20210129McKenzie Exhibit 3 Schedules 1-13.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-21-01
OF AVISTA CORPORATION FOR THE ) CASE NO. AVU-G-21-01
AUTHORITY TO INCREASE ITS RATES )
AND CHARGES FOR ELECTRIC AND )
NATURAL GAS SERVICE TO ELECTRIC ) EXHIBIT NO. 3
AND NATURAL GAS CUSTOMERS IN THE ) OF
STATE OF IDAHO ) ADRIEN M. MCKENZIE, CFA

FOR AVISTA CORPORATION

(ELECTRIC AND NATURAL GAS)

1
SCHEDULE 1
QUALIFICATIONS OF ADRIEN M. MCKENZIE
Q.PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A.My name is Adrien M. McKenzie. My business address is 3907 Red River St., Austin,
Texas 78751.
Q.PLEASE STATE YOUR OCCUPATION.
A.I am a principal in FINCAP, Inc., a firm engaged primarily in financial, economic, and
policy consulting in the field of public utility regulation.
Q.PLEASE DESCRIBE YOUR QUALIFICATIONS AND EXPERIENCE.
A.I received B.A. and M.B.A. degrees with a major in finance from The University of Texas
at Austin, and hold the Chartered Financial Analyst (CFA®) designation. Since joining
FINCAP in 1984, I have participated in consulting assignments involving a broad range
of economic and financial issues, including cost of capital, cost of service, rate design,
economic damages, and business valuation. I have extensive 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. I have personally sponsored direct and rebuttal testimony in over 140
proceedings filed with the Federal Energy Regulatory Commission (“FERC”) and
regulatory agencies in Alaska, Arkansas, Colorado, Hawaii, Idaho, Indiana, Iowa, Kansas,
Kentucky, Maryland, Michigan, Montana, Nebraska, New Mexico, Ohio, Oklahoma,
Oregon, South Dakota, Texas, Virginia, Washington, West Virginia, and Wyoming. My
testimony addressed the establishment of risk-comparable proxy groups, the application
of alternative quantitative methods, and the consideration of regulatory standards and
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 1, Page 1 of 5
2
policy objectives in establishing a fair rate of return on equity for regulated electric, gas,
and water utility operations. In connection with these assignments, my responsibilities
have included critically evaluating the positions of other parties and preparation of
rebuttal testimony, representing clients in settlement negotiations and hearings, and
assisting in the preparation of legal briefs.
FINCAP was formed in 1979 as an economic and financial consulting firm
serving clients in both the regulated and competitive sectors. FINCAP conducts
assignments ranging from broad qualitative analyses and policy consulting to technical
analyses and research. The firm’s experience is in the areas of public utilities, valuation
of closely-held businesses, and economic evaluations (e.g., damage and cost/benefit
analyses). Prior to joining FINCAP, I was employed by an oil and gas firm and was
responsible for operations and accounting. I am a member of the CFA Institute, the CFA
Society of Austin. A resume containing the details of my qualifications and experience is
attached below.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 1, Page 2 of 5
3
ADRIEN M. McKENZIE
FINCAP, INC. 3907 Red River Street
Financial Concepts and Applications Austin, Texas 78751
Economic and Financial Counsel [phone]
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 30 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
President
FINCAP, Inc.
(June 1984 to June 1987)
(April 1988 to present)
Economic consulting firm specializing in regulated
industries and valuation of closely-held businesses.
Assignments have involved electric, gas,
telecommunication, and water/sewer utilities, with
clients including utilities, consumer groups,
municipalities
Areas of participation have included rate of return,
revenue requirements, rate design, tariff analysis,
avoided cost, forecasting, and negotiations. Develop
cost of capital analyses using alternative market models
for electric, gas, and telephone utilities. Prepare pre-
filed direct and rebuttal testimony, participate in
settlement negotiations, respond to interrogatories,
evaluate opposition testimony, and assist in the areas of
cross-examination and the preparations of legal briefs.
Other assignments have involved preparation of
technical reports, valuations, estimation of damages,
industry studies, and various economic analyses in
Manager,
McKenzie Energy Company
Responsible for operations and accounting for firm
engaged in the management of working interests in oil
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 1, Page 3 of 5
4
Education
M.B.A., Finance,
University of Texas at Austin
(Sep. 1982 to May. 1984)
Program included coursework in corporate finance,
accounting, financial modeling, and statistics. Received
Dean's Award for Academic Excellence and Good
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)
Electives included capital market theory, portfolio
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)
Coursework in accounting, finance, economics, and
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-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 1, Page 4 of 5
5

Representative Assignments
Mr. McKenzie has prepared and sponsored prefiled testimony submitted in over 140 regulatory
proceedings. In addition to filings before regulatory agencies in Alaska, Arkansas, Colorado,
Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan, Montana, Nebraska, New
Mexico, Ohio, Oklahoma, Oregon, South Dakota, Texas, Virginia, Washington, West Virginia,
and Wyoming, Mr. McKenzie has considerable expertise in preparing expert analyses and
testimony before the Federal Energy Regulatory Commission (“FERC”) on the issue of rate of
return on equity (“ROE”), and has 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 developing cost of service and cost allocation studies, 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-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 1, Page 5 of 5
Schedule 2
Page 1 of 44
I.DESCRIPTION OF QUANTITATIVE ANALYSES
Q.What is the purpose of this exhibit? 1
A.Schedule 2 presents capital market estimates of the cost of equity for the2
jurisdictional electric and natural gas utility operations of Avista Corp. (“Avista” or “the 3
Company”). First, I will briefly summarize the concept of the cost of equity, along with the 4
risk-return tradeoff principle fundamental to capital markets. Next, I describe my 5
applications of the Discounted Cash Flow (“DCF”), the Capital Asset Pricing Model 6
(“CAPM”), the empirical form of the CAPM (“ECAPM”), a risk premium analyses based on 7
allowed equity returns for electric utilities, and reference to expected rates of return for 8
electric utilities. This exhibit also presents a market-based test to my utility quantitative 9
analyses by applying the DCF model to a group of low risk non -utility firms. 10
A.Overview
Q.What fundamental economic principle underlies any evaluation of11
investors’ required return on equity (“ROE”)? 12
A.The fundamental economic principle underlying the cost of equity concept is13
the notion that investors are risk averse. In capital markets where relatively risk-free assets 14
are available (e.g., U.S. Treasury securities), investors can be induced to hold riskier assets 15
only if they are offered a premium, or additional return, above the rate of return on a 16
risk-free asset. Because all assets compete with each other for investor funds, riskier assets 17
must yield a higher expected rate of return than safer assets to induce investors to hold them. 18
Given this risk-return tradeoff, the required rate of return (k) from an asset (i) can be 19
generally expressed as: 20
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 1 of 44
Schedule 2
Page 2 of 44

ki = Rf +RPi 1
where: Rf = Risk-free rate of return, and 2
RPi = Risk premium required to hold riskier asset i. 3
Thus, the required rate of return for a particular asset at any point in time is a function of: 1) 4
the yield on risk-free assets, and 2) its relative risk, with investors demanding 5
correspondingly larger risk premiums for assets bearing greater risk. 6
Q. Is there evidence that the risk-return tradeoff principle actually operates 7
in the capital markets? 8
A. Yes. The risk-return tradeoff can be readily documented in segments of the 9
capital markets where required rates of return can be directly inferred from market data and 10
where generally accepted measures of risk exist. Bond yields, for example, reflect investors’ 11
expected rates of return, and bond ratings measure the risk of individual bond issues. 12
Comparing the observed yields on government securities, which are considered free of 13
default risk, to the yields on bonds of various rating categories demonstrates that the risk-14
return tradeoff does, in fact, exist. 15
Q. Does the risk-return tradeoff observed with fixed income securities 16
extend to common stocks and other assets? 17
A. It is widely accepted that the risk-return tradeoff evidenced with long-term 18
debt extends to all assets. Documenting the risk-return tradeoff for assets other than fixed 19
income securities, however, is complicated by two factors. First, there is no standard 20
measure of risk applicable to all assets. Second, for most assets – including common stock – 21
required rates of return cannot be directly observed. Yet there is every reason to believe that 22
investors exhibit risk aversion in deciding whether or not to hold common stocks and other 23
assets, just as when choosing among fixed-income securities. 24
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 2 of 44
Schedule 2
Page 3 of 44

Q. Is this risk-return tradeoff limited to differences between firms? 1
A. No. The risk-return tradeoff principle applies not only to investments in 2
different firms, but also to different securities issued by the same firm. The securities issued 3
by a utility vary considerably in risk because they have different characteristics and 4
priorities. As noted earlier, long-term debt is senior among all capital in its claim on a 5
utility’s net revenues and is, therefore, the least risky. The last investors in line are common 6
shareholders. They receive only the net revenues, if any, remaining after all other claimants 7
have been paid. As a result, the rate of return that investors require from a utility’s common 8
stock, the most junior and riskiest of its securities, must be considerably higher than the 9
yield offered by the utility’s senior, long-term debt. 10
Q. What are the challenges in determining a just and reasonable ROE for a 11
regulated enterprise? 12
A. The actual return investors require is unobservable. Different methodologies 13
have been developed to estimate investors’ expected and required return on capital, but all 14
such methodologies are merely theoretical tools and generally produce a range of estimates, 15
based on different assumptions and inputs. The DCF method, which is frequently 16
referenced and relied on by regulators, is only one theoretical approach to gain insight into 17
the return investors require; there are numerous other methodologies for estimating the cost 18
of capital and the ranges produced by the different approaches can vary widely. 19
Q. Is it customary to consider the results of multiple approaches when 20
evaluating a just and reasonable ROE? 21
A. Yes. In my experience, financial analysts and regulators routinely consider 22
the results of alternative approaches in determining allowed ROEs. It is widely recognized 23
that no single method can be regarded as failsafe; with all approaches having advantages and 24
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 3 of 44
Schedule 2
Page 4 of 44

shortcomings. As the Federal Energy Regulatory Commission (“FERC”) has noted, “The 1
determination of rate of return on equity starts from the premise that there is no single 2
approach or methodology for determining the correct rate of return.”1 More recently, FERC 3
recognized the potential for any application of the DCF model to produce unreliable results.2 4
Similarly, a publication of the Society of Utility and Regulatory Financial Analysts 5
concluded that: 6
Each model requires the exercise of judgment as to the reasonableness of the 7
underlying assumptions of the methodology and on the reasonableness of the 8
proxies used to validate the theory. Each model has its own way of 9
examining investor behavior, its own premises, and its own set of 10
simplifications of reality. Each method proceeds from different fundamental 11
premises, most of which cannot be validated empirically. Investors clearly do 12
not subscribe to any singular method, nor does the stock price reflect the 13
application of any one single method by investors.3 14
As this treatise succinctly observed, “no single model is so inherently precise that it can be 15
relied on solely to the exclusion of other theoretically sound models.”4 Similarly, New 16
Regulatory Finance concluded that: 17
There is no single model that conclusively determines or estimates the 18
expected return for an individual firm. Each methodology possesses its own 19
way of examining investor behavior, its own premises, and its own set of 20
simplifications of reality. Each method proceeds from different fundamental 21
premises that cannot be validated empirically. Investors do not necessarily 22
subscribe to any one method, nor does the stock price reflect the application 23
of any one single method by the price-setting investor. There is no monopoly 24
as to which method is used by investors. In the absence of any hard evidence 25
as to which method outdoes the other, all relevant evidence should be used 26
and weighted equally, in order to minimize judgmental error, measurement 27
error, and conceptual infirmities.5 28
1 Northwest Pipeline Co., Opinion No. 396-C, 81 FERC ¶ 61,036 at 4 (1997).
2 Opinion No. 531, 147 FERC ¶ 61,234 at P 41 (2014).
3 David C. Parcell, The Cost of Capital – A Practitioner’s Guide, Society of Utility and Regulatory Financial
Analysts (2010) at 84. 4 Id.
5 Roger A. Morin, New Regulatory Finance, Pub. Util. Reports, Inc. (2006) at 429.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 4 of 44
Schedule 2
Page 5 of 44

Thus, while the DCF model is a recognized approach to estimating the ROE, it is not 1
without shortcomings and does not otherwise eliminate the need to ensure that the “end 2
result” is fair. The Indiana Utility Regulatory Commission has recognized this principle: 3
There are three principal reasons for our unwillingness to place a great deal 4
of weight on the results of any DCF analysis. One is. . . the failure of the 5
DCF model to conform to reality. The second is the undeniable fact that 6
rarely if ever do two expert witnesses agree on the terms of a DCF equation 7
for the same utility – for example, as we shall see in more detail below, 8
projections of future dividend cash flow and anticipated price appreciation of 9
the stock can vary widely. And, the third reason is that the unadjusted DCF 10
result is almost always well below what any informed financial analysis 11
would regard as defensible, and therefore require an upward adjustment 12
based largely on the expert witness’s judgment. In these circumstances, we 13
find it difficult to regard the results of a DCF computation as any more than 14
suggestive.6 15
As this discussion indicates, consideration of the results of alternative approaches 16
reduces the potential for error associated with any single quantitative method. Just as 17
investors inform their decisions through the use of a variety of methodologies, my 18
evaluation of a fair ROE for the Company considers the results of multiple financial models. 19
Q. What does the above discussion imply with respect to estimating the 20
ROE for a utility? 21
A. Although the ROE cannot be observed directly, it is a function of the returns 22
available from other investment alternatives and the risks to which the equity capital is 23
exposed. Because it is not readily observable, the ROE for a particular utility must be 24
estimated by analyzing information about capital market conditions generally, assessing the 25
relative risks of the company specifically, and employing various quantitative methods that 26
focus on investors’ required rates of return. These various quantitative methods typically 27
attempt to infer investors’ required rates of return from stock prices, interest rates, or other 28

6 Ind. Michigan Power Co., Cause No. 38728, 116 PUR4th, 1, 17-18 (IURC 8/24/1990).
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 5 of 44
Schedule 2
Page 6 of 44

capital market data. Consistent with FERC’s conclusion that “[t]here is significant evidence 1
indicating that combining estimates from different models is more accurate than relying on a 2
single model,”7 my evaluation of a fair ROE for the Company considers the results of 3
multiple financial models, including the DCF, CAPM (and the related ECAPM), risk 4
premium, and expected earnings approaches. 5
B. Comparable Risk Proxy Group
Q. How do you implement quantitative methods to estimate the cost of 6
common equity for Avista? 7
A. Application of quantitative methods to estimate the cost of common equity 8
requires observable capital market data, such as stock prices and beta values. Moreover, 9
even for a firm with publicly traded stock, the cost of common equity can only be estimated. 10
As a result, applying quantitative models using observable market data only produces an 11
estimate that inherently includes some degree of observation error. Thus, the accepted 12
approach to increase confidence in the results is to apply alternative quantitative methods to 13
a proxy group of publicly traded companies that investors regard as risk-comparable. The 14
results of the analysis for the sample of companies are relied upon to establish a range of 15
reasonableness for the cost of equity for the specific company at issue. 16
Q. What specific proxy group of utilities do you rely on for your analyses? 17
A. My analyses relied on a proxy group composed of 18 companies, which I 18
refer to as the “Utility Group.” In order to develop this group, I began with the following 19
criteria: 20
21
7 Coakley v. Bangor Hydro-Elec. Co., 165 FERC ¶ 61,030 at P 38 (2018); Ass’n of Bus. Advocating Tariff
Equity v. Midcontinent Indep. Sys. Operator, Inc., 165 FERC ¶ 61,118 at P 40 (2018).
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 6 of 44
Schedule 2
Page 7 of 44

1. Included in the Electric Utility Industry groups compiled by The Value Line 1
Investment Survey (“Value Line”). 2
2. Corporate credit ratings from S&P Global Ratings (“S&P”) and Moody’s 3
Investors Service (“Moody’s”) corresponding to one notch above and below 4
the Company’s current ratings. For S&P, this results in a ratings range of 5
BBB-, BBB, and BBB+; for Moody’s the range is Baa3, Baa2, or Baa1.8 6
3. Value Line Safety Rank of “2” or “3”. 7
4. No ongoing involvement in a major merger or acquisition that would distort 8
quantitative results. 9
5. No cuts in dividend payments during the past six months and no 10
announcement of a dividend cut since that time. 11
Q. Is there any other publicly traded utility that is relevant in establishing a 12
proxy group? 13
A. Yes. Investors would regard Algonquin Power & Utilities, Inc. 14
(“Algonquin”) as a comparable investment alternative that is relevant to an evaluation of a 15
just and reasonable ROE for Avista. Although it has not yet been included in Value Line’s 16
electric utility industry groups, investors also regard Algonquin as having operations 17
comparable to those of other electric utilities in the proxy group. Algonquin is a North 18
American diversified generation, transmission, and distribution utility with approximately 19
$10 billion in total assets. Algonquin provides regulated utility services to over 750,000 20
customers in Arizona, Arkansas, California, Georgia, Illinois, Iowa, Kansas, Massachusetts, 21
Missouri, New Hampshire, Oklahoma, and Texas.9 A majority of Algonquin’s revenues, 22

