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Home My WebLink About20101116Hadaway Reb, Exhibits.pdfiOiß HOV 16 Mî iQ: 16 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 APPROXIMATELY 13.7 PERCENT ) ) CASE NO. PAC.E.I0.07 ) ) Rebuttal Testimony of Samuel C. Hadaway ) ) ) ) ROCKY MOUNTAIN POWER CASE NO. PAC.E.I0.07 November 2010 1 Introduction and Purpose of Testimony 2 Q. 3 4 A. 5 Q. 6 A. 7 8 9 10 11 12 Are you the same Samuel C. Hadaway who submitted direct testimony in this proceeding? Yes. What is the purpose of your rebuttal testimony? The purpose of my rebuttl testimony is to respond to the rate of retu on equity ("ROE") recommendations offered by Idaho Public Utìlties Commission Staff witness Ms. Terr Carlock and Monsanto witness Mr. Michael P. Gorman. In my analysis, I will demonstrte that their rate of retu recommendations are not consistent with the ongoing equity market volatility or the continuing financial distress that the U.S. economy is undergoing. I will also respond to the other witnesses' comments on the methodology I used in my direct testimony to 13 estiate Rocky Mountain Power's cost of equity and I will update my ROE 14 analysis for curent market costs and conditions. 15 Review of Other Paries' Recommendaôons 16 Q.What are the parties' ROE recommendations? 17 A.Ms. Carlock recommends a 10.0 percent ROE and Mr. Gorman recommends an 18 ROE of9.5 percent. As I wil explain in my updated ROE analysis, the 19 Company's initially requested 10.6 percent ROE remains well supported by my 20 updated DCF analysis. Although my risk premium results are lower, I discount 21 those results due to the ongoing equity market tuoil and the artficially low 22 interest rates that have resulted frm the governent's expansionary monetary 23 policy, which I will discuss later in ths testimony. Hadaway, Di-Reb - 1 Rocky Mountain Power 1 Q. 2 3 A. 4 5 6 7 8 9 10 11 12 Q. 13 14 A. 15 16 17 18 19 20 21 22 23 What is your general assessment of the other parties' ROE recommendations? Their recommendations are well below Rocky Mountain Power's cost of equity. By comparison, their recommendations are much lower than recently allowed ROEs for other integrated electrc utilities around the countr. I will show that their analyses and recommendations are faulty because they use negatively biased model inputs and they fail to reasonably consider the ongoing effects of the recent financial crisis. Additionally, I will provide updated data and analysis, which shows that Rocky Mountain Power's current cost of equity is in the range of 10.3 percent to 10.8 percent. These factors demonstrate the uneasonably low natue of the other parties' recommendations. Why are their recommendations not consistent with current capita market costs and conditions? Contrary to the other parties' apparent beliefs, the cost of equity cannot be measured by simply extrapolating artificially low, governent policy induced interest rates to ROE. A more realistic view of curent market conditions and more plausible input assumptions show that the other parties' recommendations are well below the reasonable range. Relative to the downward trend in Treasures and high grade utility bond yields, the cost of equity has not declined as much. Ms. Carlock and Mr. Gorman appear to believe that the cost of equity has dropped in lockstep with declining interest rates. This contention is simply wrong. The most recently reported data from Regulatory Research Associates Hadaway, Di-Reb - 2 Rocky Mountain Power 1 shows that for the first nie months of201O, the average allowed ROE for electrc 2 1utilities was 10.36 percent. The most recently allowed ROE in Idaho has been 3 10.5 percent (Avista Corp., Case No. AVU-E-09-'01, decided July 17,2009 and 4 Idaho Power, Case No. IPC-E-08-1O, decided January 30,2009). 5 Economic and Market Condiôons 6 Q.In your direct testimony, you provided data to ilustrate interest rate trends 7 and the spreads between U.S. Treasur bond and single.A rated utilty 8 bonds. Have you updated that information? 9 A.Yes. I provide that data in Exhibit No. 57, page 1. Table 1 below sumarizes the 10 results. 1 Regulato Focus, Regulatory Reseh Asociates, Octobe 4,2010. Hadaway, Di-Reb - 3 Rocky Mountain Power 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 Oc-09 Nov-09 Dec-09 Jan-lO Feb-lO Mar-lO Apr-10 May-lO Jun-lO Jul-lO Aug-lO Sep-lO Oc-lO 3-MoAvg 12-MoAvg Table 1 Long-Term Interest Rate Trends Single-A Util 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 5.50 5.46 5.26 5.01 5.01 5.10 5.04 5.51 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 4.29 4.13 3.99 3.80 3.77 3.87 3.81 4.27 Single-A Util 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 1.21 1.33 1.27 1.21 1.24 1.23 1.23 1.24 Soes: Mergnt Bo Reco (Uti Rates); ww.federalrsere.gov(Treasur Rates). The mo average.i¡ for Augt 2010 - October 2010. Twelv mo average i¡ for Novemr 200 . Octob 2010. Hadaway, Di-Reb - 4 Rocky Mountain Power 1 2 3 4 5 6 7 8 9 Q. 10 11 12 A. 13 14 15 16 17 Q. 18 A. 19 20 21 22 23 The data in Table 1 vividly ilustrate the market tuoil that has occured. Over the past two years, interest rates have fluctuated widely. The Federal Reserve's efforts to reduce borrowing costs for banks (the Fed Funds rate) and lower the yields on U.S. Treasur bonds have now extended to high quality corporate borrowers as welL. While the effects of market tubulence may not be easily captued in financial models for estimating the rate of retu, equity market turbulence and continuing elevated risk aversion should be considered explicitly in estimates of the cost of equity capitaL. Do the smaller spreads between yields on single.A utilty bonds and U.S. Treasury bonds mean that the markets have fully recovered from the economic turmoil that resulted from the financial crisis? No. While markets have stabilized from the near-chaotic conditions that existed in late 2008, investors remain concerned about high unemployment, large federal deficits, and the potential for fuher fallout from foreclosures and other effects of the financial crsis. Although it is diffcult to measure these factors directly, they should not be ignored as Ms. Carlock and Mr. Gorman have done. What do economic and interest rate forecats show for the coming year? In Exhibit No. 57, page 2, I provide Standard and Poor's (S&P) most recent economic forecast from its Trend & Projections publication for October 2010. The S&ll forecast reflects the significant economic contraction that occured in 2009, with a drop in real GDP of2.6 percent. For all of2010 and 2011, S&P forecas that real GOP will increase by 2.7 percent and 2.5 percent, respectively. Whle this forecas does not reflect a full "double-dip" recession for the remainder Hadaway, Di-Reb - 5 Rocky Mountain Power 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Q. 24 25 A. 26 27 of 20 1 0 and into 2011, the lack of fuher expansion in 2011 is a more pessimistic outlook than S&P had previously provided. The S&P forecast now delays the resumption of more robust growth until the 3rd and 4th Quarters of2011. Consistent with S&P's pessimistic outlook for the economy, its long-term interest rate forecasts have also declined. Table 2 below sumarizes the interest rate forecasts: Table 2 Standard & Poor's Interest Rate Forecast Oct. 2010 Average Average Average 2010 Est. 2011 Est.Treasur Bils 0.1 % 0.1 % 0.3%1O-Yr. T-Bonds 2.5% 3.1% 2.5%30-Yr. T-Bonds 3.9% 4.1% 3.5%Aaa Corporate Bonds 4.7% 4.8% 4.3% Sources: www.federalreserve.gov, (Current Rates). Standard & Poor's Trends & Projections, October 2010, page 8 (Projected Rates). The data in