5.
4
12
.
14
,
13
.
Se
r
v
i
c
e

I
n
d
u
s
t
r
i
e
s
15
.
15
.
18
.
15
.
12
.
14
.
10
,
15
.
13
.
10
.
12
,
Te
l
e
c
o
m
m
u
n
i
c
a
t
i
o
n
s
13
.
11
.
15
.
13
.
10
.
17
.
14
.
20
.
17
,
17
,
13
.
Tr
a
n
s
p
o
r
t
a
t
i
o
n
14
.
11
.
14
.
16
.
16
.
Ut
i
l
i
t
i
e
s
11
.
4
10
.
11
.
11
.
4
11
.
11
.
10
.
Al
l

I
n
d
u
s
t
r
y

C
o
m
p
o
s
i
t
e
14
.
15
.
12
,
10
.
11
.
13
.
17
.
16
,
16
.
16
,
3-

Ye
a
r

M
o
v
i
n
g

A
v
e
r
a
g
e
11
.
13
.
4
%
14
.
12
.
10
.
10
.
11
.
14
.
15
.
16
.
16
.
4
%
19
9
3
-
19
9
7
,
5
-
Ye
a
r

A
v
e
r
a
g
e
15
,
19
9
4
-
19
9
8
,
5
-

Ye
a
r

A
v
e
r
a
g
e
16
.
19
9
5
-
19
9
7
,
3
-
Ye
a
r

A
v
e
r
a
g
e
16
,
19
9
6
-
19
9
8
,

3
-
Ye
a
r

A
v
e
r
a
g
e
16
.
4
%
,
~
tr
1
.
~

&
Ca
l
c
u
l
a
t
e
d
~
n

--

e;

(I
)

_
.
'"

Z

'"

0
0

..
.
.
.
.
So
u
~
e
:

.
Z
Cl
J
Au
g
.

1
4
,
1
9
8
9
;

A
u
g
.

1
3
,
1
9
9
0
;
CI
J
Au
g
.

1
9
,
1
9
9
1
;

A
u
g
.

1
7
.

1
9
9
2
;
=:
r

..
.
.
.
.

N
(I
)

P
J
0.
.

'
N
Au
g
.

1
6
,
1
9
9
3
;

A
u
g
.

1
5
,
1
9
9
4
;
tr
1
Au
g
.

1
4
,
1
9
9
5
;

A
u
g
.

1
2
,
1
9
9
6
;
Co
r
p
s
c
o
2
,

x
i
s
(I
)

Au
g
.

1
8
-
,
1
9
9
7
;

A
u
g
.
..
.
.
.
.
CO
R
P
O
R
A
T
E

S
C
O
R
E
B
O
A
R
D
BY

C
A
T
E
G
O
R
Y

L
A
B
E
L
S

B
E
G
I
N
N
I
N
G

I
N

1
9
8
8
RE
T
U
R
N
S

O
N

C
O
M
M
O
N

E
Q
U
I
T
Y

-

Y
E
A
R
S

E
N
D
I
N
G

T
H
I
R
D

Q
U
A
R
T
E
R
In
d
u
s
t
r
y
19
8
8
19
8
9
19
9
0
19
9
1
19
9
2
19
9
3
19
9
4
19
9
5
19
9
6
19
9
7
19
9
8
Ae
r
o
s
p
a
c
e

&

D
e
f
e
n
s
e
15
.
12
.
4
%
11
.
13
.
13
.
4
%
10
.
12
.
13
.
Au
t
o
m
o
t
i
v
e
16
.
16
,
11
.
11
.
27
.
22
.
21
.
20
.
48
,
Ba
n
k
s
14
.
10
.
14
.
16
.
15
.
15
,
16
.
14
,
Ch
e
m
i
c
a
l
s
19
.
20
.
15
.
12
.
15
,
24
.
23
.
18
.
15
.
Co
n
g
l
o
m
e
r
a
t
e
s
13
.
15
.
16
.
12
.
14
.
12
.
19
,
22
.
20
.
21
.
21
,
Co
n
s
u
m
e
r

P
r
o
d
u
c
t
s
22
.
25
.
23
.
21
.
4
21
.
20
.
21
.
23
.
24
.
26
.
25
,
Co
n
t
a
i
n
e
r
s

&

P
a
c
k
a
g
i
n
g
22
.
21
.
4
13
.
19
.
12
.
11
.
Di
s
c
o
u
n
t

&

F
a
s
h
i
o
n

R
e
t
a
i
l
i
n
g
14
,
15
.
13
.
12
.
10
.
12
.
11
,
12
.
10
.
13
,
16
.
El
e
c
t
r
i
c
a
l

&

E
l
e
c
t
r
o
n
i
c
s
14
.
12
.
13
.
3.
4
10
.
4
15
.
16
.
19
.
16
.
17
.
4
Fo
o
d
16
.
20
.
19
.
22
.
18
.
20
.
20
.
22
.
20
.
19
.
20
,
Fu
e
l
14
.
11
.
12
.
11
,
12
.
14
.
17
.
12
.
He
a
l
t
h

C
a
r
e
18
.
24
.
24
.
27
.
24
.
24
.
23
.
25
.
22
.
21
.
21
.
Ho
u
s
i
n
g

&

R
e
a
l

E
s
t
a
t
e
18
.
20
.
19
,
19
,
14
.
19
.
12
.
21
.
17
.
Le
i
s
u
r
e

T
i
m
e

I
n
d
u
s
t
r
i
e
s
19
.
15
.
11
,
13
.
11
.
13
.
10
.
16
.
12
.
11
.
Ma
n
u
f
a
c
t
u
r
i
n
g
14
,
16
.
12
.
16
.
19
.
20
,
19
,
16
.
Me
t
a
l
s

&

M
i
n
i
n
g
21
.
21
.
12
.
-4
,
20
.
11
.
12
,
10
,
No
n
b
a
n
k

F
i
n
a
n
c
i
a
l
12
.
12
.
11
.
12
.
13
.
14
.
12
,
13
.
15
.
17
.
14
.
Of
f
i
c
e

E
q
u
i
p
m
e
n
t

&

C
o
m
p
u
t
e
r
s
15
,
12
.
12
.
10
.
16
.
4
16
.
20
.
18
.
Pa
p
e
r

&

F
o
r
e
s
t

P
r
o
d
u
c
t
s
16
.
17
.
11
.
19
.
Pu
b
l
i
s
h
i
n
g

&

B
r
o
a
d
c
a
s
t
i
n
g
19
.
16
.
11
.
15
.
14
.
Se
r
v
i
c
e

I
n
d
u
s
t
r
i
e
s
14
.
15
,
16
.
14
.
14
,
10
.
13
.
15
.
12
.
10
.
11
.
Te
l
e
c
o
m
m
u
n
i
c
a
t
i
o
n
s
14
,
11
.
14
.
11
,
13
.
17
.
14
.
18
.
16
.
15
.
14
.
Tr
a
n
s
p
o
r
t
a
t
i
o
n
10
.
12
,
6.
4
12
,
13
.
17
.
14
.
Ut
i
l
i
t
i
e
s
11
,
10
.
10
.
11
.
10
.
11
.
10
.
10
.
9.
4
Al
l

I
n
d
u
s
t
r
y

C
o
m
p
o
s
i
t
e
14
.
14
.
11
.
12
.
14
.
4
%
17
.
16
.
16
.
15
.
Ye
a
r

M
o
v
i
n
g

A
v
e
r
a
g
e
12
.
13
.
13
.
11
.
10
.
10
.
12
,
14
.
15
.
16
.
16
.
19
9
3
-
19
9
7
,
5
-
Ye
a
r

A
v
e
r
a
g
e
15
.
19
9
4
-
19
9
8
,
5
-
Ye
a
r

A
v
e
r
a
g
e
15
,
19
9
5
-
19
9
7
,
3
-
Ye
a
r

A
v
e
r
a
g
e
16
.
19
9
6
-
19
9
8
,
3
-
Ye
a
r

A
v
e
r
a
g
e
16
,
tr
1
CJ

~

Ca
l
c
u
l
a
t
e
d
..
.
.
.
.
.
.

~
0

\0

Z

Sf
.
\0

0
'

0

,
Z
So
u
r
c
e
:

C/
J
0
C
/
J
'"
"
'
"
'
No
v
.

1
3
,
1
9
8
9
;

N
o
v
.

1
9
,
1
9
9
0
;
::
r

S

No
v
,

1
8
,
1
9
9
1
;

N
o
v
.

1
6
,
1
9
9
2
;
H'
I

N
0.
.

H
i

No
v
.

1
5
,
1
9
9
3
;

N
o
v
,

1
4
,
1
9
9
4
;
tr
1
..
.
.
.
.
No
v
.

1
3
,
1
9
9
5
;

N
o
v
.

1
8
,
1
9
9
6
;
Co
r
p
s
c
o
3
,
xl
s
No
v
.

1
7
,
1
9
9
7
;

N
o
v
.

2
3
,
1
9
9
8
,
'"
"
'
"
'
CO
R
P
O
R
A
T
E

S
C
O
R
E
B
O
A
R
D
BY

C
A
T
E
G
O
R
Y

L
A
B
E
L
S

B
E
G
I
N
N
I
N
G

I
N

1
9
8
8
RE
T
U
R
N
S

O
N

C
O
M
M
O
N

E
Q
U
I
T
Y

-

Y
E
A
R
S

E
N
D
I
N
G

F
O
U
R
T
H

Q
U
A
R
T
E
R
In
d
u
s
t
r
y
19
8
8
19
8
9
19
9
0
19
9
1
19
9
2
19
9
3
19
9
4
19
9
5
19
9
6
19
9
7
19
9
8
Ae
r
o
s
p
a
c
e

&

D
e
f
e
n
s
e
13
.
4
%
11
,
13
.
14
.
13
.
17
.
11
.
15
,
Au
t
o
m
o
t
i
v
e
16
.
12
,
12
.
17
.
31
,
18
.
19
.
23
.
49
.
Ba
n
k
s
16
.
4.
4
12
.
15
,
15
.
15
.
15
.
16
.
14
,
Ch
e
m
i
c
a
l
s
21
.
17
.
15
.
18
.
27
.
22
.
18
.
13
.
Co
n
g
l
o
m
e
r
a
t
e
s
14
.
17
.
16
.
2
'
11
.
14
.
17
.
20
.
21
.
20
.
20
.
22
.
Co
n
s
u
m
e
r

P
r
o
d
u
c
t
s
22
.
20
.
21
.
21
.
22
.
19
.
24
.
23
.
26
.
27
.
23
.
Co
n
t
a
i
n
e
r
s

&

P
a
c
k
a
g
i
n
g
23
.
19
.
11
.
21
.
10
,
Di
s
c
o
u
n
t

&

F
a
s
h
i
o
n

R
e
t
a
i
l
i
n
g
13
.
17
.
12
.
12
.
15
.
12
.
12
.
11
.
13
.
16
.
El
e
c
t
r
i
c
a
l

&

E
l
e
c
t
r
o
n
i
c
s
12
.
15
,
10
,
11
.
15
.
17
,
19
.
14
.
15
.
Fo
o
d
19
.
18
.
19
.
20
.
18
.
19
.
4
18
.
21
.
19
.
4
17
.
22
.
Fu
e
l
12
,
11
.
12
.
10
.
10
.
10
.
4
10
.
17
.
17
.
He
a
l
t
h

C
a
r
e
24
.
22
,
25
.
25
.
23
.
4
23
.
23
.
23
.
24
.
21
.
24
.
Ho
u
s
i
n
g

&

R
e
a
l

E
s
t
a
t
e
16
.
25
.
15
,
12
.
14
.
15
.
18
.
14
.
20
.
15
.
le
i
s
u
r
e

T
i
m
e

In
d
u
s
t
r
i
e
s
19
.
12
.
4
14
.
11
.
14
.
18
.
4
16
.
13
,
11
,
14
.
Ma
n
u
f
a
c
t
u
r
i
n
g
13
.
15
.
11
,
14
.
18
.
17
.
20
.
4
18
.
14
.
Me
t
a
l
s

&

M
i
n
i
n
g
25
.
18
.
-4
.
-4
.
12
.
19
.
12
.
No
n
b
a
n
k

F
i
n
a
n
c
i
a
l
13
.
11
.
10
.
13
.
10
.
13
.
12
.
14
.
15
.
16
.
14
.
Of
f
i
c
e

E
q
u
i
p
m
e
n
t

&

C
o
m
p
u
t
e
r
s
14
.
11
.
-6
.
13
,
15
.
16
.
19
.
16
,
Pa
p
e
r

&

F
o
r
e
s
t

P
r
o
d
u
c
t
s
17
.
16
.
17
.
9.
4
Pu
b
l
i
s
h
i
n
g

&

B
r
o
a
d
c
a
s
t
i
n
g
18
.
14
.
13
.
18
.
10
,
12
.
Se
r
v
i
c
e

I
n
d
u
s
t
r
i
e
s
13
.
17
,
16
.
11
.
14
.
13
,
14
.
10
.
11
.
Te
l
e
c
o
m
m
u
n
i
c
a
t
i
o
n
s
15
.
14
.
14
.
10
.
15
.
12
.
4
18
.
16
.
23
.
18
.
14
.
Tr
a
n
s
p
o
r
t
a
t
i
o
n
11
.
12
.
15
.
16
.
13
.
4
Ut
i
l
i
t
i
e
s
10
,
10
.
10
.
11
.
11
.
11
.
4
10
.
10
.
Al
l

I
n
d
u
s
t
r
y

C
o
m
p
o
s
i
t
e
14
.
13
.
11
.
10
.
11
.
15
,
16
,
16
.
16
.
15
.
Ye
a
r

M
o
v
i
n
g

A
v
e
r
a
g
e
12
.
13
.
13
.
11
.
10
.
10
.
12
.
14
.
16
,
16
.
16
.
19
9
3
-
19
9
7
,
5
-
Ye
a
r

A
v
e
r
a
g
e
15
.
19
9
4
-
19
9
8
,
5
-
Ye
a
r

A
v
e
r
a
g
e
16
,
19
9
5
-
19
9
7
,
3
-
Ye
a
r

A
v
e
r
a
g
e
16
.
19
9
6
-
19
9
8
'
,
3
-
Ye
a
r

A
v
e
r
a
g
e
16
.
tT
1
p)

&
N
n

en

Ca
l
c
u
l
a
t
e
d
(t
)

_
.
-
~

cr
'
\0

Z

\0

0
0

z
~
~

0
So
u
r
c
e
:

en

"
Ma
r
.

1
9
,
1
9
9
0
;

M
a
r
,

1
8
,
1
9
9
1
;
('
)

e
n

::
T

~

Ma
r
.

1
6
,
1
9
9
2
;

M
a
r
.

1
5
,
1
9
9
3
;
(t
)

p
)

0.
.
c=

tT
1
Ma
r
.

7
,
1
9
9
4
;

M
a
r
.

6
,
1
9
9
5
;
(t
)
Ma
r
.

4
,
1
9
9
6
;

M
a
r
.

3
,
1
9
9
7
Co
r
p
s
c
o
4

x
i
s
Ma
r
.

2
,
1
9
9
8
;

M
a
r
.

1
,
1
9
9
9
.
.J
;
:
.
.
tr
1
.
~

~
~
0

en

=:T
--

OJ

(1
)

...
.

.
\0

I
;

cr
"
,"

..
.
.
.
...
.
.
.
.
.

0
0

r-
+
CJ
'
)()

CJ
'
)

:
;
:
:
:

..
.
.
.
.
.
.
=:
T
S-

~
8.

~

I
N
c:

tr
1
-.
.

(1
)

VI

12
.
10
.
CO
R
P
O
R
A
T
E

S
C
O
R
E
B
O
A
R
D
RE
T
U
R
N
S

O
N

C
O
M
M
O
N

E
Q
U
I
T
Y
14
.
18
.
16
.
1
2

3
4

1
2

3
4

3
4

1
2

3
4

1
2

3
4

1
2

3
4

1
2

3
4

1
2

3
4

1
2

3
4

1
2

3
4

1
2

3
4
19
8
8

19
8
9

19
9
0

19
9
1

19
9
2

19
9
3

19
9
4

19
9
5

19
9
6

19
9
7

19
9
8
.U
T
I
L
I
T
I
E
S

OC
O
M
P
O
S
I
T
E

8
3
-
YE
A
R

M
O
V
I
N
G

A
V
G

(f
)

I-
'
tU
l
-
3
~
II
I
Ii

a

I-
-
l
(t
)

r
t

I-
-
l
::1
(t)
I-
-
l

SlJ
II
I
I-
J

.

I-
-
l

I
-
J

..

S

I-
J
.

"
"
I
j

(
t
)
tt
j

:
:
1

I
-
J

.
S
Sl
J

:
:
1

U
J
8
I
i

I-
J
.
.
.
.
b
~

P"
H
:3

(
t
)
::
1
I-
-
'

0.
.

0
.
.
(t
)
G)

~
0.
.

.
.
.
.
.
.
1--
'
.
UJ

U
)
f\
)
::
1
0.
.
1:1
)
(t)
...
.
.
.
tc
J Sl
J
...
.
.
.U)

(t
)
f\
)

.
.
.
.
.
.
f\
)
f\
)
..
.
.
.
.

.
.
.
.
.
.
.
f\
)
Sl
J
...
.
.
.
.

I
-
J
.
~
a
Sl
Jrt

(f
)
(f
)

1
-
3

(
)

tI
:
1
I-
J
.

0
...
.
.
.
.
.
.
.
0
.
S
l
J
Sl
J
f\
)

P
"

UJ

P
"
(1
)

(
)

(1
)

I
-
J

(f
)

(
t
)
...
.
.
.
.
.
.
.

p.
.

S
l
J

tJ
'
""
"
"
"
U)

~

Ii

Z

I-
J
.
SlJ
u)

I-
-
l

I
-
-
l

a

I-
-
l
(t
)
0
~

Z
...
.
.
.
.
.
.
.
O"
I
~

a
..

t
U
(f
)

t
I
:
1

...
.
.
.
rt

f\
)
Sl
J

U
)

f
\
)
H1

r
o
H1

,
..
.
.
.
.
...
.
.
.
..
.
.
.
.
...
.
.
.
~
~

Z

0

(f
)

~

~
~

~

~

~

""
I
j

~

~
Z

0

(f
)

~

~
~

~

~

~

""
I
j

Sl
J

(
t
)

a
0

(t
)

~

~

Sl
J
~

Sl
J

(
t
)

S
l
J

(
t
)

a
0

ro

~

~

Sl
J
~

Sl
J

(
t
)

S
l
J
::
1

0

~
r
t

tc
J

l
Q

1-
-
l
:
:
1

~
I
i

Ii

tJ
'
:
:
1

0

~
r
t

tc
J

l
Q

1-
-
l
:
:
1

~
I
i

Ii

tJ
'
:
:
1
(t
)

(
t
)

a

rt

~

~

ro

I-
J
.

