20150601McKenzie Exhibit 3.pdf

DAVID J. MEYER VICE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY & GOVERNMENTAL AFFAIRS AVISTA CORPORATION P.O. BOX 3727 1411 EAST MISSION AVENUE SPOKANE, WASHINGTON 99220-3727
TELEPHONE: [phone] FACSIMILE: [phone] [e-mail]

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION ) CASE NO. AVU-E-15-05 OF AVISTA CORPORATION FOR THE ) CASE NO. AVU-G-15-01 AUTHORITY TO INCREASE ITS RATES )
AND CHARGES FOR ELECTRIC AND ) NATURAL GAS SERVICE TO ELECTRIC ) EXHIBIT NO. 3
AND NATURAL GAS CUSTOMERS IN THE ) STATE OF IDAHO ) ADRIEN M. MCKENZIE )

FOR AVISTA CORPORATION
(ELECTRIC AND NATURAL GAS)

Schedule 1 Page 1 of 6
QUALIFICATIONS OF ADRIEN M. MCKENZIE
Q. What is the purpose of this exhibit? 1
A. This exhibit describes my background and 2
experience and contains the details of my qualifications. 3
Q. Please describe your qualifications and 4
experience. 5
A. I received B.A. and M.B.A. degrees with a major 6
in finance from The University of Texas at Austin, and hold 7
the Chartered Financial Analyst (CFA®) designation. Since 8
joining FINCAP in 1984, I have participated in consulting 9
assignments involving a broad range of economic and 10
financial issues, including cost of capital, cost of 11
service, rate design, economic damages, and business 12
valuation. I have extensive experience in economic and 13
financial analysis for regulated industries, and in 14
preparing and supporting expert witness testimony before 15
courts, regulatory agencies, and legislative committees 16
throughout the U.S. and Canada. Since 2014, I have 17
personally sponsored direct and rebuttal testimony 18
concerning the rate of return on equity (“ROE”) in 19
proceedings filed with the Federal Energy Regulatory 20
Commission (“FERC” or “the Commission”), the Hawaii Public 21
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista Schedule 1, Page 1 of 6
Schedule 1 Page 2 of 6
Utilities Commission, the Kansas State Corporation 1
Commission, the Kentucky Public Service Commission, the 2
Montana Public Service Commission, the Public Utility 3
Commission of Oregon, the South Dakota Public Utilities 4
Commission, the Washington Utilities and Transportation 5
Commission, and the Wyoming Public Service Commission. My 6
testimony addressed the establishment of risk-comparable 7
proxy groups, the application of alternative quantitative 8
methods, and the consideration of regulatory standards and 9
policy objectives in establishing a fair ROE for regulated 10
electric and gas utility operations. 11
In addition, over the course of my career I have 12
worked with Dr. William Avera to prepare prefiled direct 13
and rebuttal testimony in over 250 regulatory proceedings 14
before the Federal Energy Regulatory Commission (“FERC”) 15
(including Docket No. EL11-66-001, which established FERC’s 16
current policies with respect to ROE for electric 17
utilities, adopted in Opinion No. 531), the Canadian Radio-18
Television and Telecommunications Commission, and 19
regulatory agencies in over 30 states.1 In connection with 20
these assignments, my responsibilities have included 21
performing analyses to estimate investors’ required rate of 22
1 This testimony was sponsored by Dr. William Avera, who is President of FINCAP, Inc.
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista Schedule 1, Page 2 of 6

Schedule 1 Page 3 of 6
return, critically evaluating the results of alternative 1
approaches, evaluating the positions of other parties, 2
representing clients in settlement negotiations and 3
hearings, and assisting in the preparation of legal briefs. 4
Prior to joining FINCAP, I was employed by an oil and gas 5
firm and was responsible for operations and accounting. A 6
resume containing the details of my qualifications and 7
experience is attached below. 8
9
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista Schedule 1, Page 3 of 6
Schedule 1
Page 4 of 6

ADRIEN M. McKENZIE

Vice President 3907 Red River
FINCAP, INC. Austin, Texas 78751
Financial Concepts and Applications (512) 458–4644 Economic and Financial Counsel FAX [phone] [e-mail]

Summary of Qualifications Adrien McKenzie has an MBA in finance from the University of Texas at Austin and holds the
Chartered Financial Analyst (CFA) designation. He has over 25 years of experience in economic and financial analysis for regulated industries, and in preparing and supporting expert witness testimony
before courts, regulatory agencies, and legislative committees throughout the U.S. and Canada.
Assignments have included a broad range of economic and financial issues, including cost of capital, cost
of service, rate design, economic damages, and business valuation.
Employment Consultant,
FINCAP, Inc.
(June 1984 to June 1987)
(April 1988 to present)
industries and valuation of closely-
Assignments have involved electric, gas,
muni
Areas of participation have included rate of return,
avoided cost, forecasting, and negotiations. Develop
cost of capital analyses using alternative market models
for electric, gas, and telephone utilities. Prepare pre-
evaluate opposition testimony, and assist in the areas of
cross-examination and the preparations of legal briefs.
Manager,
McKenzie Energy Company engaged in the management of working interests in oil

Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista Schedule 1, Page 4 of 6
Schedule 1
Page 5 of 6 Education
M.B.A., Finance,
University of Texas at Austin
(Sep. 1982 to May. 1984)
Program included coursework
accounting, financial modeling, and statistics. Received
Neighbor Scholarship.
Professional Report: The Impact of Construction
Expenditures on Investor-Owned Electric Utilities
B.B.A., Finance,
University of Texas at Austin
(Jan. 1981 to May 1982)
management, and international economics and finance.
Elected to Beta Gamma Sigma business honor society.
Dean's List 1981-1982.
Simon Fraser University,
Vancouver, Canada and University
of Hawaii at Manoa, Honolulu, Hawaii
(Jan. 1979 to Dec 1980)

liberal arts.
Professional Associations Received Chartered Financial Analyst (CFA) designation in 1990.
Member – CFA Institute.

Bibliography “A Profile of State Regulatory Commissions,” A Special Report by the Electricity Consumers Resource
Council (ELCON), Summer 1991.
“The Impact of Regulatory Climate on Utility Capital Costs: An Alternative Test,” with Bruce H.
Fairchild, Public Utilities Fortnightly (May 25, 1989).

Presentations “ROE at FERC: Issues and Methods,” Expert Briefing on Parallels in ROE Issues between AER, ERA,
and FERC, Jones Day (Sydney, Melbourne, and Perth, Australia) (April 15, 2014)
Cost of Capital Working Group eforum, Edison Electric Institute (April 24, 2012)
“Cost-of-Service Studies and Rate Design,” General Management of Electric Utilities (A Training Program for Electric Utility Managers from Developing Countries), Austin, Texas (October 1989 and
November 1990 and 1991).

Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista Schedule 1, Page 5 of 6
Schedule 1
Page 6 of 6
Representative Assignments Mr. McKenzie has prepared and supported prefiled testimony submitted in over 250 regulatory
proceedings. In addition to filings before regulators in 33 states, Mr. McKenzie has considerable expertise in preparing expert analyses and testimony before the Federal Energy Regulatory
Commission (“FERC”) on the issue of ROE. Many of these proceedings have been influential in
addressing key aspects of FERC’s policies with respect to ROE determinations. Broad experience in
applying and evaluating the results of quantitative methods to estimate a fair ROE, including
discounted cash flow approaches, the Capital Asset Pricing Model, risk premium methods, and other quantitative benchmarks. Other representative assignments have included the application of
econometric models to analyze the impact of anti-competitive behavior and estimate lost profits;
development of explanatory models for nuclear plant capital costs in connection with prudency reviews;
and the analysis of avoided cost pricing for cogenerated power.

Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista Schedule 1, Page 6 of 6
Schedule 2 Page 1 of 47

I. DESCRIPTION OF QUANTITATIVE ANALYSES

Q. What is the purpose of this schedule? 1
A. Exhibit No. 3, Schedule 2 presents capital 2
market estimates of the cost of equity. First, I examine 3
the concept of the cost of equity, along with the risk-4
return tradeoff principle fundamental to capital markets. 5
Next, I describe DCF, ECAPM, and risk premium analyses 6
conducted to estimate the cost of equity for reference 7
groups of comparable risk firms. This schedule also 8
presents alternative tests to confirm that the end-results 9
of my primary analyses are reasonable and do not exceed a 10
fair ROE. 11
A. Comparable Risk Proxy Group
Q. How did you implement quantitative methods to 12
estimate the cost of common equity for Avista? 13
A. Application of quantitative methods to estimate 14
the cost of equity requires observable capital market 15
data, such as stock prices. Moreover, even for a firm 16
with publicly traded stock, the cost of equity can only be 17
estimated. As a result, applying quantitative models 18
using observable market data only produces an estimate 19
that inherently includes some degree of observation error. 20
Exhibit No. 3
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A. McKenzie, Avista
Schedule 2, Page 1 of 47
Schedule 2 Page 2 of 47
Thus, the accepted approach to increase confidence in the 1
results is to apply the quantitative methods such as the 2
DCF and ECAPM to a proxy group of publicly traded 3
companies that investors regard as risk-comparable. 4
Q. What specific proxy group of utilities did you 5
rely on for your analysis? 6
A. In order to reflect the risks and prospects 7
associated with Avista’s jurisdictional utility 8
operations, my DCF analyses focused on a reference group 9
of other utilities composed of those companies included by 10
The Value Line Investment Survey (“Value Line”) in its 11
Electric Utilities Industry groups with: 12
1. S&P corporate credit ratings of BBB-, BBB, or 13
BBB+; 14
2. Moody’s issuer ratings of Baa2, Baa1, or A3, 15
3. Value Line Safety Rank of “2” or “3”; 16
4. No involvement in a major merger or acquisition; 17
and, 18
5. Currently paying common dividends with no recent 19
dividend cuts. 20
These criteria resulted in a proxy group composed of 19 21
companies, which I refer to as the “Utility Group.” 22
Exhibit No. 3
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A. McKenzie, Avista
Schedule 2, Page 2 of 47
Schedule 2 Page 3 of 47
Q. How did you evaluate the risks of the Utility 1
Group relative to Avista? 2
A. My evaluation of relative risk considered four 3
objective, published benchmarks that are widely relied on 4
in the investment community. Credit ratings are assigned 5
by independent rating agencies for the purpose of 6
providing investors with a broad assessment of the 7
creditworthiness of a firm. Ratings generally extend from 8
triple-A (the highest) to D (in default). Other symbols 9
(e.g., "BBB+") are used to show relative standing within a 10
category. Because the rating agencies’ evaluation 11
includes virtually all of the factors normally considered 12
important in assessing a firm’s relative credit standing, 13
corporate credit ratings provide a broad, objective 14
measure of overall investment risk that is readily 15
available to investors. Although the credit rating 16
agencies are not immune to criticism, their rankings and 17
analyses are widely cited in the investment community and 18
referenced by investors. Investment restrictions tied to 19
credit ratings continue to influence capital flows, and 20
credit ratings are also frequently used as a primary risk 21
indicator in establishing proxy groups to estimate the 22
cost of common equity. 23
Exhibit No. 3
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A. McKenzie, Avista
Schedule 2, Page 3 of 47
Schedule 2 Page 4 of 47
While credit ratings provide the most widely 1
referenced benchmark for investment risks, other quality 2
rankings published by investment advisory services also 3
provide relative assessments of risks that are considered 4
by investors in forming their expectations for common 5
stocks. Value Line’s primary risk indicator is its Safety 6
Rank, which ranges from “1” (Safest) to “5” (Riskiest). 7
This overall risk measure is intended to capture the total 8
risk of a stock, and incorporates elements of stock price 9
stability and financial strength. Given that Value Line 10
is perhaps the most widely available source of investment 11
advisory information, its Safety Rank provides useful 12
guidance regarding the risk perceptions of investors. 13
The Financial Strength Rating is designed as a guide 14
to overall financial strength and creditworthiness, with 15
the key inputs including financial leverage, business 16
volatility measures, and company size. Value Line’s 17
Financial Strength Ratings range from “A++” (strongest) 18
down to “C” (weakest) in nine steps. Finally, Value 19
Line’s beta measures a utility’s stock price volatility 20
relative to the market as a whole. A stock that tends to 21
respond less to market movements has a beta less than 22
Exhibit No. 3
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A. McKenzie, Avista
Schedule 2, Page 4 of 47
Schedule 2 Page 5 of 47
1.00, while stocks that tend to move more than the market 1
have betas greater than 1.00. Beta is the only relevant 2
measure of investment risk under modern capital market 3
theory, and is widely cited in academics and in the 4
investment industry as a guide to investors’ risk 5
perceptions. Moreover, in my experience Value Line is the 6
most widely referenced source for beta in regulatory 7
proceedings. As noted in New Regulatory Finance: 8
Value Line is the largest and most widely 9 circulated independent investment advisory 10 service, and influences the expectations of a 11
large number of institutional and individual 12 investors. … Value Line betas are computed on a 13
theoretically sound basis using a broadly based 14 market index, and they are adjusted for the 15 regression tendency of betas to converge to 16 1.00.1 17
Q. How do the overall risks of your proxy group 18
compare with Avista? 19
A. Table 1 compares the Utility Group with Avista 20
across five key indicators of investment risk: 21
1 Morin, Roger A., “New Regulatory Finance,” Public Utilities Reports
at 71 (2006).
Exhibit No. 3
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A. McKenzie, Avista
Schedule 2, Page 5 of 47