8 While Hawaiian Electric Industries, Inc. (“HEI”) does not have a published Moody’s rating, it was included
in my proxy group. HEI’s S&P rating falls within the comparable range for Avista, as does the Baa2 Moody’s
rating assigned to HEI’s primary subsidiary, Hawaiian Electric Company, Inc. 9 Algonquin completed its acquisition of Empire District in 2017, which more than doubled its size. Empire
District was included in Value Line’s electric utility industry group prior to its merger with Algonquin .
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 7 of 44
Schedule 2
Page 8 of 44

earnings, and assets are related to its regulated U.S. utility operations.10 In addition, 1
Algonquin reports interim and annual consolidated financial statements in U.S. dollars, its 2
dividend is denominated in U.S. dollars, and its common shares are listed on the New York 3
Stock Exchange. While Algonquin is not rated by Moody’s, it has been assigned a credit 4
rating of BBB by S&P. 5
Q. What other publicly traded utility is relevant in establishing a proxy 6
group? 7
A. Emera should also be included in the proxy group. 8
Q. Please explain why Emera should be considered. 9
A. Investors consider Emera to have risks and operations comparable to those of 10
other electric utilities. Emera is primarily engaged in electricity generation, transmission, 11
and distribution; gas transmission and distribution; and utility energy services, and serves 12
approximately 2.5 million customers. Emera completed its acquisition of TECO Energy in 13
2016. While Emera is currently included in Value Line’s “Power Industry” sector, Value 14
Line also reported that Emera’s Florida electric utility is its largest operating segment and 15
that “over 95% of earnings now [come] from regulated operations.”11 16
Similarly, CFRA highlighted Emera’s primary focus on electric utility operations, 17
and classified Emera in its “Electric Utilities” industry group,12 and Emera reports as an 18

10 For example, Algonquin reported that during 2019 regulated utility operations accounted for 84 percent of
total revenues, 86 percent of operating income, and 63 percent of total assets. Approximately 95 percent of
Algonquin’s consolidated revenue and 90 percent of property, plant, and equipment are attributable to
operations in the U.S.
https://www.sec.gov/cgi-bin/viewer?action=view&cik=1174169&accession_number=0001174169-20-000018
&xbrl_type=v#.
11 he Value Line Investment Survey (Mar. 20, 2020). This is consistent with Emera’s 2019 Annual Report,
which noted that 95% of the company’s earnings were derived from regulated investments. Emera, Inc., 2019
Annual Report at 1.
12 CFRA, Emera Incorporated, Quantitative Stock Report (Jun. 24, 2017). CFRA, founded as the Center for
Financial Research and Analysis, is one of the world’s largest providers of institutional-grade independent
equity research, acquired the equity and fund research arm of S&P in October 2016.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 8 of 44
Schedule 2
Page 9 of 44

“Electric Utility” under the Standard Industrial Classification Code (4911).13 S&P noted 1
that “Emera, Inc. is a geographically diverse electric and natural gas holding utility 2
company,”14 and reported that regulated utility operations contribute “about 95% of 3
consolidated cash flow.”15 Thus, investors would regard Emera as a comparable investment 4
alternative that is relevant to an evaluation of the required rate of return for Avista. Emera’s 5
operations are dominated by its U.S.-based utilities, which together accounted for 6
approximately 68 percent of consolidated net income and 72% of total assets at year-end 7
2019.16 8
Q. How do you evaluate the risks of the Utility Group relative to Avista? 9
A. My evaluation of relative risk considers four objective, published 10
benchmarks that are widely relied on in the investment community. Credit ratings are 11
assigned by independent rating agencies for the purpose of providing investors with a broad 12
assessment of the creditworthiness of a firm. Ratings generally extend from triple-A (the 13
highest) to D (in default). Other symbols (e.g., “BBB+”) are used to show relative standing 14
within a category. Because the rating agencies’ evaluation includ es virtually all of the 15
factors normally considered important in assessing a firm’s relative credit standing, 16
corporate credit ratings provide a broad, objective measure of overall investment risk that is 17
readily available to investors. Although the credit rating agencies are not immune to 18
criticism, their rankings and analyses are widely cited in the investment community and 19
referenced by investors. Investment restrictions tied to credit ratings continue to influence 20
13 See https://sec.report/CIK/0000354707.
14 S&P Global Ratings, Emera Inc. And Subsidiaries ‘BBB+’ Ratings Affirmed; Outlooks Remain Negative,
RatingsDirect (Mar. 26, 2019).
15 S&P Global Ratings, Emera Inc. And TECO Downgraded On Weak Financials, Outlook Stable; Subsidiaries
Ratings Affirmed, Research Update (Mar. 24, 2020).
16 Emera, Inc., 2019 Financial Statements at Note 5.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 9 of 44
Schedule 2
Page 10 of 44

capital flows, and credit ratings are also frequently used as a primary risk indicator in 1
establishing proxy groups to estimate the cost of common equity. 2
While credit ratings provide the most widely referenced benchmark for investment 3
risks, other quality rankings published by investment advisory services also provide relative 4
assessments of risks that are considered by investors in forming their expectations for 5
common stocks. Value Line’s primary risk indicator is its Safety Rank, which ranges from 6
“1” (Safest) to “5” (Riskiest). This overall risk measure is intended to capture the total risk 7
of a stock, and incorporates elements of stock price stability and financial strength. Given 8
that Value Line is perhaps the most widely available source of investment advisory 9
information, its Safety Rank provides useful guidance regarding the risk perceptions of 10
investors. 11
The Financial Strength Rating is designed as a guide to overall financial strength and 12
creditworthiness, with the key inputs including financial leverage, business volatility 13
measures, and company size. Value Line’s Financial Strength Ratings range from “A++” 14
(strongest) down to “C” (weakest) in nine steps. Finally, Value Line’s beta measures a 15
utility’s stock price volatility relative to the market as a whole. A stock that tends to respond 16
less to market movements has a beta less than 1.00, while stocks that tend to move more 17
than the market have betas greater than 1.00. Beta is the only relevant measure of 18
investment risk under modern capital market theory, and is widely cited in academics and in 19
the investment industry as a guide to investors’ risk perceptions. Moreover, in my 20
experience Value Line is the most widely referenced source for beta in regulatory 21
proceedings. As noted in New Regulatory Finance: 22
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 10 of 44
Schedule 2
Page 11 of 44

Value Line is the largest and most widely circulated independent investment 1
advisory service, and influences the expectations of a large number of 2
institutional and individual investors. … Value Line betas are computed on a 3
theoretically sound basis using a broadly based market index, and they are 4
adjusted for the regression tendency of betas to converge to 1.00.17 5
Q. How do the overall risks of your proxy group compare with Avista? 6
A. Table 1 compares the Utility Group with Avista across five key indicators of 7
investment risk: 8
TABLE 1 9
COMPARISON OF RISK INDICATORS 10

Q. What does this comparison indicate regarding investors’ assessment of 11
the relative risk associated with your Utility Group? 12
A. As shown above, Avista’s S&P credit rating is one notch above the average 13
for the Utility Group, while the Company’s Moody’s credit rating is identical to that of the 14
Utility Group. Likewise, the average Value Line Safety Rank and Financial Strength 15
measures for the Utility Group are the same as that assigned to the Company. The average 16
of Value Line’s betas for the Utility Group is slightly lower than Avista’s beta. Considered 17
together, this comparison of objective measures, which consider a broad spectrum of risks, 18
including financial and business position, and exposure to firm-specific factors, indicates 19
that investors would likely conclude that the overall investment risks for Avista are 20
comparable to those of the firms in the Utility Group. 21

17 Roger A. Morin, New Regulatory Finance, Pub. Util. Reports (2006) at 71.
Safety Financial
S&P Moody's Rank Strength Beta
Utility Group BBB Baa2 2 B++ 0.92
Avista BBB Baa2 2 B++ 0.95
Credit Rating
Value Line
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 11 of 44
Schedule 2
Page 12 of 44

C. Discounted Cash Flow Analyses
Q. How is the DCF model used to estimate the cost of equity? 1
A. DCF models attempt to replicate the market valuation process that sets the 2
price investors are willing to pay for a share of a company’s stock. The model rests on the 3
assumption that investors evaluate the risks and expected rates of return from all securities 4
in the capital markets. Given these expectations, the price of each stock is adjusted by the 5
market until investors are adequately compensated for the risks they bear. Therefore, we can 6
look to the market to determine what investors believe a share of common stock is worth. 7
By estimating the cash flows investors expect to receive from the stock in the way of future 8
dividends and capital gains, we can calculate their required rate of return. That is, the cost 9
of equity is the discount rate that equates the current price of a share of stock with the 10
present value of all expected cash flows from the stock. The formula for the general form of 11
the DCF model is as follows: 12
13
where: P0 = Current price per share; 14
Pt = Expected future price per share in period t; 15
Dt = Expected dividend per share in period t; 16
ke = Cost of common equity. 17
Q. What form of the DCF model is customarily used to estimate the cost of 18
equity in rate cases? 19
A. Rather than developing annual estimates of cash flows into perpetuity, the 20
DCF model can be simplified to a “constant growth” form: 18 21
18 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 ra te; 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. Nevertheless, the DCF method provides a workable and practical approach
to estimate investors’ required return that is widely referenced in utility ratemaking.
t
e
t
t
e
t
ee k
P
k
D
k
D
k
DP )1()1()1()1(2
2
1
10 ++++++++=
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 12 of 44
Schedule 2
Page 13 of 44

1
where: P0 = Current price per share; 2
D1 = Expected dividend per share in the coming year; 3
ke = Cost of equity; 4
g = Investors’ long-term growth expectations. 5

The cost of equity (ke) can be isolated by rearranging terms: 6
7
This constant growth form of the DCF model recognizes that the rate of return to 8
stockholders consists of two parts: 1) dividend yield (D1/P0), and 2) growth (g). In other 9
words, investors expect to receive a portion of their total return in the form of current 10
dividends and the remainder through price appreciation. 11
Q. What steps are required to apply the DCF model? 12
A. The first step in implementing the constant growth DCF model is to 13
determine the expected dividend yield (D1/P0) for the firm in question. This is usually 14
calculated based on an estimate of dividends to be paid in the coming year divided by the 15
current price of the stock. The second step is to estimate investors' long-term growth 16
expectations (g) for the firm. The final step is to sum the firm's dividend yield and estimated 17
growth rate to arrive at an estimate of its cost of common equity. 18
Q. How is the dividend yield for the Utility Group determined? 19
A. Estimates of dividends to be paid by each of these utilities over the next 20
twelve months, obtained from Value Line, serve as D1. This annual dividend is then divided 21
by a 30-day average stock price for each utility to arrive at the expected dividend yield. The 22
stock prices, expected dividends, and resulting dividend yields for the firms in the Utility 23
Group are presented on page 1 of Exhibit No. 3, Schedule 5. 24
gk
DP
e −=10
gP
Dke +=
0
1
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 13 of 44
Schedule 2
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Q. What is the next step in applying the constant growth DCF model? 1
A. The next step is to evaluate long-term growth expectations, or “g”, for the 2
firm in question. In constant growth DCF theory, earnings, dividends, book value, and 3
market price are all assumed to grow in lockstep, and the growth horizon of the DCF model 4
is infinite. But implementation of the DCF model is more than just a theoretical exercise; it 5
is an attempt to replicate the mechanism investors used to arrive at observable stock prices. 6
A wide variety of techniques can be used to derive growth rates, but the only “g” that 7
matters in applying the DCF model is the value that investors expect. 8
Q. What are investors most likely to consider in developing their long-term 9
growth expectations? 10
A. Implementation of the DCF model is solely concerned with replicating the 11
forward-looking evaluation of real-world investors. In the case of utilities, dividend growth 12
rates are not likely to provide a meaningful guide to investors’ current growth expectations. 13
This is because utilities have significantly altered their dividend policies in response to more 14
accentuated business risks in the industry, with the payout ratios falling significantly from 15
historical levels. As a result, dividend growth in the utility industry has lagged growth in 16
earnings as utilities conserve financial resources to provide a hedge against heightened 17
uncertainties. 18
A measure that plays a pivotal role in determining investors’ long-term growth 19
expectations are future trends in earnings per share (“EPS”), which provide the source for 20
future dividends and ultimately support share prices. The importance of earnings in 21
evaluating investors’ expectations and requirements is well accepted in the investment 22
community, and surveys of analytical techniques relied on by professional analysts indicate 23
that growth in earnings is far more influential than trends in dividends per share (“DPS”). 24
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 14 of 44
Schedule 2
Page 15 of 44

The availability of projected EPS growth rates also is key to investors relying on this 1
measure as compared to future trends in DPS. Apart from Value Line, investment advisory 2
services do not generally publish comprehensive DPS growth projections, and this scarcity 3
of dividend growth rates relative to the abundance of earnings forecasts attests to their 4
relative influence. The fact that securities analysts focus on EPS growth, and that DPS 5
growth rates are not routinely published, indicates that projected EPS growth rates are likely 6
to provide a superior indicator of the future long-term growth expected by investors. 7
Q. Do the growth rate projections of security analysts consider historical 8
trends? 9
A. Yes. Professional security analysts study historical trends extensively in 10
developing their projections of future earnings. Hence, to the extent there is any useful 11
information in historical patterns, that information is incorporated into analysts’ growth 12
forecasts. 13
Q. Did Professor Myron J. Gordon, who pioneered the DCF approach, 14
recognize the pivotal role that earnings play in forming investors’ expectations? 15
A. Yes. Dr. Gordon specifically recognized that “it is the growth that investors 16
expect that should be used” in applying the DCF model and he concluded: 17
A number of considerations suggest that investors may, in fact, use earnings 18
growth as a measure of expected future growth.”19 19
Q. Are analysts’ assessments of growth rates appropriate for estimating 20
investors’ required return using the DCF model? 21
A. Yes. In applying the DCF model to estimate the cost of common equity, the 22
only relevant growth rate is the forward-looking expectations of investors that are captured 23
in current stock prices. Investors, just like securities analysts and others in the investment 24

19 Myron J. Gordon, The Cost of Capital to a Public Utility, MSU Public Utilities Studies (1974) at 89.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 15 of 44
Schedule 2
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community, do not know how the future will actually turn out. They can only make 1
investment decisions based on their best estimate of what the future holds in the way of 2
long-term growth for a particular stock, and securities prices are constantly adjusting to 3
reflect their assessment of available information. 4
Any claims that analysts’ estimates are not relied upon by investors are illogical 5
given the reality of a competitive market for investment advice. If financial analysts’ 6
forecasts do not add value to investors’ decision making, then it is irrational for investors to 7
pay for these estimates. Similarly, those financial analysts who fail to provide reliable 8
forecasts will lose out in competitive markets relative to those analysts whose forecasts 9
investors find more credible. The reality that analyst estimates are routinely referenced in 10
the financial media and in investment advisory publications (e.g., Value Line) implies that 11
investors use them as a basis for their expectations. 12
While the projections of securities analysts may be proven optimistic or pessimistic 13
in hindsight, this is irrelevant in assessing the expected growth that investors have 14
incorporated into current stock prices, and any bias in analysts’ forecasts—whether 15
pessimistic or optimistic—is irrelevant if investors share analysts’ views. Earnings growth 16
projections of security analysts provide the most frequently referenced guide to investors’ 17
views and are widely accepted in applying the DCF model. As explained in New Regulatory 18
Finance: 19
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 16 of 44
Schedule 2
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Because of the dominance of institutional investors and their influence on 1
individual investors, analysts’ forecasts of long-run growth rates provide a 2
sound basis for estimating required returns. Financial analysts exert a strong 3
influence on the expectations of many investors who do not possess the 4
resources to make their own forecasts, that is, they are a cause of g [growth]. 5
The accuracy of these forecasts in the sense of whether they turn out to be 6
correct is not an issue here, as long as they reflect widely held expectations.20 7
Q. Have regulators also recognized that analysts’ growth rate estimates are 8
an important and meaningful guide to investors’ expectations? 9
A. Yes. The Kentucky Public Service Commission has indicated its preference 10
for relying on analysts’ projections in establishing investors’ expectations: 11
KU’s argument concerning the appropriateness of using investors’ 12
expectations in performing a DCF analysis is more persuasive than the AG’s 13
argument that analysts’ projections should be rejected in favor of historical 14
results. The Commission agrees that analysts’ projections of growth will be 15
relatively more compelling in forming investors’ forward-looking 16
expectations than relying on historical performance, especially given the 17
current state of the economy.21 18
Similarly, FERC has expressed a clear preference for projected EPS growth rates in applying 19
the DCF model to estimate the cost of equity for both electric and natural gas pipeline 20
utilities: 21
Opinion No. 414-A held that the IBES five-year growth forecasts for each 22
company in the proxy group are the best available evidence of the short-term 23
growth rates expected by the investment community. It cited evidence that (1) 24
those forecasts are provided to IBES by professional security analysts, (2) 25
IBES reports the forecast for each firm as a service to investors, and (3) the 26
IBES reports are well known in the investment community and used by 27
investors. The Commission has also rejected the suggestion that the IBES 28
analysts are biased and stated that “in fact the analysts have a significant 29
incentive to make their analyses as accurate as possible to meet the needs of 30
their clients since those investors will not utilize brokerage firms whose 31
analysts repeatedly overstate the growth potential of companies.”22 32

