20170609McKenzie Exhibit 3.pdf

DAVID J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY & GOVERNMENTAL AFFAIRS
AVISTA CORPORATION
P.O. BOX 3727
1411 EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220-3727
TELEPHONE: [phone]
FACSIMILE: [phone]
[e-mail]

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION ) CASE NO. AVU-E-17-01
OF AVISTA CORPORATION FOR THE ) CASE NO. AVU-G-17-01
AUTHORITY TO INCREASE ITS RATES )
AND CHARGES FOR ELECTRIC AND )
NATURAL GAS SERVICE TO ELECTRIC ) EXHIBIT NO. 3
AND NATURAL GAS CUSTOMERS IN THE )
STATE OF IDAHO ) ADRIEN M. MCKENZIE
)

FOR AVISTA CORPORATION

(ELECTRIC AND NATURAL GAS)

1
EXHIBIT NO. 3, SCHEDULE 1
QUALIFICATIONS OF ADRIEN M. MCKENZIE
Q.PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A.My name is Adrien M. McKenzie. My business address is 3907 Red River St., Austin,
Texas 78751.
Q.PLEASE STATE YOUR OCCUPATION.
A.I am President of FINCAP, In., a firm engaged primarily in financial, economic, and
policy consulting in the field of public utility regulation.
Q.PLEASE DESCRIBE YOUR QUALIFICATIONS AND EXPERIENCE.
A.I received B.A. and M.B.A. degrees with a major in finance from The University of Texas
at Austin, and hold the Chartered Financial Analyst (CFA®) designation. Since joining
FINCAP in 1984, I have participated in consulting assignments involving a broad range
of economic and financial issues, including cost of capital, cost of service, rate design,
economic damages, and business valuation. I have extensive experience in economic and
financial analysis for regulated industries, and in preparing and supporting expert witness
testimony before courts, regulatory agencies, and legislative committees throughout the
U.S. and Canada. I have personally sponsored direct and rebuttal testimony in
approximately seventy-five proceedings filed with the Federal Energy Regulatory
Commission (“FERC”), the Regulatory Commission of Alaska, the Colorado Public
Utilities Commission, the Hawaii Public Utilities Commission, the Idaho Public Utilities
Commission, the Indiana Utility Regulatory Commission, the Iowa Utilities Board, the
Kansas State Corporation Commission, the Kentucky Public Service Commission, the
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 1, Page 1 of 5
2
Maryland Public Service Commission, the Montana Public Service Commission, the
Nebraska Public Service Commission, the Ohio Public Utilities Commission, the Oregon
Public Utilities Commission, the South Dakota Public Utilities Commission, the Virginia
State Corporation Commission, the Washington Utilities and Transportation Commission,
the West Virginia Public Service Commission, and the Wyoming Public Service
Commission.1 My testimony addressed the establishment of risk -comparable proxy
groups, the application of alternative quantitative methods, and the consideration of
regulatory standards and policy objectives in establishing a fair rate of return on equity
for regulated electric, gas, and water utility operations. In connection with these
assignments, my responsibilities have included critically evaluating the positions of other
parties and preparation of rebuttal testimony, representing clients in settlement
negotiations and hearings, and assisting in the preparation of legal briefs.
FINCAP was formed in 1979 as an economic and financial consulting firm
serving clients in both the regulated and competitive sectors. FINCAP conducts
assignments ranging from broad qualitative analyses and policy consulting to technical
analyses and research. The firm’s experience is in the areas of public utilities, valuation
of closely-held businesses, and economic evaluations (e.g., damage and cost/benefit
analyses). Prior to joining FINCAP, I was employed by an oil and gas firm and was
responsible for operations and accounting. I am a member of the CFA Institute and the
CFA Society of Austin. A resume containing the details of my qualifications and
experience is attached below.

1 Over the course of my career, I have prepared prefiled direct and rebuttal testimony in over 250
regulatory proceedings before FERC, the Canadian Radio-Television and Telecommunications
Commission, and regulatory agencies in over 30 states. This testimony was sponsored by Dr. William
Avera, who was formerly President of FINCAP, Inc.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 1, Page 2 of 5
3

ADRIEN M. McKENZIE

FINCAP, INC. 3907 Red River
Financial Concepts and Applications Austin, Texas 78751
Economic and Financial Counsel (512) 458–4644
FAX [phone]
[e-mail]

Summary of Qualifications Adrien McKenzie has an MBA in finance from the University of Texas at Austin and holds the
Chartered Financial Analyst (CFA®) designation. He has over 25 years of experience in economic
and financial analysis for regulated industries, and in preparing and supporting expert witness
testimony before courts, regulatory agencies, and legislative committees throughout the U.S. and
Canada. Assignments have included a broad range of economic and financial issues, including cost
of capital, cost of service, rate design, economic damages, and business valuation.

Employment President
FINCAP, Inc.
(June 1984 to June 1987)
(April 1988 to present)
Economic consulting firm specializing in regulated
industries and valuation of closely-held businesses.
Assignments have involved electric, gas,
telecommunication, and water/sewer utilities, with
clients including utilities, consumer groups,
municipalities, regulatory agencies, and cogenerators.
Areas of participation have included rate of return,
revenue requirements, rate design, tariff analysis,
avoided cost, forecasting, and negotiations. Develop
cost of capital analyses using alternative market models
for electric, gas, and telephone utilities. Prepare pre-
filed direct and rebuttal testimony, participate in
settlement negotiations, respond to interrogatories,
evaluate opposition testimony, and assist in the areas of
cross-examination and the preparations of legal briefs.
Other assignments have involved preparation of
technical reports, valuations, estimation of damages,
industry studies, and various economic analyses in
support of litigation. Manager,
McKenzie Energy Company
(Jan. 1981 to May. 1984)
Responsible for operations and accounting for firm
engaged in the management of working interests in oil
and gas properties.

Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 1, Page 3 of 5
4
Education
M.B.A., Finance
.
The Impact of Construction
Expenditures on Investor-Owned Electric Utilities
B.B.A., Finance,
University of Texas at Austin
(Jan. 1981 to May 1982)

Electives included capital market theory, portfolio
management, and international economics and finance.
Elected to Beta Gamma Sigma business honor society.
Dean's List 1981-1982.
Simon Fraser University,
Vancouver, Canada and University
of Hawaii at Manoa, Honolulu,
Hawaii
(Jan. 1979 to Dec 1980)

Coursework in accounting, finance, economics, and
liberal arts.

Professional Associations
Received Chartered Financial Analyst (CFA®) designation in 1990.
Member – CFA Institute.

Bibliography “A Profile of State Regulatory Commissions,” A Special Report by the Electricity Consumers
Resource Council (ELCON), Summer 1991.
“The Impact of Regulatory Climate on Utility Capital Costs: An Alternative Test,” with Bruce H.
Fairchild, Public Utilities Fortnightly (May 25, 1989).

Presentations
“ROE at FERC: Issues and Methods,” Expert Briefing on Parallels in ROE Issues between AER,
ERA, and FERC, Jones Day (Sydney, Melbourne, and Perth, Australia) (April 15, 2014).
Cost of Capital Working Group eforum, Edison Electric Institute (April 24, 2012).
“Cost-of-Service Studies and Rate Design,” General Management of Electric Utilities (A Training
Program for Electric Utility Managers from Developing Countries), Austin, Texas (October
1989 and November 1990 and 1991).

Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 1, Page 4 of 5
5

Representative Assignments Mr. McKenzie has prepared and supported prefiled testimony submitted in over 250 regulatory
proceedings. In addition to filings before regulators in over thirty state jurisdictions, Mr.
McKenzie has considerable expertise in preparing expert analyses and testimony before the
Federal Energy Regulatory Commission (“FERC”) on the issue of rate of return on equity
(“ROE”), and has broad experience in applying and evaluating the results of quantitative
methods to estimate a fair ROE, including discounted cash flow approaches, the Capital Asset
Pricing Model, risk premium methods, and other quantitative benchmarks. Other representative
assignments have included the application of econometric models to analyze the impact of anti-
competitive behavior and estimate lost profits; development of explanatory models for nuclear
plant capital costs in connection with prudency reviews; and the analysis of avoided cost pricing
for cogenerated power.

Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 1, Page 5 of 5
Schedule 2
Page 1 of 50
I. DESCRIPTION OF QUANTITATIVE ANALYSES
Q.What is the purpose of this schedule?1
A.Exhibit No. 3, Schedule 2 presents capital market
estimates of the cost of equity for the jurisdictional
electric and natural gas utility operations of Avista Corp.
(“Avista” or “the Company”). First, I will briefly summarize
the concept of the cost of equity, along with the risk-return
tradeoff principle fundamental to capital markets. Next, I
describe my applications of the Discounted Cash Flow (“DCF”),
the Capital Asset Pricing Model (“CAPM”), the empirical form
of the CAPM (“ECAPM”), a risk premium analyses based on
allowed returns for electric utilities, and reference to
expected rates of return for electric utilities. This
exhibit also presents a market-based test to my utility
quantitative analyses by applying the DCF model to a group of
low risk non-utility firms.
A. Overview
Q.What fundamental economic principle underlies any16
evaluation of investors’ required return on equity (“ROE”)? 17
A.The fundamental economic principle underlying the
cost of equity concept is the notion that investors are risk
averse. In capital markets where relatively risk-free assets
are available (e.g., U.S. Treasury securities), investors can
be induced to hold riskier assets only if they are offered a
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 1 of 50
Schedule 2
Page 2 of 50

premium, or additional return, above the rate of return on a
risk-free asset. Since all assets compete with each other
for investor funds, riskier assets must yield a higher
expected rate of return than safer assets to induce investors
to hold them.
Given this risk-return tradeoff, the required rate of
return (k) from an asset (i) can be generally expressed as:
ki = Rf +RPi 8
where: Rf = Risk-free rate of return, and
RPi = Risk premium required to hold
riskier asset i.
Thus, the required rate of return for a particular asset at
any point in time is a function of: 1) the yield on risk-free
assets, and 2) its relative risk, with investors demanding
correspondingly larger risk premiums for assets bearing
greater risk.
Q. Is there evidence that the risk-return tradeoff 17
principle actually operates in the capital markets? 18
A. Yes. The risk-return tradeoff can be readily
documented in segments of the capital markets where required
rates of return can be directly inferred from market data and
where generally accepted measures of risk exist. Bond
yields, for example, reflect investors’ expected rates of 23
return, and bond ratings measure the risk of individual bond
issues. Comparing the observed yields on government
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 2 of 50
Schedule 2
Page 3 of 50