Schedule 2 Page 6 of 47
TABLE 1 1 COMPARISON OF RISK INDICATORS 2
Value Line
Proxy Group S&P Moody’s Rank Strength Beta
Utility Group BBB+ Baa1 2 B++ 0.77
Avista BBB Baa1 2 A 0.80
Considered together, this comparison of objective 3
measures, which consider a broad spectrum of risks, 4
including financial and business position, and exposure to 5
firm-specific factors, indicates that investors would 6
likely conclude that the overall investment risks for 7
Avista are generally comparable to those of the firms in 8
the Utility Group. 9
B. Discounted Cash Flow Analyses
Q. How are DCF models used to estimate the cost of 10
equity? 11
A. DCF models attempt to replicate the market 12
valuation process that sets the price investors are 13
willing to pay for a share of a company’s stock. The 14
model rests on the assumption that investors evaluate the 15
risks and expected rates of return from all securities in 16
the capital markets. Given these expectations, the price 17
of each stock is adjusted by the market until investors 18
are adequately compensated for the risks they bear. 19
Exhibit No. 3
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A. McKenzie, Avista
Schedule 2, Page 6 of 47
Schedule 2 Page 7 of 47
Therefore, we can look to the market to determine what 1
investors believe a share of common stock is worth. By 2
estimating the cash flows investors expect to receive from 3
the stock in the way of future dividends and capital 4
gains, we can calculate their required rate of return. 5
That is, the cost of equity is the discount rate that 6
equates the current price of a share of stock with the 7
present value of all expected cash flows from the stock. 8
The formula for the general form of the DCF model is as 9
follows: 10
11
where: P0 = Current price per share; 12
Pt = Expected future price per share in 13 period t; 14 Dt = Expected dividend per share in period t; 15
ke = Cost of common equity. 16
te
t
te
t
ee k
P
k
D
k
D
k
DP )1()1()1()1(2
2
1
10 ++++++++=
Exhibit No. 3
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A. McKenzie, Avista
Schedule 2, Page 7 of 47
Schedule 2 Page 8 of 47
Q. What form of the DCF model is customarily used 1
to estimate the cost of equity in rate cases? 2
A. Rather than developing annual estimates of cash 3
flows into perpetuity, the DCF model can be simplified to 4
a “constant growth” form: 2 5
6
where: P0 = Current price per share; 7
D1 = Expected dividend per share in the 8 coming year; 9 ke = Cost of equity; 10
g = Investors’ long-term growth 11 expectations. 12
The cost of equity (Ke) can be isolated by rearranging 13
terms: 14
15
This constant growth form of the DCF model recognizes that 16
the rate of return to stockholders consists of two parts: 17
1) dividend yield (D1/P0), and 2) growth (g). In other 18
words, investors expect to receive a portion of their 19
2 The constant growth DCF model is dependent on a number of assumptions, which in practice are never strictly met. These include
a constant growth rate for both dividends and earnings; a stable dividend payout ratio; the discount rate exceeds the growth rate; a constant growth rate for book value and price; a constant earned rate
of return on book value; no sales of stock at a price above or below book value; a constant price-earnings ratio; a constant discount rate (i.e., no changes in risk or interest rate levels and a flat yield
curve); and all of the above extend to infinity.
gk
DP
e −=10
gP
Dke +=
0
1
Exhibit No. 3
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A. McKenzie, Avista
Schedule 2, Page 8 of 47

Schedule 2 Page 9 of 47
total return in the form of current dividends and the 1
remainder through price appreciation. 2
Q. What steps are required to apply the DCF model? 3
A. The first step in implementing the constant 4
growth DCF model is to determine the expected dividend 5
yield (D1/P0) for the firm in question. This is usually 6
calculated based on an estimate of dividends to be paid in 7
the coming year divided by the current price of the stock. 8
The second step is to estimate investors' long-term growth 9
expectations (g) for the firm. The final step is to sum 10
the firm's dividend yield and estimated growth rate to 11
arrive at an estimate of its cost of equity. 12
Q. How was the dividend yield for the Utility Group 13
determined? 14
A. Estimates of dividends to be paid by each of 15
these utilities over the next twelve months, obtained from 16
Value Line, served as D1. This annual dividend was then 17
divided by a 30-day average stock price for each utility 18
to arrive at the expected dividend yield. The expected 19
dividends, stock prices, and resulting dividend yields for 20
the firms in the Utility Group are presented on page 1 of 21
Schedule 5. 22
Exhibit No. 3
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A. McKenzie, Avista
Schedule 2, Page 9 of 47
Schedule 2 Page 10 of 47
Q. What is the next step in applying the constant 1
growth DCF model? 2
A. The next step is to evaluate long-term growth 3
expectations, or “g”, for the firm in question. In 4
constant growth DCF theory, earnings, dividends, book 5
value, and market price are all assumed to grow in 6
lockstep, and the growth horizon of the DCF model is 7
infinite. But implementation of the DCF model is more 8
than just a theoretical exercise; it is an attempt to 9
replicate the mechanism investors used to arrive at 10
observable stock prices. A wide variety of techniques can 11
be used to derive growth rates, but the only “g” that 12
matters in applying the DCF model is the value that 13
investors expect. 14
Q. What are investors most likely to consider in 15
developing their long-term growth expectations? 16
A. Given that the DCF model is solely concerned 17
with replicating the forward-looking evaluation of real-18
world investors, in the case of utilities, dividend growth 19
rates are not likely to provide a meaningful guide to 20
investors’ current growth expectations. This is because 21
utilities have significantly altered their dividend 22
policies in response to more accentuated business risks in 23
Exhibit No. 3
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A. McKenzie, Avista
Schedule 2, Page 10 of 47
Schedule 2 Page 11 of 47
the industry, with payout ratios remaining significantly 1
below historical levels. As a result of this trend 2
towards a more conservative payout ratio, dividend growth 3
in the utility industry has lagged growth in earnings as 4
utilities conserve financial resources to provide a hedge 5
against heightened uncertainties. 6
A measure that plays a pivotal role in determining 7
investors’ long-term growth expectations are future trends 8
in earnings per share (“EPS”), which provide the source 9
for future dividends and ultimately support share prices. 10
The importance of earnings in evaluating investors’ 11
expectations and requirements is well accepted in the 12
investment community, and surveys of analytical techniques 13
relied on by professional analysts indicate that growth in 14
earnings is far more influential than trends in dividends 15
per share (“DPS”). 16
The availability of projected EPS growth rates also 17
is key to investors relying on this measure as compared to 18
future trends in DPS. Apart from Value Line, investment 19
advisory services do not generally publish comprehensive 20
DPS growth projections, and this scarcity of dividend 21
growth rates relative to the abundance of earnings 22
Exhibit No. 3
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A. McKenzie, Avista
Schedule 2, Page 11 of 47
Schedule 2 Page 12 of 47
forecasts attests to their relative influence. The fact 1
that securities analysts focus on EPS growth, and that DPS 2
growth rates are not routinely published, indicates that 3
projected EPS growth rates are likely to provide a 4
superior indicator of the future long-term growth expected 5
by investors. 6
Q. Do the growth rate projections of security 7
analysts consider historical trends? 8
A. Yes. Professional security analysts study 9
historical trends extensively in developing their 10
projections of future earnings. Hence, to the extent 11
there is any useful information in historical patterns, 12
that information is incorporated into analysts’ growth 13
forecasts. 14
Q. Did Professor Myron J. Gordon, who originated 15
the DCF approach, recognize the pivotal role that earnings 16
play in forming investors’ expectations? 17
A. Yes. Dr. Gordon specifically recognized that 18
“it is the growth that investors expect that should be 19
used” in applying the DCF model and he concluded: 20
Exhibit No. 3
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A. McKenzie, Avista
Schedule 2, Page 12 of 47
Schedule 2 Page 13 of 47
A number of considerations suggest that 1
investors may, in fact, use earnings growth as a 2 measure of expected future growth.”3 3
Q. Are analysts’ assessments of growth rates 4
appropriate for estimating investors’ required return 5
using the DCF model? 6
A. Yes. In applying the DCF model to estimate the 7
cost of common equity, the only relevant growth rate is 8
the forward-looking expectations of investors that are 9
captured in current stock prices. Investors, just like 10
securities analysts and others in the investment 11
community, do not know how the future will actually turn 12
out. They can only make investment decisions based on 13
their best estimate of what the future holds in the way of 14
long-term growth for a particular stock, and securities 15
prices are constantly adjusting to reflect their 16
assessment of available information. 17
Any claims that analysts’ estimates are not relied 18
upon by investors are illogical given the reality of a 19
competitive market for investment advice. The market for 20
investment advice is intensely competitive, and securities 21
analysts are personally and professionally motivated to 22
provide the most accurate assessment possible of future 23
3 Gordon, Myron J., “The Cost of Capital to a Public Utility,” MSU
Public Utilities Studies at 89 (1974).
Exhibit No. 3
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A. McKenzie, Avista
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Schedule 2 Page 14 of 47
growth trends. If financial analysts’ forecasts do not 1
add value to investors’ decision making, then it is 2
irrational for investors to pay for these estimates. 3
Those financial analysts who fail to provide reliable 4
forecasts will lose out in competitive markets relative to 5
those analysts whose forecasts investors find more 6
credible. The reality that analyst estimates are 7
routinely referenced in the financial media and in 8
investment advisory publications (e.g., Value Line) 9
implies that investors use them as a basis for their 10
expectations. 11
While the projections of securities analysts may be 12
proven optimistic or pessimistic in hindsight, this is 13
irrelevant in assessing the expected growth that investors 14
have incorporated into current stock prices, and any bias 15
in analysts’ forecasts – whether pessimistic or optimistic 16
– is irrelevant if investors share analysts’ views. 17
Earnings growth projections of security analysts provide 18
the most frequently referenced guide to investors’ views 19
and are widely accepted in applying the DCF model. As 20
explained in New Regulatory Finance: 21
Because of the dominance of institutional 22
investors and their influence on individual 23
Exhibit No. 3
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A. McKenzie, Avista
Schedule 2, Page 14 of 47
Schedule 2 Page 15 of 47
investors, analysts’ forecasts of long-run 1
growth rates provide a sound basis for 2 estimating required returns. Financial analysts 3 exert a strong influence on the expectations of 4
many investors who do not possess the resources 5 to make their own forecasts, that is, they are a 6
cause of g [growth]. The accuracy of these 7 forecasts in the sense of whether they turn out 8 to be correct is not an issue here, as long as 9
they reflect widely held expectations.4 10
Q. What are security analysts currently projecting 11
in the way of growth for the firms in the Utility Proxy 12
Group? 13
A. The projected EPS growth rates for each of the 14
firms in the Utility Group reported by Value Line, IBES, 15
and Zacks Investment Research (“Zacks”) are displayed on 16
page 2 of Schedule 5.5 17
Q. How else are investors’ expectations of future 18
long-term growth prospects often estimated for use in the 19
constant growth DCF model? 20
A. In constant growth theory, growth in book equity 21
will be equal to the product of the earnings retention 22
ratio (one minus the dividend payout ratio) and the earned 23
rate of return on book equity. Furthermore, if the earned 24
rate of return and the payout ratio are constant over 25
time, growth in earnings and dividends will be equal to 26
4 Morin, Roger A., “New Regulatory Finance,” Public Utilities Reports, Inc. at 298 (2006) (emphasis added). 5 Formerly I/B/E/S International, Inc., IBES growth rates are now
compiled and published by Thomson Reuters.
Exhibit No. 3
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A. McKenzie, Avista
Schedule 2, Page 15 of 47

Schedule 2 Page 16 of 47
growth in book value. Despite the fact that these 1
conditions are seldom, if ever, met in practice, this 2
“sustainable growth” approach may provide a rough guide 3
for evaluating a firm’s growth prospects and is frequently 4
proposed in regulatory proceedings. 5
The sustainable growth rate is calculated by the 6
formula, g = br+sv, where “b” is the expected retention 7
ratio, “r” is the expected earned return on equity, “s” is 8
the percent of common equity expected to be issued 9
annually as new common stock, and “v” is the equity 10
accretion rate. Under DCF theory, the “sv” factor is a 11
component of the growth rate designed to capture the 12
impact of issuing new common stock at a price above, or 13
below, book value. The sustainable, “br+sv” growth rates 14
for each firm in the Utility Group are summarized on page 15
2 of Schedule 5, with the underlying details being 16
presented on Schedule 6.6 17
Q. Are there significant shortcomings associated 18
with the “br+sv” growth rate? 19
A. Yes. First, in order to calculate the 20
sustainable growth rate, it is necessary to develop 21
6 Because Value Line reports end-of-year book values, an adjustment factor was incorporated to compute an average rate of return over the
year, which is consistent with the theory underlying this approach.
Exhibit No. 3
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A. McKenzie, Avista
Schedule 2, Page 16 of 47

Schedule 2 Page 17 of 47
estimates of investors’ expectations for four separate 1
variables; namely, “b”, “r”, “s”, and “v.” Given the 2
inherent difficulty in forecasting each parameter and the 3
difficulty of estimating the expectations of investors, 4
the potential for measurement error is significantly 5
increased when using four variables, as opposed to 6
referencing a direct projection for EPS growth. Second, 7
empirical research in the finance literature indicates 8
that sustainable growth rates are not as significantly 9
correlated to measures of value, such as share prices, as 10
are analysts’ EPS growth forecasts.7 11
The “sustainable growth” approach was included for 12
completeness, but evidence indicates that analysts’ 13
forecasts provide a superior and more direct guide to 14
investors’ growth expectations. Accordingly, I give less 15
weight to cost of equity estimates based on br+sv growth 16
rates in evaluating the results of the DCF model. 17
Q. What cost of equity estimates were implied for 18
the Utility Group using the DCF model? 19
A. After combining the dividend yields and 20
respective growth projections for each utility, the 21
7 Morin, Roger A., “New Regulatory Finance,” Public Utilities Reports,
Inc., at 307 (2006).
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 17 of 47