0

Ii

~

(t
)

(
t
)

0

rt

~

~

ro

I-
J
.

0

Ii

~
Sl
J

S

tJ
'

(
t
)

U
J

I-
-
l

P
"

~

Sl
J

S

tJ
'

(
t
)

U
J

I-
-
l

P
"

~

Sl
J
Ii

tJ
'

t
J
'

(
t
)

S

rt

Sl
J

I
i

t
J
'

tJ
'

(
t
)

S

rt

Sl
J

I
i
(t
)

(
t
)

I
i

t
J
'

Ii

~

(t
)

(
t
)

I
i

t
J
'

Ii

~
Ii

I
i

(t
)

Ii

I
i

(t
)

Ii

..
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

...
.
.
.

.
.
.
.
.
.

...
.
.
.

...
.
.
.

.
.
.
.
.
.

...
.
.
.

.
.
.
.
.
.

..
.
.
.
.

...
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

...
.
.
.
0"
1

0
"
1

0
"
1

0
"
1

0
"
1

0
"
1

0
"
1

0
"
1

0
"
1

0
"
1

0
"
1

0
"
1

0
"
1

0
"
1

0
"
1

0
"
1

0
"
1

0
"
1

0
"
1

0
"
1

0
"
1

0
"
1

0
"
1

m

~
W

~

~

W

W

W

W

f\
)

f
\
)

f
\
)

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

00
0

0

0
0

U)

U
)
W
U
)

0

0"
1

f\
)

0

ro

m

f
\
)

U)

0"
1

W

0"
1

f
\
)

r
o

m
W

..
.
.
.
.

f
\
)

0"
1

.
.
.
.
.
.
..
.
.
.
.

.
.
.
.
.
.

f
\
)

f\
)

.
.
.
.
.
.

..
.
.
.
.

f
\
)

..
.
.
.
.

f
\
)

f\
)

0

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

f
\
)

f\
)

f
\
)

f
\
)

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

W

...
.
.
.
..
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.

~.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.

~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
W
W

W

W

W

W

W

W

W

W

W

W

W

W

W

W

W

W

W

W

W

W

W

W

W
..
.
.
.
.
.
.
.
.
.
.

00
0
0
0
0
0
0
0
0
0
"
"
"
"
"
"

f\)
f
\
)
"
"
"
"
"
"
"
"
"

""
"
"
"
"
f
\
)
f
\
)
W
ro

..
.
.
.
.

0
"
1

U
)

0"
1

W

~
~

0"
1

~
m

m

0"
1

U)

...
.
.
.

0
~

0

..
.
.
.
.

W

0"
1

W

0"
1

m
~

f\
)

f
\
)

f
\
)

W

f
\
)

f
\
)

..
.
.
.
.

f
\
)

..
.
.
.
.

0
"
1

f
\
)

f\
)

.
.
.
.
.
.

m
W

..
.
.
.
.

f
\
)

f\
)

~

f\
)

W

W
...
.
.
.
..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

...
.
.
.
U)

U
)

U
)

U
)

U
)

U
)

U
)

U
)

U
)

U
)

U
)

U
)

U
)

U
)

U
)

U
)

U
)

U
)

U
)
U)

U
)

U
)

U
)

U
)

U
)

U
)

U
)

U
)

r
o

r
o

r
o

r
o

0
0

0
0

0
0

0
0

0
0

0
0
00

~

0"
1

m

~
W

f\
)

.
.
.
.
.
.

U)

0
0

~

0"
1

m

~
W

f\
)

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

...
.
.
.

.
.
.
.
.
.

...
.
.
.
0"
1
0
"
1

mm

~

~

~

W W

f\)
"
"
"
"
"
"

0
0

0

U)

U
)

U
)

0
0
W
0

0"
1

f
\
)

0
0

~
0

0"
1

0
~

00

W

U
)

~

U)

0"
1

f\
)
0
m

U)

~

f
\
)

m

W
f
\
)

~

0
W

0"
1

0
"
1

0
"
1

U
)

0"
1

m

U)

~
..
.
.
.
.
...
.
.
.

.
.
.
.
.
.

W

f\
)

f
\
)

f
\
)

f
\
)

W

0"
1

~
~

~

..
.
.
.
.

W

W
W

W
O
O
f
\
)
0"
1

~
W

m

~

~

U)

..
.
.
.
.

.
.
.
.
.
.

0
"
1

~
~

..
.
.
.
.

0
0

U
)

00

0
0

U
)

m
..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.

...
.
.
.

.
.
.
.
.
.

..
.
.
.
.

.
.
.
.
.
.
.
.
.
.
.
.
W
W

W

f
\
)

f
\
)

f
\
)

~

..
.
.
.
.

.
.
.
.
.
.

0
0

0

0

0

0

0

U)

0
0
...
.
.
.

.
.
.
.
.
.

~~

~

..
.
.
.
.

U
)

W
0
0

m

W

~

..
.
.
.
.

0"
1

0
0
0"
1

0
0

W

U)

~

f\
)

~

f\
)

0
"
1

0
~

~

~

~

0"
1

..
.
.
.
.

..
.
.
.
.

f
\
)

f\
)

.
.
.
.
.
.
m~
~
f
\
)
f
\
)
"
"
"
"
"
"
...
.
.
.
W
~
.
.
.
.
.
.
..
.
.
.
.

f
\
)

00

W

~

f\
)

0
"
1

.
.
.
.
.
.

U)

0

f\
)

W

00

~

0"
1

0
"
1

.
.
.
.
.
.

0
0
~
0
11

:
:
t

...
.
~
~

...
.
11

0

C1

tJ
t
CD

tr
j
f'
I
11

0

...
.

p,

0
C1

~

CD

C
1
11

~

C1

~
t
j
(I
)

::
t
MOODY'S AVERAGE 1, PUBLIC UTILITY BOND YIELDS
(A)(B)(C)
Baa
1977 43%61%9 . 06 1978 9 .10%29%62%1979 10.22%10.49%10.96%1980 13 .00%13.34%13.95%1981 15.30%15. 95%16.60%1982 14.79%15.86%16.45%1983 12.83%13.66%14.20%1984 13.66%14.03% 14.53%1985 12.06%12.47%12.96%1986 30%58%10.00%1987 9 . 77%10.10%10.53%1988 10.26%10.49%11.00%1989 56%9 . 77%9 . 97%1990 65%86%10 . 06%1991 9. 09%36%9 .55%1992 8 . 55%8 .69%86%1993 7 .44%7 . 59%7 . 91%1994 8 .21%31%63%1995 7 . 77%89%29%1996 7 . 57%7 . 75%8 .1 7%1997 7 . 54 60%95%
1998 January 6 . 94 7 . 04 28%February 99%7 . 12 36%March 7 . 04 7 .16%7 .37%April 7 . 02%7 .16%7 .37%May 7 .02%7 .16%7 . 34%June 91%7 . 03%7. 2 1 %July 6 . 91%03%23%August 6 . 87%00%20%September*6 . 64 6 . 82%01%October*92%7 . 06%24%November*82%6 . 95%29%December*78%93%27%1999 January*6 . 77%6 . 92%25%
*Calculated
Source:Moody's Public Utility Manual, 1998;*Moody's Public Utility News Reports, 1998 and 1999.
moodyavg .exh (pl)
Exhibi t No. 122
Case No. WWP-E-98-11
T. Carlock , StaffSchedule 4/23/99
BANK PRIME INTEREST RATES
YEAR RATE
1970 75%8 . 50%1971
1972
1973 10.1974 12 .1975 10.1976 25 , 7.1977
1978 11. 75197911.15 . 75198010.21.1981 15.20.1982 11.1 7. 1983 10.11.1984 10. 75 13 .1985 10.1986
1987
1988 B. 50 10.1989 10.11.1990 10.10.1991
1992
1993
1994
1995
1996
1997
1998
1999 through 4/15/99
Source:Federal Reserve Bulletin
Wall Street Journal
Exhibi t No. 122
Case No. WWP-E-98-11
T. Carlock , StaffSchedule 4/23/99
bankprirn. exh
~-.
JODY'ELECTRIC UTiliTIES
RETURN ON COMMON EQUITY
Year
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998 through Dec.
Averages
10 Year
5 Year
3 Year
Calculated
Source:
Return
On Equity
10.
10.
11.
10.
10.
10.
10.
11.
10.
11.
10.
12.4%
13.
14.
14.
14.4%
14.
12.
12.4%
10.
11,
11,
10.
14.
10.
, 4.
10.
1989-1998 10,5%'
1988-1997 10,
1994-1998 10,
1993-1997
1996-1998
1995-1997 10.
Moodys Public Utility Manual 1998, page a22
A. Turner Utility Report April 1999
moodyroe.xls(p1 )
Year*
Moving
Average
10.
10,
10.
10.4%
10.
10.
10.
10.
10,
11.4%
12.
13.
14.
14,
14.
13.
11.
11,
10.
11.4%
11,
10.
10,
12,
10,
Exhibit No. 122
Case No, 'NVVP-98-
T. Carlock, Staff
4/23/1999 Schedule 9
MOO... ,S GAS DISTRIBUTION UTILIT~~~
RETURN ON COMMON EQUITY
Year
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998 through Dec.
Averages
10 Year
5 Year
3 Year
Calculated
Return
on Equity
12.
12.
12,
11.
11,
11.
12.
13,
15.
14.
13.
13,
11.
10.
12.
12.
12.
13.
13.
10.
11.
11.
12.
13.4%
15.
12.
10,
1989-1998 11.
1988-1997 12.
1994-1998 12,
1993-1997 13.
1996-1998 12.
1995-1997 13.
Source: Moodys Public Utility Manual 1998 , page a29** C.A. Turner Utility Report April 1999
moodyroe.xls(p2)
Year*
Moving
Average
12.
12.
12.
11,
12,
12.
13.8010
14.
14.
13.
12.
11.
12.
12.
13.
11.
10.
11.
11.
12.4%
13,
13.
12,
Exhibit No. 122
Case No. VVVVP-98-
T. Carlock, Staff
4/23/1999 Schedule 10
Company
Avista Corp.
B lack Hills
Edison Int'
Hawaiian Elec.
IDACORP, Inc.
MD U Resources
Montana Power
Nevada Power
PG&E CorP.
Pinnacle West Capital
Public Servo (N. Mex.
Puget Sound Energy
Sierra Pacific Res.
ELECTRI C UTILITY WEST
PERCENT EARNED ON COMMON EQUITY
TWELVEMONTHS ENDING
DECEMBER 31, 1998
Average
Average without A vista
Source: Value Line Investment Survey for Windows, March 1999
u :tcarlock/wpfi les/ COt, exhlroecomp
Common
EquitY
Return
14.60%
15.75%
12.66%
10.600/0
12.18%
13.930/0
11.91 %
98%
84%
11.63%
78%
94%
75%
11.43%
11.16%
Exhibit No. 122
Case No. WWP-98-
T. Carlock, Staff
Schedule 11
4/23/99
FI
N
A
N
C
I
A
L

S
T
A
T
I
S
T
I
C
S
Av
g
.

A
n
n
u
a
l
Pi
E

R
a

tU
L
vg
.

A
n
n

I
1

.
Di

vi
d
e
n
d
Yi
e
l
d
Ma
r
k
e
t
to

B
o
o
k
-0
-

u
a
.
r
.

t

e

Co
m
m
o
n
Eq
u
i

t
y
Ra

t
i
%
E
a
r
n
e
d
Co
m
m
o
n
Eq
u
i

t
y
Pe
r
c
e
n
t
Pa
y
o
u
t
Ma
r
k
e
t
to

B
o
o
k
Ra

ti
o
El
e
c
t
r
i
c

U
t
i
l
i
t
y

W
e
s
t
13

.
1
7
x
5
.

7
1
%
48
.

0
%
11
.
43
%
71
.
48
x
1.

6
8
x
El
e
c
t
r
i
c

U
t
i
l
i
t
y

C
e
n
t
r
a
l
15
.

6
3
x
6
.

0
6
%
45
.
11
.
60
%
89
.
67
x
1
.

9
9
x
El
e
c
t
r
i
c

U
t
i
l
i

t
y

Ea
s
t
16

.

0
6
x
6
.

1
6
%
47
.
10
.
86
%
80
.
48
x
1
.

8
9
x
Av
i
s
t
a
9.

9
6
x
6
.
35
%
5
.

0

%
14

.
60
%
65
.
45
x
1.

3

So
u
r
c
e
:
Va
l
u
e

L
i
n
e

In
v
e
s
t
m
e
n
t

S
u
r
v
e
y

f
o
r

Wi
n
d
o
w
s
,

M
a
r
c
h

1
9
9
8
.
TC
:
u
/
w
p
f
i
l
e
s
/
c
o
c
e
x
h
/
s
t
a
t
s
.

e
x
h
tr
1
.
~

&
w
n

(!
)

_
.
...
.
.
.
.
.
.

cr
"
1,
0

~

.,
.
.
.
1,
0

0
0

In

..
.
.
.
.
=r

S
'

(!
)

~

0.
.

""
"
i

'
s:
:

tr
1
(!
)

1,
0
..
.
.
.
.