Table 2 shows that S&P expects, durng 2011, that long-term Treasur interest rates will drop an additional 40 basis points from their recent (October 2010) low levels. Although in the turbulent market envionment it is diffcult to proj ect interest rates, a much slower economic recovery and continuing governent "easy money" policies are reflected in the S&P projections. Have you updated the grph from your direct testimony that shows how uôlty stocks have peñormed during the past severa yea? Yes. Utiity stock prices have remained volatile and have recovered less, relative to the broader market indices, from the March 2009 low point. The wider utility stck price fluctuations in the more recent years are vividly ilustrated in the Hadaway, Di-Reb - 6 Rocky Mountain Power 1 Graph 1 below, which depicts the Dow Jones Utility Average (DJUA) over the 2 past 25 years. Graph 1 Dow Jones Utilty Average 1986.2010 600 500 400 300 200 100 o o.fó !b ~ (l _lk _ei !b ~ (l _lk .J _Cb ~¿r cI rl~ rlOJ ¿r olf'l ¿l 0# ¿f ¿r cD- ¿r rl"' 3 In this environment,. investors' retu expectations and requirements for providing 4 capital to the utility industr remain high relative to the longer-term, traditional 5 view of the utility industr. Increased market volatility for utility shares causes 6 investors to require a higher rate of retu. 7 Q.How have utilty stocks performed relative to the overall maket recovery 8 since March 2O9? 9 A.Utility stock prices have lagged behind the overll market as welL. Graph 2 shows 10 the monthy levels for the DJUA versus the broader market S&P 500 index since 11 the market lows that occured in Februar and March of 2009. Hadaway, Di-Reb - 7 Rocky Mountain Power Graph 2 Dow Jones Utility Average vs. S&P 500 Mar. 2009.0ct. 2010 1400.00 1200.00~~,-~~~ ~.."..""..~ ....4' ".$,." ,."! ~ .,.,~"..""...~~..,'&""~ ~...." l#;,"" - ~,.~..,,"~"'~".~ I S&P 500 I 1000.00 800.00 1 While the S&P 500 has increased significantly since its lowest level in March 2 2009, utility prices have increased less than one-half as much. This result is a 3 fuher indication that the cost of equity for utility companies has not declined to 4 the same extent that interest rates have fallen or to the same extent that the cost of 5 equity may have come down for the broader equity market. The relatively lower 6 prices for utility shares indicate that the cost of capital for utilities is higher. 7 Graph 3 fuher ilustrates this result by showing the cumulative 8 percentage change in the two equity indexes since the March 2009 lows. Hadaway, Di-Reb - 8 Rocky Mountain Power 1 2 3 4 5 Q. 6 7 8 A. 9 10 Graph 3 Dow Jones Utilty Average vs.S&P500 Cumulative % Change Mar. 2009. Oct. 2010 ..~...~ ~......§f L/.~,-.. ~....... (' ~P50( t¡Cb t¡Cb t¡Cb t¡Cb 'lCb "I; "I; "I; "I; _lt "i;~~~rl#~~#~~ 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% While the S&P 500 has recovered over 60 percent (60.97%) from its March 2009 lows, utility stock prices have increased by only about 25 percent (24.97%). This result again points out the market diffculties that utilties face and the continuing relatively higher cost of equity for utility companies. How do the other parties' ROE recommendations in thi cae compare to the rates of return authorized by other state utilty commissions around the country? They are substantially lower. Over the past five years, quarterly average allowed ROEs have generally been in the 10.4 percent to 10.5 percent range. Recently allowed average rates for integrated electrc utilities have been approximately Hadaway, Di-Reb - 9 Rocky Mountain Power 1 10.4 percent. Table 3 below sumarizes the ROE data, including both delivery 2 and fully integrated companies:3 T~k3 4 Authorized Electrc Utility Equity Returns5 2006 2007 2008 6 18t Quarter 10.38% 10.27% 10.45% 7 2nd Quarter 10.68% 10.27% 10.57% 8 3rd Quarter 10.06% 10.02% 10.47% 9 4th Quarter 10.39% 10.56% 10.33% 10 Full Year Average 10.36% 10.36% 10.46%11 Average Utility 12 Oebt Cost 6.08% 6.11 % 6.65% 13 Indicated Average 14 Risk Premium 4.28% 4.25% 3.81% 15 16 Source: Regulatory Focus, Regulatory Research Associates, Inc., Major Rate 17 Case Decisions, October 4, 2010. Utility debt costs are the "average" public 18 utility bond yields as reported by Moody's. 2009 2010 10.29%10.66% 10.55%10.08% 10.46%10.27% 10.54% 10.48%10.36% 6.28%5.59% 4.20%4.77% 19 The 10.0 percent ROE recommended by Ms. Carlock is below the national 20 averages and the 9.5 percent ROE recommended by Mr. Gorman is in stark 21 contrast to the cost of equity capital deemed appropriate by state regulators 22 around the countr. 23 Current Deficiencies of the CAPM and Other Equity Rik Premium Models 24 Q.Mr. Gorman uses the CAPM to estimate ROE. Can you explain why the 25 CAPM currently understates ROE and why CAPM estimates should not 26 curently be included? 27 A.Yes. The CAPM requires thee inputs to estiate ROE: 28 1) the risk-free interest rate (Rr); 29 2) the market risk premium for stocks relative to the risk-free rate (Rm - Rr); and 2 See Exhbit No. 57, page 3. Hadaway, Di-Reb - 10 Rocky Mountain Power 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Q. 18 19 A. 20 21 22 23 3) a measure of market-related, or nondiversifiable, risk (ß or beta). The CAPM estimate of ROE is calculated from the following equation: ROE = Rr + ß(Rm - Rr) Under present market conditions, and as applied by the other partes in their CAPM analyses, all three ofthe CAPM inputs tend to understate ROE. The risk- free rate, Rr, is understated because, due to the governent's easy money policies and investors' flght to safety, the U.S. Treasury yields used for Rr are artficially low. The second input, the market risk premium (Rm - Rr) is also understated. This is the case because Mr. Gorman bases his market risk premium estimates on historical data and prior academic studies that cannot possibly reflect the recent market tuoiL While there is no objective source for measuring the widening equity risk premium phenomenon, the volatility of utility stock prices demonstrated in the graphs above are indicative ofthe effect. Finally, the CAPM's market risk factor, ß, is depressed by the relatively poor market performance that utilities have provided. In this envionment, CAPM and other equity risk premium estimates of ROE understate the cost of equity. Do may of these same issues atect traditional bond.yield plus equity.risk premium estimates of ROE? Yes. Governent and utility bond interest rates are tyically the foundation for traditional equity risk premium models. To the extent that such rates are arficially reduced by the goverent's expansionary monetary policy, risk premum estiates of ROE wil be understated. The wide divergence between DCF model results and equity risk premium results is a reflection of this Hadaway, Di-Reb - 11 Rocky Mountain Power 1 condition. While there is no widely accepted model to measure the wider equity 2 risk premiums required to balance this anomaly, it is clear that both the CAPM 3 and trditional equity risk premium models curently understate the cost of equity 4 capitaL. 5 This anomaly is similar in natue to why cost of equity analysts exclude 6 companies that are involved in a merger or acquisition from their proxy groups. 7 The stock prices of such companies wil move towards the trnsaction price per 8 share as the likelihood of the transaction occurg increases. Thus a DCF or 9 CAPM analysis will be distorted because the stock price of the utility (and the 10 resulting beta) is responding to the terms of the merger agreement, not to the 11 fudamentals of investor expectations. In an analogous manner, when the Federal 12 Reserve manipulates interest rates, bond yields respond to the Federal Reserve's 13 actions, not investor expectations and the yields of fixed income securties are 14 distorted. 