20100528Hadaway Direct.pdf

RECE
201B HAY 28 PH 12: 04
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 )
AND A PRICE INCREASE OF $27.7 )
MILLION, OR APPROXIMTELY )13.7 PERCENT )
CASE NO. PAC-E-10-07
Direct Testimony of Samuel C. Hadaway
ROCKY MOUNTAIN POWER
CASE NO. PAC-E-10-07
May 2010
1 Q.
2 A.
3
4 Q.
5 A.
6 Q.
7 A.
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
Please state your name, occupation, and business address.
My name is Samuel C. Hadaway. I am a Principal in FINANCO, Inc., Financial
Analysis Consultants, 3520 Executive Center Drive, Austin, Texas 78731.
On whose behalf are you testifying?
I am testifying on behalf of Rocky Mountain Power (RMP or the Company).
Briefly describe your educational and professional background.
I have a Bachelor's degree in economics from Southern Methodist University, as
well as MBA and Ph.D. degrees with concentrations in finance i;md economics
from the University of Texas at Austin (UT Austin). I am an owner and full-time
employee of FINANCO, Inc. FINANCO provides financial rèsearch concerning
the cost of capital and financial condition for regulated companies as well as
financial modeling and other economic studies in litigation support. In addition to
my work at FINANCO, I have served as an adjunct professor in the McCombs
School of Business at UT Austin and in what is now the McCoy College of
Business at Texas State University. In my prior academic work, I taught
economics and finance courses and I conducted research and diected graduate
students in the areas of investments and capital market research. I was previously
Director of the Economic Research Division at the Public Utilty Commssion
(Texas Commssion) of Texas where I supervised the Texas Commssion's
finance, economics, and accounting staff, and served as the Texas Commssion's
chief financial witness in electric and telephone rate cases. I have taught courses
at varous utilty conferences on cost of capital, capital strcture, utility financial
condition, and cost allocation and rate design issues. I have made presentations
Hadaway, Di- 1
Rocky Mountain Power
1 before the New York Society of Securty Analysts, the National Rate of Return
2 Analysts Forum, and varous other professional and legislative groups. I have
3 served as a vice president and on the board of directors of the Financial
4 Management Association.
5 A list of my publications and testimony that I have given before varous
6 regulatory bodies and in state and federal cours is contained in my resume, which
7 is included as Appendix A.
8 Purpose and Summary of Testimony
9 Q.
10 A.
11
12 Q.
13
14 A.
15
16
17
18
19
20
21
22
What is the purpose of your testimony?
The purpose of my testimony is to estimate the market required rate of return on
equity capital (ROE) for the Company.
Please state your ROE recommendation and summarize the results of your
cost of equity studies.
I estimate the cost of equity for RMP to be 10.6 percent. My discounted cash
flow (DCF) analysis indicates that a range of 10.3 percent to 10.8 percent is
appropriate. My risk premium analysis indicates an ROE range of 10.39 percent
to 10.59 percent. Based on these quantitative results and my furer review of
other economic data, I recommend a point estimate of 10.6 percent. As I wil
discuss in more detail later in this testimony, given the continuing market
turbulence that exists, the estimates of ROE produced by the traditional DCF and
risk premium models are modest. As such, my recommended 10.6 percent ROE
is a conservative estimate of RMP' s cost of equity capital.
Hadaway, Di- 2
Rocky Mountain Power
1 Q.
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
How is your analysis structured?
In my DCF analysis, I apply a comparable company approach. RMP's cost of
equity cannot be estimated directly from its own market data because it is a
wholly-owned subsidiar of MidAmerican Energy Holdings Company. As such,
the Company does not have publicly traded common stock or other independent
market data that would be required to estimate its cost of equity diectly. I begin
my comparable company review with all the electrc utilities that are included in
the Value Line Investors Survey (Value Line). Value Line is a widely-followed,
reputable source of financial data that is often use by professional regulatory
economists. To improve the proxy group's comparabilty with the Company, I
restricted the group to companies with senior secured bond ratings of at least "A-"
by Standard & Poor's (S&P) or "A3" by Moody's Investors Service (Moody's). I
also required the comparable companies to derive at least 70 percent of revenues
from regulated utilty sales, to have consistent financial records not affected by
recent mergers or restrctung, and to have a consistent dividend record, with no
dividend cuts or resumptions in the past two 'years, as required by the DCF modeL.
The fundamental characteristics and bond ratings of the 22 companies in my
comparable group are presented in Exhibit No. 10.
In my risk premium analysis, I relied on curent and projected single-A
utilty bond interest rates. These interest rates are consistent with the Company's
senior secured bond ratings of "A" from S&P and "A2" from Moody's. As I wil
explain in more detail later in this testimony, under curent market conditions the
DCF and risk premium models appear to provide extremely conservative
Hadaway, Di- 3
Rocky Mountain Power
1
2
3
4 Q.
5 A.
6
7
8
9
10
11
estimates of the Company's cost of equity capitaL. The data sources and the
details of my cost of equity studies are contained in Exhibit No. 10 though
Exhibit No. 14.
How is the remainder of your tetimony organized?
My testimony is divided into thee additional sections. Following this
introduction, I review varous methods for estimating the cost of equity. In this
section, I discuss comparable earings methods, risk premium methods, and the
discounted cash flow modeL. In the following section, I review genera capital
market costs and conditions and discuss recent developments in the electric utiity
industry that may affect the cost of capitaL. In the final section, I discuss the
details of my cost of equity studies and summarze my ROE recommendations.
12 Estimating the Cost of Equity Capital
13 Q.
14 A.
15
16
17
18
19
20 Q.
21
22 A.
23
What is the purpose of this section of your testimony?
The purose of this section is to present a general definition of the cost of equity
capital and to compare the strengths and weakesses of several of the most widely
used methods for estimating the cost of equity. Estimating the cost of equity is
fundaentally a matter of informed judgment. The varous models provide a
concrete link to actual capital market data and assist with defining the varous
relationships that underlie the ROE estimation process.
Please define the term "cost of equity capital" and provide an overview of
the cost estimation process.
The cost of equity capital is the rate of return that equity investors expect given
the risks of an individual securty. Conceptually it is no different than the cost of
Hadaway, Di- 4 .
Rocky Mountain Power
1 debt or the cost of preferred stock. The cost of equity is the rate of return that
2 common stockholders expect, just as interest on bonds and dividends on preferred
3 stock are the returns that investors in those securties expect. Equity investors
4 expect a retu on their capital commensurate with the risks they take and
5 consistent with returns that are available from other simlar investments. Unlike
6 returns from debt and preferred stocks, however, the equity retu is not directly
7 observable in advance and, therefore, it must be estimated or inferred from capital
8 market data and trading activity.
9 An example helps to ilustrate the cost of equity concept. Assume that an
10 investor buys a share of common stock for $20 per share. If the stock's expected
11 dividend is $1.00, the expected dividend yield is 5.0 percent ($1.00 I $20 = 5.0
12 percent). If the stock price is also expected to increase to $21.20 after one year,
13 this one dollar and 20 cent expected gain adds an additional 6.0 percent to the
14 expected total rate of retu ($1.20 I $20 = 6.0 percent). Therefore, buying the
15 stock at $20 per share, the investor expects a total return of 11 .0 percent: 5.0
16 percent dividend yield, plus 6.0 percent price appreciation. In this example, the
17 total expected rate of retu of 11.0 percent is the appropriate measure of the cost
18 of equity capital, because it is this rate of retu that caused the investor to
19 commt the $20 of equity capital in the first place. If the stock were riskier,or if
20 expected returns from other investments were higher, investors would have
21 required a higher rate of retu from the stock, which would have resulted in a
22 lower initial purchase price in market trading.
Hadaway, Di- 5
Rocky Mountain Power
1
2
3
4
5
6
7
8
9
10
11
12
13 Q.
14
15 A.
16
17
18
19
20
21
22
23
Each day market prices change to reflect new investor expectations and
requirements. Changes in maket prices, all else equal, imply changes in/investor
required rates of return. For example, when interest rates on bonds and savings
accounts rise, utilty stock prices usually falL. This is true, at least in par, because
higher interest rates on these alternative investments mae utilty stocks relatively
less attractive, which causes utilty stock prices to decline in maket trading. This
competitive market adjustment process is quick and continuous, so that market
prices generally reflect investor expectations and the relative attractiveness of one
investment versus another. In this context, to estimate the cost of equity one must
apply informed judgment about the relative risk of the company in question and
knowledge about the risk and expected rate of retu characteristics of other
available investments as well.
How does the market account for risk differences among various
investments?
Risk-return tradeoffs among capital market investments have been the subject of
extensive financial research. Literally dozens of textbooks and hundreds of
academic aricles have addressed the issue. Generally, such research confis the
common sense conclusion that investors wil take additional risks only if they
expect to receive a higher rate of retu. Empircal tests consistently show that
returns from low risk securities, such as U.S. Treasury bils, are the lowest; that
retus from longer-term Treasur bonds and corporate bonds are increasingly
higher as risks increase; and generally, retus from common stocks and other
more risky investments are even higher. These observations provide a sound
Hadaway, Di- 6
Rocky Mountain Power
1
2
3
4 Q.
5
6 A.
7
8
9
10
theoretical foundation for both the DCF and risk premium methods for estimating
the cost of equity capitaL. These methods attempt to captue the well founded
risk-retu principle and explicitly measure investors' rate of return requirements.
Can you ilustrate the capital market risk-return principle that you just
described?
Yes. The following graph depicts the risk-return relationship that has become
widely known as the Capital Market Line (CML). The CML offers a graphical
representation of the capital market risk-return priciple. The graph is not meant
to ilustrate the actual expected rate of retu for any parcular investment, but
merely to ilustrate in a general way the risk-return relationship.
Risk-Return Tradeoffs
The Capital Market Line
c..:J 20%-()a:-0 15%()
êia:
"'10%()Õ()a.5%xW
Common
Stocks
Investment
Grade Bonds
Higher Risk ~
Hadaway, Di-7
Rocky Mountain Power
1 As a continuum, the CML can be viewed as an available opportnity set for
2 investors. Those investors with low risk tolerance or investment objectives that
3 mandate a low risk profile should invest in assets depicted in the lower left-hand
4 portion of the graph. Investments in this area, such as Treasury bils and short-
5 matuty, high quality corporate commercial paper, offer a high degree of investor
6 certainty. In nominal terms (before considering the potential effects of inflation),
7 such assets are virally risk-free.
8 Investment risks increase as one moves up and to the right along the CML.
9 A higher degree of uncertainty exists about the level of investment value at any
10 point in time and about the level of income payments that may be received.
11 Among these investments, long-term bonds and preferred stocks, which offer
12 priority claims to assets and income payments, are relatively low risk, but they are
13 not risk-free. The market value of long-term bonds, even those issued by the U.S.
14 Treasury, often fluctuates widely when government policies or other factors cause
15 interest rates to change.
16 Farer up the CML continuum, common stocks are exposed to even more
17 risk, dependig on the natue of the underlying business and the financial strength
18 of the issuing corporation. Common stock risks include market-wide factors,
19 such as general changes in capital costs, as well as industry and company specifc
20 elements that may add further to the volatilty of a given company's performce.
21 As I wil ilustrate in my risk premium analysis, common stocks typically ar
22 more volatile (have higher risk) than high quality bond investments and,
23 therefore, they reside above and to the right of bonds on the CML graph. Other
Hadaway, Di- 8
Rocky Mountain Power
1
2
3
4
5 Q.
6
7 A.
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
more speculative investments, such as stock options and commodity futues
contracts, contain higher risks (but offer higher potential returns). The CML's
depiction of the risk-retu tradeoffs available in the capital markets provides a
useful perspective fôrestiating investors' required rates of retu.
How is the fair rate of return in the regulatory process related to the
estimated cost of equity capital?
The regulatory process is guided by fair rate of return principles established in the
U.S. Supreme Cour cases, Bluefield Water Works and Hope Natural Gas:
A public utilty is entitled to such rates as wil permt it to ear a
return on the value of the property which it employs for the
convenience of the public equal to that generally being made at the
same time and in the same general par of the countr on
investments in other business undertakngs which are attnded by
corresponding risks and uncertainties; but it has no constitutional
right to profits such as are realized or anticipated in highly
profitable enterprises or speculative ventues. Bluefield Water
Works & Improvement Company v. Public Service Commission of
West Virginia, 262 U.S. 679,692-693 (1923).
From the investor or company point of view, it is important that
there be enough revenue not only for operating expenses, but also
for the capital costs of the business. These include service on the
debt and dividends on the stock. By that standard the retu to the
equity owner should be commensurate with retus on investments
in other enterprises having corresponding risks. That return,
moreover, should be suffcient to assure confidence in the financial
integrity of the enterprise, so as to maintain its credit and to attract
capitaL. Federal Power Commission v. Hope Natural Gas Co., 320
U.S. 591, 603 (1944).
Based on these principles, the fair rate of return should closely paralel investor
opportnity costs as discussed above. If a utilty earns its market cost of equity,
neither its stockholders nor its customers should be disadvantaged.
Hadaway, Di- 9
Rocky Mountain Power
1 Q.
2
3 A.
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
What specific methods and capital market data are used to evaluate the cost
of equity?
Techniques for estimating the cost of equity normally fall into thee groups:
comparable earings methods, risk premium methods, andDCF methods. The
first set of estimation techniques, the comparable earnings methods, has evolved
over time. The original comparable earings methods were based on book
accounting returns. This approach developed ROE estimates by reviewing
accounting retus for unregulated companies thought to have risks similar to
those of the regulated company in question. These methods have generally been
rejected because they assume that the unregulated group is earning its actual cost
of capital, and that its equity book value is the same as its market value. In most
situations these assumptions are not valid, and, therefore, accounting-based
methods do not generally provide reliable cost of equity estimates.
More recent comparable earings methods are based on historical stock
market retus rather than book accounting returns. While ths approach has
some merit, it too has been criticized because there can be no assurance that
historical returns actually reflect currnt or future market requirements. Also, in
practical application, earned market returns tend to fluctuate widely from year to
year. For these reasons, a current cost of equity estimate (based on the DCF
model or a risk premium analysis) is usually required.
The second set of estimation techniques is grouped under the heading of
risk premium methods. These methods begin with curently observable market
retus, such as yields on government or corporate bonds, and add an increment to
Hadaway, Di- 10
Rocky Mountain Power
1 account for the additional equity risk. The capital asset pricing model (CAPM)
2 and arbitrage pricing theory (APT) model. are more sophisticated risk premium
3 approaches. The CAPM and APT methods estimate the cost of equity diectly by
4 combining the "risk-free" government bond rate with explicit risk measures to
5 determne the risk premium required by the market. Although these methods are
6 widely used in academic cost of capital research, their additional data
7 requirements and their potentially questionable underlying assumptions have
8 detracted from their use in most regulatory jursdictions. The basic equity.risk
9 premium methods provide a useful parallel approach with the DCF model and
10 assures consistency with other capital market data in the equity cost estimation
11 process.
12 The third set of estimation techniques, based on the DCF model, is the
13 most widely used regulatory cost of equity estimation method. Like the risk
14 premium approach, the DCF model has a sound basis in theory, and many argue
15 that it has the additional advantage of simplicity. I wil describe the DCF model
16 in detail below, but in essence its estimate of ROE is simply the sum of the
17 expected dividend yield aiid the expected long-term dividend, earings, or price
18 growth rate (all of which are assumed to grow at the samerate). While dividend
19 yields are easy to obtain, estimating long-term growth is more difficult. Because
20 the constant growth DCF model also requires very long-term growth estimates
21 (technically to infinity), some argue that its application is too speculative to
22 provide reliable results, leading to a preference for the multistage growth DCF
23 analysis.
Hadaway, Di- 11
Rocky Mountain Power
1 Q.
2
3 A.
4
5
6
7
8
9
10 Q.
11 A.
12
13
14
15
16
17
18
19
20
21
22
23
Of the three estimation methods, which do you believe provides the most
reliable results?
From my experience, a combination of DCF and basic equity risk premium
methods provides the most reliable approach. While the caveat about estimating
long~term growth must be observed, the DCF model's other inputs are readily
obtainable, and the model's results typically are consistent with capita market
behavior. The basic risk premium methods provide a good parallel approach to
the DCF model and further ensure that curent market conditions are accurately
reflected in the cost of equity estimate.
Please explain the DCF modeL.
The DCF model is predicated on the concept that stock prices represent the
present value or discounted value of all futue dividends that investors expect to
receive. In the most general form, the DCF model is expressed in the following
formula:
Po = DiI(l+k) + DiI(l+k)2 +... + Doo(l+k)OO (1)
where Po is today's stock price; Di, D2, etc. are all future dividends and k is the
discount rate, or the investor's required rate of return on equity. Equation (1) is a
routine present value calculation based on the assumption that the stock's price is
the present value of all dividends expected to be paid in the futue.
Under the additional assumptions that dividends are expected to grow at a
constant rate "g" and that k is strictly greater than g, equation (1) can be solved for
k and rearanged into the simple form:
k = DilPo + g (2)
Hadaway, Di- 12
Rocky Mountain Power
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18 Q.
19
20 A.
21
22
23
Equation (2) is the famliar constant growth DCF model for cost of equity
estimation, where DilPo is the expected dividend yield and g is the long-term
expected dividend growth rate.
Under circumstances when growth rates are expected to fluctuate or when
futue growth rates are highly uncertain, the constant growth model may not give
reliable results. Although the DCF model itself is stil valid (equation 1 is
mathematically correct), under such circumstances.the simplified form of the
model must be modified to capture market expectations accurately.
Recent events and current market conditions in the electrc utilty industr
as discussed later appear to challenge the constant growth assumption of the
traditional DCF modeL. Since the mid- 1990s, dividend growth expectations for
many electrc utilties have fluctuated widely. In fact, over one-third of the
electrc utilities in the U.S. have reduced or elimiated their common dividends
over this time period. Some of these companies have reestablished their
dividends, producing exceptionally high growth rates. Under these
circumstances, long-term growth rate estimates may be highly uncertain, and
estimating a reliable "constant" growth rate for many companies is often difficult.
Can the DCF model be applied when the constant growth assumption is
violated?
Y eS.When growth expectations are uncertain, the more general version of the
model represented in equation (1) should be solved explicitly over a finite
"transition" period while uncertainty prevails. The constant growth version of the
model can then be applied after the transition period, under the assumption that
Hadaway, Di- 13
Rocky Mountain Power
1 more stable conditions wil prevail in the futue. There are two alternatives for
2 dealing with the nonconstant growth transition period.
3 Under the "termnal price" nonconstant growth approach, equation (1) is
4 written in a slightly different form:
5 Po = Di/(l+k) + DZ/(1+k)2 +... + PT/(1+k)T (3)
6 where the varables are the same as in equation (1) except that PTis the estimated
7 stock price at the end of the transition period T. Under the assumption that
8 normal growth resumes after the transition period, the price PT is then expected to
9 be based on constant growth assumptions. With the termnal price approach, the
10 estimated cost of equity, k, is just the rate of retu that investors would expect to