Schedule 2 Page 18 of 47
resulting cost of equity estimates are shown on page 3 of 1
Schedule 5. 2
Q. In evaluating the results of the constant growth 3
DCF model, is it appropriate to eliminate illogical 4
estimates? 5
A. Yes. In applying quantitative methods to 6
estimate the cost of equity, it is essential that the 7
resulting values pass fundamental tests of reasonableness 8
and economic logic. Accordingly, DCF estimates that are 9
implausibly low or high should be eliminated when 10
evaluating the results of this method. 11
Q. How did you evaluate DCF estimates at the low 12
end of the range? 13
A. I based my evaluation of DCF estimates at the 14
low end of the range on the fundamental risk-return 15
tradeoff, which holds that investors will only take on 16
more risk if they expect to earn a return to compensate 17
them for the greater uncertainty. Because common stocks 18
lack the protections associated with an investment in 19
long-term bonds, a utility’s common stock imposes far 20
greater risks on investors. As a result, the rate of 21
return that investors require from a utility’s common 22
stock is considerably higher than the yield offered by 23
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 18 of 47
Schedule 2 Page 19 of 47
senior, long-term debt. Consistent with this principle, 1
DCF results that are not sufficiently higher than the 2
yields available on less risky utility bonds must be 3
eliminated. 4
Q. Have similar tests been applied by regulators? 5
A. Yes. FERC has noted that adjustments are 6
justified where applications of the DCF approach produce 7
illogical results. FERC evaluates DCF results against 8
observable yields on long-term public utility debt and has 9
recognized that it is appropriate to eliminate estimates 10
that do not sufficiently exceed this threshold.8 FERC 11
recently affirmed that: 12
The purpose of the low-end outlier test is to 13 exclude from the proxy group those companies 14 whose ROE estimates are below the average bond 15 yield or are above the average bond yield but 16 are sufficiently low that an investor would 17
consider the stock to yield essentially the same 18 return as debt. In public utility ROE cases, 19 the Commission has used 100 basis points above 20 the cost of debt as an approximation of this 21 threshold, but has also considered the 22
distribution of proxy group companies to inform 23 its decision on which companies are outliers. 24 As the Presiding Judge explained, this is a 25 flexible test.9 26
8 See, e.g., Southern California Edison Co., 131 FERC ¶ 61,020 at P 55 (2010) (“SoCal Edison”). 9 Martha Coakley et al., v. Bangor Hydro-Electric Company, et al.,
Opinion No. 531, 147 FERC ¶ 61,234 at P 122 (2014).
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 19 of 47

Schedule 2 Page 20 of 47
Q. What interest rate benchmark did you consider in 1
evaluating the DCF results for Avista? 2
A. As noted earlier, the S&P and Moody’s ratings 3
for Avista are BBB and Baa1, respectively, which fall in 4
the triple-B rating category. Accordingly, I referenced 5
average yields on triple-B utility bonds as my benchmark 6
in evaluating low-end results. Monthly yields on triple-B 7
bonds reported by Moody’s averaged approximately 4.6 8
percent over the six months ending April 2015.10 9
Q. What else should be considered in evaluating DCF 10
estimates at the low end of the range? 11
A. As indicated earlier, while long-term bond 12
yields have declined substantially in response to the 13
Federal Reserve’s stimulus policies, it is generally 14
expected that long-term interest rates will rise as the 15
economy returns to a more normal pattern of growth and the 16
Federal Reserve normalizes monetary policies. As shown in 17
Table 2 below, forecasts of IHS Global Insight and the EIA 18
imply an average triple-B bond yield of approximately 6.8 19
percent over the period 2015-2019: 20
10 Moody’s Investors Service,
http://credittrends.moodys.com/chartroom.asp?c=3.
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 20 of 47

Schedule 2 Page 21 of 47
TABLE 2 1 IMPLIED BBB BOND YIELD 2

The increase in debt yields anticipated by IHS Global 3
Insight and EIA is also supported by the widely-referenced 4
Blue Chip Financial Forecasts, which projects that yields 5
on corporate bonds will climb over 200 basis points 6
through 2019.11 7
Q. What does this test of logic imply with respect 8
to the DCF estimates for the Utility Group? 9
A. Adding FERC’s 100 basis-point premium to the 10
historical and projected average utility bond yields 11
implies a low-end threshold on the order of 5.6 percent to 12
11 Blue Chip Financial Forecasts, Vol. 33, No. 12 (Dec. 1, 2014).
2015-19
Projected AA Utility Yield
IHS Global Insight (a)6.10%
EIA (b)5.80%
Average 5.95%
Current BBB - AA Yield Spread (c)0.82%
Implied Triple-B Utility Yield 6.77%
(a)
(b)
(c)
IHS Global Insight, The U.S. Economy: The 30-Year Focus
(Third-Quarter 2014).
Energy Information Administration, Annual Energy Outlook 2015
(April 2015).
Based on monthly average bond yields from Moody's Investors
Service for the six-month period Nov. 2014 - Apr. 2015.
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 21 of 47

Schedule 2 Page 22 of 47
7.8 percent. As highlighted on page 3 of Schedule 5, 1
after considering this test and the distribution of 2
individual estimates, I eliminated low-end DCF estimates 3
ranging from 3.5% to 6.8%. Based on my professional 4
experience and the risk-return tradeoff principle that is 5
fundamental to finance, it is inconceivable that investors 6
are not requiring a substantially higher rate of return 7
for holding common stock. As a result, consistent with 8
the threshold established by historical and projected 9
utility bond yields, these values provide little guidance 10
as to the returns investors require from utility common 11
stocks and should be excluded. 12
Q. Is there a basis to eliminate high-end values 13
from the range of DCF results produced for the Utility 14
Group? 15
A. While it is just as important to evaluate DCF 16
estimates at the upper end of the range, there is no 17
objective benchmark analogous to the bond yield averages 18
used to eliminate illogical low-end values. In response, 19
FERC has consistently applied a two-pronged test for high-20
end values based on the magnitude of the cost of equity 21
estimate and its underlying growth rate. As FERC 22
observed: 23
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 22 of 47
Schedule 2 Page 23 of 47
The Presiding Judge found that the [utilities’] 1
criteria for screening high-end outliers 2 substantially complies with Commission 3 precedent. . . . The Presiding Judge further 4
stated that the Commission’s high-end outlier 5 test since 2004 has been to exclude from the 6
proxy group any company whose cost of equity 7 estimate is at or above 17.7 percent and whose 8 growth rate is at or above 13.3 percent.12 9
The upper end of the DCF range for the Utility Group 10
was set by a cost of equity estimate of 13.9 percent. 11
This cost of equity estimate, and the underlying growth 12
rate of 10.0 percent, falls well below the threshold tests 13
employed by FERC. Moreover, while this cost of equity 14
estimate may exceed the majority of the remaining values, 15
remaining low-end estimates in the 7.0 percent range are 16
assuredly far below investors’ required rate of return. 17
Taken together and considered along with the balance of 18
the DCF estimates, these values provide a reasonable basis 19
on which to frame the range of plausible DCF estimates and 20
evaluate investors’ required rate of return. 21
Q. What cost of equity is implied by your DCF 22
results for the Utility Group? 23
A. As shown on page 3 of Schedule 5 and summarized 24
in Table 3, below, after eliminating illogical low-end 25
12 Opinion No. 531 at P 115 (footnotes omitted).
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 23 of 47

Schedule 2 Page 24 of 47
values, application of the constant growth DCF model 1
resulted in the following cost of equity estimates: 2
TABLE 3 3 DCF RESULTS – UTILITY GROUP 4

C. Empirical Capital Asset Pricing Model
Q. Please describe the ECAPM. 5
A. The ECAPM is a variant of the traditional CAPM, 6
which is a theory of market equilibrium that measures risk 7
using the beta coefficient. Assuming investors are fully 8
diversified, the relevant risk of an individual asset 9
(e.g., common stock) is its volatility relative to the 10
market as a whole, with beta reflecting the tendency of a 11
stock’s price to follow changes in the market. A stock 12
that tends to respond less to market movements has a beta 13
less than 1.00, while stocks that tend to move more than 14
the market have betas greater than 1.00. The CAPM is 15
mathematically expressed as: 16
Growth Rate Average Midpoint
Value Line 9.9%10.6%
IBES 9.2%8.9%
Zacks 8.9%9.2%
br + sv 8.4%9.6%
Cost of Equity
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 24 of 47
Schedule 2 Page 25 of 47
Rj = Rf +βj(Rm - Rf) 1
where: Rj = required rate of return for stock j; 2 Rf = risk-free rate; 3
Rm = expected return on the market 4 portfolio; and, 5
βj = beta, or systematic risk, for 6 stock j. 7
Like the DCF model, the ECAPM is an ex-ante, or forward-8
looking model based on expectations of the future. As a 9
result, in order to produce a meaningful estimate of 10
investors’ required rate of return, the ECAPM must be 11
applied using estimates that reflect the expectations of 12
actual investors in the market, not with backward-looking, 13
historical data. 14
Q. Why is the ECAPM approach an appropriate 15
component of evaluating the cost of equity for Avista? 16
A. The CAPM approach, which forms the foundation of 17
the ECAPM, generally is considered to be the most widely 18
referenced method for estimating the cost of equity among 19
academicians and professional practitioners, with the 20
pioneering researchers of this method receiving the Nobel 21
Prize in 1990. Because this is the dominant model for 22
estimating the cost of equity outside the regulatory 23
sphere, the ECAPM provides important insight into 24
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 25 of 47
Schedule 2 Page 26 of 47
investors’ required rate of return for utility stocks, 1
including Avista. 2
Q. How does the ECAPM approach differ from 3
traditional applications of the CAPM? 4
A. Empirical tests of the CAPM have shown that low-5
beta securities earn returns somewhat higher than the CAPM 6
would predict, and high-beta securities earn less than 7
predicted. In other words, the CAPM tends to overstate 8
the actual sensitivity of the cost of capital to beta, 9
with low-beta stocks tending to have higher returns and 10
high-beta stocks tending to have lower risk returns than 11
predicted by the CAPM. This empirical finding is widely 12
reported in the finance literature, as summarized in New 13
Regulatory Finance: 14
As discussed in the previous section, several 15 finance scholars have developed refined and 16
expanded versions of the standard CAPM by 17 relaxing the constraints imposed on the CAPM, 18
such as dividend yield, size, and skewness 19 effects. These enhanced CAPMs typically produce 20
a risk-return relationship that is flatter than 21 the CAPM prediction in keeping with the actual 22 observed risk-return relationship. The ECAPM 23
makes use of these empirical relationships.13 24
As discussed in New Regulatory Finance, based on a review 25
of the empirical evidence, the expected return on a 26
13 Morin, Roger A., “New Regulatory Finance,” Public Utilities Reports
at 189 (2006).
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 26 of 47

Schedule 2 Page 27 of 47
security is related to its risk by the ECAPM, which is 1
represented by the following formula: 2
Rj = Rf + 0.25(Rm - Rf) + 0.75[βj(Rm - Rf)] 3
This ECAPM equation, and the associated weighting factors, 4
recognize the observed relationship between standard CAPM 5
estimates and the cost of capital documented in the 6
financial research, and correct for the understated 7
returns that would otherwise be produced for low beta 8
stocks. 9
Q. How did you apply the ECAPM to estimate the cost 10
of common equity? 11
A. Application of the ECAPM to the Utility Group 12
based on a forward-looking estimate for investors’ 13
required rate of return from common stocks is presented on 14
Schedule 7. In order to capture the expectations of 15
today’s investors in current capital markets, the expected 16
market rate of return was estimated by conducting a DCF 17
analysis on the dividend paying firms in the S&P 500. 18
The dividend yield for each firm was obtained from 19
Value Line, and the growth rate was equal to the average 20
of the earnings growth projections for each firm published 21
by IBES and Value Line, with each firm’s dividend yield 22
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 27 of 47
Schedule 2 Page 28 of 47
and growth rate being weighted by its proportionate share 1
of total market value. Based on the weighted average of 2
the projections for the individual firms, current 3
estimates imply an average growth rate over the next five 4
years of 9.2 percent. Combining this average growth rate 5
with a year-ahead dividend yield of 2.3 percent results in 6
a current cost of common equity estimate for the market as 7
a whole (Rm) of approximately 11.5 percent. Subtracting a 8
2.7 percent risk-free rate based on the average yield on 9
30-year Treasury bonds for the six months ending April 10
2015 produced a market equity risk premium of 8.8 percent. 11
Q. What was the source of the beta values you used 12
to apply the CAPM? 13
A. I relied on the beta values reported by Value 14
Line, which in my experience is the most widely referenced 15
source for beta in regulatory proceedings. As noted in 16
New Regulatory Finance: 17
Value Line is the largest and most widely 18 circulated independent investment advisory 19 service, and influences the expectations of a 20
large number of institutional and individual 21 investors. … Value Line betas are computed on a 22
theoretically sound basis using a broadly based 23 market index, and they are adjusted for the 24
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 28 of 47
Schedule 2 Page 29 of 47
regression tendency of betas to converge to 1
1.00.14 2
Q. What else should be considered in applying the 3
ECAPM? 4
A. As explained by Morningstar: 5
One of the most remarkable discoveries of modern 6 finance is that of a relationship between firm 7
size and return. The relationship cuts across 8 the entire size spectrum but is most evident 9
among smaller companies, which have higher 10 returns on average than larger ones.15 11
Because empirical research indicates that the ECAPM does 12
not fully account for observed differences in rates of 13
return attributable to firm size, a modification is 14
required to account for this size effect. 15
According to the ECAPM, the expected return on a 16
security should consist of the riskless rate, plus a 17
premium to compensate for the systematic risk of the 18
particular security. The degree of systematic risk is 19
represented by the beta coefficient. The need for the 20
size adjustment arises because differences in investors’ 21
required rates of return that are related to firm size are 22
not fully captured by beta. To account for this, 23
Morningstar has developed size premiums that need to be 24
14 Morin, Roger A., “New Regulatory Finance,” Public Utilities Reports at 71 (2006). 15 Morningstar, “Ibbotson SBBI 2013 Valuation Yearbook,” at p. 85
(footnote omitted).
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 29 of 47

Schedule 2 Page 30 of 47
added to the theoretical ECAPM cost of equity estimates to 1
account for the level of a firm’s market capitalization in 2
determining the ECAPM cost of equity. These premiums 3
correspond to the size deciles of publicly traded common 4
stocks, and range from a premium of 5.7 percent for a 5
company in the first decile (market capitalization less 6
than $300.85 million), to a reduction of 32 basis points 7
for firms in the tenth decile (market capitalization 8
greater than $24.4 billion).16 Accordingly, my ECAPM 9
analyses incorporated an adjustment to recognize the 10
impact of size distinctions, as measured by the average 11
market capitalization for the Utility Group. 12
Q. What cost of equity is indicated for the Utility 13
Group using the ECAPM approach? 14
A. As shown on page 1 of Schedule 7, a forward-15
looking application of the ECAPM approach resulted in an 16
average unadjusted ROE estimate of 10.0 percent.17 After 17
adjusting for the impact of firm size, the ECAPM approach 18
implied an average cost of equity of 11.1 percent for the 19
Utility Group, with a midpoint cost of equity estimate of 20
10.9 percent. 21
16 Morningstar, “2015 Ibbotson SBBI Market Report,” at Table 10 (2015). 17 The midpoint of the unadjusted ECAPM range was 10.2%.
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 30 of 47