15 Rebutta of Staff Witness Carlock 16 Q.What is the basis for Ms. Carlock's 10.0 percent ROE? 17 A Ms. Carlock uses the traditional constant growth DCF model and a comparable 18 earings (CE) approach. She finds the reasonable ROE range to be 9.5 percent to 19 10.5 percent. She selects the midpoint of that range, 10.0 percent, as her final 20 ROE recommendation (Carlock Direct at 2, line 25 to 3, line 1). From her 21 analysis, she finds a DCF estimate of9.3 percent (Carlock Oirect at 20, lines 3-4). 22 She sttes that her CE approach provides a range of8.6 percent to 9 percent for 23 wester utilities and about 10.5 percent for Value Line electrc utilities with Hadaway, Di-Reb - 12 Rocky Mountain Power 1 2 3 Q. 4 A. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 financial strength of "A." From these results she concludes that the CE range should be 9.0 percent to 10.5 percent. What is your general impression of Ms. Carlock's testimony? A DCF approach with a CE test of reasonableness at times may be adequate, as noted above. However, Ms. Carlock should have given more consideration to recent economic conditions and her ROE estimate should have been higher. The 10.5 percent expected earnings rate for the Value Line electrcs with financial strength of "A," which she notes in her CE analysis (Carlock Direct at 18, lines 5- 7), is more like the allowed rates of retu for other utilities around the countr and it is more consistent with investors' expectations for integrated electrc utilities like RMP. The much lower earned retu for her western utility group appear to be anomalous. This point is made clear upon a review of Ms. Carlock's workpapers. Here, it is seen that the 2009 earned retu data for her western group includes retu as low as 3.2 percent (pNM Resources), 5.7 percent (N Energy), and 5.8 percent (Hawaiian Electrc). These retu are near, and in the case ofPNM Resources, even below the curent cost of single-A debt, makng them completely unuitable for consideration in a reasnable cost of equity analysis. Finally, the 8.6 percent to 9.0 percent range she fids for the western group is far below any allowed ROE for any integrated electrc utiity in the U.S. Beging on page 17, line 25, Ms. Carlock states: "Authorized retu by State Commssions for electrc utilties durng the last quarter of 2009 and 2010 to date, range frm 9.4% Hadaway, Di-Reb - 13 Rocky Mountain Power 1 in Connecticut to 11.0% in Michigan. Many of the decisions 2 authorized a retu on equity between 10% and 10.25%." 3 These data bear fuher explanation. The lowest allowed ROE (9.4%) that Ms. 4 Carlock cites from Connecticut is not representative because it is for a 5 distrbution-only company. Distrbution-only companies are believed by the 6 rating agencies to have lower operating risks than integrated utilties and, as a 7 group, they have received lower allowed ROEs. As shown in the detailed data 8 from Regulatory Research Associates which support page 3 of Exhibit No. 57, for 9 vertically-integrated utilities, like RMP, there have been 42 rate cases durg the 10 timeframe referred to by Ms. Carlock and the average allowed ROE has been 11 10.48 percent. 3 Many more decisions have resulted in authorized ROEs at or 12 above 10.25 percent (31 cases), than below 10.25 percent (11 cases). While a few 13 decisions have been around 10.0 percent, the majority of decisions have been 14 above 10.25 percent rather than in the 10.0 percent to 10.25 percent range 15 mentioned by Ms. Carlock. 16 Her DCF results are also questionable. The growt rates in that analysis 17 are low because she uses only Value Line growth rate data, which indicates a 18 growth rate of only 4.4 percent. Also, for one of her two dividend yields, she uses 19 Value Line's projected yields for 3-5 years in the futue, which are lower than 20 cuent actul dividend yields and are not likely consistent with investors' curt 21 yield requirements given the recently depressed levels of utility stock prices. 3 See page 14 of the preta veron of Dr. Hadaway's rebuttl workpap. Hadaway, Di-Reb - 14 Rocky Mountain Power 1 2 3 Q. 4 5 A. 6 7 8 9 10 11 12 13 14 15 Q. 16 A. 17 18 19 20 21 Q. 22 23 A. With more consideration for these factors, Ms. Carlock could have found an ROE well above 10.0 percent. You criticize the other paries'. lack of consideration for current economic conditions. What does Ms. Carlock say about the economy? On page 15, she offers a brief discussion of interest rates and stock market levels. She says that interest rates have been low durng 2010. She also notes that the Dow Jones Industral Average reached a peak of over 14,000 in 2007 and as of October 4,2010 was at a level of 10,751. She does not acknowledge that this weak stock market performance implies a higher cost of equity. Although, due to governent expansionary monetary policy, interest rates have declined to their lowest levels in many years, stock market investors remain highly risk averse. In this environment, the equity market's required risk premium is larger, not lower. Ms. Carlock might have reached a higher conclusion about RMP's cost of equity if she had taen a broader view of market conditions. How does Ms. Carlock determine the growth rate in her DCF model? For her growth, she uses Value Line's projected growth rates in cash flow, earnings, dividends, and book value. Although the calculation is not shown in her testiony, in her work papers she shows the average result to be 4.4 percent (see the average of growt rates in colum I of the DCF tab in the "P AC-E-I0- 7 _TCarlock_ Workpaper.xls" workpaper file provided by Ms. Carlock). Would Ms. Carlock have found a higher grwth rate if she had considered other growth rate sources? Yes. There are at least thee areas that should be considered in evaluatig Ms. Hadaway, Di-Reb - 15 Rocky Mountain Power 1 Carlock's DCF growth rate estimate. First, several of her growt rate 2 observations are lower than any investor would expect for long-term growth in the 3 DCF modeL. For example, Value Line's average projection for dividend growth 4 for her 15-company "A" group is only 3.68 percent, and for seven of her 5 companies that growth rate is less than 3 percent. Such low relatively near-term 6 growth rate projections are not consistent with the long-term, steady-state growth 7 rates required in the OCF modeL. 8 As a second issue, other analysts' grwth rate projections, beyond those 9 provided by Value Line, are readily available on-line at no cost. In my updated 10 DCF analysis in Exhibit No. 59, page 2, I average Value Line's projected earngs 11 growth with similar estimates from Zacks and Thomson.Financial. That average 12 for my comparable group of single-A rated companies is 5.52 percent. Had Ms. .13 Carlock included other analysts' growth estimates in her calculations, she would 14 have found higher average growth, which would have produced a substantially 15 higher ROE estimate. 