11 ear if they bought the stock at today's market price, held it and received
12 dividends through the transition period (until period T), and then sold it for price
13 PT. In this approach, the analyst's task is to estimate the rate of return that
14 investors expect to receive given the current level of market prices they are
15 wiling to pay.
16 Under the "multistage" nonconstant growth approach, equation (1) is
17 simply expanded to incorporate two or more growth rate periods, with the
18 assumption that a permanent constant growth rate can be estimated for some point
19 in the future:
20 Po = Do(1+gi) + + Do(l+gz)n +o (l+k) ... (l+k)n ... +
(DO(1+gT)(T+1)i
(k~gT)
(l+k)T (4)
21 where the variables are the same as in equation (1), but gi represents the growth
22 rate for the first period,g2 for a second period, and gT for the period from year T
Hadaway, Di- 14
Rocky Mountain Power
1
2
3
4
5
6
7
8
9
10
11
12
13
14 Q.
15 A.
16
17
18
19
20
21
22
23
(the end of the transition period) to infinity. The first two growth rates are simply
estimates for fluctuating growth over "n" years (typically 5 or 10 years) and gT is
a constant growth rate assumed to prevail forever after year T. The difficult task
for analysts in the multistage approach is determning the varous growt rates for
each period.
Although less convenient for exposition purposes, the nonconstant growt
models are based on the same valid capital market assumptions as the constant
growth version. The nonconstant growth approach simply requires more explicit
data inputs and more work to solve for the discount rate, k. Fortnately, the
required data are available from investment and economic forecasting services,
and computer algorithms can easily produce the required solutions. Both constant
and nonconstant growth DCF analyses are presented in a subsequent section of
my testimony.
Please explain the risk premium methodology.
Risk premium methods are based on the assumption that equity securities are
riskier than debt and, therefore, that equity investors require a higher rate of
retu. This basic premise is well supported by legal and economic distinctions
between debt and equity securities, and it is widely accepted as a fundamental
capital market principle. For example, debt holders' claims to the earings and
assets of the borrower have priority over all claims of equity investors. The
contractual interest on mortgage debt must be paid in full before any dividends
can be paid to shareholders, and secur mortgage claims must be fully satisfied
before any assets can be distrbuted to shareholders in banptcy. Also the
Hadaway, Di- 15
Rocky Mountain Power
1
2
3
4
5 Q.
6
7 A.
8
9
10
11 Q.
12 A.
13
14
15
16
17
18
19
20
21
22
fixed-income natue of interest payments makes year-to-year retus from bonds
typically more stable than capital gains and dividend payments on stocks. All
these factors demonstrate the more risky position of stockholders and support the
equity risk premium concept.
Are risk premium estimates of the cost of equity consistent with other
current capital market costs?
Yes. The risk premium approach is useful because it is founded on curent
market interest rates, which are diectly observable. This feature assures that risk
premium estimates of the cost of equity begin with a sound basis, which is tied
diectly to current capital market costs.
Is there consensus about how risk premium data should be employed?
No. In regulatory practice there is often considerable debate about how risk
premium data should be interpreted and used. Since the analyst's basic task is to
gauge investors' required returns on long-term investments, some argue that the
estimated equity risk premium should be based on the longest possible time
period. Others argue that market relationships between debt and equity from
several decades ago are irelevant and that only recent debt-equity observations
should be given any weight in estimating investor requirements. There is no
consensus on this issue. Since analysts cannot observe or measure investors'
expectations directly, it is not possible to know exactly how such expectations are
formed or, therefore, to know exactly what time period is most appropriate in a
risk premium analysis.
Hadaway, Di- 16
Rocky Mountain Power
1
2
3
4
5
6
7
8 Q.
9 A.
10
11
12
13
14
15
16
17
18
19
20
21
22
23
The important point is to answer the following question: "What rate of
return should equity investors reasonably expect relative to retus that are
curently available from long-term bonds?" The risk premium studies and
analyses I discuss later address this question. My risk premium recommendation
is based on an intermediate position that avoids some of the problems and
concerns that have been expressed about both very long and very short periods of
analysis with the risk premium modeL.
Please summarize your discussion of cost of equity estimation techniques.
Estimating the cost of equity is one of the most controversial issues in utilty
ratemakng. Because actual investor requirements are not directly observable,
several methods have been developed to assist in the estimation process. The
comparable earings method is the oldest but perhaps least reliable. Its use of
accounting rates of retu, or even historical market returns, mayor may not
reflect curent investor requirements. Differences in accounting methods among
companies and issues of comparabilty also detract from this approach.
The DCF and risk premium methods have become the most widely
accepted in regulatory practice. In my professional judgment, a combination of
the DCF model and a review of risk premium data provides the most reliable cost
of equity estimate. While the DCF model does require judgment about futue
growth rates, the dividend yield is straightforward, and the model's results are
generally consistent with actual capital market behavior. For these reasons, I wil
rely on a combination of the DCF model and a risk premium analysis in the cost
of equity studies that follow.
Hadaway, Di- 17
Rocky Mountain Power
1 Fundamental Factors That Affect the Cost of Equity
2 Q.
3 A.
4
5 Q.
6
7 A.
S
9
10
11
12
13
14
15
16
17
is
19
20
What is the purpose of this section of your testimony?
In this section, I review recent capital market conditions and industr factors that
should be reflected in the cost of capital estimate.
What has been the experience in the U.S. capital markets for the past several
years?
In Exhibit No.1 1, page 1, I provide a review of annual interest rates and rates of
inflation in the U.S. economy over the past ten years. During that time inflation
and fixed income maket costs declined and, generally, have been lower than rates
that prevailed in the previous decade. Inflation, as measured by the Consumer
Price Index (CPI), was zero percent in 200S but increased to about a 3 percent
annual rate in 2009. Over the past decade, the CPI has averaged2.6 percent. This
is lower than its long-run average of 3.5 percent to 4.0 percent.
During the period from mid-2004 until mid-2006, the Federal Reserve
System increased the short-term Federal Funds interest rate 17 times (the Federal
Funds rate is the rate banks charge each other to borrow reserves overnight),
raising it from 1 percent to 5.25 percent. In late 2007, in response to the early
tubulence in the sub-prime credit markets, the Federal Reserve Open Market
Commttee began aggressively reducing the Federal Funds rate. Since September
2007, the rate has been lowered eleven times to its current target level of between
Hadaway, Di- is
Rocky Mountain Power
1
2
3
4 Q.
5
6 A.
7
S
9
10
11
12
13
14
15
16
17
zero and one-quarer percent. While governmental policies and "flght to safety" 1
issues have drven down interest rates on higher quality debt securties, the cost of
equity for utilties has not declined to the same extent.
Has the recent extreme turbulence in the capital markets increased the cost
of capital for utilties?
Yes. At varous times since late 200S, the capita markets in the U.S. have been
more turbulent than at any tie since the. 1 930s. This period has seen frequent
large daily moves in the stock market2 and conditions in the corporate debt market
that, in late 200S and pars of early 2009, could best be characterized as near-
chaos. The S&P 500 and the Dow Jones Industral Average have fluctuated by 50
percent since November 2007. In this environment, many large financial
institutions such as Countrywide Financial, Washington Mutual, the Federal
Home Loan Mortgage Association, the Federal.National Mortgage Association,
Wachovia, Bear Sterns, and Merrll Lynch were unable to survive as independent
institutions. Lehman Brothers was forced to fie for banptcy. Other surviving
institutions such as Citigroup, Goldman Sachs, American International Group,
Morgan Stanley and others have required multibilion dollar capita infusions.
1 The term "flght to safety" refers to the tendency for investors, durng periods of market
tubulence, to remove money from more risky investments, such as corprate bonds and stocks,
and to put the money into government securities such as Treasury bils and bonds. The effect
causes a redction in the supply of funds to corprations and an increase in funds invested in
government securities. The result is wider "spreads" between corprate bond and government
bond interest rates and higher capital costs for corprations.
2 On May 6, 2010, the Dow Jones Industral Average (Dow) opened at approximately 10,860, fell
to a low of 9,940 - nearly a 920 point drop or about 8.5%, most of which came in a matter of just
a few minutes - and then raed to close at approximately 10,520. On May 10,2010, the Dow
rose 405 points, or approximately 3.9% to close at 10,785; but on May 20, 2010, the Dow lost
3.6% or 379 points to close at 10,068.
Hadaway, Di- 19
Rocky Mountain Power
1
2
3
4
5
6
7
S
9 Q.
10
11 A.
12
13
14
15
16
Since October 200S, the Federal government has enacted emergency
legislation and taken other steps to stabilze the economy. As par of that effort
the government increased federal deposit insurance for banks, lent billions of
dollars to financial institutions, purchased hundreds of bilions of dollars in
iliquid securities, guaranteed loans between financial institutions, and purchased
equity in banks. There is no question that the economic and financial
uncertinties generated by the credit crisis have significantly impacted the risks
surounding public utility company cost of capital.
Can you be more specific regarding the impact of the credit criis on the cost
of capital of public utilties?
Yes. In Exhibit No. 11, page 2, I provide data that ilustrate the volatilty that has
occurred in the debt markets. The schedule shows that during the past two years,
single-A spreads for utility cqmpanies were at times more than thee times
previously existing levels. The month-by-month interest rates paid by single-A
rated utilties and the U.S. Treasur since January 200S are presented in Exhbit
NO.1 1, page 2. These interest rate data are summarzed in Table 1 below.
Hadaway, Di- 20
Rocky Mountain Power
Table 1
Long- Term Inerest Rate Trend
Sinle-A 30- Year Sinle-A
Month Utilty Rate Treasur Rate Utilty Spread
Jan-08 6.02 4.33 1.69Feb-OS 6.21 4.52 1.69Mar-08 6.21 4.39 1.S2Apr-OS 6.29 4.44 1.85May-08 6.28 4.60 1.6SJun-OS 6.3S 4.69 1.69Jul-OS 6.40 4.57 1.S3Aug-OS 6.37 4.50 1.87Sep-OS 6.49 4.27 2.22
Oct-OS 7.56 4.17 3.39Nov-OS 7.60 4.00 3.60Dec-08 6.52 2.S7 3.65
Jan-09 6.39 3.13 3.26Feb-09 6.30 3.59 2.71
Mar-09 6.42 3.64 2.7S
Apr-09 6.48 3.76 2.72May-09 6.49 4.23 2.26Jun-09 6.20 4.52 1.6S
Jul-09 5.97 4.41 1.56Aug-09 5.71 4.37 1.34
Sep-09 5.53 4.19 1.34Oct-09 5.55 4.19 1.36Nov-09 5.64 4.31 1.33Dec-09 5.79 4.49 1.30Jan-09 5.77 4.60 1.17Feb-l0 5.S7 4.62 1.25
Mar- 10 5.S4 4.64 1.20Apr-l0 5.81 4.69 1.123-Mo Avg 5.84 4.65 1.19
12-Mo Avg 5.85 4.44 1.41
Mergent Bond Record (Utility Rates); ww.federaleserv.gov(Treasury Rates).
Thee-month average is for February though Api120lO.
Twelve-month average is for May 2009 though Api120lO.
1 The data in Table 1 vividly ilustrate the market turmoil that has occurred. In fact,
2 increased risk aversion and continuing market volatilty have resulted in ongoing
Hadaway, Di- 21
Rocky Mountain Power
1
2
3
4
5
6 Q.
7
S
9 A.
10
11
12
13
14
difficulties for many corporations. The on-going effects of the market's
turbulence is not easily captured in financial models for estimating the requird
rate of return that assume equilbrium conditions. However, these continuing
effects and the elevated level of risk aversion should be considered in estimating
the cost of equity capitaL.
Do the smaller spreads between single-A utilty bond yields and U.S.
Treaury bonds mean that the markets have completely recovereCl from the
economic turmoil that resulted from the financial crisis?
No. While markets have attempted to stabilze relative to the near-chaotic
conditions that existed in late 200S, investors remain concerned about high
unemployment, the large federal government deficits that are being created, and
the potential for furer fallout from housing foreclosures and other remnants of
the financial crisis. Although it is difficult to measure these effects directly, the
data in Table 2 provide some perspective for the ongoing impacts.
Hadaway, Di- 22
Rocky Mountain Power
Table 2
Utiltv Bond Inerest Rate Spreads
Colum 1 2 3
Aa Baa Baa minus
Month Utility Utiltv Aa
Apr-07 5.83 6.24 0.41
May-07 5.86 6.23 0.37
Jun-07 6.18 6.54 0.36
Ju1-07 6.11 6.49 0.38
Aug-07 6.11 6.51 0.40
Sep-07 6.10 6.45 0.35
Oct-07 6.04 6.36 0.32
Nov-07 5.87 6.27 0.40
Dec-07 6.03 6.51 0.48
Jan-08 5.87 6.35 0.48
Feb-08 6.04 6.60 0.56
Mar-08 5.99 6.68 0.69
Apr-08 5.99 6.81 0.82
May-08 6.07 6.79 0.72
Jun-08 6.19 6.93 0.74
JuI-08 6.13 6.97 0.84
Aug-08 6.09 6.98 0.89
Sep-08 6.13 7.15 1.02
Oct-08 6.95 8.58 1.63
Nov~08 6.83 8.98 2.15
Dec-08 5.92 8.11 2.19 .
Jan-09 6.01 7.90 1.89
Feb-09 6.11 7.74 1.63
Mar-09 6.14 8.00 1.86
Apr-09 6.19 8.03 1.84
May-09 6.23 7.76 1.53
Jun-09 6.13 7.31 1.18
JuI-09 5.63 6.87 1.24
Aug-09 5.33 6.36 1.03
Sep-09 5.15 6.12 0.97
Oct-09 5.23 6.14 0.91
Nov-09 5.33 6.18 0.85
Dec-09 5.52 6.26 0.74
Jan-lO 5.55 6.16 0.61
Feb-lO 5.69 6.25 0.56
Mar-lO 5.64 6.22 0.58
Apr-lO 5.62 6.19 0.57
3-Mo Avg 5.65 6.22 0.57
Source: Mergent Bond Record.
TIee-month averap"e is for Februarv thou!! Auril20lO.
Hadaway, Di- 23
Rocky Mountain Power
1
2
3
4
5
6
7
S
9
10 Q.
11
12 A.
13
14
15
16
17
is
19
20
21
22
23
The spreads between the highest quality Aa utilty bond interest rates and Baa
rates remain almost twice as wide as those that existed in 2007 before the
financial crisis began. Like the Treasur bond yield spreads shown in Table 1, the
Baa - Aa spreads have narowed since late 200S and early 2009, but they have not
returned to the lowerlevels that existed in early 2007. The unsettling volatility in
the stock market documented above along with these continuing wider spreads
between the highest quality utilty Aa bonds and minimum investment grade Baa
bonds are an indication of heightened investor uncertainty and risk aversion
caused by the continuing effects of the financial tuoiL.
What do forecasts for the economy and interest rates show for the coming
year?
Expectations are beginning to move toward higher interest rates during the
coming year. On Februar is, 2010, the Federal Reserve (Fed) raised the
Discount Rate from 0.50 percent to 0.75 percent. All members of the 12 Federal
Reserve bans supported the decision. This is the first increase in any of the
government administered interest rates since the Fed began its efforts to revive the
economy in 200S.
Additional economic data and projections from S&P also point to higher
rates. S&P's most recent Trends & Projections publication for April 2010 is
presented in Exhibit NO.1 1, page 3. The S&P data reflect significant economic
contraction during 2009. S&P indicates that real gross domestic product (GDP)
declined by 2.4 percent during that year. However, GDP growth resumed in the
3rd Quarer of 2009, and for all of 2010, S&P expects real GDP to increase by 3.0
Hadaway, Di- 24
Rocky Mountain Power
1
2
3
4
5
6
7
S
9
10
11
12
13
14 Q.
15 A.
16
17
percent.
S&P also forecasts that long-term government and high grade corporate
interest rates wil rise somewhat from recent levels. The summar interest rate
data are presented in Table 3 below:
Table 3
Standard & Poor's Interest Rate Forecast(a) (b) (c)
A vcrage A vcrage Avcrage
Apr. 2010 2009 2010 Est.Treasur Bils 0.2% 0.2% 0.4%10-Yr. T-Bonds 3.9% 3.3% 4.1 %30-Yr. T-Bonds 4.7% 4.1 % 5.0%Aaa Corporate Bonds 5.3% 5.3% 5.7%
Sources: Column (a) from: www.federalreserve.gov, (Current Rates).
Columns (b) and (c) from: Standad & Poor's Trends & Projections,
April 201O,page S (Projected Rates).
The data in Table 3 show that long-term Treasury interest rates during 2010 are
projected to increase by 30 basis points from curent levels. Rates on highest
grade Aaa corporate bonds are expected to increase by 40 basis points. Although
in the recently turbulent market environment it has been difficult to project
interest rates, investors recognize that as the economy improves, the demand for
loanable funds wil rise. These market forces wil generally lead to higher
interests rates, consistent with the market data and forecasts shown on Exhibit No.
11 Page 3 of 3. As such, the information on that exhibit offers perspective for
judging the cost of capital in the present case.
How have utilty stocks performed during the past several years?
Utility stock prices have fluctuated widely. After reaching a level of over 400 in
2000, the Dow Jones Utilty Average (DJUA) dropped to about 200 by October
2002. From late 2002 unti1200S, the DJUA trended upward. However, utilty
Hadaway, Di- 25
Rocky Mountain Power
1
2
3
4
5
6
7
S
9
10 Q.
11
12 A.
13
stock prices dropped materially with the overall market decline of 200S and early
2009. The current level for the DJUA is over 25 percent below the highest levels
attained in 2007. The wider fluctuations in more recent years are vividly
ilustrated in Graph 1, which depicts DJUA prices over the past 25 years.
Graph 1
Dow Jones Utilty Average
1986-2010
600
500
400
300
200
100
o
rp'ó rp'b
~~ ~~
~OJ'I ~~ ~OJ'ó ~OJ'b~ ~ ~ ~r¡t: r¡'l
~~ ~~/" ~~
"t:~~r¡'b
~~
~~C'~
Over the last decade, utility stock prices have become much more volatile than
they previously were. In this environment, investors' return expectations and
requirements for providing capital to the utilty industr are higher than they were
relative to the longer-term traditional view of the utilty industr.
How have utilty stocks performed relative to the overall market recovery
experienced during the past year?
Utilty stock prices have lagged significantly behid the overall maket recovery.
Graph 2 shows the monthly levels for the DJUA versus the broader maket S&P
Hadaway, Di- 26
Rocky Mountain Power
1 500 index since the market lows that occured in Februar and Marh of 2009.
Graph 2
Dow Jones Utilty Average
vs. S&P 500
Mar. 2009 - Apr. 2010
,~,.."'..._---------_...................................................................................................~~._.................
I
1400.00
1200.00, ~''''''~-""~"'"'~~":\....""..~,;''''~..~.... .'''''.$..'''-1 I
i,,,,,,,,~"'''''~~'' S&P 500
""
¡
I
1000.00
800.00
IDJUA I
600.00
400.00
200.00
0.00
')QJ
~~
')QJ
~,¡
')QJ)~
~QJ
C"
')QJ~o~
,,(.
)'b~
,,(.
~'b~
2 While the S&P 500 has increased significantly durng the past year, utilty prices
3 have remained relatively flat. This result is a further indication that the cost of
4 equity for utilty companies has not declined to the same extent that interest rates
5 have fallen or to the same extent that the cost of equity may have come down for
6 the broader equity maket. The relatively lower prices for utilty shares indicate
7 that the cost of capital for utilities is higher.
8 Graph 3 further ilustrates this result by showing the cumulative
9 percentage change in the two equity indexes since the March 2009 lows.
Hadaway,Di- 27
Rocky Mountain Power
1
2
3
4
5 Q.
6 A.
7
8
9
10
11
12
Graph 3
Dow Jones Utilty Average
vs. S&P 500
Cumulative % Change
Mar. 2009 - Apr. 2010
70.00%~~..........~........................-..._.........._..........................................-....................-............._.............-...-.....~
..------.-----------------------------~~-----------~,----------._~~-_.-------------------'''~","' ,
.........................................................................._...............:7"-'''~,"-~~,:~#~................1.lI ",."" .¡.............................................~...........~......~~::~:~..:..............................u...........................u.......~
I S&P 500 I ".,..~""'"'''' ¡
..................::;.~~~~~~~~...........~......~.~~~~~~..~~............~~..~~..~~.................................~.........~.........................r...~~~~~A~.........ï.~..~......~~~~..!,l,/' :...~~--~- ----_.~-----------.-------------_.~--------.----------j
:
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
';OJ
~t§
';OJ
t:0(:
';OJ
~o~
,,~
~~
,,~~
")'b
';OJ
~,¡
Rl;Sos
While the S&P 500 has recovered over 60 percent (61.43%) from its March 2009
lows, utility stock prices have increased by less than one-third that amount
(19.75%). This result again suggests the market difficulties that utilties face and
the continuing relatively higher cost of equity for utilty companies.
What is the industry's current fundamental position?
The industry has seen significant volatility both in terms of fundamental operating
characteristics and the effects of the economy. While many companies have
refocused their businesses on more traditional utility service, the effects of
deregulation of the wholesale power markets and continuing fuel price
uncertainties remain prominent. The economic crisis has also reduced sales
volumes and increased the difficulty of planning for futue load requirements.
S&P reflects this volatilty in its most recent Electrc Utilty Industry Surey:
Hadaway, Di- 28
Rocky Mountain Power
1
2
3
4
5
6
7
S
9
10
11
12
13
14
15
16
17
is
19
20
21
22
23
24
25
26
27
2S
29
30
31
32
33
34 Q.
35
36 A.
Standard & Poor's Industry Surveys
The S&P Electric Utilties subindex was down 0.5% in 2009,
compared with a 23.5% increase for the benchmark S&P 500
Composite stock index and a 24.3% increase for the broader S&P
1500 SuperComposite. This followed a strong decline of 2S. 1 % in
200S for the S&P Electric Utilties subindex, versus declines of
3S.5% and 3S.2% for the S&P 500 and the S&P 1500,
respectively. We believe the underprformance of electrc utilty
stocks in 2009 reflected both the downturn in the economy and the
weakess in power markets, as well as the impact on earings from
abnormally mid summer weather.
We expect the performance of both the electric utilty sector and
the individual companies within the sector to remain relatively
volatile over the next several years. However, assuming that the
housing, financial, and credit markets begin to stabilze, we believe