20 Roger A. Morin, New Regulatory Finance, Pub. Util. Reports, Inc. (2006) at 298 (emphasis added). 21 Kentucky Utilities Co., Case No. 2009-00548 (Ky PSC Jul. 30, 2010) at 30-31.
22 Kern River Gas Transmission Co., 126 FERC ¶ 61,034at P 121 (2009) (footnote omitted).
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 17 of 44
Schedule 2
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The Public Utility Regulatory Authority of Connecticut has also noted that “there is 1
not growth in DPS without growth in EPS,” and concluded that securities analysts’ growth 2
projections have a greater influence over investors’ expectations and stock prices.23 In 3
addition, the Regulatory Commission of Alaska (“RCA”) has previously determined that 4
analysts’ EPS growth rates provide a superior basis on which to estimate investors’ 5
expectations: 6
We also find persuasive the testimony . . . that projected EPS returns are more 7
indicative of investor expectations of dividend growth than historical growth 8
data because persons making the forecasts already consider the historical 9
numbers in their analyses.24 10
The RCA has concluded that arguments against exclusive reliance on analysts’ EPS growth 11
rates to apply the DCF model “are not convincing.”25 12
Q. What are security analysts currently projecting in the way of growth for 13
the firms in the Utility Proxy Group? 14
A. The projected EPS growth rates for each of the firms in the Utility Group 15
reported by Value Line, IBES,26 and Zacks Investment Research (“Zacks”) are displayed on 16
page 2 of Exhibit No. 3, Schedule 6. 17
Q. How else are investors’ expectations of future long-term growth 18
prospects often estimated for use in the constant growth DCF model? 19
A. In constant growth theory, growth in book equity will be equal to the product 20
of the earnings retention ratio (one minus the dividend payout ratio) and the earned rate of 21
return on book equity. Furthermore, if the earned rate of return and the payout ratio are 22
constant over time, growth in earnings and dividends will be equal to growth in book va lue. 23

23 Decision, Docket No. 13-02-20 (Sept. 24, 2013).
24 Regulatory Commission of Alaska, U-07-76(8) at 65, n. 258. 25 Regulatory Commission of Alaska, U-08-157(10) at 36.
26 Formerly I/B/E/S International, Inc., IBES growth rates are now compiled and published by Refinitiv.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 18 of 44
Schedule 2
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Despite the fact that these conditions are seldom, if ever, met in practice, this “sustainable 1
growth” approach may provide a rough guide for evaluating a firm’s growth prospects and is 2
frequently proposed in regulatory proceedings. 3
The sustainable growth rate is calculated by the formula, g = br+sv, where “b” is the 4
expected retention ratio, “r” is the expected earned return on equity, “s” is the percent of 5
common equity expected to be issued annually as new common stock, and “v” is the equity 6
accretion rate. Under DCF theory, the “sv” factor is a component of the growth rate 7
designed to capture the impact of issuing new common stock at a price above, or below, 8
book value. The sustainable, “br+sv” growth rates for each firm in the Utility Group are 9
summarized on page 2 of Exhibit No. 3, Schedule 5, with the underlying details being 10
presented on Exhibit No. 3, Schedule 6. 11
The sustainable growth rate analysis shown in Exhibit No. 3, Schedule 6 12
incorporates an “adjustment factor” because Value Line’s reported returns are based on year-13
end book values. Since earnings is a flow over the year while book value is determined at a 14
given point in time, the measurement of earnings and book value are distinct concepts. It is 15
this fundamental difference between a flow (earnings) and point estimate (book value) that 16
makes it necessary to adjust to mid-year in calculating the ROE. Given that book value will 17
increase or decrease over the year, using year-end book value (as Value Line does) 18
understates or overstates the average investment that corresponds to the flow of earnings. 19
To address this concern, earnings must be matched with a corresponding representative 20
measure of book value, or the resulting ROE will be distorted. The adjustment factor 21
determined in Exhibit No. 3, Schedule 6 is solely a means of converting Value Line’s end-22
of-period values to an average return over the year. 23
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 19 of 44
Schedule 2
Page 20 of 44

Q. What cost of equity estimates are implied for the Utility Group using the 1
DCF model? 2
A. After combining the dividend yields and respective growth projections for 3
each utility, the resulting cost of equity estimates are shown on page 3 of Exhibit No. 3, 4
Schedule 5. 5
Q. In evaluating the results of the constant growth DCF model, is it 6
appropriate to eliminate illogical low or high-end values? 7
A. Yes. In applying quantitative methods to estimate the cost of equity, it is 8
essential that the resulting values pass fundamental tests of reasonableness and economic 9
logic. Accordingly, DCF estimates that are implausibly low or high should be eliminated 10
when evaluating the results of this method. 11
Q. How do you evaluate DCF estimates at the low end of the range? 12
A. I base my evaluation of DCF estimates at the low end of the range on the 13
fundamental risk-return tradeoff, which holds that investors will only take on more risk if 14
they expect to earn a return to compensate them for the greater uncertainty. Because 15
common stocks lack the protections associated with an investment in long-term bonds, a 16
utility’s common stock imposes far greater risks on investors. As a result, the rate of return 17
that investors require from a utility’s common stock is considerably higher than the yield 18
offered by senior, long-term debt. Consistent with this principle, DCF results that are not 19
sufficiently higher than the yields available on less risky utility bonds must be eliminated. 20
Q. Have similar tests been applied by regulators? 21
A. Yes. FERC has noted that adjustments are justified where applications of the 22
DCF approach produce illogical results. FERC previously evaluated DCF results against 23
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 20 of 44
Schedule 2
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observable yields on long-term public utility debt and recognized that it is appropriate to 1
eliminate estimates that do not sufficiently exceed this threshold.27 FERC affirmed that: 2
The purpose of the low-end outlier test is to exclude from the proxy group 3
those companies whose ROE estimates are below the average bond yield or 4
are above the average bond yield but are sufficiently low that an investor 5
would consider the stock to yield essentially the same return as debt. In 6
public utility ROE cases, the Commission has used 100 basis points above 7
the cost of debt as an approximation of this threshold, but has also considered 8
the distribution of proxy group companies to inform its decision on which 9
companies are outliers. As the Presiding Judge explained, this is a flexible 10
test.28 11
More recently, FERC has established a new test which is based on adding 20 percent 12
of the CAPM market risk premium to the current triple-B bond yield. While this test has no 13
evidentiary support, it does recognize that risk premiums widen when bond yields go down. 14
Q. What interest rate benchmark do you consider in evaluating the DCF 15
results for Avista? 16
A. As noted earlier, the S&P and Moody’s ratings for Avista are BBB and Baa2, 17
respectively, which fall in the triple-B rating category. Furthermore, utility bonds rated 18
“Baa” represent the lowest ratings grade for which Moody’s publishes index values, and the 19
closest available approximation for the risks of common stock, which are significantly 20
greater than those of long-term debt. Accordingly, I referenced average yields on triple-B 21
utility bonds as my benchmark in evaluating low-end results. Monthly yields on Baa bonds 22
reported by Moody’s averaged 3.20 percent over the six months ending November 2020.29 23
Current forecasts continue to anticipate higher long-term rates over the near-term. 24
As shown in Table AMM-2 below, forecasts of IHS Markit and the EIA imply an average 25
Baa bond yield of approximately 4.7 percent over the period 2021-2025: 26

27 See, e.g., Southern California Edison Co., 131 FERC ¶ 61,020 at P 55 (2010) (“SoCal Edison”). 28 Opinion No. 531, 147 FERC ¶ 61,234 at P 122 (2014).
29 Moody’s Investors Service, CreditTrends.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 21 of 44
Schedule 2
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TABLE AMM-2 1
IMPLIED BBB BOND YIELD 2

Q. What else should be considered in evaluating DCF estimates at the low 3
end of the range? 4
A. While adding a fixed spread to public utility bond yields is a starting place in 5
evaluating low-end values, reference to a static test ignores the implications of the inverse 6
relationship between equity risk premiums and bond yields. Specifically, the premium that 7
investors demand to bear the higher risks of common stock is not constant. As demonstrated 8
empirically in the application of the risk premium method,30 equity risk premiums expand 9
when interest rates fall, and vice versa. 10
For example, based on a review of its precedent for evaluating low-end values, 11
FERC established a 100 basis point risk premium over Moody’s bond yield averages as a 12
threshold to eliminate DCF results in SoCal Edison, citing prior decisions in Atlantic Path 13

30 Exhibit No. 3, Schedule 9, page 4.
Baa Yield
2021-25
Projected Aa Utility Yield
IHS Global Insight (a)3.65%
EIA (b)4.60%
Average 4.12%
Current Baa - Aa Yield Spread (c)0.58%
Implied Baa Utility Yield 4.70%
(a) IHS Markit, Long-Term Macro Forecast - Baseline (Jun. 29, 2020).
(b)
(c)Based on monthly average bond yields from Moody's Investors Service for
the six-month period Jun. - Nov. 2020.
Energy Information Administration, Annual Energy Outlook 2020 (Jan. 29,
2020).
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 22 of 44
Schedule 2
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15,31 Startrans,32 and Pioneer33 in support of this policy.34 Because bond yields declined 1
significantly between the time of those findings and the data relevant to this case, the inverse 2
relationship implies a significant increase in the equity risk premium that investors require to 3
accept the higher uncertainties associated with an investment in utility common stocks 4
versus bonds. As shown on page 4 of Exhibit No. 3, Schedule 5, recognizing the inverse 5
relationship between equity risk premiums and bond yields would indicate a current low-end 6
threshold in the range of approximately 5.7 percent to 6.5 percent. The impact of widening 7
equity risk premiums should be considered in evaluating low-end cost of equity estimates. 8
Meanwhile, FERC’s more recent methodology based on the CAPM market risk premium 9
indicates a low-end threshold of 5.2 percent. 10
Q. What do you conclude regarding the reasonableness of DCF values at the 11
low end of the range of results? 12
A. As highlighted on page 3 of Exhibit No. 3, Schedule 5, after considering 13
these tests and the distribution of individual estimates, I eliminate low-end DCF estimates in 14
the range of -3.1 percent to 6.1 percent. Based on my professional experience and the risk-15
return tradeoff principle that is fundamental to finance, it is inconceivable that investors are 16
not requiring a substantially higher rate of return for holding common stock. As a result, 17
consistent with the threshold established by utility bond yields, the values below the 18
threshold provide little guidance as to the returns investors require from utility common 19
stocks and should be excluded. 20

31 Atl. Path 15, LLC, 122 FERC ¶ 61,135 (2008) (“Atlantic Path 15”).
32 Startrans IO, LLC, 122 FERC ¶ 61,306 (2008) (“Startrans”). 33 Pioneer Transmission, LLC, 126 FERC ¶ 61,281 (2009) (“Pioneer”).
34 SoCal Edison at P 54.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 23 of 44
Schedule 2
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Q. Do you typically recommend excluding estimates at the high end of the 1
range of DCF results? 2
A. While I typically recommend the exclusion of high end estimates that are 3
clearly implausible, in this case, no such values exist. The upper end of the cost of common 4
equity range produced by the DCF analysis is set by a cost of equity estimate of 13.9 5
percent. While a 13.9 percent cost of equity estimate may exceed the majority of the 6
remaining values, low-end DCF estimates in the 6 percent range are assuredly far below 7
investors’ required rate of return. Taken together and considered along with the balance of 8
the results, the remaining values provide a reasonable basis on which to frame the range of 9
plausible DCF estimates and evaluate investors’ required rate of return. 10
Q. What cost of equity is implied by your DCF results for the Utility Group? 11
A. As shown on page 3 of Exhibit No. 3, Schedule 5 and summarized in Table 3, 12
below, after eliminating illogical values, application of the constant growth DCF model 13
results in the following cost of equity estimates: 14
TABLE 3 15
DCF RESULTS – UTILITY GROUP 16

D. Capital Asset Pricing Model
Q. Please describe the CAPM. 17
A. The CAPM is a theory of market equilibrium that measures risk using the 18
beta coefficient. Assuming investors are fully diversified, the relevant risk of an individual 19
asset (e.g., common stock) is its volatility relative to the market as a whole, with beta 20
Growth Rate Average Midpoint
Value Line 8.8%10.2%
IBES 9.6%9.9%
Zacks 9.0%9.5%
br + sv 8.6%9.2%
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 24 of 44
Schedule 2
Page 25 of 44

reflecting the tendency of a stock’s price to follow changes in the market. A stock that tends 1
to respond less to market movements has a beta less than 1.00, while stocks that tend to 2
move more than the market have betas greater than 1.00. The CAPM is mathematically 3
expressed as: 4
Rj = Rf +βj(Rm - Rf) 5
where: Rj = required rate of return for stock j; 6
Rf = risk-free rate; 7
Rm = expected return on the market portfolio; and, 8
βj = beta, or systematic risk, for stock j. 9
Under the CAPM formula above, a stock’s required return is a function of the risk-10
free rate (Rf), plus a risk premium that is scaled to reflect the relative volatility of a firm’s 11
stock price, as measured by beta (β). Like the DCF model, the CAPM is an ex-ante, or 12
forward-looking model based on expectations of the future. As a result, in order to produce 13
a meaningful estimate of investors’ required rate of return, the CAPM must be applied using 14
estimates that reflect the expectations of actual investors in the market, not with backward-15
looking, historical data. 16
Q. Why is the CAPM approach an appropriate component of evaluating the 17
cost of equity for Avista? 18
A. The CAPM approach (which also forms the foundation of the ECAPM) 19
generally is considered to be the most widely referenced method for estimating the cost of 20
equity among academicians and professional practitioners, with the pioneering researchers 21
of this method receiving the Nobel Prize in 1990. Because this is the dominant model for 22
estimating the cost of equity outside the regulatory sphere, the CAPM (and ECAPM) 23
provides important insight into investors’ required rate of return for utility stocks, including 24
Avista. 25
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 25 of 44
Schedule 2
Page 26 of 44

Q. How do you apply the CAPM to estimate the cost of common equity? 1
A. Application of the CAPM to the Utility Group based on a forward-looking 2
estimate for investors’ required rate of return from common stocks is presented on Exhibit 3
No. 3, Schedule 7. In order to capture the expectations of today’s investors in current capital 4
markets, the expected market rate of return is estimated by conducting a DCF analysis on 5
the dividend paying firms in the S&P 500. 6
The dividend yield for each firm is obtained from Value Line. The growth rate is 7
based on the earnings growth projections for each firm published by Value Line, IBES, and 8
Zacks, after removing companies with growth rates that were negative or greater than 20 9
percent. Each firm’s dividend yield and growth rate is weighted by its proportionate share 10
of total market value. Based on the weighted average of the projections for the individual 11
firms, current estimates imply an average dividend yield of 2.1 percent and an average 12
growth rate of 9.4 percent. Combining these values results in a current cost of common 13
equity estimate for the market as a whole (Rm) of 11.5 percent.35 Subtracting a 1.5 percent 14
risk-free rate based on the average yield on 30-year Treasury bonds for the six months 15
ending November 2020 produces a market equity risk premium of 10.0 percent. 16
Q. What is the source of the beta values you used to apply the CAPM? 17
A. As I do in the development of my proxy group discussed above, I rely on the 18
beta values reported by Value Line, which in my experience is the most widely referenced 19
source for beta in regulatory proceedings. 20

35 Any difference in the summation due to rounding.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 26 of 44
Schedule 2
Page 27 of 44

Q. What else should be considered in applying the CAPM? 1
A. Financial research indicates that the CAPM does not fully account for 2
observed differences in rates of return attributable to firm size. Accordingly, a modification 3
is required to account for this size effect. As explained by Morningstar: 4
One of the most remarkable discoveries of modern finance is the finding of a 5
relationship between firm size and return. On average, small companies have 6
higher returns than larger ones. . . . The relationship between firm size and 7
return cuts across the entire size spectrum; it is not restricted to the smallest 8
stocks.36 9
According to the CAPM, the expected return on a security should consist of the 10
riskless rate, plus a premium to compensate for the systematic risk of the particular security. 11
The degree of systematic risk is represented by the beta coefficient. The need for the size 12
adjustment arises because differences in investors’ required rates of return that are related to 13
firm size are not fully captured by beta. To account for this, researchers have developed size 14
premiums that need to be added to CAPM cost of equity estimates to account for the level of 15
a firm’s market capitalization in determining the CAPM cost of equity.37 Accordingly, my 16
CAPM analyses incorporated an adjustment to recognize the impact of size distinctions, as 17
measured by the market capitalization for the firms in the Utility Group. 18
Q. Is this size adjustment related to the relative size of Avista as compared 19
with the proxy group? 20
A. No. I am not proposing to apply a general size risk premium in evaluating a 21
fair and reasonable ROE for the Company and my recommendation does not include any 22
adjustment related to the relative size of Avista. Rather, this size adjustment is specific to 23
the CAPM and merely corrects for an observed inability of the beta measure to fully reflect 24

36 Morningstar, 2015 Ibbotson SBBI Classic Yearbook, at p. 99 (footnote omitted).
37 Originally compiled by Ibbotson Associates and published in their annual yearbook entitled, “Stocks, Bonds,
Bills and Inflation,” these size premia are now developed by Duff & Phelps and presented in its Valuation
Handbook – Guide to Cost of Capital.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
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the risks perceived by investors for the firms in the proxy groups. As FERC has recognized, 1
“This type of size adjustment is a generally accepted approach to CAPM analyses.”38 2
Q. What cost of equity is indicated for the Utility Group using the CAPM 3
approach? 4
A. As shown on Exhibit No. 3, Schedule 7, after adjusting for the impact of firm 5
size the CAPM approach implies an average cost of equity estimate of 11.4 percent for the 6
Utility Group. 7
E. Empirical Capital Asset Pricing Model
Q. How does the ECAPM approach differ from traditional applications of 8
the CAPM? 9
A. Empirical tests of the CAPM have shown that low-beta securities earn returns 10
somewhat higher than the CAPM would predict, and high-beta securities earn less than 11
predicted. In other words, the CAPM tends to overstate the actual sensitivity of the cost 12
of capital to beta, with low-beta stocks tending to have higher returns and high-beta 13
stocks tending to have lower risk returns than predicted by the CAPM. This is illustrated 14
graphically in the figure below: 15

38 Opinion No. 531-B, 150 FERC ¶ 61,165 at P 117 (2015).
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
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FIGURE 1 1
CAPM – PREDICTED VS. OBSERVED RETURNS 2