16 Finally, many regulatory economists are now also including more broadly- 17 based growth rate sources, such as the projected grwth rate in gross domestic 18 product (GDP). The FERC has used this growth rate, along with analysts' growt 19 projections, for many years in gas pipeline cases. While we disagree on the level, 20 Mr. Gorman and I have routiely used GDP grwth as one of our long-term 21 growt estimates for the past several years. My estimate of the expected GDP 22 long-ter growt rate (6.0%) is shown in my Direct Testiony Exhibit No. 12. Hadaway, Di-Reb - 16 Rocky Mountain Power 1 2 3 Q. 4 5 A. 6 7 8 9 10 11 12 13 14 Q. 15 16 17 18 A. 19 20 21 22 Ms. Carlock's DCF growth rate and her DCF ROE estimates would have been higher if she had included a broader-based growth rate assessment. Why do you disagree with Ms. Carlock's using a 3.5 year future dividend yield in her analysis? The projected yield from Value Line's 3-5 year forecast is lower than curent market yields because it is based on utility stock prices that Value Line projects for the 2013-2015 tie period. For her group, the dividend yield based on 2009 data is 4.95 percent, but the 2013-2015 yield is only 4.39 percent. The 4.39 percent yield is not consistent with what investors are currently payig for utility stocks and, therefore, it is not representative of the curent cost of equity capitaL For my comparable group, as shown in Exhibit No. 59, the updated dividend yield with stock prices through September is 4.8 percent to 4.9 percent, about the same as Ms. Carlock's 2009 dividend yield. What would Ms. Carlock's DCF analysis have indicated if she used only her 2009 dividend yield (4.95%) or your average 2010 dividend yield (4.77%) with the 5.52 percent average of analysts' growth projections from your Exhibit No. 59? Her DCF range would have been 10.29 percent to 10.47 percent (4.77% yield + 5.52% grwt = 10.29% ROE and 4.95% yield + 5.52% growth = 10.47% ROE). Thi range would have been much closer to the 10.5 percent CE check of reasonableness that Ms. Carlock found for her "A" fiancial strengt Value Line electrc utility grup. Hadaway, Di-Reb - 17 Rocky Mountain Power 1 Q.Please summarize your rebuttal of Ms. Carlock? 2 A.Ms. Carlock's 10.0 percent ROE recopnendation does not adequately consider 3 the ongoing equity market effects that have lingered from the recent financial 4 crisis. She seems to base her recommendation on a belief that much lower 5 governent-induced interest rates should trnslate directly to a lower cost of 6 equity. While equity costs have declined somewhat from the near-chaotic 7 conditions that existed in late 2008 and early 2009, they have not dropped in 8 lockstep with interest rates. Ms. Carlock's limited DCF grwt rate analysis and 9 use of one dividend yield from the 2013-2015 time period should be reconsidered 10 and her CE check of reasonableness for the "A" financial strength Value Line 11 electrc utility group should be given more weight. 12 Rebuttal of Monsanto Witness Gorman 13 Q.What is the basis for Mr. Gorman's 9.5 percent ROE recommendation? 14 A.Mr. Gorman's results are sumaried on page 37 of his testimony. Based on two 15 constat growth and one multi-stage growt DCF models, a risk premium 16 analysis, and the CAPM, he concludes that the reasonable ROE range is 9.1 17 percent to 9.9 percent with a midpoint of 9.5 percent. 18 Q.What is your general assessment of Mr. Gorman's ROE testimony and 19 recommendaôon? 20 A.Mr. Gorman's recommendation is far below RMP's cost of equity. His 21 recommendation is understated because he employs negatively biased model 22 inputs and he includes the results from one model, the CAPM, that are curently 23 uneliable. In addition,. even if there were no Federal Reserve activity distortg Hadaway, Di-Reb- 18 Rocky Mountain Power 1 2 3 4 5 6 Q. 7 A. 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 fixed income yields, his equity risk premium analysis is flawed because he rejects the well-documented fact that equity rik premium increase when interest rates are low (as they are now) and decrease when interest rates are higher. I wil show that, but for these deficiencies, Mr. Gorman's analysis should have supported an ROE of 10.21 percent What are your specific areas of disgreement with Mr. Gorman's analysis? Mr. Gorman and I disagree strongly on the pricipal inputs to two of his three models and we disagree on the curent reliability of the CAPM. In his analysis, he consistently applies inputs that are negatively biased and produce the lowest ROE results. In one of his constant growth DCF models, he sumaries the data in a way that skews the results downward. In hi multi-stage DCF model, which is similar to mine, he agrees with me that GDP growth is an appropriate input, but he uses short-term GDP growth rate forecasts that are signficantly dominated by recently low infation rates. The inflation rates in his GDP forecast are almost a full percentage point lower than the longer-term historical averages. This approach is inconsistent with the long-term growth rate requirement of the DCF modeL. In his equity risk premum analysis, he selects data that are not consistent with the recent risk premium allowed by regulators and he fails to include the well documented inverse relationship that exists between equity risk premiums and interest rates, i.e., equity risk premum tend to increase when interest rates are low and decrease when interest rates are high. With this omission, in the Hadaway, Di-Reb - 19 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 currently low interest rate environment, his equity risk premiums are significantly understated and, therefore, his equity risk premium estimates of ROE are too low. His CAPM estimates are even lower. From that analysis, his ROE estimate is only 8.80 percent. This result is far below the next lowest number in the sumary shown in his Table 4 on page 37. This low result is simply a confirmation of the CAPM's curent artificially low input problems that I discussed earlier. The CAPM estimate is clearly an outlier that should have been discarded. Can you demonstrate what Mr. Gorman's results would have been if he had used more reasonable input assumptions? Yes. I have redone one of Mr. Gorman's constant growth DCF models with one correction and I have redone his multi-stage model with a more reasonable long- term GDP growth rate input. In Mr. Gorman's "sustainable growth" OCF analysis, the result for DPL, Inc. is 19.14 percent, which he correctly considers to be an outlier. Rather than simply eliminating DPL, Inc. from his group, however, Mr. Gorman uses the group median, rather than average and median, to sumarie all of his results. A more logical approach would have been simply to remove OPL, Inc. frm the analysis. When that is done, as I show in Exhibit No. 58, page 2, the group average is 9.48 percent, as compared to Mr. Gorman's grup median (including OPL) of9.14 percent. Although not a large effect when applied to all thee of Mr. Gorman's models, his reporting of only the median results in his sumary table produces a slightly lower overall DCF estiate. Hadaway, Di-Reb - 20 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 Q. 21 22 A. 23 What is your specific disagreement with Mr. Gorman's multi-stage DCF analysis? In that analysis, Mr. Gorman uses analysts' growth rate forecasts in the first five years and a GDP growth rate forecast for years 11 and later. In the interediate years, years six through 10, he interpolates growt in a linear fashion between the first and third stages. I disagree with his final result because it is dominated by an estimate of futue GDP growth that is far too low. He uses GDP growth forecast from the Blue Chip Financial Forecast servce, which are for five and 10-year periods. The curent Blue Chip GDP consensus forecasts are low because they are dominated by low expected real growth in the economy and the assumed long- term inflation rate is only about 2.0 percent. As shown in the GDP forecast in my Direct Testimony Exhibit No. 12, these inflation rates are lower