0
0
DISCOUNTED CASH FLO~.-
VISTA ELECTRIC UTILITY COMP ARABLES
s =
- - - -
(l+df) + g
Using: current dividend yields (DY)average annual dividend yields (ADY)
growth based on proj ected dividend growthand proj ected earnings growth
df = direct flotation costs of 4.
Electric Utility - West:
Current Dividend YieldAverage proj ect~d Dividend
and Earnings Growth
4 .18%
4 .18%
(4.18% * 1.04) + 4.18%8 . 53
Average Annual Dividend Yield 5 . 71%
(5.71% * 1.04) + 4.18%= 10.10%
Electric Utility - Central:
Current Dividend YieldAverage proj ected Dividend
and Earnings Growth
5 .23 %
4 . 70%
(5.23% * 1.04) + 4.70%= 10.14%
Average Annual Dividend Yield 6 . 06%
(6.06% * 1.04) + 4.70%= 11.00%
Electric Utili ty - East:
Current Dividend Yield
Average proj ected Dividend
and Earnings Growth
5 . 12
4 . 77%
(5 .12 % * 1. 04) + 4. 77%= 10.09%
Average Annual Dividend Yield 6 . 16%
(6.16% * 1.04) + 4.77%= 11.20%
Sources:Val ue Line Inves tmen Survey for Windows
TC :u/wpfiles/cocexh/dcfwwp, exh
Exhibit No. 122
Case No. WWP-E-98-11
T. Carlock, StaffSchedule 4/23/99
., "'
VISTA
CAPITAL STRUCTURE
AND WEIGHTED COST OF CAPITAL
Com pos ite Rate ofLine No.Component Ratio Cost Return
Long-Term Debt 48.030%011 % '848%Short-Term Debt 958%255%248%Total Debt 51.988%096%
Preferred Securities
Preferred Trust Security 032%113%652%Preferred Stock 556%151%208%Total Preferred 10.588%860%
Common Equity 37.424%10.25% - 11.25%'836% - 4,210%
Total 100.000%792% - 9,166%
Point Estimate:
Return on Equity
Overall Rate of Return 11.000%
073%
Exhibit 122
Case No. VVVVP-98-
1. Carlock, Staff
Schedule 14
4/23/99
W It?-
ReCEiVED
r:' !; i:" f. t ..-
--.':'
1"1(1 J PI -. " f. 'LLJU,-Ui!~ H~
" 1f'..~)liC! Ir'1:'
;:"
1',
" ",::,.
'.J
UTILiTiES COht'"'iiSS!ON
BEFORE THE
IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE
APPLICATION OF UNITED WATER
IDAHO INC. FOR AUTHORITY TO
REVISE AND INCREASE RATES
CHARGED FOR WATER SERVICE.
CASE NO. UWI-00-
DIRECT TESTIMONY OF TERRI CARLOCK
IDAHO PUBLIC UTILITIES COMMISSION
JUNE 6, 2000
Please state your name and address for the
record.
My name is Terri Carlock.My business
addre~s is 472 West Washington Street, Boise, Idaho.
By whom are you employed and in what
capaci ty?
I am employed by the Idaho Public Utili ~ies
Commission as the Accounting Section Supervisor.
Please outline your educational background
and exper ience
I graduated from Boise State Uni versi ty
May 1980, with a B.A. Degree in Accounting and
Finance.I have attended various regulatory, accounting,
rate of return, economics, finance and ratings programs.
I chaired the National Association of Regulatory
Utili ties Commissioners (NARUC) Staff Subcommi t tee
Economics and Finance for over 3 years.Under this
subcommittee, I also chaired the Ad Hoc Committee on
Di versification.Since joining the Commission Staff
May 1980, I have participated in audits, performed
financial analysis on various companies and have
presented testlmony before this Commission on numerous
occaslons.
What is the purpose of your testimony in
this proceeding?
UWl -W- 0 0-106/06/00 CARLOCK, T (Di)Staff
The purpose of my testimony is to present
the Staff's recommendation related to the overall cost
capi tal for Uni ted Water Idaho Inc.(United Water Idaho)
to be used in the revenue requirement in this case,
UWI -W-O 0-1 I will address the appropr,iate capi tal
structure, cost rates and the overall rate of return.
Please summarize your recommendations.
I am recommending a return on common equi
in the range of 10.00% - 11.00% with a point estimat~ of
10.6%.The recommended overall weighted cost of capi tal
lS in the range of 8.585% - 9.016% wi th a point estimate
of 8.843% to be applied to the rate base for the test
year.
Are you sponsoring any exhibi ts to accompany
your testimony?
Yes , I am sponsorlng Exhibi t No.1 08
consisting of 14 schedules wi th a total of 15 pages.
Have you reviewed the testimony and exhibi
of Uni ted Water wi tness Hanley?
Yes.The theoretical approach used by Mr.
Hanley in his testimony and exhibi ts is generally the
same as I have used.My judgement in some areas of
application resul ts in different outcomes.
What legal standards have been established
for determining a fair and reasonable rate of return?
UWI -W-00-106/06/00 CARLOCK, T ( Di )Staff
The legal test of a fair rate of return fo~
a utili ty company was established in the Bl uefield Wa re:
Works decision of the Uni ted States Supreme Court and
repeated specifically in Hope Natural Gas.
In Bl uefield Wa ter Works and Improvemen Co.
v. West Virginia Public Service
Commission, 262 U. S ~ 679,
692, 43 S.Ct. 675, 67 L.Ed. 1176 (1923), the Supreme
Court sta ted:
A public utili ty is enti tIed' to suchrates as will permi t it to earn a returnon the value of the property which
employs for the convenience of the
public equal to that generally being
made at the same time and in the samegeneral part of the country on
investments in other business
undertakings which are attended by
corresponding risks and uncertainties;but it has no consti tutional right to
profi ts such as are realized or
anticipa ted in highly profi tableenterprises or speculati ve ventures.The return should be reasonably
sufficient to assure confidence in thefinancial soundness of the utili ty andshould be adequate, under efficient and
economical management, to maintain andsupport its credi t and enable it toraise the money necessary for the properdischarge of its public duties. A rateof return may be reasonable at one timeand become too high or too low by
changes affecting opportuni ties forinvestment, the money market and
business, condi tions generally.
The Court stated in FPC v. Hope Natural Gas Company, 320
0 . S. 591 , 603, 64 S. C t". 281, 88 L. Ed. 333 1944) :
OW I - W - 0 0 - 106/06/00 CARLOCK, T ( Di )Staff
From the investor or company point of
view it is important that there beenough revenue not only for opera tingexpenses but also for the capital costsof the business. These include serviceon the debt and di vidends on the stock.
. .
. By that standard the return to the
equi ty p owner should be commensurate wi
returns on investments in other
enterprises having corresponding risks.That return, moreover, should be
sufficient to assure confidence in thefinancial integrity of the enterprise,so as to maintain its credi t and to
a t tract capi tal. (Ci ta tions omi t ted.
) ,
The Supreme Court decisions in Bl uefield
Water Works and Hope Natural Gas have been affirmed in
re Permian Basin Area Rate Case, 390 U.S. 747 88 S.
13 4 4, 2 0 L. Ed 2 d 3 12 ( 1 9 6 8), and D u qu e s L i g h Co.
Barasch, 488 U. S. 299, 109 S.Ct. 609, 102 L.Ed.2d. 646
(1989) The Idaho Supreme Court has also adopted the
principles established in Bluefield Water Works and Hope
Natural Gas.See In re Moun ta in Sta res Tel. Tel. Co.
76 Idaho 474, 284 P.2d 681 (1955)General Telephone Co.
v. IPUC, 109 Idaho 942, 712 P.2d 643 1986)Hayden Pines
Wa t e r C ompa n v. I P UC , 12 2 I 0 3 5 6 , 8 3 4 P. 2 d 8 7 3 (1 9 92)
As a result of these United States and Idaho
Supreme Court decisions, three standards have evol ved for
determining a fair and reasonable rate of return:
UWI -W-OO-106/06/00 CARLOCK, T (Di Staff
1 7
(1) the Financial Integrity or Credit Maintenance
Standard;(2) the Capital Attraction Standard; and,(3 )
the Comparable Earnings Standard.If the Comparable
Earnings Standard is met, the Financial Integrity or
Credi t Maintenance Standard and the Capi tal- Attrac~ion
Standard will also be met, as they are an integral part
of the Comparable Earnings Standard.
Have you considered these standards in your
recommendation?
Yes.These cri teria have been seriously
considered in the analysis upon which my recommendations
are based.It is also important to recognize that the
fair rate of return that allows the utili ty company to
maintain its financial integri ty and to attract capi tal
is established assuming efficient and economic
management, as specified by the Supreme Court
Bl uefield Wa ter Works.
Please summarize the parenti subsidiary
relationships for United Water Idaho.
Uni ted Water Idaho s common stock is not
traded.It is wholly owned by United Waterworks, which
is wholly owned by Uni ted Water Resources.Due to this
parent/subsidiary relationship there is no direct market
data available on Uni ted Water Idaho.The only stock
market information available to utilize in determining
UWI-W-OO-l06/06/00 CARLOCK, T ( Di )Staff
1 7
the cost of equi ty capi tal is for Uni ted Water Resou~ces.
The market stock prices for Uni ted Water Resources are
currently influenced by the shareholder approved takeover
offer of Suez Lyonnaise des Eaux at a $35 cash price per
share.
What approach have you used to determine the
cost of equity for United Water Idaho specifically?
I have presented two methods:the
Discounted Cash Flow (DCF) method and the Comparable
Earnings method for industrials and utili ties.
Please explain the Comparable Earnings
method and how the cost of equi ty is determined using
this approach.
The Comparable Earnings method for
determining the cost of equity is based upon the premlse
that a gi ven investment should earn its opportuni
costs.In competi ti ve markets, if the return earned by
firm is not equal to the return being earned on other
investments of similar risk , the flow of funds will be
toward those investments earnlng the higher returns.
~herefore, for a utility to be competitive in the
financial markets, it should be allowed to earn a return
on equi ty equal to the average return earned by other
firms of similar risk.The Comparable Earnings approach
is supported by the Bl uefield Wa ter Works and Hope
OWl -W-O 0-1
06/06/00 CARLOCK, T ( Di )Staff
1 "7
~ '
..L Na tural Gas decisions as a basis for determining those
average returns.
I have analyzed the returns for utilities
and industrials in order to determine
fai~ return for
United Water Idaho.When determining the comparable
earnings rate, it is important that a cross-section of
varlOUS companies and industries be utilized in the
sample so that any possible effects of unusual
occurrences or monopoly powers are limi ted.It is also
important that any risk differentials between the
comparable earnings sample and Uni ted Water Idaho be
resolved.
In my comparable earnings analysis, the
rates of return on common equi ty historically earned by
industrial firms were examined.The historical returns
earned by electric and gas utili ties were also studied.
Current returns for water companies, interest rates and
bond yields were also examlned.Then, based upon current
economic condi tions, the current cost of equi ty capi tal
for industrial firms on the average was estimated.
Taking into consideration the risk
differentials between industrials and utilities and those
differentials as they specifically relate to Uni ted Water
Idaho, I estimated the current cost of equity range
utilizing the Comparable Earnings approach.
UWI -W-OO-l06/06/00 CARLOCK, T ( Oi )Staff
! ~
Please explain your schedules reflecting the
historical rate of return earned for industrial flrms.
Schedules 1 through 4 of Exhibi t No.1 08
show the returns on common equi ty for the Business Week
Corporate Scoreboard over the last 11 years.Schedule
reflects the returns earned for periods ending the First
Quarter of each year; Schedule 2 reflects the returns fo~
periods ending the Second Quarter; Schedule 3 reflects
the returns for periods ending the Third Quarter; and
Schedule 4 reflects the returns for periods endlng the
Fourth Quarter of each year.Changing economlC
condi tions are reflected in the yearly return
fluctuations.
Industrial returns tend to fluctuate wi
business cycles, increasing as the economy improves and
decreasing as the economy declines.I have utilized
three-year moving average to smooth the business cycle
effects and yearly fluctuations in the industrial rate of
return.Utili ty returns are not as sensi ti ve to
fluctuations in the business cycle because the demand for
utili ty services generally tends to be more stable and
predictable.
For years ending the First Quarter
(Schedule 1 of Exhibit No. 108), the three-year average
industry composite return from 1998 through 2000 was
UWI -W- 0 0-106/06/00 CARLOCK, T (Di)Staff
1 ~
~ 0
16.0%, a decrease from the three-year average from 1997
through 1999 of 16.3%.For years ending ~he Second
Quarter (Schedule 2 of Exhibi t No. 108), the three-year
movlng average decreases from 16. 4 % in 1998 to 16. 1 % in
2000.For years ending the Third Quarter (S~hedule 3 of
Exhibit No. 108), the three-year average from 1997
through 1999 was 15.8%, decreasing from 16.1% in 1998.
For years ending the Fourth Quarter (Schedule 4 of
Exhibit No. 108) the three-year average in 1999 of 16.
is up slightly from the 16.2 % in 1998.These statistlcs
show the decrease and increase in industrial returns as a
result of economlc conditions.The three-year average
has been relatively steady with a slight decrease in the
average.
Schedule 5 of Exhibi t No. 108 depicts the
returns for the years ending each quarter from 1990
through the First Quarter of 2000 for the Corporate
Scoreboard composi te return, the three-year movlng
average industrial return and the utilities return
reflected in Schedules 1 through This graph shows the
increase and decrease of industrial returns and the
utili ty composi te return through various business cycles.
What is your estimate of the current and
near-future equity returns for industrial companies?
Based upon the three-year moving average
UWI -W-00-1
06/06/00 CARLOCK , T (Di Staff
'1,
.L
trend in industrial earnlngs and actual earnlngs
slnce 1994, '(Schedules 1 through 5, Exhibit No. 108)
along wi th current economic condi tions, I believe the
average industrial returns will continue to be stable
through 2001.
The 1999 inflation rate is 2.7% for the
consumer price index and preliminarily 3% for the
producer prlce index.Looking a t the consumer and
producer prlce indexes as shown in Schedule 6 of Exhibi
No. 108 the change in the inflation rate can be seen.
The change in bond rates is illustrated in Schedule 7 of
Exhibi t No.08, Moody s Average for Public Utili ty Bond
Yields.The yields are shown for "
, ", "
Baa " bonds
and the utili ty average bond yield from 1977 through
May 2000.Prime interest rates as shown in Schedule 8 of
Exhibit No. 108 is currently at 9.50%.
The Dow Jones Industrial Average Index
(DJIA) has fluctuated widely since the 1982 low of 776.
on August 12, but the long-run rising trend has
con t inued The DJIA closed at a record high of 11 722.
on January 14 , 2000.The DJIA closed at 10,794.76 on
June 2 , 2 000 .The Dow Jones Utility Average (DJUA)
reached a high of 334 on June 14 , 1999 and closed at
323 . 09 on June 2 , 2000.
I reviewed the actual earned returns on
OW I - W - 0 0 - 106/06/00 CARLOCK, T (Di Staff
equity for industrial companies , the stabilization and
decline in economlC returns, changing inflation and stock
market condi t ions.Based upon these considerations my
estimate of the near future earned equi ty capi tal return
for industrial companies is in the range of 15.5%-16.5%.
How does the trend in utility returns
compare with the trend in industrial returns?
Schedule 5 of Exhibi t No.1 0 8 shows in graph
form the more stable utili ty returns.Schedule 9 of
Exhibit No. 108 shows the returns for the Moody
Electric Utilities since 1970.The returns in individual
years may lncrease or decrease from the prior year , but
the three-year moving averages show general movements in
earned returns.The three-year moving average return has
declined since the 12.0% in 1996, the highest since 1987.
In 1998 the 8.8% three-year moving average return is the
lowest for any period shown on this schedule.The area
of 10.3% - 10.5% reflects the long-term average of earned
return.
The return on common equi ty for the Moody'
Gas Distribution Companies is shown in Schedule 10 of
Exhibit No. 108.The three-year average return in 1999
is 11.1%.The annual returns and the three-year average
returns for the gas utili ties generally reflect decreases
from 1996 through 1998.
OWl -W-OO-l06/06/00 CARLOCK, T (Di)Staff
1 7
The return on common equi ty for water
utili ties is shown on Schedule 11 of Exhibi t No.08.
The average return on common equi ty for the 12-month
period ending December 31, 1999 is 11.0%.The averaae
return for the group excluding United Water -Resources,
Inc. is 11.2%.The average return for the period ending
March 31, 2000 for the group has declined to 10.5% and
10.8% excluding United Water Resources.
A review of electric and gas utili ty returns
provides a record of actual utili ty returns earned in the
past.The water utili ty average provides a water
industry specific comparison.The required return for
water utilities, and United Water Idaho specifically, can
then be estima ted by reviewing current market changes and
considering any risk differentials between the different
types of utili ties.
Please explain the risk differentials
between industrials and utilit~es.
Risk is a degree of uncertainty relative to
a company.The lower risk level associated with
utilities is attributable to many factors even though the
difference is not as great as it used to be.Utili ties
continue to have limi ted competi tion for distribution of
utili ty serVlces wi thin the certificated area.With
limited competition for regulated services, there is less
UW I - W - 0 0 06/06/00 CARLOCK, T ( Di )Staff
chance of losses related to pricing practices, marketing
strategy and advertising policies.The competi ti ve rlSKs
for gas, electric and telecommunication utili ties have
changed wi th increasing non-utili ty generation, open
transmission access, and implementing the
Telecommunications Act of 1996.Competi ti ve ris ks are
limited for United Water Idaho.Smaller water companles
that have certificated areas near areas served by Uni tea
Water Idaho produce Ii ttle competi tion for Uni ted Water
Idaho.In fact, United Water Idaho continues to evaluate
and purchase many of these systems.Investments required
and the costs resul ting from the Safe Drinking Water Act
continue to produce some investment risk.This
investment risk is one type of risk but it does not make
water utilities more risky than 'other utilities.The
demand for water utility services is relatively stable
and certain or increasing compared to that of unregulated
firms and even other utili ty industries.
Under regulation, utilities are generally
allowed to recover, through ra tes , reasonable, prudent
and justifiable cost expendi tures rela ted to regula ted
servlces.Unregulated firms have no such assurance.
Utili ties in general are shel tered by regulation for cost
recovery ris ks, making the average utili ty less risky
than the average unregulated industrial firm.
UWI -W-00-106/06/00 CARLOCK, T ( Di )Staff
1 7
Have you compared United Water direc~ly w~~~
other utili ty companies?
Uni ted Water Idaho s common stock
currently 100% owned by United Waterworks, which
5 'is 100% owned by United Water Resources Inc.In my
comparisons I used the market data for United Water
Resources because neither United Water Idaho nor Uni~ed
Waterworks have common stock outstanding in the market.
As previously discussed the Uni ted Water Resources shares
are being purchased by Suez Lyonnaise des Eaux.
Schedule 11 of Exhibi t No. 108 shows the
10.5% average return for water companies and the 10.
average when Uni ted Water Resources is excluded.
Schedule 12 of Exhibit No. 108, I have compared financial
statistics for Uni ted Water Resources wi th the water
utili ty group.The statistics shown include average
annual price/earnings ratio, average annual dividend
yield, common equity ratio, percent earned on common
equi ty and percent payout ratio.
Based upon your analysis of industrial
returns, utili ty returns, and current economic
condi tions, what lS your estimate of the cost of equi
capital for United Water Resources, and ultimately United
Water Idaho, based upon the Comparable Earnings method?
When utilizing the Comparable Earnings
UW I - W - 0 0 - 106/06/00 CARLOCK , T (Di)Staff
oJ..method, the risk differentials between industrials and
utilities, particularly United Water Idaho and United
Water Resources, must be considered.Utili ty returns , lr.
comparison to industrial returns, may be ranked by
classifying the utility services according to risk
levels.Utili ty groups are less risky than industrials
and water utili ties continue to be the least risky.
Because an average utili ty company is less risky than an
average industrial company, its cost of equi ty capi tal
range would be less.Wa ter companies, incl uding Uni ted
Water Resources and United Water Idaho, are less risky
than an average utility company so the cost of equity
capi tal would be less than that of both an average
utili ty and that of an average industrial company.When
considering the risk differentials between water
utili ties and -other companies, capi tal requirements to
meet the standards under the Safe Drinking Wa ter Act are
a concern.Under current standards, Uni ted Water Idaho
has made investments to meet the required standards
therefore the risks are minimized.
The Value Line relative strength of the
water utili ty industry is improving substantially
compared to the Val ue Line Composi te .The composi
index equals 100 wi th the water utili ty index increasing
from approximately 140 in 1998 to approximately 200 at
UWI -W-00-106/06/00 CARLOCK, T (Di Staff
the end of 1999.
Using the Comparable Earnings approach, my
estimate of the current cost of equi ty capi tal for Uni tea
Water Idaho is in the range of 10.0% - 11.0%.This range
is developed by reviewing the most recent industrial
returns and the expected industrial return range of 15.
- 16.5% adjusted for the risk differential (Beta of .
for Uni ted Water Resources) resul ts in a risk adj usted
range of 9.3% - 9.9%.The utili ty returns as shown
the Corporate Scoreboard of 12.6% for the First Quarter
of 2000, 10.1% for the Second Quarter of 1999, 11.2% for
the Third Quarter of 1999 and, 12. 4 % for the Fourth
Quarter of 1999 (Ex. 108, Sch. 1-4 , respectively); three-
year average utili ty returns of 10.7% ending First
Quarter 2000 and 9.0% for the Moody s Electric Utilities
(Ex. 108, Sch. 9) three-year average returns ending 1999
and 10.5% in 1999 for the Moody s Gas Distribution
Utilities (Ex. 108, Sch. 10)These returns are then
analyzed along with the 10.5% average water utility
returns shown on Ex. 108, Sch. 11, the comparable
statistics shown on Schedule 12, the market indicators
(Schedules 6 - 8 of Ex. 108) and the industrial returns
(Schedules 1 - 5 of Ex. 108) to predict a reasonable
required return.Considering all of these statistics, I
have utilized a reasonable return for a water utili ty
OWl -W- 00-106/06/00 CARLOCK, T (Di Staff
1 7
the range of 10.0% - 11.0%.
,..,
You indicated that the Discounted Cash Flow
method is utilized in your analysis.Please explain thlS
method.
The Discounted Cash Flow (DCF) 'method is
based upon the theory that (1) stocks are bought for ~he
income they provide (i. e., both di vidends andl or galns
from the sale of the stock), and (2) the market pr ice of
stocks equals the discounted value of all future incomes.
The discount rate, or cost of equity, equates the present
value of the stream of income to the current market price
of the stock.The formula to accomplish this goal is:
--------------
-t-.
------------
( 1 + ks ) 1 (l+ks ) 2 ( 1 + ks ) (l+ks
Po =Current Price
D =Di vidend
ks =Capitalization Rate, Discount Rate, or RequiredRate of Return
N =Latest Year Considered
The pattern of the future income stream
the key factor that must be estimated in this approach.
Some simplifying assumptions for ratemaking purposes can
be made without sacrificing the validity of the results.
Two such assumptions are:(1) dividends per share grow
OWl -W-OO-l06/06/00 CARLOCK, T (Di)Staff
at a constant rate in perpetuity; and,(2) prices tracK
earnings.These assumptions lead to the simplified OCF
formula, where the required return is the di vidend yiela
pI us the growth ra te (g)
ks = - -
+ g
What is your estimate of the current cost of
capi tal for Uni ted Water Resources using the Discounted
Cash Flow method?
The current cost of equi ty capi tal for
United Water Resources and thus United Water Idaho , uslng
the Discounted Cash Flow method is between 6.3% - 9.
during various time intervals over a 52-week range , as
shown on Schedule 13, page 1 of Exhibit No. 108.
believe the three-month average price (December 1999
May 2000) is the most appropriate average time interval
to use.This average price reflects current investor
expectations wi thout being subj ect to daily market
fluctuations, as could be the case if the price on
specific date were used.However wi th the share price
for Uni ted Water Resources being determined based on the
forthcoming purchase price rather than normal stock
market activities, the DCF using the dividend yield for
Uni ted Water Resources during this time produces
UWI -W-O 0-106/06/00 CARLOCK, T (Di)Staff
unreasonable results.Therefore I have used the di videnc
yield of 5% for the Value Line water utili ty group.
Using the di vidend yield of 5% resul ts in the ocr return
range of 8. 6% to 9. 6%
How is the growth rate (g), determlned?
The growth rate is the factor that requlres
the most extensi ve analysis in the DCF method.It is
important that the growth rate used in the model be
consistent with the dividend yield so that investor
expectations are accurately reflected and the growth rate
is not too large or too small.
I have used an expected growth rate of
5% - 4.5%.This expected growth rate was deri ved from
an analysis of various historical and proj ected growth
indicators, including growth in earnings per share,
growth in cash dividends per share, growth in book value
per share and the sustainable growth for Uni ted Water
Resources (Exhibit No. 108, Schedule 13, page 2)
A review of these growth indicators shows
the five-year growth rate through 1999 in earnings per
share of 1.0% and the fi ve-year average growth in book
value per share of 4.0 % .The Value-Line projected growth
rates for 2002-2004 are 7.5% for earnings, 1.5% for
di vidends and 5% for book value.I have used a 3.5% -
4 .5% growth rate to reflect the growth potential over
UWI-W-00-106/06/00 CARLOCK, T ( Oi )Staff
1 7
longer term.The Value Line water utili ty group reflects
a di vidend growth rate over one year of 3.6%, earnings
per share growth over one year of 3.6% and book value
growth over one year of 4.2 % .
You have utilized an adjusted dividend Yl~lQ
to determine the required return wi th the DCF method:
Please explain.
The adjustments I have made to arrlve at the
adjusted dividend yield for the DCF method recognize the
quarterly compounding of di vidends, growth and direct
lssuance or flotation costs for stock issuances.
Al though market pressure should not be reflected in the
flotation cost adjustment, I have used a 2% flotation
cost rate as a reasonable flotation cost over time to be
included in the DCF analysis.The adj usted formula and
results are shown on Exhibit No. 108, Schedule 13,
page 1.
Please explain the quarterly compounding
di vidends.
The Commission allowed for compounding of
dividends in Order No. 23420, Case No. BOl-W-90-1.As in
BOl-W-93-1 and OWl-W-97~6, I have adjusted the dividend
yield in this case to reflect the impact of quarterly
di vidend compounding.To properly compound for the
quarterly payment of di vidends, the adj ustment
OWl -W-00-106/06/00 CARLOCK, T (Di)Staff
appropria tely made to the di vidend rate.This annua:
dividend rate , compounded for quarterly payments, is usee
to calculate the dividend yield and required return
the OCF method.Exhibit No. 108, Schedule 13, page
Al though it is true that di vidends are paid
quarterly and not annually, I do not believe that the
quarterly adj ustment is necessary for the DCF method.
Quarterly OCF models basically compound the di vidend
yield for timing differences of quarterly payments then
add the incremental growth rate.The compounded yield
assumes that the company is responsible for reinvestment
of payments the investor will recei ve by reinvesting
his/her dividends.The investor has the option to
reinvest the di vidends in Uni ted Water Resources stock
in some other secur i ty.
Please explain the adj ustment to reflect
0% lssuance expense or flotation cost factor to
calculate the dividend yield in the OCF calculation?
The 2.0% is based on the recent issuance
expenses incurred.Issuance costs are relevant
expendi tures to consider in the cost of equi
determination for new issuances.Direct issuance or
flotation costs impact the actual price recelved by the
company for stock sold.The funds recei ved amount to the
stock price less the issuance costs.To reflect these
UWI -W- 00-106/06/00 CARLOCK, T (Di)Staff
1 ~
1 7
~ ,
costs, the dividend yield is adj uste~ in the OCF method.
A specific allowance for market pressure is not
appropriate.Investors determine the price they are
willing to pay for stock at the time of issuance.I do
not believe it is appropriate to make an allowance for
price fluctuations as a result of this competitive
process.I have used the 2% allowance as reasonable over
time.
What is the capital structure you have used
for Uni ted Wa ter Idaho to determine the overall cost of
capi tal?
I have utilized the capi tal structure
consisting of 56.81% debt,. 12 % minori ty interest or
preferred equi ty and 43.07 % COrnITLOn equi ty as shown on
Schedule 14 of Exhibi t No. 108.This is the same capi tal
structure used by Uni ted Water wi tness Hanley on Exhibi t
No. 18, Schedule 6, page
What are the costs related to the capital
structure for debt and the minori ty interest?
The cost of debt is 7.52% and the cost of
minority interest is 5.0%.I have verified these rates
as used by United Water witness Hanley in Exhibit No. 18,
Schedule 6, page
You indicated the cost of common equi ty
range for United Water Idaho is 10.0% - 11.0% under the
UWI -W-00-106/06/00 CARLOCK, T ( Oi )Staff
., -.
.i. /
Comparable Earnings method and 8.6% - 9.6% under the
Discounted Cash Flow method.What is the cost of common
equi ty capi tal you are recommending?
The fair and reasonable cost or common
equi ty capi tal I am recommending for Uni ted' Water Idaho
is in the range of 10.0% - 11.0%~Al though any point
wi thin this range is reasonable, the return on equity
granted would not normally be at ei ther extreme of the
fair and reasonable range.I utilized a point estimate
of 10.6%, in calculating the overall rate of return for
the revenue requirement.
What is the basis for your point estimate
being 10.6% when your range is 10.0% - 11.0%?
The 10.6% return on equity point estimate
utilized is based on:(1) a review of the market da
and comparables shown on the schedules in Exhibi
No. 108;(2) use of the wa ter utili ty group di vidend
yield in the Uni ted Water Resources DCF calculation shown
on Exhibit No. 108, Schedule 13,(3) average risk
characteristics for United Water Idaho,(4) favorable
customer relations, and (5) the capital structure.
What is the overall weighted cost of capi tal
you are recommending for Uni ted Water Idaho?
I am recommending an overall weighted cost
of capital in the range of 8.585% - 9.016% as shown on
UWI -W-00-1
6/0 6 / 0 0 CARLOCK, T (Di)Staff
...J
., ..,
.L
'"") '"'.....
Schedule 14, Exhibit No. 108.For use in calculating ~ne
revenue requirement, a point estimate consisting of
return on equity of 10.6% and a resulting overall rate of
return of 8.843% was utilized.
Does this conclude your direct testimony i~
this proceeding?
Yes.
OWl -W-00-106/06/00 CARLOCK, T (Di)Staff
CERTIFICA TE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 6TH DAY OF JUNE 2000. SERVEDTHE FOREGOING DIRECT TESTIMONY OF TERRI CARLOCK, IN CASE NO.UWI-OO-, BY MAILING A COpy THEREOF POSTAGE PREPAID TO THEFOLLOWING:
MARK G ENN ARI
UNITED WATER
200 OLD HOOK RD
HARRINGTON PARK, NJ 07640-1738
PRIORITY OVERNIGHT FEDEX
DR DON READING
1227 EL PELAR ST
BOISE ID 83702
DEAN J MILLER
McDEVITT & MILLER LLP
PO BOX 2564
BOISE ID 83701-2564
PETER J RICHARDSON
RI CHARDSON & O'LEARY
99 E STATE ST., SUITE 200
EAGLE, ID 83616
Y-c 'J~L':b ' )('~t-
SECRETARY
CERTIFICATE OF SERVICE
CO
R
P
O
R
A
T
E

