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2007 OCT 26 MilO:
UT!~AI-L.o PUBtiCI IE;;) COMMISS1O;\;
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE
APPLICATION OF ROCKY MOUNTAIN
POWER FOR APPROVAL OF
CHANGES TO ITS ELECTRIC SERVICE SCHEDULES
CASE NO. PAC-07-
Rebuttal Testimony
of Samuel C. Hadaway
ROCKY MOUNTAIN POWER
CASE NO. PAC-07-
October 2007 '
Please state your name and affdiation.
My name is Samuel C. Hadaway. I previously filed Direct Testimony on behalf
of Rocky Mountain Power (hereinafter the Company) in this proceeding.
Are you the same Samuel C. Hadaway that previously submitted testimony
in this proceeding?
Yes.
What is the purpose of your rebuttal testimony?
The purpose of my rebuttal testimony is to respond to the return on equity (ROE)
recommendations of Idaho Public Utility Commission Staff (Staff) witness Ms.
Terri Carlock and Monsanto witness Mr. Michael P. Gorman. I will also update
my cost of equity capital estimates.
Overview of Rate of Return Positions
What are the parties' rate of return recommendations?
Ms. Carlock recommends an ROE of 10.25 percent, Mr. Timothy Shurtz
recommends that any ROE over 10.0 percent is excessive, and Mr. Gorman
recommends an ROE of 10.0 percent. Mr. Shurtz does not offer an opinion on the
Company s proposed capital structure and he has indicated through discovery
responses that he is now accepting of Staffs position on ROE. As such, my
rebuttal testimony directed towards Staffs recommendation shall also be
considered to be directed towards Mr. Shurtz s recommendation. Both Ms.
Carlock and Mr. Gorman accept the Company s proposed capital structure and
embedded costs of debt and preferred stock, which results in their overall rate of
return recommendations of 8.267 percent for Ms. Carlock (Carlock Direct
Hadaway, Di-Reb -
Rocky Mountain Power
Testimony at 16) and 8.14 percent for Mr. Gorman (Gorman Direct Testimony at
9). The Company s requested ROE is 10.75 percent, which results in an overall
rate of return of8.52 percent (Williams Direct Testimony at 3).
Do you have any general comments about Ms. Carlock's and Mr. Gorman
rate of return recommendations?
Yes.
What are your general comments?
Their recommendations are on the lower end of the reasonable range for electric
utilities generally. However, they fail to recognize the increasing cost of
borrowing for all corporate entities and the significant operating risks faced by
Rocky Mountain Power. In this context, their specific ROE estimates for Rocky
Mountain Power are below the reasonable cost of equity capital.
Please identify some of the operating risks currently facing Rocky Mountain
Power.
The Company s operating risks include the lack of a fuel and purchased power
adjustment clause in Idaho, its significant capital requirements, and its Idaho load
concentration in a single large industrial customer. With respect to the power cost
recovery issue, under exactly the opposite circumstances in Washington Mr.
Gorman recommended that ROE should be reduced by 30 basis points (0.
percent) if the Company was granted a Power Cost Recovery Mechanism
(Washington Utilities and Transportation Commission, Docket Nos. UE-061546
and UE-060817, Gorman Direct Testimony, at 1). Because Mr. Gorman
continues to use a comparable company approach based on companies that
Hadaway, Di-Reb - 2
Rocky Mountain Power
generally have fuel and power cost adjustment clauses, a symmetrical approach
would indicate a higher rate of return than the bottom of his recommended range.
Please identify other concerns you have with Mr. Gorman s analytical
methodology .
Mr. Gorman s analytical methodology is also inconsistent with his prior
testimony. In prior cases, he has severely criticized my use of gross domestic
product (GDP) growth in the DCF model. In the present case, he finds his own
analysts' growth rate estimates too high because they are higher than his five- and
ten-year growth rate projections for Gross Domestic Product (GDP) (Gorman
Direct Testimony at 14, lines 6-12). As a result, he applies my GDP approach
(Exhibit No. 227, MPG-14), but injects lower near-term GDP growth estimates to
produce an ROE of only 9.6 percent (Gorman Direct Testimony at 19, lines 8-10).
With respect to his risk premium analysis, he provides no independent risk
premium analysis but extracts portions of my analysis from which he obtains an
ROE of 10.2 percent (Gorman Direct Testimony at 22, line 17). In addition, he
attempts to minimize the result of his own CAPM analysis, which produces an
ROE of 10.6 percent (Gorman Direct Testimony at 27, line 19). Had he not
applied an unreasonably low GDP growth rate in his two-stage DCF model, his
own risk premium and CAPM results would have shown that his 10.0 percent
ROE recommendation is at the very bottom of his ROE range. Mr. Gorman
selective approach is unreasonable and should be carefully scrutinized by the
Commission.