Because the betas of utility stocks, including those in the Utility Group, are generally less 3
than 1.0, this implies that cost of equity estimates based on the traditional CAPM would 4
understate the cost of equity. This empirical finding is widely reported in the finance 5
literature, as summarized in New Regulatory Finance: 6
As discussed in the previous section, several finance scholars have developed 7
refined and expanded versions of the standard CAPM by relaxing the 8
constraints imposed on the CAPM, such as dividend yield, size, and 9
skewness effects. These enhanced CAPMs typically produce a risk-return 10
relationship that is flatter than the CAPM prediction in keeping with the 11
actual observed risk-return relationship. The ECAPM makes use of these 12
empirical relationships.39 13
As discussed in New Regulatory Finance, based on a review of the empirical 14
evidence, the expected return on a security is related to its risk by the ECAPM, which is 15
represented by the following formula: 16
Rj = Rf + 0.25(Rm - Rf) + 0.75[βj(Rm - Rf)] 17
Like the CAPM formula presented earlier, the ECAPM represents a stock’s required return 18
as a function of the risk-free rate (Rf), plus a risk premium. In the formula above, this risk 19

39 Roger A. Morin, New Regulatory Finance, Pub. Util. Reports (2006) at 189.
Return
Rf
Beta1.0
High beta assetsLow beta assets
0
Predicted
Observed
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
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premium is composed of two parts: (1) the market risk premium (Rm - Rf) weighted by a 1
factor of 25 percent, and (2) a company-specific risk premium based on the stocks relative 2
volatility [(β)(Rm - Rf)] weighted by 75 percent. This ECAPM equation, and its associated 3
weighting factors, recognizes the observed relationship between standard CAPM estimates 4
and the cost of capital documented in the financial research, and corrects for the understated 5
returns that would otherwise be produced for low beta stocks. 6
Q. Is the use of the ECAPM consistent with the use of Value Line betas? 7
A. Yes. Value Line beta values are adjusted for the observed tendency of beta to 8
converge toward the mean value of 1.00 over time.40 The purpose of this adjustment is to 9
refine beta values determined using historical data to better match forward-looking estimates 10
of beta, which are the relevant parameter in applying the CAPM or ECAPM models. 11
Meanwhile, the ECAPM does not involve any adjustment to beta whatsoever. Rather, it 12
represents a formal recognition of findings in the financial literature that the observed risk-13
return tradeoff illustrated in Figure 1 is flatter than predicted by the CAPM. In other words, 14
even if a firm’s beta value were estimated with perfect precision, the CAPM would still 15
understate the return for low-beta stocks and overstate the return for high-beta stocks. The 16
ECAPM and the use of adjusted betas represent two separate and distinct issues in 17
estimating returns. 18
Q. Have other regulators relied on the ECAPM? 19
A. Yes. The staff of the Public Utilities Commission of Colorado has recognized 20
that, “The ECAPM is an empirical method that attempts to enhance the CAPM analysis by 21
40 See, e.g., Marshall E. Blume, Betas and Their Regression Tendencies, Journal of Finance (Jun. 1975), pp.
785-795.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
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flattening the risk-return relationship,”41 and relied on the exact same standard ECAPM 1
equation presented above.42 The Wyoming Office of Consumer Advocate, an independent 2
division of the Wyoming Public Service Commission, has relied on this same ECAPM 3
formula in estimating the cost of equity for a natural gas utility.43 4
The ECAPM approach has been relied on by the Staff of the Maryland Public 5
Service Commission. For example, Maryland Staff Witness Julie McKenna noted that “the 6
ECAPM model adjusts for the tendency of the CAPM model to underestimate returns for 7
low Beta stocks,” and concluded that, “I believe under current economic conditions that the 8
ECAPM gives a more realistic measure of the ROE than the CAPM model does.”44 The 9
New York Department of Public Service also routinely incorporates the results of the 10
ECAPM approach in determining allowed ROEs.45 The Regulatory Commission of Alaska 11
has also relied on the ECAPM approach, noting that: 12
Tesoro averaged the results it obtained from CAPM and ECAPM while at the 13
same time providing empirical testimony that the ECAPM results are more 14
accurate then [sic] traditional CAPM results. The reasonable investor would 15
be aware of these empirical results. Therefore, we adjust Tesoro’s 16
recommendation to reflect only the ECAPM result.46 17
The Wyoming Office of Consumer Advocate, an independent division of the 18
Wyoming Public Service Commission, has also relied on this same ECAPM formula in 19
estimating the cost of equity for a natural gas utility, as have witnesses for the Office of 20
Arkansas Attorney General.47 More recently, the Montana Public Service Commission 21

41 Proceeding No. 13AL-0067G, Answer Testimony and Attachments of Scott England (July 31, 2013) at 47. 42 Id. at 48. 43 Docket No. 30011-97-GR-17, Pre-Filed Direct Testimony of Anthony J. Ornelas (May 1, 2018) at 52-53.
44 Direct Testimony and Exhibits of Julie McKenna, Maryland PSC Case No. 9299 (Oct. 12, 2012) at 9.
45 See, e.g., New York Public Service Commission, Cases 19-E-0065 19-G-0066, Prepared Fully Redacted
Testimony of Staff Finance Panel (May 2019) at 94-95.
46 Regulatory Commission of Alaska, Order No. P-97-004(151) (Nov. 27, 2002) at 145. 47 Docket No. 30011-97-GR-17, Pre-Filed Direct Testimony of Anthony J. Ornelas (May 1, 2018) at 52-53;
Docket No. 17-071-U, Direct Testimony of Marlon F. Griffing, PH.D. (May 29, 2018) at 33-35.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
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determined that “[t]he evidence in this proceeding has convinced the Commission that the 1
Empirical Capital Asset Pricing Model (“ECAPM”) should be the primary method for 2
estimating . . . the cost of equity” for a gas distribution utility under its jurisdiction.48 3
Q. What cost of equity is indicated by the ECAPM? 4
A. My applications of the traditional ECAPM are based on the same forward-5
looking market rate of return, risk-free rates, and beta values discussed earlier in connections 6
with the CAPM. As shown on Exhibit No. 3, Schedule 8, applying the forward-looking 7
ECAPM approach to the firms in the Utility Group results in an average ROE estimate of 8
11.6 percent after incorporating the size adjustment corresponding to the market 9
capitalization of the individual utilities. 10
F. Risk Premium Approach
Q. Please briefly describe the risk premium method. 11
A. The risk premium method of estimating investors’ required rate of return 12
extends to common stocks the risk-return tradeoff observed with bonds. The cost of equity 13
is estimated by first determining the additional return investors require to forgo the relative 14
safety of bonds and to bear the greater risks associated with common stock, and by then 15
adding this equity risk premium to the current yield on bonds. Like the DCF model, the risk 16
premium method is capital market oriented. However, unlike DCF models, which indirectly 17
impute the cost of equity, risk premium methods directly estimate investors’ required rate of 18
return by adding an equity risk premium to observable bond yields. 19

48 Montana Public Service Commission, Docket No. D2017.9.80, Order No. 7575c (Sep. 26, 2018) at P 114.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
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Q. Is the risk premium approach a widely accepted method for estimating 1
the cost of equity? 2
A. Yes. The risk premium approach is based on the fundamental risk-return 3
principle that is central to finance, which holds that investors will require a premium in the 4
form of a higher return in order to assume additional risk. This method is routinely 5
referenced by the investment community and in academia and regulatory proceedings, and 6
provides an important tool in estimating a fair ROE for Avista. 7
Q. How do you implement the risk premium method? 8
A. I base my estimates of equity risk premiums for electric utilities on surveys of 9
previously authorized ROEs. Authorized ROEs presumably reflect regulatory commissions’ 10
best estimates of the cost of equity, however determined, at the time they issued th eir final 11
order. Moreover, allowed ROEs are an important consideration for investors and have the 12
potential to influence other observable investment parameters, including credit ratings and 13
borrowing costs. Thus, when considered in the context of a complete and rigorous analysis, 14
this data provides a logical and frequently referenced basis for estimating equity risk 15
premiums for regulated utilities. 16
Q. Is it circular to consider risk premiums based on authorized returns in 17
assessing a fair ROE for Avista? 18
A. No. In establishing authorized ROEs, regulators typically consider the results 19
of alternative market-based approaches, including the DCF model. Because allowed risk 20
premiums consider objective market data (e.g., stock prices, dividends, beta, and interest 21
rates), and are not based strictly on past actions of other regulators, this mitigates concerns 22
over any potential for circularity. 23
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
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Q. How do you calculate the equity risk premiums based on allowed 1
returns? 2
A. The ROEs authorized for electric utilities by regulatory commissions across 3
the U.S. are compiled by S&P Global Market Intelligence and published in its RRA 4
Regulatory Focus report. On page 3 of Exhibit No. 3, Schedule 9, the average yield on 5
long-term public utility bonds is subtracted from the average allowed rate of return on 6
common equity for electric utilities to calculate equity risk premiums for each year between 7
1974 and 2019.49 Over this 46-year period, these equity risk premiums for electric utilities 8
average 3.76 percent, and the yield on public utility bonds average 8.10 percent. 9
Q. Is there any capital market relationship that must be considered when 10
implementing the risk premium method? 11
A. Yes. There is considerable evidence that the magnitude of equity risk 12
premiums is not constant and that equity risk premiums tend to move inversely with interest 13
rates. In other words, when interest rate levels are relatively high, equity risk premiums 14
narrow, and when interest rates are relatively low, equity risk premiums widen. The 15
implication of this inverse relationship is that the cost of equity does not move as much as, 16
or in lockstep with, interest rates. Accordingly, for a 1 percent increase or decrease in 17
interest rates, the cost of equity may only rise or fall some fraction of 1 percent. Therefore, 18
when implementing the risk premium method, adjustments may be required to incorporate 19
this inverse relationship if current interest rate levels diverge from the average interest rate 20
level represented in the data set. 21

49 Yield averages reported by Moody’s are for seasoned bonds with a remaining maturity of 20 years or more.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
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Q. Has this inverse relationship been documented in the financial research? 1
A. Yes. There is considerable empirical evidence that when interest rates are 2
relatively high, equity risk premiums narrow, and when interest rates are relatively low, 3
equity risk premiums are greater. This inverse relationship between equity risk premiums 4
and interest rates has been widely reported in the financial literature. As summarized by 5
New Regulatory Finance: 6
Published studies by Brigham, Shome, and Vinson (1985), Harris (1986), 7
Harris and Marston (1992, 1993), Carelton, Chambers, and Lakonishok 8
(1983), Morin (2005), and McShane (2005), and others demonstrate that, 9
beginning in 1980, risk premiums varied inversely with the level of interest 10
rates – rising when rates fell and declining when rates rose.50 11
Other regulators have also recognized that, while the cost of equity trends in the 12
same direction as interest rates, these variables do not move in lock-step.51 This relationship 13
is illustrated in the figure on page 4 of Exhibit No. 3, Schedule 9. As shown there, the “R-14
squared” value52 for the equity risk premium-utility bond interest rate relationship is 15
approximately 0.90. This is an extremely high score and indicates a strong inverse 16
relationship between equity risk premiums and utility bond interest rates. 17
Q. What are the implications of this relationship under current capital 18
market conditions? 19
A. Current bond yields are lower than those prevailing over the risk premium 20
study periods. Given that equity risk premiums move inversely with interest rates, these 21

50 Roger A. Morin, New Regulatory Finance, Pub. Util. Reports (2006) at 128.
51 See, e.g., California Public Utilities Commission, Decision 08-05-035 (May 29, 2008); Entergy Mississippi
Formula Rate Plan FRP-7,
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwiLs4Sy67nsAhVKH
qwKHddgA1wQFjABegQIBRAC&url=https%3A%2F%2Fcdn.entergy-
mississippi.com%2Fuserfiles%2Fcontent%2Fprice%2Ftariffs%2Feml_frp.pdf&usg=AOvVaw1vyc6J_1IccZsh
zpfCtD0v (last visited Oct. 16, 2020); Opinion No. 531, 147 FERC ¶ 61,234 at P 147 (2014).
52 R-squared (R2) is a statistical measure that represents the proportion of the variance for a dependent variable
(in this case, the equity risk premium level) that is explained by an independent variable (utility bond yields) in
a regression model.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
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lower bond yields also imply an increase in the equity risk premium that investors require to 1
accept the higher uncertainties associated with an investment in utility common stocks 2
versus bonds. In other words, higher required equity risk premiums offset the impact of 3
declining interest rates on the ROE. This relationship is illustrated in the figure below, 4
which is based on three-year rolling averages for the utility bond yields and risk premiums 5
shown on page 3 of Exhibit No. 3, Schedule 9. 6
FIGURE 2 7
INVERSE RELATIONSHIP 8

Q. What cost of equity is implied by the risk premium method using surveys 9
of allowed ROEs? 10
A. Because risk premiums move inversely with interest rates and current bond 11
yields are significantly lower than the average over the study period, it is necessary to adjust 12
the average equity risk premium over the study period to reflect the impact of changes in 13
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
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bond yields. Based on the regression output between the interest rates and equity risk 1
premiums displayed on page 4 of Exhibit No. 3, Schedule 9, the equity risk premium for 2
electric utilities increased approximately 42 basis points for each percentage point drop in 3
the yield on average public utility bonds. As illustrated on page 1 of Exhibit No. 3, 4
Schedule 9, with the yield on average public utility bonds for the six months ending 5
November 2020 being 2.9 percent, this implied a current equity risk premium of 5.95 6
percent for electric utilities. Adding this equity risk premium to the yield on Baa utility 7
bonds of 3.2 percent produces a current cost of equity of 9.15 percent. 8
Q. What cost of equity estimate is produced by the risk premium approach 9
after incorporating forecasted bond yields? 10
A. As note earlier, widely cited forecasts indicate that utility bond yields will 11
increase over the period when the rates established in this proceeding will be in effect. This 12
is documented in Table AMM-4 below, which compares current interest rates on 10-year and 13
30-year Treasury bonds, triple-A rated corporate bonds, and double-A rated utility bonds 14
with the average of near-term projections from Blue Chip Financial Forecasts, Energy 15
Information Administration (“EIA”), IHS Markit, and Value Line: 16
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
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TABLE 4 1
INTEREST RATE TRENDS 2

Accordingly, in addition to the use of current bond yields, I also applied the risk premium 3
approach based on a forecasted yield for 2021-2025. 4
As shown on page 2 of Exhibit No. 3, Schedule 9, after adjusting for changes in 5
interest rates since the study period, this implies an equity risk premium of 5.32 percent for 6
electric utilities. Adding this equity risk premium to the average implied yield on long-term 7
Baa public utility bonds for 2021-2025 of 4.70 percent results in an implied cost of equity of 8
10.02 percent. 9
G. Expected Earnings Approach
Q. What other analyses do you conduct to estimate the cost of common 10
equity? 11
A. I also evaluate the cost of common equity using the expected earnings 12
method. Reference to rates of return available from alternative investments of comparable 13
risk can provide an important benchmark in assessing the return necessary to assure 14
confidence in the financial integrity of a firm and its ability to attract capital. This expected 15
earnings approach is consistent with the economic underpinnings for a fair rate of return 16
Average Change
Nov. 2020 2021-25 Basis Pts
10-Yr. Treasury 0.9%1.9%99
30-Yr. Treasury 1.6%2.2%61
Aaa Corporate 2.3%2.9%60
Aa Utility 2.6%4.1%149
Sources:
Moody's Investors Service.
https://fred.stlouisfed.org/.
Value Line Investment Survey, Forecast for the U.S. Economy (Nov. 27, 2020).
IHS Markit, Long-Term Macro Forecast - Baseline (Jun. 29, 2020).
Energy Information Administration, Annual Energy Outlook 2020 (Jan. 29, 2020).
Wolters Kluwer, Blue Chip Financial Forecasts (Dec. 1, 2020).
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
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established by the U.S. Supreme Court in Bluefield53 and Hope.54 Moreover, it avoids the 1
complexities and limitations of capital market methods and instead focuses on the returns 2
earned on book equity, which are readily available to investors. 3
Q. What economic premise underlies the expected earnings approach? 4
A. The simple, but powerful concept underlying the expected earnings approach 5
is that investors compare each investment alternative with the next best opportunity. If the 6
utility is unable to offer a return similar to that available from other opportunities of 7
comparable risk, investors will become unwilling to supply the capital on reasonable terms. 8
For existing investors, denying the utility an opportunity to earn what is available from other 9
similar risk alternatives prevents them from earning their opportunity cost of capital. Such 10
an outcome would violate the Hope and Bluefield standards and undermine the utility’s 11
access to capital on reasonable terms. 12
Q. How is the expected earnings approach typically implemented? 13
A. The traditional comparable earnings test identifies a group of companies that 14
are believed to be comparable in risk to the utility. The actual earnings of those companies 15
on the book value of their investment are then compared to the allowed return of the utility. 16
While the traditional comparable earnings test is implemented using historical data taken 17
from the accounting records, it is also common to use projections of returns on book 18
investment, such as those published by recognized investment advisory publications (e.g., 19
Value Line). Because these returns on book value equity are analogous to the allowed return 20
on a utility’s rate base, this measure of opportunity costs results in a direct, “apples to 21
apples” comparison. 22
53 Bluefield Water Works & Improvement Co. v. Pub. Serv. Comm’n, 262 U.S. 679 (1923) (“Bluefield”).
54 Federal Power Comm’n v. Hope Natural Gas Co., 320 U.S. 391 (1944) (“Hope”).
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
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Moreover, regulators do not set the returns that investors earn in the capital markets, 1
which are a function of dividend payments and fluctuations in common stock prices , both of 2
which are outside their control. Regulators can only establish the allowed ROE, which is 3
applied to the book value of a utility’s investment in rate base, as determined from its 4
accounting records. This is directly analogous to the expected earnings approach, which 5
measures the return that investors expect the utility to earn on book value. As a result, the 6
expected earnings approach provides a meaningful guide to ensure that the allowed ROE is 7
similar to what other utilities of comparable risk will earn on invested capital. 8
This expected earnings test does not require theoretical models to indirectly infer 9
investors’ perceptions from stock prices or other market data. As long as the proxy 10
companies are similar in risk, their expected earned returns on invested capital provide a 11
direct benchmark for investors’ opportunity costs that is independent of fluctuating stock 12
prices, market-to-book ratios, debates over DCF growth rates, or the limitations inherent in 13
any theoretical model of investor behavior. 14
Q. What rates of return on equity are indicated for utilities based on the 15
expected earnings approach? 16
A. For the firms in the Utility Group, the year-end returns on common equity 17
projected by Value Line over its forecast horizon are shown on Exhibit No. 3, Schedule 10. 18
As I explained earlier in my discussion of the br+sv growth rates used in applying the DCF 19
model, Value Line’s returns on common equity are calculated using year-end equity 20
balances, which understates the average return earned over the year.55 Accordingly, these 21
year-end values are converted to average returns using the same adjustment factor discussed 22

