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IN THE MATTER OF THE APPLICATION OF )
PACIFICORP DBA ROCKY MOUNTAIN ) CASE NO. PAC-E-10-07
POWER FOR APPROVAL OF CHANGES )
TO ITS ELECTRIC SERVICE SCHEDULES )
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DIRECT TESTIMONY OF TERRI CARLOCK
IDAHO PUBLIC UTILITIES COMMISSDN
OCTOBER 14, 2010
1 Q.Please state your name and address for the
3
2 record.
A.My name is Terri Carlock. My business address
4 is 472 West Washington Street, Boise, Idaho.
5 Q.By whom are you employed and in what capacity?
I am the Deputy Administrator of the Utili ties6A.
7 Division at the Idaho Public Utili ties Commission. I am
8 responsible for the Accounting/Audit Section and
9 coordinating Staff's policy positions with Staff
10 Administrator Randy Lobb.
11 Q.Please outline your educational background and
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12 experience.
A.I graduated from Boise State Uni versi ty in
14 1980, with B.B.A. Degrees in Accounting and Finance. I
15 have attended various regulatory, accounting, rate of
16 return, economics, finance, and ratings programs. I am
17 currently the Chair of the National Association of
18 Regulatory Utility Commissioners (NARUC) Staff
19 Subcommittee on Accounting and Finance. I also Co-chair
20 the Task Force on International Financial Reporting
21 Standards. I previously chaired the NARUC Staff
22 Subcommittee on Economics and Finance for more than 3
23 years. Under this subcommittee, I also chaired the Ad
24 Hoc Committee on Diversification. I have been a
25 presenter for the Institute of Public Utilities at
CASE NO. PAC-E-10-0710/14/10 CALOCK, T (Di) 1
STAFF
1 Michigan State Uni versi ty and for many other conferences.
2 Since joining the Commission Staff in May 1980, I have
3 participated in audits, performed financial analysis on
4 various companies, and have presented testimony before
5 this Commission on numerous occasions.
6 Q.What is the purpose of your testimony in this
7 proceeding?
8 A.The purpose of my testimony is to present the
9 Staff's recommendation related to the return on equity
10 and overall cost of capital for PacifiCorp to be used to
11 determine the Staff proposed revenue requirement in this
12 case, PAC-E-10-07. i will address the appropriate
13 capital structure, cost rates and the overall rate of
14 return. I also discuss the Idaho Irrigation Load Control
15 Program.
16 Q.Please summarize your testimony.
17 A.In my testimony I support the Staff
18 recommendation that the Idaho Irrigation Load Control
19 Program be assigned as a power supply cost. I discuss
20 this recommendation in terms of the Revised Protocol
21 Allocation Methodology and the Multi-State Process (MSP).
22 I also present testimony on the capital
23 structure and cost components comprising the overall rate
24 of return. I am recommending a return on common equity
25 (ROE) in the range of 9.5% - 10.5% with a point estimate
CASE NO. PAC-E-10-0710/14/10 CARLOCK, T (Di) 2
STAFF
1 of 10.0%. The Staff recommended 10% ROE compares to the
2 Company-proposed 10.6% ROE. I accept the Company's
3 proposed capital structure and updated the cost rates. I
4 recommend an overall weighted cost of capital in the
5 range of 7.769% - 8.29% with a point estimate of 8.03%
6 to be applied to the rate base for the test year. The
7 Company proposes an 8.357% overall weighted cost of
8 capital.
9 Q.Are you sponsoring any exhibits to accompany
10 your testimony?
11 A.Yes, I am sponsoring Staff Exhibit No. 132
12 consisting of 3 schedules..
13 Idaho Irrigation Load Control Program
14 Q.Staff witness Randy Lobb discusses the Idaho
15 Irrigation Load Control Program and recommends the
16 program costs being treated as power supply costs.