Hadaway, Di-Reb - 3
Rocky Mountain Power
Please identify the concerns you have with Commission Staff's
recommendation.
Similarly, while Ms. Carlock reasonably assesses the comparable earnings ROE
range at 10 percent to 11 percent, with a midpoint of 10.5 percent (Carlock Direct
Testimony at 11 , lines 17-18), without any analytical support, she injects a DCF
ROE of9.4 percent and concludes that only 10.25 percent is the appropriate ROE
for Rocky Mountain Power. Ms. Carlock makes no mention of Rocky Mountain
Power s significant risks, its lack of a fuel and purchased power cost recovery
mechanism in Idaho, or any of the other operating factors she should have
considered. In fact, she states that her 10.25 percent ROE recommendation is
based on the "average risk characteristics of Rocky Mountain Power and
PacifiCorp...." (Carlock Direct Testimony at 15, lines 23-24), but she selects an
ROE below the midpoint of the comparable earnings range. This result
demonstrates an inconsistency in Ms. Carlock's approach-finding a 10 percent to
11 percent comparable earnings range appropriate, arguing that Rocky Mountain
Power is of "average risk " and yet recommending an ROE below the middle of
the comparable earnings range. Ms. Carlock should have found an ROE of at
least 10.5 percent reasonable, and with further consideration of Rocky Mountain
Power s risks she could have recommended an ROE above, not below, the middle
of the range.
What is the basis for your saying that corporate borrowing costs have
increased?
With improving economic conditions, since mid-2004, the Federal Reserve
Hadaway, Di-Reb - 4
Rocky Mountain Power
System increased the short-term Federal Funds interest rate 17 times between
June 30, 2004 and June 29, 2006, raising it from 1 percent to 5.25 percent. At its
most recent meeting on September 18, 2007, in response to the extreme
turbulence in the sub-prime lending markets the Federal Reserve Open Market
Committee reduced the Federal Funds rate for the first time in over three years
dropping the rate to 4.75 percent. However, long-term interest rates, which are
not directly affected by the Federal Reserve s short-term rate policies, have not
declined and remain 70 to 80 basis points above the levels they reached in mid-
2005. Estimates for the coming year are also for continued economic growth and
for further increases in long-term interest rates.
How have long-term borrowing costs changed over the past two years?
The following table provides the month-by-month interest rates paid by utilities
and the U.S. Treasury:
Hadaway, Di-Reb - 5
Rocky Mountain Power
Month
Sep-
Oct-
Nov-
Dec-
Jan-
Feb-
Mar-
Apr-
May-
Jun-
Jul-
Aug-
Sep-
Oct-
Nov-
Dec-
Jan-
Feb-
Mar-
Apr-
May-
Jun-
Jul-
Aug-
Sep-
Table 1
Long-Term Interest Rate Trends
Single-Average Long-TermUtility Utility TreasuryRates Rates Rates
52% 5.54% 4.51%79% 5.79% 4.74%88% 5.88% 4.83%80% 5.83% 4.73%75% 5.77% 4.65%82% 5.83% 4.73%98% 5.98% 4.91 %29% 6.28% 5.22%6.42% 6.39% 5.35%6.43% 6.41 % 5.29%6.39% 6.39% 5.25%20% 6.20% 5.08%00% 6.02% 4.93%98% 6.01 % 4.94%80% 5.82% 4.78%81% 5.83% 4.78%96% 5.97% 4.95%90% 5.91 % 4.93%85% 5.87% 4.81 %97% 6.01 % 4.95%99% 6.03% 4.98%6.30% 6.34% 5.29%25% 6.28% 5.19%24% 6.29% 5.00%18% 6.24% 4.84%
to-Year
Treasury
Rates
20%
4.46%
54%
4.47%
4.42%
57%
72%
99%
11%
11%
09%
88%
72%
73%
60%
56%
76%
72%
56%
69%
75%
10%
00%
67%
52%
Sources: Mergent Bond Record (Utility Rates);
www.federaireserve.gov (Treasury Rates).
The data in Table 1 show that long-term interest rates are 30 to nearly 70 basis
points higher than they were two years ago. Borrowing costs for single-A rated
utilities like Rocky Mountain Power increased from 5.52 percent to 6.18 percent
during this period (66 basis points). These higher long-term borrowing costs
Hadaway, Di-Reb - 6
Rocky Mountain Power
should not be ignored and should be considered explicitly in estimates ofthe on-
going cost of equity capital for Rocky Mountain Power.
What levels of interest rates are forecast for the coming year?