the stocks wil be less volatile in 2010 than they were in 200S and
2009, or during the first few years of this decade.... *** The
performance of the sector, however, wil remain sensitive to the
macroeconomic environment and market forces surounding it.
(Standard & Poor's Industry Sureys, Electric Utilties Februar
25,2010, page 6).
Value Line also comments on the industry's relatively poor stock price
performance:
Value Line Investment Survey
The Value Line Utilty Average underperformed the Value Line
Geometric Average by a wide margin in 2009. Things haven't
changed so far in 2010. The broad-based Value Line Geometric
Average is up 8tX7, while the Value Line Utility Average is where it
,"vas at the start of the year. (Value Line Investment Survey, Electric
Utilty (Central) Industr, March 26, 2010, page 901.)
Credit maket gyrations and the volatilty of utilty shares demonstrate the
increased uncertainties that utilty investors face. These uncertainties translate
into a higher cost of capita for utilties than has been experienced in recent years.
Do utilties continue to face the operating and financial risks that existed -
prior to the recent financial crisis?
Yes. Prior to the recent financial crisis, the greatest consideration for utilty
Hadaway, Di- 29
Rocky Mountain Power
1 investors was the industry's continuing transition to more open market conditions
2 and competition. With the passage of the Energy Policy Act (EPACT) in 1992
3 and the Federal EneFgy Regulatory Commssion's (FERC) Order 888 in 1996, the
4 stage was set for vastly increased competition in the electrc utilty industry.
5 EPACT's mandate for open access to the transmission grid and PERC's
6 implementation through Order 888 effectively opened the market for wholesale
7 electrcity to competition. Previously protected utilty serviceterrtory and lack of
8 transmission access in some parts of the countr had limited the availabilty of
9 competitive bulk power prices. EP ACT and Order 888 have essentially
10 eliminated such constraints for incremental power needs.
11 In addition to wholesale issues at the federal level, many states
12 implemented retail access and opened their retail makets to competition. Prior to
13 the Western energy crisis, investors' concerns had focused principally on
14 appropriate transition mechanisms and the recovery of stranded costs. More
15 recently, however,' provisions for dealing with power cost adjustments have
16 become a larger concern.
17 Concern is also beginning to develop around pending climate change
18 legislation including the recent passage by the House of Representatives of H.R.
19 2454 - the American Clean Energy and Security Act of 2009, also referred to as
20 the Waxman-Markey bil, which has been followed by the introduction in the U.S.
21 Senate on May 12,2010, of the American Power Act, also called the Kerr-
22 Lieberman bil. It appears increasingly likely that in the foreseeable future
23 climate change initiatives wil require utilities to balance a diverse set of supply-
Hadaway, Di- 30
Rocky Mountain Power
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21 Q.
22
23 A.
side and demand-side resources. In paricular, utilties with signifcant coal-fired
generation would have the added risk of addressing a reduction in greenhouse gas
(GHGs) emissions by needng to make costly changes to existing generation fleets
such as retirng existing coal plants in favor of lower-emission alternatives,
operating higher cost supply options, purchasing domestic and/or foreign carbon
offsets, or purchasing more expensive low-or-zero emission power. In addition,
climate change legislation may require investment in a mandated percentage of
renewable energy options, whether or not the investment appears to be economic,
and would likely place added pressure on utilties to offer additional demand-side
alternatives, including energy efficiency programs, that wil reduce customers'
demand for power. Moreover, electric utilties must continue to manage the
uncertainty of addressing sulfur dioxide, nitrogen oxides and mercury. Finally,
the Environmental Protection Agency has proposed rules in May 2010 regarding
coal combustion residue and new permt requirements for best available control
technology for GHGs.
As expected, the opening of previously protected utilty markets to
competition, the uncertainty created by the removal of regulatory protection,
continuing fuel price volatilty and concerns about the impact of climate change
legislation have raised the level of uncertainty about investment returns across the
entire industry.
Is RMP affected by these same uncertinties and increasing utilty capital
costs?
Yes. To some extent all electric utilties are being affected by the industr's
Hadaway, Di- 31
Rocky Mountain Power
1
2
3
4
5
6
7
8
9 Q.
10
11 A.
12
13
14
15
16
17
18
19
20
21
22
23
transition to competition and the emphasis on protecting the environment.
Although deregulation has not occurred in the state of Idaho, the Company's
power costs and other operating activities have been significantly affected by
transition and restructung events around the countr. In fact, the uncertainty
associated with the changes that are transformng the utilty industr as a whole,
as viewed from the perspective of the investor, remain a factor in assessing any
utilty's required ROE, including the ROE from the Company's operations in
Idaho.
How do capital market concerns and financial risk perceptions affect the cost
of equity capital?
As I discussed previously, equity investors respond to changing assessments of
risk and financial prospects by changing the price they are wiling to pay for a
given securty. When the risk perceptions increase or financial prospects decline,
investors refuse to pay the previously existing maket price for a company's
securities and market supply and demand forces then establish a new lower price.
The lower market price typically translates into a higher cost of capital through a
higher dividend yield requirement as well as the potential for increased capital
gains if prospects improve. In addition to market losses for prior shareholders,
the higher cost of capital is transmitted directly to the company by the need to
ear a higher cost of capital on existing and new investment just to maintain the
stock's new lower price level and the reality that the firm must issue more shares
to raise any given amount of capital for future investment. The additional shares
also impose additional future dividend requirements and may reduce futue
Hadaway, Di- 32
Rocky Mountain Power
1 earings per share growth prospects if the proceeds of the share issuance ar
2 unable to ear their expected rate of retu.
3 Q.How have regulatory commissions responded to these changing market and
4 industry conditions?
5 A.Over the past five years, average allowed equity returns have fluctuated in a
6 relatively narrow range. Table 4 provides a quarter-by-quarter summar of the
7 results:
1st Quarer
2nd Quarer
3rd Quarter
4th Quarer
Full Year Average
Average Utilty
Debt Cost
Indicated Average
Risk Premium
Table 4
Authorized Electric Utilty Equity Returns
2006 2007 2008
10.38% 10.27% 10.45%
10.68% 10.27% 10.57%
10.06% 10.02% 10.47%
10.39% 10.56% 10.33%
10.36% 10.36% 10.46%
2009
10.29%
10.55%
10.46%
10.54%
10.48%
2010
10.66%
10.66%
6.08%6.11%6.65%6.28%5.88%
4.28%4.25%3.81%4.20%4.78%
Source: Regulatory Focus, Regulatory Research Associates, Inc., Major Rate Case
Decisions, April 1, 2010. Utilty debt costs are the "average" public utilty bond
yields as reported by Moody's.
8 Since 2006, equity risk premiums (the difference between allowed equity retus
9 and utilty interest rates) have ranged from 3.81 percent to 4.78 percent.
10 Cost of Equity Capital for RMP
11 Q.What is the purpose of this section of your testimony?
12 A.The purpose of this section is to present my quantitative studies of the cost of
13 equity capital for the Company and to discuss the details and results of my
14 analysis.
Hadaway, Di- 33
Rocky Mountain Power
1 Q.
2 A.
3
4
5
6
7 Q.
8 A.
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
How are your studies organized?
In the first par of my analysis, I apply thre versions of the DCF model to a 22-
company group of electric utilties based on the selection criteria discussed
previously. In the second par of my analysis, I present my risk premium analysis
and review projected economic conditions and projected capital costs for the
coming year.
Please describe your DCF analysis.
My DCF analysis is based on thee versions of the DCF modeL. In the first
version of the DCF model, I use the constant growth format with long-term
ercpected growth based on analysts' estimates of five-year utilty earings growth.
While I continue to use a longer-term growth estimation approach based on
growth in overall gross domestic product, I also rely on the DCF results with
analysts' growth rates because this is the approach that has traditionally been used
by many regulators. Because the analysts' growth estimates are objective,
verifiable forecasts provided by independent third pares, this approach can
minimize disputes among the paries about the appropriate inputs to and
application of the modeL.
In the second version of the DCF model, again a constant growth format,
for the estimated growth rate I use the estimated long-term ODP growth rate. In
the third version of the DCF model, I use a two-stage growth approach, with stage
one based on Value Line's thee-to-five-year dividend projections and stage two
based on long-term projected growth in GDP. The dividend yields in all three of
the annual models are from Value Line's projections of dividends for the coming
Hadaway, Di- 34
Rocky Mountain Power
1
2
3
4 Q.
5
6 A.
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
year and stock prices are from the three-month average for the months that
correspond to the Value Line editions from which the underlying financial data
are taken.
Why do you use the long-term GDP growth rate to estimate long-term
growth expectations in the DCF model?
Growth in nominal GDP (real GDP plus inflation) is the most general measure of
economic growth in the U.S. economy. For long time periods, such as those used
in the MorningstarlIbotson Associates rate of return data, GDP growth has
averaged between 5 percent and 8 percent per year. From this observation,
Professors Brigham and Houston offer the following observation concerning the
appropriate long-term growth rate in the DCF Model:
Expected growth rates var somewhat among companies, but
dividends for mature firms are often expected to grow in the future
at about the same rate as nominal gross domestic product (real
GDP plus inflation). On this basis, one might expect the dividend
of an average, or "normal," company to grow at a rate of 5 to 8
percent a year. (Eugene F. Brigham and Joel F. Houston,
Fundamentals of Financial Management, 11th Ed. 2007, page
298.)
Other academic research on corporate growth rates offers similar conclusions
about GDP growth as well as concerns about the long-term adequacy of analysts'
forecasts:
Ou estimated median growth rate is reasonable when compared to
the overall economy's growth rate. On average over the sample
period, the median growth rate over 10 years for income before
extraordinar items is about 10 percent for al fir... After
deducting the dividend yield (the median yield is 2.5 percent per
year), as well as inflation (which averages 4 percent per year over
the sample period), the growth in real income before extraordinar
items is roughly 3.5 percent per year. This is consistent with the
historical growth rate in real gross domestic product, which has
averaged about 3.4 percent per year over the period 1950-1998.
Hadaway, Di- 35
Rocky Mountain Power
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16 Q.
17 A.
18
19
20
21
22
23
24
25
26
(Louis K. C. Chan, Jason Karceski, and Josef Lakonishok, "The
Level and Persistence of Growth Rates," The Journal of Finance,
April 2003, p.649)
IBES long-term growth estimates are associated with realized
growth in the immediate short-term future. Over long horizons,
however, there is little forecastabilty in earings, and analysts'
estimates tend to be overly optimistic... On the whole, the absence
of predictabilty in growth fits in with the economic intuition that
competitive pressures ultimately work to correct excessively high
or excessively low profitability growth. (Ibid, page 683)
These findigs support the notion that long-term growth expectations are more
closely predicted by broader measures of economic growth than by near-term
analysts' estimates. Especially for the very long-term growth rate requirements of
the DCF model, the growthin nominal GDP should be considered an important
input.
How did you estimate the expected long-run GDP growth rate?
I developed my long-term GDP growth forecast from nominal GDP data
contained in the St. Louis Federal Reserve Ban data base. That data for the
period 1949 through 2009 are summarzed in my Exhibit No. 12. As shown at the
bottom of that exhibit, the overall average for the period was 6.9 percent. The
data also show, however, that in the more recent years since 1980, lower inflation
has resulted in lower overall GDP growth. For this reason I gave more weight to
the more recent years in my GDP forecast. This approach is consistent with the
concept that more recent data should have a greater effect on expectations. Based
on this approach, my overall forecast for long-term GDP growth is 90 basis points
lower than the long-term average, at a level of 6.0 percent.
Hadaway, Di- 36
Rocky Mountain Power
1 Q.
2
3
4 A.
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
The DCF model requires an estimate of investors' long-term growth rate
expectations. Why do you believe your forecast of GDP growth based on
long-term historical data is appropriate?
There are at least thee reasons. First, most econometrc forecasts are derived
from the trending of historical data or the use of weighted averages. This is the
approach I have taen in Exhibit No. 12. The long-run historical average GDP
growth rate is 6.9 percent, but my estimate of long-term expected growth is only
6.0 percent. My forecast is lower because my forecasting method gives much
more weight to the more recent 10- and 20-year periods.
Second, some currently lower GDP growth forecasts likely understate very
long growth rate expectations that are required in the DCF modeL. Many of those
forecasts are currently low because they are based on the assumption of
permanently low inflation rates, in the range of 2 percent. As shown in my
Exhibit No. 12, the average long-term inflation rate has been over 3 percent in all
but the most recent 20 years.
Finally, the current economic tuoil makes it even more important to
consider longer-term economic data in the growth rate estimate. As discussed in
the previous section, curent near-term forecasts for both real GDP and inflation
are severely depressed. To the extent that the longer-term outlooks of
professional economists are also depressed, their forecasts may be understated.
Under these circumstances, a longer-term view is even more importt. For all
these reasons, while I am also presenting other growth rate approaches based on
analysts' estimates in this testimony, I believe it is appropriate also to consider
Hadaway, Di- 37
Rocky Mountain Power
1
2 Q.
3 A.
4
5
6
7
8
9
10
11
12
13 Q.
14 A.
15
16
17
18
19
20
21
22
long-term GDP growt in estimating the DCF growth rate.
Please summarize the results of your DCF analyses.
The DCF results for my comparble company group are presented in Exhibit No.
13. As shown in the first column of page 1 of that exhibit, the trditional constant
growth model indicates an ROE of 10.3 percent to 10.5 percent. In the second
column of page 1, I recalculate the constant growth results with the growth rate
based on long-term forecasted growth in GDP. With the GDP growth rate, the
constant growth model indicates an ROE range of 10.7 percent to 10.8 percent.
Finally, in the third column of page 1, I present the results from the multistage
DCF modeL. The multistage model indicates an ROE of 10.6 percent. The results
from the DCF model, therefore, indicate a reasonable ROE range of 10.3 percent
to 10.8 percent.
What are the results of your equity risk premium studies?
The details and results of my equity risk premium studies are shown in Exhibit
No. 14. These studies indicate an ROE range of 10.39 percent to 10.59 percent.
The Federal Reserve System's continuing "easy money" policies have provided
renewed liquidity in the credit makets that is reflected in these lower yields.
These results are slightly below the average DCF results, which continues to
demonstrate the equity market risk aversion that is reflected in continuing
volatilty and relatively low stock prices for utilty shares. These circumstaces
indicate that the cost of equity capital has not declined to the same extent as the
yields on utilty debt.
Hadaway, Di- 38
Rocky Mountain Power
1 Q.
2 A.
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
How are your equity risk premium studies structured?
My equity risk premium studies are divided into two pars. First; I compare
electrc utility authorized ROEs for the period 1980-2009 to contemporaneous
long-term utilty interest rates. The differences between the average authorized
ROEs and the average interest rate for the year is the indicated equity risk
premium. I then add the indicated equity risk premium to the forecasted and
current single-A utilty bond interest rate to estimate ROE. Because there is a
strong inverse relationship between equity risk premiums and interest rates (when
interest rates are high, risk premiums are low and vice versa), further analysis is
required to estimate the curent equity risk premium leveL.
The inverse relationship between equity risk premiums and interest rate
levels is well documented in numerous, well-respected academic studies. These
studies typically use regression analysis or other statistical methods to predict or
measure the equity risk premium relationship under varing interest rate
conditions. On page 3 of Exhibit No. 14, I provide regression analyses of the
allowed annual equity risk premiums relative to interest rate levels. The negative
and statistically significant regression coefficients confir the inverse relationship
between equity risk premiums and interest rates. This means that when interest
rates rise by one percentage point, the cost of equity increases, but by a smaller
amount. Similarly, when interest rates decline by one percentage point, the cost
of equity declines by less than one percentage point. I use this negative interest
rate change coefficient in conjunction with current interest rates to establish the
appropriate current equity risk premium.
Hadaway, Di- 39
Rocky Mountain Power
1 Q.
2 A.
3 Q.
4
5 A.
6
7
8
9
10
11
12
13
14
15
Please summarize the results of your cost of equity analysis.
My results are summarzed in Table 5 below:
Table 5
Summary of Cost of Equity Estimates
DCF Analysis
Constant Growth (Analysts' Growth)
Constant Growth (GDP Growth)
Multistage Growth Model
Reasonable DCF Range
Indicated Cost
10.3%-10.5%
10.7%-10.8%
10.6%
1Q.3%- lQ.8%
Equity Risk Premium Analysis
Projected Utility Debt Yield + Equity Risk Premium
Equity Risk Premium ROE (6.19% + 4.40%)
Current Utility Debt + Equity Risk Premium
Equity Risk Premium ROE (5.84% + 4.55%)
Indicated Cost
10.59%
10.39%
RMP Estimated ROE 10.6%
How should these results be interpreted to determine the fair cost of equity
for the Company?
The recent market tuoil and the continuing effects on capital maket conditions
make it difficult to strictly interpret quantitative model estimates for the cost of
equity. While corporate interest rates have dropped from the levels that existed in
late 2008, the DCF results, based on continuing relatively low utility stock prices,
show that the cost of equity has not declined as much as utility bond yields.
Under these conditions, use of a lower DCF range or equity risk premium
estimates based strictly on historical risk premium relationships likely understate
the cost of equity. From this perspective, and with consideration of the
Company's on-going capital requirements, I estimate the fair and reasonable cost
of equity capital to be at least at the approximate mid-point of my DCF range and
at the upper end of my risk premium range. This leads to a point estimate of 10.6
Hadaway, Di- 40
Rocky Mountain Power
1 percent as the maket required ROE for the Company.
2 Q.
3 A.
Does this conclude your testimony?
Yes, it does.
Hadaway, Di- 41
Rocky Mountain Power
Appendix A
Page 1 of 10
SAMUEL C. HADAWAY
FINANCO, Inc.
Financial Analysis Consultants
3520 Executive Center Drive, Suite 124
Austin, Texas 78731
[phone]
SUMMARY OF QUALIFICATIONS
. Principal, Financial Analysis Consultants (FINANCO, Inc.).
. Ph.D. in Finance and Econometrcs.
. Extensive expert witness testimony in court and before regulatory agencies.
. Management of professional researh staff in academic and regulatory organizations.
. Professional presentations before executive development groups, the National Rate of
Retu Analysts' Forum, and the New York Society of Security Analysts.
. Financial Management Association, Vice President for Practitioner Services.
EDUCATION
The University of Texas at Austin
Ph.D., Finance and Econometrics
January 1975
The University of Texas at Austin
MBA, Finance
June 1973
Southern Methodist University
BA, Economics
June 1969
OTHER EXPERIENCE
University of Texas at Austin
Adjunct Associate Professor
1985-1988,2004-Present
Texas State University San Marcos
Associate Professor of Finance
1983-1984,2003-2004
Public Utilty Commission of Texas
Chief Economist and Director of
Economic Research Division
August 1980-August 1983
Assistant Professor of Finance
Texas Tech University
July 1978-July 1980
University of Alabama
January 1975-June 1978
Dissertation: An Evaluation of the
Original and Recent Variants of the
Capital Asset Pricing Model.
Thesis: The Pricing of Risk on the
New York Stock Exchange.
Honors program. Deparmental
distinction.
Corporate Financial Management,
Investments, and Integrative Finance
Cases.
Graduate and undergraduate courses
in Financial Management, Managerial
Economics, and Investment Analysis.
Lead financial witness. Supervised
Commssion staff in research and
testimony on rate of return, financial
condition, and economic analysis.
Member of graduate faculty. Conducted
Ph.D. seminars and directed doctoral
dissertations in capital market theory.
Served as consultant to industry,
church and governmental organizations.
Appendix A
Page2of10
FINANCIAL AND ECONOMIC TESTIMONY IN REGULATORY
PROCEEDINGS (Client in parenthesis)
Cost of Money Testimony:
. Washington Utilties and Transportation Commssion, Docket UE-100749, May 4,
2010 (PacifiCorp).
. New Hampshire Public Utilties Commssion, Docket No. DE 10-055, April 15,2010
(Unitil Energy Systems)