Schedule 2 Page 31 of 47
Q. Did you also apply the ECAPM using forecasted 1
bond yields? 2
A. Yes. As discussed earlier, there is widespread 3
consensus that interest rates will increase materially as 4
the economy continues to strengthen. Accordingly, in 5
addition to the use of current bond yields, I also applied 6
the ECAPM based on the forecasted long-term Treasury bond 7
yields developed based on projections published by Value 8
Line, IHS Global Insight and Blue Chip. As shown on page 9
2 of Schedule 7, incorporating a forecasted Treasury bond 10
yield for 2015-2019 implied a cost of equity of 11
approximately 10.3% for the Utility Group, or 11.4% after 12
adjusting for the impact of relative size. The midpoints 13
of the unadjusted and size adjusted cost of equity ranges 14
were 10.4% and 11.1%, respectively. 15
D. Risk Premium Approach
Q. Please briefly describe the risk premium method. 16
A. The risk premium method of estimating investors’ 17
required rate of return extends to common stocks the risk-18
return tradeoff observed with bonds. The cost of equity 19
is estimated by first determining the additional return 20
investors require to forgo the relative safety of bonds 21
and to bear the greater risks associated with common 22
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 31 of 47
Schedule 2 Page 32 of 47
stock, and by then adding this equity risk premium to the 1
current yield on bonds. Like the DCF model, the risk 2
premium method is capital market oriented. However, 3
unlike DCF models, which indirectly impute the cost of 4
equity, risk premium methods directly estimate investors’ 5
required rate of return by adding an equity risk premium 6
to observable bond yields. 7
Q. Is the risk premium approach a widely accepted 8
method for estimating the cost of equity? 9
A. Yes. The risk premium approach is based on the 10
fundamental risk-return principle that is central to 11
finance, which holds that investors will require a premium 12
in the form of a higher return in order to assume 13
additional risk. This method is routinely referenced by 14
the investment community and in academia and regulatory 15
proceedings, and provides an important tool in estimating 16
a fair ROE for Avista. 17
Q. How did you implement the risk premium method? 18
A. I based my estimates of equity risk premiums for 19
electric utilities on surveys of previously authorized 20
ROEs. Authorized ROEs presumably reflect regulatory 21
commissions’ best estimates of the cost of equity, however 22
determined, at the time they issued their final order. 23
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 32 of 47
Schedule 2 Page 33 of 47
Moreover, allowed ROEs are an important consideration for 1
investors and have the potential to influence other 2
observable investment parameters, including credit ratings 3
and borrowing costs. Thus, this data provides a logical 4
and frequently referenced basis for estimating equity risk 5
premiums for regulated utilities. 6
Q. Is it circular to consider risk premiums based 7
on authorized returns in assessing a fair ROE for Avista? 8
A. No. In establishing authorized ROEs, regulators 9
typically consider the results of alternative market-based 10
approaches, including the DCF model. Because allowed risk 11
premiums consider objective market data (e.g., stock 12
prices, dividends, beta, and interest rates), and are not 13
based strictly on past actions of other regulators, this 14
mitigates concerns over any potential for circularity. 15
Q. How did you implement the risk premium approach 16
using surveys of allowed rates of return? 17
A. The ROEs authorized for electric utilities by 18
regulatory commissions across the U.S. are compiled by 19
Regulatory Research Associates and published in its 20
Regulatory Focus report. On page 3 of Schedule 8, the 21
average yield on public utility bonds is subtracted from 22
the average allowed rate of return on common equity for 23
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 33 of 47
Schedule 2 Page 34 of 47
electric utilities to calculate equity risk premiums for 1
each year between 1974 and 2014. Over this 40-year 2
period, these equity risk premiums for electric utilities 3
averaged 3.57 percent, and the yield on public utility 4
bonds averaged 8.58 percent. 5
Q. Is there any capital market relationship that 6
must be considered when implementing the risk premium 7
method? 8
A. Yes. There is considerable evidence that the 9
magnitude of equity risk premiums is not constant and that 10
equity risk premiums tend to move inversely with interest 11
rates. In other words, when interest rate levels are 12
relatively high, equity risk premiums narrow, and when 13
interest rates are relatively low, equity risk premiums 14
widen. The implication of this inverse relationship is 15
that the cost of equity does not move as much as, or in 16
lockstep with, interest rates. Accordingly, for a 1 17
percent increase or decrease in interest rates, the cost 18
of equity may only rise or fall, say, 50 basis points. 19
Therefore, when implementing the risk premium method, 20
adjustments may be required to incorporate this inverse 21
relationship if current interest rate levels diverge from 22
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 34 of 47
Schedule 2 Page 35 of 47
the average interest rate level represented in the data 1
set. 2
Q. Has this inverse relationship been documented in 3
the financial research? 4
A. Yes. This inverse relationship between equity 5
risk premiums and interest rates has been widely reported 6
in the financial literature.18 For example, New Regulatory 7
Finance documented this inverse relationship: 8
Published studies by Brigham, Shome, and Vinson 9
(1985), Harris (1986), Harris and Marston (1992, 10 1993), Carelton, Chambers, and Lakonishok 11 (1983), Morin (2005), and McShane (2005), and 12
others demonstrate that, beginning in 1980, risk 13 premiums varied inversely with the level of 14
interest rates – rising when rates fell and 15 declining when rates rose.19 16
Other regulators have also recognized that the cost of 17
equity does not move in tandem with interest rates.20 18
Q. What are the implications of this relationship 19
under current capital market conditions? 20
18 See, e.g., Brigham, E.F., Shome, D.K., and Vinson, S.R., “The Risk
Premium Approach to Measuring a Utility’s Cost of Equity,” Financial Management (Spring 1985); Harris, R.S., and Marston, F.C., “Estimating Shareholder Risk Premia Using Analysts’ Growth Forecasts,” Financial
Management (Summer 1992). 19 Morin, Roger A., “New Regulatory Finance,” Public Utilities Reports, at 128 (2006). 20 See, e.g., California Public Utilities Commission, Decision 08-05-035 (May 29, 2008); Entergy Mississippi Formula Rate Plan FRP-5, http://www.entergy-mississippi.com/content/price/tariffs/emi_frp.pdf;
Martha Coakley et al., 147 FERC ¶ 61,234 at P 147 (2014).
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 35 of 47

Schedule 2 Page 36 of 47
A. As noted earlier, bond yields are at 1
unprecedented lows. Given that equity risk premiums move 2
inversely with interest rates, these uncharacteristically 3
low bond yields also imply a sharp increase in the equity 4
risk premium that investors require to accept the higher 5
uncertainties associated with an investment in utility 6
common stocks versus bonds. In other words, higher 7
required equity risk premiums offset the impact of 8
declining interest rates on the ROE. 9
Q. What cost of equity is implied by the risk 10
premium method using surveys of allowed ROEs? 11
A. Because risk premiums move inversely with 12
interest rates and current bond yields are significantly 13
lower than the average over the study period, it is 14
necessary to adjust the average equity risk premium over 15
the study period to reflect the impact of changes in bond 16
yields. Based on the regression output between the 17
interest rates and equity risk premiums displayed on page 18
4 of Schedule 8, the equity risk premium for electric 19
utilities increased approximately 43 basis points for each 20
percentage point drop in the yield on average public 21
utility bonds. As illustrated on page 1 of Schedule 8, 22
with the yield on average public utility bonds for the six 23
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 36 of 47
Schedule 2 Page 37 of 47
months ending April 2015 being 4.03 percent, this implied 1
a current equity risk premium of 5.51 percent for electric 2
utilities. Adding this equity risk premium to the yield 3
on triple-B utility bonds of 4.55 percent produces a 4
current cost of equity of approximately 10.1 percent. 5
Q. What cost of equity was produced by the risk 6
premium approach after incorporating forecasted bond 7
yields? 8
A. As shown on page 2 of Schedule 8, incorporating 9
a forecasted yield for 2015-2019 and adjusting for changes 10
in interest rates since the study period implied an equity 11
risk premium of 4.56 percent for electric utilities. 12
Adding this equity risk premium to the average implied 13
yield on triple-B public utility bonds for 2015-2019 of 14
6.77 percent resulted in an implied cost of equity of 15
approximately 11.3 percent. 16
II. OTHER ROE BENCHMARKS
Q. What is the purpose of this section? 17
A. This section presents alternative tests to 18
demonstrate that the end-results of the ROE analyses 19
discussed earlier are reasonable and do not exceed a fair 20
ROE. The first test is based on applications of the 21
traditional CAPM analysis using current and projected 22
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 37 of 47
Schedule 2 Page 38 of 47
interest rates. The second test is based on expected 1
earned returns for electric utilities. Finally, I present 2
a DCF analysis for a low risk group of non-utility firms, 3
with which Avista must compete for investors’ money. 4
A. Capital Asset Pricing Model
Q. What cost of equity estimates were indicated by 5
the traditional CAPM? 6
A. My applications of the traditional CAPM were 7
based on the same forward-looking market rate of return, 8
risk-free rates, and beta values discussed earlier in 9
connections with the ECAPM. As shown on page 1 of 10
Schedule 9, applying the forward-looking CAPM approach to 11
the firms in the Utility Group results in an average 12
theoretical cost of equity estimate of 9.5 percent, or 13
10.6 percent after incorporating the size adjustment 14
corresponding to the market capitalization of the 15
individual utilities. 16
As shown on page 2 of Schedule 9, incorporating a 17
forecasted Treasury bond yield for 2015-2019 implied a 18
cost of equity of approximately 9.9 percent for the 19
Utility Group, or 11.0 percent after adjusting for the 20
impact of relative size. 21
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 38 of 47
Schedule 2 Page 39 of 47
B. Expected Earnings Approach
Q. What other analyses did you conduct to estimate 1
the cost of common equity? 2
A. As noted earlier, I also evaluated the cost of 3
common equity using the expected earnings method. 4
Reference to rates of return available from alternative 5
investments of comparable risk can provide an important 6
benchmark in assessing the return necessary to assure 7
confidence in the financial integrity of a firm and its 8
ability to attract capital. This expected earnings 9
approach is consistent with the economic underpinnings for 10
a fair rate of return established by the U.S. Supreme 11
Court in Bluefield and Hope. Moreover, it avoids the 12
complexities and limitations of capital market methods and 13
instead focuses on the returns earned on book equity, 14
which are readily available to investors. 15
Q. What economic premise underlies the expected 16
earnings approach? 17
A. The simple, but powerful concept underlying the 18
expected earnings approach is that investors compare each 19
investment alternative with the next best opportunity. If 20
the utility is unable to offer a return similar to that 21
available from other opportunities of comparable risk, 22
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 39 of 47
Schedule 2 Page 40 of 47
investors will become unwilling to supply the capital on 1
reasonable terms. For existing investors, denying the 2
utility an opportunity to earn what is available from 3
other similar risk alternatives prevents them from earning 4
their opportunity cost of capital. In this situation the 5
government is effectively taking the value of investors’ 6
capital without adequate compensation. The expected 7
earnings approach is consistent with the economic 8
rationale underpinning established regulatory standards, 9
which specifies a methodology to determine an ROE 10
benchmark based on earned rates of return for a peer group 11
of other utilities. 12
Q. How is the expected earnings approach typically 13
implemented? 14
A. The traditional comparable earnings test 15
identifies a group of companies that are believed to be 16
comparable in risk to the utility. The actual earnings of 17
those companies on the book value of their investment are 18
then compared to the allowed return of the utility. While 19
the traditional comparable earnings test is implemented 20
using historical data taken from the accounting records, 21
it is also common to use projections of returns on book 22
investment, such as those published by recognized 23
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 40 of 47
Schedule 2 Page 41 of 47
investment advisory publications (e.g., Value Line). 1
Because these returns on book value equity are analogous 2
to the allowed return on a utility’s rate base, this 3
measure of opportunity costs results in a direct, “apples 4
to apples” comparison. 5
Moreover, regulators do not set the returns that 6
investors earn in the capital markets, which are a 7
function of dividend payments and fluctuations in common 8
stock prices- both of which are outside their control. 9
Regulators can only establish the allowed ROE, which is 10
applied to the book value of a utility’s investment in 11
rate base, as determined from its accounting records. 12
This is directly analogous to the expected earnings 13
approach, which measures the return that investors expect 14
the utility to earn on book value. As a result, the 15
expected earnings approach provides a meaningful guide to 16
ensure that the allowed ROE is similar to what other 17
utilities of comparable risk will earn on invested 18
capital. This expected earnings test does not require 19
theoretical models to indirectly infer investors’ 20
perceptions from stock prices or other market data. As 21
long as the proxy companies are similar in risk, their 22
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 41 of 47
Schedule 2 Page 42 of 47
expected earned returns on invested capital provide a 1
direct benchmark for investors’ opportunity costs that is 2
independent of fluctuating stock prices, market-to-book 3
ratios, debates over DCF growth rates, or the limitations 4
inherent in any theoretical model of investor behavior. 5
Q. What rates of return on equity are indicated for 6
utilities based on the expected earnings approach? 7
A. Value Line’s projections imply an average rate 8
of return on common equity for the electric utility 9
industry of 10.6 percent over its 2017-2019 forecast 10
horizon.21 Meanwhile, for the firms in the Utility Group 11
specifically, the year-end returns on common equity 12
projected by Value Line over its forecast horizon are 13
shown on Schedule 10. Consistent with the rationale 14
underlying the development of the br+sv growth rates, 15
these year-end values were converted to average returns 16
using the same adjustment factor discussed earlier and 17
developed on Schedule 6. As shown on Schedule 10, Value 18
Line’s projections for the Utility Group suggest an 19
average ROE of approximately 10.3 percent, with a midpoint 20
value of 10.8 percent. 21
21 The Value Line Investment Survey (Feb. 20, Mar. 20, & May 1, 2015). Recall that Value Line reports return on year-end equity so the
equivalent return on average equity would be higher.
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 42 of 47