55 For example, to compute the annual return on a passbook savings account with a beginning balance of
$1,000 and an ending balance of $5,000, the interest income would be divided by the average balance of
$3,000. Using the $5,000 balance at the end of the year would understate the actual return.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
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earlier and developed on Exhibit No. 3, Schedule 6. As shown on Exhibit No. 3, Schedule 1
10, Value Line’s projections for the Utility Group suggest an average ROE of approximately 2
10.3 percent, with the midpoint value also being 10.3 percent. 3
II. NON-UTILITY BENCHMARK
Q. What is the purpose of this section of your testimony? 4
A. This section presents the results of my DCF analysis applied to a group of 5
low-risk firms in the competitive sector, which I refer to as the “Non-Utility Group.” This 6
analysis is not directly considered in arriving at my recommended ROE range of 7
reasonableness; however, it is my opinion that this is a relevant consideration in evaluating a 8
fair and reasonable ROE for the Company 9
Q. Do utilities have to compete with non-regulated firms for capital? 10
A. Yes. The cost of capital is an opportunity cost based on the returns that 11
investors could realize by putting their money in other alternatives. Clearly, the total capital 12
invested in utility stocks is only the tip of the iceberg of total common stock investment, and 13
there are a plethora of other enterprises available to investors beyond those in the utility 14
industry. Utilities must compete for capital, not just against firms in their own industry, but 15
with other investment opportunities of comparable risk. Indeed, modern portfolio theory is 16
built on the assumption that rational investors will hold a diverse portfolio of stocks, not just 17
companies in a single industry. 18
Q. Is it consistent with the Bluefield and Hope cases to consider investors’ 19
required ROE for non-utility companies? 20
A. Yes. The cost of equity capital in the competitive sector of the economy form 21
the very underpinning for utility ROEs because regulation purports to serve as a substitute 22
for the actions of competitive markets. The Supreme Court has recognized that it is the 23
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
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degree of risk, not the nature of the business, which is relevant in evaluating an allowed 1
ROE for a utility. The Bluefield case refers to “business undertakings attended with 2
comparable risks and uncertainties.” It does not restrict consideration to other utilities. 3
Similarly, the Hope case states: 4
By that standard, the return to the equity owner should be commensurate with 5
returns on investments in other enterprises having corresponding risks.56 6
As in the Bluefield decision, there is nothing to restrict “other enterprises” solely to the 7
utility industry. 8
Q. Does consideration of the results for the Non-Utility Group make the 9
estimation of the cost of equity using the DCF model more reliable for Avista? 10
A. Yes. The estimates of growth from the DCF model depend on analysts’ 11
forecasts. It is possible for utility growth rates to be distorted by short-term trends in the 12
industry, or by the industry falling into favor or disfavor by analysts. Such distortions could 13
result in biased DCF estimates for utilities. Because the Non-Utility Group includes low 14
risk companies from many industries, it helps to insulate against any possible distortion that 15
may be present in the results for a particular sector. 16
Q. What criteria do you apply to develop the Non-Utility Group? 17
A. The comparable risk proxy group is composed of those U.S. companies 18
followed by Value Line that: 19
1) pay common dividends; 20
2) have a Safety Rank of “1”; 21
3) have a Financial Strength Rating of “A” or greater; 22
4) have a beta of 1.00 or less; and 23
5) have investment grade credit ratings from S&P and Moody’s. 24

56 Federal Power Comm’n v. Hope Natural Gas Co., 320 U.S. 391 (1944) (“Hope”).
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
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Q. How do the overall risks of this Non-Utility Group compare with the 1
Utility Group and Avista? 2
A. Table 5 compares the Non-Utility Group with the Utility Group and Avista 3
across the measures of investment risk discussed earlier: 4
TABLE 5 5
COMPARISON OF RISK INDICATORS 6

As shown above, the risk indicators for the Non-Utility Group generally suggest less risk 7
than for the Utility Group and Avista. 8
The companies that make up the Non-Utility Group are representative of the 9
pinnacle of corporate America. These firms, which include household names such as Coca-10
Cola, Procter & Gamble, and Walmart, have long corporate histories, well-established track 11
records, and exceedingly conservative risk profiles. Many of these companies pay dividends 12
on a par with utilities, with the dividend yield for the group averaging 2.4 percent. 13
Moreover, because of their significance and name recognition, these companies receive 14
intense scrutiny by the investment community, which increases confidence that published 15
growth estimates are representative of the consensus expectations reflected in common stock 16
prices. 17
Q. What are the results of your DCF analysis for the Non-Utility Group? 18
A. I apply the DCF model to the Non-Utility Group using analysts EPS growth 19
projections, as described earlier for the Utility Group, with the results being presented in 20
Safety Financial
S&P Moody's Rank Strength Beta
Non-Utility Group A A2 1 A+0.82
Utility Group BBB Baa2 2 B++ 0.92
Avista BBB Baa2 2 B++ 0.95
Value Line
Credit Rating
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
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Exhibit No. 3, Schedule 11. As summarized in Table 6, below, application of the constant 1
growth DCF model resulted in the following cost of equity estimates: 2
TABLE 6 3
DCF RESULTS – NON-UTILITY GROUP 4