securities, which are considered free of default risk, to the
yields on bonds of various rating categories demonstrates
that the risk-return tradeoff does, in fact, exist.
Q. Does the risk-return tradeoff observed with fixed 4
income securities extend to common stocks and other assets? 5
A. It is widely accepted that the risk-return tradeoff
evidenced with long-term debt extends to all assets.
Documenting the risk-return tradeoff for assets other than
fixed income securities, however, is complicated by two
factors. First, there is no standard measure of risk
applicable to all assets. Second, for most assets –
including common stock – required rates of return cannot be
directly observed. Yet there is every reason to believe that
investors exhibit risk aversion in deciding whether or not to
hold common stocks and other assets, just as when choosing
among fixed-income securities.
Q. Is this risk-return tradeoff limited to differences 17
between firms? 18
A. No. The risk-return tradeoff principle applies not
only to investments in different firms, but also to different
securities issued by the same firm. The securities issued by
a utility vary considerably in risk because they have
different characteristics and priorities. As noted earlier,
long-term debt is senior among all capital in its claim on a
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 3 of 50
Schedule 2
Page 4 of 50

utility’s net revenues and is, therefore, the least risky. 1
The last investors in line are common shareholders. They
receive only the net revenues, if any, remaining after all
other claimants have been paid. As a result, the rate of
return that investors require from a utility’s common stock, 5
the most junior and riskiest of its securities, must be
considerably higher than the yield offered by the utility’s 7
senior, long-term debt.
Q. What does the above discussion imply with respect 9
to estimating the cost of common equity for a utility? 10
A. Although the cost of common equity cannot be
observed directly, it is a function of the returns available
from other investment alternatives and the risks to which the
equity capital is exposed. Because it is unobservable, the
cost of equity for a particular utility must be estimated by
analyzing information about capital market conditions
generally, assessing the relative risks of the company
specifically, and employing various quantitative methods that
focus on investors’ current required rates of return. These 19
various quantitative methods typically attempt to infer
investors’ required rates of return from stock prices, 21
interest rates, or other capital market data.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 4 of 50
Schedule 2
Page 5 of 50

B. Comparable Risk Proxy Group
Q. How did you implement quantitative methods to 1
estimate the cost of common equity for Avista? 2
A. Application of quantitative methods to estimate the
cost of equity requires observable capital market data, such
as stock prices. Moreover, even for a firm with publicly
traded stock, the cost of equity can only be estimated. As a
result, applying quantitative models using observable market
data produces an estimate that inherently includes some
degree of observation error. Thus, the accepted approach to
increase confidence in the results is to apply multiple
quantitative methods such as the DCF and CAPM to a proxy
group of publicly traded utility companies that investors
regard as risk-comparable.
Q. What specific proxy group of utilities did you rely 14
on for your analyses? 15
A. In order to reflect the risks and prospects
associated with Avista’s jurisdictional utility operations,
my DCF analyses focused on a reference group of other
utilities composed of those companies included by The Value
Line Investment Survey (“Value Line”) in its Electric 20
Utilities Industry groups with:
1. Corporate credit ratings from Standard & Poor’s 22
Corporation (“S&P”) and Moody’s Investors Service
(“Moody’s”) corresponding to one notch above and
below the Company’s current ratings. For S&P, this 25
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 5 of 50
Schedule 2
Page 6 of 50

resulted in a ratings range of BBB-, BBB, and BBB+;
for Moody’s the range was Baa2, Baa1, or A3.
2. Value Line Safety Rank of “2” or “3”.
3. No ongoing involvement in a major merger or
acquisition.
4. No cuts in dividend payments during the past six
months and no announcement of a dividend cut since
that time.
These criteria resulted in a proxy group composed of 18
companies, which I refer to as the “Utility Group.”
Q. How did you evaluate the risks of the Utility Group 11
relative to Avista? 12
A. My evaluation of relative risk considered four
objective, published benchmarks that are widely relied on in
the investment community. Credit ratings are assigned by
independent rating agencies for the purpose of providing
investors with a broad assessment of the creditworthiness of
a firm. Ratings generally extend from triple-A (the highest)
to D (in default). Other symbols (e.g., "BBB+") are used to
show relative standing within a category. Because the rating
agencies’ evaluation includes virtually all of the factors 21
normally considered important in assessing a firm’s relative
credit standing, corporate credit ratings provide a broad,
objective measure of overall investment risk that is readily
available to investors. Although the credit rating agencies
are not immune to criticism, their rankings and analyses are
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 6 of 50
Schedule 2
Page 7 of 50

widely cited in the investment community and referenced by
investors. Investment restrictions tied to credit ratings
continue to influence capital flows, and credit ratings are
also frequently used as a primary risk indicator in
establishing proxy groups to estimate the cost of common
equity.
While credit ratings provide the most widely referenced
benchmark for investment risks, other quality rankings
published by investment advisory services also provide
relative assessments of risks that are considered by
investors in forming their expectations for common stocks.
Value Line’s primary risk indicator is its Safety Rank, which 12
ranges from “1” (Safest) to “5” (Riskiest). This overall 13
risk measure is intended to capture the total risk of a
stock, and incorporates elements of stock price stability and
financial strength. Given that Value Line is perhaps the
most widely available source of investment advisory
information, its Safety Rank provides useful guidance
regarding the risk perceptions of investors.
The Financial Strength Rating is designed as a guide to
overall financial strength and creditworthiness, with the key
inputs including financial leverage, business volatility
measures, and company size. Value Line’s Financial Strength 23
Ratings range from “A++” (strongest) down to “C” (weakest) in 24
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 7 of 50
Schedule 2
Page 8 of 50

nine steps. Finally, Value Line’s beta measures a utility’s 1
stock price volatility relative to the market as a whole. A
stock that tends to respond less to market movements has a
beta less than 1.00, while stocks that tend to move more than
the market have betas greater than 1.00. Beta is the only
relevant measure of investment risk under modern capital
market theory, and is widely cited in academics and in the
investment industry as a guide to investors’ risk 8
perceptions. Moreover, in my experience Value Line is the
most widely referenced source for beta in regulatory
proceedings. As noted in New Regulatory Finance:
Value Line is the largest and most widely
circulated independent investment advisory service,
and influences the expectations of a large number
of institutional and individual investors. . . .
Value Line betas are computed on a theoretically
sound basis using a broadly based market index, and
they are adjusted for the regression tendency of
betas to converge to 1.00.1
Q. How do the overall risks of your proxy group 20
compare with Avista? 21
A. Table 1 compares the Utility Group with Avista
across four key indicators of investment risk:

1 Roger A. Morin,“New Regulatory Finance,” Public Utilities Reports (2006)
at 71.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 8 of 50
Schedule 2
Page 9 of 50

TABLE 1 1
COMPARISON OF RISK INDICATORS 2

Q. What does this comparison indicate regarding 3
investors’ assessment of the relative risk associated with 4
your Utility Group? 5
A. As shown above, the BBB and Baa1 credit ratings
corresponding to Avista are identical to the average credit
ratings for the Utility Group. Similarly, the average Value
Line Safety Rank for the Utility Group is the same as that
assigned to the Company. With respect to Value Line’s 10
Financial Strength and beta, the average values for the
Utility Group indicate slightly more risk than for Avista.
Considered together, this comparison of objective measures,
which consider a broad spectrum of risks, including financial
and business position, and exposure to firm-specific factors,
indicates that investors would likely conclude that the
overall investment risks for Avista are generally comparable
to those of the firms in the Utility Group.
Safety Financial
S&P Moody's Rank Strength Beta
Utility Group BBB Baa1 2 B++ 0.71
Avista BBB Baa1 2 A 0.70
Credit Rating
Value Line
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 9 of 50
Schedule 2
Page 10 of 50

C. Discounted Cash Flow Analyses
Q. How are DCF models used to estimate the cost of 1
equity? 2
A. DCF models attempt to replicate the market
valuation process that sets the price investors are willing
to pay for a share of a company’s stock. The model rests on 5
the assumption that investors evaluate the risks and expected
rates of return from all securities in the capital markets.
Given these expectations, the price of each stock is adjusted
by the market until investors are adequately compensated for
the risks they bear. Therefore, we can look to the market to
determine what investors believe a share of common stock is
worth. By estimating the cash flows investors expect to
receive from the stock in the way of future dividends and
capital gains, we can calculate their required rate of
return. That is, the cost of equity is the discount rate
that equates the current price of a share of stock with the
present value of all expected cash flows from the stock. The
formula for the general form of the DCF model is as follows:

where: P0 = Current price per share;
Pt = Expected future price per share in period
t;
Dt = Expected dividend per share in period t;
ke = Cost of common equity.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 10 of 50
Schedule 2
Page 11 of 50

Q. What form of the DCF model is customarily used to 1
estimate the cost of equity in rate cases? 2
A. Rather than developing annual estimates of cash
flows into perpetuity, the DCF model can be simplified to a
“constant growth” form:

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

The cost of equity (Ke) can be isolated by rearranging terms:

This constant growth form of the DCF model recognizes that
the rate of return to stockholders consists of two parts: 1)
dividend yield (D1/P0), and 2) growth (g). In other words,
investors expect to receive a portion of their total return
in the form of current dividends and the remainder through
price appreciation.