than for any 10- year period in the last 60 years. The nomial 4.9 percent growth rate that Mr. Gorman uses is itselflower than nominal GOP growth inany 1O-year period, other than the most recent 10-years, which is obviously dominated by the low growth rates experienced in 2008 and 2009 and that are curently expected though 2011. For Mr. Gorman to base his long-term DCF growth estimate on curently depressed near-term GDP expectations is unrealistic and it creates an unealistically low estimate of ROE. If Mr. Gorman had used your updated GDP growth rate, what would the reults of hi multi-stage DCF anlysis have been? In Exhbit No. 58, page 3, I have reproduced Mr. Gorman's multi-stage analysis frm his Exhbit No. 210 (MPG-9) with my 6.0 percent GDP growth forecast Hadaway, Di-Reb - 21 Rocky Mountain Power 1 2 3 Q. 4 A. 5 6 7 8 9 10 11 12 Q. 13 A. 14 15 16 17 18 19 20 21 22 substituted for his growth rates in years 11 and later. From that analysis, the average ROE is 10.70 percent and the median is 10.94 percent. Please comment on Mr. Gorman's equity risk premium analysis. In his equity risk premium analysis, Mr. Gorman fails to include the well- documented tendency for equity risk premiums to increase when interest rates are low and decrease when interest rates are higher. In the risk premium analysis from my Direct Testimony, I provide a detailed regression of the past 30 years of data to document this fact. Mr. Gormanignores that relationship altogether. When his analysis is modified to properly reflect wider equity risk premium that are appropriate in the curent low interest rate environment, his equity risk premium is much higher. Please elaborate. Mr. Gorman presents his equity risk premium data in Exhibit Nos. 212-213 (MPG-ll through MPG-12). He discusses that analysis on pages 28-32 of his testimony. The analysis consists of two parts. In one approach, he adds equity risk premium based on governent bond interest rates of 4.40 percent to 6.08 percent to a projected Treasur bond yield of 4.70 percent. This analysis produces an ROE range of9.10 percent to 10.78. In his second approach he adds equity risk premium of 3.03 percent to 4.59 percent over utility bond yields to the recent "A" utility bond yield of 5.17 percent. Ths analysis produces an ROE range of 8.20 percent to 9.76 percent, with a midpoint estite of8.98 percent. From these two results, he concludes that an ROE of 9.46 percent is appropriate. Hadaway, Di-Reb - 22 Rocky Mountain Power 1 Q. 2 3 A. 4 5 6 7 8 9 10 11 Q. 12 13 A. What does Mr. Gorman's equity risk premium data indicate when your regression analysis approach is included? In Exhibit No. 58, pages 4-7, I have applied the standard regression analysis to calculate "interest rate adjustment" factors for his two equity rik premium studies. This approach properly takes into account the inverse relationship between equity risk premiums and interest rates. With this adjustment, Mr. Gorman's Treasur bond equity risk premium analysis indicates an ROE ofl0.57 percent, as shown in pages 4-5 of Exhibit No. 58. His utility bond equity risk premium analysis indicates an ROE of9.91 percent (pages 6-7). The midpoint of these revised risk premium results is 10.23 percent. Please summarize the results of your adjustments to Mr. Gorman's ROE analysis. My adjustments are sumarized in Table 4 below: Table 4 Suiry of Updated Gormn ROE Results DCF Models Constant Growth DCF (Anlysts' Growth) Constant Growth DCF (Sustainable Growt) Mult-Stage DCF DCF Rik Premium Averae CAPM Recmmended ROE Sumni of Results Gorman Initial ROE 10.50% 9.14% 9.90% 9.85% 9.46% 8.80% 9.50% Updated ROE 10.50% 9.11% 10.94% 10.18% 10.24% NA 10.21% 14 His constant growth DCF result at 10.50 percent is within the reasonable range. 15 As discused above, removing DPL, Inc. frm the analysis altogether (rather than Hadaway, Di-Reb - 23 Rocky Mountain Power 1 2 3 4 5 6 7 8 9 10 11 Q. 12 13 A. 14 15 16 17 18 Q. 19 20 21 A. 22 23 just relyig on the median), changes his sustainable grwt constant growth result to 9.11 percent, relative to a group average of 9.48 percent. The inclusion of a more realistic long-term GDP growth rate of 6.0 percent in his multi-stage DCF analysis increases that result to 10.94 percent. Factoring in the observed inverse relationship between interest rates and equity risk premium, increases the equity risk premium average to 10.24 percent. I also excluded his uneasonably low CAPM result altogether. As shown above, the average of the adjusted DCF and risk premium results is an ROE of 10.21 percent. Had Mr. Gorman considered these more reasonable inputs, his ROE estimates would have been well above the 9.5 percent ROE he recommends. On pages 42-51, Mr. Gorman criticizes various aspects of your ROE analysis. What is your general response to his criticisms? His criticisms are not accurate. They are pricipally focused on my use of the GOP growt rate in my DCF model and his mistaken view that the cost of equity for utilities has declined as much as interest rates. His characteriation of my GOP growt forecast is misplaced and his contention that equity costs have declined significantly is simply wrong. On pages 44-45, Mr. Gorman criôcizs your GDP growth foreast by saying that it is based on hitorical GDP data. Is it accurate to say that your foret is a "historical input"? No. The GDP growt rate that I use is a forecast based on general economic conditions that investors may expect for utilities in the very long ru, as is required in the DCF modeL. While I develop my forecast from the St. Louis Hadaway, Di-Reb - 24 Rocky Mountain Power 1 2 3 4 5 6 7 8 9 10 11 12 Q. 13 14 A. 15 16 17 18 19 20 21 22 23 Federal Reserve Bank data base that covers the past 60 years, my forecast is not a simple average or an extrapolation of the historical data. As is done in most econometrc forecasts, I use the long-ru historical relationships to project what investors may reasonably expect for the long-term futue. I also give more weight to more recent observations by applying weighted averages that give about five times as much weight to the most recent 10 years as compared to the earliest 10 years. Giving more weight to the more recent data lowers the overall growth rate forecast. For example, my curent forecast is 6.0 percent whereas the annual average of the growt rate data is 6.9 percent. In this context, Mr. Gorman's criticism of my growth forecast is unwarrnted and his comparison of my approach to forecasted earnings growth rates is misplaced. How do you respond to Mr. Gorman's criôcisms of your equity rik premium analysis? I find Mr. Gorman's comments about my equity risk premum analysis surrising since he has relied on the same data in his equity risk premium analysis. He adopts my commssion-authorized ROEs as the basis to estimate risk premiums and then he applies those risk premium, as I do, to both projected and curent interest rates. The priary differences between our approaches is that my historical timeframe is longer (my data goes back to 1980, Mr. Gorman's to 1986) and I tae into account the invere relationship between interest rates and equity risk premium. As I demonstrated previously, had Mr. Gorman included this fudaental relationship in his analysis, hi equity risk premium analysis would have produced an ROE above 10 percent. Hadaway, Di-Reb - 25 Rocky Mountain Power 1 Update of ROE Estimates 2 Q. 3 4 A. 5 6 7 Q. 8 A. 9 10 Q. 11 12 A. 13 14 15 16 17 Q. 18 A. 19 20 21 22 Have you updated your ROE analysis to take into account recent data and the current conditions in the capital markets? Yes. Consistent with my