As discussed earlier, reference to the Non-Utility Group is consistent with 5
established regulatory principles. Required returns for utilities should be in line with those 6
of non-utility firms of comparable risk operating under the constraints of free competition. 7
Because the actual cost of equity is unobservable, and DCF results inherently incorporate a 8
degree of error, cost of equity estimates for the Non-Utility Group provide an important 9
benchmark in evaluating a fair and reasonable ROE for Avista. 10
Growth Rate Average Midpoint
Value Line 10.1%9.7%
IBES 9.3%9.9%
Zacks 9.7%10.1%
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 2, Page 44 of 44
ROE ANALYSIS Schedule 3
Page 1 of 1
SUMMARY OF RESULTS
Method Average Midpoint
DCF
Value Line 8.8%10.2%
IBES 9.6%9.9%
Zacks 9.0%9.5%
Internal br + sv 8.6%9.2%
CAPM 11.4%11.9%
Empirical CAPM 11.6%12.0%
Utility Risk Premium
Current Bond Yield 9.1%
Projected Bond Yields 10.0%
Expected Earnings 10.3%10.3%
Cost of Equity Range 9.4% -- 10.8%
Flotation Cost Adjustment
Dividend Yield 3.8%
Flotation Cost Percentage 2.9%
Adjustment 0.1%
Recommended ROE Range 9.5% -- 10.9%
Midpoint 10.2%
ROE Recommendation
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 3, Page 1 of 1
CAPITAL STRUCTURE Schedule 4
Page 1 of 3
UTILITY GROUP
Common Common
Company Debt (c) Preferred Equity Debt (c) Other Equity
1 Algonquin Pwr & Util 47.2% 2.2% 50.6% n/a n/a n/a
2 ALLETE 40.9% 0.0% 59.1% 41.0% 0.0% 59.0%
3 Ameren Corp.53.3% 0.0% 46.7% 51.0% 0.5% 48.5%
4 Avista Corp.49.4% 0.0% 50.6% 50.5% 0.0% 49.5%
5 Black Hills Corp. 56.1% 0.0% 43.9% 51.0% 0.0% 49.0%
6 CenterPoint Energy 64.4% 0.0% 35.6% 54.0% 3.5% 42.5%
7 CMS Energy Corp. 72.2% 0.0% 27.8% 67.0% 0.5% 32.5%
8 DTE Energy Co. 58.4% 0.0% 41.6% 58.5% 0.0% 41.5%
9 Edison International 54.2% 0.0% 45.8% 60.0% 3.5% 36.5%
10 Emera Inc.64.8% 4.2% 30.9% 53.6% 0.0% 46.4%
11 Entergy Corp.63.0% 0.8% 36.2% 60.5% 1.0% 38.5%
12 Exelon Corp.51.3% 0.0% 48.7% 50.5% 0.0% 49.5%
13 Hawaiian Elec. 47.3% 0.8% 51.9% 47.0% 0.5% 52.5%
14 IDACORP, Inc. 42.6% 0.0% 57.4% 45.0% 0.0% 55.0%
15 NorthWestern Corp. 52.5% 0.0% 47.5% 49.5% 0.0% 50.5%
16 OGE Energy Corp. 43.6% 0.0% 56.4% 49.0% 0.0% 51.0%
17 Otter Tail Corp. 46.9% 0.0% 53.1% 45.5% 0.0% 54.5%
18 Sempra Energy 50.6% 0.0% 49.4% 48.0% 1.5% 50.5%
Average 53.3% 0.4% 46.3% 51.9% 0.6% 47.5%
(a) Company Form 10-K and Annual Reports.
(b) The Value Line Investment Survey (Oct. 23, Nov. 13 and Dec. 11 2020).
(c) Includes current maturities.
Value Line Projected (b)At Fiscal Year-End 2019 (a)
Exhibit No. 3
Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 4, Page 1 of 3
CAPITAL STRUCTURE Schedule 4
Page 2 of 3
ELECTRIC GROUP OPERATING SUBSIDIARIES
Operating Company Debt (b) Preferred
Common
Equity
ALGONQUIN PWR. & UTIL.
Empire District Electric Co.46.01% 0.00% 53.99%
Liberty Utilities (Granite State Elec.)22.95% 0.00% 77.05%
ALLETE
ALLETE, Inc. (Minnesota Power)40.41% 0.00% 59.59%
AMEREN CORP.
Ameren Illinois Co.46.39% 0.80% 52.81%
Union Electric Co.49.07% 0.94% 49.99%
AVISTA CORP.
Avista Corp.49.17% 0.00% 50.83%
Alaska Electric Light & Power 40.16% 0.00% 59.84%
BLACK HILLS CORP.
Black Hills Power 43.18% 0.00% 56.82%
Cheyenne Light Fuel & Power 51.68% 0.00% 48.32%
Black Hills/Colorado Electric Utility Co 27.02% 0.00% 72.98%
CENTERPOINT ENERGY
CenterPoint Energy Houston Elect.60.36% 0.00% 39.64%
CMS ENERGY
Consumers Energy Co.48.70% 0.25% 51.05%
DTE ENERGY CO.
DTE Electric Co.49.98% 0.00% 50.02%
EDISON INTERNATIONAL
Southern California Edison Co.46.04% 6.80% 47.16%
EMERA INC.
Emera Maine 42.83% 0.04% 57.13%
Tampa Electric Co.44.70% 0.00% 55.30%
ENTERGY CORP.
Entergy Arkansas Inc.52.94% 0.00% 47.06%
Entergy Louisiana LLC 53.31% 0.00% 46.69%
Entergy Mississippi Inc.51.14% 0.00% 48.86%
Entergy New Orleans Inc.52.91% 0.00% 47.09%
Entergy Texas Inc.51.66% 0.94% 47.40%
At Year-End 2019 (a)
Exhibit No. 3
Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 4, Page 2 of 3
CAPITAL STRUCTURE Schedule 4
Page 3 of 3
ELECTRIC GROUP OPERATING SUBSIDIARIES
Operating Company Debt (b) Preferred
Common
Equity
EXELON CORP.
Delmarva Power and Light 49.79% 0.00% 50.21%
Baltimore Gas & Electric Co.47.03% 0.00% 52.97%
Commonweath Edison Co.44.89% 0.00% 55.11%
PECO Energy Co.46.21% 0.00% 53.79%
Potomac Electric Power Co.49.63% 0.00% 50.37%
Atlantic City Electric Co.50.98% 0.00% 49.02%
HAWAIIAN ELEC.
Hawaiian Electric Co.41.84% 0.96% 57.20%
IDACORP
Idaho Power Co.44.66% 0.00% 55.34%
NORTHWESTERN CORP.
NorthWestern Corporation 52.41% 0.00% 47.59%
OGE ENERGY CORP.
Oklahoma G&E 44.85% 0.00% 55.15%
OTTER TAIL CORP.
Otter Tail Power Co.48.88% 0.00% 51.12%
SEMPRA ENERGY
San Diego Gas & Electric 47.26% 0.00% 52.74%
Oncor Electric Delivery 43.36% 0.00% 56.64%
Minimum 22.9% 0.0% 39.6%
Maximum 60.4% 6.8% 77.1%
Average 46.5% 0.3% 53.1%
(a) Data from 2019 Company Form 10-K and FERC Form 1 reports.
(b) Includes current maturities.
At Year-End 2019 (a)
Exhibit No. 3
Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 4, Page 3 of 3
DCF MODEL - UTILITY GROUP Schedule 5
Page 1 of 4
DIVIDEND YIELD
(a)(b)
Company Price Dividends Yield
1 Algonquin Pwr & Util $15.79 $0.62 3.9%
2 ALLETE $56.97 $2.56 4.5%
3 Ameren Corp.$80.14 $2.09 2.6%
4 Avista Corp.$37.15 $1.67 4.5%
5 Black Hills Corp.$61.14 $2.26 3.7%
6 CenterPoint Energy $23.16 $0.64 2.8%
7 CMS Energy Corp.$62.77 $1.74 2.8%
8 DTE Energy Co.$127.93 $4.34 3.4%
9 Edison International $62.01 $2.65 4.3%
10 Emera Inc.$54.72 $2.55 4.7%
11 Entergy Corp.$107.88 $3.86 3.6%
12 Exelon Corp.$42.02 $1.59 3.8%
13 Hawaiian Elec.$36.17 $1.32 3.6%
14 IDACORP, Inc.$91.85 $2.84 3.1%
15 NorthWestern Corp.$57.53 $2.48 4.3%
16 OGE Energy Corp.$33.05 $1.63 4.9%
17 Otter Tail Corp.$41.19 $1.56 3.8%
18 Sempra Energy $130.27 $4.42 3.4%
Average 3.8%
(a)Average of closing prices for 30 trading days ended Dec. 11, 2020.
(b)The Value Line Investment Survey, Summary & Index (Dec. 11, 2020).
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 5, Page 1 of 4
DCF MODEL - UTILITY GROUP Schedule 5
Page 2 of 4
GROWTH RATES
(a) (b) (c) (d)
br+sv
Company Value Line IBES Zacks Growth
1 Algonquin Pwr & Util n/a 8.1% 8.1% n/a
2 ALLETE 4.5% 7.0% n/a 3.3%
3 Ameren Corp.6.0% 3.5% 5.2% 6.0%
4 Avista Corp.1.0% 5.5% 5.5% 3.0%
5 Black Hills Corp.3.5% 4.7% 5.8% 4.1%
6 CenterPoint Energy 5.0% -5.9% 5.0% 9.2%
7 CMS Energy Corp.7.5% 7.2% 7.0% 7.2%
8 DTE Energy Co.6.0% 6.0% 5.7% 5.4%
9 Edison International n/a -0.5% 3.1% 6.0%
10 Emera Inc.6.0% 5.6% n/a 3.8%
11 Entergy Corp.3.0% 5.4% 5.4% 4.9%
12 Exelon Corp.4.5% -2.4% 3.2% 4.2%
13 Hawaiian Elec.1.5% 3.3% 1.7% 2.9%
14 IDACORP, Inc.3.5% 2.6% 2.6% 3.5%
15 NorthWestern Corp.2.5% 2.7% 3.4% 3.3%
16 OGE Energy Corp.3.0% 2.1% 3.6% 2.6%
17 Otter Tail Corp.6.5% 9.0% n/a 6.1%
18 Sempra Energy 10.5% 7.7% 7.8% 7.1%
(a) The Value Line Investment Survey (Oct. 23, Nov. 13 and Dec. 11 2020).
(b)
(c)
(d) See Schedule 6.
Earnings Growth
www.finance.yahoo.com (retreived Dec. 19, 2020).
www.zacks.com (retrieved Dec. 19, 2020).
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 5, Page 2 of 4
DCF MODEL - UTILITY GROUP Schedule 5
Page 3 of 4
DCF COST OF EQUITY ESTIMATES
(a) (a) (a) (a)
br+sv
Company Value Line IBES Zacks Growth
1 Algonquin Pwr & Util n/a 12.0% 12.0% n/a
2 ALLETE 9.0% 11.5% n/a 7.8%
3 Ameren Corp.8.6% 6.1% 7.8% 8.6%
4 Avista Corp.5.5% 10.0% 10.0% 7.5%
5 Black Hills Corp.7.2% 8.4% 9.5% 7.8%
6 CenterPoint Energy 7.8% -3.1% 7.8% 11.9%
7 CMS Energy Corp.10.3% 10.0% 9.8% 9.9%
8 DTE Energy Co.9.4% 9.4% 9.1% 8.8%
9 Edison International n/a 3.8% 7.4% 10.3%
10 Emera Inc.10.7% 10.3% n/a 8.5%
11 Entergy Corp.6.6% 8.9% 8.9% 8.4%
12 Exelon Corp.8.3% 1.4% 7.0% 8.0%
13 Hawaiian Elec.5.1% 6.9% 5.3% 6.5%
14 IDACORP, Inc.6.6% 5.7% 5.7% 6.6%
15 NorthWestern Corp.6.8% 7.0% 7.7% 7.6%
16 OGE Energy Corp.7.9% 7.0% 8.5% 7.6%
17 Otter Tail Corp.10.3% 12.8% n/a 9.9%
18 Sempra Energy 13.9% 11.1% 11.2% 10.5%
Average (b)8.8% 9.6% 9.0% 8.6%
Midpoint (b,c)10.2% 9.9% 9.5% 9.2%
(a) Sum of dividend yield (Schedule 5, p. 1) and respective growth rate (Schedule 5, p. 2).
(b)Excludes highlighted figures.
(c) Average of low and high values.
Earnings Growth
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 5, Page 3 of 4
DCF MODEL - UTILITY GROUP Schedule 5
Page 4 of 4
LOW-END THRESHOLD ADJUSTMENTS
Atlantic Path 15 / Startrans / So. Cal Edison Pioneer Transmission
Baa Yield Baa Yield
Jun-07 6.54%Apr-08 6.81%
Jul-07 6.49%May-08 6.79%
Aug-07 6.51%Jun-08 6.93%
Sep-07 6.45%Jul-08 6.97%
Oct-07 6.36%Aug-08 6.98%
Nov-07 6.27%Sep-08 7.15%
Current Projected
Historical Baa Bond Yield 6.69% (a) 6.69% (a)
Current Baa Bond Yield 3.20% (b) 4.70% (c)
Change in Bond Yield -3.49%-1.99%
Risk Premium/Interest Rate Relationship -0.42103 (d) -0.42103 (d)
Adjustment to Low-end Threshold 1.47%0.84%
Current Baa Bond Yield 3.20%4.70%
Original Threshold 1.00%1.00%
Adjustment 1.47%0.84%
Adjusted Low-end Threshold 5.67%6.54%
Low-end Test -- FERC Opinion No. 569-A
Current Baa Bond Yield 3.20%
CAPM Market Risk Premium (e)10.01%
Risk Premium Factor (f)20.00%
Adjustment to Low-end Threshold 2.00%
Adjusted Low-end Threshold 5.20%
(a) Average Baa utility bond yield for 6-mo. periods ending Nov. 2007 and Sep. 2008.
(b) Average Baa utility bond yield for 6-months ended Nov. 2020.
(c)
(d) Schedule 9, page 4.(e)Schedule 7, page 1.(f)
Average Baa utility bond yield for 2021-25 based on data from IHS Markit, Long-Term Macro Forecast -
Baseline (Jun. 29, 2020); Energy Information Administration, Annual Energy Outlook 2020 (Jan. 29, 2020),
Moody's Investors Service at www.credittrends.com.
171 FERC ¶ 61,154, Docket Nos. EL14-12-004 and EL15-45-013, Opinion No. 569-A, Order on Rehearing
(issued May 21, 2020).
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 5, Page 4 of 4
DCF MODEL - UTILITY GROUP Schedule 6
Page 1 of 2
BR+SV GROWTH RATE
(a) (a) (a)(b) (c)(d) (e)
Adjustment
Company EPS DPS BVPS b r Factor Adjusted r br s v sv br + sv
1 Algonquin Pwr & Util n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
2 ALLETE $4.25 $2.80 $51.25 34.1% 8.3% 1.0223 8.5% 2.9% 0.0142 0.3167 0.45%3.3%
3 Ameren Corp.$4.50 $2.45 $44.50 45.6% 10.1% 1.0400 10.5% 4.8% 0.0303 0.3862 1.17%6.0%
4 Avista Corp.$2.50 $1.90 $32.00 24.0% 7.8% 1.0192 8.0% 1.9% 0.0275 0.3905 1.07%3.0%
5 Black Hills Corp. $4.25 $2.75 $47.50 35.3% 8.9% 1.0268 9.2% 3.2% 0.0194 0.4242 0.83%4.1%
6 CenterPoint Energy $1.70 $0.80 $15.25 52.9% 11.1% 1.0400 11.6% 6.1% 0.0798 0.3776 3.01%9.2%
7 CMS Energy Corp. $3.50 $2.15 $25.75 38.6% 13.6% 1.0427 14.2% 5.5% 0.0281 0.6038 1.70%7.2%
8 DTE Energy Co. $8.50 $5.20 $79.00 38.8% 10.8% 1.0347 11.1% 4.3% 0.0234 0.4456 1.04%5.4%
9 Edison International $5.25 $3.00 $43.75 42.9% 12.0% 1.0226 12.3% 5.3% 0.0169 0.4531 0.76%6.0%
10 Emera Inc.$4.00 $2.76 $44.95 31.0% 8.9% 1.0290 9.2% 2.8% 0.0252 0.3800 0.96%3.8%
11 Entergy Corp.$7.00 $4.55 $64.50 35.0% 10.9% 1.0279 11.2% 3.9% 0.0203 0.4735 0.96%4.9%
12 Exelon Corp.$3.50 $1.90 $39.75 45.7% 8.8% 1.0203 9.0% 4.1% 0.0044 0.2050 0.09%4.2%
13 Hawaiian Elec.$2.00 $1.40 $24.50 30.0% 8.2% 1.0208 8.3% 2.5% 0.0130 0.3000 0.39%2.9%
14 IDACORP, Inc.$5.50 $3.50 $58.50 36.4% 9.4% 1.0177 9.6% 3.5% 0.0002 0.4429 0.01%3.5%
15 NorthWestern Corp. $4.00 $2.80 $46.00 30.0% 8.7% 1.0184 8.9% 2.7% 0.0162 0.3867 0.62%3.3%
16 OGE Energy Corp. $2.50 $1.95 $20.75 22.0% 12.0% 0.9999 12.0% 2.7% (0.0002) 0.5632 -0.01%2.6%
17 Otter Tail Corp.$3.00 $1.80 $24.50 40.0% 12.2% 1.0282 12.6% 5.0% 0.0193 0.5333 1.03%6.1%