Both corporate and government interest rates are expected to rise further from
present levels. Exhibit No. 43 provides Standard & Poor s most recent economic
forecast from its Trends Projections publication for September 20, 2007. S&P
forecasts continuing, albeit slower, economic growth for 2007 and 2008. For
2007 , growth in real Gross Domestic Product (GDP) is projected at 2.0 percent
with nominal GDP (real GDP plus inflation) at 4.6 percent. For 2008, real GDP
growth is projected at 2.0 percent and nominal growth at 3.9 percent. These
projected growth rates compare to a real rate for 2006 of 2.9 percent and a
nominal rate of 6.1 percent. S&P also forecasts that interest rates will rise from
current levels. The summary interest rate data are presented in the following
table:
Table 2
Standard & Poor s Interest Rate Forecast
Treasury Bills
10-Yr. T-Bonds
30-Yr. T-Bonds
Aaa Corporate Bonds
Current
Average
2007 Est.
Average
2008 Est.
5.4%
Sources: www.vahoo.com Yahoo Finance (Current Rates);
Standard & Poor Trends Projections September 20 2007
page 8 (Projected Rates).
The data in Table 2 show that average interest rates are projected to increase
further during the coming year. The long-term Treasury Bond rate is projected by
S&P to average 5.4 percent during 2008. Relative to current levels, projected
Hadaway, Di-Reb - 7
Rocky Mountain Power
long-term rates on Treasuries and corporate bonds are expected to increase by an
additional 40-60 basis points. These increasing interest rate trends offer important
perspective for judging the cost of capital in the present case.
Please summarize your general comments regarding the other parties ' ROE
recommendations.
All these factors indicate that the other parties' ROE recommendations are below
the cost of equity capital for Rocky Mountain Power. Their recommendations are
inconsistent with the increases in long-term interest rates during the past two
years. Their positions are also inconsistent with projections for further interest
rate increases in 2008. And, most important, neither Ms. Carlock nor Mr.
Gorman provides any recognition of the Company s Idaho-specific operating
risks. Had either more reasonably considered readily available economic and
capital market data and Rocky Mountain Power s risk profile, they should have
recognized that their ROE recommendations are too low.
Technical Rebuttal of Idaho Public Utilities Commission Staff Witness Ms. Terri
Carlock
What are your primary technical disagreements with Ms. Carlock's ROE
analysis?
While Ms. Carlock's overall conclusions are not outside the range of
reasonableness, she provides little analytical detail and her final selection of 10.25
percent seems arbitrary. I disagree with her briefDCF analysis because it appears
to consider only the simple yield plus growth version of the constant growth DCF
model and her inputs for yield and growth are unexplained. Also, both her yield
Hadaway, Di-Reb - 8
Rocky Mountain Power
and growth selections seem to be below the current actual market yields, as I will
demonstrate in my own DCF update, and her growth rate is below other equally
plausible and better supported estimates of investors' growth rate expectations. I
discussed these growth rate issues in my direct testimony and need not repeat
them here, but I will show that a higher ROE estimate is consistent with the
longer-term, more general measures of economic growth that I use.
Do you have any other technical disagreements with Ms. Carlock's ROE
analysis?
Not at this time. The Company has served written discovery requests requesting
copies of Ms. Carlock's work papers, analysis, and other material relied upon by
her in formulating her ROE recommendations. However, at the time of finalizing
my rebuttal testimony the Company had not yet received responses to the
discovery requests. As such, upon receipt of the information, if the Company
believes additional comments are warranted, the Company will request to file
supplemental rebuttal testimony at that time.
Technical Rebuttal of Monsanto Witness Mr. Michael P. Gorman
Can you demonstrate what Mr. Gorman s DCF analysis would have
indicated if he had used more reasonable assumptions as inputs to that
analysis?
Yes. These results are shown on Exhibit No. 44, pages 1-7. In Exhibit No. 44
page 1 , column 1 , I summarize Mr. Gorman s initial ROE results. These data
show that only one of his model results (9.6 percent from the Two-Stage DCF
model) is below his final ROE recommendation of 10.0 percent. Had he not
Hadaway, Di-Reb - 9
Rocky Mountain Power
forced his low two-stage growth results down by including an unreasonably low
estimate of GDP growth in the second stage of that model, he would have found
by simply averaging the results from his other three models an ROE of 10.
percent. In this light, had Mr. Gorman more reasonably interpreted his own
analysis and the other checks of reasonableness that he offers, his ROE estimate
would have been higher.
How did you adjust Mr. Gorman s DCF analysis?
My changes to his analysis are summarized in column 2 of page 1 on Exhibit No.
44. They indicate that had Mr. Gorman relied on more reasonable input
assumptions, he would have found an ROE estimate very similar to the 10.
percent that I have recommended.