. Oregon Public Utility Commssion, Docket No. UE-217, March 1,2010 (PacifiCorp).
. Texas Public Utility Commssion, Docket No. 37744, December 30, 2009,(Entergy
Texas, Inc.)
. Kansas Corporation Commssion, Docket No. 10-KCPE-415-RTS, December 17,
2009 (Kansas City Power & Light Company).
. Texas Public Utility Commssion, Docket No. 37690, December 9, 2009,(EI Paso
Electrc Company).
. California Public Utilties Commssion, Application No. 09-11-015, November 20,
2009 (PacifiCorp).
. Federal Energy Regulatory Commssion, Docket No. ERI0-230-000, November 6,
2009 (Kansas City Power & Light Company and KCP&L Greater Missour
Operations Company).
. Wyoming Public Service Commssion, Docket No. 20000-352-ER-09, October 2,
2009 (Rocky Mountain Power dbalacifiCorp).
. Arkansas Public Service Commssion, Docket No; 09-084-U, September 4,2009,
(Entergy- Arkansas)
. Texas Public Utility Commssion, Docket No. 37364, August 28, 2009,(American
Electrc Power-SWEPCO)
. Utah Public Service Commssion, Docket No. 09-035-23, June 23, 2009 (Rocky
Mountain PowerlPacifiCorp).
. New Mexico Public Regulation Commssion, Case No. 09-00171-UT, May 2009, (EI
Paso Electric Company).
. Oregon Public Utilty Commssion, Docket No. UE-207, April 2, 2009 (PacifiCorp).
. Arkansas Public Service Commssion, Docket No. 09-008-U, Februar 19, 2009
(American Electric Power-SWEPCO).
. Washington Utilties and Transportation Commssion, Docket UE-090205, Februar
9,2009 (PacifiCorp).
. Idaho Public Utilties Commssion, Case No. PAC-E-08-07, September 19,2008
(Rocky Mountain PowerlPacifiCorp).
. Missouri Public Service Commssion, Case No. ER-2009-089, September 5, 2008
(Kansas City Power & Light Company).
. Kansas Corporation Commssion, Docket No. 09-KCPE-246-RTS, September 5,
2008 (Kansas City Power & Light Company).
. Missouri Public Service Commssion, Case No. ER-2009-090, September 5, 2008
(Aquila, Inc. dbalKCP&L Greater Missouri Operations Company).
. Utah Public Service Commssion, Docket No. 08-035-38, July 17, 2008 (Rocky
Mountain PowerlPacifiCorp).
. Wyoming Public Service Commssion, Docket No. 20000-333-ER-08, July 2008
(Rocky Mountain Power dbalacifiCorp).
. Texas Public Utility Commssion, Docket No. 35717, June 27, 2008, (Oncor Electrc
Delivery Company LLC).
. Washington Utilties and Transportation Commssion, Docket UG-080546, March 28,
2008 (NW Natual).
. Washington Utilities and Transportation Commssion, Docket UE-080220, Februar
6,2008 (PacifiCorp).
. Utah Public Service Commssion, Docket No. 07-035-93, December 17,2007
(PacifiCorp ).
Appendix A
Page 3 of 10
. Ilinois Commerce Commssion, Docket No. 07-0566, October 17, 2007
(Commonwealth Edison Company).
. Texas Public Utility Commssion, Docket No. 34800, September 26,2007, (Entergy
Gulf States, Inc.)
. Texas Public Utility Commssion, Docket No. 34040, August 28,2007, (OncorlTXU
Electrc Delivery Company)
. Massachusetts Deparment of Public Utilties, D.P. U. 07-71, August 17, 2007,
(Fitchburg Gas and Electrc Light Company d//a! Unitil)
. Arzona Corporation Commssion, Docket No. E-01933A-07-0402, July 2, 2007,
(Tucson Electric Power Company).. Wyoming Public Service Commssion, Docket No. 20000-277-ER-07, June 29, 2007
(Rocky Mountain Power dbalacifiCorp).
. Idaho Public Utilties Commssion, Case No. PAC-E-05-1, June 8, 2007 (Rocky
Mountain Power dbalacifiCorp).
. Kansas Corporation Commssion, Docket No. 07-KCPE-905-RTS, March 1,2007
(Kansas City Power & Light Company).
. New Mexico Public Regulation Commssion, Case No. 07-00077-UT, Februar 21,
2007, (Public Service Company of New Mexico).
. Missouri Public Service Commssion, Case No. ER-2006-0291, Februar 1,2007
(Kansas City Power & Light Company).. Texas PUC Docket Nos. 33734, Januar 22, 2007 (Electrc Transmission Texas,
LLC).
. Texas PUC Docket Nos. 33309 and 33310, November 2006, (AEP Texas Centrl
Company and AEP Texas North Company).
. Louisiana Public Service Commssion, Docket No. U-23327, October 2006 and
Januar 2005 (Southwestern Electric Power Company, American Electrc Power
Company)
. Missouri Public Service Commssion, Case No. ER-2007-0004, July 3, 2006 (Aquila,
Inc.).
. New Mexico Public Regulation Commssion, Case No. 06-00258-UT, June 30, 2006
(EI Paso Electric Company).
. New Mexico Public Regulation Commssion, Case No. 06-00210-UT, May 30, 2006
(Public Service Company of New Mexico).
. Texas Public Utility Commssion, Docket No. 32093, April 14,2006 (CenterPoint
Energy-Houston Electric, LLC).
. Utah Public Service Commssion, Docket No. 06-035-21, March 7, 2006
(PacifiCorp ).
. Oregon Public Utilty Commssion, Case No. UE-179, Februar 23, 2006
(PacifiCorp ).
. Kansas Corporation Commssion, Docket No. 06-KCPE-828-RTS, Januar 31, 2006
(Kansas City Power & Light Company).
. Missouri Public Service Commssion, Case No. ER-2006-0314, Januar 27, 2006(Kansas City Power & Light Company). .
. California Public Utilties Commssion, Docket No. 05- 11 -022, November 29,2005
(PacifiCorp ).
. Texas Public Utilty Commssion, Docket No. 31994, November 5,2005 (Texas-New
Mexico Power Company).
. New Hampshire Public Utilities Commssion, Docket No. DE 05-178, November 4,
2005 (Unitil Energy Systems).
. Wyoming Public Service Commssion, Docket No. 20000-ER-05-230, October 14,
2005 (PacifiCorp).
. Minnesota Public Utilties Commssion, Docket. No. G-008/GR-05-1380, October
2005 (CenterPoint Energy Minnegasco).
. Texas Railroad Commssion, Gas Utilties Division No. 9625, September 2005
(CenterPoint Energy Entex).
Appendix A
Page 4 of 10
. Ilinois Commerce Commssion, Docket No. 05-0597, August 31,2005
(Commonwealth Edison Company).
. Washington Utilties and Transporttion Commssion, Docket ,UE-050684/General
Rate Case, May 2005 (PacifiCorp). .
. Missouri Public Service Commssion, Case No. ER-2005-0436, May 2005 (Aquila,
Inc.).
. Idaho Public Utilties Commssion, Case No. PAC-E-05-1, Januar 14,2005
(PacifiCorp ).
. Arkansas Public Service Commssion, Docket No. 04-121-U, December 3,2004
(CenterPoint Energy Arkla).
. Oregon Public Utilty Commssion, Case No. UE-170, November 12, 2004
(PacifiCorp ).
. Texas Public Utilty Commssion, Docket No. 29206, November 8, 2004 (Texas-New
Mexico Power Company).
. Texas Railroad Commssion, Gas Utilties Division Nos. 9533 and 9534, October 13,
2004 (CenterPoint Energy Entex).
. Texas Public Utility Commssion, Docket No. 29526, August 18 and September 2,
2004 (CenterPoint Energy Houston Electrc).
. Utah Public Service Commssion, Docket No. 04-2035-, August 4,2004 (PacifiCorp).
. Oklahoma Corporation Commssion, Cause No. PUD-200400187, July 2,2004,
(CenterPoint Energy Arkla).
. Minnesota Public Utilities Commssion, Docket No. G-008/GR-04-901, July 2004,
(CenterPoint Energy Minnegasco).
. Washington Utilties and Transportation Commssion, Docket ,UE-032065/General
Rate Case, December 2003 (PacifiCorp).
. Washington Utilties and Transportation Commssion, Docket ,UG-031885,
November 2003 (Nortwest Natural Gas Company.).
. Wyoming Public Service Commssion, Docket No. 20000-ER-03-198, May 2003
(PacifiCorp ).
. Public Service Commssion of Utah, Docket No. 03-2035-02, May 2003
(PacifiCorp ).
. Public Utilty Commssion of Oregon, Case. UE- 147, March 2003 (PacifiCorp).
. Wyoming Public Service Commssion, Docket No. 20000-ER-00- 162, May 2002
(PacifiCorp ).
. Public Utility Commssion of Oregon, UG-152, November 2002 (Nortwest Natual).
. Massachusetts Deparment of Telecommunications and Energy, D.T.E. 02-24/24,
May 2002 (Fitchburg Gas and Electrc Light Company).
. New Hampshire Public Utilties Commssion, Docket No. DE 01-247, Januar 2002
(Unitil Corporation).
. Washington Utilties and Transportation Commssion, Docket UE-Ol 1569,70,UG-
011571, November 2001 (Puget Sound Energy, Inc.).
. California Public Utilities Commssion, Docket No. 01-03-026, September and
December 2001 (PacifiCorp).
. New Mexico Public Regulation Commssion, Docket No. 3643, July 2001 (Texas-
New Mexico Power Company).
. Texas Natural Resources Conservation Commssion, Docket No. 2001-1074/5-URC,
May 2001 (AquaSource Utility, Inc.).
. Massachusetts Deparment of Telecommunications' and Energy, Docket No. 99- 118,
May 2001 (Fitchburg Gas and Electric Light Company).
. Public Service Commssion of Utah, Docket No. 01 -035-01, Januar 2001
(PacifiCorp )
. Federal Energy Regulatory Commssion, Docket No. ER-01-651, Januar 2001
(Southwestern Electric Power Company).. Wyoming Public Service Commssion, Docket No. 20000-ER-00-162, December
2000 (PacifiCorp).
. Public Utilty Commssion of Oregon, Case. UE- 116, November 2000, (PacifiCorp)
Appendi A
PageS of 10
. Public Utility Commssion of Texas, Docket No. 22344, September 2000, (AEP
Texas Companies, Entergy Gulf States, Inc., Reliant Energy HL&P, Texas-New
Mexico Power Company, TXU Electrc Company)
. Public Utilty Commssion of Oregon, Case UE- 11 1, August 2000, (PacifiCorp)
. Texas Public Utility Commssion, Docket Nos. 22352,3,4, March 2000 (Central
Power and Light Co., Southwestern Electrc Power Co., West Texas Utilities Co.).
. Texas Public Utiliy Commssion, Docket No. 22355, March 2000 (Reliant Energy,
Inc.).
. Texas Public Utility Commssion, Docket No. 22349, March 2000 (Texas-New
Mexico Power Co.).
. Texas Public Utility Commssion, Docket No. 22350, March 2000 (TXU Electric).
. Washington Utilties and Transportation Commssion, Docket UE-991831, November
1999 (PacifiCorp).
. Public Service Commssion of Utah, Docket No. 99-035-10, September 1999
(PacifiCorp)
. Louisiana Public Service Commssion Docket No. U-23029, August 1999
(Southwestern Electric Power Company). Wyoming Public Service Commssion, Docket No. 2000-ER-99-145, July 1999,
Januar 2000 (PacifiCorp, dba Pacific Power and Light Company).
. Texas PUC Docket No. 20150, March 1999 (Entergy Gulf States, Inc.)
. Federal Energy Regulatory Commssion Docket No. ER-98-3177-00, May and
December 1998 (Southwestern Electrc Power Company).
. Public Service Commssion of Utah, Docket No. 97-035-01, June 1998 (PacifiCorp,
dba Utah Power and Light Company).
. Massachusetts Dept. of Telecommunications and Energy, Docket No. DTE 98-51,
May 1998, (Fitchburg Gas and Electric Light Company, a subsidiary of Unitil Corp.)
. Texas PUC, Docket No. 18490, March 1998, (Texas Utilties Electrc Company)
. Texas PUC Docket No. 17751, March 1998 and July 1997 (Texas-New Mexico
Power Company).
. Federal Energy Regulatory Commssion Docket No. RP-97, Februar 1998 and May
1997 (Koch Gateway Pipeline Company).
. Federal Energy Regulatory Commssion Docket No. ER-97-4468-000, December
1997 (Puget Sound Power & Light).
. Oklahoma Corporation Commssion, Cause No. PUD 960000214, August 1997
(Public Service Company of Oklahoma).
. Oregon Public Utilty Commssion Docket No. UE-94, April 1996, (PacifiCorp).
. Texas PUC Docket No. 15643, May and September 1996, (Central Power and Light
and West Texas Utilties Company).
. Federal Energy Regulatory Commssion Docket No. ER-96, April 1996 (Puget Sound
Power & Light).
. Federal Energy Regulatory Commssion Docket No. ER96, Februar 1996, (Central
and South West Corporation).
. Washington Utilties & Transportation Commssion Docket No. UE-951270,
November 1995 (Puget Sound Power & Light).
. Texas PUC Docket No. 14965, November 1995, (Central Power and Light).. Texas PUC Docket No. 13369, Februar 1995 (West Texas Utilties).
. Texas PUC Docket No. 12065, July and December 1994, (Houston Lighting &
Power).
. Texas PUC, Docket No. 12820, July and November 1994, (Central Power and Light).
. Texas PUC Docket No. 12900, March 1994, and New Mexico PUC Case No. 2531,
August 1993, (TNP Enterprises).
. Texas PUC, Docket No. 12815, March 1994, (Pedernales Electrc Cooperative).
. Florida Public Service Commssion, Docket No. 930987-EI, December 1993, (TECO
Energy).
Appendix A
Page 7 of 10
. Florida Public Service Commssion Generic Purchased Power Proceedings, October
1993. (TECO Energy).
. Texas PUC, Docket No. 11248, December 1992 (Barbar Faskis).
. Texas PUC Dkt. No. 10894, Januar and June 1992, (Gulf States Utilties Company).
. State Corporation Commssion of Kansas, Dkt. NO.1 75,456-U, August 1991,
(UtilCorp United).
. Texas PUC Dkt. No. 9561, May 1990; Texas PUC Dkt. Nos. 6668/8646, July 1989
and Februar 1990, (Central Power and Light Company).
. Texas PUC Dkt. No. 9300, April 1990 and June 1990, (Texas Utilties Electrc Co.).
. Texas PUC Dkt. No. 10200, August 1991, (Texas-New Mexico Power Company).
. Texas PUC Dkt. No. 7289, May 1987, (West Texas Utilties Company).
. Texas PUC Dkt. No. 7195, Januar 1987, (Nort Sta Steel Texas).
. New Mexico PSC Case No. 1916, April 1986, (Public Service Company of New
Mexico).
. Texas PUC Dkt. No. 6525, March 1986, (Nort Star Steel Texas).
. Texas PUC Dkt. No. 6375, November 1985, (Valley Industrial Council).
. Texas PUC Dkt. No. 6220, April 1985, (Nort Sta Steel Texas).
. Texas PUC Dkt. No. 5940, March 1985, (West Texas Municipal Power Agency).
. Texas PUC Dkt. No. 5820, October 1984, (NortStar Steel Texas).
. Texas PUC Dkt. No. 5779, September 1984, (Texas Industrial Energy Consumers).
. Texas PUC Dkt. No. 5560, April 1984, (Nort Star Steel Texas).
. Arzona PSC Dkt. No. U-1345-83-155, Januar 1984 and May 1984 (Arzona Public
Service Company Shareholders Association).
Insurance Rate Testimony:
. Texas Deparment of Insurance, Docket No. 2673, Januar 2008, (Texas Land Title
Association).
. Texas Deparment of Insurance, Docket No. 2601, December 2006,.(Texas Land Title
Association).
. Texas Deparment of Insurance, Docket No. 2394, November 1999, (Texas Title
Insurance Agents).
. Senate Interim Commttee on Title Insurance of the Texas Legislatue, Februar 6,
1998
. Texas Department of Insurance, Docket No. 2279, October 1997, (Texas Title
Insurance Agents).
. Texas Department of Insurance, Januar 1996, (Independent Metropolitan Title
Insurance Agents of Texas).
. Texas Insurance Board, Januar 1992, (Texas Land Title Association).
. Texas Insurance Board, December 1990, (Texas Land Title Association).
. Texas Insurance Board, November 1989, (Texas Land Title Association).
. Texas Insurance Board, December 1987, (Texas Land Title Association).
Testimony On Behalf Of Texas PUC Staff:
. Texland Electrc Cooperative, Dkt. No. 3896, February 1983
. EI Paso Electrc Company, Dkt. No. 4620, September 1982.
. Southwestern Bell Telephone Company, Dkt. No. 4545, August 1982.
. Central Power and Light Company, Dkt. No. 4400, May 1982.
. Texas-New Mexico Power Company, Dkt. 4240, March 1982.
. Texas Power and Light Company, Dkt. No. 3780, May 1981.
. General Telephone Company of the Southwest, Dkt. No. 3690, April 1981.
. Mid-South Electrc Cooperative, Dkt. No. 3656, March 1981.
Appendix A
PageS otl0
. West Texas Utilties Company, Dkt. No. 3473, December 1980.
. Houston Lighting & Power Company, Dkt. No. 3320, September 1980.
ECONOMIC ANALYSIS AND TESTIMONY
Antitrust Litigation:
. Marginal Cost Analysis of Concrete Productionlredatory Pricing (Stiles)
. Analysis of Lost Business Opportnity due to denial of Waste Disposal Site Permt
(Browning-Ferrs Industries, Inc.).
. Analysis of Electrc Power Transmission Costs in Puchased Power Dispute (City of
College Station, Texas).
Contract Litigation:
. Analysis of Cogeneration Contractlconomic Viabilty Issues(Texas-New Mexico
Power Company)
. Definition of Electrc SaleslFranchise Fee Contract Dispute (Reliant Energy HL&P)
. Analysis of Purchased Power Agreementlreach of Contract (Texas-New Mexico
Power Company)
. Regulatory Commssion Provisions in Franchise Fee Ordinance Dispute (Central
Power & Light Company)
. Analysis of Economic Damages resulting from attempted Acquisition of Highway
Constrction Company (Dillngham Constrction Corporation).
. Analysis of Economic Damages due to Contract Interference in Acquisition of
Electric Utilty Cooperative (PacifiCorp).
. Analysis of Economic Damages due to Patent Infrngement of Boiler Cleaning
Process (Dowell-SchlumbergerlThe Dow Chemical Company).
Lender Liabilty/Securities Litigation:
. ERISA Valuation ofJletail Drug Store Chain (Sommers Drug Stores Company).
. Analysis of Lost Business Opportnities in Failed Businesses where Lenders Refused
to Extend or Foreclosed Loans (FirstCity Ban Texas, McAllen State Bank, General
Electric Credit Corporation).
. Usury and Punitive Damages Analysis based on Property Valuation in Failed Real
Estate Venture (Tomen America, Inc.).
Personal InjurylWrongful DeathIost Earnings Capacity Litigation:
. Analysis of Lost Earings Capacity and Punitive Damages due to Industral Accident
(Worsham, Forsythe and Wooldrdge).
. Analysis of Lost Earings Capacity due to Improper Termnatìon (Lloyd Gosselin,
Ryan & Fowler).
. Present Value Analysis of Lost Earings and Future Medical Costs due to Medical
Malpractice (Sierra Medical Center).
Product WarrantylLiabilty Litigation:
. Analysis of Lost Profits due to Equipment Failure in Cogeneration Facility (WF
EnergylTravelers Insurance Company).
. Analysis of Economic Damages due to Grain Elevator Explosion (Degesch Chemical
Company).
. Analysis of Economic Damages due to failure of Plastic Pipe Water Lines (Western
Plastics, Inc.)
Appendix A
Page90fl0
. Analysis of Rail Car Repair and Maintenance Costs in Product Waranty Dispute
(Youngstown Steel Door Company).
Property Tax Litigation:
. Evaluation of Electric Utility Distribution System (Jasper-Newton Electric
Cooperative).
. Evaluations of Electric Utilty Generating Plants (WestTexas Utilties Company),
Valuations of Closely Held Businesses in Litigation Support and Federal Estate Tax
Planning.
PROFESSIONAL PRESENTATIONS
"Fundamentals of Financial Management and Reporting for Non-Financial Managers,"
Austin Energy, July 2000,
"Fundamentals of Finance and Accounting," the IC2 Institute, University of Texas at
Austin, December 1996 and 1997.
"Fundamentals of Financial Analysis and Project Evaluation," Central and South West
Companies, Apri, May, and June 1997.
"Fundamentals of Financial Management and Valuation," West Texas Utilties Company,
November 1995.
"Financial Modeling: Testing the Reasonableness of Regulatory Results," University of
Texas Center for Legal and Regulatory Studies Conference, June 1991.
"Estimating the Cost of Equity Capital," University of Texas at Austin Utilties
Conference, June 1989, June 1990.
"Regulation: The Bottom Line," Texas Society of Certified Public Accountants, Annual
Utilties Conference, Austin, Texas, Apri 1990.
"Alternative Treatments of Large Plant Additions -- Modeling the Alternatives,"
University of Texas at Dallas Public Utilties Conference, July 1989.
"Industrial Customer Electrical Requirements," Edison Electric Institute Financial
Conference, Scottsdale, Arizona, October 1988.
"Acquisitions and Consolidations in the Electrc Power Industr," Conference on
Emerging Issues of Competition in the Electrc Utility Industry, University of
Texas at Austin, May 1988.
"The General Fund Transfer - Is It A Tax? Is It A Dividend Payout? Is It Fair?" The
Texas Public Power Association Annual Meeting, Austin, May 1984.
"A voiding 'Rate Shock' - Preoperational Phase-In Though CWIP in Rate Base," Edison
Electric Institute, Finance Commttee Annual Meeting, May 1983.
"A Cost-Benefit Analysis of Alternative Bond Ratings Among Electrc Utilty
Companies in Texas," (with B.L. Heidebrecht and J.L. Nash), Texas Senate
Subcommttee on Consumer Affairs, Decmber 1982.
"Texas PUC Rate of Retu and Construction Work in Progress Methods," New York
Society of Security Analysts, New York, August 1982.
"In Support of Debt Service Requirements as a Guide to Setting Rates of Return for
Subsidiaries," Financial Forum, National Society of Rate of Retu Analysts,
Washington, D.C., May 1982.
PUBLICATIONS
"Institutional Constraints on Public Fund Performance," (with B.L. Hadaway) Journal of
Portolio Management, Winter 1989.
"Implications of Savings and Loan Conversions in a Deregulated World," (with B.L.
Hadaway) Journal of Bank Research, Spring 1984.
Appendix A
Page 10 of 10
"Regulatory Treatment of Constrction Work in Progress," abstract, (with B.L.
Heidebrecht and J. L. Nash), Rate & Regulation Review, Edison Electrc Institute,
December 20, 1982.
"Financial Integrity and Market-to,-Book Ratios in an Effcient Market," (with W. L.
Beedles), Gas Pricing & Ratemaking, December 7, 1982.
"An Analysis of the Performnce Characteristics of Converted Savings and Loan
Associations," (with B.L. Hadaway) Journal of Financial Research, Fall 1981.
"Inflation Protection from Multi-Asset Sector Investments: A Long-Run Examination of
Correlation Relationships with InflationRates," (with B.L. Hadaway), Review of
Business and Economic Resêarch, Spring 1981.
"Converting to a Stock Company-Association Characteristics Before and After
Conversion," (with B.L. Hadaway), Federal Home Loan Bank Board Journal,
October 1980.
"A Large-Sample Comparative Test for Seasonality in Individual Common Stocks,"
(with D.P. Rochester), Journal of Economics and Business, Fall 1980."Diversification Possibilties in Agricultural Land Investments," Appraisal Journal,
October 1978.
"Further Evidence on Seasonality in Common Stocks," (with D.P. Rochester), Journal of
Financial and Quantitative Analysis, March 1978.
Case No. PAC-E-I0-07
Exhibit No. 10
Witness: Samuel C. Hadaway
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOUNTAIN POWER
Exhibit Accompanying Direct Testimony of Samuel C. Hadaway
Comparable Company Fundamentals
May 2010
Rocky Mountain Power
Exhibit No. 10 Page 1 of 1
Case No. PAC-E-10-07
Witness: Samuel C. Hadaway
Rocky Mountain Power
Comparable Company Fundamental Characteristics
(1 )(2)(3)
Capital Structure (2009)
% Regulated Credit Rating Common Equity Long-Term Debt Preferred Stock
No.Company Revenue S&P Moody's Ratio Ratio Ratìo
1 ALLETE 89.8%A-A2 57.2%42.8%0.0%
2 Allant Energy Co.90.2%A-A2 51.2%44.3%4.5%
.3 Black Hils Corp 88.3%BBB A3 51.6%48.4%0.0%
4 Con. Edison 83.8%A-A3 50.4%48.5%1.0%
5 DPLlnc.100.0%A Aa3 46.9%52.1%1.0%
6 DTE Energy Co.81.1%A-A2 46.1%53.9%0.0%
7 Duke Energy 83.9%BBB+A2 57.6%42.4%0.0%
8 Edison Internat.80.6%A A1 46.5%49.3%4.2%
9 Entergy Corp.74.9%A-Baa3 43.1%55.3%1.6%
10 FPL Group, Inc.73.5%A Aa2 44.3%55.7%0.0%
11 IDACORP 84.2%A-NR 49.8%50.2%0.0%
12 Northeast Utilties 99.0%BBB+A3 43.7%54.9%1.4%
13 NSTAR 99.5%M-A1 48.2%50.7%1.1%
14 PG&E Corp.100.0%BBB+A3 47.4%51.4%1.2%
15 Portland General 100.0%A-A3 49.7%50.3%0.0%
16 Progress Energy 99.9%A-A1 43.8%55.8%0.4%
17 SCANACorp.73.1%A-A3 43.2%56.8%0.0%
18 Sempra Energy 76.7%A+Aa3 54.1%44.8%1.1%
19 Southern Co.84.5%A A2 45.7%53.2%1.1%
20 Vectren Corp.76.3%A A2 47.5%52.5%0.0%
21 Wisconsin Energy 99.8%A-A1 47.7%51.9%0.4%
22 Xcel Energy Inc.99.2%A A2 47.7%51.6%0.7%
Average 88.1%AlA-A2 48.3%50.8%0.9%
Column Sources:
(1) Most recent company 10-Ks.
(2) AUS Utilty Reports, Mar 2010.
(3) Value Line Investment Survey, Electric Utility (East), Feb 26,2010; (Central), Mar 26,2010; (West), May 7, 2010 and
most recent company 10-Ks (where actual 2009 data not available from Value Line).
Case No. PAC-E-1O-07
Exhbit No. 11
Witness: Samuel C. Hadaway
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOUNTAIN POWER
Exhibit Accompanying Direct Testimony of Samuel C. Hadaway
Capital Market Costs
May 2010
Ro
c
k
y