customary practice, I have updated my ROE analysis for curent conditions using the same methodologies that I employed in my direct testimony. What are the results of your updated DCF analyses? My updated DCF results are shown in Exhibit No. 59. The indicated DCF range is 10.3 percent to 10.8 percent, with a midpoint of 10.55 percent. What are the results of your updated bond yield plus equity risk premium analysis? My equity risk premium studies are shown in Exhibit No. 60. These studies indicate an ROE range of9.73 percent to 9.91 percent. Under curent market conditions, I discount these results because curent utiity bond yields are artficially depressed by governent monetary policy and investors' contiuing flight to safet away from the ongoing tubulence in the equity capital market. What do you conclude from your updated ROE analyses? My updated DCF analysis shows that Rocky Mountain Power's curent cost of equity capital is in the range of 10.3 percent to 10.8 percent. These results show that the Company's requested ROE of 10.6 percent is reasonable and that the recommendations of Ms. Carlock and Mr. Gorman, as discussed herein, are uneasnably low. Hadaway, Di-Reb - 26 Rocky Mountain Power 1 Q.Are you providing a CAPM analysis in your ROE update? 2 A.No. As I explained previously, governent monetary policies and recent flight to 3 safety issues have pushed Treasury bond interest rates to artficially low levels. In 4 this environment, CAPM estimates understate the market cost of equity capitaL. 5 For this reason, I do not include CAPM estimates in my ROE analysis and any 6 results from a CAPM analysis should be disregarded. 7 Q.Does this conclude your rebuttal testimony? 8 A.Yes. Hadaway, Di-Reb - 27 Rocky Mountain Power Case No. PAC-E-1O-07 Exhibit No. 57 Witness: Samuel C. Hadaway BEFORE THE IDAHO PUBLIC UTITIES COMMISSION ROCKY MOUNTAI POWER Exhibit Accompanying Rebutta Testimony of Samuel C. Hadaway Economic Data November 2010 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 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 3-MoAvg 12-MoAvg Rocky Mountain Power Long-Term Interest Rate Trends 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 5.50 5.46 5.26 5.01 5.01 5.10 5.04 5.51 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 4.29 4.13 3.99 3.80 3.77 3.87 3.81 4.27 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 1.21 1.33 1.27 1.21 1.24 1.23 1.23 1.24 Rocky Mountain Power Exhibit No. 57 Page 1 of 3 Case No. PAC-E-1()7 Witness: Samuel C. Hadaway Sources: Mergent Bond Recrd (Utilit Rates); ww.federalreserve.gov (Treasury Rates). Three month average is for August 2010 - Octber 2010. Twelve month average is for November 2009 - Octber 2010. co Ec o n o m i c I n d i c a t o r s Se a s o n a l f 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 l i o n s -- A n n u a l % C h a n g e - - - - -- - - - - - - - - - - - - - - - - - - - - - - - 2 0 1 0 - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - . - - - - - - - - E 2 0 1 1 - - - - - - - - - - - - - - - - - - - - - - - - - 20 0 E2 0 1 0 E2 0 1 1 20 0 E2 0 1 0 E2 0 1 1 1Q R2 Q E3 Q E4 Q 1Q 2Q 3Q 4Q Gr o s s D o m e s t i c P r o d u c t $1 4 , 1 1 9 . 0 $ 1 4 . 6 3 . 3 $ 1 5 , 1 9 7 . 6 (1 . 7 ) 3. 7 3. 8 GO P ( c u r r e n t d o l l a r s ) $1 4 , 4 4 6 . 4 $1 4 , 5 7 8 . 7 $ 1 4 , 7 2 3 . 7 $ 1 4 , 7 9 2 . 3 $ 1 4 , 9 5 7 . 5 $1 5 , 0 9 5 . 1 $1 5 , 2 6 3 . 5 $ 1 5 , 4 7 4 . 3 (1 . 7 ) 3. 7 3. 8 - - - An n u a l r a t e o f i n c r e a s e ( % ) 4. 8 3. 7 4. 0 1. 9 4. 5 3. 7 4. 5 5. 6 (2 . 6 ) 2. 7 2. 5 - . - 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 ( % ) 3. 7 1. 7 1. 7 2. 0 2. 4 2. 6 3. 2 4. 2 0. 9 0. 9 1. 4 - - - 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 / 1. 0 1. 9 2. 3 (0 . 1 ) 2. 1 1. 1 1. 3 1. 4 .C o m p o n e n t s o f R e a l G D P $9 , 1 5 4 . 0 $9 , 2 9 . 8 $9 . 5 1 3 . 2 (1 . 2 ) 1. 6 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 2 5 . 4 $9 , 2 7 5 . 7 $9 , 3 2 2 . 5 $9 , 3 7 5 . 8 $9 , 4 3 5 . 4 $9 , 4 7 7 . 9 $9 , 5 3 5 . 9 $9 , 6 0 3 . 5 (1 . 2 ) 1.6 2. 3 . - - % c h a n g e 1. 9 2. 2 2. 0 2. 3 2. 6 1. 8 2. 5 2. 9 1, 0 9 . 6 1. 1 6 4 . 1 1, 2 4 1 . 1 (3 . 7 ) 6. 3 6. 6 Du r a b l e g o o d 1, 1 3 8 . 9 1, 1 5 7 . 8 1, 1 7 2 . 7 1, 1 8 6 . 7 1, 2 1 4 . 4 1, 2 2 2 . 5 1, 2 4 8 . 2 1, 2 7 9 . 3 2, 0 1 7 . 4 2, 0 6 7 . 8 2, 1 0 4 . 8 (1 . 2 ) 2. 5 1. 8 No n d u r a b l e g o o d s 2, 0 5 3 . 5 2, 0 6 3 . 4 2, 0 6 9 . 4 2, 0 8 5 . 0 2, 0 9 1 . 4 2, 0 9 9 . 4 2, 1 0 9 . 0 2, 1 1 9 . 3 6, 0 3 2 . 7 6, 0 6 7 . 5 6, 1 7 7 . 0 (0 . 8 ) 0. 6 1. 8 Se r v i c e s 6, 0 2 9 . 6 6, 0 5 3 . 4 6, 0 8 1 . 0 6, 1 0 6 . 1 6, 1 3 5 . 8 6, 1 6 2 . 7 6, 1 8 9 . 2 6, 2 2 0 . 5 iI 1, 2 9 0 . 8 1, 3 5 4 . 0 1, 4 4 5 . 4 (1 7 . 1 ) 4. 9 6. 7 No n r e s i d e n l a l f i x e d i n v e s t m e n t 1, 3 0 2 . 6 1, 3 5 5 . 3 1, 3 6 8 . 1 1, 3 9 0 . 1 1, 4 0 9 . 3 1, 4 3 4 . 1 1, 4 5 8 . 2 1, 4 7 9 . 9 m (1 7 . 1 ) 4. 9 6. 7 - - - % c h a n g e 7. 8 17 . 2 3. 8 6. 6 5. 6 7. 2 6. 9 6. 1 ~ 91 6 . 3 1, 0 5 1 . 4 1, 1 7 3 . 0 (1 5 . 3 ) 14 . 7 11 . 6 Pr o d u c e r s d u r a b l e e q u i p m e n t 98 9 . 7 1, 0 4 6 . 0 1. 0 6 9 . 2 1, 1 0 0 . 7 1, 1 2 9 . 2 1, 1 6 1 . 8 1, 1 8 9 . 1 1, 2 1 1 . 7 i: 33 . 9 31 9 . 2 34 1 . 0 (2 3 . 2 ) (4 . 4 ) 6. 8 Re s i d e n l a l f i x e d i n v e s t m e n t 32 1 . 4 34 0 . 7 30 6 . 6 30 6 . 0 31 3 . 1 33 0 . 3 34 4 . 8 37 5 . 6 "' (2 3 . 2 ) (4 . 4 ) 6. 8 - - - % c h a n g e (1 2 . 8 ) 26 . 2 (3 2 . 7 ) (3 . 3 ) 9. 6 23 . 9 18 . 6 40 . 9 :: (1 1 3 . 1 ) 68 . 5 38 . 6 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 44 . 1 68 . 8 10 6 . 3 54 . 6 37 . 9 32 . 2 36 . 9 47 . 3 ~ - - - 2, 5 4 2 . 6 2, 5 6 . 4 2, 5 5 8 . 1 1. 6 0. 7 (0 . 1 ) 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 4 0 . 2 2, 5 6 4 . 9 2, 5 6 8 . 5 2, 5 6 8 . 0 2, 5 6 5 . 9 2, 5 6 2 . 7 2, 5 5 5 . 8 2, 5 4 7 . 8 ~ 1, 0 2 7 . 6 1, 0 6 3 . 7 1, 0 5 1 . 4 5. 7 3. 5 (1 . 2 ) Fe d e r a l 1, 0 4 8 . 4 1, 0 7 1 . 5 1, 0 6 9 . 4 1, 0 6 5 . 4 1, 0 6 0 . 3 1, 0 5 4 . 3 1, 0 4 9 . 3 1, 0 4 1 . 8 i 1, 5 1 8 . 8 1, 5 0 . 1 1, 5 1 1 . 4 (0 . 9 ) (1 . 1 ) 0.6 Sl a t e & l o c a l 1, 4 9 6 . 8 1.4 9 9 . 1 1, 5 0 4 . 7 1, 5 0 7 . 9 1, 5 1 0 . 7 1. 5 1 3 . 3 1, 5 1 1 . 3 1, 5 1 0 . 5 - (3 6 . 0 ) (4 1 6 . 7 ) (3 7 7 . 7 ) - - - Ne t e x p o r t s (3 3 8 . 4 ) (4 4 9 . 0 ) (4 6 2 . 8 ) (4 1 6 . 6 ) (4 0 1 . 3 ) (3 8 . 5 ) (3 7 1 . 6 ) (3 5 1 . 2 ) l 1 , 4 9 0 . 7 1, 6 6 . 5 1, 8 0 . 6 (9 . 5 ) 11 . 8 8.6 Ex p o r t s 1, 6 1 6 . 4 1,6 5 2 . 1 1, 6 8 0 . 2 1, 7 1 7 . 2 1, 7 4 8 . 6 1, 7 8 7 . 3 1, 8 3 1 . 7 1, 8 7 0 . 7 1, 8 5 . 8 2, 0 8 . 2 2, 1 8 7 . 2 (1 3 . 8 ) 12 . 4 5. 0 Im p o r t s 1, 9 5 4 . 8 2, 1 0 1 . 1 2, 1 4 3 . 0 2, 1 3 3 . 8 2, 1 4 9 . 8 2, 1 7 3 . 9 2, 2 0 3 . 4 2. 2 2 1 . 8 ~ .. I n c o m e & P r o f i t s .. $1 2 , 1 7 5 . 0 $ 1 2 , 5 1 6 . 2 $ 1 2 , 9 3 4 . 5 (1 . 7 ) 2. 8 3. 3 Pe r s o n a l i n c o m e $1 2 , 3 5 0 . 3 $ 1 2 , 4 3 . 8 $ 1 2 . 5 6 3 . 5 $ 1 2 , 6 7 7 . 4 $1 2 , 7 6 8 . 1 $1 2 , 8 6 7 . 3 $ 1 2 , 9 8 4 . 8 $ 1 3 , 1 1 7 . 7 0 11 , 0 3 5 . 0 11 , 3 6 5 . 9 11 , 6 8 1 . 8 0. 7 3. 0 2. 8 Dis p o s a b l e p e r s o n a l i n c o m e 11 , 2 1 5 . 6 11 , 3 3 6 . 5 11 , 4 0 7 . 8 11 , 5 0 3 . 9 11 , 5 4 3 . 9 11 , 6 2 9 . 0 11 , 7 2 1 . 0 11 , 8 3 3 . 4 5. 9 5. 7 4. 8 - - Sa v i n g s r a t e ( % ) 5. 5 5. 9 5. 8 5. 7 5. 0 5. 0 4. 8 4. 6 1, 3 1 6 . 7 1, 7 7 3 . 8 1, 8 3 5 . 2 (1 . 2 ) 34 . 7 3. 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, 7 7 2 . 9 1, 7 8 8 . 2 1, 7 7 5 . 5 1, 7 5 8 . 6 1, 7 8 2 . 1 1, 8 1 6 . 7 1, 8 5 2 . 1 1, 8 9 0 . 0 1, 0 6 1 . 8 1, 3 6 8 . 1 1,3 3 4 . 4 3. 6 28 . 8 (2 . 5 ) Co r p o r a t e p r o f i s a f t e r l a x e s 1, 3 6 9 . 