Schedule 2 Page 43 of 47
C. Low Risk Non-Utility DCF
Q. What other proxy group did you consider in 1
evaluating a fair ROE for Avista? 2
A. Consistent with underlying economic and 3
regulatory standards, I also applied the DCF model to a 4
reference group of low-risk companies in the non-utility 5
sectors of the economy. I refer to this group as the 6
“Non-Utility Group”. 7
Q. Do utilities have to compete with non-regulated 8
firms for capital? 9
A. Yes. The cost of capital is an opportunity cost 10
based on the returns that investors could realize by 11
putting their money in other alternatives. Clearly, the 12
total capital invested in utility stocks is only the tip 13
of the iceberg of total common stock investment, and there 14
are a plethora of other enterprises available to investors 15
beyond those in the utility industry. Utilities must 16
compete for capital, not just against firms in their own 17
industry, but with other investment opportunities of 18
comparable risk. Indeed, modern portfolio theory is built 19
on the assumption that rational investors will hold a 20
diverse portfolio of stocks, not just companies in a 21
single industry. 22
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 43 of 47
Schedule 2 Page 44 of 47
Q. Does consideration of the results for the Non-1
Utility Group make the estimation of the cost of equity 2
using the DCF model more reliable? 3
A. Yes. The estimates of growth from the DCF model 4
depend on analysts’ forecasts. It is possible for utility 5
growth rates to be distorted by short-term trends in the 6
industry, or by the industry falling into favor or 7
disfavor by analysts. The result of such distortions 8
would be to bias the DCF estimates for utilities. Because 9
the Non-Utility Group includes low risk companies from 10
many industries, it diversifies away any distortion that 11
may be caused by the ebb and flow of enthusiasm for a 12
particular sector. 13
Q. What criteria did you apply to develop the Non-14
Utility Group? 15
A. The comparable risk proxy group was composed of 16
those U.S. companies followed by Value Line that: 17
1) pay common dividends; 18
2) have a Safety Rank of “1”; 19
3) have a Financial Strength Rating of “B++” or 20
greater; 21
4) have a beta of 0.70 or less; and 22
5) have investment grade credit ratings from 23
S&P. 24
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 44 of 47
Schedule 2 Page 45 of 47
Q. How do the overall risks of this Non-Utility 1
Group compare with the Utility Group and Avista? 2
A. As illustrated in Table 5 to my testimony, the 3
average credit ratings, Safety Rank, Financial Strength 4
Rating, and beta for the Non-Utility Group suggest less 5
risk than for Avista and the proxy group of utilities. 6
When considered together, a comparison of these objective 7
measures, which consider a broad spectrum of risks, 8
including financial and business position, relative size, 9
and exposure to company-specific factors, indicates that 10
investors would likely conclude that the overall 11
investment risks for the Utility Group and Avista are 12
greater than those of the firms in the Non-Utility Group. 13
The thirteen companies that make up the Non-Utility 14
Group are representative of the pinnacle of corporate 15
America. These firms, which include household names such 16
as Colgate-Palmolive, McDonalds, and Wal-Mart, have long 17
corporate histories, well-established track records, and 18
exceedingly conservative risk profiles. Many of these 19
companies pay dividends on a par with utilities, with the 20
average dividend yield for the group approaching 21
3 percent. Moreover, because of their significance and 22
name recognition, these companies receive intense scrutiny 23
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 45 of 47
Schedule 2 Page 46 of 47
by the investment community, which increases confidence 1
that published growth estimates are representative of the 2
consensus expectations reflected in common stock prices. 3
Q. What were the results of your DCF analysis for 4
the Non-Utility Group? 5
A. I applied the DCF model to the Non-Utility Group 6
using the same analysts EPS growth projections described 7
earlier for the Utility Group, with the results being 8
presented in Schedule 11. As summarized in Table 4, 9
below, application of the constant growth DCF model 10
resulted in the following cost of equity estimates: 11
TABLE 4 DCF RESULTS – NON-UTILITY GROUP

As discussed earlier, reference to the Non-Utility Group 12
is consistent with established regulatory principles. 13
Required returns for utilities should be in line with 14
those of non-utility firms of comparable risk operating 15
under the constraints of free competition. Considering 16
the lower risk associated with the Non-Utility Group, 17
Growth Rate Average Midpoint
Value Line 10.1%10.3%
IBES 9.4%9.2%
Zacks 9.8%10.1%
Cost of Equity
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 46 of 47
Schedule 2 Page 47 of 47
these DCF results suggests that the 9.9 percent requested 1
ROE for Avista’s utility operations is a conservative 2
estimate of a fair return. 3
Q. Please summarize the results of your alternative 4
ROE benchmarks. 5
A. The cost of common equity estimates produced by 6
the various tests of reasonableness discussed above are 7
shown on page 2 of Schedule 3, and summarized in Table 5, 8
below: 9
TABLE 5 10 SUMMARY OF ALTERNATIVE ROE BENCHMARKS 11