17 First, do you believe this recommendation is supportable
18 under Revised Protocol and through the Multi-State
19 Process using the concepts in the Revised Protocol?
20 A.Yes. The Idaho Irrigation Load Control Program
21 has evolved since inception to the point it now provides
22 PacifiCorp a valuable system resource. With the program
23 changes through 2008, the dispatchable service
24 interruptions under Schedule 72A contracts allow
25 PacifiCorp to reduce loads during peak periods and during
CASE NO. PAC-E-10-0711/24/10 CARLOCK, T (Rev.) 3
STAFF
1 outages at generation plants. These contracts provide
2 system flexibility. The interruptions are large enough
3 (over 200 MW load reduction capability) and are reliable
4 enough to allow PacifiCorp to utilize these interruptions
5 as a resource for planning purposes in the Integrated
6 Resource Plan (IRP). The Idaho Irrigation Load Control
7 Program contracts are more like power purchase agreements
8 or ancillary service contracts and should be classified
9 as such and treated the same for allocation purposes.
10 Q.How is the Idaho Irrigation Load Control
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11 Program currently allocated by PacifiCorp?
A.The Idaho Irrigation Load Control Program is
13 currently identified as a Demand Side Management Program
14 (DSM). All DSM is treated as a State Resource under the
15 Revised Protocol and assigned situs to the state in which
16 the investment is made.
17 PacifiCorp identifies the Idaho Irrigation Load
18 Control Program as Class 1 DSM. Depending on
19 dispatchability, reliability of results, term of load
20 reduction, and persistence over time, PacifiCorp divides
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21 DSM into classes for IRP purposes. The definition for
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Class 1 DSM is def ined as:
Resources from fully dispatchable or
scheduled firm capacity product
offerings/programs - Class 1 programs are
those for which capacity savings occur as a
result of active Company control or advanced
scheduling. Once customers agree to
CASE NO. PAC-E-10-0710/14/10 CARLOCK, T (Di) 4
STAFF
1 participate in a Class 1 DSM program, the
timing and persistence of the load reduction
is involuntary on their part within the
agreed limits and parameters of the program.
In most cases, loads are shifted rather thanavoided.
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5 Q. Please explain why this allocation isn' t
6 acceptable?
7 A. This identification may be adequate for IRP and
8 DSM reporting purposes but it is inadequate for
9 allocation purposes in a state where the state loads are
10 a small percentage of the system operations but the load
11 interruptions are a growing percentage. The program
12 success has outgrown the benefits that can be attributed
13 to Idaho alone. The system operations rather than the
14 state loads are the driver to evaluate cost
15 effectiveness. As a result the system receives a benefit
16 from the program of approximately $20 million as reported
17 in the 2009 DSM Report due to avoidance or delay of
18 generation. Therefore, base rates for all of the
19 Company's customers are lower than they would have been
20 absent the program. The total program costs, including
21 irrigation payments for interruption, are $11.4 million.
22 Idaho customers pay the full out of pocket program cost
23 of $11.4 million. The Idaho benefits are received
24 through the load decrements in the dynamic allocation
25 model. The resulting change in system allocators and the
CASE NO. PAC-E-10-0710/14/10 CARLOCK, T (Di) 5
STAFF
1 allocated costs results in the $7.5 million benefit to
2 Idaho customers. This system resource is provided at a
3 net cost to Idaho customers because costs exceed the
4 benefits by $3.9 million. These costs are recovered
5 entirely from Idaho customers through base rates and the
6 Idaho tariff rider. This simple cost/benefit analysis
7 shows how the costs do not follow the system benefits,
8 creating a mismatch to the detriment of Idaho customers.
9 This mismatch needs to be corrected so this valuable
10 system resource is not lost.
11 Q.What is the next step?
12 A.Although the program has changed and it is
13 identified as Class 1 DSM, the classification of the
14 contracts for allocation purposes has not changed. Based
15 on my participation in all of the MSP Standing Committee
16 and Workgroup discussions, along with my work analyzing
17 the options to ultimately support the Revised Protocol, I
18 believe a classification change would be allowed under
19 Revised Protocol.
20 If PacifiCorp wants assurance it will be allowed the
21 opportunity to recover its costs as a power supply
22 expense, qualifications to the Revised Protocol could be
23 requested through the MSP process. Now is a good time to
24 make the distinctions related to the Idaho Irrigation
25 Load Control Program as part of the MSP and the 2010
CASE NO. PAC-E-10-0710/14/10 CARLOCK, T (Di) 6
STAFF
1 Amendments to the Revised Protocol currently filed before
2 the various state commissions. This filing before the
3 Idaho Commission is Case No. PAC-E-10-09.
4 Q.Is a change in allocation for the Idaho
5 Irrigation Load Control Program a new concept before MSP
6 since it is not currently part of the 2010 Amendments
7 proposed in PAC-E-10-09?