M
o
u
n
t
a
i
n

P
o
w
e
r
Hi
s
t
o
r
i
c
a
l

C
a
p
i
t
a
l

M
a
r
k
e
t

C
o
s
t
s
20
0
0
20
0
1
20
0
2
20
0
3
20
0
4
20
0
5
20
0
6
20
0
7
20
0
8
20
0
9
Pr
i
m
e

R
a
t
e
9.
2
%
6.
9
%
4.
7
%
4.
1
%
4.
3
%
6.
2
%
8.
0
%
8.
1
%
5.
1
%
3.
3
%
Co
n
s
u
m
e
r

P
r
i
c
e

I
n
d
e
x
3.
4
%
1.
6
%
2.
5
%
2.
0
%
3.
3
%
3.
3
%
2.
5
%
4.
1
%
0.
0
%
2.
8
%
Lo
n
g
-
T
e
r
m

T
r
e
a
s
u
r
i
e
s
5.
9
%
5.
5
%
5.
4
%
5.
0
%
5.
1
%
4.
7
%
5.
0
%
4.
8
%
4.
3
%
4.
1
%
Mo
o
d
y
'
s

A
v
g

U
t
i
l
t
y

D
e
b
t
8.
1
%
7.
7
%
7.
5
%
6.
6
%
6.
2
%
5.
7
%
6.
1
%
6.
1
%
6.
7
%
6.
3
%
Mo
o
d
y
'
s

A

U
t
i
l
t
y

D
e
b
t
8.
2
%
7.
8
%
7.
4
%
6.
6
%
6.
2
%
5.
7
%
6.
1
%
6.
1
%
6.
5
%
6.
0
%
SO
U
R
C
E
S
:
Pr
i
m
e

I
n
t
e
r
e
s
t

R
a
t
e

-

F
e
d
e
r
a
l

R
e
s
e
r
v
e

B
a
n
k

o
f

S
1
.

L
o
u
i
s

w
e
b
s
i
t
e
Co
n
s
u
m
e
r

P
r
i
c
e

I
n
d
e
x

F
o
r

A
l
l

U
r
b
a
n

C
o
n
s
u
m
e
r
s
:

A
l
l

I
t
e
m
s

(
S
e
a
s
o
n
a
l
l
y

A
d
j
u
s
t
e
d
.

D
e
c
e
m
b
e
r

t
o

D
e
c
e
m
b
e
r
)

-

F
e
d
e
r
a
l

R
e
s
e
r
v
e

B
a
n
k

o
f

S
1
.

L
o
u
i
s

w
e
b
s
i
t
e
Lo
n
g
-
T
e
r
m

T
r
e
a
s
u
r
i
e
s

-

F
e
d
e
r
a
l

R
e
s
e
r
v
e

B
a
n
k

o
f

S
1
.

L
o
u
i
s

w
e
b
s
i
t
e
;

3
0
-
y
e
a
r

T
r
e
a
s
u
r
y

b
o
n
d
s

1
9
9
9
-
2
0
0
1

a
n
d

2
0
0
7
-
2
0
0
9
;

2
0
-
y
e
a
r

T
r
e
a
s
u
r
y

b
o
n
d
s

2
0
0
2
-
2
0
0
6
Mo
o
d
y
'
S

A
v
e
r
a
g
e

U
t
i
l
i
y

D
e
b
t

-

M
o
o
d
y
'
s

(
M
e
r
g
e
n
t
)

B
o
n
d

R
e
c
o
r
d
Mo
o
d
y
'
s

A

U
t
i
i
t
y

D
e
b
t

-

M
o
o
d
y
'
s

(
M
e
r
g
e
n
t
)

B
o
n
d

R
e
c
o
r
d
~(
)
m
;
:
§'
g
j

~
o
11

1
1

õ
'

~
~
z
:
:
"
'
..

~

z

s
:
gi

'
"

~

g
3
;
i

.
.

:
J
1"
.
.
-
15

~
'

'
"

!
!
.
-r
;
i
i

:
J
()

.
.
(
0

'
"
.
0
1
1

0
:i
ò
.
.
~
~.
.
s
.

.
.
i
w
Rocky Mountain Power
Long-Term Interest Rate Trends
Month
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
3-Mo Avg
12-Mo Avg
Single-A
Utilty Rate
6.02
6.21
6.21
6.29
6.28
6.38
6.40
6.37
6.49
7.56
7.60
6.52
6.39
6.30
6.42
6.48
6.49
6.20
5.97
5.71
5.53
5.55
5.64
5.79
5.77
5.87
5.84
5.81
5.84
5.85
30-Year
Treasury Rate
4.33
4.52
4.39
4.44
4.60
4.69
4.57
4.50
4.27
4.17
4.00
2.87
3.13
3.59
3.64
3.76
4.23
4.52
4.41
4.37
4.19
4.19
4.31
4.49
4.60
4.62
4.64
4.69
4.65
4.44
Single-A
Utilty Spread
1.69
1.69
1.82
1.85
1.68
1.69
1.83
1.87
2.22
3.39
3.60
3.65
3.26
2.71
2.78
2.72
2.26
1.68
1.56
1.34
1.34
1.36
1.33
1.30
1.17
1.25
1.20
1.12
1.19
1.41
Rocky Mountain Power
Exhibit No. 11 Page 2 of 3
Case No. PAC-E-10-07
Witness: Samuel C. Hadaway
Sources: Mergent Bond Record (Utilty Rates); ww.federalreserve.gov (Treasury Rates).
Three month average is for Feb 2010 - Apr 2010.
Twelve month average is for May 2009 - Apr 2010.
00
Ec
o
n
o
m
i
c

I
n
d
i
c
a
t
o
r
s
Se
a
s
o
n
a
l
l
y

A
d
j
u
s
t
e
d

A
n
n
u
a
l

R
a
t
e
s

-

D
o
l
l
a
r

F
i
g
u
r
e
s

i
n

B
i
l
i
o
n
s
--
-
-
-

A
n
n
u
a
l

%

C
h
a
n
g
e

-
-
-
-
-
--
-
-
-
-
-
-
-
-
-

2
0
0
9

-
-
-
-
-
-
-
-
-
-
--
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-

E
2
0
1
0

-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-

-
-
-
-
-
-
-
-
"
-

E
2
0
1
1

-
-
-
-
-
-
-
-
-
-
-
R2
0
0
9
E2
0
1
0
E2
0
1
1
R2
0
0
9
E2
0
1
0
E2
0
1
1
3Q
R4
Q
1Q
2Q
3Q
4Q
1Q
2Q
Gr
o
s
s