The results in column 2 ofthe exhibit are based on a simple adjustment to
Mr. Gorman s data. I averaged the long-term GDP growth rate with his short-
term analysts' growth rate estimates. The effect of this adjustment is shown on
Exhibit No. 44, page 2. With this change, his constant growth DCF estimate
increases to 10.5 percent.
I also updated Mr. Gorman s Two-Stage Growth DCF analysis by
replacing his second stage GDP growth estimate of 5.1 0 percent with my long-
term projection of GDP growth of 6.60 percent. These results are shown on page
3 of Exhibit No. 44. They indicate a Two-Stage Growth DCF estimate of 10.
percent.
What are your technical criticisms of Mr. Gorman s risk premium analysis.
In his bond yield plus risk premium analysis he uses the same approach based on
Hadaway, Di-Reb - 10
Rocky Mountain Power
allowed regulatory rates of return that I used. However, in his analysis, he uses a
shorter time period and he fails to include the well known inverse relationship
between risk premiums and interest rates. As I demonstrated in my direct
testimony, equity risk premiums are smaller when interest rates are high and they
are larger when interest rates decline. Without including this characteristic of risk
premiums, Mr. Gorman s risk premium analysis is not consistent with recent
experience or with sound academic research, such as the Harris and Marston
studies I discussed in my direct testimony. Without considering this fundamental
relationship, Mr. Gorman (1) used recent low interest rates rather than reasonable
forecasts of the level of interest rates for the time rates will be in effect and (2)
combined them with low risk premiums that are not adjusted for the inverse
relationship between risk premiums an interest rates. These two errors combine
to understate the cost of equity capital. In addition, his interpretation of his risk
premium analysis appears to be quite subjective in terms of the data he presented.
How is Mr. Gorman s risk premium analysis constructed?
He presents his risk premium analysis in Exhibit No. 229 (MPG-16) through
Exhibit No. 232 (MPG-19) and he discusses his analysis on pages 19-22 of his
direct testimony. His analysis consists oftwo parts. In one part he adds a
Treasury bond equity risk premium of 5.2 percent to a projected 30-year Treasury
bond yield of 5.2 percent. This produces an ROE of 10.4 percent. In his second
approach, he adds a utility bond equity risk premium of 3.7 percent to the recent
single-A utility bond yield of 6.25 percent. This produces an ROE estimate of
10.0 percent. From these two results, he concludes that a 10.2 percent risk
Hadaway, Di-Reb -
Rocky Mountain Power
premium ROE is appropriate.
How did Mr. Gorman select his equity risk premiums?
On page 2, at lines 19-, Mr. Gorman explains that 18 of his 22 equity risk
premium observations based on Treasury bond interest rates range between 4.4
percent and 5.9 percent. From this range he selects the approximate midpoint of
2 percent for his Treasury bond analysis. In the following paragraph, he says
that his equity risk premiums based on utility bond interest rates ... primarily fall
in the range of3.0% to 4.4%...." (Gorman Direct Testimony at 21 , line 2). From
this range he selects a midpoint utility bond risk premium of 3.7 percent.
Why do you disagree with Mr. Gorman s selections in his Treasury bond
analysis?
Without closer inspection, his selections might appear reasonable. In fact, they
are not. What Mr. Gorman fails to explain is that, with the lower interest rates in
recent years, in his own risk premium data since 2000 there is not one Treasury
bond equity risk premium as low as the 5.2 percent he recommends. Indeed, Mr.
Gorman excludes from his subjective range the one observation in 2002 when the
Treasury bond equity risk premium was closest to the 5.2 percent projected
Treasury bond equity risk premium that he finally applies. In 2002, the Treasury
bond yield was 5.43 percent and, based on an average allowed ROE of 11.
percent, the indicated equity risk premium was 5.73 percent. Similarly, in 2005
when Treasury yields dropped to 4.65 percent, the equity risk premium rose to
89 percent and the average ROE was 10.54 percent. Given today s Treasury
yields, without any further analysis, this data shows that Mr. Gorman s risk
Hadaway, Di-Reb - 12
Rocky Mountain Power
premium estimates of ROE should have been in the 10.5 percent to 11.0 percent
range.
Is there a similar problem with Mr. Gorman s equity risk premium analysis
based on utility bonds?
Yes. Mr. Gorman s Exhibit No. 230 (MPG-17) shows that to find an equity risk
premium as low as his 3.7 percent one must revert to 2001 when the interest rate
on A-rated utility bonds (7.37 percent) was considerably higher than today
yields or the level of interest rates forecasted to be in effect when rates from this
proceeding are approved. The effect of Mr. Gorman s improper omission of the
inverse risk premium-interest rate relationship can be seen further by simply
comparing the 7.98 percent average utility interest rate over his 22-year analysis
Exhibit No. 230 (MPG-17) to the 6.25 percent current single-A rate in Exhibit No.