S
C
O
R
E
B
O
A
R
D
BY

C
A
T
E
G
O
R
Y

L
A
B
E
L
S

B
E
G
I
N
N
I
N
G

I
N

1
9
8
8
RE
T
U
R
N
S

O
N

C
O
M
M
O
N

E
Q
U
I
T
Y

-

Y
E
A
R
S

E
N
D
I
N
G

F
I
R
S
T

Q
U
A
R
T
E
R
In
d
u
s
t
r
y
19
9
0
19
9
1
19
9
2
19
9
3
19
9
4
19
9
5
19
9
6
19
9
7
19
9
8
19
9
9
20
0
0
Ae
r
o
s
p
a
c
e

&

D
e
f
e
n
s
e
11
,
10
.
15
,
14
,
11
,
17
,
17
,
12
,
Au
t
o
m
o
t
i
v
e
23
,
30
,
17
.
21
,
46
.
21
,
21
.
Ba
n
k
s
12
,
15
,
15
,
15
,
16
,
16
.
4
14
.
18
,
Ch
e
m
i
c
a
l
s
17
,
14
,
9.
4
21
,
26
.
22
.
4
18
,
11
.
Co
n
g
l
o
m
e
r
a
t
e
s
15
,
14
,
10
.
12
.
17
.
21
.
21
,
20
,
21
.
21
,
22
.
4
Co
n
s
u
m
e
r

P
r
o
d
u
c
t
s
21
.
21
.
20
,
22
,
18
,
24
,
23
.
27
.
27
.
24
,
27
,
Co
n
t
a
i
n
e
r
s

&

P
a
c
k
a
g
i
n
g
16
.
10
.
13
,
18
,
Di
s
c
o
u
n
t

&

F
a
s
h
i
o
n

R
e
t
a
i
l
i
n
g
15
,
12
.
10
,
12
.
4
14
.
13
.
14
,
16
.
15
,
El
e
c
t
r
i
c
a
l

&

E
l
e
c
t
r
o
n
i
c
s
14
.
12
,
16
,
18
,
19
.
14
,
14
.
10
,
11
,
Fo
o
d
19
.
19
.
21
,
19
,
22
.
21
.
22
.
18
,
19
.
4
19
.
20
,
Fu
e
l
9.
4
14
,
10
.
4
10
,
11
.
4
12
.
4
17
.
16
.
14
,
He
a
l
t
h

C
a
r
e
21
.
26
,
25
.
24
.
20
,
25
.
24
,
24
.
4
21
.
22
.
23
,
Ho
u
s
i
n
g

&

R
e
a
l

E
s
t
a
t
e
22
,
15
,
13
.
13
,
19
,
17
,
18
,
20
.
4
18
.
4
20
,
le
i
s
u
r
e

Ti
m
e

I
n
d
u
s
t
r
i
e
s
14
.
13
,
12
.
4
14
.
9.
4
18
,
15
,
13
,
10
.
4
10
,
12
,
Ma
n
u
f
a
c
t
u
r
i
n
g
15
,
11
,
10
.
15
.
4
19
,
18
,
20
,
19
,
14
,
16
,
Me
t
a
l
s

&

M
i
n
i
n
g
15
.
17
,
14
.
11
,
12
.
No
n
b
a
n
k

F
i
n
a
n
c
i
a
l
12
,
12
,
12
,
14
.
14
,
15
,
15
.
17
.
15
,
18
,
Of
f
i
c
e

E
q
u
i
p
m
e
n
t

&

C
o
m
p
u
t
e
r
s
10
,
11
,
15
,
16
,
19
.
4
19
,
16
,
20
,
Pa
p
e
r

&

F
o
r
e
s
t

P
r
o
d
u
c
t
s
14
,
12
,
16
.
13
.
4
Pu
b
l
i
s
h
i
n
g

&

B
r
o
a
d
c
a
s
t
i
n
g
10
,
13
,
17
,
10
.
3.
4
13
,
Se
r
v
i
c
e

I
n
d
u
s
t
r
i
e
s
17
,
15
.
11
,
15
.
4
10
,
14
.
14
,
13
,
12
,
10
.
11
.
4
Te
l
e
c
o
m
m
u
n
i
c
a
t
i
o
n
s
15
.
14
,
10
,
15
,
13
,
19
.
16
,
22
,
14
.
4
14
.
12
.
Tr
a
n
s
p
o
r
t
a
t
i
o
n
7.
4
10
,
13
.
16
.
16
,
13
,
12
.
4
Ut
i
l
i
t
i
e
s
11
.
4
11
,
9.
4
11
,
11
,
11
,
10
,
12
.
AI
/
I
n
d
u
s
t
r
y

C
o
m
p
o
s
i
t
e
12
.
11
.
11
.
4
%
12
,
16
,
16
,
17
.
4
%
16
,
14
.
16
,
Ye
a
r

M
o
v
i
n
g

A
v
e
r
a
g
e
13
,
13
.
11
,
10
,
10
.
13
,
15
,
16
,
16
.
16
,
16
.
Ye
a
r

M
o
v
i
n
g

A
v
e
r
a
g
e
12
,
12
.
12
.
12
.
11
.
4
%
12
.
13
,
14
.
16
.
16
.
4
%
16
,
..
.
.
,

tT
1
~.

~
~
on
c
n
::
r
0\

~

('
I
)

-
.
--
-

0"
"

Z

00
"

0

...
.
.
Ca
l
c
u
l
a
t
e
d
.
Z
c:
:
~
(t
)

C
/
'
J

~.
.
.
.
.
.
0.
.
-

0
So
u
r
c
e
:

B
u
s
i
n
e
s
s

We
e
~
fi
)
~
~
Ma
y

1
5
,
1
9
8
9
;

M
a
y

1
4
,
1
9
9
0
;
Ma
y

1
5
19
9
5
;

M
a
y

1
3
19
9
6
;
..
.
.
.
.

Ma
y

2
0
19
9
1
;

M
a
y

1
8
,
19
9
2
;
Ma
y

1
2
,
1
9
9
7
;

M
a
y

1
8
,
1
9
9
8
;
Ma
y

1
7
19
9
3
;

M
a
y

1
6
19
9
4
;
Ma
y

1
7
,
1
9
9
9
;

M
a
y

1
5
20
0
0
...
.
.
.
UW
I
W
O
O

1

Co
r
p
s
r
.
o

1

x
l
!
'
;
CO
R
P
O
R
A
T
E

S
C
O
R
E
B
O
A
R
D
BY

C
A
T
E
G
O
R
Y

L
A
B
E
L
S

B
E
G
I
N
N
I
N
G

I
N

1
9
9
8
RE
T
U
R
N
S

O
N

C
O
M
M
O
N

E
Q
U
I
T
Y

-

Y
E
A
R
S

E
N
D
I
N
G

S
E
C
O
N
D

Q
U
A
R
T
E
R
In
d
u
s
t
r
y
19
8
9
19
9
0
19
9
1
19
9
2
19
9
3
19
9
4
19
9
5
19
9
6
.
1
9
9
7
19
9
8
19
9
9
Ae
r
o
s
p
a
c
e

&

D
e
f
e
n
s
e
11
,
10
,
12
,
15
,
13
.
70
%
11
.
17
,
16
,
Au
t
o
m
o
t
i
v
e
.
1
7
,
11
,
27
,
24
.
18
.
21
,
49
,
21
,
Ba
n
k
s
16
,
13
,
16
.
15
.
16
,
16
.
15
,
16
.
Ch
e
m
i
c
a
l
s
22
.
17
,
10
,
23
,
26
,
22
,
17
,
10
,
Co
n
g
l
o
m
e
r
a
t
e
s
15
,
16
,
15
,
13
,
12
,
18
.
21
.
21
.
20
,
21
.
21
,
Co
n
s
u
m
e
r

P
r
o
d
u
c
t
s
23
,
22
,
20
.
20
,
23
.
20
,
24
,
23
,
26
.
25
.
24
.
4
Co
n
t
a
i
n
e
r
s

&

P
a
c
k
a
g
i
n
g
21
,
15
.
3.
4
18
.
14
.
Di
s
c
o
u
n
t

&

F
a
s
h
i
o
n

R
e
t
a
i
l
i
n
g
15
,
13
,
11
,
10
.
11
,
12
,
10
,
13
.
15
.
16
.
El
e
c
t
r
i
c
a
l

&

E
l
e
c
t
r
o
n
i
c
s
12
.
13
,
8.
4
14
,
16
,
18
.
4
17
.
17
.
12
.
Fo
o
d
23
,
22
,
22
,
20
,
17
.
23
,
19
,
18
,
17
.
19
,
14
.
Fu
e
l
14
.
10
.
4
13
.
11
,
12
,
13
,
17
,
14
.
He
a
l
t
h

C
a
r
e
23
.
23
,
26
.
4
25
.
24
,
22
,
25
,
23
.
4
21
,
23
,
22
.
Ho
u
s
i
n
g

&

R
e
a
l

E
s
t
a
t
e
21
,
21
.
12
.
13
,
19
.
4
12
,
22
.
4
16
,
19
,
Le
i
s
u
r
e

T
i
m
e

I
n
d
u
s
t
r
i
e
s
17
,
14
.
11
,
13
.
14
,
15
,
17
.
13
.
13
.
10
,
12
,
Ma
n
u
f
a
c
t
u
r
i
n
g
17
,
14
,
10
.
12
,
17
.
4
19
.
19
,
19
.
18
,
12
.
Me
t
a
l
s

&

M
i
n
i
n
g
23
,
13
,
20
,
14
.
11
,
11
,
No
n
b
a
n
k

F
i
n
a
n
c
i
a
l
12
,
10
,
13
,
11
,
13
,
13
.
16
.
16
,
16
,
16
.
Of
f
i
c
e

E
q
u
i
p
m
e
n
t

&

C
o
m
p
u
t
e
r
s
14
.
10
.
4
14
,
19
.
4
14
,
21
,
14
,
23
.
Pa
p
e
r

&

F
o
r
e
s
t

P
r
o
d
u
c
t
s
17
.
13
.
4
15
.
12
,
Pu
b
l
i
s
h
i
n
g

&

B
r
o
a
d
c
a
s
t
i
n
g
18
.
11
.
5.
4
12
,
14
.
4
13
;
10
.
Se
r
v
i
c
e

I
n
d
u
s
t
r
i
e
s
15
.
18
,
15
.
12
,
14
,
10
,
15
.
13
,
10
.
12
,
13
,
Te
l
e
c
o
m
m
u
n
i
c
a
t
i
o
n
s
11
,
15
,
13
,
10
.
17
.
14
.
20
.
17
,
17
,
13
,
12
,
Tr
a
n
s
p
o
r
t
a
t
i
o
n
14
.
11
.
14
.
16
,
16
,
14
,
Ut
i
l
i
t
i
e
s
10
,
11
,
11
.
4
11
.
11
.
10
,
10
.
Al
l

I
n
d
u
s
t
r
y

C
o
m
p
o
s
i
t
e
15
,
12
,
10
.
11
.
4
%
13
,
17
,
16
.
16
,
16
,
15
.
Ye
a
r

M
o
v
i
n
g

A
v
e
r
a
g
e
13
.
4
%
14
.
12
,
10
.
10
,
11
,
14
-
.
0
%
15
,
16
.
16
.
4
%
16
.
5-

Ye
a
r

M
o
v
i
n
g

A
v
e
r
a
g
e
12
,
12
,
12
,
12
,
11
.
11
,
12
,
13
,
15
.
16
,
16
.
..
.
.
,

tT
1
Ca
l
c
u
l
a
t
e
d
~.