D
o
m
e
s
t
i
c

P
r
o
d
u
c
t
$1
4
,
2
5
6
.
3

$
1
4
,
8
4
5
.
4
$1
5
,
5
5
6
.
1
(1
.
3
)
4.
1
4.
8
GO
P

(
c
u
r
r
e
n
t

d
o
l
l
a
r
s
)
$1
4
,
2
4
2
.
1
$1
4
,
4
5
3
.
8

$
1
4
.
5
8
1
.
6

$
1
4
,
7
7
4
.
0

$
1
4
,
9
4
0
.
0

$
1
5
,
0
8
5
.
9

$
1
5
,
2
7
6
.
2
$1
5
,
4
5
1
.
0
(1
.
3
)
4.
1
4.
8
-
-
An
n
u
a
l

r
a
t
e

o
f

i
n
c
r
e
a
s
e

(
%
)
2.
6
6.
1
3.
6
5.
4
4.
6
4.
0
5.
1
4.
7
(2
.
4
)
3.
0
2.
9
-
-
-
An
n
u
a
l

r
a
t
e

o
f

i
n
c
r
e
a
s
e
-
r
e
a
l

G
O
P

(
%
)
2.
2
5.
6
2.
5
3.
5
2.
3
2.
6
2.
8
2.
9
1.
2
1.
1
1.
8
-
-
-
An
n
u
a
l

r
a
t
e

o
f

i
n
c
r
e
a
s
e
-
G
O
P

d
e
f
l
a
t
o
r

(
o
/
0.
4
0.
5
1.
1
1.
8
2.
2
1.
3
2.
2
1.
7
'C
o
m
p
o
n
e
n
t
s

o
f

R
e
a
l

G
O
P
$9
,
2
3
5
.
1
$9
,
4
4
9
.
7
$9
,
6
6
5
.
5
(0
.
6
)
2.
3
2.
3
Pe
r
s
o
n
a
l

c
o
n
s
u
m
p
t
i
o
n

e
x
p
e
n
d
i
t
u
r
e
s
$9
,
2
5
2
.
6
$9
,
2
8
9
.
5
$9
.
3
6
4
.
1
$9
,
4
1
5
.
8
$9
,
4
8
2
.
8
$9
,
5
3
5
.
9
$9
,
5
7
4
.
7
$9
,
6
2
4
.
9
(0
.
6
)
2.
3
2.
3
-
-
-
%
c
h
a
n
g
e
2.
8
1.
6
3.
3
2.
2
2.
9
2.
3
1.
6
2.
1
1,
1
0
1
.
4
1,
1
7
7
.
0
1,
2
5
6
.
0
(3
.
9
)
6.
9
6.
7
Du
r
a
b
l
e

g
o
o
d
s
1,
1
2
2
.
7
1,
1
2
3
.
7
1,
1
3
9
.
1
1,
1
6
7
.
4
1,
1
9
2
.
2
1,
2
0
9
.
3
1,
2
2
2
.
7
1,
2
3
7
.
6
2,
0
3
7
.
0
2,
0
8
8
.
8
2,
1
1
6
.
5
(1
.
0
)
2.
5
1.
3
No
n
d
u
r
a
b
l
e

g
o
o
d
s
2,
0
3
3
.
3
2,
0
5
3
.
4
2,
0
7
7
.
7
2,
0
8
3
.
5
2,
0
9
3
.
7
2,
1
0
0
.
4
2,
1
0
3
.
3
2,
1
1
0
.
5
6,
0
8
7
.
8
6,
1
8
3
.
6
6,
3
0
3
.
3
0.
1
1.
6
1.
9
Se
r
v
i
c
e
s
6,
0
9
0
.
6
6,
1
0
5
.
9
6,
1
4
2
.
0
6,
1
6
3
.
6
6,
1
9
8
.
8
6.
2
3
0
.
1
6,
2
5
4
.
4
6,
2
8
4
.
1
-i
1,
2
9
1
.
0
1,
3
1
2
.
5
1,
4
0
3
.
5
(1
7
.
8
)
1.
7
6.
9
No
n
r
e
s
i
d
e
n
t
a
l

f
i
x
e
d

i
n
v
e
s
t
m
e
n
t
1,
2
6
9
,
0
1,
2
8
5
.
5
1,
2
8
7
.
9
1,
3
0
5
.
9
1,
3
2
0
.
0
1,
3
3
6
.
0
1,
3
6
1
.
6
1,
3
8
5
.
8
:i
(1
7
.
8
)
1.
7
6.
9
-
-
-
%
c
h
a
n
g
e
(5
.
9
)
5.
3
0.
7
5.
7
4.
4
4.
9
7.
9
7.
3
mz
89
0
.
7
97
5
.
9
1,
0
9
7
.
1
(1
6
.
6
)
9.
6
12
.
4
Pr
o
d
u
c
e
r
s

d
u
r
a
b
l
e

e
q
u
i
p
m
e
n
t
87
9
.
8
91
8
.
9
93
0
.
2
96
0
.
5
99
1
.
0
1,
0
2
1
.
9
1,
0
5
5
.
8
1,
0
8
5
.
3
0en
34
9
.
6
34
8
.
7
43
2
.
0
(2
0
.
8
)
(0
.
3
)
23
.
9
Re
s
i
d
e
n
t
a
l

f
i
x
e
d

i
n
v
e
s
t
m
e
n
t
35
0
.
5
35
3
.
5
34
3
.
2
34
5
.
4
34
6
.
7
35
9
.
4
38
3
.
9
41
7
.
0
Re"l
(2
0
.
8
)
(0
.
3
)
23
.
9
-
-
-
%
c
h
a
n
g
e
19
.
0
3.
5
(1
1
.
1
)
2.
6
1.
5
15
.
5
30
.
2
39
.
3
:i
(1
0
8
.
3
)
27
.
5
51
.
0
Ne
t

c
h
a
n
g
e

i
n

b
u
s
i
n
e
s
s

i
n
v
e
n
t
o
r
i
e
s
(1
3
9
.
2
)
(1
9
.
7
)
(2
.
8
)
31
.
4
38
.
3
42
.
9
48
.
2
49
.
2
e
-
-
-
m
2,
5
6
4
.
6
2,
5
8
4
.
6
2,
5
6
4
.
8
1.
8
0.
8
(0
.
8
)
Go
v
'
t

p
u
r
c
h
a
s
e
s

o
f

g
o
o
d
s

&

s
e
r
v
i
c
e
s
2,
5
8
5
.
5
2,
5
7
6
.
9

.
2,
5
7
0
.
4
2,
5
8
6
.
7
2,
5
9
0
.
2
2,
5
9
1
.
1
2,
5
8
4
.
6
2,
5
7
0
.
1
~
1,
0
2
6
.
6
1,
0
6
5
.
2
1,0
3
8
.
2
5.
2
3.
8
(2
.
5
)
Fe
d
e
r
a
l
1,
0
4
3
.
3
1,
0
4
3
.
4
1,
0
5
2
.
8
1,
0
6
9
.
3
1,
0
7
0
.
6
1,
0
6
8
.
2
1,
0
5
8
.
8
1,
0
4
4
.
0
Õ
1,
5
4
1
.
0
1,
5
2
3
.
5
1,
5
3
0
.
3
(0
.
2
)
(1
.
1

)
0.
4
St
a
t
e

&

l
o
c
a
l
1,
5
4
5
.
5
1,
5
3
7
.
0
1,
5
2
1
.
5
1,
5
2
1
.
6
1,
5
2
3
.
9
1,
5
2
6
,
9
1,
5
2
9
.
6
1,
5
2
9
.
8
zen
(3
5
5
.
6
)
(3
5
7
.
2
)
(3
4
8
.
6
)
-
-
-
Ne
t

e
x
p
o
r
t
s
(3
5
7
.
4
)
(3
4
8
.
0
)
(3
4
4
.
7
)
(3
5
2
.
0
)
(3
6
6
.
7
)
(3
6
5
.
3
)
(3
5
4
.
3
)
(3
4
5
.
9
)
-.;i
1,
4
7
2
.
4
1,6
5
0
.
1
1,
7
9
2
.
5
(9
.
6
)
12
.
1
8.
6
Ex
p
o
r
t
s
1,
4
7
8
.
8
1,
5
5
6
.
8
1,
5
8
7
.
7
1,
6
3
3
.
7
1,
6
7
1
.
3
1,
7
0
7
.
8
1,
7
4
0
.
8
1.
7
7
6
.
6
"0==
1,
8
2
8
.
0
2,
0
0
7
.
3
2,
1
4
1
.
1
(1
3
.
9
)
9.
8
6.
7
Im
p
o
r
t
s
1,
8
3
6
.
2
1,
9
0
4
.
8
1,
9
3
2
.
3
1,
9
8
5
.
7
2,
0
3
8
.
0
2,
0
7
3
.
0
2,
0
9
5
.
1
2,
1
2
2
.
5
I\~
"I
n
c
o
m
e

&

P
r
o
f
i
t
s
0
$1
2
,
0
2
6
.
1
$1
2
,
4
1
8
.
6

$
1
3
,
0
0
7
.
2
(1
.
7
)
3.
3
4.
7
Pe
r
s
o
n
a
l

i
n
c
o
m
e
$1
2
,
0
0
5
.
2
$1
2
,
0
9
7
.
7

$
1
2
,
1
8
8
.
2
$1
2
,
3
4
2
.
2
$1
2
,
5
0
5
.
8

$
1
2
,
6
3
8
.
0

$
1
2
,
7
8
5
.
5
$1
2
,
9
1
9
.
3
10
,
9
2
3
.
7
11
,
2
5
5
.
6
11
,
6
5
9
.
4
1.
1
3.
0
3.
6
Di
s
p
o
s
a
b
l
e

p
e
r
s
o
n
a
l

i
n
c
o
m
e
10
,
9
3
4
.
3
11
,
0
2
8
.
7
11
,
0
5
9
.
4
11
,
1
9
1
.
2
11
,
3
4
0
.
7
11
,
4
3
1
.
0
11
,
4
6
9
.
5
11
,
5
8
2
.
6
4.2
3.
3
2.
8
-
-
-
Sa
v
i
n
g
s

r
a
t
e

(
%
)
3.
9
3.
9
3.
1
3.
4
3.5
3.
4
2.
8
2.
8
1,
4
2
7
.
7
1,
7
0
1
.
4
1,
8
4
6
.
3
(2
.
4
)
19
.
2
8.
5
Co
r
p
o
r
a
t
e

p
r
o
f
i
t
s

b
e
f
o
r
e

t
a
x
e
s
1,
4
9
5
.
0
1,
6
3
2
.
0
1,
7
3
6
.
8
1,
6
7
4
.
8
1,
6
8
3
.
4

.
1,
7
1
0
.
5
1,
8
2
5
.
0
1,
8
3
0
.
5
1,
1
1
2
.
8
1,
3
0
9
.
7
1,
3
0
8
.
2
(4
.
9
)
17
.
7
(0
.
1
)
Co
r
p
o
r
a
t
e

p
r
o
f
i
s

a
f
t
e
r

t
a
x
e
s
1,
1
7
3
.
9
1,
2
7
0
.
1
1,
3
3
4
.
5
1,2
8
8
.
4
1,
2
9
7
.
3
1,
3
1
8
.
6
1,
2
9
5
.
3
1,
2
9
6
.
3
51
.
1
5
63
.
8
9
71
.
8
1
24
3
.
8
24
.
9
12
.
4
iE
a
r
n
i
n
g
s

p
e
r

s
h
a
r
e

(
S
&
P

5
0
0
)
12
.
4
9
51
.
1
5
59
.
5
2
61
.
6
5
63
.
2
3
63
.
8
9
66
.
6
3
68
.
9
7
fP
r
i
c
e
s

&

I
n
t
e
r
e
s
t

R
a
t
e
s
(0
.
3
)
2.
2
2.
0
-
-
-
Co
n
s
u
m
e
r

p
r
i
c
e

i
n
d
e
x
3.
7
2.
6
1.
6
1.
5
2.
5
1.
6
2.
3
2.
1
0.
2
0.
4
2.
0
-
-
-
Tr
e
a
s
u
r
y

b
i
l
l
s
0.
2
0.
1
0.
1
0.
2
0.
4
0.
8
1.
3
1.
8
3.
3
4.
1
5.
1
-
-
-
10
.
y
r

n
o
t
e
s
3.
5
3.5
3.
7
4.
0
4.
3
4.
5
4.
8
5.
0
4.
1
5.
0
5.
7
-
-
-
30
-
y
r

b
o
n
d
s
4.
3
4.
3
4.
6
4.
9
5.
1
5.
3
5.
6
5.
7
5.
3
5.
7
6.
6
-
-
-
Ne
w

i
s
s
u
e

r
a
t
e
-
e
o
r
p
o
r
a
t
e

b
o
n
d
s
5.
3
5.
2
5.
3
5.
6
5.
9
6.
1
6.
4
6.
6

:
E

Q

~

a
i
z
Ot
h
e
r

K
e
y

I
n
d
i
c
a
t
o
r
s
S"

~

~

~
0
m
z
;
:
o
.
c
55
3
.
3
66
2
.
9
1,
1
4
2
.
2
(3
8
.
6
)
19
.
8
72
.
3
Ho
u
s
i
n
g

s
t
a
r
t
s

(
1
,
0
0
0

u
n
i
t
s

S
A
A
R
)
58
6
.
7
55
8
.
7
59
5
.
2
60
4
.
5
68
1
.
2
77
0
.
8
93
0
.
2
1,
0
8
3
.
3

f
J

?

z

~
~
10
.
3
11
.
7
13
.
6
(2
1
.
6
)
13
.
4
15
.
6
Au
t
o

&

t
r
u
c
k

s
a
l
e
s

(
1
,
0
0
0
,
0
0
0

u
n
i
t
s
)
11
.
5
10
.
8
11
.
0
11
.
6
12
.
0
12
.
4
12
.
7
13
.
2

C
I
"
"
?

c
:
:i
II

;
x
~
;
:
-e
9.
3
9.
6
9.
2
-
-
-
Un
e
m
p
l
o
y
m
e
n
t

r
a
t
e

(
%
)
9.
6
10
.
0
9.
7
9.
6
9.
6
9.
7
9.
6
9.
4

~

(
)

~

i
.
en~
4
.
5

(
4
.
6
)

(
6
.
0
)

-

-

-

§
U
.
S
.

d
o
l
l
a
r

(
1
8
.
6
)

(
9
.
5
)

1
0
.
7

(
1
.
3
)

(
6
.
9
)

(
8
.
2
)
(7
.
3
)
(4
.
8
)

~

i
i

~

;
:
()

~

c
.

"
"
¡S

N
o
t
e
:

A
n
n
u
a
l

c
h
a
n
g
e
s

a
r
e

f
r
o
m

p
r
i
o
r

y
e
a
r

a
n
d

q
u
a
r
t
e
r
l
y

c
h
a
n
g
e
s

a
r
e

f
r
o
m

p
r
i
o
r

q
u
a
r
t
e
r
.

F
i
g
u
r
e
s

m
a
y

n
o
t

a
d
d

t
o

t
o
t
a
l
s

b
e
c
a
u
s
e

o
f

r
o
u
n
d
i
n
g
.

A
-
A
d
v
a
n
c
e

d
a
t
a
.

P
-
P
r
e
l
l
m
l
n
a
r
y
.

E
-
E
s
l
i
m
a
t
e
d
.

R
-
R
a
v
i
s
e
d
.
.
e
r
r
o
~
ü.

"
2
0
0
5

C
h
a
i
n
-
w
e
i
g
h
t
e
d

d
o
l
l
a
r
s
.

"
"
C
u
r
r
e
n
t

d
o
l
l
a
r
s
.

:
j
r
a
l
l
n
g

4

q
u
a
r
t
e
r
s
.

t
A
v
e
r
a
g
e

f
o
r

p
e
r
i
o
d
.

§
Q
u
a
r
t
e
r
l
y

%

c
h
a
n
g
e
s

a
t

q
u
a
r
t
e
r
l
y

r
a
t
e
s
.

T
h
i
s

f
o
r
e
c
a
s
t

p
r
e
p
a
r
e
d

b
y

S
t
a
n
d
a
r
d

&

P
o
o
t
s
.
:i
o
w
r
o
II

.
.

0

.
.
c.

_
II
W
~o.
Case No. PAC-E-I0-07
Exhibit No. 12
Witness: Samuel C. Hadaway
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOUNTAIN POWER
Exhibit Accompanying Direct Testimony of Samuel C. Hadaway
GDP Growth Rate
May 2010
Rocky Mountain Power
Exhibit No. 12 Page 1 of 1
Case No. PAC-E-10-07
Rocky Mountain Power Witness: Samuel C. Hadaway
GOP Growth Rate Forecast
Nominal %GDP Price %%
GDP Change Deflator Change CPI Change
1949 265.2 14.4 23.6
1950 313.3 18.1%15.0 4.2%25.0 5.8%
1951 347.9 11.0%15.9 5.6%26.5 6.0%
1952 371.4 6.8%16.1 1.5%26.7 0.9%
1953 375.9 1.2%16.2 0.8%26.9 0.6%
1954 389.4 3.6%16.4 0.8%26.8 -0.4%
1955 426.0 9.4%16.8 2.6%26.9 0.4%
1956 448.1 5.2%17.3 3.3%27.6 2.8%
1957 461.5 3.0%17.8 2.7%28.5 3.0%
1958 485.0 5.1%18.3 2.5%29.0 1.8%
1959 513.2 5.8%18.4 0.9%29.4 1.5%
1960 523.7 2.0%18.7 1.4%29.8 1.4%
1961 562.6 7.4%18.9 1.1%30.0 0.7%
1962 593.3 5.5%19.1 1.3%30.4 1.2%
1963 633.5 6.8%19.4 1.4%30.9 1.6%
1964 675.6 6.6%19.7 1.5%31.3 1.2%
1965 747.5 10.6%20.1 2.0%31.9 1.9%
1966 806.9 7.9%20.8 3.5%32.9 3.4%
1967 852.7 5.7%21.4 3.1%34.0 3.3%
1968 936.2 9.8%22.4 4.6%35.6 4.7%
1969 1004.5 7.3%23.6 5.2%.37.7 5.9%
1970 1052.7 4.8%24.7 5.0%39.8 5.6%
1971 1151.4 9.4%25.9 4.7%41.3.3%
1972 1286.6 11.7%27.1 4.5%42.5 3.4%
1973 1431.8 11.3%28.9 6.8%46.3 8.9%
1974 1552.8 8.5%32.0 10.7%51.9 12.1%
1975 1713.9 10.4%34.4 7.6%55.6 7.1%
1976 1884.5 10.0%36.3 5.4%58.4 5.0%
1977 2110.8 12.0%38.7 6.7%62.3 6.7%
1978 2416.0 14.5%41.5 7.3%67.9 9.0%
1979 2659.4 10.1%45.2 8.7%76.9 13.3%
1980 2915.3 9.6%49.6 9.7%86.4 12.4%
1981 3194.7 9.6%53.6 8.3%94.1 8.9%
1982 3312.5 3.7%56.4 5.2%97.7 3.8%
1983 3688.1 11.3%58;3 3.3%101.4 3.8%
1984 4034.0 9.4%60.4 3.6%105.5 4.0%
1985 4318.7 7.1%62.1 2.8%109.5 3.8%
1986 4543.3 5.2%63.5 2.3%110.8 1.2%
1987 4883.1 7.5%65.5 3.1%115.6 4.3%
1988 5251.0 7.5%67.9 3.7%120.7 4.4%
1989 5581.7 6.3%70.3 3.5%126.3 4.6%
1990 5846.0 4.7%73.2 4.2%134.2 6.3%
1991 6092.5 4.2%75.5 3.2%138.2 3.0%
1992 6493.6 6.6%77.1 2.2%142.3 3.0%
1993 6813.8 4.9%78.8 2.2%146.3 2.8%
1994 7248.2 6.4%80.5 2.1%150.1 2.6%
1995 7542.5 4.1%82.1 2.0%153.9 2.5%
1996 8023.0 6.4%83.6 1.8%159.1 3.4%
1997 8505.7 6.0%85.0 1.6%161.8 1.7%
1998 9027.5 6.1%85.9 1.1%164.4 1.6%
1999 9607.7 6.4%87.2 1.5%168.8 2.7%
2000 10129.8 5.4%89.4 2.5%174.6 3.4%
2001 10373.1 2.4%91.2 2.0%177.4 1.6%
2002 10766.9 3.8%92.8 1.8%181.8 2.5%
2003 11416.5 6.0%94.8 2.1%185.5 2.0%
2004 12144.9 6.4%97.9 3.2%191.7 3.3%
2005 12915.6 6.3%101.3 3.5%198.1 3.3%
2006 13611.5 5.4%104.2 2.9%203.1 2.5%
2007 14337.9 5.3%107.1 2.7%211.4 4.1%
2008 14347.3 0.1%109.2 2.0%211.3 0.0%
2009 14453.8 0.7%109.9 0.7%217.2 2.8%
10-Year Average 4.2%2.3%2.6%
20-Year Average 4.9%2.3%2.8%
30-Year Average 5.8%3.0%3.5%
40-Year Average 6.9%4.0%4.5%
50-Year Average 6.9%3.7%4.1%
60-Year Average 6.9%3.5%3.8%
Average of Periods 6.0%3.1%3.6%
Source: S1. Louis Federal Reserve Bank, ww.research.stlouisfed.org
Case No. PAC-E-I0-07
Exhibit No. 13
Witness: Samuel C. Hadaway
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOUNTAIN POWER
Exhibit Accompanying Direct Testimony of Samuel C. Hadaway
Discounted Cash Flow Analysis
May 2010
Ro
c
k
y

M
o
u
n
t
a
i
n

P
o
w
e
r
Di
s
c
o
u
n
t
e
d

C
a
s
h

F
l
o
w

A
n
a
l
y
s
i
s
Su
m
m
a
r
y

O
f

D
C
F

M
o
d
e
l

R
e
s
u
l
t
s
Co
n
s
t
a
n
t

G
r
o
w
t
h
Co
n
s
t
a
n
t

G
r
o
w
t
h
Lo
w

N
e
a
r
-
T
e
r
m

G
r
o
w
t
h
DC
F

M
o
d
e
l
DC
F

M
o
d
e
l
Tw
o
-
S
t
a
g
e

G
r
o
w
t
h
Co
m
p
a
n
y
An
a
l
v
s
t
s
'

G
r
o
w
t
h

R
a
t
e
s
La
n
a
-
T
e
r
m

G
D
P

G
r
o
w
t
h
DC
F

M
o
d
e
l
1
A
L
L
E
T
E
9.
8
%
11
.
3
%
10
.
6
%
2
A
l
l
i
a
n
t

E
n
e
r
g
y

C
o
.
10
.
4
%
10
.
9
%
10
.
9
%
3
B
l
a
c
k

H
i
l
l
s

C
o
r
p
11
.
1
%
11
.
0
%
10
.
6
%
4
C
a
n
.