232 (MPG-19) he uses to estimate ROE.. Based on a 7.98 percent average utility
interest rate, the average equity risk premium was 3.67 percent from his 22-year
study. During the only years in that analysis when interest rates were as low as
6.25 percent (2004-2007), the average equity risk premium was 4.5 percent. Had
Mr. Gorman simply used this equity risk premium for consistency with his low
6.25 percent utility interest rate, he would have found an ROE of 10.75 percent
(10.75% = 6.25% + 4.5%). These comparisons show that Mr. Gorman s risk
premium data actually support an ROE range of 10.5 percent to 11.0 percent.
Hadaway, Di-Reb - 13
Rocky Mountain Power
In your risk premium analysis in your direct testimony, you used a standard
regression analysis to account for the inverse relationship between risk
premiums and interest rates. What does Mr. Gorman s risk premium
analysis indicate when this approach is applied to his data?
In Exhibit No. 44 and pages 4-, I have applied the standard regression analysis to
calculate "interest rate adjustment" factors for his two risk premium studies. This
approach properly takes into account the inverse relationship between equity risk
premiums and interest rates. Using this analysis, Mr. Gorman s Treasury bond
equity risk premium data indicate an ROE of 10.8 percent. For his utility bond
equity risk premium data, the indicated ROE is 10.6 percent. These results further
confirm that Mr. Gorman s risk premium data support an ROE in the range of
10.5 percent to 11.0 percent.
Has Mr. Gorman previously recognized the inverse risk premium-interest
rate relationship?
Yes. In his testimony before the Public Utility of Commission of Texas in Docket
No. 14965, page 15, lines 10-, Mr. Gorman stated:
The results of my study indicate an inverse relationship between a
bond's real return and the equity risk premium. This result is
consistent with the findings of published studies which indicate
equity risk premiums move inversely with interest rates.
Had Mr. Gorman made a similar adjustment in this case, his risk premium results
would have indicated an ROE considerably higher than the one he recommends.
What is the result of Mr. Gorman s CAPM analysis?
His CAPM results are presented in his Exhibit No. 236 (MPG-23) and discussed
on page 27 of his testimony. That analysis indicates an ROE of 10.6 percent.
Hadaway, Di-Reb - 14
Rocky Mountain Power
In Exhibit No. 237 (MPG-24), Mr. Gorman presents an alternative CAPM
analysis that indicates a lower ROE. Is that analysis appropriate?
No. In Exhibit No. 237, Mr. Gorman attempts to downplay the results of his
current CAPM analysis, which produces an ROE estimate of 10.6 percent, by
injecting a five-year historical CAPM analysis. In that analysis, instead of using
current market derived beta coefficients for comparable group, he substitutes
average betas for the past five years. In effect, this analysis would have the
Commission ignore current market data that reflects the increased risks of the
electric utility industry. This approach is inappropriate and should be disregarded
and is certainly inconsistent with the Hope and Bluefield directive that:
(a) public utility is entitled to such rates as will permit it to earn a
return upon the value of the property which it employs for the
convenience ofthe public equal to that generally being made at the
same time and in the same general part of the country on
investments in other business undertakings which are attended by
corresponding risks and uncertainties..." (Bluefield Water Works
and Improvement Co. v. Public Service Comm n. 262 U.S. 679
692 (1923)) Emphasis added.
Mr. Gorman s primary CAPM result at 10.6 percent should have been given
greater weight in his final recommendation.
Update of ROE Analysis
What are the results of your updated DCF analyses?
My updated DCF estimates are based on the same comparable company methods
I used in my Direct Testimony. My updated DCF results are presented in Exhibit
No. 45. The reasonable range from my updated DCF analysis is 10.7 percent to
11.2 percent. These results are based on the two-stage growth DCF model and the
single-stage growth DCF model with the growth rate based on long-term GDP
Hadaway, Di-Reb - 15
Rocky Mountain Power
growth. The traditional constant growth DCF model indicates an ROE of only 9.
percent to 9.8 percent, which falls more than 100 basis points below my risk
premium checks of reasonableness and, therefore, continues to be excluded from
my recommended electric utility DCF range.
What are the results of your updated risk premium analysis?
My updated risk premium analysis is presented in Exhibit No. 46. Based on
currently projected single A rated utility interest rates for 2008, the risk premium
analysis indicates an ROE of 10.83 percent. The updated results of the Ibbotson
risk premium analysis and the Harris-Marston risk premium analysis indicate
ROEs of 11.0 percent (6.50% + 4.5% = 11.0%) and 11.6 percent (6.50% + 5.13%
= 11.63%), respectively.
What do you conclude from your updated ROE analyses?