P:
I

X
On
(
/
)
::
r
0\

(!
)

-
.
--
-

P
:
I

cr
-
..
,

Z

-
,
So
u
r
c
e
:

.B
.
u
s
i
n
e
s
s

W
e
e
~
00
-

0

..
.
.
.
.
Au
g
,

1
4
,
1
9
8
~

A
u
g
,

1
3
,
1
9
9
0
;
Au
g
,

1
4
,
1
9
9
5
;

A
u
g
,

1
2
,
1
9
9
6
;
(I
)

;
:
0
-
.

0
g.

.

C
:
:
Au
g
,

1
9
,
1
9
9
1
;

A
u
g
,

1
7
,

1
9
9
2
;
Au
g
,

1
8
-
,
1
9
9
7
;

A
u
g
,

1
7
,
1
9
9
8
;
(D

C/
J

:
:
E

-
'
0.
.
-

0
P:I
Au
g
,

1
6
,
1
9
9
3
;

A
u
g
,

1
5
,
1
9
9
4
;
Au
g
,

1
6
,
1
9
9
9
'
-
~

UW
I
W
O
O

1

Co
r
p
s
c
o
2
.

x
l
CO
R
P
O
R
A
T
E

S
C
O
R
E
B
O
A
R
D
BY

C
A
T
E
G
O
R
Y

L
A
B
E
L
S

B
E
G
I
N
N
I
N
G

I
N

1
9
8
8
RE
T
U
R
N
S

O
N

C
O
M
M
O
N

E
Q
U
I
T
Y

-

Y
E
A
R
S

E
N
D
I
N
G

T
H
I
R
D

Q
U
A
R
T
E
R
In
d
u
s
t
r
y
19
8
9
19
9
0
19
9
1
19
9
2
19
9
3
19
9
4
19
9
5
19
9
6
19
9
7
19
9
8
19
9
9
Ae
r
o
s
p
a
c
e

&

D
e
f
e
n
s
e
12
.
4
%
11
,
13
.
13
,
10
,
12
,
13
.
13
,
Au
t
o
m
o
t
i
v
e
16
,
11
.
11
,
27
,
22
.
21
.
4
20
,
48
,
25
,
Ba
n
k
s
5.
4
10
,
14

7
16
,
15
.
15
.
16
,
14
.
17
,
Ch
e
m
i
c
a
l
s
20
,
15
,
12
.
15
,
24
,
23
,
18
,
15
.
11
,
Co
n
g
l
o
m
e
r
a
t
e
s
15
,
16
.
12
,
14
.
12
.
19
.
22
,
20
.
21
.
21
,
22
,
Co
n
s
u
m
e
r

P
r
o
d
u
c
t
s
25
,
23
.
21
.
4
21
,
20
.
21
,
23
,
24
.
26
.
25
,
24
.
Co
n
t
a
i
n
e
r
s

&

P
a
c
k
a
g
i
n
g
21
.
13
.
9.
4
19
,
12
.
11
.
Di
s
c
o
u
n
t

&

F
a
s
h
i
o
n

R
e
t
a
i
l
i
n
g
15
,
13
,
12
,
10
,
12
.
11
.
12
.
10
,
13
,
16
,
15
,
El
e
c
t
r
i
c
a
l

&

E
l
e
c
t
r
o
n
i
c
s
12
,
13
,
10
.
4
15
,
16
,
19
.
16
.
17
.
4
12
,
Fo
o
d
20
.
19
,
22
,
18
,
20
,
20
,
22
,
20
,
19
.
20
.
16
,
Fu
e
l
14
,
11
.
12
,
11
,
12
,
14
.
17
.
12
.
He
a
l
t
h

C
a
r
e
24
,
24
,
27
.
24
,
24
.
23
,
25
,
22
,
21
.
21
,
20
.
Ho
u
s
i
n
g

&

R
e
a
l

E
s
t
a
t
e
20
7
19
,
19
,
14
.
19
,
12
,
21
.
17
,
17
,
le
i
s
u
r
e

T
i
m
e

In
d
u
s
t
r
i
e
s
15
.
11
,
13
.
11
.
13
,
10
.
16
,
12
.
11
,
Ma
n
u
f
a
c
t
u
r
i
n
g
16
.
4
12
.
16
,
19
,
20
,
19
.
16
,
11
.
Me
t
a
l
s

&

M
i
n
i
n
g
21
.
12
,
20
,
11
,
12
,
10
,
No
n
b
a
n
k

F
i
n
a
n
c
i
a
l
12
,
11
,
12
.
13
,
14
,
12
.
13
.
15
.
17
,
14
,
16
.
4
Of
f
i
c
e

E
q
u
i
p
m
e
n
t

&

C
o
m
p
u
t
e
r
s
12
.
12
,
10
,
16
,
16
,
20
.
18
.
22
,
Pa
p
e
r

&

F
o
r
e
s
t

P
r
o
d
u
c
t
s
17
,
11
,
19
.
10
,
Pu
b
l
i
s
h
i
n
g

&

B
r
o
a
d
c
a
s
t
i
n
g
16
.
11
.
15
.
4
14
,
8.
4
Se
r
v
i
c
e

I
n
d
u
s
t
r
i
e
s
15
,
16
,
14
.
14
.
10
.
13
,
15
,
12
,
10
,
11
.
13
.
Te
l
e
c
o
m
m
u
n
i
c
a
t
i
o
n
s
11
,
14
,
11
.
13
.
17
,
14
.
18
,
16
,
15
.
14
,
13
,
Tr
a
n
s
p
o
r
t
a
t
i
o
n
12
.
6.
4
12
.
13
,
17
.
14
,
13
,
Ut
i
l
i
t
i
e
s
10
,
10
,
11
,
10
,
11
.
4
10
,
10
.
9.
4
11
.
Al
l

I
n
d
u
s
t
r
y

C
o
m
p
o
s
i
t
e
14
.
11
,
12
,
14
,
17
,
16
.
16
,
15
.
5O
k
15
.
Ye
a
r

M
o
v
i
n
g

A
v
e
r
a
g
e
13
,
13
,
11
,
10
,
10
,
12
.
14
.
15
,
16
.
16
,
15
,
Ye
a
r

M
o
v
i
n
g

A
v
e
r
a
g
e
12
.
12
.
4
%
12
.
12
,
11
,
11
.
12
,
13
.
15
,
15
,
16
.
~~
n
t
T
1
--
-
P'

~
Ca
l
c
u
l
a
t
e
d
on

en

=
r
0'
\

P
'

~

--
-

0"
'
1

Z

_
.
0
-

So
u
r
c
e
:

0
0

Z
(,
f
)

"
'
"

No
v
,

1
3
,
1
9
8
9
;

N
o
v
,

1
9
,
1
9
9
0
;
No
v
,

1
3
,
1
9
9
5
;

N
o
v
,

1
8
,
1
9
9
6
;
..

c:
:
::
r
'

~
(
/
)
~.
.
.
.
.
.
0.

No
v
,

1
8
,
1
9
9
1
;

N
o
v
.

1
6
,
1
9
9
2
;
No
v
.

1
7
,
1
9
9
7
;

N
o
v
.

2
3
,
1
9
9
8
;
-~

No
v
.

1
5
,
1
9
9
3
;

N
o
v
,

1
4
,
1
9
9
4
;
No
v
.

2
2
,
1
9
9
9
~)

~
UW
I
W
O
0
1

C
o
r
p
s
c
o
3
.
CO
R
P
O
R
A
T
E

S
C
O
R
E
B
O
A
R
D
BY

C
A
T
E
G
O
R
Y

L
A
B
E
L
S

B
E
G
I
N
N
I
N
G

IN

1
9
8
8
RE
T
U
R
N
S

O
N

C
O
M
M
O
N

E
Q
U
I
T
Y

-

Y
E
A
R
S

E
N
D
I
N
G

F
O
U
R
T
H

Q
U
A
R
T
E
R
In
d
u
s
t
r
y
19
8
9
19
9
0
19
9
1
19
9
2
19
9
3
19
9
4
19
9
5
19
9
6
19
9
7
19
9
8
19
9
9
Ae
r
o
s
p
a
c
e

&

D
e
f
e
n
s
e
11
,
13
,
14
.
13
,
17
,
11
,
15
,
13
.
Au
t
o
m
o
t
i
v
e
12
,
12
.
17
,
31
,
18
.
19
.
23
,
49
.
25
,
Ba
n
k
s
4.
4
12
.
15
,
15
.
15
,
15
,
16
,
14
.
24
,
Ch
e
m
i
c
a
l
s
17
.
15
,
18
,
27
.
22
,
18
,
13
,
Co
n
g
l
o
m
e
r
a
t
e
s
17
,
16
,
11
.
4
14
,
17
,
20
,
21
.
20
.
4
20
,
22
.
4
22
,
Co
n
s
u
m
e
r

P
r
o
d
u
c
t
s
20
,
21
,
21
.
22
.
19
,
24
,
23
.
26
.
27
.
23
.
26
.
Co
n
t
a
i
n
e
r
s

&

P
a
c
k
a
g
i
n
g
19
.
11
,
21
,
10
.
11
,
Di
s
c
o
u
n
t

&

F
a
s
h
i
o
n

R
e
t
a
i
l
i
n
g
17
.
12
,
12
,
15
.
4
12
,
12
.
11
,
13
.
16
,
16
,
El
e
c
t
r
i
c
a
l

&

E
l
e
c
t
r
o
n
i
c
s
15
,
10
,
11
,
15
.
4
17
.
4
19
,
14
,
15
,
12
,
Fo
o
d
18
,
19
,
20
,
18
,
19
.
4
18
,
21
,
19
.
4
17
,
22
,
19
.
4
Fu
e
l
11
,
12
6
10
,
10
.
10
.
4
10
,
17
.
17
.
6
11
,
He
a
l
t
h

C
a
r
e
22
.
25
,
25
.
23
.
4
23
,
23
,
23
.
4
24
,
21
,
24
,
24
,
Ho
u
s
i
n
g

&

R
e
a
l

E
s
t
a
t
e
25
,
15
,
2.
4
12
,
14
,
15
,
18
.
14
,
20
.
15
,
18
.
4
le
i
s
u
r
e

T
i
m
e

In
d
u
s
t
r
i
e
s
12
.
4
14
.
11
,
14
,
18
.
4
16
,
13
,
11
,
14
,
11
,
Ma
n
u
f
a
c
t
u
r
i
n
g
15
.
11
.
14
,
18
.
17
.
20
.
4
18
.
14
,
14
.
Me
t
a
l
s

&

M
i
n
i
n
g
18
,
12
,
19
,
12
,
No
n
b
a
n
k

F
i
n
a
n
c
i
a
l
11
.
4
10
,
13
.
10
,
13
,
12
,
14
,
15
.
16
.
14
.
4
18
.
Of
f
i
c
e

E
q
u
i
p
m
e
n
t

&

C
o
m
p
u
t
e
r
s
11
.
5.
4
13
,
15
.
16
.
19
,
16
.
20
,
Pa
p
e
r

&

F
o
r
e
s
t

P
r
o
d
u
c
t
s
16
.
17
.
9.
4
12
,
Pu
b
l
i
s
h
i
n
g

&

B
r
o
a
d
c
a
s
t
i
n
g
14
,
13
.
18
,
10
.
12
,
21
,
Se
r
v
i
c
e

I
n
d
u
s
t
r
i
e
s
17
.
16
,
11
,
14
,
13
,
14
,
10
,
11
,
Te
l
e
c
o
m
m
u
n
i
c
a
t
i
o
n
s
14
.
14
,
10
,
15
,
12
.
4
18
,
16
,
23
.
18
,
14
,
12
.
Tr
a
n
s
p
o
r
t
a
t
i
o
n
0.
4
11
.
12
,
15
.
16
.
13
.
4
14
,
Ut
i
l
i
t
i
e
s
10
,
10
.
11
.
11
.
11
,
10
.
10
,
12
.
4
Al
l

I
n
d
u
s
t
r
y

C
o
m
p
o
s
i
t
e
13
,
11
,
10
.
11
,
15
,
16
.
16
.
16
,
15
.
17
.
3-

Y
e
a
r

Mo
v
i
n
g

A
v
e
r
a
g
e
13
,
13
,
11
,
10
,
10
.
12
,
14
,
16
.
16
,
16
,
16
3
%
5-

Y
e
a
r

Mo
v
i
n
g

A
v
e
r
a
g
e
12
,
12
,
12
,
11
,
11
,
11
,
12
.
14
.
15
.
16
,
16
.
4
%
o.
.
.
.
.
,
o
r
n
Ca
l
c
u
l
a
t
e
d
~.

Po
'

X
Oo
t
I
J
::
r
0'
1

(1
)

-

.
--
-
-

Po
'

cr
-
0"
"

Z

-
.
00
-

0
."
"
"
So
u
r
c
e
:

Bu
s
i
es
s

W
e
e
l
s
(/
)
'
Z
Ma
r
.

1
9
,
1
9
9
0
;

M
a
r
,

1
8
,
1
9
9
1
;
Ma
r
.

4
,
1
9
9
6
;

M
a
r
.

3
,
1
9
9
7
;
::
r

(i
)

C
/
)

:
:
e

Ma
r
.

1
6
,
'
19
9
2
;

M
a
r
.

1
5
,
1
9
9
3
;
Ma
r
,

2
,
1
9
9
8
;

M
a
r
.

1
,
1
9
9
9
;
Q.
.

.
.
.
.
.

Po
'
~
~

~
Ma
r
,

7
,
1
9
9
4
;

M
a
r
,

6
,
1
9
9
5
;
Fe
b
,

2
8
,
2
0
0
0
,J
:
:
.
.

UW
I
W
O
O
1
C
o
r
p
s
c
o
4
,
I
2
0
.
i
1
8
.
16
,
i
1
4
,
12
.
I
1
0
,
I
8
.
!
6
.
O-
i
o
r
n
~.

~
x
tI
J

:
:
r
0'
1

~

-
.

--
-

~

0
-
'
1
0
..,

00
-
0

...
.
.
(/
)

n
.
Z
(t
)

CI
)
~
-
a.
r
l

-
~

;:

~
CO
R
P
O
R
A
T
E

S
C
O
R
E
B
O
A
R
D
RE
T
U
R
N
S

O
N

C
O
M
M
O
N

E
Q
U
I
T
Y
19
9
0

19
9
1

19

19
9
8

19
9
9

20
0
0
'-
-
-
0

..
,

U
T
I
L
I
T
I
E
S

-.
-

CO
M
P
O
S
I
T
E

-6
,
-
-

3
-
YE
A
R

M
O
V
I
N
G

A
V
G
~
-
Ii
.
0
-
-
0
-
0
-
-
0.

-
0
-

0
"
/
0
"
0-
-
0
..
.
.
(J
)
'(
1
...
.
.
.
.
.
.
1-
:
1

!--
-
J
t-;
ri

!-
-
-
J
!-
-
-
J
I-
'
-

!-
-
-
J
1-
'
-
t-
;
1-
'
-

tt
1

~
1-
'
-

3
()

P
I
...
.
.
.
.
.
.
0
~
1-
'
-

~
.
b
~
P"
'

H
I-
-
'
p.

p
.
...
.
.
.
-
...
.
.
.
.
.
.
(j
)

X
0
~
I-
i
C1
I
P.

f-
-
I
Q.,
...
.
.
.
.
...
.
.
.
.
.
t-
;
f--
I
f-
-
I
\.D

rv

f-
-
I
f-
-
I

1-'
-
~
0
ri

(J
)
1-
'
-

0
!-
-
-
J
(J
)

r
o
...
.
.
.
.
.
.
.
.
!--
-
J
a.
.
.
,
n
t
T
J
-
~.

j:
I
)

~
an
t
/
)

0\

"
,

(1
)
--
-
-

a"
"

""
'
"
0
0

c:
:
::
r

C/
)

-
c
:
:
-
:
:

..
.
.
.
.
.
.
c.
.

.
.
.
.
.
.
.