2 The constant growth DCF model is dependent on a number of assumptions,
which in practice are never strictly met. These include a constant growth
rate for both dividends and earnings; a stable dividend payout ratio; the
discount rate exceeds the growth rate; a constant growth rate for book
value and price; a constant earned rate of return on book value; no sales
of stock at a price above or below book value; a constant price-earnings
ratio; a constant discount rate (i.e., no changes in risk or interest rate
levels and a flat yield curve); and all of the above extend to infinity.
gk
DP
e 10
gP
Dke 
0
1
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 11 of 50
Schedule 2
Page 12 of 50

Q. What steps are required to apply the DCF model? 1
A. The first step in implementing the constant growth
DCF model is to determine the expected dividend yield (D1/P0)
for the firm in question. This is usually calculated based
on an estimate of dividends to be paid in the coming year
divided by the current price of the stock. The second step
is to estimate investors' long-term growth expectations (g)
for the firm. The final step is to sum the firm's dividend
yield and estimated growth rate to arrive at an estimate of
its cost of equity.
Q. How was the dividend yield for the Utility Group 11
determined? 12
A. Estimates of dividends to be paid by each of these
utilities over the next twelve months, obtained from Value
Line, served as D1. This annual dividend was then divided by
a 30-day average stock price for each utility to arrive at
the expected dividend yield. The expected dividends, stock
prices, and resulting dividend yields for the firms in the
Utility Group are presented on page 1 of Exhibit No. 3,
Schedule 5.
Q. What is the next step in applying the constant 21
growth DCF model? 22
A. The next step is to evaluate long-term growth
expectations, or “g”, for the firm in question. In constant 24
growth DCF theory, earnings, dividends, book value, and
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 12 of 50
Schedule 2
Page 13 of 50

market price are all assumed to grow in lockstep, and the
growth horizon of the DCF model is infinite. But
implementation of the DCF model is more than just a
theoretical exercise; it is an attempt to replicate the
mechanism investors used to arrive at observable stock
prices. A wide variety of techniques can be used to derive
growth rates, but the only “g” that matters in applying the 7
DCF model is the value that investors expect.
Q. What are investors most likely to consider in 9
developing their long-term growth expectations? 10
A. Implementation of the DCF model is solely concerned
with replicating the forward-looking evaluation of real-world
investors. In the case of utilities, dividend growth rates
are not likely to provide a meaningful guide to investors’ 14
current growth expectations. This is because utilities have
significantly altered their dividend policies in response to
more accentuated business risks in the industry, with the
payout ratios falling significantly from historical levels.
As a result, dividend growth in the utility industry has
lagged growth in earnings as utilities conserve financial
resources to provide a hedge against heightened
uncertainties.
A measure that plays a pivotal role in determining
investors’ long-term growth expectations are future trends in
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 13 of 50
Schedule 2
Page 14 of 50

earnings per share (“EPS”), which provide the source for 1
future dividends and ultimately support share prices. The
importance of earnings in evaluating investors’ expectations 3
and requirements is well accepted in the investment
community, and surveys of analytical techniques relied on by
professional analysts indicate that growth in earnings is far
more influential than trends in dividends per share (“DPS”).
The availability of projected EPS growth rates also is
key to investors relying on this measure as compared to
future trends in DPS. Apart from Value Line, investment
advisory services do not generally publish comprehensive DPS
growth projections, and this scarcity of dividend growth
rates relative to the abundance of earnings forecasts attests
to their relative influence. The fact that securities
analysts focus on EPS growth, and that DPS growth rates are
not routinely published, indicates that projected EPS growth
rates are likely to provide a superior indicator of the
future long-term growth expected by investors.
Q. Do the growth rate projections of security analysts 19
consider historical trends? 20
A. Yes. Professional security analysts study
historical trends extensively in developing their projections
of future earnings. Hence, to the extent there is any useful
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 14 of 50
Schedule 2
Page 15 of 50

information in historical patterns, that information is
incorporated into analysts’ growth forecasts.
Q. Did Professor Myron J. Gordon, who originated the 3
DCF approach, recognize the pivotal role that earnings play 4
in forming investors’ expectations? 5
A. Yes. Dr. Gordon specifically recognized that “it 6
is the growth that investors expect that should be used” in 7
applying the DCF model and he concluded:
A number of considerations suggest that investors
may, in fact, use earnings growth as a measure of
expected future growth.”3
Q. Are analysts’ assessments of growth rates 12
appropriate for estimating investors’ required return using 13
the DCF model? 14
A. Yes. In applying the DCF model to estimate the
cost of common equity, the only relevant growth rate is the
forward-looking expectations of investors that are captured
in current stock prices. Investors, just like securities
analysts and others in the investment community, do not know
how the future will actually turn out. They can only make
investment decisions based on their best estimate of what the
future holds in the way of long-term growth for a particular
stock, and securities prices are constantly adjusting to
reflect their assessment of available information.

3 Myron J. Gordon,“The Cost of Capital to a Public Utility,” MSU Public
Utilities Studies at 89 (1974).
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 15 of 50
Schedule 2
Page 16 of 50

Any claims that analysts’ estimates are not relied upon 1
by investors are illogical given the reality of a competitive
market for investment advice. The market for investment
advice is intensely competitive, and securities analysts are
personally and professionally motivated to provide the most
accurate assessment possible of future growth trends. If
financial analysts’ forecasts do not add value to investors’ 7
decision making, then it is irrational for investors to pay
for these estimates. Those financial analysts who fail to
provide reliable forecasts will lose out in competitive
markets relative to those analysts whose forecasts investors
find more credible. The reality that analyst estimates are
routinely referenced in the financial media and in investment
advisory publications (e.g., Value Line) implies that
investors use them as a basis for their expectations.
While the projections of securities analysts may be
proven optimistic or pessimistic in hindsight, this is
irrelevant in assessing the expected growth that investors
have incorporated into current stock prices, and any bias in
analysts’ forecasts – whether pessimistic or optimistic – is
irrelevant if investors share analysts’ views. Earnings 21
growth projections of security analysts provide the most
frequently referenced guide to investors’ views and are 23
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 16 of 50
Schedule 2
Page 17 of 50

widely accepted in applying the DCF model. As explained in
New Regulatory Finance:
Because of the dominance of institutional investors
and their influence on individual investors,
analysts’ forecasts of long-run growth rates
provide a sound basis for estimating required
returns. Financial analysts exert a strong
influence on the expectations of many investors who
do not possess the resources to make their own
forecasts, that is, they are a cause of g [growth].
The accuracy of these forecasts in the sense of
whether they turn out to be correct is not an issue
here, as long as they reflect widely held
expectations.4
Q. Have regulators also recognized that analysts’ 15
growth rate estimates are an important and meaningful guide 16
to investors’ expectations? 17
A. Yes. The Kentucky Public Service Commission has
indicated its preference for relying on analysts’ projections 19
in establishing investors’ expectations:
KU’s argument concerning the appropriateness of 21
using investors’ expectations in performing a DCF 22
analysis is more persuasive than the AG’s argument 23
that analysts’ projections should be rejected in
favor of historical results. The Commission agrees
that analysts’ projections of growth will be 26
relatively more compelling in forming investors’ 27
forward-looking expectations than relying on
historical performance, especially given the
current state of the economy.5
Similarly, the Federal Energy Regulatory Commission (“FERC”)
has expressed a clear preference for projected EPS growth

4 Roger A. Morin,“New Regulatory Finance,” Public Utilities Reports, Inc.
(2006) at 298 (emphasis added).
5 Kentucky Utilities Co., Case No. 2009-00548 (Ky PSC Jul. 30, 2010) at
30-31.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 17 of 50
Schedule 2
Page 18 of 50

rates in applying the DCF model to estimate the cost of
equity for both electric and natural gas pipeline utilities:
Opinion No. 414-A held that the IBES five-year
growth forecasts for each company in the proxy
group are the best available evidence of the short-
term growth rates expected by the investment
community. It cited evidence that (1) those
forecasts are provided to IBES by professional
security analysts, (2) IBES reports the forecast
for each firm as a service to investors, and (3)
the IBES reports are well known in the investment
community and used by investors. The Commission has
also rejected the suggestion that the IBES analysts
are biased and stated that “in fact the analysts 14
have a significant incentive to make their analyses
as accurate as possible to meet the needs of their
clients since those investors will not utilize
brokerage firms whose analysts repeatedly overstate
the growth potential of companies.”6
The Public Utility Regulatory Authority of Connecticut has
also noted that “there is not growth in DPS without growth in 21
EPS,” and concluded that securities analysts’ growth 22
projections have a greater influence over investors’ 23
expectations and stock prices.7
Q. What are security analysts currently projecting in 25
the way of growth for the firms in the Utility Proxy Group? 26
A. The projected EPS growth rates for each of the
firms in the Utility Group reported by Value Line, IBES,8

6 Kern River Gas Transmission Co., 126 FERC ¶ 61,034at P 121 (2009)
(footnote omitted).
7 Decision, Docket No. 13-02-20 (Sept. 24, 2013).
8 Formerly I/B/E/S International, Inc., IBES growth rates are now compiled
and published by Thomson Reuters.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 18 of 50
Schedule 2
Page 19 of 50

Zacks Investment Research (“Zacks”), and S&P Capital IQ are
displayed on page 2 of Exhibit No. 3, Schedule 5.
Q. How else are investors’ expectations of future 3
long-term growth prospects often estimated for use in the 4
constant growth DCF model? 5
A. In constant growth theory, growth in book equity
will be equal to the product of the earnings retention ratio
(one minus the dividend payout ratio) and the earned rate of
return on book equity. Furthermore, if the earned rate of
return and the payout ratio are constant over time, growth in
earnings and dividends will be equal to growth in book value.
Despite the fact that these conditions are seldom, if ever,
met in practice, this “sustainable growth” approach may 13
provide a rough guide for evaluating a firm’s growth 14
prospects and is frequently proposed in regulatory
proceedings.
The sustainable growth rate is calculated by the
formula, g = br+sv, where “b” is the expected retention 18
ratio, “r” is the expected earned return on equity, “s” is 19
the percent of common equity expected to be issued annually
as new common stock, and “v” is the equity accretion rate. 21
Under DCF theory, the “sv” factor is a component of the 22
growth rate designed to capture the impact of issuing new
common stock at a price above, or below, book value. The
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 19 of 50
Schedule 2
Page 20 of 50

sustainable, “br+sv” growth rates for each firm in the 1
Utility Group are summarized on page 2 of Exhibit No. 3,
Schedule 5, with the underlying details being presented on
Exhibit No. 3, Schedule 6.9
Q. Are there significant shortcomings associated with 5
the “br+sv” growth rate? 6
A. Yes. First, in order to calculate the sustainable
growth rate, it is necessary to develop estimates of
investors’ expectations for four separate variables; namely, 9
“b”, “r”, “s”, and “v.” Given the inherent difficulty in 10
forecasting each parameter and the difficulty of estimating
the expectations of investors, the potential for measurement
error is significantly increased when using four variables,
as opposed to referencing a direct projection for EPS growth.
Second, empirical research in the finance literature
indicates that sustainable growth rates are not as
significantly correlated to measures of value, such as share
prices, as are analysts’ EPS growth forecasts.10 The
“sustainable growth” approach was included for completeness, 19
but evidence indicates that analysts’ forecasts provide a 20