Average Midpoint
CAPM - Historical Bond Yield
Unadjusted 9.5%9.7%
Size Adjusted 10.6%10.4%
CAPM - Projected Bond Yield
Unadjusted 9.9%10.1%
Size Adjusted 11.0%10.8%
Expected Earnings
Industry
Proxy Group 10.3%10.8%
Non-Utility DCF
Value Line 10.1%10.3%
IBES 9.4%9.2%
Zacks 9.8%10.1%
10.6%
Exhibit No. 3
Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 2, Page 47 of 47
ROE ANALYSES Schedule 3
Page 1 of 2
SUMMARY OF RESULTS
DCF Average Midpoint
Value Line 9.9% 10.6%
IBES 9.2% 8.9%
Zacks 8.9% 9.2%
Internal br + sv 8.4% 9.6%
Empirical CAPM ‐ Historical Bond Yield
Unadjusted 10.0% 10.2%
Size Adjusted 11.1% 10.9%
Empirical CAPM ‐ Projected Bond Yield
Unadjusted 10.3% 10.4%
Size Adjusted 11.4% 11.1%
Utility Risk Premium
Historical Bond Yields
Projected Bond Yields
Cost of Equity Recommendation
Cost of Equity Range 9.4%‐‐10.8%
Flotation Cost Adjustment
Dividend Yield
Flotation Cost Percentage
Adjustment
ROE Recommendation 9.5%‐‐10.9%
0.10%
10.1%
3.6%
11.3%
3.6%
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 3, Page 1 of 2
ROE ANALYSES Schedule 3
Page 2 of 2
CHECKS OF REASONABLENESS
Average Midpoint
CAPM ‐ Historical Bond Yield
Unadjusted 9.5% 9.7%
Size Adjusted 10.6% 10.4%
CAPM ‐ Projected Bond Yield
Unadjusted 9.9% 10.1%
Size Adjusted 11.0% 10.8%
Expected Earnings
Industry
Proxy Group 10.3% 10.8%
Non‐Utility DCF
Value Line 10.1% 10.3%
IBES 9.4% 9.2%
Zacks 9.8% 10.1%
10.6%
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 3, Page 2 of 2
CAPITAL STRUCTURE Schedule 4
Page 1 of 1
UTILITY GROUP
Common Common
Company Debt Preferred Equity Debt Other Equity
1 ALLETE 46.0% 0.0% 54.0% 42.0% 0.0% 58.0%
2 Ameren Corp.47.7% 1.1% 51.3% 45.0% 1.0% 54.0%
3 American Elec Pw 49.9% 0.0% 50.1% 48.5% 0.0% 51.5%
4 Avista Corp.50.3% 0.0% 49.7% 52.5% 0.0% 47.5%
5 Black Hills Corp.52.9% 0.0% 47.1% 48.0% 0.0% 52.0%
6 CenterPoint Energy 55.2% 0.0% 44.8% 58.0% 0.0% 42.0%
7 CMS Energy Corp.69.8% 0.0% 30.2% 65.5% 0.0% 34.5%
8 DTE Energy Co.50.8% 0.0% 49.2% 51.0% 0.0% 49.0%
9 Edison Internationa 45.3% 8.5% 46.2% 43.5% 7.5% 49.0%
10 El Paso Electri 53.9% 0.0% 46.1% 56.5% 0.0% 43.5%
11 Empire District Ele 50.6% 0.0% 49.4% 50.0% 0.0% 50.0%
12 Great Plains Energy 49.1% 0.5% 50.3% 45.5% 0.5% 54.0%
13 IDACORP, Inc.45.2% 0.0% 54.8% 45.0% 0.0% 55.0%
14 NorthWestern Corp.53.0% 0.0% 47.0% 48.5% 0.0% 51.5%
15 Otter Tail Corp.46.5% 0.0% 53.5% 48.0% 0.0% 52.0%
16 PG&E Corp.48.5% 0.8% 50.7% 48.5% 0.5% 51.0%
17 Portland General Elec. 56.7% 0.0% 43.3% 48.5% 0.0% 51.5%
18 Sempra Energy 51.1% 0.1% 48.8% 52.5% 0.0% 47.5%
19 Westar Energy 49.3% 0.0% 50.7% 50.0% 0.0% 50.0%
Average 51.1% 0.6% 48.3% 49.8% 0.5% 49.7%
(a) Company Form 10‐K and Annual Reports.
(b) The Value Line Investment Survey (Feb. 20, Mar. 20, & May 1, 2015).
Value Line Projected (b)At Fiscal Year‐End 2014  (a)
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 4, Page 1 of 1
DCF MODEL ‐ UTILITY GROUP Schedule 5
Page 1 of 3
DIVIDEND YIELD
(a)(b)
Company Price Dividends Yield
1  ALLETE 51.82$  2.04$  3.9%
2  Ameren Corp.41.80$  1.66$  4.0%
3  American Elec Pwr 56.60$  2.18$  3.9%
4  Avista Corp.33.59$  1.33$  4.0%
5  Black Hills Corp.50.89$  1.64$  3.2%
6  CenterPoint Energy 20.83$  1.00$  4.8%
7  CMS Energy Corp.34.84$  1.18$  3.4%
8  DTE Energy Co.81.28$  2.87$  3.5%
9  Edison International 62.37$  1.76$  2.8%
10  El Paso Electric 38.11$  1.18$  3.1%
11  Empire District Elec 24.63$  1.05$  4.3%
12  Great Plains Energy 26.67$  1.01$  3.8%
13  IDACORP, Inc.62.21$  1.88$  3.0%
14  NorthWestern Corp.53.24$  1.94$  3.6%
15  Otter Tail Corp.31.79$  1.23$  3.9%
16  PG&E Corp.52.87$  1.82$  3.4%
17  Portland General Elec.36.58$  1.18$  3.2%
18  Sempra Energy 108.71$2.84$  2.6%
19  Westar Energy 38.38$  1.44$  3.8%
     Average 3.6%
(a)Average of closing prices for 30 trading days ended May 1, 2015.
(b)The Value Line Investment Survey, Summary & Index (May 1, 2015).
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 5, Page 1 of 3
DCF MODEL ‐ UTILITY GROUP Schedule 5
Page 2 of 3
GROWTH RATES
(a)(b)(c) (d)
br+sv
Company V Line IBES Zacks Growth
1  ALLETE 7.0% 6.0% NA 4.1%
2  Ameren Corp.5.0% 6.9% 7.4% 4.3%
3  American Elec Pwr 5.5% 5.2% 5.0% 4.6%
4  Avista Corp.7.0% 5.0% NA 3.7%
5  Black Hills Corp.4.5% 7.0% NA 4.0%
6  CenterPoint Energy 1.5% 1.6% 5.0% 3.5%
7  CMS Energy Corp.5.5% 6.7% 6.2% 5.0%
8  DTE Energy Co.6.0% 4.5% 5.1% 4.4%
9  Edison International 3.0% 0.7% 4.2% 5.9%
10  El Paso Electric 3.5% 7.0% 6.7% 4.8%
11  Empire District Elec 3.0% 5.0% 5.0% 3.2%
12  Great Plains Energy 5.0% 5.9% 5.4% 3.0%
13  IDACORP, Inc.1.0% 4.0% 4.0% 3.6%
14  NorthWestern Corp.6.5% 4.5% 4.5% 4.0%
15  Otter Tail Corp.10.0% 6.0% NA 8.1%
16  PG&E Corp.8.5% 4.7% 5.3% 4.5%
17  Portland General Elec.6.0% 4.7% 5.2% 4.5%
18  Sempra Energy 8.5% 7.9% 8.5% 6.7%
19  Westar Energy 6.0% 3.1% 3.6% 5.3%
(a)The Value Line Investment Survey (Feb. 20, Mar. 20, & May 1, 2015).
(b)
(c)
(d)See Schedule 6.
Earnings Growth
www.finance.yahoo.com (retrieved May 5, 2015).
www.zacks.com (retrieved May 14, 2015).
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 5, Page 2 of 3
DCF MODEL ‐ UTILITY GROUP Schedule 5
Page 3 of 3
DCF COST OF EQUITY ESTIMATES
(a) (a) (a) (a)
br+sv
Company V Line IBES Zacks Growth
1  ALLETE 10.9% 9.9%   NA 8.1%
2  Ameren Corp.9.0% 10.8% 11.3% 8.3%
3  American Elec Pwr 9.4% 9.0% 8.8% 8.5%
4  Avista Corp.11.0% 9.0%   NA 7.6%
5  Black Hills Corp.7.7% 10.2%   NA 7.3%
6  CenterPoint Energy 6.3% 6.4% 9.8% 8.3%
7  CMS Energy Corp.8.9% 10.1% 9.6% 8.4%
8  DTE Energy Co.9.5% 8.0% 8.6% 8.0%
9  Edison International 5.8% 3.5% 7.0% 8.7%
10  El Paso Electric 6.6% 10.1% 9.8% 7.9%
11  Empire District Elec 7.3% 9.3% 9.3% 7.5%
12  Great Plains Energy 8.8% 9.7% 9.2% 6.8%
13  IDACORP, Inc.4.0% 7.0% 7.0% 6.6%
14  NorthWestern Corp.10.1% 8.1% 8.1% 7.6%
15  Otter Tail Corp.13.9% 9.9%   NA 12.0%
16  PG&E Corp.11.9% 8.2% 8.7% 7.9%
17  Portland General Elec.9.2% 7.9% 8.4% 7.7%
18  Sempra Energy 11.1% 10.5% 11.1% 9.3%
19  Westar Energy 9.8% 6.8% 7.3% 9.1%
Average  (b)9.9% 9.2% 8.9% 8.4%
Midpoint (c)10.6% 8.9% 9.2% 9.6%
(a)
(b)Excludes highlighted values.
(c) Average of low and high values.
Earnings Growth
Sum of dividend yield (Schedule 5, p. 1) and respective growth rate (Schedule 5, p. 2).
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 5, Page 3 of 3
DCF MODEL ‐ UTILITY GROUP Schedule 6
Page 1 of 2
BR+SV GROWTH RATE
(a) (a) (a)(b) (c)(d) (e)
Adjustment ‐‐‐‐‐‐‐‐‐  ʺsvʺ Factor  ‐‐‐‐‐‐‐‐
Company                    EPS DPS BVPS   b     r   Factor Adjusted r   br     s     v     sv   br + sv
1  ALLETE $4.00 $2.40 $42.25 40.0% 9.5% 1.0240 9.7% 3.9% 0.0138  0.1952  0.27%4.1%
2  Ameren Corp.$3.25 $1.85 $34.00 43.1% 9.6% 1.0238 9.8% 4.2% 0.0070  0.1500  0.11%4.3%
3  American Elec Pwr $4.50 $2.65 $42.25 41.1% 10.7% 1.0198 10.9% 4.5% 0.0055  0.2652  0.15%4.6%
4  Avista Corp.$2.50 $1.55 $27.50 38.0% 9.1% 1.0170 9.2% 3.5% 0.0071  0.2143  0.15%3.7%
5  Black Hills Corp. $3.25 $1.90 $36.50 41.5% 8.9% 1.0205 9.1% 3.8% 0.0085  0.3048  0.26%4.0%
6  CenterPoint Energy $1.45 $1.15 $12.00 20.7% 12.1% 1.0182 12.3% 2.5% 0.0190  0.5200  0.99%3.5%
7  CMS Energy Corp. $2.25 $1.50 $17.75 33.3% 12.7% 1.0329 13.1% 4.4% 0.0138  0.4929  0.68%5.0%
8  DTE Energy Co. $5.75 $3.50 $59.00 39.1% 9.7% 1.0310 10.0% 3.9% 0.0215  0.2387  0.51%4.4%
9  Edison International $5.00 $2.45 $44.25 51.0% 11.3% 1.0274 11.6% 5.9%‐        0.3679  0.00%5.9%
10  El Paso Electric $2.75 $1.40 $29.50 49.1% 9.3% 1.0212 9.5% 4.7% 0.0049  0.2625  0.13%4.8%
11  Empire District Elec $1.75 $1.20 $20.25 31.4% 8.6% 1.0205 8.8% 2.8% 0.0220  0.1900  0.42%3.2%
12  Great Plains Energy $2.00 $1.20 $26.75 40.0% 7.5% 1.0149 7.6% 3.0% 0.0017  0.0273  0.00%3.0%
13  IDACORP, Inc.$3.90 $2.25 $47.05 42.3% 8.3% 1.0199 8.5% 3.6% 0.0002  0.2472  0.00%3.6%
14  NorthWestern Corp. $3.75 $2.25 $38.50 40.0% 9.7% 1.0200 9.9% 4.0% 0.0005  0.2667  0.01%4.0%
15  Otter Tail Corp. $2.35 $1.32 $18.10 43.8% 13.0% 1.0281 13.3% 5.9% 0.0473  0.4829  2.28%8.1%
16  PG&E Corp.$3.75 $2.10 $40.75 44.0% 9.2% 1.0301 9.5% 4.2% 0.0208  0.1421  0.30%4.5%
17  Portland General Elec. $2.75 $1.55 $30.50 43.6% 9.0% 1.0357 9.3% 4.1% 0.0313  0.1286  0.40%4.5%
18  Sempra Energy $7.25 $3.60 $58.75 50.3% 12.3% 1.0268 12.7% 6.4% 0.0073  0.4268  0.31%6.7%
19  Westar Energy $3.00 $1.65 $29.25 45.0% 10.3% 1.0128 10.4% 4.7% 0.0189  0.3500  0.66%5.3%
  ‐‐‐‐‐‐‐‐‐‐‐‐  2019  ‐‐‐‐‐‐‐‐‐‐‐‐
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 6, Page 1 of 2
DCF MODEL ‐ UTILITY GROUP Schedule 6
Page 2 of 2
BR+SV GROWTH RATE
(a) (a) (f) (a) (a) (f) (g) (a) (a)(h) (a) (a) (g)
 ‐‐‐‐‐‐‐‐‐‐‐‐‐‐  2014  ‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 2019  ‐‐‐‐‐‐‐‐‐‐‐Chg ‐‐‐‐  Common Shares  ‐‐‐‐
Company                    Eq Ratio Tot Cap Com Eq Eq Ratio Tot Cap Com Eq Equity High Low Avg.M/B 2014 2019 Growth
1  ALLETE 55.8% $2,882 $1,608 58.0% $3,525 $2,045 4.9% $60.00 $45.00 $52.50 1.243 45.90 48.50 1.11%
2  Ameren Corp.51.5% $12,975 $6,682 54.0% $15,700 $8,478 4.9% $45.00 $35.00 $40.00 1.176 242.65 250.00 0.60%
3  American Elec Pwr 51.0% $34,050 $17,366 51.5% $41,100 $21,167 4.0% $70.00 $45.00 $57.50 1.361 490.00 500.00 0.40%
4  Avista Corp.49.0% $3,027 $1,483 47.5% $3,700 $1,758 3.4% $40.00 $30.00 $35.00 1.273 62.24 64.00 0.56%
5  Black Hills Corp. 52.1% $2,644 $1,377 52.0% $3,250 $1,690 4.2% $60.00 $45.00 $52.50 1.438 44.67 46.00 0.59%
6  CenterPoint Energy 36.0% $12,550 $4,518 42.0% $12,900 $5,418 3.7% $30.00 $20.00 $25.00 2.083 430.00 450.00 0.91%
7  CMS Energy Corp. 31.0% $11,846 $3,672 34.5% $14,800 $5,106 6.8% $40.00 $30.00 $35.00 1.972 275.20 285.00 0.70%
8  DTE Energy Co. 50.0% $16,675 $8,338 49.0% $23,200 $11,368 6.4% $90.00 $65.00 $77.50 1.314 177.00 192.00 1.64%
9  Edison International 47.2% $23,216 $10,958 49.0% $29,400 $14,406 5.6% $80.00 $60.00 $70.00 1.582 325.81 325.81 0.00%
10  El Paso Electric 46.5% $2,118 $985 43.5% $2,800 $1,218 4.3% $45.00 $35.00 $40.00 1.356 40.36 41.10 0.36%
11  Empire District Elec 49.4% $1,587 $784 50.0% $1,925 $963 4.2% $30.00 $20.00 $25.00 1.235 43.48 47.50 1.78%
12  Great Plains Energy 50.5% $7,115 $3,593 54.0% $7,725 $4,172 3.0% $35.00 $20.00 $27.50 1.028 154.20 155.50 0.17%
13  IDACORP, Inc.54.7% $3,568 $1,951 55.0% $4,330 $2,382 4.1% $70.00 $55.00 $62.50 1.328 50.27 50.30 0.01%
14  NorthWestern Corp. 46.6% $3,168 $1,476 51.5% $3,500 $1,803 4.1% $65.00 $40.00 $52.50 1.364 46.91 47.00 0.04%
15  Otter Tail Corp. 53.5% $1,071 $573 52.0% $1,460 $759 5.8% $40.00 $30.00 $35.00 1.934 37.22 42.00 2.45%
16  PG&E Corp.50.7% $31,050 $15,742 51.0% $41,700 $21,267 6.2% $55.00 $40.00 $47.50 1.166 475.91 520.00 1.79%
17  Portland General Elec. 47.3% $4,037 $1,910 51.5% $5,300 $2,730 7.4% $40.00 $30.00 $35.00 1.148 78.23 89.50 2.73%
18  Sempra Energy 48.2% $23,513 $11,333 47.5% $31,200 $14,820 5.5% $120.00 $85.00 $102.50 1.745 246.33 251.50 0.42%
19  Westar Energy 50.0% $6,596 $3,298 50.0% $7,500 $3,750 2.6% $50.00 $40.00 $45.00 1.538 131.69 140.00 1.23%
(a) The Value Line Investment Survey (Feb. 20, Mar. 20, & May 1, 2015).
(b) Computed using the formula 2*(1+5‐Yr. Change in Equity)/(2+5 Yr. Change in Equity).