-o
e
:
:
:
:
:
:

(b

~

0\

~
~
ro

P
I
tJ
'

~
~
~
PI

~
~
~
f-
-
I

f
-
-
I
0'
\

0
'
\
\.
D

O
J
-.
.
.
J

-.
.
.
J
lJ
1

r
v
f-
-
I

f--
I
LV

L
V
0'
\

l
J
1
~
0
f-
-
I
f--
I
\.D \.D \.D
~
Z

a

(J
)

~

~
~

3

~

3

~

~

~

Z

a

(J
)

~

~
~

3

~

~
~

ro

0

0

ro

~

~

~

PI

t
o

PI

r
o

PI

r
o

0

ro

~

~

~

PI

t
o

PI

r
o

0
~

ri
t
O
l
Q

I
-
'
~
~

~
~

tJ
'
~

0

~

r
i
t
O
l
Q

!-
-
-
J
~
~

~
~

tJ
'
~
ro

r
o

0

ri

~

~

ro

1-
'
-

0

~
~

ro

r
o

0

ri

~

~

ro

1-
'
-

0

~
~
tJ
'
r
o

en

I-
'
P
"
'
~

PI

3

3

tJ
'
r
o

en

I-
'
P
"
'
~

tJ
'
b
'
r
o
ri

P
I
b'
b
'
r
o
ri

P
I
b'

~
~
b'

ro

~
~
ro

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f
-
-
I

f-
-
I

f-
-
I

f
-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f--
I
0'
\

0
'
\

0
'
\

0
'
\

0
'
\

0
'
\

0
'
\

0
'
\

0
'
\

0
'
\

0
'
\

0
'
\

0
'
\

0
'
\

0
'
\

0
'
\

0
'
\

0
'
\

0
'
\

0
'
\

0
'
\

0
'
\

0
'
\

0
'
\
OJ

O
J

O
J

-.
.
.
J

-.
.
.
J

0
'
\

0
'
\

0
'
\

0'
\

l
J
1

~

LV

~

LV

L
V

L
V

L
V

r
v

r
v

r
v

f-
-
I

f-
-
I
LV

L
V

r
v

f-
-
I

-.
.
.
J

r
v

rv

r
v

0

lJ
1

L
V

\.
D

0

0'
\

~

rv

0

OJ

l
J
1

r
v

\.
D

0
'
\
rv

r
v

r
v

~

LV

L
V

0
0

-.
.
.
J

r
v

f-
-
I

r
v

f-
-
I

r
v

r
v

f-
-
I

f-
-
I

r
v

f-
-
I

r
v

r
v

f-
-
I

f-
-
I
f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f
-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f
-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I
LV

L
V

L
V

L
V

L
V

L
V

L
V

L
V

L
V

L
V

L
V

L
V

L
V

L
V

L
V

L
V

L
V

L
V

L
V

L
V

L
V

L
V

L
V

L
V
lJ
1

~

~
~

LV

r
v

r
v

r
v

r
v

f-
-
I

f-
-
I

f-
-
I

f-
-
I

0

0
0

0

0

0

0

0

0

0

0
\.
D

0
'
\

0
'
\

l
J
1

-
.
.
.
J

~
'
LV

r
v

0'
\

f
-
-
I

0'\

f
-
-
I

0
'
\

\.
D

0
'
\

L
V

-.
.
.
J

0'
\

-
.
.
.
J

lJ
1

l
J
1

0
'
\
f-
-
I

r
v

OJ

0
'
\

r
v

f-
-
I

f-
-
I

l
J
1

~

~
~

~

rv

r
v

r
v

L
V

r
v

r
v

f-
-
I

r
v

f-
-
I

0
'
\
f-
-
I
\.D
f-
-
I

f-
-
I

f
-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f
-
-
I

f-
-
I

f
-
-
I

f-
-
I

f-
-
I

f-
-
I
\.
D

\
.
D

\
.
D

\
.
D

\
.
D

\.
D

\
.
D

\
.
D

\
.
D

\
.
D

\
.
D

\
.
D

\
.
D

\
.
D

\
.
D

\
.
D

\
.
D

\
.
D

\
.
D
\.
D

\
.
D

\
.
D

\
.
D

\
.
D

\.
D

\
.
D

\
.
D

\
.
D

O
J

OJ

O
J

0
0

O
J

0
0

0
0

0
0

O
J

0
0
\.
D

0
0

-.
.
.
J

0
'
\

l
J
1

LV

r
v

f-
-
I

0

\.
D

0
0

-.
.
.
J

0
'
\

l
J
1

LV

r
v

f-
-
I

0
f-
-
I

f
-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f
-
-
I
0'
\

0
'
\

0
'
\

l
J
1

l
J
1

~

~
~

LV

W

r
v

f-
-
I

f
-
-
I

0

0
0

\.
D

\
.
D

\
.
D

O
J
0'
\

L
V

0

0'
\

r
v

O
J

~

0'
\

0

OJ

w~

-.
.
.
J

L
V

\
.
D

0
'
\

0'
\

0

lJ
1

\
.
D

~

rv

lJ
1

L
V

r
v

-..
.
J

LV

0
'
\

0
'
\

0
'
\

\.
D

0
'
\

l
J
1

\
.
D

~
f--
I
rv

f-
-
I

f-
-
I

L
V

r
v

rv

r
v

r
v

w

0'
\

~

~
~

f-
-
I

L
V

LV

L
V

L
V

O
J

r
v
-.
.
.
J

0
'
\

-.
.
.
J

L
V

l
J
1

-..
.
J

-.
.
.
J

\
.
D

f
-
-
I

f-
-
I

0
'
\

~

f-
-
I

0
0

\.
D

0
0

O
J

\.
D

l
J
1
f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f-
-
I

f
-
-
I

f-
-
I

f-
-
I

f
-
-
I

f-
-
I

f-
-
I

f
-
-
I

f-
-
I

f-
-
I

f-
-
I

f
-
-
I
LV

L
V

W

r
v

rv

r
v

r
v

r
v

f-
-
I

f-
-
I

0

0
0

0

0

0

0

\.
D

O
J
LV

0

f-
-
I

f-
-
I

-.
.
.
J

l
J
1

LV

f
-
-
I

\.
D

L
V

0
0

lJ
1

W

~

LV

f-
-
I

0

0'
\

0
0
f-
-
I

-.
.
.
J

0
0

W

\.
D

l
J
1

-
.
.
.
J

r
v

-.
.
.
J

r
v

0'
\

0

rv

-..
.
J

-.
.
.
J

0
'
\

f-
-
I

0
'1
:
'
f-
-
I

r
v

t
V

f--
I
f-
-
I
LV

-.
.
.
J

f
-
-
I
f-
-
I

I

lJ
1

~

rv

f-
-
I

f-
-
I
0
0

rv

0
0

L
V

-.
.
.
J

r
v

0'
\

f
-
-
I

~

\.
D

0

rv

L
V

0
0

-.
.
.
J

m

f-
-
I

O
J
tt
l
0.

f-
'
.

m
)
I
CD

0

~
-
CD

a
..
.
.
t'1
tt
I

~
tt
I
tt
l
0.

f-
'
-

0.

n
e
0

~

..
.
.

CD

0
..
,
tt
I
IT

C
D
PI

1
1
='

0
C1
)

=
'
t'(
j

tt
I

t
J
MOODY'S AVERAGE FORPUBLIC UTILITY BOND YIELDS
(A)(B)(C)
Baa (D)Utili tv Avera
1977 43%61%06%58%1978 10%29%62%22%1979 10.22%10.49%10.96%10.39%1980 13.00%13.34%13 . 95%13 .15%1981 15.30%15.95%16.60%15.62%1982 14.79%15.86%16.45%15.33%1983 12.83%13.66%14.20%13.31%1984 13.66%14 . 03%14.53%14~03%1985 12.06%12.47%12.96%12.29%1986.9 .30%58%10.00%46%1987 9 . 77%10.10%10.53%98%1988 10.26%10 . 4 11.00%10.45%1989 56%9 . 77%9 . 97%66%1990 65%86%10.06%76%1991 09%36%55%21%1992 55%8 .69%86%57%1993 44%59%7 . 91%7 . 5 6
' %
1994 21%31%63%30%1995 7 . 77%89%29%91%1996 7 . 57%7 . 75%8 .17%7 .74%1997 7 . 54 60%7 .95%63%
1998 Range *55%-7.13%74%-7.27%92%-48%66%-24%1999 Range *77%-8.25%92%-8.39%25%-8.41%82%-17%2000 Range *87%-8.60%11%-8.86%18%-9.02%96%-70%(Through 5/19/00)
Source: Moody's Public Uti~anua~, 1998.Moody's Public Utility News Repor~1998 , 1999 and 2000.
tc/wordperfect/wpfiles/coc. exh/moodyavg. exh
Exhibit No.1 08
Case No, UWI-OO-
T. Carlock, Staff
06/06/00 Schedule 7
BANK PRIME INTEREST RATES
YEAR RATE
1970 75%50%1971 6 .1972
1973 6 .10.1974 12 . 00197510.1976 7 .1977 7 . 7519787 .11 . 75197911.15 .1980 10 . 15 21.1981 15 .20.1982 11 . 00 17.1983 10.11.1984 10.13 .1985 10.1986 7 .9 . 0019877 .1988 8 .10.1989 10.11.1990 10.10.1991 6 .1992
1993 6 . 001994
1995 9 . 001996
1997 8 .1998 7 . 751999 8 .2000 Through 6/1/00 8 .
Source:Federal Reserve Bulletin
Wall Street Journal
tc/wordperfect/wpfiles/coc. exh/bankprim. exh
Exhibit No.1 08
Case No, UWI-OO-
T. Carlock, Staff
06/06/00 Schedule 8
.v100DY'S ELECTRIC UTILI11t:SRETURN ON COMMON EQUITY
Year Return
On Equi ty
3 -Year*
MovingAverage
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998**
1999 through Dee. **
10.
10.
11.
10.
10.
10.
10.
11. 0%
10 .
11.
10.
12 .
13 .
14 .
14 .
14.
14 .
12 .
8 . 6%
12.
10.
11.
11.
7 .
10.
14 .
10.
4 .
10.
11.
10.
10.
10.
10.
10.
10.
10.
10.
10.
11.
12 .
13 .
14 .
14 .
14 . 6
13.
11.
11.
10.
11 .
11.
10.
10.
12 . 0
10.
8 . 8%
Averages
10 Year , 1990-1999
1989-1998 iO.
10.
5 Year 1995-1999
1994-1998 10.
10.
3 Year 1997-1999
1996-1998 8 . 8%
*Caleulated
Source:Moody's Public Utility Manual 1998 , pages a22.A. Turner Utility Report, April 1999, April 2000.
tc/wordperfect/wpfiles/coc. exh/moodyroe. exh (pl)
Exhibit No.1 08
Case No, UWI-OO-
T. Carlock, Staff
06/06/00 Schedule 9
MOODY'S GAS DISTRIBUTION UTILITIESRETURN ON COMMON EQUITY
Year
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998**
1999 through Dec.
Averages
10 Year , 1990-1999
1989-1998
5 Year 1995-1999
1994-1998
3 Year,1997~1999
1996-1998
*Calculated
Return
on Equi
-Year*
Moving
Average
12 .
12 .
12.
11.
11 .
11.
12 .
13 .
15.
14 .
13 .
13 .
11. 0
10.
4 .
12 .
12 .
12 .
13 .
13 .
10.
11.
11.
12 . 0
13 .
15.
12.
10.
10.
12.
12.
12.
11.
12 .
12.
13 .
14 .
14 .
13.
12 .
11.
12 .
12 .
13. 2~
11.
10.
11.
11.
12 .
13.
13.
12.
11.
11.
11.
12.
12.
11.
12.
Source: Moody's Public Utility Manual 1998 , pages a29.
**
A. Turner Utili ty Report,April 1999, April 2000.
Exhibit No.1 08
Case No. UWI-OO-
T. Carlock, Staff
06/06/00 Schedule 10
tc/wordperfect/wpfiles/coc. exh/moodyroe. exh (p2)
WATER COMPANY COMPARISONS
RETURN ON EQUITY
TWEL VE MONTHS ENDING
Companv December 31..1999 March 31.. 2000
American States Water Company (NY)
American Water Works (NY)
Artesian Resources Corp (NDQ)
California Water Service Group (NY)
Connecticut Water Service Inc, (NDQ)
Dominquez Services Corp. (NDQ)
town Corporation (NY)
Middlesex Water Company (NDQ)
Pennichuck Corporation (NDQ)
Philadelphia Suburban Corp. (NY)
SJW Corporation (ASE)
Southwest Water Company (NDQ)
United Water Resources, Inc, (NY)
Average
11.30/0 10.20/0
80/0
30/0
10.50/0
12.30/0 12.
11.10/0
12.70/0 10.
11.5%10.
11.3%13.
10.11.40
15.30/0 15.60/0
11. 0%10.50/0
11.10.80;()
Average without United Water Resources
Source: C.A. Turner Utility Reports April 2000, June 2000.
TC :gdk:u:tcarlockiwordlwpfiles/cocexh/uwiwOO 1 watercos,roe
Exhibit No.1 08
Case No. UWI- W-00-
T. Carlock, Staff
06/06/00 Schedule)
vg
.

A
n
n

I
1

.
Av
g
.

A
n
n
u
a
l
Wa
t
e
r

U
t
i
l
i

ty

I
n
d
u
s
t
r
y
18
.
Un
i

t
e
d

Wa
t
e
r

R
e
s
o
u
r
c
e
s
22
.
So
u
r
c
e
:
FI
N
A
N
C
I
A
L

S
T
A
T
I
S
T
I
C
S
Co
m
m
o
n
Di

vi
d
e
n
d
Yi
e
l
d
%E
a
r
n
e
d
Eq
u
i

t
y
Ra

ti
o
Pe
r
c
e
n
t
Co
m
m
o
n
qu
i

t
Pe
r
c
e
n
t
Pa
y
o
u
t
Ra

ti
o
46
.
11
.
70
.
3
.
44
.
10
.
75
.
Va
l
u
e

L
i
n
e

In
v
e
s
t
m
e
n
t

S
u
r
v
e
y

f
o
r

W
i
n
d
o
w
s
,
F
e
b
r
u
a
r
y

4
,
2
0
0
0
,
~
a
y

1
7
,
2
0
0
0
.
TC
:

u/
w
o
r
d
p
e
r
f
e
c
t
/
c
o
c
e
x
h
/
w
t
r
s
t
a
t
s
.

e
x
h
0
-
j

('
)

t
T
J
0\
'

P'

~
--
-

(')
t/
)

:
:
r
0
(
I
)
O\
P
'

--
-

"
'
1

0-

r-+
0
g

?

Z
en

'
"

("
)

'
.

::
r

C
/
'
J

--
'
(1
)

r
-
+

~
0
o.
P
'

-
""
"
h

I
(b
-
+
)
DISCOUNTED CASH FLOW
UNITED WATER RESOURCES
g =
---- x (l+df) + g
Where:
: = $.
g = 3.5% - 4.
The annual effective growth rate = 3.52% - 4.53%(four dividend compounding periods)
df = direct flotation costs of 2.
at Various Time Intervals for UWR:
May 17 , 2000Price $34.6875, then k
g =
December 1999 - May 2000
-Month Price Range
3% - 7.
" $ 3 4 . 00 - $ 35 . 0 0 , then k
g =
4% - 7.
52 Weeks Price Range as of May 17, 2000:
High $34.938 , then k
g =
$ 20 . 688 , t hen k
g =
3% - 7.
Low 3% - 9.
Source: Val ue Line Inves tmen Survey
TC: u/word/wpfiles/cocexh/dcfuswc. exh
Exhibit No. 108
Case No, UWI-OO-
T. Carlock, Staff
06/06/00 Schedule 13 Page 1 of 2
GROWTH INDICATORS
UNITED WATER RESOURCES
Five-Year Growth Rates 1999
Growth Earnings per Share
Growth Cash Dividends per Share
rowt h Book Value per Share
Sustainable Growth as Return Times the Retention Rate
1999 2000 E
Common Equ~ty Return 10.
Retention Ratio
(1 minus the Payout Ratio)16.25.
Sustainable Growth Rate
(Line 4 x line 44 %
Value Line Projected Growth Rates 2002-2004
Earnings 7 . 5%
Di vidends
Book Value
Average 4 .
Source:Value Line Investment Survey, February 4 , 2000.
TC: u/word/wpfiles/ cocexh/growind. exh
Exhibit No. ) 08
Case No. UWI-OO-
T. Carlock, Staff
06/06/00 Schedule 13 Page 2 of
Li
n
e
No
.
Po
i
n
t

E
s
t
i
m
a
t
e
:
Re
t
u
r
n

o
n

E
q
u
i
t
y
Co
m
p
o
n
e
n
t
Lo
n
g
-
Te
r
m

D
e
b
t
Mi
n
o
r
i
t
y

I
n
t
e
r
e
s
t
Pr
e
f
e
r
r
e
d

S
t
o
c
k
Co
m
m
o
n

S
t
o
c
k
To
t
a
l
10
.
60
/
0
Ov
e
r
a
l
l

R
a
t
e

o
f

R
e
t
u
r
n
O-
i
n
t
T
1
~.

~
~
V"
J

:
:
r
0'
\

(t
)

-

.
--
-
-

~

0"
"
""
1

.-+
0
0

('
)

.
W"
-
'

::
r
~
c
.
V)

~

...
.
.
.
.
o.
'
-
+
c:
:
.to
.