7 1, 3 8 2 . 6 1, 3 6 2 . 9 1, 3 5 7 . 3 1, 2 9 2 . 4 1, 3 2 0 . 5 1, 3 4 7 . 5 1, 3 7 7 . 0 51 . 3 0 71 . 5 6 85 . 3 2 24 5 . 0 39 . 5 19 . 2 tE a r n i n g s p e r s h a r e ( S & P 5 0 ) 61 . 2 8 67 . 4 6 70 . 3 6 71 . 5 6 75 . 4 2 77 . 1 2 81 . 2 8 85 . 3 2 tP r l c e s & I n t e r e s t R a t e s (0 . 3 ) 1. 6 1. 7 - - - Co n s u m e r p r i c e i n d e x 1. 5 (0 . 7 ) 1. 6 1. 9 2.1 1. 6 1. 9 2.0 0. 2 0. 1 0. 3 - - - Tr e a s u r y b i l l s 0.1 0.1 0. 2 0. 2 0. 2 0. 2 0. 3 0.4 3.3 3. 1 2. 5 - - - 10 ' y r n o t e s 3. 7 3. 5 2. 8 2. 5 2. 4 2. 4 2. 6 ¥o m : : 4. 1 4. 1 3. 5 - - - 30 ' y r b o n d s 4. 6 4. 4 3. 9 3. 6 3. 5 3. 5 3. 5 Dl x 0 ¡ß ~ ~ 5. 3 4. 8 4. 3 - - - Ne w i s s u e r a t E H r p o r a t e b o n d s 5. 3 5. 0 4. 6 4. 4 4. 2 4. 2 4. 3 ~ _ . - . 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R - R e v i s e d . ~" ' g ' " ~ . 2 0 0 5 C h a l n - w e l h t e d d o l l a r s . . . C u r r e n t d o l l r s . : i T r a l 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 r ' s . Dl e, ~-. (/c:'-::.. Q) '- 0:(1 ;:~ :'o :: a. iNc: ;: CO :'..:. c: :: :: U0.-oi '-ii t5 ~ Q)~W (. "0 o Q) 0: N"¡: o.c..::c: o (\Zv o~.. 0 o CO C\ (\o.. omZ (\ m~00o coC\ ~o.. o I'Z (\ co ~00o coC\ ~o.. omZ (\ I' ~00o coC\ ~o.. o co Z C\ co ~00o coC\ ~o.. w ~ "0 Q) enN Q)'C :¡0'-.i :¡"5 ~ c: .2 Q) t5 ro Q)~w ~ - c: c: I' v C\C\.. ~~~C\ co 0~~~o m C\.. .. I' 0 C\ C\ .. ~~~ (\ LO co co .. ... . .000.. .. .. LO I' LOC\ ~~~LO co v~ ": ~om.... .. co.. 0 C\ .. ~ ~ c:lo lo Z LC oqom.. LO 0.... .. ~.~~I' .. 0 LC ~ ~om.... .. en Q)E en :¡ Q) ~ en en"O.~ ~S:: ;:ro :¡ -.. ~ i:g' ;:0cCci 0 ro;: 1-= ~iiro Q) .. ~ .~ ~Q) Q) 0;: 0 ii Rocky Mountain Power Exhibit No. 57 Page 3 of 3 Case No. PAC-E-10-07 Witness: Samuel C. Hadaway ö..oC\ -.Üo Ul .. 2 -êCI CI'(3 ::~ 0 ~ ~ ~ CD~ ~CI -CD ~Ul OlCD :: c: e ~ :5o Ul~ Õ:: ..Ol 0CD C\c: .. = _ .E~ S.~ ~ '(3 . CD ""Co CD 0Ul C\CI -U ~ 2 ~ CI CIc: ::.. c: .2. .! ~ -g = _ CI ~ å)(. 0.. if ~CD _~ ~ C\ ~ ~ '; (/.! CIS:: ::tV ~ ãiC.. .. Case No. PAC-E-lO-07 Exhbit No. 58 Witness: Samuel C. Hadaway BEFORE THE IDAHO PUBLIC UTLITIES COMMISSION ROCKY MOUNTAIN POWER Exhibit Accompanying Rebutt Testimony of Samuel C. Hadaway Updated Gormn ROE Results November 2010 Rocky Mountain Power Exhibit No. 58 Page 1 of 7 Case No. PAC-E-10-07 Witness: Samuel C. Hadaway Rocky Mountain Power Summary of Updated Gorman ROE Results (1 )(2) Summary of Results Gorman Updated Median Median ROE ROE DCF Models Constant Growth DCF (Analysts' Growth)10.50%10.50% Constant Growth DCF (Sustainable Growth)9.14%9.11% Multi-Stage DCF 9.90%10.94% DCF 9.85%10.18% Risk Premium Average 9.46%10.24% CAPM 8.80%NA High/Low Midpoint (Recommended ROE)9.50%10.21% Notes: Column 1: Gorman, page 27 (DCF results) and page 37 (summary results). Column 2: Constant Growth DCF results not changed. DPL result at 19.14% is considered an outlier and removed from the group (see page 2 of this Exhibit). Only change to Multi-Stage DCF result is the use of a third-stage growth rate of 6.0% (see page 3 of this Exhibit). Risk Premium results are an average of Treasury Bond results (see from pages 4-5 of this Exhibit) and Utilty Bond results (see pages 6-7 of this Exhibit). CAPM results are not reliable and are excluded as discussed in my testimony. ROE results are midpoint of DCF average and average of Risk Premium and CAPM results. Rocky Mountain Power Exhibit No. 58 Page 2 of 7 Case No: PAC-E-1O-Q7 Witness: Samuel C. Hadaway Rocky Mou ntai n Power Gorman Sustainable Growth DCF Analysis (eliminating DPL) (1 )(2)(3)(4)(5) Price Sustainable Dividend Adjusted Cost of No.Company Po Growth Do Yield Equity 1 ALLETE $35.60 3.05%$1.76 5.10%8.14% 2 Allant Energy Co.$34.26 5.87%$1.58 4.88%10.76% 3 Black Hills Corp $30.44.2.95%$1.44 4.87%7.82% 4 Con. Edison $46.03 3.53%$2.38 5.35%8.88% 5 DPL Inc.$25.26 13.69%$-5.45%19.14% 6 DTE Energy Co.$46.88 3.97%$2.12 4.70%8.67% 7 Duke Energy $16.94 2.53%$0.98 5.93%8.46% 8 Edison Internat.$33.38 5.20%$1.26 3.97%9.17% 9 Entergy Corp.$77.17 4.75%$3.32 4.51%9.25% 10 NextEra Corp.$52.27 6.79%$2.00 4.09%10.87% 11 IDACORP $35.04 5.10%$1.20 3.60%8.69% 12 Northeast Utilties $27.80 5.23%$1.03 3.88%9.11% 13 NSTAR $37.06 4.15%$1.60 4.50%8.64% 14 PG&E Corp.$44.25 8.26%$1.82 4.45%12.72% 15 Portland General $19.33 3.28%$1.04 5.56%8.83% 16 Progress Energy $41.56 2.91%$2.48 6.14%9.05% 17 SCANACorp.$38.28 5.74%$1.90 5.25%10.99% 18 Sempra Energy $50.24 5.72%$1.56 3.28%9.01% 19 Southern Co.$35.27 5.53%$1.82 5.45%10.98% 20 Vectren Corp.$24.45 3.79%$1.36 .5.77%9.56% 21 Wisconsin Energy $54.00 6.56%$1.60 3.16%9.72% 22 Xcel Energy Inc.$21.84 4.96%$1.01 4.85%9.81% Average $38.19 4.76%$1.68 4.73%9.48% Median 9.11% Notes: Columns 1-5: Exhibit No. 209 (MPG-8). 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Hadaway Rocky Mountain Power Update of Gorman Risk Premium Analysis - Treasury Bond (Projected) (1 )(2)(3) AUTHORIZED INDICATED TREASURY ELECTRIC RISK BOND YIELD RETURNS PREMIUM 1986 7.78%13.93%6.15% 1987 8.59%12.99%4.40% 1988 8.96%12.79%3.83% 1989 8.45%12.97%4.52% 1990 8.61%12.70%4.09% 1991 8.14%12.55%4.41% 1992 7.67%12.09%4.42% 1993 6.59%11.41%4.82% 1994 7.37%11.34%3.97% 1995 6.88%11.55%4.67% 1996 6.71%11.39%4.68% 1997 6.61%11.40%4.79% 1998 5.58%11.66%6.08% 1999 5.87%10.77%4.90% 2000 5.94%11.43%5.49% 2001 5.49%11.09%5.60% 2002 5.43%11.16%5.73% 2003 4.96%10.97%6.01% 2004 5.05%10.75%5.70% 2005 4.65%10.54%5.89% 2006 4.91%10.36%5.45% 2007 4.84%10.36%5.52% 2008 4.28%10.46%6.18% 2009 4.08%10.48%6.40% Jun 2010 4.50%10.41%5.92% AVERAGE 6.32%11.50%5.19% INDICATED COST OF EQUITY PROJECTED TREASURY BOND YIELD*4.70% TREASURY BOND AVG ANNUAL YIELD DURING STUDY 6.32% INTEREST RATE DIFFERENCE -1.62% INTEREST RATE CHANGE COEFFICIENT -42.14% ADUSTMENT TO BASIC RISK PREMIUM 0.68% BASIC RISK PREMIUM 5.19% INTEREST RATE ADJUSTMENT 0.68% EQUITY RISK PREMIUM 5.87% PROJECTED TREASURY BOND YIELD*4.70% INDICATED EQUITY RETURN 10.570k Notes: Coumn 1-3: Exhibi No. 212 (MPG-11). .See Gorm page 31, lines 20-21 for Projeed Treasury Bond Yield. Se reresson data on pae 5 of ths Exhibit for derivation of .Interest Rate Chane Coefficient.. Rocky Mountain Power Exhibit No. 58 Page 5 of 7 Case No. PAC-E-10-07 Witness: Samuel C. Hadaway Rocky Mountain Power Update of Gorman Risk Premium Analysis - Treasury Bond Authorized Equity Risk Premiums vs. Treasury Bond Interest Rates (1986 - Jun 2010) 7.0% 6.5%. II 6.0% E:i 5.5%Ël!D.5.0%.0IIii 4.5% ~:i 4.0%0-W 3.5% 3.0% 4% .. y = -0.4214x + 0.0785 R2= 0.68 5%6% 7% 8% Average Tresury Bond Interest Rate 9%10% SUMMARY OUTPUT Regression StatisticsMultiple R 0.82765442 R Square 0.685011942 Adjusted R Square 0.671316809 Standard Error 0.004468313Observations 25 ANOVA df ss 1 0.000998663 23 0.000459214 24 0.001457877 MS F 0.000998663 50.01864125 1.99658E-05 Significanc F 3.32057E-07Regresion Residual Total Intercept X Varabe 1 Coeffcien Standar Error t Stat P-value 0.078469504 0.003868502 20.28420731 3.557E-16 -0.421394706 0.059583105 -7.07238582 3.32057E-07 Lower 95% Uppr95% Lowe95.O% Upper95.0% 0.070466897 0.0884721 0.070466897 0.08647211 -0.544851749 -0.298138 -0.54465175 -0.2981377 Rocky Mountain Power Exhibit No. 58 Page 6 of 7 Case No. PAC-E-10-07 Witness: Samuel C. Hadaway Rocky Mountain Power Update of Gorman Risk Premium Analysis - Utility Bond (1 ) MOODY'S "A" RATED PUBLIC UTILITY BOND YIELD 9.58% 10.10% 10.49% 9.77% 9.86% 9.36% 8.69% 7.59% 8.31% 7.89% 7.75% 7.60% 7.04% 7.62% 8.24% 7.76% 7.37% 6.58% 6.16% 5.65% 6.07% 6.07% 6.53% 6.04% 5.71% 7.75% 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Jun 2010 AVERAGE (2) AUTHORIZED ELECTRIC RETURNS 13.93% 12.99% 12.79% 12.97% 12.70% 12.55% 12.09% 11.41% 11.34% 11.55% 11.39% 11.40% 11.66% 10.77% 11.43% 11.09% 11.16% 10.97% 10.75% 10.54% 10.36% 10.36% 10.46% 10.48% 10.41% 11.50% (3) INDICATED RISK PREMIUM 4.35% 2.89% 2.30% 3.20% 2.84% 3.19% 3.40% 3.82% 3.03% 3.66% 3.64% 3.80% 4.62% 3.15% 3.19% 3.33% 3.79% 4.39% 4.59% 4.89% 4.29% 4.29% 3.93% 4.44% 4.70% 3.75% INDICATED COST OF EQUITY CURRENT "A" UTILITY BOND YIELD* MOODY'S AVG ANNUAL YIELD DURING STUDY INTEREST RATE DIFFERENCE 5.17% 7.75% -2.58% INTEREST RATE CHANGE COEFFICIENT ADUSTMENT TO BASIC RISK PREMIUM BASIC RISK PREMIUM INTEREST RATE ADJUSTMENT EQUITY RISK PREMIUM -38.42% 0.99% 3.75% 0.99% 4.74% 5.17% 9.91% CURRENT "A" UTILITY BOND YIELD* INDICATED EQUITY RETURN Nots: Column 1-3: Exhibi No. 213 (MPG-12). *S Go pae 32, lines 1-3 for Current. A. Utlit Bond Yield. Se resson data on page 7 of ths Exhibi for derivation of .Interest Rate Change Coefficient.. Rocky Mountain Power Exhibit No. 58 Page 7 of 7 Case No. PAC-E-1Q.7 Witness: Samuel C. Hadaway Rocky Mountain Power Update of Gorman Risk Premium Analysis - Utilty Bond Authorized Equity Risk Premiums vs. Utilty Interest Rates (1986 - Jun 2010) 5.0%.. 