8 A.No. The Idaho Irrigation Load Control Program
9 and allocation methodology have been discussed on
10 numerous occasions within the MSP forum. The discussions
11 revolved around differences between investments in DSM
12 where a capital investment saves energy and instances
13 ,where there are contracts for the purchase of po~er or
i
I14services associated with interruptions.
15
i
The 2010 Amendments to Revised protocol are
16 ibased in part on a concept agreement that is the ¡ basis of
17 the current filing in PAC-E-10-9. The 2010 Amen~ments to
18 Revised Protocol allows for state specific items ito
19 Revised Protocol but the Idaho Irrigation Load CÓntrol
20 Program was not originally anticipated to be one of those
21 specific items.
22 Q.How does the timeline for the ratification of
23 Revised Protocol compare to the timeline for changes in
24 the Idaho Irrigation Load Control Program.
25 A.Revised Protocol was approved by the IQaho
CASE NO. PAC-E-10-0710/14/10 CARLock, T (Di) 7
STAFF
1 Commission on February 28, 2005 in Case No. PAC-E-02-3,
2 Order No. 29708. In addition to Idaho, the Revised
3 Protocol was ratified by Oregon, Utah and Wyoming.
4 As discussed previously, the Idaho Irrigation
5 Load Control Program has evolved. Contract changes in
6 2008 created greater system operational benefits with
7 dispatchable interruptions. Staff witness Lobb shows the
8 increase in contract participants and the annual MWs
9 available for interruptions. Between 2007 and 2009, the
10 annual MWs increased from 78 MW to 276 MW or more than a
11 250% increase.
12 Q.Does this proposed power supply cost treatment
13 for the Idaho Irrigation Load Control Program result in
14 increased risk for the Company?
15 A.Yes and no. It results in some increased
16 recovery and financial risks. However, these increased
17 risks should be short-term risks associated with timing.
18 Q.Are there other allocation issues to address?
19 A.The newly proposed 2010 Allocation Study is
20 presented in Case No. PAC-E-10-09. This 2010 Amendment
21 starting with a rolled-in allocation methodology will
22 reduce the Idaho Allocated costs. That case is a
23 separate proceeding and a timeline for processing has yet
24 to be established. The Company requests that the
25 Commission issue an Order no later than March 31, 2011.
CASE NO. PAC-E-10-0710/14/10 CARLOCK, T (Di) 8
STAFF
1 If PAC-E-10-09 were to be completed before the Commission
2 issued an Order in this case, the reductions could be
3 reflected in prospective 2011 rates.
4 Rate of Return
5 Q.Have you reviewed the testimony and exhibits of
6 PacifiCorp witnesses Hadaway and Williams associated with
7 the return components?
8 A.Yes. Much of the theoretical approach used by
9 PacifiCorp witnesses Hadaway and Williams in their
10 respective testimony and exhibits is generally similar to
11 what I have used. My return on equity analysis is based
12 primarily on the DCF analysis. My judgment in some areas
13 of application results in different outcomes.
14 Q.What capital structure are you recommending be
15 used to calculate the overall rate of return?
16 A.I recommend a capital structure consisting of
17 47.6% debt, 0.3% preferred equity and 52.1% common
18 equity. This is the same capital structure proposed by
19 Company witness Williams. I compared this capital
20 structure to the actual June 30, 2010 capital structure
21 of 47.5% debt, 0.3% preferred equity and 52.2% common
22 equity finding the proposed capital structure to be
23 reasonable. A common equity ratio of 52.1% supports
24 PacifiCorp's bond rating even when debt is imputed for
25 Purchase Power Agreements in the Standard and Poor's
CASE NO. PAC-E-10-0710/14/10 CARLOCK, T (Di) 9
STAFF
1 ratio analysis.