My updated analyses indicate that the Company s requested 10.75 percent base
ROE is a reasonable, albeit conservative, estimate of the fair cost of equity capital
for my comparable company group. My conclusion is also supported by the
interest rate risk associated with projections for higher rates over the coming year
and the ongoing risks and uncertainties that exist in the electric utility industry as
well as the specific risks that Rocky Mountain Power is currently facing.
Does this conclude your rebuttal testimony?
Yes.
Hadaway, Di-Reb - 16
Rocky Mountain Power
- ,- ~
..- " i f::" 1""
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lfiU1OCT 26 AM 10=
IDAHO PU\?UC "
UTILITIES Cm..'lMISSIO;
Case No. PAC-07-
Exhibit No. 43
Witness: Samuel C. Hadaway
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOUNTAIN POWER
Exhibit Accompanying Rebuttal Testimony of Samuel C. Hadaway
Standard & Poor s Projections
October 2007
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R F C E.1YJ:~L
20m OCT 26 AM 10: ~e No. PAC-07-05
\DAt"iO PUBLIC E~bit No.
UTILITIES COMMtSSWttness: Samuel C. Hadaway
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOUNTAIN POWER
Exhibit Accompanying Rebuttal Testimony of Samuel C. Hadaway
Mr. Gorman Analysis Revised
October 2007
Rocky Mountain Power
Exhibit No. 44 page 1 of 7
CASE No. PAC-O7-
Witness: Samuel C, Hadaway
Page 1 of 7
Rocky Mountain Power
Summary of Updated Gorman ROE Results
(1) (2)
Summary of Results
Gorman
Initial
ROE
Updated
ROE
DCF Models
Constant Growth DCF 10.10.
Two-Stage DCF 10.
Risk Premium 10.10.
CAPM 10.10.
ROE Recommendation 10.10.
Notes:
Column 1: See Table 2 at Gorman, page 28.
Column 2: See page 2 of this exhibit for updated Constant Growth DCF result; page 3 for Two-Stage result;
average of results from pages 4 and 6 for Risk Premium result; CAPM results unchanged.
Rocky Mountain Power
Exhibit No, 44 page 2 of?
CASE No, PAC-O?-
Witness: Samuel C, Hadaway
Page 2 of 7
Rocky Mountain Power
Gorman Constant Growth DCF Analysis Considering Long-Term GDP Growth
(1)(2)(3)(4)(5)(6)(7)
Gorman
Gorman Gorman Short-Term Long-Term Updated
Dividend Price Dividend Growth Growth Average Cost of
No. Company Yield (EPS)(GDP)Growth Equity
ALLETE 45.87%25%60%6.43%10.30%
Alliant Energy Co.38.50%22%60%6.41%91%
CH Energy Group 46.98%N/A 60%60%N/A
Con. Edison 45.33%3.48%60%04%10.37%
DTE Energy Co.48.59%89%60%75%10.34%
Energy East Corp.25.96%83%60%22%10.18%
IDACORP 32.96%56%60%08%10.04%
MGEEnergy, Inc.32.56%N/A 60%60%N/A
NSTAR 32.25%33%60%47%10.71%
10 PPL Corporation 47.79%12.62%60%61%12.40%
Progress Energy 2.44 45.61%58%60%59%11.20%
12 SCANA Corp.38.82%27%60%44%10.26%
13 Southern Co.34.87%71%60%66%10.52%
14 Vectren Corp.1.26 27.91%22%60%41%10.32%
15 Xcel Energy Inc.20.70%04%60%82%10.52%
Average 37.51%54%60%14%10.
Notes:
Columns 1-2: See Gorman Exhibit 225 (MPG-12).
Column 3: Column 1 increased by column 6, divided by Column 2.
Column 4: See Gorman Exhibit 225 (MPG-12).
Column 5: See Exhibit SCH-5 from Dr. Hadaway s direct testimony.
Column 6: Average of Columns 4 and 5.
Column 7: Sum of Columns 3 and 6.
Rocky Mountain Power
Exhibit No, 44 page 3 of7
CASE No, PAC-O7-
Witness: Samuel C, Hadaway
Page 3 of 7
Rocky Mountain Power
Gorman Two-Stage Growth DCF Analysis Considering Long-Term GDP Growth
(1)(2)(3)(4)(5)
Gorman Second
Gorman Gorman First Stage Stage Updated
Dividend Price Growth Growth Cost of
No.Company (EPS)(GDP)Equity
ALLETE 45.25%60%10.40%
Alliant Energy Co.38.22%60%10.02%
CH Energy Group 46.N/A 60%N/A
Can. Edison 45.3.48%60%11.31%
DTE Energy Co.48.89%60%10.89%
Energy East Corp.25.44 83%60%11.04%
IDACORP 32.56%60%10.38%
MGE Energy, Inc.32.46 N/A 60%N/A
NSTAR 32.33%60%10.79%
PPL Corporation 47.12.62%60%10.09%
Progress Energy 2.44 45.58%60%11.79%
SCANA Corp.38.47 27%60%10.99%
Southern Co.34.71%60%11.11%
Vectren Corp.27.22%60%11.06%
Xcel Energy Inc.20.04%60%11.01%
Average 37.47 54%60%10.