4.5% IIE 4.0%:: 'E l!3.5%Q...II ã:3.0%~::t:2.5%W 2.0% 50/6% y = -0.3842x + 0.0673 R2= 0.6799 . 7% 80 9% Average Utilit Intre Rates 100 11%12% SUMMARY OUTPUT Regresion Statistics Multiple R 0.824542838 R Square 0.679870892 Adjusted R Square 0.665952236 Standard Error 0.003971171Observations 25 ANOVA el SS MS F Significanc F Regression 1 0.0007703 0.000770311 48.84601293 4.01356E-07 Residual 23 0.0003627 1.57702E-05 Total 24 0.001133 Coffcients tandarErr tStat P-vale Lower 95% Upper 95% Lower 95.0% Upp 95.0% Intercept 0.067272587 0.0043354 15.51719134 1.12215E-13 0.05804215 0.07624096 0.058304215 0.07624096 X Variable 1 -0.384177701 0.054969 -6.988992269 4.01356E-07 -0.497889677 -0.27046573 -0.49788968 -0.270465725 Case No. PAC-E-1O-07 Exhbit No. 59 Witness: Samuel C. Hadaway BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION ROCKY MOUNTAIN POWER Exhibit Accompanying Rebutta Testimony of Samuel C. Hadaway Discounted Cash Flow Analysis November 2010 Rocky Mountain Power Exhibit No. 59 Page 1 of 5 Case No. PAC-E-10-07 Witness: Samuel C. Hadaway .£ i .£ e ic: e (iEc:~ ~~~~~~~~~~~~~~~~~~~~~~~ Q)Q)~.;CO.;LO()COC\o COLO ° ° 0 C£i.C\C'~~~""o ~i- gi LL Ó Ó Ó Ó Ó Ó ,. co . . C' co co "C£~~O ~~~~~~~m~~mmm~~~~~m~~m~m Cn 0Z 0 ~~.. ~~i. i.00.. .. .!! !!t/ -~ ~¡:: as Goo c a: c. ci 'ã c ;: "0._ .2 0 ca u. :: - .c U.C t/ (. = as Q.g (.-iG "0 0 ~ Go.. - ~- C" g 5 Ë a: ~ E.- ::Q en .£i-= e 3= - c:e~o.c: 00 ~~~~~~~~~~~~~~~~~~~~~~~ e ~ c: () ~ co .. a ~ ~ a i. C£ ~ 0 ~ C£ ~ i. a ~ & C\ C£ & C£ ClLLEÓÓÓ....O..OC\O~O . o 0.. C\ 0 ..... 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LL e C Co CJ.- Q Q. .! .c Q C i CJ :: 0 Eo ,'; .. :E - CI~ ë i-~ as C) Co - co tI 0a: ã..Co Rocky Mountain Power Exhibit No. 59 Page 3 of 5 case No. PAC-E-10-Q7 Witness: Samuel C. 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E C/o .: () ~: Ne! ::ro .0 Q) '0 )- Q) LO 1: - 8.x Q)~ ii: LO e: E:i 8 ..'V.. e: E:iÕ() Q) Q)(J e: E:iÕ() Q) Q)(J co..I'.. e: E:iÕ() e: E:i 8 '0Q) - 1: Q)o 0 0. e:Q) ro ii e: Q) iI- 0~ 0._ ..- ro cß )- .c ã:¡-o -e~ 0o .! - Q)E z ê ca e: .-ro g ~ roQ) e:0..--u. e! e:ro ~ ~ Eio 0..X I-Q) :;z.o: co e: E:i 8 co.. e: E:i 8 C/:i ã: co.. e: E:io() åi.. e: E:io() 0).. e: E:i 8 C/:iii 0).. e: E:iÕ() ÖC\ e: E:iÕ() coi'V C/e: E:i 8õ Q) fè~ Q) ~ I' e: E:i 8 e: E:i 8 C/:iiioC\ e: E:iÕ() I' e: E:i 8 C/:i ã:(\ e: E:i 8 co e: E:i 8 co.. ..C\ e: E:iÕ() .c ~ o C' Q) C\ .. e: ;, E.0 :i'0 ÕQ) () ~ .~~e:o ~e: 0..N (Je: ~ E iiro:i 8 C\C\ e: E:i 8 .. e: E:i 8 Q)Q)(J 0) e: E:i 8 Rocky Mountain Power Exhibit No. 59 Page 5 of 5 Case No. PAC-E-10-07 Witness: Samuel C. Hadaway C\ e: E:iÕ() Q)Q)(J ö.. e: E:i 8 C\.. C/~ C/ .c .Q -g t:i. Q) S.c '0 e~:~ 0 () Cl Q) Q) Q) -=-=-= ::_ .c .0o :!: '0 (\E ~~C\:i Clo.e:ã5 e: E E ii .Q - :i_ ro 0 Õo C\ io () Q) ~ "7 e: ã: I' co .- ii .. 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Hadaway Rocky Mountain Power Risk Premium Analysis (Based on Projected Interest Rates) MOODY'S AVERAGE AUTHORIZED INDICATED PUBLIC UTILITY ELECTRIC RISK BOND YIELD (1)RETURNS (2)PREMIUM 1980 13.15%14.23%1.08% 1981 15.62%15.22%-0.40% 1982 15.33%15.78%0.45% 1983 13.31%15.36%2.05% 1984 14.03%15.32%1.29% 1985 12.29%15.20%2.91% 1986 9.46%13.93%4.47% 1987 9.98%12.99%3.01% 1988 10.45%12.79%2.34% 1989 9.66%12.97%3.31% 1990 9.76%12.70%2.94% 1991 9.21%12.55%3.34% 1992 8.57%12.09%3.52% 1993 7.56%11.41%3.85% 1994 8.30%11.34%3.04% 1995 7.91%11.55%3.64% 1996 7.74%11.39%3.65% 1997 7.63%11.40%3.77% 1998 7.00%11.66%4.66% 1999 7.55%10.77%3.22% 2000 8.14%11.43%3.29% 2001 7.72%11.09%3.37% 2002 7.53%11.16%3.63% 2003 6.61%10.97%4.36% 2004 6.20%10.75%4.55% 2005 5.67%10.54%4.87% 2006 6.08%10.36%4.28% 2007 6.11%10.36%4.25% 2008 6.65%10.46%3.81% 2009 6.28%10.48%4.20% AVERAGE 9.05%12.28%3.23% INDICATED COST OF EQUITY PROJECTED SINGLE-A UTILITY BOND YIELD*4.73% MOODY'S AVG ANNUAL YIELD DURING STUDY 9.05% INTEREST RATE DIFFERENCE -4.32% INTEREST RATE CHANGE COEFFICIENT -41.13% ADUSTMENT TO AVG RISK PREMIUM 1.78% BASIC RISK PREMIUM 3.23% INTEREST RATE ADJUSTMENT 1.78% EQUITY RISK PREMIUM 5.00% PROJECTED SINGLE-A UTILITY BOND YIELD*4.73% INDICATED EQUITY RETRN 9.73% (1) Moods Investor Servic (2) Reory Focs, Reglaor Reea Asses, Inc. .Proed single-A bond yield is 123 bas pont ovr preced long-term Treasury bond rae of 3.5% from RMP Exhib No. 57, p. 2. The single-A sp is for 3 mohs ende Ocober 2010 from RMP Exhib No. 57, p. 1. Rocky Mountain Power Exhibit No. 60 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) MOODY'S AVERAGE AUTHORIZED INDICATED PUBLIC UTILITY ELECTRIC RISK BOND YIELD (1)RETURNS (2)PREMIUM 1980 13.15%14.23%1.08% 1981 15.62%15.22%-0.40% 1982 15.33%15.78%0.45% 1983 13.31%15.36%2.05% 1984 14.03%15.32%1.29% 1985 12.29%15.20%2.91% 1986 9.46%13.93%4.47% 1987 9.98%12.99%3.01% 1988 10.45%12.79%2.34% 1989 9.66%12.97%3.31% 1990 9.76%12.70%2.94% 1991 9.21%12.55%3.34% 1992 8.57%12.09%3.52% 1993 7.56%11.41%3.85% 1994 8.30%11.34%3.04% 1995 7.91%11.55%3.64% 1996 7.74%11.39%3.65% 1997 7.63%11.40%3.77% 1998 7.00%11.66%4.66% 1999 7.55%10.77%3.22% 2000 8.14%11.43%3.29% 2001 7.72%11.09%3.37% 2002 7.53%11.16%3.63% 2003 6.61%10.97%4.36% 2004 6.20%10.75%4.55% 2005 5.67%10.54%4.87% 2006 6.08%10.36%4.28% 2007 6.11%10.36%4.25% 2008 6.65%10.46%3.81% 2009 6.28%10.48%4.20% AVERAGE 9.05%12.28%3.23% INDICATED COST OF EQUITY CURRENT SINGLE-A UTILITY BOND YIELD*5.04% MOODY'S AVG ANNUAL YIELD DURING STUDY 9.05% INTEREST RATE DIFFERENCE -4.01% INTEREST RATE CHANGE COEFFICIENT -41.13% ADUSTMENT TO AVG RISK PREMIUM 1.65% BASIC RISK PREMIUM 3.23% INTEREST RATE ADJUSTMENT 1.65% EQUITY RISK PREMIUM 4.8?01c CURRENT SINGLE-A UTILITY BOND YIELD*5.04% INDICATED EQUITY RETURN 9.91% (1) Mo's Investo Servic (2) Reulor Focs, Regulor Rech Asocates, Inc. .Currnt siglA utlity bond yi is thre mont avera of Mo's Single-A Public Uti6t Bond Yield Ave thgh Ocobr 2010 fro AMP Exhib No. fi. p. 1. Rocky Mountain Power Exhibit No. 60 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%. II E 4%:: ï§ l!3%a.'"IIif 2%.~ '3go 1%w 0% -1% 5% . . y = -0.4113x + 0.0695 R2= 0.8598 . 7%9% 11% Average Utilty Interest Rates 13%15% SUMMARY OUTPUT Regression StatistcsMultiple R 0.927242552 R Square 0.85977875 Adjusted R Square 0.85477084 Stndard Error 0.0047873Obsrvtions 30 AN OVA Regresion Residua Totl 1 28 29 58 0.003934704 0.000641711 0.004576415 MS F Significance F 0.003934704 171.6844276 1.82118E-13 2.29182E-05 df Intercept X Variable 1 Coffcient Standard Errr t Stat P-vaJe Lower 95% Upp 95% Lower 95.0% Upp 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 -0.34702659 -0.475635937 -0.34702659