2 Q.Please discuss the general impact on PacifiCorp
3 of being a wholly-owned subsidiary of PPW Holdings, LLC,
4 an entity owned by MidAmerican Holdings Company (MEHC).
5 A.PacifiCorp does not have publicly traded stock
6 as a wholly-owned subsidiary. Therefore, only comparable
7 companies can be utilized when evaluating the required
8 cost of equity for PacifiCorp. PacifiCorp has received
9 cash equity contributions from MEHC, has retained
10 earnings in PacifiCorp and has not paid dividends or made
11 distributions. Overall, I believe the relationship has a
12 positive impact on ratings and PacifiCorp's ability to
13 finance debt at reasonable rates.
14 Q.Did you consider double or triple leveraging of
15 PacifiCorp's common equity since it is wholly-owned and
16 does not raise common equity in the market?
17 A.Yes, I considered double and triple leveraging
18 of PacifiCorp's common equity. Leveraging ultimately
19 reflects additional debt costs in the overall weighted
20 cost of capital. To maintain reasonable cash flow levels
21 and earnings, I do not believe a leveraging adjustment is
22 reasonable.
23 Q.What legal standards have been established for
24 determining a fair and reasonable rate of return?
25 A.The legal test of a fair rate of return for a
CASE NO. PAC-E-10-0710/14/10 CALOCK, T (Di) 10
STAFF
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utility company was established in the Bluefield Water
Works decision of the United States Supreme Court and is
repeated specifically in Hope Na tural Gas.
In Bluefield Water Works and Improvement Co. v.
West Virginia Public Service Commission, 262 U. S. 679,
692, 43 S. Ct. 675 , 67 L. Ed. 1176 ( 1923), the Supreme
Court stated:
A public utility is entitled to such rates as
will permit it to earn 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 part of the country on
investments in other business undertakings
which are attended 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 ventures. The return should
be reasonably sufficient to assure confidence
in the financial soundness of the utility and
should be adequate, under efficient and
economical management, to maintain and
support its credit and enable it to raise the
money necessary for the proper discharge of
its public duties. A rate of return may be
reasonable at one time and become too high or
too low by changes affecting opportunities
for investment, the money market and businessconditions generally.
The Court stated in FPC v. Hope Na tural Gas Company, 320
U . S. 591, 603, 64 S. Ct. 28 1 , 8 8 L. Ed . 333 ( 1944) :
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 thestock.. .. By that standard the return to the equity
owner should be commensurate with returns on
CASE NO. PAC-E-10-0710/14/10 CARLOCK, T (Di) 11
STAFF
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1 investments in other enterprises having
corresponding risks. That return, moreover,
should be sufficient to assure confidence in
the financial integrity of the enterprise, so
as to maintain its credit and to attract
capital. (Citations omitted.)
The Supreme Court decisions in Bluefield Water
6 Works and Hope Natural Gas have been affirmed in In re
Permian Basin Area Rate Case, 390 U. S. 747, 88 S. Ct 1344,
8 20 L.Ed 2d 312 (1968), and Duquesne Light Co. v. Barasch,
9 488 U. S. 299, 109 S. Ct. 609, 102 L. Ed . 2 d . 646 ( 1989) .
The Idaho Supreme Court has also adopted the principles
12 Gas. See In re Mountain States Tel. & Tel. Co. 76 Idaho
established in Bluefield Water Works and Hope Natural
13 474, 284 P.2d 681 (1955); General Telephone Co. v. IPUC,
14 109 Idaho 942, 712 P. 2d 643 1986); Hayden Pines Water
15 Company v. IPUC, 122 Idaho 356, 834 P. 2d 873 (1992).
16 As a result of these United States and Idaho
17 Supreme Court decisions, three standards have evolved for
18 determining a fair and reasonable rate of return:
19 (1) The Financial Integrity or Credit Maintenance
20 Standard; (2) the Capital Attraction Standard; and,
21 (3) The Comparable Earnings Standard. If the Comparable
22 Earnings Standard is met, the Financial Integrity or
23 Credit Maintenance Standard and the Capital Attraction
24 Standard will also be met, as they are an integral part
25 of the Comparable Earnings Standard.