9 Because Value Line reports end-of-year book values, an adjustment factor
was incorporated to compute an average rate of return over the year, which
is consistent with the theory underlying this approach.
10 Roger A. Morin, “New Regulatory Finance,” Public Utilities Reports,
Inc., (2006) at 307.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 20 of 50
Schedule 2
Page 21 of 50

superior and more direct guide to investors’ growth 1
expectations.
Q. What cost of equity estimates were implied for the 3
Utility Group using the DCF model? 4
A. After combining the dividend yields and respective
growth projections for each utility, the resulting cost of
equity estimates are shown on page 3 of Exhibit No. 3,
Schedule 5.
Q. In evaluating the results of the constant growth 9
DCF model, is it appropriate to eliminate illogical low or 10
high-end values? 11
A. Yes. In applying quantitative methods to estimate
the cost of equity, it is essential that the resulting values
pass fundamental tests of reasonableness and economic logic.
Accordingly, DCF estimates that are implausibly low or high
should be eliminated when evaluating the results of this
method.
Q. How did you evaluate DCF estimates at the low end 18
of the range? 19
A. I based my evaluation of DCF estimates at the low
end of the range on the fundamental risk-return tradeoff,
which holds that investors will only take on more risk if
they expect to earn a return to compensate them for the
greater uncertainty. Because common stocks lack the
protections associated with an investment in long-term bonds,
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 21 of 50
Schedule 2
Page 22 of 50

a utility’s common stock imposes far greater risks on 1
investors. As a result, the rate of return that investors
require from a utility’s common stock is considerably higher 3
than the yield offered by senior, long-term debt. Consistent
with this principle, DCF results that are not sufficiently
higher than the yields available on less risky utility bonds
must be eliminated.
Q. Have similar tests been applied by regulators? 8
A. Yes. FERC has noted that adjustments are justified
where applications of the DCF approach produce illogical
results. FERC evaluates DCF results against observable
yields on long-term public utility debt and has recognized
that it is appropriate to eliminate estimates that do not
sufficiently exceed this threshold.11 FERC affirmed that:
The purpose of the low-end outlier test is to
exclude from the proxy group those companies whose
ROE estimates are below the average bond yield or
are above the average bond yield but are
sufficiently low that an investor would consider
the stock to yield essentially the same return as
debt. In public utility ROE cases, the Commission
has used 100 basis points above the cost of debt as
an approximation of this threshold, but has also
considered the distribution of proxy group
companies to inform its decision on which companies
are outliers. As the Presiding Judge explained,
this is a flexible test.12

11 See, e.g., Southern California Edison Co., 131 FERC ¶ 61,020 at P 55
(2010) (“SoCal Edison”).
12 Martha Coakley et al., v. Bangor Hydro-Electric Company, et al., Opinion
No. 531, 147 FERC ¶ 61,234 at P 122 (2014).
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 22 of 50
Schedule 2
Page 23 of 50

Q. What interest rate benchmark did you consider in 1
evaluating the DCF results for Avista? 2
A. As noted earlier, the S&P and Moody’s ratings for
Avista are BBB and Baa1, respectively, which fall in the
triple-B rating category. Accordingly, I referenced average
yields on triple-B utility bonds as my benchmark in
evaluating low-end results. Monthly yields on Baa bonds
reported by Moody’s averaged 4.6 percent over the six months
ending April 2017.13
Q. What else should be considered in evaluating DCF 10
estimates at the low end of the range? 11
A. As indicated earlier, it is generally expected that
long-term interest rates will rise as the Federal Reserve
normalizes monetary policies. As shown in Table 2 below,
forecasts of IHS Global Insight and the Energy Information
Administration (“EIA”) imply an average triple-B bond yield
of approximately 6.1 percent over the period 2018-2022:

13 Moody’s Investors Service,
http://credittrends.moodys.com/chartroom.asp?c=3.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 23 of 50
Schedule 2
Page 24 of 50

TABLE 2 1
IMPLIED BAA BOND YIELD 2

The increase in debt yields anticipated by IHS Global Insight
and EIA is also supported by the widely-referenced Blue Chip
Financial Forecasts (“Blue Chip”), which projects that yields
on corporate bonds will climb on the order of 150 basis
points through 2022.14
Q. What does this test of logic imply with respect to 8
the DCF estimates for the Utility Group? 9
A. Adding FERC’s 100 basis-point premium to the
historical and projected average utility bond yields implies
a low-end threshold on the order of 5.6 percent to 7.1
percent. As highlighted on page 3 of Exhibit No. 3, Schedule
5, after considering these tests and the distribution of

14 Blue Chip Financial Forecasts, Vol. 35, No. 12 (Dec. 1, 2016).
Baa Yield
2018-22
Projected Aa Utility Yield
IHS Global Insight (a) 5.35%
EIA (b)5.56%
Average 5.45%
Current Baa - Aa Yield Spread (c)0.64%
Implied Baa Utility Yield 6.09%
(a)
(b)
(c)
IHS Global Insight (Feb. 2017).
Energy Information Administration, Annual
Energy Outlook 2017 (Jan. 5, 2017).
Based on monthly average bond yields from
Moody's Investors Service for the six-month
period Nov. 2016 - Apr. 2017.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 24 of 50
Schedule 2
Page 25 of 50

individual estimates, I eliminated low-end DCF estimates
ranging from -2.2 percent to 6.9 percent. Based on my
professional experience and the risk-return tradeoff
principle that is fundamental to finance, it is inconceivable
that investors are not requiring a substantially higher rate
of return for holding common stock. As a result, consistent
with the threshold established by historical and projected
utility bond yields, these values provide little guidance as
to the returns investors require from utility common stocks
and should be excluded.
Q. What else should be considered in evaluating DCF 11
estimates at the low end of the range? 12
A. While FERC has historically relied on a 100 basis
point spread over public utility bond yields as a starting
place in evaluating low-end values, reference to a static
test ignores the implications of current low bond yields.
Specifically, the premium that investors demand to bear the
higher risks of common stock is not constant. As I
demonstrate later in my testimony, equity risk premiums
expand when interest rates fall, and vice versa. Given that
bond yields have remained uncharacteristically low, this
inverse relationship implies a significant increase in the
equity risk premium that investors require to accept the
higher uncertainties associated with an investment in utility
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 25 of 50
Schedule 2
Page 26 of 50

common stocks versus bonds. As a result, using a fixed
premium of 100 basis points over public utility bond yields
will vastly understate the threshold for investors’ minimum 3
required return on utility stocks.
Q. Do you also recommend excluding estimates at the 5
high end of the range of DCF results? 6
A. While I typically recommend the exclusion of high
end estimates that are clearly implausible, in this case, no
such values existed. The upper end of the cost of common
equity range produced by the DCF analysis presented on page 3
of Exhibit No. 3, Schedule 5 was set by a cost of equity
estimate of 14.7 percent. When compared with the balance of
the remaining estimates, this value is reasonable and should
not be excluded in evaluating the results of the DCF model
for the Utility Group.
Q. What cost of equity is implied by your DCF results 16
for the Utility Group? 17
A. As shown on page 3 of Exhibit No. 3, Schedule 5 and
summarized in Table 3, below, after eliminating illogical
low-end values, application of the constant growth DCF model
resulted in the following cost of equity estimates:
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 26 of 50
Schedule 2
Page 27 of 50

TABLE 3 1
DCF RESULTS – UTILITY GROUP 2

D. Capital Asset Pricing Model
Q. Please describe the CAPM. 3
A. The CAPM is a theory of market equilibrium that
measures risk using the beta coefficient. Assuming investors
are fully diversified, the relevant risk of an individual
asset (e.g., common stock) is its volatility relative to the
market as a whole, with beta reflecting the tendency of a
stock’s price to follow changes in the market. A stock that
tends to respond less to market movements has a beta less
than 1.00, while stocks that tend to move more than the
market have betas greater than 1.00. The CAPM is
mathematically expressed as:
Rj = Rf +βj(Rm - Rf)
where: Rj = required rate of return for stock j;
Rf = risk-free rate;
Rm = expected return on the market portfolio;
and,
βj = beta, or systematic risk, for stock j.
Like the DCF model, the CAPM is an ex-ante, or forward-
looking model based on expectations of the future. As a
Growth Rate Average Midpoint
Value Line 9.1% 9.3%
IBES 10.0% 11.3%
Zacks 9.5% 10.1%
S&P Capital/IQ 9.4% 9.4%
br + sv 8.0% 8.2%
Cost of Equity
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 27 of 50
Schedule 2
Page 28 of 50

result, in order to produce a meaningful estimate of
investors’ required rate of return, the CAPM must be applied
using estimates that reflect the expectations of actual
investors in the market, not with backward-looking,
historical data.
Q. Why is the CAPM approach an appropriate component 6
of evaluating the cost of equity for Avista? 7
A. The CAPM approach generally is considered to be the
most widely referenced method for estimating the cost of
equity among academicians and professional practitioners,
with the pioneering researchers of this method receiving the
Nobel Prize in 1990. Because this is the dominant model for
estimating the cost of equity outside the regulatory sphere,
the CAPM provides important insight into investors’ required 14
rate of return for utility stocks, including Avista.
Q. How did you apply the CAPM to estimate the cost of 16
common equity? 17
A. Application of the CAPM to the Utility Group based
on a forward-looking estimate for investors’ required rate of 19
return from common stocks is presented on Exhibit No. 3,
Schedule 7. In order to capture the expectations of today’s 21
investors in current capital markets, the expected market
rate of return was estimated by conducting a DCF analysis on
the dividend paying firms in the S&P 500.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 28 of 50
Schedule 2
Page 29 of 50