Notes:
Columns 1-3: See Gorman Exhibit 227 (MPG-14).
Column 4: See Exhibit SCH-5 from Dr. Hadaway s direct testimony.
Column 5: The internal rate of return implied by the price in column 2 and dividends for 150 periods. The initial
dividand shown in column 1 is assumed to grow for the first five periods at the rate in column 3, then at the rate
in column 4 for the remaining periods.
Page 4 of 7
Rocky Mountain Power
Exhibit No. 44 page 4 of7
CASE No, PAC-E-O7-
Witness: Samuel C. Hadal'ayRocky Mountain Power
Update of Gorman Risk Premium Analysis - Treasury Bond
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Jun-
AVERAGE
(1 )
TREASURY
BOND YIELD
78%
59%
96%
8.45%
61%
14%
67%
59%
37%
88%
71%
61%
58%
87%
94%
5.49%
43%
96%
05%
65%
91%
89%
60%
(2)
AUTHORIZED
ELECTRIC
RETURNS
13.93%
12.99%
12.79%
12.97%
12.70%
12.55%
12.09%
11.41 %
11.34%
11 .55%
11.39%
11.40%
11 .66%
10.77%
11.43%
11.09%
11.16%
10.97%
10.75%
10.54%
10.36%
10.27%
11.64%
(3)
INDICATED
RISK
PREMIUM
15%
4.40%
83%
52%
09%
41%
42%
82%
97%
67%
68%
79%
08%
90%
49%
60%
73%
01%
70%
89%
45%
38%
04%
INDICATED COST OF EQUITY
GORMAN TREASURY BOND YIELD
MOODY'S AVG ANNUAL YIELD DURING STUDY
INTEREST RATE DIFFERENCE
20%
60%
40%
INTEREST RATE CHANGE COEFFICIENT
ADUSTMENT TO AVG RISK PREMIUM
39.46%
55%
BASIC RISK PREMIUM
INTEREST RATE ADJUSTMENT
EQUITY RISK PREMIUM
GORMAN TREASURY BOND YIELD
INDICATED EQUITY RETURN
04%
55%
60%
20%
10.80%
Notes:
Columns 1-3: Gorman Exhibit 229 (MPG-16).
Gorman Direct, page 22, lines 3-9 for base Treasury bond yield.
See regression data on next page for derivation of "Interest Rate Change Coefficient"
1/1
E 6%
e! 5%
.:.:
1/1
iX 5%
C" 4%
Page 5 of 7
Rocky Mountain Power
Exhibit No, 44 page 5 of?Rocky Mountain Power CASE No, PAC-07-
Witness: Samuel C, Hadaway
Update of Gorman Risk Premium Analysis - Treasury Bond
Authorized Equity Risk Premiums vs. Treasury
Interest Rates (1986-Jun 2007)
y = -
3946x + 0.0765
2 = 0.5896
10%
Average Utility Interest Rates
Rocky Mountain Power
Update of Gorman Risk Premium Analysis - Utility Bond
(1 )
MOODY'S "A" RATED
PUBLIC UTILITY
BOND YIELD
58%
10.10%
10.49%
77%
86%
36%
69%
59%
31%
89%
75%
60%
04%
62%
24%
76%
37%
58%
16%
65%
07%
00%
98%
(2)
AUTHORIZED
ELECTRIC
RETURNS
13.93%
12.99%
12.79%
12.97%
12.70%
12.55%
12.09%
11.41 %
11.34%
11.55%
11.39%
11.40%
11.66%
10.77%
11.43%
11 .09%
11.16%
10.97%
10.75%
10.54%
10.36%
10.27%
11.64%
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Jun-
AVERAGE
INDICATED COST OF EQUITY
GORMAN "A" UTILITY BOND YIELD
MOODY'S AVG ANNUAL YIELD DURING STUDY
INTEREST RATE DIFFERENCE
INTEREST RATE CHANGE COEFFICIENT
ADUSTMENT TO AVG RISK PREMIUM
BASIC RISK PREMIUM
INTEREST RATE ADJUSTMENT
EQUITY RISK PREMIUM
GORMAN "A" UTILITY BOND YIELD
INDICATED EQUITY RETURN
Source:
Columns 1-3: Gorman Exhibit 230 (MPG-17).