18 Sempra Energy $9.75 $5.60 $90.00 42.6% 10.8% 1.0520 11.4% 4.9% 0.0472 0.4706 2.22%7.1%
2024 "sv" Factor
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 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)
Chg
Company Eq Ratio Tot Cap Com Eq Eq Ratio Tot Cap Com Eq Equity High Low Avg.M/B 2019 2024 Growth
1 Algonquin Pwr & Util n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
2 ALLETE 61.4% $3,633 $2,231 59.0% $4,725 $2,788 4.6% $85.00 $65.00 $75.00 1.463 51.70 54.25 0.97%
3 Ameren Corp.47.1% $17,116 $8,062 48.5% $24,800 $12,028 8.3% $85.00 $60.00 $72.50 1.629 246.20 270.00 1.86%
4 Avista Corp.50.6% $3,835 $1,940 49.5% $4,750 $2,351 3.9% $60.00 $45.00 $52.50 1.641 67.18 73.00 1.68%
5 Black Hills Corp. 42.9% $5,502 $2,360 49.0% $6,300 $3,087 5.5% $95.00 $70.00 $82.50 1.737 61.48 65.00 1.12%
6 CenterPoint Energy 29.1% $22,603 $6,577 42.5% $23,100 $9,818 8.3% $30.00 $19.00 $24.50 1.607 502.24 640.00 4.97%
7 CMS Energy Corp. 29.4% $17,082 $5,022 32.5% $23,700 $7,703 8.9% $75.00 $55.00 $65.00 2.524 283.86 300.00 1.11%
8 DTE Energy Co.42.3% $27,607 $11,678 41.5% $39,800 $16,517 7.2% $165.00 $120.00 $142.50 1.804 192.21 205.00 1.30%
9 Edison International 39.9% $33,360 $13,311 36.5% $45,700 $16,681 4.6% $95.00 $65.00 $80.00 1.829 361.99 379.00 0.92%
10 Emera Inc.38.5% $22,245 $8,566 46.4% $24,685 $11,451 6.0% $85.00 $60.00 $72.50 1.613 242.48 262.00 1.56%
11 Entergy Corp.37.1% $27,557 $10,224 38.5% $35,100 $13,514 5.7% $140.00 $105.00 $122.50 1.899 199.15 210.00 1.07%
12 Exelon Corp.50.4% $63,943 $32,227 49.5% $79,800 $39,501 4.2% $60.00 $40.00 $50.00 1.258 973.00 990.00 0.35%
13 Hawaiian Elec.54.6% $4,177 $2,281 52.5% $5,350 $2,809 4.3% $40.00 $30.00 $35.00 1.429 108.97 114.00 0.91%
14 IDACORP, Inc.58.7% $4,201 $2,466 55.0% $5,350 $2,943 3.6% $120.00 $90.00 $105.00 1.795 50.42 50.45 0.01%
15 NorthWestern Corp. 47.5% $4,290 $2,038 50.5% $4,850 $2,449 3.7% $85.00 $65.00 $75.00 1.630 50.45 53.00 0.99%
16 OGE Energy Corp. 56.4% $7,335 $4,137 51.0% $8,100 $4,131 0.0% $55.00 $40.00 $47.50 2.289 200.10 200.00 -0.01%
17 Otter Tail Corp.53.1% $1,471 $781 54.5% $1,900 $1,036 5.8% $60.00 $45.00 $52.50 2.143 40.16 42.00 0.90%
18 Sempra Energy 43.4% $40,734 $17,679 50.5% $58,900 $29,745 11.0% $195.00 $145.00 $170.00 1.889 291.71 330.00 2.50%
(a) The Value Line Investment Survey (Oct. 23, Nov. 13 and Dec. 11 2020).
(h) Average of High and Low expected market prices divided by 2024 BVPS.
(e) Computed as 1 - B/M Ratio.
(b) Computed using the formula 2*(1+5-Yr. Change in Equity)/(2+5 Yr. Change in Equity).
(g) Five-year compound rate of change.
(c) Product of average year-end "r" for 2024 and Adjustment Factor.
(d) Product of change in common shares outstanding and M/B Ratio.
(f) Product of total capital and equity ratio.
Common Shares202420192024
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 6, Page 2 of 2
CAPM Schedule 7
Page 1 of 1
UTILITY GROUP
(a) (b)(c)(d)(d) (e)
Div Proj. Cost of Risk-Free Risk Unadjusted Market Size CAPM
Company Yield Growth Equity Rate Premium Beta CAPM Cap Adjustment Result
1 Algonquin Pwr & Util 2.1% 9.4% 11.5% 1.5% 10.0% 0.90 10.5% $9,564 0.73% 11.2%
2 ALLETE 2.1% 9.4% 11.5% 1.5% 10.0% 0.85 10.0% $2,900 1.10% 11.1%
3 Ameren Corp. 2.1% 9.4% 11.5% 1.5% 10.0% 0.85 10.0% $19,000 0.50% 10.5%
4 Avista Corp.2.1% 9.4% 11.5% 1.5% 10.0% 0.95 11.0% $2,400 1.34% 12.3%
5 Black Hills Corp. 2.1% 9.4% 11.5% 1.5% 10.0% 1.00 11.5% $3,700 1.10% 12.6%
6 CenterPoint Energy 2.1% 9.4% 11.5% 1.5% 10.0% 1.15 13.0% $13,000 0.73% 13.7%
7 CMS Energy Corp. 2.1% 9.4% 11.5% 1.5% 10.0% 0.80 9.5% $18,000 0.50% 10.0%
8 DTE Energy Co. 2.1% 9.4% 11.5% 1.5% 10.0% 0.95 11.0% $24,000 0.50% 11.5%
9 Edison International 2.1% 9.4% 11.5% 1.5% 10.0% 0.95 11.0% $21,000 0.50% 11.5%
10 Emera Inc.2.1% 9.4% 11.5% 1.5% 10.0% 0.80 9.5% $13,100 0.73% 10.2%
11 Entergy Corp.2.1% 9.4% 11.5% 1.5% 10.0% 0.95 11.0% $22,000 0.50% 11.5%
12 Exelon Corp.2.1% 9.4% 11.5% 1.5% 10.0% 0.95 11.0% $40,000 -0.28% 10.7%
13 Hawaiian Elec. 2.1% 9.4% 11.5% 1.5% 10.0% 0.80 9.5% $3,800 1.10% 10.6%
14 IDACORP, Inc. 2.1% 9.4% 11.5% 1.5% 10.0% 0.80 9.5% $4,500 0.79% 10.3%
15 NorthWestern Corp. 2.1% 9.4% 11.5% 1.5% 10.0% 0.95 11.0% $2,700 1.10% 12.1%
16 OGE Energy Corp. 2.1% 9.4% 11.5% 1.5% 10.0% 1.10 12.5% $6,500 0.79% 13.3%
17 Otter Tail Corp. 2.1% 9.4% 11.5% 1.5% 10.0% 0.85 10.0% $1,600 1.47% 11.5%
18 Sempra Energy 2.1% 9.4% 11.5% 1.5% 10.0% 1.00 11.5% $37,000 -0.28% 11.2%
Average 10.7%11.4%
Midpoint (f)11.3%11.9%
(a)
(b)
(c) Average yield on 30-year Treasury bonds for the six-months ending Nov. 2020 based on data from the Federal Reserve at https://fred.stlouisfed.org/.
(d) The Value Line Investment Survey (Oct. 23, Nov. 13 and Dec. 11 2020).
(e)Duff & Phelps, 2020 CRSP Deciles Size Study -- Supplementary Data Exhibits, Cost of Capital Navigator.
(f) Average of low and high values.
Market Return (Rm)
Weighted average for Dividend paying components of S&P 500 index from zacks.com (retrieved Dec. 7, 2020).
Average of weighted average earnings growth rates from Value Line Investment Survey, IBES, and Zacks Investment Research for dividend-paying stocks in the
7, 2020). Eliminated negative growth rates and all values greater than 20%.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 7, Page 1 of 1
EMPIRICAL CAPM Schedule 8
Page 1 of 1
UTILITY GROUP
(a) (b)(c)(d)(e) (d)(e) (f)
Div Proj.Risk-Free Risk Total Unadjusted Market Size ECAPM
Company Yield Growth Equity Rate Premium RP 1 Beta RP2 RP Ke Cap Adjustment Result
1 Algonquin Pwr & Util 2.1% 9.4% 11.5% 1.5% 10.0% 25% 2.5% 0.90 75% 6.8% 9.3% 10.8% $9,564 0.73% 11.5%
2 ALLETE 2.1% 9.4% 11.5% 1.5% 10.0% 25% 2.5% 0.85 75% 6.4% 8.9% 10.4% $2,900 1.10% 11.5%
3 Ameren Corp. 2.1% 9.4% 11.5% 1.5% 10.0% 25% 2.5% 0.85 75% 6.4% 8.9% 10.4% $19,000 0.50% 10.9%
4 Avista Corp. 2.1% 9.4% 11.5% 1.5% 10.0% 25% 2.5% 0.95 75% 7.1% 9.6% 11.1% $2,400 1.34% 12.5%
5 Black Hills Corp. 2.1% 9.4% 11.5% 1.5% 10.0% 25% 2.5% 1.00 75% 7.5% 10.0% 11.5% $3,700 1.10% 12.6%
6 CenterPoint Energy 2.1% 9.4% 11.5% 1.5% 10.0% 25% 2.5% 1.15 75% 8.6% 11.1% 12.6% $13,000 0.73% 13.4%
7 CMS Energy Corp. 2.1% 9.4% 11.5% 1.5% 10.0% 25% 2.5% 0.80 75% 6.0% 8.5% 10.0% $18,000 0.50% 10.5%
8 DTE Energy Co. 2.1% 9.4% 11.5% 1.5% 10.0% 25% 2.5% 0.95 75% 7.1% 9.6% 11.1% $24,000 0.50% 11.6%
9 Edison International 2.1% 9.4% 11.5% 1.5% 10.0% 25% 2.5% 0.95 75% 7.1% 9.6% 11.1% $21,000 0.50% 11.6%
10 Emera Inc.2.1% 9.4% 11.5% 1.5% 10.0% 25% 2.5% 0.80 75% 6.0% 8.5% 10.0% $13,100 0.73% 10.7%
11 Entergy Corp. 2.1% 9.4% 11.5% 1.5% 10.0% 25% 2.5% 0.95 75% 7.1% 9.6% 11.1% $22,000 0.50% 11.6%
12 Exelon Corp. 2.1% 9.4% 11.5% 1.5% 10.0% 25% 2.5% 0.95 75% 7.1% 9.6% 11.1% $40,000 -0.28% 10.9%
13 Hawaiian Elec. 2.1% 9.4% 11.5% 1.5% 10.0% 25% 2.5% 0.80 75% 6.0% 8.5% 10.0% $3,800 1.10% 11.1%
14 IDACORP, Inc. 2.1% 9.4% 11.5% 1.5% 10.0% 25% 2.5% 0.80 75% 6.0% 8.5% 10.0% $4,500 0.79% 10.8%
15 NorthWestern Corp. 2.1% 9.4% 11.5% 1.5% 10.0% 25% 2.5% 0.95 75% 7.1% 9.6% 11.1% $2,700 1.10% 12.2%
16 OGE Energy Corp. 2.1% 9.4% 11.5% 1.5% 10.0% 25% 2.5% 1.10 75% 8.3% 10.8% 12.3% $6,500 0.79% 13.1%
17 Otter Tail Corp. 2.1% 9.4% 11.5% 1.5% 10.0% 25% 2.5% 0.85 75% 6.4% 8.9% 10.4% $1,600 1.47% 11.9%
18 Sempra Energy 2.1% 9.4% 11.5% 1.5% 10.0% 25% 2.5% 1.00 75% 7.5% 10.0% 11.5% $37,000 -0.28% 11.2%
Average 10.9%11.6%
Midpoint (g)11.3%12.0%
(a) Weighted average for Dividend paying components of S&P 500 index from zacks.com (retrieved Dec. 7, 2020).
(b)
(c)
(d) Roger A. Morin, New Regulatory Finance, Pub. Util. Reports, Inc. (2006) at 190.
(e) The Value Line Investment Survey (Oct. 23, Nov. 13 and Dec. 11 2020).
(f)Duff & Phelps, 2020 CRSP Deciles Size Study -- Supplementary Data Exhibits, Cost of Capital Navigator.
(g) Average of low and high values.
Average yield on 30-year Treasury bonds for the six-months ending Nov. 2020 based on data from the Federal Reserve at https://fred.stlouisfed.org/.
Market Return (Rm)
Beta Adjusted RPUnadjusted RP
Average of weighted average earnings growth rates from Value Line Investment Survey, IBES, and Zacks Investment Research for dividend-paying stocks in the S&P 500 based on data from
http://finance.yahoo.com (retrieved Dec. 8, 2020), www.zacks.com (retrieved Dec. 7, 2020), and www.valueline.com (retrieved Dec. 7, 2020). Eliminated negative growth rates and all values greater
than 20%.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 8, Page 1 of 1
ELECTRIC UTILITY RISK PREMIUM Schedule 9
Page 1 of 4
CURRENT BOND YIELD
Current Equity Risk Premium
(a) Avg. Yield over Study Period 8.10%
(b) Average Utility Bond Yield 2.90%
Change in Bond Yield -5.20%
(c) Risk Premium/Interest Rate Relationship -0.4210
Adjustment to Average Risk Premium 2.19%
(a) Average Risk Premium over Study Period 3.76%
Adjusted Risk Premium 5.95%
Implied Cost of Equity
(b) Baa Utility Bond Yield 3.20%
Adjusted Equity Risk Premium 5.95%
Risk Premium Cost of Equity 9.15%
(a) Schedule 9, page 3.
(b)
(c) Schedule 9, page 4.
Moody's Investors Service at www.credittrends.com.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 9, Page 1 of 4
ELECTRIC UTILITY RISK PREMIUM Schedule 9
Page 2 of 4
PROJECTED BOND YIELD
Current Equity Risk Premium
(a) Avg. Yield over Study Period 8.10%
(b) Average Utility Bond Yield 2021-2025 4.40%
Change in Bond Yield -3.70%
(c) Risk Premium/Interest Rate Relationship -0.4210
Adjustment to Average Risk Premium 1.56%
(a) Average Risk Premium over Study Period 3.76%
Adjusted Risk Premium 5.32%
Implied Cost of Equity
(b) Baa Utility Bond Yield 2021-2025 4.70%
Adjusted Equity Risk Premium 5.32%
Risk Premium Cost of Equity 10.02%
(a) Schedule 9, page 3.
(b)
(c) Schedule 9, page 4.
Yields on all utility bonds and Baa subset based on data from IHS Markit, Long-Term Macro Forecast -
Baseline (Jun. 29, 2020); Energy Information Administration, Annual Energy Outlook 2020 (Jan. 29, 2020); &
Moody's Investors Service at www.credittrends.com.
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 9, Page 2 of 4
ELECTRIC UTILITY RISK PREMIUM Schedule 9
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 10.34%6.08%4.26%
2007 10.32%6.11%4.21%
2008 10.37%6.65%3.72%
2009 10.52%6.28%4.24%
2010 10.29%5.56%4.73%
2011 10.19%5.13%5.06%
2012 10.02%4.26%5.76%
2013 9.82%4.55%5.27%
2014 9.76%4.41%5.35%
2015 9.60%4.37%5.23%
2016 9.60%4.11%5.49%
2017 9.68%4.07%5.61%
2018 9.56%4.34%5.22%
2019 9.64%3.86%5.78%
Average 11.86%8.10%3.76%
(a)
(b)Moody's Investors Service.
Major Rate Case Decisions, Regulatory Focus, Regulatory Research Associates ("RRA"); UtilityScope
Regulatory Service, Argus. Data for "general" rate cases (excluding limited-issue rider cases) beginning in
2006 (the first year such data presented by RRA).Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 9, Page 3 of 4
ELECTRIC UTILITY RISK PREMIUM Schedule 9
Page 4 of 4
REGRESSION RESULTS
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.936629767
R Square 0.87727532
Adjusted R Square 0.874486122
Standard Error 0.004786234
Observations 46
ANOVA
df SS MS F Significance F
Regression 1 0.007205175 0.007205175 314.5260916 1.15178E-21
Residual 44 0.001007954 2.2908E-05
Total 45 0.008213129
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.071731079 0.00204844 35.01742055 9.02999E-34 0.06760272 0.075859439 0.06760272 0.075859439
X Variable 1 -0.4210 0.023740031 -17.73488347 1.15178E-21 -0.46887158 -0.373181801 -0.46887158 -0.373181801
y = -0.421x + 0.0717
R² = 0.8773
-1%0%1%
2%3%
4%5%6%7%
4% 6% 8% 10% 12% 14% 16%
Eq
u
i
t
y