The dividend yield for each firm was obtained from
Zacks, and the growth rate was equal to the average of the
earnings growth projections for each firm published by Value
Line, IBES, and Zacks with each firm’s dividend yield and 4
growth rate being weighted by its proportionate share of
total market value. Based on the weighted average of the
projections for the individual firms, current estimates imply
an average growth rate over the next five years of 9.2
percent. Combining this average growth rate with a year-
ahead dividend yield of 2.4 percent results in a current cost
of common equity estimate for the market as a whole (Rm) of
11.6 percent. Subtracting a 3.0 percent risk-free rate based
on the average yield on 30-year Treasury bonds for the six
months ending April 2017 produced a market equity risk
premium of 8.6 percent.
Q. What was the source of the beta values you used to 16
apply the CAPM? 17
A. As I did in the development of my proxy group
discussed above, I relied on the beta values reported by
Value Line, which in my experience is the most widely
referenced source for beta in regulatory proceedings.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 29 of 50
Schedule 2
Page 30 of 50

Q. What else should be considered in applying the 1
CAPM? 2
A. Financial research indicates that the CAPM does not
fully account for observed differences in rates of return
attributable to firm size. Accordingly, a modification is
required to account for this size effect. As explained by
Morningstar:
One of the most remarkable discoveries of modern
finance is the finding of a relationship between
firm size and return. On average, small companies
have higher returns than larger ones. . . . The
relationship between firm size and return cuts
across the entire size spectrum; it is not
restricted to the smallest stocks.15
According to the CAPM, the expected return on a security
should consist of the riskless rate, plus a premium to
compensate for the systematic risk of the particular
security. The degree of systematic risk is represented by
the beta coefficient. The need for the size adjustment
arises because differences in investors’ required rates of 20
return that are related to firm size are not fully captured
by beta. To account for this, researchers have developed
size premiums that need to be added to CAPM cost of equity
estimates to account for the level of a firm’s market

15 Morningstar, “Ibbotson SBBI 2014 Classic Yearbook,” at p. 99 (footnote
omitted).
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 30 of 50
Schedule 2
Page 31 of 50

capitalization in determining the CAPM cost of equity.16
Accordingly, my CAPM analyses incorporated an adjustment to
recognize the impact of size distinctions, as measured by the
average market capitalization for the firms in the Utility
Group.
Q. What cost of equity is indicated for the Utility 6
Group using the CAPM approach? 7
A. As shown on page 1 of Exhibit No. 3, Schedule 7,
after adjusting for the impact of firm size the CAPM approach
implied an average and midpoint cost of equity estimates of
9.9% for the Utility Group.
Q. Did you also apply the CAPM using forecasted bond 12
yields? 13
A. Yes. As discussed earlier, there is widespread
consensus that interest rates will increase materially as the
economy continues to strengthen. Accordingly, in addition to
the use of current bond yields, I also applied the CAPM based
on the forecasted long-term Treasury bond yields developed
based on projections published by Value Line, IHS Global
Insight and Blue Chip. As shown on page 2 of Exhibit No. 3,
Schedule 7, incorporating a forecasted Treasury bond yield
for 2018-2022 implied an average cost of equity of 10.2

16 Originally compiled by Ibbotson Associates and published in their annual
yearbook entitled, “Stocks, Bonds, Bills and Inflation,” these size premia
are now developed by Duff & Phelps and presented in its “Valuation
Handbook – Guide to Cost of Capital.”
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 31 of 50
Schedule 2
Page 32 of 50

percent for the Utility Group after adjusting for the impact
of relative size.17
E. Empirical Capital Asset Pricing Model
Q. How does the ECAPM approach differ from traditional 3
applications of the CAPM? 4
A. Empirical tests of the CAPM have shown that low-
beta securities earn returns somewhat higher than the CAPM
would predict, and high-beta securities earn less than
predicted. In other words, the CAPM tends to overstate the
actual sensitivity of the cost of capital to beta, with low-
beta stocks tending to have higher returns and high-beta
stocks tending to have lower risk returns than predicted by
the CAPM.18 This is illustrated graphically in the figure
below:

17 The midpoint of the size adjusted CAPM cost of equity range based on
projected bond yields was 10.3 percent.
18 Because the betas of utility stocks, including Avista, are generally
less than 1.0, this implies that cost of equity estimates based on the
traditional CAPM would understate the cost of equity.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 32 of 50
Schedule 2
Page 33 of 50

FIGURE 1 1
CAPM – PREDICTED VS. OBSERVED RETURNS 2

Because the betas of utility stocks, including those in
the Utility Group, are generally less than 1.0, this implies
that cost of equity estimates based on the traditional CAPM
would understate the cost of equity. This empirical finding
is widely reported in the finance literature, as summarized
in New Regulatory Finance:
As discussed in the previous section, several
finance scholars have developed refined and
expanded versions of the standard CAPM by relaxing
the constraints imposed on the CAPM, such as
dividend yield, size, and skewness effects. These
enhanced CAPMs typically produce a risk-return
relationship that is flatter than the CAPM
prediction in keeping with the actual observed
risk-return relationship. The ECAPM makes use of
these empirical relationships.19
As discussed in New Regulatory Finance, based on a review of
the empirical evidence, the expected return on a security is

19 Roger A. Morin, “New Regulatory Finance,” Public Utilities Reports
(2006) at 189.
Return
Rf
Beta1.0
High beta assetsLow beta assets
0
Predicted
Observed
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 33 of 50
Schedule 2
Page 34 of 50

related to its risk by the ECAPM, which is represented by the
following formula:
Rj = Rf + 0.25(Rm - Rf) + 0.75[βj(Rm - Rf)]
Like the CAPM formula presented earlier, the ECAPM
represents a stock’s required return as a function of the 5
risk-free rate (Rf), plus a risk premium. In the formula
above, this risk premium is composed of two parts: (1) the
market risk premium (Rm - Rf) weighted by a factor of 25%, and
(2) a company-specific risk premium based on the stocks
relative volatility [(β)(Rm - Rf)] weighted by 75%. This
ECAPM equation, and its associated weighting factors,
recognizes the observed relationship between standard CAPM
estimates and the cost of capital documented in the financial
research, and corrects for the understated returns that would
otherwise be produced for low beta stocks.
Q. What cost of equity estimates were indicated by the 16
ECAPM? 17
A. My applications of the traditional ECAPM were based
on the same forward-looking market rate of return, risk-free
rates, and beta values discussed earlier in connections with
the CAPM. As shown on page 1 of Exhibit No. 3, Schedule 8,
applying the forward-looking ECAPM approach to the firms in
the Utility Group results in an average of 10.5 percent after
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 34 of 50
Schedule 2
Page 35 of 50

incorporating the size adjustment corresponding to the market
capitalization of the individual utilities.
As shown on page 2 of Exhibit No. 3, Schedule 8,
incorporating a forecasted Treasury bond yield for 2018-2022
implied an average ECAPM cost of equity of 10.7% for the
Utility Group after adjusting for the impact of relative
size.
F. Risk Premium Approach
Q. Please briefly describe the risk premium method. 8
A. The risk premium method of estimating investors’ 9
required rate of return extends to common stocks the risk-
return tradeoff observed with bonds. The cost of equity is
estimated by first determining the additional return
investors require to forgo the relative safety of bonds and
to bear the greater risks associated with common stock, and
by then adding this equity risk premium to the current yield
on bonds. Like the DCF model, the risk premium method is
capital market oriented. However, unlike DCF models, which
indirectly impute the cost of equity, risk premium methods
directly estimate investors’ required rate of return by 19
adding an equity risk premium to observable bond yields.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 35 of 50
Schedule 2
Page 36 of 50

Q. Is the risk premium approach a widely accepted 1
method for estimating the cost of equity? 2
A. Yes. The risk premium approach is based on the
fundamental risk-return principle that is central to finance,
which holds that investors will require a premium in the form
of a higher return in order to assume additional risk. This
method is routinely referenced by the investment community
and in academia and regulatory proceedings, and provides an
important tool in estimating a fair ROE for Avista.
Q. How did you implement the risk premium method? 10
A. I based my estimates of equity risk premiums for
electric utilities on surveys of previously authorized ROEs.
Authorized ROEs presumably reflect regulatory commissions’ 13
best estimates of the cost of equity, however determined, at
the time they issued their final order. Moreover, allowed
ROEs are an important consideration for investors and have
the potential to influence other observable investment
parameters, including credit ratings and borrowing costs.
Thus, this data provides a logical and frequently referenced
basis for estimating equity risk premiums for regulated
utilities.
Q. Is it circular to consider risk premiums based on 22
authorized returns in assessing a fair ROE for Avista? 23
A. No. In establishing authorized ROEs, regulators
typically consider the results of alternative market-based
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 36 of 50
Schedule 2
Page 37 of 50

approaches, including the DCF model. Because allowed risk
premiums consider objective market data (e.g., stock prices,
dividends, beta, and interest rates), and are not based
strictly on past actions of other regulators, this mitigates
concerns over any potential for circularity.
Q. How did you implement the risk premium approach 6
using surveys of allowed rates of return? 7
A. The ROEs authorized for electric utilities by
regulatory commissions across the U.S. are compiled by
Regulatory Research Associates and published in its
Regulatory Focus report. On page 3 of Exhibit No. 3,
Schedule 9, the average yield on long-term public utility
bonds is subtracted from the average allowed rate of return
on common equity for electric utilities to calculate equity
risk premiums for each year between 1974 and 2016.20 Over
this 43-year period, these equity risk premiums for electric
utilities averaged 3.67 percent, and the yield on public
utility bonds averaged 8.38 percent.
Q. Is there any capital market relationship that must 19
be considered when implementing the risk premium method? 20
A. Yes. There is considerable evidence that the
magnitude of equity risk premiums is not constant and that
equity risk premiums tend to move inversely with interest