Gorman Direct, page 22, lines 10-15 for base "A" utility bond yield.
See regression data on next page for derivation of Interest Rate Change Coefficient"
Page 6 of 7
Rocky Mountain Power
Exhibit No, 44 page 6 of?
CASE No, PAC-O?-
Witness: Samuel C, Hadaway
(3)
INDICATED
RISK
PREMIUM
35%
89%
30%
20%
84%
19%
3.40%
82%
03%
66%
64%
80%
62%
15%
19%
33%
79%
39%
59%
89%
29%
27%
67%
25%
98%
73%
38.13%
66%
67%
66%
32%
25%
10.57%
ell
2 4%
I!!
.:.: 4%
ell
5 3%
Page 7 of 7
Rocky Mountain Power
Exhibit No, 44 page 7 of7
Rock Mountain Power CASE No, PAC-07-
Witness: Samuel C. Hadaway
Update of Gorman Risk Premium Analysis - Utility Bond
Authorized Equity Risk Premiums vs. Utility Interest
Rates (1986-Jun 2007)
y = -
3813x + 0.0671
2 = 0.638
10%11%12%
Average Utility Interest Rates
1'\I.::v-1 V L,..,
;..
1.0ll1 OCT 26 ttM \0:
Case No. P AC-07-
Exhibit No. 45
Witness: Samuel C. Hadaway\Oi_!-lO PUBLIC
UTiLfr\1:s COMMiSSiOt\
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOUNTAIN POWER
ExhibitAccompanying Rebuttal Testimony of Samuel C. Hadaway
Updated DCF Results
October 2007
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20U1 OCT 26 Ai; to:
Case No. PAC-07-
Exhibit No. 46
Witness: Samuel C. Hadaway
IDAHO PUBLIC
UTiLITIES COMM1SSIO!
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOUNTAIN POWER
Exhibit Accompanying Rebuttal Testimony of Samuel C. Hadaway
Updated Risk Premium
October 2007
Rocky Mountain Power
Risk Premium Analysis
MOODY'S AVERAGE
PUBLIC UTILITY
BOND YIELD (1)
13.15%
15.62%
15.33%
13.31%
14.03%
12.29%
46%
98%
10.45%
66%
76%
21%
57%
56%
30%
91%
74%
63%
00%
55%
14%
72%
53%
61%
20%
67%
08%
35%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
AVERAGE
AUTHORIZED
ELECTRIC
RETURNS
14.23%
15.22%
15.78%
15.36%
15.32%
15.20%
13.93%
12.99%
12.79%
12.97%
12.70%
12.55%
12.09%
11.41 %
11.34%
11.55%
11.39%
11 .40%
11.66%
10.77%
11.43%
11.09%
11.16%
10.97%
10.75%
10.54%
10.36%
12.48%
INDICATED COST OF EQUITY
PROJECTED SINGLE-A UTILITY BOND YIELD*
MOODY'S AVG ANNUAL YIELD DURING STUDY
INTEREST RATE DIFFERENCE
INTEREST RATE CHANGE COEFFICIENT
ADUSTMENT TO AVG RISK PREMIUM
BASIC RISK PREMIUM
INTEREST RATE ADJUSTMENT
EQUITY RISK PREMIUM
PROJECTED SINGLE-A UTILITY BOND YIELD*
INDICATED EQUITY RETURN
Pa~e 1 of 2
Rocky Mountain Power
Exhibit No. 46 page 1 of 2
CASE No, PAC-O7-
Witness: Samuel C. Hadaway
INDICATED
RISK
PREMIUM
08%
0.40%
45%
05%
29%
91%
4.47%
01%
34%
31%
94%
34%
52%
85%
04%
64%
65%
77%
66%
3.22%
29%
37%
63%
36%
55%
87%
28%
13%
50%
35%
85%
42.18%
20%
13%
20%
33%
50%
10.83%
Sources:
(1) Moody s Investors Service
(2) Regulatory Focus, Regulatory Research Associates, Inc.
The projected single-A bond yield is equal to the projected 3o-year Treasury bond rate (5.4 percent) from
S&P's Trends & Projections (Sept. 20, 2007) plus 110 basis points. The average single-
spread over Treasuries for 2006 was 108 basis points.
Rocky Mountain Power
Risk Premium Analysis
Page 2 of 2
Rocky Mountain Power
Exhibit No, 46 page 2 of2
CASE No, PAC-O7-
Witness: Samuel C. Hadaway
Authorized Equity Risk Premiums vs. Utility Interest
Rates (1980-2006)
1/1
1/1
y = -
4218x + 0.0707
2 = 0.8575
11%13%15%
A verage Utility Interest Rates