CASE NO. PAC-E-10-0710/14/10 CARLOCK, T (Di) 12
STAFF
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2 recommendation?
Q.Have you considered these standards in your
A.Yes. These criteria have been thoroughly
4 considered in the analysis upon which my recommendations
5 are based. It is also important to recognize that the
6 fair rate of return that allows the utility company to
7 maintain its financial integrity and to attract capital
8 is established assuming efficient and economic
9 management, as specified by the Supreme Court in
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10 Bl uefield Wa ter Works.
Q.Why is the return on equity calculation
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12 important?
A.The return on equity and the overall rate of
14 return provides the method for calculating the return
15 authorized. This return provides the level of
16 compensation to investors for the use of the capital
17 invested in the utility plant and equipment to serve
18 customers. The actual return investors receive is
19 derived from dividends and growth in stock price when the
20 shares are sold. Since the direct required return is not
21 a contractual calculation, the authorized return on
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22 equity serves as the proxy.
Q.What approach have you used to determine the
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24 cost of equity for PacifiCorp?
A.I have primarily evaluated two methods: I
CASE NO. PAC-E-10-07
10/14/10 CARLOCK, T (Di) 13
STAFF
1 utilized the Discounted Cash Flow (DCF) method and also
2 tested its reasonableness with the Comparable Earnings
3 method.
4 Q.Please explain the Comparable Earnings method
5 and how the cost of equity is determined using this
6 approach.
7 A.The Comparable Earnings method for determining
8 the cost of equity is based upon the premise that a given
9 investment should earn its opportunity costs. In
10 competitive markets, if the return earned by a firm is
11 not equal to the return being earned on other investments
12 of similar risk, the flow of funds will be toward those
13 investments earning the higher returns. Therefore, for a
14 utility to be competitive in the financial markets, it
15 should be allowed to earn a return on equity equal to the
16 average return earned by other firms of similar risk.
17 The Comparable Earnings approach is supported by the
18 Bluefield Water Works and Hope Natural Gas decisions as a
19 basis for determining those average returns.
20 Industrial returns tend to fluctuate with
21 business cycles, increasing as the economy improves and
22 decreasing as the economy declines. Utility returns are
23 not as sensitive to fluctuations in the business cycle
24 because the demand for utility services generally tends
25 to be more stable and predictable. However, returns have
CASE NO. PAC-E-10-0710/14/10 CARLOCK, T (Di) 14
STAFF
1 fluctuated since 2000 partially due to the price
2 volatility in the electricity markets. Electricity
3 prices lately have been less volatile so earnings have
4 tended to be more stable.
5 Q.Please evaluate interest rate trends.
6 A.The U. S. prime interest rate has been stable at
7 3.25% since December 16, 2008. The federal funds rate
8 and other rates have been low and fairly flat during
9 2010.
10 Q.Please provide the current index levels for the
11 Dow Jones Industrial Average and the Dow Jones Utility
12 Average.
13 A.The Dow Jones Industrial Average (DJIA) closed
14 at 10,751.27 on October 4, 2010. The DJIA all-time high
15 of 14,164.53 was reached on October 9, 2007. The Dow
16 Jones Utility Average .closed on October 4, 2010 at
17 398.88. The 52-week high was 406.72 for the Dow Jones
18 Utility Average.
19 Q.Please explain the risk differentials between
20 industrials and utilities.
21 A. Risk is a degree of uncertainty relative to ~
22 company. The lower risk level associated with utilities
23 is attributable to many factors even though the
24 difference is not as great as it used to be. Utilities
25 continue to have limited competition for distribution of
CASE NO. PAC-E-10-0710/14/10 CARLOCK, T (Di) 15
STAFF
1 utility services within the certificated area. With
2 limited competition for regulated services, there is less
3 chance of losses related to pricing practices, marketing
4 strategy and advertising policies. The competi ti ve risks
5 for electric utilities have changed with increasing non-
6 utili ty generation, deregulation in some states, open
7 transmission access, and changes in electricity markets.