20 Yield averages reported by Moody’s are for seasoned bonds with a
remaining maturity of 20 years or more.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 37 of 50
Schedule 2
Page 38 of 50

rates. In other words, when interest rate levels are
relatively high, equity risk premiums narrow, and when
interest rates are relatively low, equity risk premiums
widen. The implication of this inverse relationship is that
the cost of equity does not move as much as, or in lockstep
with, interest rates. Accordingly, for a 1 percent increase
or decrease in interest rates, the cost of equity may only
rise or fall, say, 50 basis points. Therefore, when
implementing the risk premium method, adjustments may be
required to incorporate this inverse relationship if current
interest rate levels diverge from the average interest rate
level represented in the data set.
Q. Has this inverse relationship been documented in 13
the financial research? 14
A. Yes. This inverse relationship between equity risk
premiums and interest rates has been widely reported in the
financial literature.21 For example, New Regulatory Finance
documented this inverse relationship:
Published studies by Brigham, Shome, and Vinson
(1985), Harris (1986), Harris and Marston (1992,
1993), Carelton, Chambers, and Lakonishok (1983),
Morin (2005), and McShane (2005), and others
demonstrate that, beginning in 1980, risk premiums
varied inversely with the level of interest rates –

21 See, e.g., E.F. Brigham, D.K. Shome, and S.R. Vinson,“The Risk Premium
Approach to Measuring a Utility’s Cost of Equity,” Financial Management
(Spring 1985); R.S. Harris and F.C. Marston,“Estimating Shareholder Risk
Premia Using Analysts’ Growth Forecasts,” Financial Management (Summer
1992).
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 38 of 50
Schedule 2
Page 39 of 50

rising when rates fell and declining when rates
rose.22
Other regulators have also recognized that the cost of equity
does not move in tandem with interest rates.23
Q. What are the implications of this relationship 5
under current capital market conditions? 6
A. As noted earlier, bond yields are at unprecedented
lows. Given that equity risk premiums move inversely with
interest rates, these uncharacteristically low bond yields
also imply a sharp increase in the equity risk premium that
investors require to accept the higher uncertainties
associated with an investment in utility common stocks versus
bonds. In other words, higher required equity risk premiums
offset the impact of declining interest rates on the ROE.
This relationship is illustrated in the figure below, which
is based on three-year rolling averages for the utility bond
yields and risk premiums shown on page 3 of Exhibit No. 3,
Schedule 9.

22 Roger A. Morin,“New Regulatory Finance,” Public Utilities Reports,
(2006) at 128.
23 See, e.g., California Public Utilities Commission, Decision 08-05-035
(May 29, 2008); Entergy Mississippi Formula Rate Plan FRP-5,
http://www.entergy-mississippi.com/content/price/tariffs/emi_frp.pdf;
Martha Coakley et al., 147 FERC ¶ 61,234 at P 147 (2014).
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 39 of 50
Schedule 2
Page 40 of 50

FIGURE 2 1
INVERSE RELATIONSHIP 2

Q. What cost of equity is implied by the risk premium 3
method using surveys of allowed ROEs? 4
A. Because risk premiums move inversely with interest
rates and current bond yields are significantly lower than
the average over the study period, it is necessary to adjust
the average equity risk premium over the study period to
reflect the impact of changes in bond yields. Based on the
regression output between the interest rates and equity risk
premiums displayed on page 4 of Exhibit No. 3, Schedule 9,
the equity risk premium for electric utilities increased
approximately 43 basis points for each percentage point drop
in the yield on average public utility bonds. As illustrated
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 40 of 50
Schedule 2
Page 41 of 50

on page 1 of Exhibit No. 3, Schedule 9, with the yield on
average public utility bonds for the six months ending April
2017 being 4.26 percent, this implied a current equity risk
premium of 5.44 percent for electric utilities. Adding this
equity risk premium to the yield on Baa utility bonds of 4.63
percent produces a current cost of equity of 10.07 percent.
Q. What cost of equity was produced by the risk 7
premium approach after incorporating forecasted bond yields? 8
A. As shown on page 2 of Exhibit No. 3, Schedule 9,
incorporating a forecasted yield for 2018-2022 and adjusting
for changes in interest rates since the study period implied
an equity risk premium of 4.81 percent for electric
utilities. Adding this equity risk premium to the average
implied yield on long-term Baa public utility bonds for 2018-
2022 of 6.09 percent resulted in an implied cost of equity of
approximately 10.9 percent.
G. Expected Earnings Approach
Q. What other analyses did you conduct to estimate the 17
cost of common equity? 18
A. As noted earlier, I also evaluated the cost of
common equity using the expected earnings method. Reference
to rates of return available from alternative investments of
comparable risk can provide an important benchmark in
assessing the return necessary to assure confidence in the
financial integrity of a firm and its ability to attract
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 41 of 50
Schedule 2
Page 42 of 50

capital. This expected earnings approach is consistent with
the economic underpinnings for a fair rate of return
established by the U.S. Supreme Court in Bluefield and Hope.
Moreover, it avoids the complexities and limitations of
capital market methods and instead focuses on the returns
earned on book equity, which are readily available to
investors.
Q. What economic premise underlies the expected 8
earnings approach? 9
A. The simple, but powerful concept underlying the
expected earnings approach is that investors compare each
investment alternative with the next best opportunity. If
the utility is unable to offer a return similar to that
available from other opportunities of comparable risk,
investors will become unwilling to supply the capital on
reasonable terms. For existing investors, denying the
utility an opportunity to earn what is available from other
similar risk alternatives prevents them from earning their
opportunity cost of capital. In this situation the
government is effectively taking the value of investors’ 20
capital without adequate compensation. The expected earnings
approach is consistent with the economic rationale
underpinning established regulatory standards, which
specifies a methodology to determine an ROE benchmark based
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 42 of 50
Schedule 2
Page 43 of 50

on earned rates of return for a peer group of other
utilities.
Q. How is the expected earnings approach typically 3
implemented? 4
A. The traditional comparable earnings test identifies
a group of companies that are believed to be comparable in
risk to the utility. The actual earnings of those companies
on the book value of their investment are then compared to
the allowed return of the utility. While the traditional
comparable earnings test is implemented using historical data
taken from the accounting records, it is also common to use
projections of returns on book investment, such as those
published by recognized investment advisory publications
(e.g., Value Line). Because these returns on book value
equity are analogous to the allowed return on a utility’s 15
rate base, this measure of opportunity costs results in a
direct, “apples to apples” comparison.
Moreover, regulators do not set the returns that
investors earn in the capital markets, which are a function
of dividend payments and fluctuations in common stock prices,
both of which are outside their control. Regulators can only
establish the allowed ROE, which is applied to the book value
of a utility’s investment in rate base, as determined from
its accounting records. This is directly analogous to the
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 43 of 50
Schedule 2
Page 44 of 50

expected earnings approach, which measures the return that
investors expect the utility to earn on book value. As a
result, the expected earnings approach provides a meaningful
guide to ensure that the allowed ROE is similar to what other
utilities of comparable risk will earn on invested capital.
This expected earnings test does not require theoretical
models to indirectly infer investors’ perceptions from stock 7
prices or other market data. As long as the proxy companies
are similar in risk, their expected earned returns on
invested capital provide a direct benchmark for investors’ 10
opportunity costs that is independent of fluctuating stock
prices, market-to-book ratios, debates over DCF growth rates,
or the limitations inherent in any theoretical model of
investor behavior.
Q. What rates of return on equity are indicated for 15
utilities based on the expected earnings approach? 16
A. Value Line’s projections imply an average rate of 17
return on common equity for the electric utility industry of
10.8 percent over its three- to five-year forecast horizon.24
Meanwhile, for the firms in the Utility Group specifically,
the year-end returns on common equity projected by Value Line
over its forecast horizon are shown on Exhibit No. 3,

24 The Value Line Investment Survey (Feb. 17, Mar. 17, & Apr. 28, 2017).
Recall that Value Line reports return on year-end equity so the equivalent
return on average equity would be higher.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 44 of 50
Schedule 2
Page 45 of 50

Schedule 10. Consistent with the rationale underlying the
development of the br+sv growth rates, these year-end values
were converted to average returns using the same adjustment
factor discussed earlier and developed on Exhibit No. 3,
Schedule 6. As shown on Exhibit No. 3, Schedule 10, Value
Line’s projections for the Utility Group suggest an average 6
ROE of approximately 10.3 percent, with a midpoint value of
11.1 percent.
II. LOW RISK NON-UTILITY DCF
Q. What other proxy group did you consider in 9
evaluating a fair ROE for Avista? 10
A. Consistent with underlying economic and regulatory
standards, I also applied the DCF model to a reference group
of low-risk companies in the non-utility sectors of the
economy. I refer to this group as the “Non-Utility Group”.
Q. Do utilities have to compete with non-regulated 15
firms for capital? 16
A. Yes. The cost of capital is an opportunity cost
based on the returns that investors could realize by putting
their money in other alternatives. Clearly, the total
capital invested in utility stocks is only the tip of the
iceberg of total common stock investment, and there are a
plethora of other enterprises available to investors beyond
those in the utility industry. Utilities must compete for
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 45 of 50
Schedule 2
Page 46 of 50

capital, not just against firms in their own industry, but
with other investment opportunities of comparable risk.
Q. Does consideration of the results for the Non-3
Utility Group make the estimation of the cost of equity using 4
the DCF model more reliable for Avista? 5
A. Yes. The estimates of growth from the DCF model
depend on analysts’ forecasts. It is possible for utility 7
growth rates to be distorted by short-term trends in the
industry, or by the industry falling into favor or disfavor
by analysts. The result of such distortions would be to bias
the DCF estimates for utilities. Because the Non-Utility
Group includes low risk companies from many industries, it
diversifies away any distortion that may be caused by the ebb
and flow of enthusiasm for a particular sector.
Q. What criteria did you apply to develop the Non-15
Utility Group? 16
A. The comparable risk proxy group was composed of
those U.S. companies followed by Value Line that:
1) pay common dividends.
2) have a Safety Rank of “1”.
3) have a Financial Strength Rating of “A” or 21
greater.
4) have a beta of 0.75 or less.
5) have investment grade credit ratings from S&P
and Moody’s.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 46 of 50
Schedule 2
Page 47 of 50

Q. How do the overall risks of this Non-Utility Group 1
compare with the Utility Group and Avista? 2
A. As illustrated in Table 4 below, the average credit
ratings, Safety Rank, and Financial Strength rating for the
Non-Utility Group suggest less risk than for Avista and the
proxy group of utilities.
TABLE 4 7
COMPARISON OF RISK INDICATORS 8