R
i
s
k

P
r
e
m
i
u
m
s
Average Utility Interest Rates
Authorized Equity Risk Premiums vs. Utility Interest Rates
(1974-2019)
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 9, Page 4 of 4
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 Algonquin Pwr & Util n/a n/a n/a
2 ALLETE 8.5%1.0223 8.7%
3 Ameren Corp.10.0%1.0400 10.4%
4 Avista Corp.8.0%1.0192 8.2%
5 Black Hills Corp.9.0%1.0268 9.2%
6 CenterPoint Energy 11.0%1.0400 11.4%
7 CMS Energy Corp.14.0%1.0427 14.6%
8 DTE Energy Co.11.0%1.0347 11.4%
9 Edison International 12.0%1.0226 12.3%
10 Emera Inc.10.0%1.0290 10.3%
11 Entergy Corp.11.0%1.0279 11.3%
12 Exelon Corp.8.5%1.0203 8.7%
13 Hawaiian Elec.8.5%1.0208 8.7%
14 IDACORP, Inc.9.5%1.0177 9.7%
15 NorthWestern Corp.8.5%1.0184 8.7%
16 OGE Energy Corp.12.5%0.9999 12.5%
17 Otter Tail Corp.12.0%1.0282 12.3%
18 Sempra Energy 11.0%1.0520 11.6%
Average (d)10.3%
Midpoint (d,e)10.3%
(a)The Value Line Investment Survey (Oct. 23, Nov. 13 and Dec. 11 2020).
(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-21-01 & AVU-G-21-01 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 Air Products & Chem. Chemical (Diversified) 278.76$ 5.36$ 1.9%
2 Amdocs Ltd. IT Services 63.58$ 1.31$ 2.1%
3 Amgen Biotechnology 228.20$ 7.00$ 3.1%
4 Amphenol Corp. Electronics 126.24$ 1.16$ 0.9%
5 Apple Inc.Computers/Peripherals 118.40$ 0.85$ 0.7%
6 AT&T Inc.Telecom. Services 28.84$ 2.12$ 7.4%
7 Baxter Int'l Inc. Med Supp Invasive 78.34$ 0.98$ 1.3%
8 Bristol-Myers Squibb Drug 62.38$ 1.80$ 2.9%
9 Brown & Brown Financial Svcs. (Div.)45.81$ 0.37$ 0.8%
10 Brown-Forman 'B' Beverage 78.14$ 0.73$ 0.9%
11 Church & Dwight Household Products 86.98$ 0.96$ 1.1%
12 Cisco Systems Telecom. Equipment 41.15$ 1.47$ 3.6%
13 Coca-Cola Beverage 52.21$ 1.67$ 3.2%
14 Colgate-Palmolive Household Products 84.33$ 1.76$ 2.1%
15 Comcast Corp. Cable TV 48.76$ 0.92$ 1.9%
16 Commerce Bancshs. Bank (Midwest)63.67$ 1.03$ 1.6%
17 Costco Wholesale Retail Store 377.81$ 2.80$ 0.7%
18 CVS Health Pharmacy Services 67.83$ 2.00$ 2.9%
19 Danaher Corp. Diversified Co.227.79$ 0.72$ 0.3%
20 Gen'l Mills Automotive 60.34$ 2.06$ 3.4%
21 Hormel Foods Food Processing 49.04$ 1.02$ 2.1%
22 Intel Corp.Hotel/Gaming 47.18$ 1.32$ 2.8%
23 Int'l Flavors & Frag. Wireless Networking 111.45$ 3.12$ 2.8%
24 Johnson & Johnson Med Supp Non-Invasive 146.36$ 4.04$ 2.8%
25 Kellogg Food Processing 63.81$ 2.31$ 3.6%
26 Kimberly-Clark Household Products 137.86$ 4.28$ 3.1%
27 Lilly (Eli)Drug 144.77$ 2.96$ 2.0%
28 Lockheed Martin Aerospace/Defense 366.95$ 10.40$ 2.8%
29 Marsh & McLennan Financial Svcs. (Div.) 113.05$ 1.86$ 1.6%
30 McCormick & Co. Food Processing 92.59$ 1.36$ 1.5%
31 McDonald's Corp. Restaurant 214.04$ 5.16$ 2.4%
32 Merck & Co. Drug 80.64$ 2.60$ 3.2%
33 Microsoft Corp. Computer Software 213.71$ 2.24$ 1.0%
34 Northrop Grumman Aerospace/Defense 305.48$ 5.80$ 1.9%
35 Oracle Corp. Drug 57.61$ 0.96$ 1.7%
36 PepsiCo, Inc. Beverage 142.69$ 4.09$ 2.9%
37 Pfizer, Inc.Drug 37.91$ 1.52$ 4.0%
38 Procter & Gamble Household Products 139.42$ 3.16$ 2.3%
39 Public Storage R.E.I.T.227.18$ 8.00$ 3.5%
40 Texas Instruments Environmental 157.55$ 4.08$ 2.6%
41 Travelers Cos. Insurance (Prop/Cas.) 132.71$ 3.40$ 2.6%
42 United Parcel Serv. Air Transport 166.29$ 4.19$ 2.5%
43 Verizon Communic. Telecom. Services 60.17$ 2.51$ 4.2%
44 Walmart Inc. Retail Store 148.07$ 2.18$ 1.5%
45 Waste Management Environmental 118.45$ 2.18$ 1.8%
Average 2.4%
(a)Average of closing prices for 30 trading days ended Dec. 11, 2020.
(b)The Value Line Investment Survey, Summary & Index (Dec. 11, 2020).
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 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 Value Line IBES Zacks
1 Air Products & Chem. 12.50% 10.30% 8.53%
2 Amdocs Ltd. 9.50% 6.50% 8.50%
3 Amgen 7.00% 6.65% 7.23%
4 Amphenol Corp.10.50% 5.00% 8.50%
5 Apple Inc.15.50% 12.64% 11.50%
6 AT&T Inc.5.50% -1.74% 2.92%
7 Baxter Int'l Inc.9.00% 9.00% 9.25%
8 Bristol-Myers Squibb 12.50% 21.35% 9.11%
9 Brown & Brown 10.50% 9.89% n/a
10 Brown-Forman 'B' 11.00% 6.85% n/a
11 Church & Dwight 8.00% 9.55% 8.90%
12 Cisco Systems 7.00% 6.14% 6.67%
13 Coca-Cola 6.50% 3.34% 4.20%
14 Colgate-Palmolive 5.00% 6.67% 6.05%
15 Comcast Corp.8.00% 5.78% 9.76%
16 Commerce Bancshs. 5.50% -8.70% n/a
17 Costco Wholesale 9.50% 7.32% 8.49%
18 CVS Health 6.00% 4.60% 5.89%
19 Danaher Corp.16.00% 15.14% 12.92%
20 Gen'l Mills 4.00% 5.05% 7.50%
21 Hormel Foods 8.50% 4.05% 7.50%
22 Intel Corp.7.00% 7.94% 7.50%
23 Int'l Flavors & Frag. 6.00% 1.75% 3.49%
24 Johnson & Johnson 10.00% 4.38% 5.80%
25 Kellogg 3.00% 1.78% 3.63%
26 Kimberly-Clark 6.50% 6.04% 5.40%
27 Lilly (Eli)10.00% 12.27% 15.15%
28 Lockheed Martin 8.50% 8.12% 6.65%
29 Marsh & McLennan 9.00% 6.40% 5.04%
30 McCormick & Co.6.50% 4.80% 5.54%
31 McDonald's Corp.9.00% 5.53% 7.35%
32 Merck & Co.9.00% 6.70% 7.16%
33 Microsoft Corp.13.50% 14.53% 12.50%
34 Northrop Grumman 10.50% 7.62% n/a
35 Oracle Corp.10.50% 7.72% 9.00%
36 PepsiCo, Inc.6.00% 5.90% 6.49%
37 Pfizer, Inc.8.50% -1.00% 4.22%
38 Procter & Gamble 8.50% 8.47% 7.57%
39 Public Storage n/a 17.00% 3.79%
40 Texas Instruments 4.00% 10.00% 9.33%
41 Travelers Cos.9.50% 4.48% 7.11%
42 United Parcel Serv. 8.00% 9.61% 7.90%
43 Verizon Communic. 4.00% 2.27% 3.47%
44 Walmart Inc.7.00% 6.81% 5.50%
45 Waste Management 7.50% 4.38% 7.35%
(a)The Value Line Investment Survey (various editions as of Dec. 11, 2020).
(b)
(c)www.zacks.com (retrieved Nov. 30, 2020).
www.finance.yahoo.com (retrieved Nov. 30, 2020).
Earnings Growth
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 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 Value Line IBES Zacks
1 Air Products & Chem.14.4% 12.2% 10.5%
2 Amdocs Ltd.11.6% 8.6% 10.6%
3 Amgen 10.1% 9.7% 10.3%
4 Amphenol Corp.11.4% 5.9% 9.4%
5 Apple Inc.16.2% 13.4% 12.2%
6 AT&T Inc.12.9% 5.6% 10.3%
7 Baxter Int'l Inc.10.3% 10.3% 10.5%
8 Bristol-Myers Squibb 15.4% 24.2% 12.0%
9 Brown & Brown 11.3% 10.7% n/a
10 Brown-Forman 'B'11.9% 7.8% n/a
11 Church & Dwight 9.1% 10.7% 10.0%
12 Cisco Systems 10.6% 9.7% 10.2%
13 Coca-Cola 9.7% 6.5% 7.4%
14 Colgate-Palmolive 7.1% 8.8% 8.1%
15 Comcast Corp.9.9% 7.7% 11.6%
16 Commerce Bancshs.7.1% -7.1% n/a
17 Costco Wholesale 10.2% 8.1% 9.2%
18 CVS Health 8.9% 7.5% 8.8%
19 Danaher Corp.16.3% 15.5% 13.2%
20 Gen'l Mills 7.4% 8.5% 10.9%
21 Hormel Foods 10.6% 6.1% 9.6%
22 Intel Corp.9.8% 10.7% 10.3%
23 Int'l Flavors & Frag.8.8% 4.5% 6.3%
24 Johnson & Johnson 12.8% 7.1% 8.6%
25 Kellogg 6.6% 5.4% 7.3%
26 Kimberly-Clark 9.6% 9.1% 8.5%
27 Lilly (Eli)12.0% 14.3% 17.2%
28 Lockheed Martin 11.3% 11.0% 9.5%
29 Marsh & McLennan 10.6% 8.0% 6.7%
30 McCormick & Co.8.0% 6.3% 7.0%
31 McDonald's Corp.11.4% 7.9% 9.8%
32 Merck & Co.12.2% 9.9% 10.4%
33 Microsoft Corp.14.5% 15.6% 13.5%
34 Northrop Grumman 12.4% 9.5% n/a
35 Oracle Corp.12.2% 9.4% 10.7%
36 PepsiCo, Inc.8.9% 8.8% 9.4%
37 Pfizer, Inc.12.5% 3.0% 8.2%
38 Procter & Gamble 10.8% 10.7% 9.8%
39 Public Storage n/a 20.5% 7.3%
40 Texas Instruments 6.6% 12.6% 11.9%
41 Travelers Cos.12.1% 7.0% 9.7%
42 United Parcel Serv.10.5% 12.1% 10.4%
43 Verizon Communic.8.2% 6.4% 7.6%
44 Walmart Inc.8.5% 8.3% 7.0%
45 Waste Management 9.3% 6.2% 9.2%
Average (b)10.1% 9.3% 9.7%
Midpoint (b,c)9.7% 9.9% 10.1%
(a)
(b)Excludes highlighted figures.
(c)Average of low and high values.
Earnings Growth
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 11, Page 3 of 3
FLOTATION COST STUDY Schedule 12
Page 1 of 1
ELECTRIC & GAS UTILITIES
(1) (2) (3) (4)(5)(6) (7)(8)(9)
Underwriting Total Gross Proceeds Flotation
Shares Offering Discount Underwriting Offering Flotation Before Flot. Cost
No. Sym Company Date Issued Price (per share) Discount Expense Costs Costs (%)
1 ALE ALLETE 2/27/2014 3,220,000 $49.75 $1.74125 $5,606,825 $450,000 $6,056,825 $160,195,000 3.781%
2 LNT Alliant Energy 11/14/2019 3,717,502 $52.63 $0.39500 $1,468,413 $500,000 $1,968,413 $195,652,130 1.006%
3 AEE Ameren Corp.8/5/2019 7,549,205 $74.30 $0.12000 $905,905 $750,000 $1,655,905 $560,905,932 0.295%
4 AEP American Elec Pwr 4/2/2009 69,000,000 $24.50 $0.73500 $50,715,000 $400,000 $51,115,000 $1,690,500,000 3.024%
5 AGR Avangrid, Inc.
6 AVA Avista Corp.12/13/2006 3,162,500 $25.05 $0.48000 $1,518,000 $300,000 $1,818,000 $79,220,625 2.295%
7 BKH Black Hills Corp. 11/19/2015 6,325,000 $40.25 $1.40875 $8,910,344 $1,200,000 $10,110,344 $254,581,250 3.971%
8 CNP CenterPoint Energy 9/27/2018 60,550,459 $27.25 $0.75000 $45,412,844 $1,000,000 $46,412,844 $1,650,000,008 2.813%
9 CMS CMS Energy Corp. 3/31/2005 23,000,000 $12.25 $0.42880 $9,862,400 $325,000 $10,187,400 $281,750,000 3.616%
10 ED Consolidated Edison (a) 5/7/2019 5,800,000 $84.83 $0.59000 $3,422,000 $400,000 $3,822,000 $492,014,000 0.777%
11 D Dominion Energy (a) 3/29/2018 20,000,000 $67.33 $1.89420 $37,884,000 $450,000 $38,334,000 $1,346,516,000 2.847%
12 DTE DTE Energy Co.10/29/2019 2,400,000 $126.00 $3.15000 $7,560,000 $300,000 $7,860,000 $302,400,000 2.599%
13 DUK Duke Energy Corp. (a) 11/18/2019 25,000,000 $85.99 $2.66000 $66,500,000 $592,000 $67,092,000 $2,149,750,000 3.121%
14 EIX Edison International 7/30/2019 28,000,000 $68.50 $1.62688 $45,552,500 $725,000 $46,277,500 $1,918,000,000 2.413%
15 EE El Paso Electric Co.
16 ETR Entergy Corp.6/8/2018 13,289,037 $75.25 $0.80000 $10,631,230 $650,000 $11,281,230 $1,000,000,034 1.128%
17 EVRG Evergy Inc.
18 ES Eversource Energy 5/30/2019 15,600,000 $71.48 $1.69000 $26,364,000 $615,000 $26,979,000 $1,115,088,000 2.419%
19 EXC Exelon Corp.6/13/2014 57,500,000 $35.00 $1.05000 $60,375,000 $600,000 $60,975,000 $2,012,500,000 3.030%
20 FE FirstEnergy Corp. 9/15/2003 32,200,000 $30.00 $0.97500 $31,395,000 $423,000 $31,818,000 $966,000,000 3.294%
21 FTS Fortis Inc.
22 HE Hawaiian Elec.3/20/2013 7,000,000 $26.75 $1.00312 $7,021,840 $450,000 $7,471,840 $187,250,000 3.990%
23 IDA IDACORP, Inc.12/10/2004 4,025,000 $30.00 $1.20000 $4,830,000 $300,000 $5,130,000 $120,750,000 4.248%
24 MGEE MGE Energy 9/10/2004 1,265,000 $31.85 $1.03500 $1,309,275 $125,000 $1,434,275 $40,290,250 3.560%
25 NEE NextEra Energy, Inc. (a) 11/3/2016 13,800,000 $124.00 $1.89000 $26,082,000 $750,000 $26,832,000 $1,711,200,000 1.568%
26 NWE NorthWestern Corp. (a) 9/30/2015 1,100,000 $51.81 $1.33000 $1,463,000 $1,000,000 $2,463,000 $56,991,000 4.322%
27 OGE OGE Energy Corp. 8/22/2003 5,324,074 $21.60 $0.79000 $4,206,018 $325,000 $4,531,018 $114,999,998 3.940%
28 OTTR Otter Tail Corp.
29 PNW Pinnacle West Capital 4/9/2010 6,900,000 $38.00 $1.33000 $9,177,000 $190,000 $9,367,000 $262,200,000 3.572%
30 PNM PNM Resources 1/7/2020 5,375,000 $47.21 $1.99000 $10,696,250 $750,000 $11,446,250 $253,753,750 4.511%
31 POR Portland General Elec. 6/13/2013 12,765,000 $29.50 $0.95875 $12,238,444 $600,000 $12,838,444 $376,567,500 3.409%
32 PPL PPL Corp.5/10/2018 55,000,000 $27.00 $0.29430 $16,186,500 $1,000,000 $17,186,500 $1,485,000,000 1.157%
33 PEG Pub Sv Enterprise Grp. 10/2/2003 9,487,500 $41.75 $1.25250 $11,883,094 $350,000 $12,233,094 $396,103,125 3.088%
34 SRE Sempra Energy 1/5/2018 26,869,158 $107.00 $1.92600 $51,749,998 $1,500,000 $53,249,998 $2,874,999,906 1.852%
35 SO Southern Company (a) 8/18/2016 32,500,000 $49.30 $1.66000 $53,950,000 $557,000 $54,507,000 $1,602,250,000 3.402%
36 WEC WEC Energy Group
37 XEL Xcel Energy Inc. (a) 10/30/2019 10,300,000 $62.69 $0.63000 $6,489,000 $650,000 $7,139,000 $645,707,000 1.106%
Average 2.779%
1 ATO Atmos Energy Corp. 11/30/2018 7,008,087 $92.75 $0.97690 $6,846,200 $1,000,000 $7,846,200 $650,000,069 1.207%
2 CPK Chesapeake Utilities 9/23/2016 960,488 $62.26 $2.33000 $2,237,937 $162,046 $2,399,983 $59,799,983 4.013%
3 NJR New Jersey Resources 12/4/2019 5,700,000 $41.25 $1.23750 $7,053,750 $500,000 $7,553,750 $235,125,000 3.213%
4 NI NiSource Inc.5/3/2017 N/A N/A N/A $10,000,000 $57,950 $10,057,950 $500,000,000 2.012%
5 NWN Northwest Nat. Holding Co. 6/4/2019 1,250,000 $67.00 $2.17750 $2,721,875 $400,000 $3,121,875 $83,750,000 3.728%
6 OGS ONE Gas, Inc.
7 SJI South Jersey Industries 4/20/2018 11,016,949 $29.50 $1.03250 $11,375,000 $700,000 $12,075,000 $324,999,996 3.715%
8 SWX Southwest Gas 11/28/2018 3,100,000 $75.50 $2.54810 $7,899,110 $600,000 $8,499,110 $234,050,000 3.631%
9 SR Spire Inc.5/9/2018 2,000,000 $63.05 $2.10938 $4,218,760 $325,000 $4,543,760 $126,100,000 3.603%
10 UGI UGI Corporation 3/18/2004 8,625,000 $32.10 $1.40440 $12,112,950 $1,149,550 $13,262,500 $276,862,500 4.790%
Average 3.324%
Average - Electric & Gas 2.902%
Column Notes:
(1-4) SEC Form 424B for each company.
(5) Column (2) * Column (4)
(6) SEC Form 424B for each company.
(7) Column (5) + Column (6)
(8) Column (2) * Column (3)
(9)Column (7) / Column (8)
Note (a): Underwriting discount computed as the difference between the current market price and the price offered to the issuing company by the underwriters.
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 12, Page 1 of 1
REGULATORY MECHANISMS Schedule 13
Page 1 of 4
UTILITY GROUP
Conserv.RTO-related Future Formula
Program Renewables Environ. Generation Generic Trans.Test Rates /
Company Fuel/PPA Expense Full Partial WNA Expense Compliance Capacity Infrastructure Expense Other*Year MRP
1 Algonquin Pwr & Util ✓ ✓--✓-- --✓--✓✓ ✓P ✓
2 ALLETE ✓ ✓---- --✓ ✓----✓ ✓C ✓
3 Ameren Corp.✓ ✓--✓--✓ ✓--✓✓ ✓O,P ✓
4 Avista Corp.✓✓ ✓✓--✓-------- --P ✓
5 Black Hills Corp.✓ ✓--✓--✓ ✓ ✓✓✓ ✓O ✓
6 CenterPoint Energy ✓ ✓--✓--✓ ✓--✓✓ ✓--✓
7 CMS Energy Corp.✓ ✓---- --✓-- ----✓--C --
8 DTE Energy Co.✓ ✓---- --✓-- ----✓--C --
9 Edison International ✓--✓-- -- ---- ------✓C ✓
10 Emera Inc.✓ ✓---- -- --✓ ✓----✓C ✓
11 Entergy Corp.✓ ✓--✓--✓ ✓ ✓✓✓ ✓O,P ✓
12 Exelon Corp.D ✓ ✓✓WNA ✓ ✓✓✓✓ ✓O,P ✓
13 Hawaiian Elec.✓✓ ✓-- --✓--✓✓--✓C ✓
14 IDACORP, Inc.✓ ✓ ✓----✓-- ------ --C,P --
15 NorthWestern Corp.✓ ✓---- --✓-- ------✓----
16 OGE Energy Corp.✓ ✓--✓--✓ ✓ ✓✓✓ ✓P ✓
17 Otter Tail Corp.✓ ✓---- --✓ ✓ ✓✓✓ ✓C,O ✓
18 Sempra Energy ✓ ✓ ✓---- ---- --✓✓ ✓C ✓
Sources:
Schedule 13, pages 2-4, contain operating company data that are aggregated into the parent company data on this page.
Notes:
* Recover mechanisms for other expenses, such as taxes, franchise fees, bad debts, storm costs, pensions, societal benefits, vegetation management, and decommissioning.
D - Delivery-only utility.
C - Fully-forecasted test years commonly used in the state listed for this operating company.
O - Fully-forecasted test years occasionally used in the state listed for this operating company.
P - Partially-forecasted test years commonly or occasionally used in the state listed for this operating company.
Type of Adjustment Clause
New Capital
Decoupling
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 13, Page 1 of 4
Schedule 13Page 2 of 4REGULATORY MECHANISMS
UTILITY GROUP OPERATING COS.
(b) (c)
Conserv.RTO-related Future Formula
Program Renewables Environ. Generation Generic Trans.Test Rates /
Company State Fuel/PPA Expense Full Partial WNA Expense Compliance Capacity Expense Other*Year MRP
1 ALGONQUIN PWR. & UTIL.
Empire District Electric KS ✓ ✓-- -- -- --✓-- --✓ ✓-- --
Empire District Electric MO ✓-- -- -- -- --✓-- --✓ ✓P --
Liberty Util. (Granite State Electric) NH D -- --✓-- ------✓-- -- --✓
2 ALLETE
Minnesota Power MN ✓ ✓-- -- --✓✓-- --✓ ✓C ✓
3 AMEREN CORP.
Ameren Illinois IL D ✓-- -- --✓✓-- --✓ ✓O ✓
Union Electric MO ✓ ✓--✓--✓✓--✓✓ ✓P --
4 AVISTA CORP.
Alaska Electric Light & Power AK ✓-- -- -- -- ------ ---- -- -- --
Avista Corp.ID ✓ ✓ ✓-- -- ------ ---- -- P --
Avista Corp.WA ✓ ✓--✓--✓---- ---- -- --✓
5 BLACK HILLS CORP.
Black Hills Colorado Electric CO ✓ ✓-- -- --✓--✓ ✓--✓--✓
Black Hills Power SD ✓ ✓--✓--✓✓-- --✓ ✓-- --
Cheyenne Light Fuel & Power WY ✓ ✓--✓--✓---- ----✓O --
6 CENTERPOINT ENERGY
CenterPoint Energy Houston Electric TX D ✓-- -- -- ------✓✓ ✓--✓
Southern Indiana Gas & Electric IN ✓ ✓--✓-- --✓--✓✓ ✓--✓
7 CMS ENERGY
Consumers Energy MI ✓ ✓-- -- --✓---- --✓-- C --
8 DTE ENERGY CO.
DTE Electric MI ✓ ✓-- -- --✓---- --✓-- C --
9 EDISON INTERNATIONAL
Southern California Edison CA ✓--✓-- -- ------ ----✓C ✓
10 EMERA INC.
Tampa Electric FL ✓ ✓-- -- -- --✓✓----✓C ✓
Emera Maine ME D -- -- -- -- ------ ---- -- C ✓
Type of Adjustment Clause (a)
Decoupling
New Capital
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 13, Page 2 of 4
Schedule 13Page 3 of 4REGULATORY MECHANISMS
UTILITY GROUP OPERATING COS.
(b) (c)
Conserv.RTO-related Future Formula
Program Renewables Environ. Generation Generic Trans.Test Rates /
Company State Fuel/PPA Expense Full Partial WNA Expense Compliance Capacity Expense Other*Year MRP
Type of Adjustment Clause (a)
Decoupling
New Capital
11 ENTERGY CORP.
Entergy Arkansas AR ✓ ✓--✓--✓--✓ ✓✓ ✓P ✓
Entergy New Orleans LA ✓ ✓--✓-- --✓✓--✓ ✓O ✓
Entergy Louisiana LA ✓ ✓--✓-- --✓✓ ✓✓ ✓O ✓
Entergy Mississippi MS ✓ ✓--✓-- --✓-- --✓ ✓O ✓
Entergy Texas TX ✓✓-- -- -- -- ----✓--✓--✓
12 EXELON CORP.
Delmarva Power & Light DE D -- -- -- -- ------✓✓ ✓P --
Potomac Electric Power DC D -- --✓WNA ✓----✓--✓P --
Commonwealth Edison IL D ✓-- -- --✓✓--✓✓ ✓O ✓
Baltimore Gas & Electric MD D ✓ ✓-- -- ------ ----✓P --
Delmarva Power & Light MD D ✓-- -- ------ ---- -- P --
Potomac Electric Power MD D ✓ ✓-- -- ------ ----✓P --
Atlantic City Electric NJ D ✓-- -- --✓----✓--✓P --
PECO Energy PA D ✓-- -- -- ------✓--✓O --
13 HAWAIIAN ELEC.
Hawaiian Electric HI ✓ ✓ ✓-- --✓--✓ ✓--✓C ✓
Hawaii Electric Light HI ✓ ✓ ✓-- --✓--✓ ✓--✓C ✓
Maui Electric HI ✓ ✓ ✓-- --✓--✓ ✓--✓C ✓
14 IDACORP
Idaho Power ID ✓ ✓ ✓-- -- ------ ---- -- P --
Idaho Power OR ✓ ✓-- -- --✓---- ---- -- C --
15 NORTHWESTERN CORP.
NorthWestern Corp.MT ✓ ✓-- -- --✓---- ----✓-- --
NorthWestern Corp.SD ✓ ✓-- -- -- ------ ---- -- -- --
16 OGE ENERGY CORP.
Oklahoma Gas & Electric AR ✓ ✓--✓--✓✓✓--✓ ✓P --
Oklahoma Gas & Electric OK ✓ ✓--✓--✓✓--✓✓ ✓--✓
17 OTTER TAIL CORP.
Otter Tail Power MN ✓ ✓-- -- --✓✓-- --✓-- C --
Otter Tail Power ND ✓-- -- -- -- --✓✓ ✓--✓O ✓
Otter Tail Power Corp.SD ✓ ✓-- -- --✓✓✓ ✓-- -- -- --
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 13, Page 3 of 4
Schedule 13Page 4 of 4REGULATORY MECHANISMS
UTILITY GROUP OPERATING COS.
(b) (c)
Conserv.RTO-related Future Formula
Program Renewables Environ. Generation Generic Trans.Test Rates /
Company State Fuel/PPA Expense Full Partial WNA Expense Compliance Capacity Expense Other*Year MRP
Type of Adjustment Clause (a)
Decoupling
New Capital
18 SEMPRA ENERGY
San Diego Gas & Electric CA ✓--✓-- -- ------ ----✓C ✓
Oncor Electric Delivery TX D ✓-- -- -- ------✓✓-- --✓
Sources:
(a) S&P Global Market Intelligence, Adjustment Clauses, RRA Regulatory Focus (Nov. 12, 2019).
(b) Edison Electric Institute, Alternative Regulation for Emerging Utility Challenges: 2015 Update (Nov. 11, 2015).
Notes:
* Recover mechanisms for other expenses, such as taxes, franchise fees, bad debts, storm costs, pensions, societal benefits, vegetation management, and decommissioning.
D - Delivery-only utility.
C - Fully-forecasted test years commonly used in the state listed for this operating company.
O - Fully-forecasted test years occasionally used in the state listed for this operating company.
P - Partially-forecasted test years commonly or occasionally used in the state listed for this operating company.
LIR - Limited issue reopeners.
(c) Formula rates and Multiyear Rate plans approved in the state listed for this operating company. See , (b); U.S. Department of Energy, State Performance-Based Regulation Using Multiyear Rate
Plans for U.S. Electric Utilities,GRID Modernization Laboratory Consortium (Jul. 2017); The Brattle Group, Exploring the Use of Alternative Regulatory Mechanisms to Establish New Base Rates,
Joint Utilities of Maryland (Mar. 29, 2018).
Exhibit No. 3 Case Nos. AVU-E-21-01 & AVU-G-21-01 A. McKenzie, Avista
Schedule 13, Page 4 of 4