84
3
0
/
0
UN
I
T
E
D

W
A
T
E
R

I
D
A
H
O
,
I
N
C
.
CA
P
I
T
A
L

S
T
R
U
C
T
U
R
E
Se
p
t
e
m
b
e
r

3
0
,
1
9
9
9
Co
m
p
o
s
i
t
e
Ra
t
i
o
Co
s
t
56
.
81

%
52
%
12
%
00
0
/
0
Ra
t
e

o
f
Re
t
u
r
n
27
2
0
1
0
00
6
%
43
.
07
%
10
.
00
%

-

11
.
00
0
1
0
30
7
%

-

4
.
73
8
%
10
0
,
00
%
58
5
%

-

9
.
01
6
0
/
0
TC
:
u
:
w
o
r
d
/
w
p
f
i
l
e
s
/
c
o
c
e
x
h
/
c
a
p
s
t
r
u
c

e
x
h
BEFORE THE
IDAHO PUBLIC UTiliTIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPANY FOR
AUTHORITY TO INCREASE ITS INTERIM
AND BASE RATES AND CHARGES FOR
ElECTR.IC SERVICE.
. CASE NO. IPC-O3-
DIRECT TESTIMO'NY OF TERRI CARLOCK,
IDAHO PUBLIC UTiliTIES COMMISSION.
FEBRUARY 20 2004
Please state your name and address for the
record.
My name is Terri Carlock.My business
address is 472 West Washington Street,' Boise, Idaho.
By whom are you employed and in what
capaci ty?
, am employed by the Idaho Public Utilities
Commission as the Accounting Section Supervisor.
Please outline your educational background
and experience.
I graduated from Boise State University in
May 1980i with a B.A. Degree in Accountirig and in
Finance.I have attended various ,regu;latory, accounting,
rate of return, economics, finance and ratings programs.
I chaired the National Association of Regulatory
Utilities Commissioners (NARUC) Staff Subcommittee on
Economics and Finance for over 3 years.Under this,
subcommi t tee,' I al so chaired the Ad Hoc Commi t tee
Diversification.I am currently a member of the NARUC
Staff Subcommittee on Accounting and Finance.I have
been a presenter for the Institute of Public Utilities
Michigan State Uni versi ty and for many other conferences.
Since joining the Commission Staff in May 1980, I have
participated in audits, performed financial analysis on
- various companies and have presented testimony before
IPC-E- 03 -02/20/04 CARLOCK , T (Di)
STAFF
.12
18'
this Commission on numerous occasions.
What is the purpose of your testimony in
this proceeding?
The purpose of my testimony is to present
the Staff's recommendation related to the overall cost of
capi tal for Idaho Power Company (Idaho Power) to be used
in the revenue requirement in this case, IPC-E- 03 -13 .
will address the appropriate capi tal structure, cost
rates and the overall rate of return.
Please summarize your recommendations.
I am recommending a return on common equity
in the range of 9.5% - 10.5% wi th a point estimate of
10.0%.The recommended overall weighted cost of capital
is in the range of 7.42% - 7.88% with a point estimate of
7 . 65% to be applied to the rate base for the test year.
Are you sponsoring any exhibi ts to accompany
your testimony?
Yes, I am sponsoring Staff Exhibi t No. 144
consisting of 5 schedules.
Have you reviewed the testimony and exhibits
of Idaho Power witnesses Avera and Gribble?
Much of the theoretical approach usedYes.
by witnesses Avera and Gribble in their testimonies and
exhibi ts is generally the same as I have used.
judgment in some areas of application resul ts in
I PC - E - 03 - 13
02/20/04
CARLOCK, T (Di)
STAFF
different outcomes.
What legal standards have been established
for determining a fair and reasonable rate of return?
The legal test of a fair rate of return for
a utility company was established in the Bluefield Water
Works decision of the United States Supreme Court and is
repeated specifically in Hope Natural Gas.
In Bluefield Water Works and Improvement Co.
v. West Virginia Public Service Commission, 262 U. S. 679,
692, 43 S. Ct. 675, 67 L. Ed. 1176 (1923), the Supreme
Court stated:
A public utility is entitled to such
rates as will permit it to earn a return
on the value of the property wpich
employs for the convenience of the
public equal to that generally being
made at the ' same time and in the same
general part of the country on
investments in other business
undertakings which are attended by
corresponding risks and uncertainties
but it has no constitutional right to
prof its such as are real i zed or
anticipated in highly profitable
enterprises or speculative ventures.
The return should be reasonably
~ufficient to assure confidence in the
financial soundness of the utility andshould be adequate, under efficient and
economical management, to maintain and
support its credit and enable it to
raise the money necessary for the proper
discharge of its public duties. A rate
of return may be reasonable at one time
and become too high or too low by
changes affecting opportunities for
investment, the money market andbusiness conditions generally.
IPC-E- 03 -13
02/20/04 CARLOCK , T (Di)
STAFF
The Court stated in FPC v. Hope Natural Gas Company, 320
u. S. 591, 603,. 64 S. Ct. 281 , 88 L. Ed. 333 (1944)
From the investor or company point view it is important that there be
enough revenue not only for operating
expenses but also for the capital costsof the business. These include service
on the debt and dividends on the stock.
. .
. By that standard the return to the
equi ty owner should be commensurate wi
returns on investments in other
enterprises having corresponding risks
That return, moreover,' should
sufficient to assure confidence in the
financial integrity of the enterprise,
so as to maintain its credit and toattract capital. (Citations omitted.
The Supreme Court decisions in Bluefield
Water Works and Hope Natural Gas have been affirmed in
re Permian Basin Area Rate Case, 390 u. S. 747, 88 S.
1344, 20 L.Ed 2d 312 (1968), and Duquesne Light ,Co.
Barasch, 488 U. S. 299, 109 S.Ct. 609, 102 L.Ed.2d. 646
(1989) .The Idaho Supreme Court h~s also adopted the
principles established in Bluefield Wa ter Works and Hope
Na tural Gas.See In re Moun tain Sta tes Tel. Tel. Co.
76 Idaho 474, 284 P.2d 681 (1955) i General Telephone Co.
v. IPUC, 109 Idaho 942 , 712 P. 2d 643 1986) i Hayden Pin~s
Water Company v. IPUC, 122 ID 356 , 834 P.2d 873 (1992)
As a resul t of these Uni ted States and Idaho
Supreme Court decisions, three standards have evolved for
determining a fair and reasonable rate of return:
IPC-E-03-13
02/20/04 CARLOCK, T (Di)
-STAFF
(1) the Financial Integrity or Credit Maintenance
Standard;(2) the Capi tal At tract ion St andard; and,
(3) the Comparable Earnings. Standard.If the Comparable
Earnings Standard is met, the Financial Integrity or
Credi t Maintenance Standard 'and the Capi tal At traction
Standard will also be met, as they are an integral part
of the Comparable Earnings Standard.
Have yov considered these standards in your
recommenda t ion?
These cri teria have been seriouslyYes.
considered in the analysis upon which my recommendations
are based.It is also important to recognize that the
fair rate of return that allows the utility company to
maintain its financial integrity and to att~act capital
is established assuming efficient and economic
management, as specified ,by the Supreme Court. in
Bl uef i el Wa ter Works.
Please summarize the parentI subsidiary
relationships for Idaho Powe r Company.
Idaho Power I s common stock is not traded.
It is wholly owned by IDACORP, INC. Due to this
parent/ subsidiary relationship there is no direct market
data available for utility operations at Idaho Power
Company.The only direct stock market information
available to utilize in determining the cost of equity
IPC-E- 03 -13
02/20/04 CARLOCK, T (Di)
STAFF
10
capi tal 'is for IDACORP, Inc.
What approach have you used to determine the
cost of equity for Idaho' Power Company specifically?
I have primarily evaluated two methods:the
Discounted Cash Flow (DCF) method and the Comparable
Earnings method.
Please explain the Comparable Earnings
method and how the cost of equi ty is determined using
this approach.
The Comparable Earnings method for
determining the cost of equi ty is based upon the prern~se
that a given investment should earn its opportunity
costs.In competitive markets, if the return earned by a
firm is not equal to the return ,being earned on other
investments of similar risk, the flow of funds ~ill be
toward those investments earning the higher returns.
Therefore, for a utility to be competitive in the
financial markets, it should be allowed to earn a return
on equity equal to the average return earned by other
firms of similar risk.The Comparable Earnings approach
is supported by the Bluefield Water Works and Hope
Na tural Gas decisions as a basis for determining those
average returns.
Industrial returns tend to fluctuate with
business cycles, increasing as the economy improves and
IPC-03-02/20/04 CARLOCK, T (Di)
STAFF
15
18
decreasing as the economy declines.Utility returns are
not as sensitive to fluctuations in the business cycle
because the demand for utili ty services, generally tends
to be more stable and predictable.However, returns have
fluctuated since 2000 when prices in the e~ectricity
markets dramatically increased.Electrici ty prices have
not seen the dramatic spikes lately so earnings are
beginning to stabilize again.
Please evaluate the recent pr~ce index
trends.
The trends for price indexes are shown on
Staff Exhibit No. 144 , Schedule The consumer price
index percent change has averaged 1.9% for 2001-2003 and
was 1.9% for 2003.This is less than historical
averages.
Please evaluate interest rate trends.
The prime interest rate ranges by year are
shown on Staff Exhibit No. 144 ~ Schedule 2.Interest
rates are at historical lows and no dramatic increase is
expected.
Please provide the current index levels for
the Dow Jones Industrial Average and the Dow Jones
Utility Average.
The Dow Jones Industrial Average closed
495 on February 5, 2004.This close was a 12 -month
IPC-E- 03 -
02/20/04 CARLOCK, T (Di)
STAFF
13
~ncrease of 31 % The Dow Jones Utility Average closed
267 on February 5, 2004.
Please explain the risk differentials
between industrials and utilities.
Risk. is a degree of uncertainty relative to
a company.The lower risk level associated with
utilities is attributable to many factors even though the
di fference is not as great as it used to be Utilities
continue to have limited competition for distribution
utility services within the certificated area.With
limited competition for regulated services, there is less
chance of losses related to pricing practices, marketing
strategy and advertising policies.The competitive risks
for electric utilities have changed' with increasing non-
utility generation ,. deregulation in some states, open
transmission access, and changes in electrici ty markets.
However, competitive risks are limited for Idaho Power.
The demand for utili ty services is relatively stable and
certain or increasing compared to that of unregulated
firms and eve~) other utili ty industries.
Competitive risks are less for Idaho Power
than for most other electric companies primarily because
of the low-cost source of power and the low retail rates.
The investment risk for Idaho Power is less due to
recovery levels for power supply costs reflected in the
IPC-E- 03 -1302/20/04 CARLOCK, T (Di)
STAFF
, 9
. 15
Power Cost Adjustment mechanism (PCA)The risk
differential between Idaho Power and other electric
utilities is based on the resource mix and the cost of
those resources.All resource mixes have risks specific
to resources chosen.The demand for electric utility
services of Idaho Power is relatively stable.This low
demand risk is partially due to the low-cost power. and
the customer mix of the power users.
Under regulation, utilities are generally
allowed to recover through rates, reasonable, prud~nt and
justifiable cost expenditures related to regulated
services.Unregulated firms have no such assurance.
Utilities in general are sheltered by regulation for
reasonable cost recovery risks, making the average
utility less risky than the average unregulated
industrial firm.
The main risks experienced by IDACORP have
been 'and continue to be primarily due to non-regulated
operations.This was particularly true during the
operation and closure of IDACORP Energy, the energy
trading affiliate.
You indicated that the Discounted Cash Flow
method is utilized in your analysis.Please explain this
method.
The Discounted Cash Flow (DCF) method
IPC-E- 03 -13
02/20/04 CARLOCK , T (Di)
STAFF
, 9
3 .
based upon the theory that (1) stocks are bought for the
income they provide (i. e ., both dividends and/ or gains
from the sale of the stock), and (2) the market price of
stocks equals the discounted value of all future incomes.
The discount rate, or cost of equity, equates the present~
val ue of the stream of income to the current market price
of the stock.The formula to accomplish this goal is:
- - - - - _. -------------------
( 1 + ks ) 1 ( I + ks ) :2 (l+ks ) N (l+ks ) N
Po =Current Price
D =Di vidend
ks =Capitalization Rate, Discount Rate, or Requ~red
Rate of Return
N =Latest Year Considered
The pattern of the future income stream is
the key factor that must be estimated in this approach.
Some simplifying assumptions for ratemaking purposes can
be made without sacrificing the validity of the results.
Two such assumptions are:( 1 ) dividends per share grow
at a constant rate in perpetuity and (2) prices track
earnings.These assumptions lead to the simplified DCF
formula , where the required return is the dividend yield
plus the growth rate (g)
I PC - E - 03-1302/20/04 CARLOCK , T (Di)
STAFF
2'2
ks = -
- + g
Q. What is your estimate of the current cost of
capi tal for Idaho Power using the Discounted C~sh Flow
method?
The current cost of equity capital for
IDACORP and thus Idaho Power, using the Discounted Cash
Flow method is between 7. ~% - 8.8% during various time
intervals.Due to changes in the markets and the
dividend cut for IDACORP, I believe the proj ected price
range of $25 to $35 with a growth rate of 4% is the most
representative.
The dividend yield for Moody s Public
Utility Common Stock average is 4 .18% as of February 17
2004 .This compares to ~he midpoint dividend yield for
IDACORP of 4% at a price of $30.
How is the growth rate (g) determined?
The growth rate is the factor that requires
the most extensive analysis in the DCF method.It is
important that the growth rate used in the model be
consistent with the dividend yield so that investor
expectations are accurately reflected and the growth rate
is not too . large or too small.
I have used an expected growth rate of
3% - 5%.This expected growth rate was derived from
I PC - E - 03-13
02/20/04 CARLOCK, T (Di)
STAFF
, 2
analysis of var~ous historical and prpj ected growth
indicators, including, growth in earnings per share,
growth in cash dividends per share, growth in book value
per share and the sustainable growth for Idaho Power and
IDACORP.
. Q.What is the capital structure you have used
for Idaho Power to determine the overall cost of capital?
I have utilized the capital structure
consisting of 51.38% debt, 2.99% preferred stock and
45.63% common equity as shown on Schedule 5 of Staff
Exhibi t No. 144.This represents the updated capital
structure for Idaho Power on 11/30/03 plus the equity
infusion of $40, 000, 000 from IDACORP on December. 31,
2003.I have accepted t,he equi ty infusion to reflect the
updated capital structure as it reduces the risk levels
for Idaho Power and should help maintain the Idaho Power
bond ratings.This capital structure is shown on Staff
Exhibit No. 144, Schedule 5, Columns 2 and
What are the costs related to the capital
structure for debt?
The cost of debt is 5.63 %.I have verified
these rates as used in Staff Exhibi t No. 144, Schedule
I have adjusted the debt rate used by Idaho Power witness
Gribble to reflect the maturity of the 8% First Mortgage
Bond in 2004 (Staff Exhibi t No. 144 , Schedule 3, line 1)
IPC-E- 03 -13
02/20/04 CARLOCK, T (Di)
STAFF
12 '
I have replaced the 8% rate with a current rate of .6%.
have also reflected the Pollution Control Revenue Bond
variable rates at the current rates as shown on Staff
Exhibit No. 144 , Schedule 3, lines 12 - 15.Staff
witness English proposed this adjustment in his
testimony.I support this recommendation as the most
reasonable.
What are the costs related to the capital
structure for preferred stock?
The cost of preferred stock is 6.53% as
shown in Staff Exhibit No. 144, Schedule I have
verified these rates as used by Idaho Power witness
Gribble.
You indicated the cost of common equity
range for Idaho Power is 10.- 11.0% under the
Comparable Earnings method and 7.4% - 8.8% under the
Discounted Cash Flow method.What is the cost of common
equi ty capi tal you are recommending?
The fair and reasonable cost of common
equi ty capi tal I am recommending for Idaho Power is in
the range of 9.5% - 10.5%.Al though any point wi thin
this range is reasonable, the return on equity granted
would not normally be at either extreme of the fair and
reasonabl e range.I utilized a point estimate of 10.
in calculating the overall rate of return for the revenue
IPC-E- 03 -1302/20/04 CARLOCK , T (Di)
STAFF
requirement.
What is the basis for your point estimate
being 10.0% when your range is 9.5% - 10.5%?
The 10.0% return on equity' point estimate
utilized is based on a review ot the market data and
comparables, average risk characteristics for Idaho
Power, and the updated capi tal ~tructure.
What is the overall weighted cost of capital
you are recommending for Idaho Power?
I am recommending an overall weighted cost
of capital in the range of 7.42%- 7.88%.For use in
calculating the revenue ~equirement, a point estimate
, consisting of a return .on equity of 10.0% and a resulting
overall rate of return of 7.65% was utilized as shown on
Schedule 5, St'aff Exhibi t No. 144.
Does this conclude your direct tes,timony in
this proceeding?
Yes, it does.
IPC-E- 03 -13
02/20/04 CARLOCK, T (Di)
STAFF
PRICE INDEXES
(A)(B)(C)(D)
Consumer CPI Producer PPI
Price Percent Price Percent
Index Chan Index Chan
1980 82.4 12.88.11.8
1981 90.96.7.1
1982 96.100.
1983 99.101.6
1984 103.103.1.7
1985 107.104.1.8
1986 109.1.1 103.
1987 113.4.4 105.4
1988 118.4.4 108.
1989 124.113.
1990 130.. 6.119.
1991 136.121.7
1992 140.123.1.6
1993 144.124.
1994 148.125.1.7
1995 152.4 127.
1996 156.131.3
1997 160.1.7 131.8 1.2
1998 163.1.6 130.
1999 166.133.
2000 172.3.4 138.
2001 177.1.6 140.
2002 179.2.4 138.1.2
2003 184.1.9 143.
All items; Index, 1982 - 1984 = 100 (Ratio Scale)
Total Finished Goods; Index, 1982 = 100 (Ratio Scale)
Preliminary
Source: Economic Indicators, pages 22-24.
Exhibit No, 144
Case No. IPC-O3-
T. Carlock, Staff
.., /'H)/nLl Q,-.hpH1l1p 1
BANK PRIME INTEREST RATES
Year Rate
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
. 1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004 Through 2/20/04
75%
. 11.50
10.
15.
11.
10.
10.
10.
10.00.
50%
10.
12.
10.
11.75
15.
21.50
20.
17.
11.50
13.
10.
10.
11.50
10.
. 8.
Source: Federal Reserve Bulletin
Wall Street J oumal
Exhibit No. 144
Case No. IPC-03-
T, Carlock, Staff
2/20104 Schedule 2
ID
A
H
O

P
O
W
E
R

C
O
M
P
A
N
Y
EF
F
E
C
T
I
V
E

E
M
B
E
D
D
E
D

C
O
S
T

O
F
LO
N
G
-
TE
R
M

D
E
B
T
CO
M
P
O
S
I
T
E

C
O
S
T

O
F

C
A
P
I
T
A
L

2
0
0
3
($
O
O
O
'
(1
)
(2
)
(3
)
(4
)
(5
)
(6
)
(7
)
(8
)
(9
)
(1
0
)
(1
1
)
(1
2
)
(1
3
)
((
4
)
+
(
6
)
-
(
7
)
-
(
8
)
-
(
9
)
)
((
4
)

.