(c) Product of average year‐end ʺrʺ for 2019 and Adjustment Factor.
(d) Product of change in common shares outstanding and M/B Ratio.
(e) Computed as 1 ‐ B/M Ratio.
(f)Product of total capital and equity ratio.
(g) Five‐year rate of change.
(h) Average of High and Low expected market prices divided by 2019 BVPS.
 ‐‐‐‐‐‐‐‐ 2019 Price ‐‐‐‐‐‐‐‐
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 6, Page 2 of 2
EMPIRICAL CAPM ‐ CURRENT BOND YIELD Schedule 7
Page 1 of 2
UTILITY GROU
(a) (b)(c)(d)(e) (d)(f)(g)
Size
Di Proj. Cost of Risk‐Free Ris Tota Unadjuste Market Size Adjuste
Company Yield Growth Equity Rate Premium Weight R 1 Beta Weight R RP Ke Cap Adjustment Ke
1  ALLETE 2.3% 9.2% 11.5% 2.7% 8.8% 25% 2.2% 0.80 75% 5.3% 7.5% 10.2% 2,308.8$    1.63% 11.8%
2  Ameren Corp.2.3% 9.2% 11.5% 2.7% 8.8% 25% 2.2% 0.75 75% 5.0% 7.2% 9.9% 9,933.4$    0.94% 10.8%
3  American Elec Pwr 2.3% 9.2% 11.5% 2.7% 8.8% 25% 2.2% 0.70 75% 4.6% 6.8% 9.5% 27,862.3$  ‐0.32% 9.2%
4  Avista Corp.2.3% 9.2% 11.5% 2.7% 8.8% 25% 2.2% 0.80 75% 5.3% 7.5% 10.2% 2,030.4$    1.63% 11.8%
5  Black Hills Corp. 2.3% 9.2% 11.5% 2.7% 8.8% 25% 2.2% 0.95 75% 6.3% 8.5% 11.2% 2,201.8$    1.63% 12.8%
6  CenterPoint Energy 2.3% 9.2% 11.5% 2.7% 8.8% 25% 2.2% 0.80 75% 5.3% 7.5% 10.2% 8,996.1$    0.94% 11.1%
7  CMS Energy Corp. 2.3% 9.2% 11.5% 2.7% 8.8% 25% 2.2% 0.75 75% 5.0% 7.2% 9.9% 9,364.7$    0.94% 10.8%
8  DTE Energy Co. 2.3% 9.2% 11.5% 2.7% 8.8% 25% 2.2% 0.75 75% 5.0% 7.2% 9.9% 14,280.1$  0.65% 10.5%
9  Edison International 2.3% 9.2% 11.5% 2.7% 8.8% 25% 2.2% 0.75 75% 5.0% 7.2% 9.9% 19,854.9$  0.65% 10.5%
10  El Paso Electric 2.3% 9.2% 11.5% 2.7% 8.8% 25% 2.2% 0.70 75% 4.6% 6.8% 9.5% 1,501.7$    1.77% 11.3%
11  Empire District Elec 2.3% 9.2% 11.5% 2.7% 8.8% 25% 2.2% 0.70 75% 4.6% 6.8% 9.5% 1,024.8$    1.77% 11.3%
12  Great Plains Energy 2.3% 9.2% 11.5% 2.7% 8.8% 25% 2.2% 0.85 75% 5.6% 7.8% 10.5% 4,036.0$    1.05% 11.6%
13  IDACORP, Inc.2.3% 9.2% 11.5% 2.7% 8.8% 25% 2.2% 0.80 75% 5.3% 7.5% 10.2% 3,032.7$    1.65% 11.8%
14  NorthWestern Corp. 2.3% 9.2% 11.5% 2.7% 8.8% 25% 2.2% 0.70 75% 4.6% 6.8% 9.5% 2,450.2$    1.63% 11.2%
15  Otter Tail Corp. 2.3% 9.2% 11.5% 2.7% 8.8% 25% 2.2% 0.90 75% 5.9% 8.1% 10.8% 1,113.2$    1.77% 12.6%
16  PG&E Corp.2.3% 9.2% 11.5% 2.7% 8.8% 25% 2.2% 0.65 75% 4.3% 6.5% 9.2% 25,185.3$  ‐0.32% 8.9%
17  Portland General Elec. 2.3% 9.2% 11.5% 2.7% 8.8% 25% 2.2% 0.80 75% 5.3% 7.5% 10.2% 2,754.6$    1.65% 11.8%
18  Sempra Energy 2.3% 9.2% 11.5% 2.7% 8.8% 25% 2.2% 0.80 75% 5.3% 7.5% 10.2% 26,152.9$  ‐0.32% 9.9%
19  Westar Energy 2.3% 9.2% 11.5% 2.7% 8.8% 25% 2.2% 0.75 75% 5.0% 7.2% 9.9% 4,958.0$    1.05% 10.9%
Average 10.0%11.1%
Midpoint (h)10.2%10.9%
(a)Weighted average for dividend‐paying stocks in the S&P 500 based on data from www.valueline.com (retrieved Mar. 10, 201
(b)
(c) Average yield on 30‐year Treasury bonds for the six‐months ending Apr. 2015 based on data from the Federal Reserve at http://www.federalreserve.gov/releases/h15/data.ht
(d) Morin, Roger A., ʺNew Regulatory Finance,ʺPublic Utilities Reports, Inc at 190 (2006).
(e) The Value Line Investment Survey (Feb. 20, Mar. 20, & May 1, 2015)
(f)www.valueline.com (retrieved May 5, 2015
(g)Morningstar, ʺ2015 Ibbotson SBBI Market Report,ʺ at Table 10 (2015). 
(h)Average of low and high value
Average of weighted average earnings growth rates from IBES and Value Line Investment Survey for dividend‐paying stocks in the S&P 500 based on data from http://finance.yahoo.c
(retrieved Mar. 11, 2015). and www.valueline.com (retrieved Mar. 10, 2015).
Market Return (Rm)Market
Beta Adjusted RPUnadjusted RP
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 7, Page 1 of 2
EMPIRICAL CAPM ‐ PROJECTED BOND YIEL Schedule 7
Page 2 of 2
UTILITY GROU
(a) (b)(c)(d)(e) (d)(f)(g)
Size
Di Proj. Cost of Risk‐Free Ris Tota Unadjuste Market Size Adjuste
Company Yield Growth Equity Rate Premium Weight R 1 Beta Weight R RP Ke Cap Adjustment Ke
1  ALLETE 2.3% 9.2% 11.5% 4.3% 7.2% 25% 1.8% 0.80 75% 4.3% 6.1% 10.4% 2,308.8$    1.63% 12.1%
2  Ameren Corp.2.3% 9.2% 11.5% 4.3% 7.2% 25% 1.8% 0.75 75% 4.1% 5.9% 10.2% 9,933.4$    0.94% 11.1%
3  American Elec Pwr 2.3% 9.2% 11.5% 4.3% 7.2% 25% 1.8% 0.70 75% 3.8% 5.6% 9.9% 27,862.3$  ‐0.32% 9.6%
4  Avista Corp.2.3% 9.2% 11.5% 4.3% 7.2% 25% 1.8% 0.80 75% 4.3% 6.1% 10.4% 2,030.4$    1.63% 12.1%
5  Black Hills Corp. 2.3% 9.2% 11.5% 4.3% 7.2% 25% 1.8% 0.95 75% 5.1% 6.9% 11.2% 2,201.8$    1.63% 12.9%
6  CenterPoint Energy 2.3% 9.2% 11.5% 4.3% 7.2% 25% 1.8% 0.80 75% 4.3% 6.1% 10.4% 8,996.1$    0.94% 11.4%
7  CMS Energy Corp. 2.3% 9.2% 11.5% 4.3% 7.2% 25% 1.8% 0.75 75% 4.1% 5.9% 10.2% 9,364.7$    0.94% 11.1%
8  DTE Energy Co. 2.3% 9.2% 11.5% 4.3% 7.2% 25% 1.8% 0.75 75% 4.1% 5.9% 10.2% 14,280.1$  0.65% 10.8%
9  Edison International 2.3% 9.2% 11.5% 4.3% 7.2% 25% 1.8% 0.75 75% 4.1% 5.9% 10.2% 19,854.9$  0.65% 10.8%
10  El Paso Electric 2.3% 9.2% 11.5% 4.3% 7.2% 25% 1.8% 0.70 75% 3.8% 5.6% 9.9% 1,501.7$    1.77% 11.7%
11  Empire District Elec 2.3% 9.2% 11.5% 4.3% 7.2% 25% 1.8% 0.70 75% 3.8% 5.6% 9.9% 1,024.8$    1.77% 11.7%
12  Great Plains Energy 2.3% 9.2% 11.5% 4.3% 7.2% 25% 1.8% 0.85 75% 4.6% 6.4% 10.7% 4,036.0$    1.05% 11.7%
13  IDACORP, Inc.2.3% 9.2% 11.5% 4.3% 7.2% 25% 1.8% 0.80 75% 4.3% 6.1% 10.4% 3,032.7$    1.65% 12.1%
14  NorthWestern Corp. 2.3% 9.2% 11.5% 4.3% 7.2% 25% 1.8% 0.70 75% 3.8% 5.6% 9.9% 2,450.2$    1.63% 11.5%
15  Otter Tail Corp. 2.3% 9.2% 11.5% 4.3% 7.2% 25% 1.8% 0.90 75% 4.9% 6.7% 11.0% 1,113.2$    1.77% 12.7%
16  PG&E Corp.2.3% 9.2% 11.5% 4.3% 7.2% 25% 1.8% 0.65 75% 3.5% 5.3% 9.6% 25,185.3$  ‐0.32% 9.3%
17  Portland General Elec. 2.3% 9.2% 11.5% 4.3% 7.2% 25% 1.8% 0.80 75% 4.3% 6.1% 10.4% 2,754.6$    1.65% 12.1%
18  Sempra Energy 2.3% 9.2% 11.5% 4.3% 7.2% 25% 1.8% 0.80 75% 4.3% 6.1% 10.4% 26,152.9$  ‐0.32% 10.1%
19  Westar Energy 2.3% 9.2% 11.5% 4.3% 7.2% 25% 1.8% 0.75 75% 4.1% 5.9% 10.2% 4,958.0$    1.05% 11.2%
Average 10.3%11.4%
Midpoint (h)10.4%11.1%
(a)Weighted average for dividend‐paying stocks in the S&P 500 based on data from www.valueline.com (retrieved Mar. 10, 201
(b)
(c)
(d) Morin, Roger A., ʺNew Regulatory Finance,ʺPublic Utilities Reports, Inc at 190 (2006).
(e) The Value Line Investment Survey (Feb. 20, Mar. 20, & May 1, 2015)
(f)www.valueline.com (retrieved May 5, 2015
(g)Morningstar, ʺ2015 Ibbotson SBBI Market Report,ʺ at Table 10 (2015). 
(h)Average of low and high value
Market Return (Rm)Market
Average yield on 30‐year Treasury bonds for 2015‐2019 based on data from the Value Line Investment Survey, Forecast for the U.S. Economy (Feb. 20, 2015); IHS Global Insight, The U.
Economy: The 30‐Year Focus (Third‐Quarter 2014); & Blue Chip Financial Forecasts, Vol. 33, No. 12 (Dec. 1, 2014).
Beta Adjusted RPUnadjusted RP
Average of weighted average earnings growth rates from IBES and Value Line Investment Survey for dividend‐paying stocks in the S&P 500 based on data from http://finance.yahoo.c
(retrieved Mar. 11, 2015). and www.valueline.com (retrieved Mar. 10, 2015).
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 7, Page 2 of 2
ELECTRIC UTILITY RISK PREMIUM Schedule 8
Page 1 of 4
CURRENT BOND YIELD
Current Equity Risk Premium
(a)Avg. Yield over Study Period 8.58%
(b)Average Utility Bond Yield 4.03%
Change in Bond Yield ‐4.55%
(c)Risk Premium/Interest Rate Relationship ‐0.4267
Adjustment to Average Risk Premium 1.94%
(a)Average Risk Premium over Study Period 3.57%
Adjusted Risk Premium 5.51%
Implied Cost of Equity
(b)Baa Utility Bond Yield 4.55%
Adjusted Equity Risk Premium 5.51%
Risk Premium Cost of Equity 10.06%
(a) Schedule 8, page 3.
(b)
(c) Schedule 8, page 4.
Average bond yield for six‐months ending Apr. 2015 based on data from Moodyʹs Investors 
Service at www.credittrends.com.
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 8, Page 1 of 4
ELECTRIC UTILITY RISK PREMIUM Schedule 8
Page 2 of 4
PROJECTED BOND YIELD
Current Equity Risk Premium
(a)Avg. Yield over Study Period 8.58%
(b)Average Utility Bond Yield 2015‐2019 6.25%
Change in Bond Yield ‐2.33%
(c)Risk Premium/Interest Rate Relationship ‐0.4267
Adjustment to Average Risk Premium 0.99%
(a)Average Risk Premium over Study Period 3.57%
Adjusted Risk Premium 4.56%
Implied Cost of Equity
(b)Baa Utility Bond Yield 2015‐2019 6.77%
Adjusted Equity Risk Premium 4.56%
Risk Premium Cost of Equity 11.33%
(a) Schedule 8, page 3.
(b)
(c) Schedule 8, page 4.
Based on data from Value Line Investment Survey, Forecast for the U.S. Economy (Feb. 20, 
2015); IHS Global Insight, The U.S. Economy: The 30‐Year Focus (Third‐Quarter 2014); & 
Moodyʹs Investors Service at www.credittrends.com.
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 8, Page 2 of 4
ELECTRIC UTILITY RISK PREMIUM Schedule 8
Page 3 of 4
AUTHORIZED RETURNS
(a)(b)
Allowed Average Utility Risk
Year ROE Bond Yield Premium
1974 13.10%9.27%3.83%
1975 13.20%9.88%3.32%
1976 13.10%9.17%3.93%
1977 13.30%8.58%4.72%
1978 13.20%9.22%3.98%
1979 13.50%10.39%3.11%
1980 14.23%13.15%1.08%
1981 15.22%15.62%‐0.40%
1982 15.78%15.33%0.45%
1983 15.36%13.31%2.05%
1984 15.32%14.03%1.29%
1985 15.20%12.29%2.91%
1986 13.93%9.46%4.47%
1987 12.99%9.98%3.01%
1988 12.79%10.45%2.34%
1989 12.97%9.66%3.31%
1990 12.70%9.76%2.94%
1991 12.55%9.21%3.34%
1992 12.09%8.57%3.52%
1993 11.41%7.56%3.85%
1994 11.34%8.30%3.04%
1995 11.55%7.91%3.64%
1996 11.39%7.74%3.65%
1997 11.40%7.63%3.77%
1998 11.66%7.00%4.66%
1999 10.77%7.55%3.22%
2000 11.43%8.09%3.34%
2001 11.09%7.72%3.37%
2002 11.16%7.53%3.63%
2003 10.97%6.61%4.36%
2004 10.75%6.20%4.55%
2005 10.54%5.67%4.87%
2006 10.36%6.08%4.28%
2007 10.36%6.11%4.25%
2008 10.46%6.65%3.81%
2009 10.48%6.28%4.20%
2010 10.34%5.56%4.78%
2011 10.29%5.13%5.16%
2012 10.17%4.26%5.91%
2013 10.02%4.55%5.47%
2014 9.92%4.42%5.50%
Average 12.16% 8.58% 3.57%
(a)
(b) Moodyʹs Investors Service.
Major Rate Case Decisions, Regulatory Focus, Regulatory Research Associates; UtilityScope 
Regulatory Service, Argus.Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 8, Page 3 of 4
ELECTRIC UTILITY RISK PREMIUM Schedule 8
Page 4 of 4
REGRESSION RESULTS
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.92319
R Square 0.85228
Adjusted R Square 0.84850
Standard Error 0.00508
Observations 41
ANOVA
d SS S F ignificance F
Regressio 1 0.005802 0.005802 225.0178 8.7182E‐18
Residual 39 0.001006 2.58E‐05
Total 40 0.006807
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercep 0.07235 0.00257 28.18815 1.52E‐27 0.06716 0.07755 0.06716 0.07755
X Variable 1 ‐0.42669 0.02845 ‐15.0006 8.72E‐18 ‐0.48423 ‐0.36916 ‐0.48423 ‐0.36916
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 8, Page 4 of 4
CAPM ‐ CURRENT BOND YIELD Schedule 9
Page 1 of 2
UTILITY GROU
(a) (b)(c)(d)(e)(f)
Size
Div Proj. Cost of Risk‐Free Risk Unadjusted Market Size Adjusted
Company Yield Growth Equity Rate Premium Beta Ke Cap Adjustment Ke
1  ALLETE 2.3% 9.2% 11.5% 2.7% 8.8% 0.80 9.7% 2,308.8$      1.63% 11.4%
2  Ameren Corp.2.3% 9.2% 11.5% 2.7% 8.8% 0.75 9.3% 9,933.4$      0.94% 10.2%
3  American Elec Pwr 2.3% 9.2% 11.5% 2.7% 8.8% 0.70 8.9% 27,862.3$    ‐0.32% 8.5%
4  Avista Corp.2.3% 9.2% 11.5% 2.7% 8.8% 0.80 9.7% 2,030.4$      1.63% 11.4%