When considered together, a comparison of these objective
measures, which consider a broad spectrum of risks, including
financial and business position, relative size, and exposure
to company-specific factors, indicates that investors would
likely conclude that the overall investment risks for the
Utility Group and Avista are greater than those of the firms
in the Non-Utility Group.
The 17 companies that make up the Non-Utility Group are
representative of the pinnacle of corporate America. These
firms, which include household names such as Coca-Cola,
General Mills, and Wal-Mart, have long corporate histories,
well-established track records, and exceedingly conservative
risk profiles. Many of these companies pay dividends on a
Safety Financial
S&P Moody's Rank Strength Beta
Non-Utility Group A A2 1 A+ 0.73
Utility Group BBB Baa1 2 B++ 0.71
Avista BBB Baa1 2 A 0.70
Value Line
Credit Rating
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 47 of 50
Schedule 2
Page 48 of 50

par with utilities, with the average dividend yield for the
group approaching 3 percent. Moreover, because of their
significance and name recognition, these companies receive
intense scrutiny by the investment community, which increases
confidence that published growth estimates are representative
of the consensus expectations reflected in common stock
prices.
Q. What were the results of your DCF analysis for the 8
Non-Utility Group? 9
A. I applied the DCF model to the Non-Utility Group
using analysts EPS growth projections, as described earlier
for the Utility Group, with the results being presented in
Exhibit No. 3, Schedule 11. As summarized in Table 5, below,
application of the constant growth DCF model resulted in the
following cost of equity estimates:
TABLE 5 16
DCF RESULTS – NON-UTILITY GROUP 17

As discussed earlier, reference to the Non-Utility Group is
consistent with established regulatory principles. Required
returns for utilities should be in line with those of
Growth Rate Average Midpoint
Value Line 10.7% 11.3%
IBES 10.5% 11.0%
Zacks 10.6% 11.4%
Cost of Equity
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 48 of 50
Schedule 2
Page 49 of 50

non-utility firms of comparable risk operating under the
constraints of free competition.
Q. How can you reconcile these DCF results for the 3
Non-Utility Group against the lower estimates produced for 4
your group of utilities? 5
A. First, it is important to be clear that the higher
DCF results for the Non-Utility Group cannot be attributed to
risk differences. As documented earlier, the risks that
investors associate with the group of non-utility firms - as
measured by credit ratings, Value Line’s Safety Rank, and
Financial Strength – are lower than the risks investors
associate with the Utility Group and Avista. The objective
evidence provided by these observable risk measures rules out
a conclusion that the higher non-utility DCF estimates are
associated with higher investment risk.
Rather, the divergence between the DCF results for these
groups of utility and non-utility firms can be attributed to
the fact that DCF estimates invariably depart from the
returns that investors actually require because their
expectations may not be captured by the inputs to the model,
particularly the assumed growth rate. Because the actual
cost of equity is unobservable, and DCF results inherently
incorporate a degree of error, the cost of equity estimates
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 49 of 50
Schedule 2
Page 50 of 50