E
d
i
s
o
n
8.
7
%
11
.
4
%
10
.
8
%
5
D
P
L

I
n
c
.
9.
9
%
10
.
6
%
10
.
6
%
6
D
T
E

E
n
e
r
g
y

C
o
.
10
.
5
%
10
.
9
%
10
.
9
%
7
D
u
k
e

E
n
e
r
g
y
10
.
7
%
12
.
0
%
11
.
7
%
8
E
d
i
s
o
n

I
n
t
e
r
n
a
t
.
NA
9.
9
%
9.
7
%
9
E
n
t
e
r
g
y

C
o
r
p
.
9.
0
%
9.
8
%
9.
8
%
10

F
P
L

G
r
o
u
p
,

I
n
c
.
11
.
1
%
10
.
1
%
10
.
1
%
11

I
D
A
C
O
R
P
8.
7
%
9.
5
%
9.
4
%
12

N
o
r
t
h
e
a
s
t

U
t
i
l
i
t
i
e
s
11
.
8
%
10
.
0
%
9.
9
%
13

N
S
T
A
R
10
.
5
%
10
.
8
%
10
.
9
%
14

P
G
&
E

C
o
r
p
.
11
.
5
%
10
.
4
%
10
.
7
%
15

P
o
r
t
l
a
n
d

G
e
n
e
r
a
l
10
.
3
%
11
.
5
%
11
.
3
%
16

P
r
o
g
r
e
s
s

E
n
e
r
g
y
10
.
5
%
12
.
4
%
11
.
6
%
17

S
C
A
N
A

C
o
r
p
.
9.
7
%
11
.
1
%
10
.
7
%
18

S
e
m
p
r
a

E
n
e
r
g
y
8.
1
%
9.
3
%
9.
4
%
19

S
o
u
t
h
e
r
n

C
o
.
10
.
3
%
11
.
5
%
11
.
4
%
20

V
e
c
t
r
e
n

C
o
r
p
.
10
.
5
%
11
.
8
%
11
.
3
%
21

W
i
s
c
o
n
s
i
n

E
n
e
r
g
y
12
.
2
%
9.
4
%
10
.
0
%
22

X
c
e
l

E
n
e
r
g
y

I
n
c
.
10
.
6
%
10
.
8
%
10
.
6
%
GR
O
U
P

AV
E
R
A
G
E

10
.
3
%
10
.
7
%
10
.
6
%
GR
O
U
P

M
E
D
I
A
N
10
.
5
%
10
.
8
%
10
.
6
%
So
u
r
c
e
:

V
a
l
u
e

L
i
n
e

I
n
v
e
s
t
m
e
n
t

S
u
r
v
e
y
,

E
l
e
c
t
r
i
c

U
t
i
l
i
t
y

(
E
a
s
t
)
,

F
e
b

2
6
,

2
0
1
0
;

(
C
e
n
t
r
a
l
)
,

M
a
r

2
6
,

2
0
1
0
;
(W
e
s
t
)
,

M
a
y

7
,

2
0
1
0
.
Co
n
s
t
a
n
t

g
r
o
w
t
h

r
e
s
u
l
t

f
o
r

E
d
i
s
o
n

I
n
t
e
r
n
a
t
i
o
n
a
l

at

6
.
4
%

i
s

b
e
l
o
w

t
h
e

c
o
s
t

o
f

d
e
b
t

p
l
u
s

1
0
0

b
a
s
i
s

p
o
i
n
t
s

a
n
d

i
s

e
l
i
m
i
n
a
t
e
d
.
NO
T
E
:

S
E
E

P
A
G
E

5

O
F

T
H
I
S

S
C
H
E
D
U
L
E

F
O
R

F
U
R
T
H
E
R

E
X
P
L
A
N
A
T
I
O
N

O
F

E
A
C
H

C
O
L
U
M
N
.
~
Q

~

$
I
9"

C
D
(
/

:
i

0
CD

0
"

"
gi

Z

;
:
"
0
..

~

z

š
:
gi
"
'
~

g
3
"
.

.
.

:
:
c:

o
w
i
i
~i
i
~
:
;
-
o
~

c
o

"
'
.
0

C
D

~
:i
6
-
"
c
o
~"
'

0
'
"
Q)

.
.
::

t
T
~
Ro
c
k
y

M
o
u
n
t
a
i
n

P
o
w
e
r
Co
n
s
t
a
n
t

G
r
o
w
t
h

D
C
F

M
o
d
e
l
An
a
l
y
s
t
s
'

G
r
o
w
t
h

R
a
t
e
s
(1

)
(2
)
(3
)
(4
)
(5
)
(6
)
(7
)
(8
)
An
a
l
v
s
t
s
'

E
s
t
i
m
a
t
e
d

G
r
o
w
t
h
Ne
x
t
Av
e
r
a
g
e
RO
E
Re
c
e
n
t
Ye
a
r
'
s

D
i
v
i
d
e
n
d
Va
l
u
e
Gr
o
w
t
h
K=
D
i
v

Y
l
d
+
G
Co
m
p
a
n
y
Pr
i
c
e
l
P
Q
)

D
i
v
(
0
1
)
Yi
e
l
d
Li
n
e
Za
c
k
s

T
h
o
m
s
o
n
rG
o
l
s

4
-
6
)
rG
o
l
s

3
+
7
)
1
A
L
L
E
T
E
33
.
3
0
1.
7
6
5.
2
9
%
NA
3.
7
0
%
5.
3
3
%
4.
5
2
%
9.
8
%
2
A
l
l
a
n
t

E
n
e
r
g
y

C
o
.
32
.
9
1
1.
6
2
4.
9
1
%
7.
0
0
%
4.
0
0
%
5.
6
0
%
5.
5
3
%
10
.
4
%
3
B
l
a
c
k

H
i
l
l
s

C
o
r
p
29
.
4
0
1.
4
6
4.
9
7
%
6.
5
0
%
6.
0
0
%
6.
0
0
%
6.
1
7
%
11
.
1
%
4
C
a
n
.

E
d
i
s
o
n
43
.
9
9
2.
3
9
5.
4
3
%
2.
5
0
%
3.
0
0
%
4.
2
8
%
3.
2
6
%
8.
7
%
5
D
P
L

I
n
c
.
27
.
2
5
1.
2
5
4.
5
7
%
6.
5
0
%
5.
0
0
%
4.
4
7
%
5.
3
2
%
9.
9
%
6
D
T
E

E
n
e
r
g
y

C
o
.
44
.
8
9
2.
1
8
4.
8
6
%
7.
0
0
%
5.
0
0
%
4.
9
0
%
5.
6
3
%
10
.
5
%
7
D
u
k
e

E
n
e
r
g
y
16
.
4
5
0.
9
8
5.
9
6
%
5.
5
0
%
4.
4
0
%
4.
3
8
%
4.
7
6
%
10
.
7
%
8
E
d
i
s
o
n

i

n
t
e
r
n
a
t
.
~
~
M9
MG
MG
~
~
êA
9
E
n
t
e
r
g
y

C
o
r
p
.
79
.
5
8
3.
0
0
3.
7
7
%
5.
0
0
%
4.
0
0
%
6.
6
8
%
5.
2
3
%
9.
0
%
10

F
P
L

G
r
o
u
p
,

I
n
c
.
48
.
4
4
2.
0
0
4.
1
3
%
7.
0
0
%
7.
0
0
%
6.
8
9
%
6.
9
6
%
11
.
1
%
11

I
D
A
C
O
R
P
34
.
0
6
1.
2
0
3.
5
2
%
5.
5
0
%
5.
0
0
%
5.
0
0
%
5.
1
7
%
8.
7
%
12

N
o
r
t
h
e
a
s
t

U
t
i
l
i
t
i
e
s
26
.
7
3
1.
0
7
3.
9
8
%
7.
0
0
%
8.
4
0
%
7.
9
4
%
7.
7
8
%
11
.
8
%
13

N
S
T
A
R
34
.
9
5
1.
6
8
4.
8
1
%
5.
5
0
%
6.
0
0
%
5.
7
2
%
5.
7
4
%
10
.
5
%
14

P
G
&
E

C
o
r
p
.
42
.
6
0
1.
8
9
4.
4
4
%
7.
0
0
%
7.
7
0
%
6.
4
0
%
7.
0
3
%
11
.
5
%
15

P
o
r
t
l
a
n
d

G
e
n
e
r
a
l
19
.
1
1
1.
0
6
5.
5
2
%
3.
0
0
%
5.
8
0
%
5.
6
7
%
4.
8
2
%
10
.
3
%
16

P
r
o
g
r
e
s
s

E
n
e
r
g
y
39
.
0
2
2.
5
1
6.
4
3
%
4.
5
0
%
4.
0
0
%
3.
5
6
%
4.
0
2
%
10
.
5
%
17

S
C
A
N
A

C
o
r
p
.
37
.
1
2
1.
9
1
5.
1
5
%
3.
5
0
%
5.
1
0
%
5.
0
8
%
4.
5
6
%
9.
7
%
18

S
e
m
p
r
a

E
n
e
r
g
y
49
.
6
4
1.
6
2
3.
2
6
%
4.
0
0
%
7.
0
0
%
3.
5
0
%
4.
8
3
%
8.
1
%
19

S
o
u
t
h
e
r
n

C
o
.
32
.
8
9
1.
8
2
5.
5
3
%
4.
5
0
%
4.
9
0
%
4.
9
4
%
4.
7
8
%
10
.
3
%
20

V
e
c
t
r
e
n

C
o
r
p
.
23
.
9
9
1.
3
8
5.
7
5
%
4.
5
0
%
4.
8
0
%
5.
0
0
%
4.
7
7
%
10
.
5
%
21

W
i
s
c
o
n
s
i
n

E
n
e
r
g
y
49
.
9
3
1.
7
0
3.
4
0
%
8.
0
0
%
9.
5
0
%
9.
0
0
%
8.
8
3
%
12
.
2
%
22

X
c
e
l

E
n
e
r
g
y

I
n
c
.
21
.
1
2
1.
0
2
4.
8
1
%
5.
5
0
%
5.
7
0
%
6.
1
6
%
5.
7
9
%
10
.
6
%
GR
O
U
P

A
V
E
R
A
G
E
36
.
5
4
~
1.
6
9
4.
7
8
%
5.
4
8
%
5.
5
2
%
5.
5
5
%
5.
5
0
%
10
.
3
%
GR
O
U
P

M
E
D
I
A
N
4.
8
6
%
10
.
5
%
So
u
r
c
e
:

V
a
l
u
e

L
i
n
e

In
v
e
s
t
m
e
n
t

S
u
r
v
e
y
,

E
l
e
c
t
r
i
c

U
t
i
l
i
t
y

(
E
a
s
t
)
,

F
e
b

2
6
,

2
0
1
0
;

(
C
e
n
t
r
a
l
)
,

M
a
r

2
6
,

2
0
1
0
;
(W
e
s
t
)
,

M
a
y

7
,

2
0
1
0
.
Co
n
s
t
a
n
t

g
r
o
w
t
h

r
e
s
u
l
t

f
o
r

E
d
i
s
o
n

I
n
t
e
r
n
a
t
i
o
n
a
l

a
t

6
.
4
%

i
s

b
e
l
o
w

t
h
e

c
o
s
t

o
f

d
e
b
t

p
l
u
s

1
0
0

b
a
s
i
s

p
o
i
n
t
s

a
n
d

i
s

e
l
i
m
i
n
a
t
e
d
.
NO
T
E
:

S
E
E

P
A
G
E

5

O
F

T
H
I
S

S
C
H
E
D
U
L
E

F
O
R

F
U
R
T
H
E
R

E
X
P
L
A
N
A
T
I
O
N

O
F

E
A
C
H

C
O
L
U
M
N
.
:'

0

m

;
:
9'
g
¡
~
o
CD

CD

¡;
!
*
~
z
;
:
'
c
..

0

Z

s
:
gi
,
,
!
=

g
3
"
.
.
:
i
i:

0

(
.

¡
¡
~
i
l

~

:
:
'
o.
.
c
c

"
1
.
0

C
D

~
:i

6

I
\

C
D
~
.
.

Q
,
.
.
l
t
n
Ro
c
k
y

M
o
u
n
t
a
i
n

P
o
w
e
r
Co
n
s
t
a
n
t

G
r
o
w
t
h

O
C
F

M
o
d
e
l
Lo
n
g
-
T
e
r
m

G
O
P

G
r
o
w
t
h
(9
)
(1
0
)
(1
1
)
(1
2
)
(1
3
)
Ne
x
t
RO
E
Re
c
e
n
t
Ye
a
r
'
s

D
i
v
i
d
e
n
d
GD
P

K
=
D
i
v

Y
l
d
+
G
Co
m
o
a
n
v
Pr
i
c
e
(
P
O
)

D
i
v
(
D
1
)
Yi
e
l
d
Gr
o
w
t
h

r
C
o
l
s

1
1

+

1
2
)
1
A
L
L
E
T
E
33
.
3
0
1.
7
6
5.
2
9
%
6.
0
0
%
11
.
3
%
2
A
l
l
i
a
n
t

E
n
e
r
g
y

C
o
.
32
.
9
1
1.
6
2
4.
9
1
%
6.
0
0
%
10
.
9
%
3
B
l
a
c
k

H
i
l
l
s

C
o
r
p
29
.
4
0
1.
4
6
4.
9
7
%
6.
0
0
%
11
.
0
%
4
C
a
n
.

E
d
i
s
o
n
43
.
9
9
2.
3
9
5.
4
3
%
6.
0
0
%
11
.
4
%
5
D
P
L

I
n
c
.
27
.
2
5
1.
2
5
4.
5
7
%
6.
0
0
%
10
.
6
%
6
D
T
E

E
n
e
r
g
y

C
o
.
44
.
8
9
2.
1
8
4.
8
6
%
6.
0
0
%
10
.
9
%
7
D
u
k
e

E
n
e
r
g
y
16
.
4
5
0.
9
8
5.
9
6
%
6.
0
0
%
12
.
0
%
8
E
d
i
s
o
n

I
n
t
e
r
n
a
L
.
33
.
6
8
1.
3
1
3.
8
9
%
6.
0
0
%
9.
9
%
9
E
n
t
e
r
g
y

C
o
r
p
.
79
.
5
8
3.
0
0
3.
7
7
%
6.
0
0
%
9.
8
%
10

F
P
L

G
r
o
u
p
,

I
n
c
.
48
.
4
4
2.
0
0
4.
1
3
%
6.
0
0
%
10
.
1
%
11

I
D
A
C
O
R
P
34
.
0
6
1.
2
0
3.
5
2
%
6.
0
0
%
9.
5
%
12

N
o
r
t
h
e
a
s
t

U
t
i
l
i
t
i
e
s
26
.
7
3
1.
0
7
3.
9
8
%
6.
0
0
%
10
.
0
%
13

N
S
T
A
R
34
.
9
5
1.
6
8
4.
8
1
%
6.
0
0
%
10
.
8
%
14

P
G
&
E

C
o
r
p
.
42
.
6
0
1.
8
9
4.
4
4
%
6.
0
0
%
10
.
4
%
15

P
o
r
t
l
a
n
d

G
e
n
e
r
a
l
19
.
1
1
1.
0
6
5.
5
2
%
6.
0
0
%
11
.
5
%
16

P
r
o
g
r
e
s
s

E
n
e
r
g
y
39
.
0
2
2.
5
1
6.
4
3
%
6.
0
0
%
12
.
4
%
17

S
C
A
N
A

C
o
r
p
.
37
.
1
2
1.
9
1
5.
1
5
%
6.
0
0
%
11
.
1
%
18

S
e
m
p
r
a

E
n
e
r
g
y
49
.
6
4
1.
6
2
3.
2
6
%
6.
0
0
%
9.
3
%
19

S
o
u
t
h
e
r
n

C
o
.
32
.
8
9
1.
8
2
5.
5
3
%
6.
0
0
%
11
.
5
%
20

V
e
c
t
r
e
n

C
o
r
p
.
23
.
9
9
1.
3
8
5.
7
5
%
6.
0
0
%
11
.
8
%
21

W
i
s
c
o
n
s
i
n

E
n
e
r
g
y
49
.
9
3
1.
7
0
3.
4
0
%
6.
0
0
%
9.
4
%
22

X
c
e
l

E
n
e
r
g
y

I
n
c
.
21
.
1
2
1.
0
2
4.
8
1
%
6.
0
0
%
10
.
8
%
GR
O
U
P

A
V
E
R
A
G
E
36
.
4
1
1.
6
7
4.
7
4
%
6.
0
0
%
10
.
7
%
GR
O
U
P

M
E
D
I
A
N
.
4.
8
3
%
10
.
8
%
So
u
r
c
e
:

V
a
l
u
e

L
i
n
e

I
n
v
e
s
t
m
e
n
t

S
u
r
v
e
y
,

E
l
e
c
t
r
i
c

U
t
i
l
i
t
y

(
E
a
s
t
)
,

F
e
b

2
6
,

2
0
1
0
;

(
C
e
n
t
r
a
l
)
,

M
a
r

2
6
,

2
0
1
0
;
(W
e
s
t
)
,

M
a
y

7
,

2
0
1
0
.
NO
T
E
:

S
E
E

P
A
G
E

5

O
F

T
H
I
S

S
C
H
E
D
U
L
E

F
O
R

F
U
R
T
H
E
R

E
X
P
L
A
N
A
T
I
O
N

O
F

E
A
C
H

C
O
L
U
M
N
.
:E

0

m
:
;
§j
g
i

~
o
CD

C
D

õ
'

!
*
gi

z
;
:
-
"
..