5  Black Hills Corp.2.3% 9.2% 11.5% 2.7% 8.8% 0.95 11.1% 2,201.8$      1.63% 12.7%
6  CenterPoint Energy 2.3% 9.2% 11.5% 2.7% 8.8% 0.80 9.7% 8,996.1$      0.94% 10.7%
7  CMS Energy Corp.2.3% 9.2% 11.5% 2.7% 8.8% 0.75 9.3% 9,364.7$      0.94% 10.2%
8  DTE Energy Co.2.3% 9.2% 11.5% 2.7% 8.8% 0.75 9.3% 14,280.1$    0.65% 10.0%
9  Edison International 2.3% 9.2% 11.5% 2.7% 8.8% 0.75 9.3% 19,854.9$    0.65% 10.0%
10  El Paso Electric 2.3% 9.2% 11.5% 2.7% 8.8% 0.70 8.9% 1,501.7$      1.77% 10.6%
11  Empire District Elec 2.3% 9.2% 11.5% 2.7% 8.8% 0.70 8.9% 1,024.8$      1.77% 10.6%
12  Great Plains Energy 2.3% 9.2% 11.5% 2.7% 8.8% 0.85 10.2% 4,036.0$      1.05% 11.2%
13  IDACORP, Inc.2.3% 9.2% 11.5% 2.7% 8.8% 0.80 9.7% 3,032.7$      1.65% 11.4%
14  NorthWestern Corp. 2.3% 9.2% 11.5% 2.7% 8.8% 0.70 8.9% 2,450.2$      1.63% 10.5%
15  Otter Tail Corp.2.3% 9.2% 11.5% 2.7% 8.8% 0.90 10.6% 1,113.2$      1.77% 12.4%
16  PG&E Corp.2.3% 9.2% 11.5% 2.7% 8.8% 0.65 8.4% 25,185.3$    ‐0.32% 8.1%
17  Portland General Elec. 2.3% 9.2% 11.5% 2.7% 8.8% 0.80 9.7% 2,754.6$      1.65% 11.4%
18  Sempra Energy 2.3% 9.2% 11.5% 2.7% 8.8% 0.80 9.7% 26,152.9$    ‐0.32% 9.4%
19  Westar Energy 2.3% 9.2% 11.5% 2.7% 8.8% 0.75 9.3% 4,958.0$      1.05% 10.4%
Average 9.5%10.6%
Midpoint (g)9.7%10.4%
(a)Weighted average for dividend‐paying stocks in the S&P 500 based on data from www.valueline.com (retrieved Mar. 10, 2015)
(b)
(c)
(d) The Value Line Investment Survey (Feb. 20, Mar. 20, & May 1, 2015)
(e)www.valueline.com (retrieved May 5, 2015)
(f)Morningstar, ʺ2015 Ibbotson SBBI Market Report,ʺ at Table 10 (2015). 
(g)Average of low and high values
Market Return (Rm)
Average of weighted average earnings growth rates from IBES and Value Line Investment Survey for dividend‐paying stocks in the S&P 500 based on dat
from http://finance.yahoo.com (retrieved Mar. 11, 2015). and www.valueline.com (retrieved Mar. 10, 2015).
Average yield on 30‐year Treasury bonds for the six‐months ending Apr. 2015 based on data from the Federal Reserve a
http://www.federalreserve.gov/releases/h15/data.htm.
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 9, Page 1 of 2
CAPM ‐ PROJECTED BOND YIELD Schedule 9
Page 2 of 2
UTILITY GROU
(a) (b)(c)(d)(e)(f)
Size
Div Proj. Cost of Risk‐Free Risk Unadjusted Market Size Adjusted
Company Yield Growth Equity Rate Premium Beta Ke Cap Adjustment Ke
1  ALLETE 2.3% 9.2% 11.5% 4.3% 7.2% 0.80 10.1% 2,308.8$    1.63% 11.7%
2  Ameren Corp.2.3% 9.2% 11.5% 4.3% 7.2% 0.75 9.7% 9,933.4$    0.94% 10.6%
3  American Elec Pwr 2.3% 9.2% 11.5% 4.3% 7.2% 0.70 9.3% 27,862.3$  ‐0.32% 9.0%
4  Avista Corp.2.3% 9.2% 11.5% 4.3% 7.2% 0.80 10.1% 2,030.4$    1.63% 11.7%
5  Black Hills Corp.2.3% 9.2% 11.5% 4.3% 7.2% 0.95 11.1% 2,201.8$    1.63% 12.8%
6  CenterPoint Energy 2.3% 9.2% 11.5% 4.3% 7.2% 0.80 10.1% 8,996.1$    0.94% 11.0%
7  CMS Energy Corp.2.3% 9.2% 11.5% 4.3% 7.2% 0.75 9.7% 9,364.7$    0.94% 10.6%
8  DTE Energy Co.2.3% 9.2% 11.5% 4.3% 7.2% 0.75 9.7% 14,280.1$  0.65% 10.4%
9  Edison International 2.3% 9.2% 11.5% 4.3% 7.2% 0.75 9.7% 19,854.9$  0.65% 10.4%
10  El Paso Electric 2.3% 9.2% 11.5% 4.3% 7.2% 0.70 9.3% 1,501.7$    1.77% 11.1%
11  Empire District Elec 2.3% 9.2% 11.5% 4.3% 7.2% 0.70 9.3% 1,024.8$    1.77% 11.1%
12  Great Plains Energy 2.3% 9.2% 11.5% 4.3% 7.2% 0.85 10.4% 4,036.0$    1.05% 11.5%
13  IDACORP, Inc.2.3% 9.2% 11.5% 4.3% 7.2% 0.80 10.1% 3,032.7$    1.65% 11.7%
14  NorthWestern Corp. 2.3% 9.2% 11.5% 4.3% 7.2% 0.70 9.3% 2,450.2$    1.63% 11.0%
15  Otter Tail Corp.2.3% 9.2% 11.5% 4.3% 7.2% 0.90 10.8% 1,113.2$    1.77% 12.6%
16  PG&E Corp.2.3% 9.2% 11.5% 4.3% 7.2% 0.65 9.0% 25,185.3$  ‐0.32% 8.7%
17  Portland General Elec. 2.3% 9.2% 11.5% 4.3% 7.2% 0.80 10.1% 2,754.6$    1.65% 11.7%
18  Sempra Energy 2.3% 9.2% 11.5% 4.3% 7.2% 0.80 10.1% 26,152.9$  ‐0.32% 9.7%
19  Westar Energy 2.3% 9.2% 11.5% 4.3% 7.2% 0.75 9.7% 4,958.0$    1.05% 10.8%
Average 9.9%11.0%
Midpoint (g)10.1%10.8%
(a)Weighted average for dividend‐paying stocks in the S&P 500 based on data from www.valueline.com (retrieved Mar. 10, 2015)
(b)
(c)
(d) The Value Line Investment Survey (Feb. 20, Mar. 20, & May 1, 2015)
(e)www.valueline.com (retrieved May 5, 2015)
(f)Morningstar, ʺ2015 Ibbotson SBBI Market Report,ʺ at Table 10 (2015). 
(g)Average of low and high values
Market Return (Rm)
Average yield on 30‐year Treasury bonds for 2015‐2019 based on data from the Value Line Investment Survey, Forecast for the U.S. Economy (Feb. 20, 2015)
IHS Global Insight, The U.S. Economy: The 30‐Year Focus (Third‐Quarter 2014); & Blue Chip Financial Forecasts, Vol. 33, No. 12 (Dec. 1, 2014).
Average of weighted average earnings growth rates from IBES and Value Line Investment Survey for dividend‐paying stocks in the S&P 500 based on dat
from http://finance.yahoo.com (retrieved Mar. 11, 2015). and www.valueline.com (retrieved Mar. 10, 2015).
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 9, Page 2 of 2
EXPECTED EARNINGS APPROACH Schedule 10
Page 1 of 1
UTILITY GROUP
(a)(b)(c)
Expected Return Adjustment Adjusted Return
Company on Common Equity Factor on Common Equity
1  ALLETE 9.5%1.0240 9.7%
2  Ameren Corp.9.5%1.0238 9.7%
3  American Elec Pwr 10.5%1.0198 10.7%
4  Avista Corp.9.0%1.0170 9.2%
5  Black Hills Corp 8.5%1.0205 8.7%
6  CenterPoint Energ 12.5%1.0182 12.7%
7  CMS Energy Corp.13.5%1.0329 13.9%
8  DTE Energy Co.10.0%1.0310 10.3%
9  Edison Internationa 11.5%1.0274 11.8%
10  El Paso Electri 9.0%1.0212 9.2%
11  Empire District Ele 8.5%1.0205 8.7%
12  Great Plains Energ 7.5%1.0149 7.6%
13  IDACORP, Inc.8.5%1.0199 8.7%
14  NorthWestern Corp 10.0%1.0200 10.2%
15  Otter Tail Corp 13.0%1.0281 13.4%
16  PG&E Corp.9.5%1.0301 9.8%
17  Portland General Elec.9.0%1.0357 9.3%
18  Sempra Energy 12.5%1.0268 12.8%
19  Westar Energ 9.5%1.0128 9.6%
Average  (d)10.3%
Midpoint (d)10.8%
(a)The Value Line Investment Survey (Feb. 20, Mar. 20, & May 1, 2015).
(b) Adjustment to convert year‐end return to an average rate of return from Schedule 6.
(c) (a) x (b).
(d) Excludes highlighted values.
(e) Average of low and high values.
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 10, Page 1 of 1
DCF MODEL ‐ NON‐UTILITY GROUP Schedule 11
Page 1 of 3
DIVIDEND YIELD
(a)(b)
Company                Industry Group      Price Dividends Yield
1  Church & Dwight Household Products 84.85$    1.36$   1.6%
2  Coca‐Cola Beverage 40.69$    1.32$   3.2%
3  Colgate‐Palmolive Household Products 69.20$    1.54$   2.2%
4  ConAgra Foods Food Processing 36.93$    1.00$   2.7%
5  Genʹl Mills Food Processing 55.74$    1.76$   3.2%
7  Kellogg Food Processing 64.57$    1.96$   3.0%
8  Kimberly‐Clark Household Products 108.60$  3.52$   3.2%
10  McDonaldʹs Corp. Restaurant 97.01$    3.40$   3.5%
11  PepsiCo, Inc.Beverage 95.81$    2.77$   2.9%
12  Procter & Gamble Household Products 82.44$    2.65$   3.2%
13  Smucker (J.M.) Food Processing 116.26$  2.56$   2.2%
14  Verizon Com. Telecommunications 49.42$    2.20$   4.5%
15  Wal‐Mart Stores Retail Store 80.28$    1.96$   2.4%
     Average 2.9%
(a) Average of closing prices for 30 trading days ended May 1, 2015.
(b)The Value Line Investment Surve , Summar  & Index (Ma  1, 2015 .
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 11, Page 1 of 3
DCF MODEL ‐ NON‐UTILITY GROUP Schedule 11
Page 2 of 3
GROWTH RATES
(a)(b)(c)
Company                V Line IBES Zacks
1  Church & Dwight 9.0%9.55%9.50%
2  Coca‐Cola 5.5%4.83%6.70%
3  Colgate‐Palmolive 11.0%8.03%8.20%
4  ConAgra Foods 6.5%8.47%7.50%
5  Genʹl Mills 5.5%5.66%6.20%
6  Kellogg 5.0%4.15%5.00%
7  Kimberly‐Clark 9.5%6.90%6.90%
8  McDonaldʹs Corp.4.0%6.78%7.90%
9  PepsiCo, Inc.9.5%6.36%6.20%
10  Procter & Gamble 7.5%6.73%6.80%
11  Smucker (J.M.)7.0%5.36%5.70%
12  Verizon Com.8.0%5.93%8.10%
13  Wal‐Mart Stores 5.0%4.93%5.20%
(a)The Value Line Investment Survey (Feb. 27, Mar. 20, Mar. 27, Apr. 24, May 1, 2015).
(b)www.finance.yahoo.com (retreived May 15, 2015).
(c)www.zacks.com (Retreived May 15, 2015).
Earnings Growth Rates
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 11, Page 2 of 3
DCF MODEL ‐ NON‐UTILITY GROUP Schedule 11
Page 3 of 3
DCF COST OF EQUITY ESTIMATES
(a)(a)(a)
Company                ____V Line IBES Zacks
1  Church & Dwight 10.6%11.2%11.1%
2  Coca‐Cola 8.7%8.1%9.9%
3  Colgate‐Palmolive 13.2%10.3%10.4%
4  ConAgra Foods 9.2%11.2%10.2%
5  Genʹl Mills 8.7%8.8%9.4%
6  Kellogg 8.0%7.2%8.0%
7  Kimberly‐Clark 12.7%10.1%10.1%
8  McDonaldʹs Corp.7.5%10.3%11.4%
9  PepsiCo, Inc.12.4%9.3%9.1%
10  Procter & Gamble 10.7%9.9%10.0%
11  Smucker (J.M.)9.2%7.6%7.9%
12  Verizon Communications 12.5%10.4%12.6%
13  Wal‐Mart Stores 7.4%7.4%7.6%
Average 10.1%9.4%9.8%
Midpoint (c)10.3%9.2%10.1%
(a)
(b)Average of low and high values.
Cost of Equity Estimates
Sum of dividend yield (Schedule 11, p. 1) and respective growth rate (Schedule 11, p. 2).
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 11, Page 3 of 3
REGULATORY MECHANISMS Schedule 12
Page 1 of 1
UTILITY GROUP
Company Mechanism
1 ALLETE FCA, PGA, FTY, ICR, Investment Pre‐approval, DSM, ECA, TC
2 Ameren Corp.FCA, PGA, ICR, DSM, ECA, BDR, PCR, Vegetation Mgt, SCR, FRP
3 American Elec Pwr FCA, FTY, ICR, ECA, AMS, TCR, Vegetation Mgt, SCR, RDM
4 Avista Corp.FCA, PGA, RDM
5 Black Hills Corp.FCA, PGA, ICR, ECA, TCR, WNA, DSM, BDR, TA
6 CenterPoint Energy PGA, ICR, RDM, WNA, FRP, TCR, DSM, Nuclear Decommissioning, AMS, 
SCR
7 CMS Energy Corp.FCA, PGA, RDM, FTY
8 DTE Energy Co.FCA, PGA, RDM, FTY, ICR, DSM, BDR, SCR, ECA, PCR, Line Clearance, 
BDR, Nuclear Decommissioning
9 Edison International FCA, RDM, FTY, PCR, ICR, Nuclear Decommissioning, DSM, ECA, TC
10 El Paso Electric FCA, FTY, DSM
11 Empire District Elec FCA, PGA, DSM, TCR, PCR, Hybrid Test Year, Vegatation Mgt, ECA, ICR
12 Great Plains Energy FCA in Kansas (no FCA in Missouri), PCR, DS
13 IDACORP, Inc.FCA, RDM (Fixed Cost Adjustment Mechanism), DSM 
14 NorthWestern Corp.FCA, PGA, DSM, PCR, TA
15 Otter Tail Corp.FCA, FTY, DSM, ICR, TCR, ECA
16 PG&E Corp.FCA, RDM, FTY, Nuclear Decommissioning, DSM, ECA
17 Portland General Elec.FCA, RDM, FTY, ICR, DSM, SC
18 Sempra Energy FCA, PGA, RDM, FTY, ECA, DS
19 Westar Energy FCA, ECA, DSM
AMS‐‐Advanced Metering System Recovery Rider
BDR ‐‐ Bad Debt Cost Recovery Rider
DSM ‐‐ Demand Side Management / Conservation / Energy Efficiency Adjustment Clause
ECA ‐‐ Environmental and/or Emissions Cost Adjustment Clause
FCA ‐‐ Fuel and/or Power Cost Adjustment Clause
FRP‐‐Formula Rate Plan
FTY ‐ Jurisdiction allows for future test year
ICR ‐‐ Infrastructure Investment / Renewables Cost Recovery Mechanism
PCR ‐‐ Pension Cost Recovery Mechanism
PGA ‐‐ Gas Cost Adjustment Clause
RDM ‐‐ Revenue Decoupling Mechanism
SCR ‐ Storm Cost Recovery Tracker
TAX‐‐Property / Franchise Tax Recovery Mechanism
TCR ‐‐ Transmission Cost Recovery Tracker
WNA ‐‐ Weather Normalization Adjustment or other mitigants
Source : 2014 Form 10‐K Reports; Edison Electric Institute, Forward Test Years for US Electric Utilities (Aug. 2010).
Exhibit No. 3 Case Nos. AVU-E-15-05/AVU-G-15-01
A. McKenzie, Avista
Schedule 12, Page 1 of 1