(
1
1
)
)
((
1
2
)
/
(
1
0
)
)
Ne
t
An
n
u
a
l
Lin
e
Da
t
e

o
f
Pr
i
n
c
i
p
a
l

A
m
o
u
n
t
. U
n
d
e
r
w
r
i
t
e
r
Ex
p
e
n
s
e
Pr
o
c
e
e
d
s
In
t
e
r
e
s
t
Ef
f
e
c
t
i
v
e
Cl
a
s
s

a
n
d

S
e
r
i
e
s
Is
s
u
e
.
I
s
s
u
e
d
Ou
t
s
t
a
n
d
i
n
g
Pr
i
c
e
Pr
e
m
i
u
m
Di
s
c
o
u
n
t
.
Co
m
m
i
s
s
i
o
n
of

I
s
s
u
e
Re
c
e
i
v
e
d
Ra
t
e
Re
q
u
i
r
e
m
e
n
t
s
Co
s
t
Fi
r
s
t

M
o
r
t
a
a
a
e

B
o
n
d
s
:
0%

S
e
r
i
e
s
,
d
u
e

2
0
0
4

(
R
E
P
L
A
C
E

A
S

M
A
T
U
R
E
S
)
3/
2
5
1
1
9
9
2
00
0
00
0
99
.
20
0
40
0
,
33
7
,
42
2
.
83
9
.
00
%
00
0
,
6.
4
0
83

%

S
e
r
i
e
s
,
d
u
e

2
0
0
5

.
.
.
.
91
1
/
1
9
9
3
00
0
00
0
10
0
.
00
0
36
0
,
14
8
,
57
,
4
9
1
,
S3
%
49
8
.
20

%

S
e
r
i
e
s
,
d
u
e

2
0
0
9

.
.
.
.
11
/
2
3
/
1
9
9
9
00
0
00
0
10
0
.
00
0
50
0
.
18
2
,
31
7
,
20
%
76
0
.
38

%

S
e
r
i
e
s
,
d
u
e

2
0
0
7

.
.
.
.
12
/
1
/
2
0
0
0
OO
O
OO
O
10
0
,
00
0
48
0
,
91
3
.
60
6
,
38
%
90
4
,
60

%

S
e
r
i
e
s
,
d
u
e

2
0
1
1

.
.
.
.
3/
2
/
2
0
0
1
12
0
00
0
12
0
00
0
10
0
,
00
0
75
0
,
12
1
,
11
9
12
8
,
60
%
92
0
.
75

%

S
e
r
i
e
s
,
d
u
e

2
0
1
2

'
.
.
,
11
1
1
5
/
2
0
0
2
10
0
00
0
10
0
00
0
98
,
94
8
05
2
,
62
5
,
44
1
,
88
1
,
75
%
75
0
,
00

%

S
e
r
i
e
s
,
d
u
e

2
0
3
2

.
.
.
.
11
/
1
5
/
2
0
0
2
10
0
00
0
10
0
00
0
99
.
4
5
6
54
4
,
75
0
.
44
1
,
26
4
,
00
%
00
0
,
25

%

S
e
r
i
e
s
,
d
u
e

2
0
3
2

.
.
.
.

.
5/
1
3
/
2
0
0
3
00
0
00
0
99
.
4
6
5
37
4
,
43
7
,
82
,
10
6
,
25
%
97
5
,
5%

S
e
r
i
e
s
,
d
u
e

2
0
3
1

.
.
.
.
5/
1
3
/
2
0
0
3
00
0
00
0
99
,
94
8
36
.
4
52
5
,
68
8
,
75
0
,
50
%
85
0
,
To
t
a
l

F
i
r
s
t

M
o
r
t
g
a
g
e

B
o
n
d
s
73
0
00
0
73
0
00
0
40
6
,
76
5
,
44
2
,
70
9
38
5
.
65
7
,
15
%
Po
l
l
u
t
i
o
n

C
o
n
t
r
o
l

R
e
v
e
n
u
e

B
o
n
d
s
:
05
%

S
e
r
i
e
s

1
9
9
6
A
, d
u
e

2
0
2
6
71
2
5
/
1
9
9
6
10
0
10
0
99
,
30
8
47
1
.
44
2
,
40
3
,
78
2
,
05
%
12
0
.
Va
r
,

R
a
t
e

S
e
r
i
e
s

1
9
9
6
B
,
d
u
e

2
0
2
6

.
.
,
(a
)
7/
2
5
/
1
9
9
6
20
0
20
0
10
0
,
00
0
7S
,
16
5
.
95
6
,
33
%
32
1
.
Va
r
,

R
a
t
e

S
e
r
i
e
s

1
9
9
6
C
,
d
u
e

2
0
2
6

.
.
.
(b
)
7/
2
5
/
1
9
9
6
00
0
00
0
10
0
,
00
0
78
,
22
2
,
69
9
,
1.4
0
%
33
6
,
1.
4
2
Po
r
t

o
f

M
o
r
r
o
w

V
R
C
,
d
u
e

2
0
2
7
.
.
,
.
.
,
.
.
.
.

(
c
)
5/
7
/
2
0
0
0
36
0
36
0
10
0
,
00
0
50
,
72
,
23
7
.
15
%
93
.
Va
r
.

R
a
t
e

R
e
f
i
n
a
n
c
e
d

H
u
m
b
o
l
d
t

S
e
r
i
e
s
,
d
u
e

2
0
2
4

.
.
(e

12
/
2
0
1
1
9
8
4
80
0
80
0
10
0
,
00
0
24
9
,
14
0
,
41
0
,
15
%
57
2
,
To
t
a
l

P
o
l
l
u
t
i
o
n

C
o
n
t
r
o
l

R
e
v
e
n
u
e

B
o
n
d
s
17
0
46
0
17
0
46
0
47
1
.
3
89
8
,
00
3
.
16
3
08
7
,
44
4
.
4
Pr
a
i
r
e

P
o
w
e
r

R
E
A

N
o
l
e
s
(d
)
va
r
i
o
u
s
14
6
,
14
6
,
82
,
TO
T
A
L

D
E
B
T

C
A
P
I
T
A
L

.
.
.
.
,
.
.
.
.
.
.
$9
0
0
46
0
$9
0
1
60
6
,
87
8
.
66
3
,
$1
9
44
5
.
4
$8
7
3
61
9
,
$4
9
18
3
.
63
%
t:
;
1
G
t
r
1
tV

PJ

0
0

--
-

P
J

(
D

01
-
0
\

cr
'
--
-

...
.
.
'
0
0

~
'
Z
1'
"
"
"
"
'
0
::
r

--
C

.
(D

en
o
-
0.
.
8

I
~
2.
.

~

t;
r
1

(D

0
(a
.
)

-
In
t
e
r
e
s
t

f
o
r

S
w
e
e
t
w
a
t
e
r

1
9
9
6
B

B
o
n
d

1
2
/
3
1
/
0
3
(b
)

-

I
n
t
e
r
e
s
t

f
o
r

S
w
e
e
t
w
a
t
e
r

1
9
9
6
C

B
o
n
d

1
2
/
3
1
/
0
3
(c
)

-

I
n
t
e
r
e
s
t

f
o
r

P
o
r
t

o
f

M
o
r
r
o
w

B
o
n
d

12
/
3
1
1
0
3
(d
)

-

I
n
c
l
u
d
e
s

v
a
r
i
o
u
s

d
a
t
e
s

o
f

i
s
s
u
e

a
n
d

m
a
t
u
r
i
t
y

-

s
o
m
e

a
t

2
,
0%

t
h
a
t

m
a
t
u
r
e

q
u
a
r
t
e
r
l
y

a
n
d

s
o
m
e

a
t

5
.
0%

t
h
a
t

m
a
t
!
-
l
r
e

m
o
n
t
h
l
y
(e
)

-

I
n
t
e
r
e
s
t

f
o
r

H
u
m
b
o
l
d
t

B
o
n
d

w
a
s

e
s
t
i
t
m
a
t
e
d

b
y

t
a
k
i
n
g

t
h
e

a
v
e
r
a
g
a
g
e

s
p
r
e
a
d

o
v
e
r

t
h
e

B
M
A

i
n
d
e
x

o
n

t
h
e

l
i
f
e

o
f

t
h
e

b
o
n
d

p
l
u
s

a
v
e
r
a
g
e

o
f

t
h
e

B
M
A

i
n
d
e
x

(
0
,
61

+

3
.
04

=

3
.
65
)
NO
T
E
:

A
m
e
r
i
c
a
n

F
a
l
l
s

D
a
m

B
o
n
d

a
n
d

M
i
l
n
e
r

D
a
m

N
b
t
e

a
r
e

g
u
a
r
a
n
t
e
e
s
,

T
h
e
s
e

i
n
s
t
r
u
m
e
n
t
s

a
r
e

e
x
c
l
u
d
e
d

i
n

r
a
t
e

m
a
k
i
n
g

c
a
l
c
u
l
a
t
i
o
n
s

a
n
d

t
h
e
r
e
f
o
r
e

a
r
e

o
m
i
t
t
e
d

f
r
o
m

t
h
i
s

s
c
h
e
d
u
l
e
,
ID
A
H
O

P
O
W
E
R

C
O
M
P
A
N
Y
EF
F
E
C
T
I
V
E

E
M
B
E
D
D
E
D

C
O
S
T

O
F
PR
E
F
E
R
R
E
D

S
T
O
C
K
CO
M
P
O
S
I
T
E

C
O
S
T

O
F

C
A
P
I
T
A
L

2
0
0
3
($
O
O
O
'
(1
)
(2
)
(3
)
(4
)
(5
)
(6
)
(7
)
(8
)
(9
)
(1
0
)
(1
1
)
((
5
)

-

(4
)
/
1
0
)
((
4
)
/
1
0

+
(
6
)

-

(
7
)
)
((
4
)
/
1
0

(9
)
)
((1
0
)

(8
)
)
Pr
i
n
c
i
o
a
l

A
m
o
u
n
t
Ne
t
An
o
u
a
l
Li
n
e
Da
t
e

o
f
#
S
h
a
r
e
s
#
S
h
a
r
e
s
Gr
o
s
s

C
a
s
h
Pr
e
m
i
u
m
l
Ex
p
e
n
s
e
Pr
o
c
e
e
d
s
Di
v
i
d
e
n
d
Ef
f
e
c
t
i
v
e
Se
r
i
e
s
Is
s
u
e
Is
s
u
e
d
Ou
t
s
t
a
n
d
i
n
Re
c
e
i
v
e
d
Di
s
c
o
u
n
t
of

I
s
s
u
e
Re
c
e
i
v
e
d
Ra
t
e
ui
r
e
m
e
n
t
s
Co
s
t
4
%

S
e
r
i
e
s

.
.
.
19
4
4
-
21
5
00
0
12
6
19
9
$1
3
01
2
.
$3
9
2
.
$2
9
5
,
$1
2
71
6
.
00
%
$5
0
4
,
97
%
68
%

S
e
r
i
e
s

'
.
.
.
27
-
15
0
00
0
15
0
00
0
15
,
01
7
,
$1
7
,
33
,
98
3
,
68
%
15
2
.
76
8
.
84
%
07
%

S
e
r
i
e
s

'
.
,
.
25
0
00
0
25
0
00
0
78
1
.
($
2
1
8
,
71
,
24
,
7
0
9
,
07
%
76
7
,
71
5
,
31
%
TO
T
A
L

P
R
E
F
E
R
R
E
D

S
T
O
C
K
61
5
00
0
52
6
19
9
$5
2
81
1
,
$1
9
1
,
$4
0
1
.
$5
2
40
9
,
42
4
.
53
%
N~
(
)
t
T
1
-.

p)

~
Iv

en

::
:
:
:
r
0
(
1
)
-p
)

'"
1

.t
:
.
.
.
.
.
.
.

r-+
~.

Z
(/
)
x
-
-
o
'l
:
1
'
::
:
:
:
r

.
(1
)

C
f
)

(
)

...
.
.
.
.
.
0.
.

r
-
+

I

.t:
.
c:
:

p
)

tT
1

.
t
:
.
..
.
.
.
.

:
:
:
I
:
j

I
(1
)

0
.t
:
.

~
..
.
.
.
.
.
.
CO
M
P
O
S
I
T
E

C
O
S
T

O
F

C
A
P
I
T
A
L

2
0
0
3
ID
A
H
O

P
O
W
E
R

C
O
M
P
A
N
Y
(1
)
(2
)
(3
)
(4
)
(5
)
Li
n
e
it
a
l
i
z
a
t
i
o
n

S
t
r
u
c
t
u
r
e
Em
b
e
d
d
e
d
We
i
g
h
t
e
d
Am
o
u
n
t

*
Pe
r
c
e
n
t
Co
s
t
Co
s
t
Lo
n
g
-
te
r
m

D
e
b
t
90
1
56
6
00
0
51
,
38
0
/
0
63
0
/
0
89
0
1
0
Pr
e
f
e
r
r
e
d

S
t
o
c
k
52
.
4
2
9
.
4
0
0
99
0
1
0
53
%
20
0
/
0
Co
m
m
o
n

E
q
u
i
t
y
80
0
61
0
25
4
45
.
63
0
1
0
10
.
00
0
1
0
56
%
To
t
a
l

C
a
p
i
t
a
l
i
z
a
t
i
o
n
75
4
60
5
65
4
10
0
.
00
0
1
0
65
0
/
0
No
t
e
:
*
1
1
/
3
0
/
0
3

B
a
l
a
n
c
e
s

+

E
q
u
i
t
y

I
n
f
u
s
i
o
n

o
f

$
4
0
00
0
00
0

a
t

1
2
/
3
1
/
0
3
do
e
s

n
o
t

i
n
c
l
u
d
e

R
e
t
a
i
n
e
d

E
a
r
n
i
n
g
s

f
o
r

1
2
/
2
0
0
3
N-
-
3
0
t
r
1
--
-
-
-
.

P
'

&
~
(
)

..
.
.
'
--
-
-
-

P
'

0.
;

...
.
.
+:
:
-

-
-

..
.
.
.
.
0
0

(/
)
~
-
o
~~

~
.

..
.
.
.

(
J
)

...
.
.
.
.
.
..
.
.
.
.

I

+::
-
Po

PJ

tT
1

t:
:
!
!

I
0.
"VI

I.
f
...
.
.
.
.
.
tJ
.
I
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 20TH DAY OF FEBRUARY 2004
SERVED THE FOREGOING DIRECT TESTIMONY OF TERRI CARLOCK, IN CASE
NO. IPC-03-, BY MAILING A COpy THEREOF POSTAGE PREPAID , TO THE
FOLLOWING:
BARTON L KLINE
MONICA MOEN
IDAHO POWER COMPANY
PO BOX 70
BOISE, ID 83707-0070
Hand carried
JOHN R GALE
VICE PRESIDENT REG AFFAIRS
IDAHO POWER COMPANY
PO BOX 70
BOISE, ill 83707-0070
Hand carried
PETER J RICHARDSON ESQ
RICHARDSON & O'LEARY
PO BOX 1849
EAGLE ID 83616
Hand carried
DON READING
BEN JOHNSON ASSOCIATES
6070 HILL ROAD
,-
BOISE ID 83703
Hand carried
RANDALL C BUDGE
RACINE OLSON NYE BUDGE BAILEY
CHARTERED.
PO BOX 1391
POCATELLO ill 83204-1391
F edEx
ANTHONY YANKEL
29814 LAKE ROAD
BAY VILLAGE OH 44140
F edEx
LAWRENCE A GOLLOMP
ASSISTANT GENERAL COUNSEL
S. DEPARTMENT OF ENERGY
1000 INDEPENDENCE AVE SW
WASHINGTON DC 20585
F edEx
DENNIS GOINS
POTOMAC MANAGEMENT GROUP
5801 WESTCHESTER ST
ALEXANDRIA VA 2231 0-1149
FedEx
DEAN J MILLER
McD EVITT & MILLER LLP
PO BOX 2564
BOISE ill 83701
Hand carri ed
JEREMIAH J HEAL Y
UNITED WATER IDAHO INC
PO BOX 190420
BOISE ID 83719-0420
Hand carried
WILLIAM MEDDlE
ADVOCATES OF THE WEST
PO BOX 1612
BOISE ill 83701
Hand carried
NANCY HIRSH
NW ENERGY COALITION
219 FIRST A'VE SOUTH SUITE 100
SEATTLE WA 98104
F edEx
CERTIFICATE OF SERVICE
. CONLEY E WARD
GIVENS PURSLEY LLP
PO BOX 2720
BOISE ill 83701-2720
Hand carried
DENNIS E PESEAU PH.
UTILITY RESOURCES INC.
SUITE 250 .
1500 LIBERTY STREET SE
SALEM OR 97302
FedEx
BRAD M PURDY
ATTORNEY AT LA W
2019 N 17TH STREET
BOISE ID 83702
Hand carried
MICHAEL KARP
147 APPALOOSA LANE
BELLINGHAM W A 98229
F edEx
MICHAEL L KURTZ, ESQ
KURT J BOEHM ESQ
BOEHM KURTZ & LOWRY
36 E. SEVENTH ST SUITE 2110
CINCINNATI OH 45202
F edEx
THOMAS M POWER
ECONOMICS DEPARTMENT
LIBERAL ARTS BLDG. 407
UNIVERSITY OF MONT ANA
32 CAMPUS DR
MISSOULA MT 59812
F edEx
CERTIFICATE OF SERVICE
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 14TH DAY OF WLY 2004
SERVED THE FOREGOING COMMISSION STAFF RESPONSE TO THE
FIRST PRODUCTION REQUEST OF POTLATCH CORPORATION, IN CASE
NO. AVU-04-l/AVU-04-, BY MAILING A COpy THEREOF POSTAGE
PREPAID TO THE FOLLOWING:
DAVID J. MEYER
SR VP AND GENERAL COUNSEL
VISTA CORPORATION
PO BOX 3727
SPOKANE WA 99220-3727
E-mail dmeyer~avistacorp. com
KELLY NORWOOD
VICE PRESIDENT STATE & FED, REG.
AVIS T A UTILITIES
PO BOX 3727
SPOKANE W A 99220-3727
E-mail Kelly .norwood~avistacorp. com
CONLEY E WARD
GIVENS PURSLEY LLP
PO BOX 2720
BOISE ID 83701-2720
E-mail cew~givenspursley.com
DENNIS E PESEAU, PH. D.
UTILITY RESOURCES INC
1500 LIBERTY ST SE, SUITE 250
SALEM OR 97302
E-mail dpeseau~excite.com
CHARLES L A COX
EVANS KEANE
111 MAIN STREET
PO BOX 659
KELLOGG ID 83837
E-mail ccox~usamedia. tv
BRAD M PURDY
ATTORNEY AT LA W
2019 N 17TH ST
BOISE ID 83702
E-mail bmpurdy~hotmail.com
~ \-c(~
CERTIFICATE OF SERVICE