!
=

z

š
:
~"
t
!
=

g
3
~

~
:
J
i:

0
(
.
0
0
!2

i
;

~

3
'
o~
c
c

"
t
.
0

C
D

0
:i
ò
(
.
~
~
.
.

s
a

.
.
~
o
i
~
ãi.. '0(I .c 0
~ - ==
o .~ LLC. e ()cOO'¡ E.c- ..-c C1 ~:: i- 0o i ..II mO-= C1 C1
:: z C'~ ~ .!(, 0 (/O.. ia: 0~
Rocky Mountain Powr
Exhibit No. 13 Page 4 of 5
Case No. PAC-E~10-07
Witness: Samuel C. Hadaway
ã ct EoE .3 It0' 0' ..ë a: 6ii ..w 0 l!0$ è:a: æ
o ..~ii 0LO ..
(¡ CJ0' :;)- 0
LO :;
(¡o0')-v:;
(¡o
CJ 0'~ )-
OC" :;
Lt (¡ 0
:i 0'
CJ )-e: C\ :;o .. 0ct0')-
~~~~~~~~~~~~~~~~~~~~~~'# '#0 0 0 0 ia 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
ca ~ca ca ~ I'r-CX ,...~~I'C'ca I'....C'a ca ca ca000000,.0)0)0 0)0)0 0 ,.,.0 0),.,.0 0 0 0,.,.,.,..,.,.,,..,.,,.,.,.,.,.,..,.,,.
~ '# '# '# '# '# '# '# '# '# '# '# '# '# '# '# '# '# '# '# '# '#b 000 0 0 0 0 0 0 0 0 0 000 0 0 0 0 0 00000000 a a a 0 0 0 00 0 0 0 0 0 0 0~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ ~ ~ ~ ~ ~ ~ ~
,. v 0 ,. 0) ~ r- 0) C\ v CX C" r- v r- C" r- r- C" 0) v C\~ 0 r- ~ LO r- ~ ~ CX LO v C" ,. LO C\ r- ,. ,. ~ ~ ~ ~,. C\ ,. N ~ ~ ,. ,. M N ~ ~ N N ~ N N C\ C\ ., C\ ,.
o C\ 0 ~ 0 0 0 0 0 0 0 LO LO 0 0 CX LO LO 0 0 0 LOca 0) ~ .. LO ~ ,. LO ~ v v C\ 0 V C\ LO 0 0 ~ ~ .. ~., ., ., C\ ~ ~ ., ~ M N ~ ~ N N ~ ~ N ~ C\ ,. C\ .,
0) C"~ v C" CX ~ LO 0 r- C" 0 v LO ~ ~ ,. C" C\ ~ 0 ,.
I' CX LO v v v a .. .. ~ C' ~ ~ ~ ., ~ a 0) 0 v C\ ,.~ ~ ~ N ~ N ~ ~ MN ~~ ~N~ N N ~ N~N ~
r- v C\ C\ LO ~ C" 0) 0 C" r- LO v ,. ., v ~ 0 C" C" 0 r-
I' I'~.. C' C' a C' ~ ~ ~,. ca,.., ~ ~ ca ~.. a a~ ~~ N~ N ~~ MN~~~ N ~N~~~ ~ N ~
~ LO CX 0 CX . 0) v 0 0 00 C" ~ r- C\ C\ CX ~ 0) 0 C"
I' ca .. .. ~ ~ ~ C' a 0 C\ ~ I' 0) 0 LO ~ ca ca C' ca a~ ~ ~ N ~ N o~ MN ~ ~ ~ ~~ N ~ ~ ~ ~ ~~
o ,. 0 0) LO 0) LO CX CX v ~ C" LO 0 ,. C\ C\ V 0) 0) C" C\
C' ~ .. 0) C\ CX V ca LO v 0 r- 0) ~ ,. 0 ., ~ CX 0) 0) ,.C" C\ 0) M ~ ~ ~ C" m 00 ~ ~ ~ ~ m m ~ m ~ M m ,.C" C" C\ V C\ V ,. C" r- v C" C\ C" V ,. C" C" v C" C\ V C\I I I I I I I I I I I I I I I I I I I I I I
â
&
-,.C\-
~
-Ø),.-
-Cl,.-,. :;
(¡ 00')-
,. 0) v C\ r- C\ v LO 0 C" r- LO ,. LO v C\ v C\ CX V 0 Va 0000., 00 C\ ,. 00,. ., 00 a ~ a 0 C\ 0o Ó Ó Ó Ó Ó Ó Ó Ó Ó Ó Ó Ó Ó Ó Ó 0 00 ó ó ó
o C\ 0 ~ 0 0 0 0 0 0 0 LO LO 0 0 CX LO LO 0 0 0 LO
ca ~ ca .. ~ ca ~ LO ~ v v C\ 0 V C\ LO 0 0 ,. LO v ,.,. ,. ,. C\ ,. C\ ,. ,. M N ~ ~ ~ N ~ ~ ~ ~ N ~ N ~
~ LO CX 0 CX v 0) v 0 0 0 0 C" ~ r- C\ C\ CX LO 0) 0 C"r- ~ v v C\ ~ 0) C" 0 0 ~ ~ I' ~ a ~ ~ ca ca C' ca a~ ~ ~N~ N ó~ ~N~ ~ ~ ~~ N ~ ~ ~ ~ ~ ~
¡:,.-.. 0'e: U
0' .-U ..0' 0-a:
~
~Eoo
o w:: ~ .02- 0"" . 0' (i :: ..U::0 O~e:ct.g:E (¡ei.o .O'e:
00 .. o.-:¡ e: 0' 0."' o' o.e:-.. e: ::o(¡.. ~ ¿O'e:..O'O..w::0' w Ow ei..O'.. 0 ~o- ..CJwowe: 0 e: 0e:- 0' e:O- & 0 wOe:O-O'..
ww=~ U e: e:- ::0 a: cta:O~ We: ct.. e: we:
~ ë ~ w E w ~ § ei~ 0 ~ e: w æ ~ z ~~ ~ § w~ ct Uct ¿~W~~$~gt~~~ooe: E5Ui~~~_ oO-~:J~ e:0-- oCJCJ 0..00' 0 0'- U
e: e: in 0 0 0 0 w w ~ e Z Zo-o- 0- 00 00 CJ ~ ~ X,. C\ C" v LO ~ r- CX 0) 0 ,. C\ C" v LO ~ r- CX 0) 0 ,. C\~,.,.,.,.,.,.,.,.,.NC\,C\
wCJ Z
e: e:a: -wO~ w
e: :2
0- 0-~~00
a: a:
CJ CJ
iD,.-ct 0' v:J 0,.e: e: (Ye: ct ,.e: 0 æ
Q
(Y v .~""50
æ C\
iñ,.-
0;,.-õ ,..~"".,000C\ C\
o.,oC\
cDC\..ct:2-~ë0'
Q.o,.oC\
~C\.00'~-&ctw-~
:5
U"¡:
g
¡¡
~è:J00ë0'E
~:;e:
Q; ó.ç: a~ C\
~ i'
(i iñ
~ :2
CD ..
t= Cñ
:J 0'o~CJ _
Z
:2~~o°:i
~~oZo
~Z
::0-xw
a:w:i~a:~~
a:o~
w~~ow:i°CJ
~:i~~o
LO
W
Sa0-
WW00
u.~oZ
Ro
c
k
y

M
o
u
n
t
a
i
n

P
o
w
e
r
Di
s
c
o
u
n
t
e
d

C
a
s
h

F
l
o
w

A
n
a
l
y
s
i
s
Co
l
u
m
n

D
e
s
c
r
i
p
t
i
o
n
s
Co
l
u
m
n

1
:

T
h
r
e
e
-
m
o
n
t
h

A
v
e
r
a
g
e

P
r
i
c
e

p
e
r

S
h
a
r
e

(
F
e
b

2
0
1

O
-
A
p
r

2
0
1
0
)

C
o
l
u
m
n

1
3
:

C
o
l
u
m
n

1
1

P
l
u
s

C
o
l
u
m
n

1
2
Co
l
u
m
n

2
:

A
v
e
r
a
g
e

o
f

E
s
t
i
m
a
t
e
d

2
0
1
0
-
2
0
1
1

D
i
v

p
e
r

S
h
a
r
e

f
r
o
m

V
a
l
u
e

L
i
n
e

C
o
l
u
m
n

1
4
:

E
s
t
i
m
a
t
e
d

2
0
1
1

D
i
v

p
e
r

S
h
a
r
e

f
r
o
m
Va
l
u
e

L
i
n
e
Co
l
u
m
n

3
:

C
o
l
u
m
n

2

D
i
v
i
d
e
d

b
y

C
o
l
u
m
n

1
Co
l
u
m
n

4
:

"
E
s
t
d

'
0
7
-
'
0
9

t
o

'
1
3
-
'
1
5
"

E
a
r
n
i
n
g
s

G
r
o
w
t
h
Re
p
o
r
t
e
d

b
y

V
a
l
u
e

L
i
n
e
Co
l
u
m
n

5
:

"
N
e
x
t

5

Y
e
a
r
s
"

C
o
m
p
a
n
y

G
r
o
w
t
h

E
s
t
i
m
a
t
e

a
s
Re
p
o
r
t
e
d

b
y

Z
a
c
k
s
.
c
o
m
Co
l
u
m
n

6
:

"
N
e
x
t

5

Y
e
a
r
s

(
p
e
r

a
n
n
u
m
)

G
r
o
w
t
h

E
s
t
i
m
a
t
e

R
e
p
o
r
t
e
d
by

T
h
o
m
s
o
n

F
i
n
a
n
c
i
a
l

N
e
t
w
o
r
k

(
a
t

Y
a
h
o
o

F
i
n
a
n
c
e
)
Co
l
u
m
n

7
:

A
v
e
r
a
g
e

o
f

C
o
l
u
m
n
s

4
-
6
Co
l
u
m
n

8
:

C
o
l
u
m
n

3

P
l
u
s

C
o
l
u
m
n

7
Co
l
u
m
n

9
:

S
e
e

C
o
l
u
m
n

1
Co
l
u
m
n

1
0
:

S
e
e

C
o
l
u
m
n

2
Co
l
u
m
n

1
1
:

C
o
l
u
m
n

1
0

D
i
v
i
d
e
d

b
y

C
o
l
u
m
n

9
Co
l
u
m
n

1
2
:

A
v
e
r
a
g
e

o
f

G
D
P

G
r
o
w
t
h

D
u
r
i
n
g

t
h
e

L
a
s
t

1
0

y
e
a
r
,

2
0

y
e
a
r
,
30

y
e
a
r
,

4
0

y
e
a
r
,

5
0

y
e
a
r
,

a
n
d

6
0

y
e
a
r

g
r
o
w
t
h

p
e
r
i
o
d
s
.
Se
e

E
x
h
i
b
i
t

N
o
.

1
2
Co
l
u
m
n

1
5
:

E
s
t
i
m
a
t
e
d

20
1
4

D
i
v

p
e
r

S
h
a
r
e

f
r
o
m
Va
l
u
e

L
i
n
e
Co
l
u
m
n

1
6
:

(
C
o
l
u
m
n

1
5

M
i
n
u
s

C
o
l
u
m
n

1
4
)

D
i
v
i
d
e
d

b
y

T
h
r
e
e
Co
l
u
m
n

1
7
:

S
e
e

C
o
l
u
m
n

1
Co
l
u
m
n

1
8
:

S
e
e

C
o
l
u
m
n

1
4
Co
l
u
m
n

1
9
:

C
o
l
u
m
n

1
8

P
l
u
s

C
o
l
u
m
n

1
6
Co
l
u
m
n

2
0
:

C
o
l
u
m
n

1
9

P
l
u
s

C
o
l
u
m
n

1
9
Co
l
u
m
n

2
1
:

C
o
l
u
m
n

2
0

P
l
u
s

C
o
l
u
m
n

1
6
Co
l
u
m
n

2
2
:

C
o
l
u
m
n

2
1

I
n
c
r
e
a
s
e
d

b
y

t
h
e

G
r
o
w
t
h
Ra
t
e

S
h
o
w
n

i
n

C
o
l
u
m
n

2
3
Co
l
u
m
n

2
3
:

S
e
e

C
o
l
u
m
n

1
2
Co
l
u
m
n

2
4
:

T
h
e

I
n
t
e
r
n
a
l

R
a
t
e

o
f

R
e
t
u
r
n

of

t
h
e

C
a
s
h

F
l
o
w
s
in

C
o
l
u
m
n
s

1
7
-
2
2

a
l
o
n
g

w
i
t
h

t
h
e

D
i
v
i
d
e
n
d
s
fo
r

t
h
e

Y
e
a
r
s

6
-
1
5
0

I
m
p
l
i
e
d

b
y

t
h
e

G
r
o
w
t
h
Ra
t
e
s

s
h
o
w
n

i
n

C
o
l
u
m
n

2
3
~
(
)

m
:
;
a:
D
)
X
O
¡g
!
ß
~
~
æ
z

;
:
-
.
..

?

z

s
:
f¡
-
o
?

g
3
"
.

.
.

:
;
c:

(
)
w
i
i
I!

n
,

~

5
'
()

.
.

c
o

-
0
.
0

c
o

0
:i
6
(
1
~
~
'
l
Q
,
'
"
j
(
1
Case No. PAC-E-I0~07
Exhibit No. 14
Witness: S~muel C. Hadaway
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
ROCKY MOUNTAIN POWER
Exhibit Accompanying Direct Testimony of Samuel C. Hadaway
Risk Premium Analysis
May 2010
Rocky Mountain Power
Exhibit No. 14 Page 1 of 3
Case No. PAC-E-10-Q7
Witness: Samuel C. Hadaway
Rocky Mountain Power
Risk Premium Analysis
(Based on Projected Interest Rates)
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
2007
2008
2009
AVERAGE
MOODY'S AVERAGE
PUBLIC UTILITY
BOND YIELD (1)
13.15%
15.62%
15.33%
13.31%
14.03%
12.29%
9.46%
9.98%
10.45%
9.66%
9.76%
9.21%
8:57%
7.56%
8.30%
7.91%
7.74%
7.63%
7.00%
7.55%
8.14%
7.72%
7.53%
6.61%
6.20%
5.67%
6.08%
6.11%
6.65%
6.28%
9.05%
AUTHORIZED
ELECTRIC
RETURNS (2)
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%
10.36%
10.46%
10.48%
12.28%
INDICATED
RISK
PREMIUM
1.08%
-0.40%
0.45%
2.05%
1.29%
2.91%
4.47%
3.01%
2.34%
3.31%
2.94%
3.34%
3.52%
3.85%
3.04%
3.64%
3.65%
3.77%
4.66%
3.22%
3.29%
3.37%
3.63%
4.36%
4.55%
4.87%
4.28%
4.25%
3.81%
4.20%
3.23%
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
6.19%
9.05%
-2.86%
-41.13%
1.18%
3.23%
1.18%
4.40%
6.19%
10.59%
(1) Moody's Investors Service
(2) Regulatory Research Associates, Inc.
'Projected single-A bond yield is 119 basis points over projected long-term Treasury bond rae of 5.0% from
Exhibit RMP _(SCH-2), p. 3. The single-A spread is for 3 months ended Apr 2010 from Exhibit RMP _(SCH-2), p. 2.
Rocky Mountain Power
Exhibit No. 14 Page 2 of 3
Case No. PAC-E-10-07
Witness: Samuel C. Hadaway
Rocky Mountain Power
Risk Premium Analysis
(Based on Current Interest Rates)
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
2007
2008
2009
AVERAGE
MOODY'S AVERAGE
PUBLIC UTILITY
BOND YIELD (1)
13.15%
15.62%
15.33%
13.31%
14.03%
12.29%
9.46%
9.98%
10.45%
9.66%
9.76%
9.21%
8.57%
7.56%
8.30%
7.91%
7.74%
7.63%
7.00%
7.55%
8.14%
7.72%
7.53%
6.61%
6.20%
5.67%
6.08%
6.11%
6.65%
6.28%
9.05%
AUTHORIZED
ELECTRIC
RETURNS (2)
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%
10.36%
10.46%
10.48%
12.28%
INDICATED
RISK
PREMIUM
1.08%
-0.40%
0.45%
2.05%
1.29%
2.91%
4.47%
3.01%
2.34%
3.31%
2.94%
3.34%
3.52%
3.85%
3.04%
3.64%
3.65%
3.77%
4.66%
3.22%
3.29%
3.37%
3.63%
4.36%
4.55%
4.87%
4.28%
4.25%
3.81%
4.20%
3.23%
INDICATED COST OF EQUITY
CURRENT 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
5.84%
9.05%
-3.21%
-41.13%
1.32%
3.23%
1.32%
4.55%
5.84%
10.39%
CURRENT SINGLE-A UTILITY BOND YIELD'
INDICATED EQUITY RETURN
(1) Moody's Investors Service
(2) Regulatory Research Associates, Inc.
'Current single-A utilty bond yield is three month average of Moody's Triple-B Public Utility Bond Yield
Average through Apr 2010 from Exhibit No. 11, p. 2.
Rocky Mountain Power
Exhibit No. 14 Page 3 of 3
Case No. PAC-E-10-07
Witness: Samuel C. Hadaway
Rocky Mountain Power
Risk Premium Analysis
Regression Analysis & Interest Rate Change Coefficient
Authorized Equity Risk Premiums vs. Utilty Interest Rates
(1980-2009)
6%
5%.
(I 4%E::
ï§3%£..(I 2%æ::::1%~
0%
-1%
5%
.
.
y = -0.4113x + 0.0695
R2= 0.8598
.
7%9% 11 %
Average Utilty Interest Rates
13%15%
SUMMARY OUTPUT
Regressn Statistics
Multiple R 0.927242552
R Square 0.85977875
Adjusted R Square 0.854770848
Standard Error 0.0047873Observations 30
ANOVA
Regression
Residual
Total
1
28
29
ss
0.003934704
0.000641711
0.004576415
MS F Significnce F
0.003934704171.6844276 1.82118E-13
2.29182E-05
df
Intercept
X Variable 1
Coefficients Stanar Error t Stat P-value Lower 95% Upper 95% Lowe 95.0% Upper 95.0%
0.069475479 0.002972433 23.373272 6.55788E-20 0.063386727 0.075564232 0.063386727 0.075564232
-0.411331263 0.031392526 -13.10284044 1.82118E-13 -0.475635937 -0.347026589 -0.475635937 -0.347026589