8 However, demand has declined during the recession.
9 Recently utility demand for some customers has been flat
10 with forecasts of slight growth in usage. Competitive
11 risks continue to be limited for the utility operations
12 in general. The demand for electric utility services is
13 relatively stable and certain compared to that of
14 unregulated firms.
15 For PacifiCorp specifically, competitive risks
16 continue to be average primarily because of the lower-
17 cost source of power and the low retail rates compared to
18 national averages. The risk differential between
19 PacifiCorp and other electric utilities is based on the
20 resource mix and the cost of those resources. All
21 resource mixes have risks specific to resources chosen.
22 Under regulation, utilities are generally
23 allowed to recover through rates, reasonable, prudent and
24 justifiable cost expenditures related to regulated
25 services. PacifiCorp has been authorized an Energy Cost
CASE NO. PAC-E-10-0710/14/10 CARLOCK, T (Di) 16
STAFF
1 Adjustment Mechanism (ECAM) in Idaho. Recovery
2 mechanisms have been approved also in Oregon and Wyoming.
3 A mechanism is being reviewed in Utah. Recovery
4 mechanisms reduce PacifiCorp's recovery risk from the
5 level it was at before the mechanisms were adopted.
6 Compared to other utilities with recovery mechanisms, the
7 risk differential will be minimal but the overall risk
8 has still been reduced for PacifiCorp. Unregulated firms
9 have no such assurance. Utilities in general are
10 sheltered by regulation for reasonable cost recovery
11 risks, even if it isn' t 100%, making the average utility
12 less risky than the average unregulated industrial firm.
13 As everyone is aware, current market trends and
14 earnings levels have dramatically declined. I believe
15 PacifiCorp continues to be in a better position than many
16 utilities to fund its near-term capital requirements with
17 its current debt authority and equity levels. The
18 current credit and investment markets are positive for
19 utility capitalization at reasonable rates. Based on the
20 Value Line industry rank for electric utilities,
21 investors have reevaluated their investment portfolios,
22 ranking utilities higher in probable performance. This
23 indicates utility stocks with the primary operation being
24 the utility will be favored over higher risk operations.
25 Authorized returns by State Commissions for
CASE NO. PAC-E-10-0710/14/10 CARLOCK, T (Di) 17
STAFF
1 electric utilities during the last quarter of 2009 and
2 2010 to date, range from 9.4% in Connecticut to 11.0% in
3 Michigan. Many of the decisions authorized a return on
4 equity between 10% and 10.25%.
5 Earnings comparisons for the Value Line
6 electric utilities with a financial strength of A is
7 around 10.5%. The earnings comparison for the electric
8 utilities in the west, including Idaho utilities, is
9 around 8. 6 % - 9 % .
10 Considering all of these comparisons, I believe
11 the most reasonable return on equity range attributed to
12 PacifiCorp is 9.0% - 10.5% under the Comparable Earnings
13 method.
14 Q.You indicated that the Discounted Cash Flow
15 method is utilized in your analysis. Please explain this
16 method.
17 A.The Discounted Cash Flow (DCF) method is based
18 upon the theory that (1) stocks are bought for the income
19 they provide (i.e., both dividends and/or gains from the
20 sale of the stock), and (2) the market price of stocks
21 equals the discounted value of all future incomes. The
22 discount rate, or cost of equity, equates the present
23 value of the stream of income to the current market price
24 of the stock. The formula to accomplish this goal is:
25
CASE NO. PAC-E-10-0710/14/10 CARLOCK, T (Di) 18
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D D D P
1 2 N N
Po =PV =-------+-------+. . . +------+------
(l+ks)l (l+ks) 2 (l+ks) N (l+ks) N
4 D = Di vidend
Po =Current Price
6
5 ks = Capitalization Rate, Discount Rate, or Required
Rate of Return
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N = Latest Year Considered
The pattern of the future income stream is the
9 key factor that must be estimated in this approach. Some
10 simplifying assumptions for ratemaking purposes can be
11 made without sacrificing the validity of the results.
12 Two such assumptions are:( 1) dividends per share grow
13 at a constant rate in perpetuity and (2) prices track
14 earnings. These assumptions lead to the simplified DCF
15 formula, where the required return is the dividend yield
16 plus the growth rate (g):17 D
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ks = + g
Po
Q.What is your estimate of the current cost of
20 capital for PacifiCorp using the Discounted Cash Flow
21 method?
22 A.The current cost of equity capital for
23 PacifiCorp using the Discounted Cash Flow method is
24 between 8.8% - 9.3%. The range is calculated using the
25 Value Line electric utilities with an A financial
CASE NO. PAC-E-10-0710/14/10 CARLOCK, T (Di) 19
STAFF
1 strength. Due to ongoing capital requirements, the low
2 end of the range is not the most reasonable and
3 representati ve. I recommend the 9.3 % as the point
5
4 estimate using the comparable DCF.
6
Q.How is the growth rate (g) determined?
The growth rate is the factor that requires theA.
7 most extensive analysis in the DCF' method. It is
8 important that the growth rate used in the model be
9 consistent with the dividend yield so that investor
10 expectations are accurately reflected and the growth rate
11 is not too large or too small.
12 I have used the average expected growth rate of
13 4.4%. This expected growth rate was derived from an
14 analysis of various proj ected growth indicators,
15 including growth in earnings per share, growth in cash
16 dividends per share, growth in book value per share and
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1 7 growth in cash flow.
What are the costs related to the capital
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19 structure for debt?
Q.
21 current information. The recommended cost of debt is
A.I updated the cost of debt rate to reflect
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22 5.88% as shown on Staff Exhibit No. 132, Schedule 1.
Q.What are the costs related to the capital
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24 structure for preferred equity?
I updated the cost of preferred equity rate toA.
CASE NO. PAC-E-10-0710/14/10 CALOCK, T (Di) 20
STAFF
1 reflect current information. The recommended cost of
2 preferred equity is 5.42% as shown on Staff Exhibit
3 No. 132, Schedule 2.
4 Q.You indicated the cost of common equity range
5 for PacifiCorp is 9.0% - 10.5% under the Comparable
6 Earnings method and 8. 8 % - 9.3 % under the Discounted
7 Cash Flow method. What is the cost of common equity
8 capi tal you are recommending?
9 A.The fair and reasonable cost of common equity
10 capital I am recommending for PacifiCorp is in the range
11 of 9.5% - 10.5%. Although any point within this range is
12 reasonable, the return on equity granted would not
13 normally be at either extreme of the fair and reasonable
14 range. I utilized a point estimate of 10.0% in
15 calculating the overall rate of return for the revenue
16 requirement.
17 Q.What is the basis for your point estimate being
18 10.0% when your range is 9.5% - 10. 5%?
19 A.My recommended range and 10.0% return on equity
20 point estimate is based on a review of market data and
21 comparables, average risk characteristics for PacifiCorp,
22 operating characteristics, and the capital structure. It
23 also considers the reduced risk of PacifiCorp itself for
24 the implementation of the ECAM and the increased risk for
25 PacifiCorp itself for the recovery risk caused by the
CASE NO. PAC-E-10-0711/24/10 CALOCK, T (Rev.) 21
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1 recommended change in allocation. I considered all Staff
2 adjustments to determine if recovery risk increased. The
3 adjustments moving plant in service to plant held for
4 future use will delay recovery and impact cash flows.
5 Q.What is the overall weighted cost of capital
6 recommended for PacifiCorp?
7 A.My recommended overall weighted cost of capital
8 is in the range of 7.769% - 8.29%. For use in
9 calculating the revenue requirement, a point estimate
10 consisting of a return on equity of 10.0% and a resulting
11 overall rate of return of 8.03% was utilized as shown on
12 Staff Exhibit No. 132, Schedule 3.
13 Q.Many customer comments indicate the return
14 earned by the Company should not be much higher than
15 deposit rates they are able to obtain. Please explain
16 how that view fits with your return on equity
17 recommendation of 10%?
18 A.Any comparison must be based on risk
19 assessment. The assessment also includes the cash volume
20 available to invest and the length of time you are
21 willing to tie up the cash in the investment. For
22 instance, individuals are able to invest in different
23 financial institutions at different interest rates. The
24 basic savings account will typically have the lowest
25 interest rate offered. As the volume of cash and the
CASE NO. PAC-E-10-0711/24/10 CARLOCK, T (Rev.) 22
STAFF
1 length of time available for the cash to be held at the
2 insti tution increase, the higher the interest rate that
3 will be available. As you add additional risk, the
4 safety and ability to get your money back goes down and
5 the return required goes up. Utilities require
6 significant levels of cash to invest in the
8
7 infrastructure to assure customers receive electric
9
10
11
12
13
service with a safe and reliable system.Even when the
economy is slow,a base level of investment is still
required.The required return on equity for a utility
will vary but will not swing like earnings for
competi ti ve companies,including \ Mom and Pop'stores.
Q.Does this conclude your direct testimony in
15
14 this proceeding?
16
17
18
19
20
21
22
23
24
25
A.Yes, it does.
CASE NO. PAC-E-10-0710/14/10 CARLOCK, T (Di) 23
STAFF
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Revised Exhibit No. 132
Case No. PAC-E-lO-07
Carlock, T., Staff
11/24110 Schedule 3
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 14TH DAY OF OCTOBER 2010,
SERVED THE FOREGOING DIRECT TESTIMONY OF TERR CARLOCK, IN
CASE NO. PAC-E-IO-07, BY MAILING A COPY THEREOF, POSTAGE PREPAID, TO
THE FOLLOWING:
TED WESTON
ID REGULATORY AFFAIRS MANAGER
ROCKY MOUNTAIN POWER
201 S MAIN ST STE 2300
SALT LAKE CITY UT 84111
(FED EX)
E-MAIL: ted.weston(ipacificorp.com
E-MAIL: ONLY
MARK C MOENCH
DANIEL E SOLANDER
ROCKY MOUNTAIN POWER
E-MAIL: mark.moench(ipacificorp.com
daniel. solander(ipacificorp.com
RANDALL C BUDGE
RACINE OLSON NYE ET AL
PO BOX 1391
POCATELLO ID 83204-1391
(FED EX)
E-MAIL: rcb(iracinelaw.net
E-MAIL: ONLY
JAMES R SMITH
MONSANTO COMPANY
E-MAIL: jim.r.smith(imonsanto.com
ANTHONY Y ANKEL
29814 LAKE ROAD
BAY VILLAGE OH 44140
(FED EX)
E-MAIL: tony(iyanke1.net
PAUL J HICKEY
HICKEY & EVANS LLP
1800 CAREY AVE., SUITE 700
PO BOX 467
CHEYENNE WY 82003
(FED EX)
E-MAIL: phickey(ihickeyevans.com
E-MAIL: ONLY
KATIE IVERSON
BRUBAKER & ASSOCIATES
E-MAIL: kiverson(iconsultbai.com
ERIC L OLSEN
RACINE OLSON NYE ET AL
PO BOX 1391
POCATELLO ID 83204-1391
(FED EX)
E-MAIL: elo(iracinelaw.net
CERTIFICATE OF SERVICE
TIM BULLER
JASON HARRS
AGRIUMINC
3010 CONDA RD
SODA SPRINGS ID 83276
(FED EX)
E-MAIL: tbuller(iagrium.com
j aharis(iagrium.com
BENJAMIN J OTTO
IDAHO CONSERVATION LEAGUE
710 N 6TH STREET
POBOX 844
BOISE ID 83702
(HAND CARRIED)
E-MAIL: botto(iidahoconservation.org
E-MAIL: ONLY
DR. DON READING
E-MAIL: dreading(imindspring.com
MELINDA J DAVISON
DAVISON VAN CLEVE, P.C.
333 SW TAYLOR, SUITE 400
PORTLAND, OR 97204
(FED EX)
E-MAIL: mjd(idvclaw.com
RONALD L WILLIAMS
WILLIAMS BRADBURY, P.C.
1015 W HAYS STREET
BOISE ID 83702
(HAND CARRIED)
E-MAIL: ron(iwiliamsbradbury.com
BRAD M PURDY
ATTORNEY AT LAW
2019 N 17TH STREET
BOISE ID 83702
(HAND CARRIED)
E-MAIL: bmpurdy(ihotmai1.com
~~.\(cd
SECRETARY
CERTIFICATE OF SERVICE