for the Non-Utility Group provide an important benchmark in
evaluating a fair ROE for Avista.
There is no basis to conclude that DCF results for a
group of utilities would be intrinsically more reliable than
those for firms in the competitive sector, and the divergence
between the DCF estimates for the group of utilities and the
Non-Utility Group suggests that both should be considered to
ensure a balanced end-result. The DCF results for the Non-
Utility Group suggests that the 9.9 percent requested ROE for
Avista’s utility operations is a conservative estimate of a
fair return.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 2, Page 50 of 50
ROE ANALYSES Schedule 3
Page 1 of 1
SUMMARY OF RESULTS
DCF Average Midpoint
Value Line 9.1%9.3%
IBES 10.0%11.3%
Zacks 9.5%10.1%
S&P Capital/IQ 9.4%9.4%
Internal br + sv 8.0%8.2%
CAPM
Current Bond Yield 9.9%9.9%
Projected Bond Yield 10.2%10.3%
Empirical CAPM
Current Bond Yield 10.5%10.6%
Projected Bond Yield 10.7%10.8%
Utility Risk Premium
Current Bond Yield 10.1%
Projected Bond Yields 10.9%
Expected Earnings
Industry 10.8%
Proxy Group 10.3%11.1%
Recommended Cost of Equity Range
Cost of Equity Range 9.5%--10.7%
Flotation Cost Adjustment
ROE Recommendation 9.6%--10.8%
0.10%
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 3, Page 1 of 1
CAPITAL STRUCTURE Schedule 4
Page 1 of 2
UTILITY GROUP
Common Common
Company Debt Preferred Equity Debt Other Equity
1 ALLETE 45.1%0.0%54.9%40.0%0.0%60.0%
2 Ameren Corp.50.1%0.0%49.9%48.5%1.0%50.5%
3 Avangrid, Inc.24.3%0.0%75.7%24.0%0.0%76.0%
4 Avista Corp.50.5%0.0%49.5%49.0%0.0%51.0%
5 Black Hills Corp.65.0%0.0%35.0%59.5%0.0%40.5%
6 CMS Energy Corp.68.9%0.0%31.1%64.5%0.0%35.5%
7 Dominion Energy 65.5%0.0%34.5%70.5%0.0%29.5%
8 DTE Energy Co.54.3%0.0%45.7%56.5%0.0%43.5%
9 Edison International 44.0%8.6%47.3%45.0%7.5%47.5%
10 El Paso Electric Co.54.3%0.0%45.7%51.5%0.0%48.5%
11 Entergy Corp.64.2%0.9%35.0%62.5%0.5%37.0%
12 Exelon Corp.55.2%0.0%44.8%52.5%0.0%47.5%
13 Hawaiian Elec.43.9%0.0%56.1%47.5%1.0%51.5%
14 IDACORP, Inc.56.6%0.0%43.4%42.5%0.0%57.5%
15 NorthWestern Corp.51.7%0.0%48.3%48.0%0.0%52.0%
16 Otter Tail Corp.44.6%0.0%55.4%40.0%0.0%60.0%
17 Portland General Elec.50.1%0.0%49.9%50.5%0.0%49.5%
18 Sempra Energy 50.2%0.1%49.8%60.0%0.0%40.0%
Average 52.1%0.5%47.3%50.7%0.6%48.8%
(a)Company Form 10-K and Annual Reports.
(b)The Value Line Investment Survey (Mar. 17, Apr. 28, & May 19, 2017).
Value Line Projected (b)At Fiscal Year-End 2016 (a)
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 4, Page 1 of 2
CAPITAL STRUCTURE Schedule 4
Page 2 of 2
UTILITY GROUP
Common
Operating Company Debt Preferred Equity
1 Ameren Illinois Co.45.5%1.1%53.4%
2 Atlantic City Electric Co.52.8%0.0%47.2%
3 Baltimore Gas & Electric Co.44.9%0.0%55.1%
4 Black Hills Power 46.9%0.0%53.1%
5 Black Hills/Colorado Electric Utility Co 49.2%0.0%50.8%
6 Central Maine Power 39.0%0.0%61.0%
7 Cheyenne Light Fuel & Power 46.8%0.0%53.2%
8 Commonweath Edison Co.44.6%0.0%55.4%
9 Consumers Energy Co.48.8%0.3%50.9%
10 Delmarva Power and Light 50.3%0.0%49.7%
11 DTE Electric Co.49.6%0.0%50.4%
12 Entergy Arkansas Inc.55.3%0.6%44.1%
13 Entergy Louisiana LLC 53.4%0.0%46.6%
14 Entergy Mississippi Inc.50.1%0.9%49.0%
15 Entergy New Orleans Inc.49.1%2.3%48.7%
16 Entergy Texas Inc.58.5%0.0%41.5%
17 Hawaiian Electric Co.41.8%1.1%57.1%
18 Idaho Power Co.58.4%0.0%41.6%
19 Minnesota Power n/a n/a n/a
20 New York State Electric & Gas 43.6%0.0%56.4%
21 Otter Tail Power Co.47.2%0.0%52.8%
22 PECO Energy Co.43.0%0.0%57.0%
23 Potomac Electric Power Co.50.5%0.0%49.5%
24 Rochester Gas and Electric 45.1%0.0%54.9%
25 San Diego Gas & Electric 46.1%0.0%53.9%
26 Southern California Edison Co.41.6%9.0%49.3%
27 Southern California Gas Co.45.9%0.3%53.7%
28 Superior Water, Light & Power Co.39.8%0.0%60.2%
29 Union Electric Co.48.9%1.0%50.1%
30 United Illuminating 48.1%0.0%51.9%
31 Virginia Electric Power 47.0%0.0%53.0%
Minimum 39.0%0.0%41.5%
Maximum 58.5%9.0%61.0%
Simple Average 47.7%0.6%51.7%
Weighted Average 47.2%1.4%51.4%
(a)Company Form 10-K, Annual Reports, and FERC Form 1 Reports.
At Year-End 2016 (a)
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 4, Page 2 of 2
DCF MODEL - UTILITY GROUP Schedule 5
Page 1 of 3
DIVIDEND YIELD
(a)(b)
Company Price Dividends Yield
1 ALLETE 69.47$ 2.16$ 3.1%
2 Ameren Corp.54.84$ 1.79$ 3.3%
3 Avangrid, Inc.43.72$ 1.73$ 4.0%
4 Avista Corp.40.66$ 1.45$ 3.6%
5 Black Hills Corp.67.99$ 1.81$ 2.7%
6 CMS Energy Corp.45.35$ 1.35$ 3.0%
7 Dominion Energy 77.67$ 3.14$ 4.0%
8 DTE Energy Co.104.37$ 3.42$ 3.3%
9 Edison International 79.64$ 2.25$ 2.8%
10 El Paso Electric Co.51.43$ 1.32$ 2.6%
11 Entergy Corp.76.22$ 3.52$ 4.6%
12 Exelon Corp.34.90$ 1.31$ 3.8%
13 Hawaiian Elec.33.30$ 1.24$ 3.7%
14 IDACORP, Inc.84.19$ 2.28$ 2.7%
15 NorthWestern Corp.60.04$ 2.13$ 3.5%
16 Otter Tail Corp.38.36$ 1.28$ 3.3%
17 Portland General Elec.45.35$ 1.36$ 3.0%
18 Sempra Energy 111.78$ 3.36$ 3.0%
Average 3.3%
(a)Average of closing prices for 30 trading days ended May 19, 2017.
(b)The Value Line Investment Survey, Summary & Index (May 19, 2017).
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 5, Page 1 of 3
DCF MODEL - UTILITY GROUP Schedule 5
Page 2 of 3
GROWTH RATES
(a)(b)(c)(d)(e)
S&P br+sv
Company V Line IBES Zacks Capital IQ Growth
1 ALLETE 5.0%5.0%6.1%6.6%3.7%
2 Ameren Corp.6.0%6.3%6.5%6.1%3.9%
3 Avangrid, Inc.n/a 9.0%8.5%7.8%1.7%
4 Avista Corp.2.5%5.7%n/a n/a 2.5%
5 Black Hills Corp.7.5%12.0%5.0%5.0%6.6%
6 CMS Energy Corp.6.5%7.5%6.0%7.1%5.8%
7 Dominion Energy 5.5%4.0%6.0%5.6%0.1%
8 DTE Energy Co.5.0%4.6%5.9%5.7%4.2%
9 Edison International 3.0%4.1%6.3%6.0%4.6%
10 El Paso Electric Co.5.0%6.5%7.9%7.9%4.1%
11 Entergy Corp.-2.5%-6.8%0.0%6.0%2.8%
12 Exelon Corp.7.0%2.2%4.9%4.7%4.7%
13 Hawaiian Elec.1.5%2.7%4.0%3.4%3.0%
14 IDACORP, Inc.3.5%4.0%4.0%4.0%3.7%
15 NorthWestern Corp.4.5%3.4%3.3%3.3%3.9%
16 Otter Tail Corp.5.0%5.2%n/a 6.0%5.3%
17 Portland General Elec.6.0%5.6%5.3%4.4%4.3%
18 Sempra Energy 8.0%9.9%8.7%8.0%3.7%
(a)The Value Line Investment Survey (Mar. 17, Apr. 28, & May 19, 2017).
(b)
(c)
(d)SNL, S&P Global, Inc. (May 25, 2017).
(e)See Schedule 6.
www.finance.yahoo.com (May 25, 2017).
www.zacks.com (May 25, 2017).
Earnings Growth
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 5, Page 2 of 3
DCF MODEL - UTILITY GROUP Schedule 5
Page 3 of 3
DCF COST OF EQUITY ESTIMATES
(a)(a)(a)(a)(a)
S&P br+sv
Company V Line IBES Zacks Capital/IQ Growth
1 ALLETE 8.1%8.1%9.2%9.7%6.8%
2 Ameren Corp.9.3%9.5%9.8%9.4%7.1%
3 Avangrid, Inc.n/a 13.0%12.5%11.8%5.7%
4 Avista Corp.6.1%9.2%n/a n/a 6.0%
5 Black Hills Corp.10.2%14.7%7.7%7.7%9.3%
6 CMS Energy Corp.9.5%10.5%9.0%10.1%8.8%
7 Dominion Energy 9.5%8.0%10.0%9.6%4.2%
8 DTE Energy Co.8.3%7.9%9.2%9.0%7.5%
9 Edison International 5.8%6.9%9.1%8.8%7.5%
10 El Paso Electric Co.7.6%9.1%10.5%10.5%6.7%
11 Entergy Corp.2.1%-2.2%4.6%10.6%7.4%
12 Exelon Corp.10.8%6.0%8.7%8.5%8.5%
13 Hawaiian Elec.5.2%6.4%7.7%7.1%6.7%
14 IDACORP, Inc.6.2%6.7%6.7%6.7%6.4%
15 NorthWestern Corp.8.0%6.9%6.8%6.8%7.4%
16 Otter Tail Corp.8.3%8.5%n/a 9.3%8.7%
17 Portland General Elec.9.0%8.5%8.3%7.4%7.3%
18 Sempra Energy 11.0%12.9%11.7%11.0%6.7%
Average (b)9.1%10.0%9.5%9.4%8.0%
Midpoint (b,c)9.3%11.3%10.1%9.4%8.2%
(a)Sum of dividend yield (Schedule 5, p. 1) and respective growth rate (Schedule 5, p. 2).
(b)Excludes highlighted figures.
(c)Average of low and high values.
Earnings Growth
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 5, Page 3 of 3
DCF MODEL - UTILITY GROUP Schedule 6
Page 1 of 2
BR+SV GROWTH RATE
(a)(a)(a)(b)(c)(d)(e)
Adjustment
Company EPS DPS BVPS b r Factor Adjusted r br s v sv br + sv
1 ALLETE $4.00 $2.50 $45.50 37.5%8.8%1.0218 9.0%3.4%0.0125 0.2417 0.30%3.7%
2 Ameren Corp.$3.50 $2.15 $35.50 38.6%9.9%1.0190 10.0%3.9%- 0.3238 0.00%3.9%
3 Avangrid, Inc.$2.75 $1.85 $52.00 32.7%5.3%1.0060 5.3%1.7%0.0000 (0.3000) 0.00%1.7%
4 Avista Corp.$2.25 $1.67 $29.00 25.8%7.8%1.0181 7.9%2.0%0.0160 0.2750 0.44%2.5%
5 Black Hills Corp.$4.25 $2.20 $41.00 48.2%10.4%1.0440 10.8%5.2%0.0412 0.3440 1.42%6.6%
6 CMS Energy Corp.$2.75 $1.70 $21.00 38.2%13.1%1.0356 13.6%5.2%0.0132 0.4750 0.63%5.8%
7 Dominion Energy $4.50 $4.20 $24.25 6.7%18.6%1.0025 18.6%1.2%(0.0153) 0.7306 -1.11%0.1%
8 DTE Energy Co.$6.50 $4.30 $62.00 33.8%10.5%1.0254 10.8%3.6%0.0137 0.3951 0.54%4.2%
9 Edison International $5.00 $2.90 $46.25 42.0%10.8%1.0228 11.1%4.6%- 0.4394 0.00%4.6%
10 El Paso Electric Co.$3.00 $1.75 $32.25 41.7%9.3%1.0208 9.5%4.0%0.0037 0.3550 0.13%4.1%
11 Entergy Corp.$5.25 $3.80 $52.00 27.6%10.1%1.0150 10.2%2.8%(0.0002) 0.3500 -0.01%2.8%
12 Exelon Corp.$3.25 $1.70 $35.50 47.7%9.2%1.0280 9.4%4.5%0.0124 0.2111 0.26%4.7%
13 Hawaiian Elec.$2.00 $1.40 $22.00 30.0%9.1%1.0174 9.2%2.8%0.0085 0.2667 0.23%3.0%
14 IDACORP, Inc.$4.75 $2.90 $51.50 38.9%9.2%1.0195 9.4%3.7%0.0014 0.2897 0.04%3.7%
15 NorthWestern Corp.$4.00 $2.50 $41.00 37.5%9.8%1.0177 9.9%3.7%0.0048 0.3440 0.17%3.9%
16 Otter Tail Corp.$2.20 $1.38 $23.20 37.3%9.5%1.0417 9.9%3.7%0.0389 0.4200 1.64%5.3%
17 Portland General Elec.$3.00 $1.70 $31.00 43.3%9.7%1.0176 9.8%4.3%0.0030 0.2250 0.07%4.3%
18 Sempra Energy $7.50 $4.55 $57.75 39.3%13.0%1.0078 13.1%5.1%(0.0261) 0.5558 -1.45%3.7%
(f)
(g)
(h)
2021 "sv" Factor
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 6, Page 1 of 2
DCF MODEL - UTILITY GROUP Schedule 6
Page 1 of 2 Page 2 of 2
BR+SV GROWTH RATE
(a)(a)(f)(a)(a)(f)(g)(a)(a)(h)(a)(a)(g)
Chg
Company Eq Ratio Tot Cap Com Eq Eq Ratio Tot Cap Com Eq Equity High Low Avg.M/B 2016 2021 Growth
1 ALLETE 58.0%$3,263 $1,893 60.0%$3,925 $2,355 4.5%$70.00 $50.00 $60.00 1.319 49.60 52.00 0.95%
2 Ameren Corp.51.3%$13,840 $7,100 50.5%$17,000 $8,585 3.9%$60.00 $45.00 $52.50 1.479 242.63 242.63 0.00%
3 Avangrid, Inc.77.0%$19,619 $15,107 76.0%$21,100 $16,036 1.2%$45.00 $35.00 $40.00 0.769 308.99 309.00 0.00%
4 Avista Corp.48.8%$3,379 $1,649 51.0%$3,875 $1,976 3.7%$45.00 $35.00 $40.00 1.379 64.19 68.00 1.16%
5 Black Hills Corp.33.5%$4,826 $1,617 40.5%$6,200 $2,511 9.2%$70.00 $55.00 $62.50 1.524 53.38 61.00 2.70%
6 CMS Energy Corp.32.6%$13,040 $4,251 35.5%$17,100 $6,071 7.4%$45.00 $35.00 $40.00 1.905 279.21 289.00 0.69%
7 Dominion Energy 32.6%$44,836 $14,617 29.5%$50,800 $14,986 0.5%$105.00 $75.00 $90.00 3.711 627.80 615.00 -0.41%
8 DTE Energy Co.44.4%$20,280 $9,004 43.5%$26,700 $11,615 5.2%$120.00 $85.00 $102.50 1.653 179.43 187.00 0.83%
9 Edison International 49.2%$24,362 $11,986 47.5%$31,700 $15,058 4.7%$95.00 $70.00 $82.50 1.784 325.81 325.81 0.00%
10 El Paso Electric Co.47.3%$2,270 $1,074 48.5%$2,725 $1,322 4.2%$60.00 $40.00 $50.00 1.550 40.52 41.00 0.24%
11 Entergy Corp.35.5%$22,777 $8,086 37.0%$25,400 $9,398 3.1%$95.00 $65.00 $80.00 1.538 179.13 179.00 -0.01%
12 Exelon Corp.44.5%$58,053 $25,834 47.5%$72,000 $34,200 5.8%$55.00 $35.00 $45.00 1.268 924.04 970.00 0.98%
13 Hawaiian Elec.57.5%$3,595 $2,067 51.5%$4,775 $2,459 3.5%$35.00 $25.00 $30.00 1.364 108.58 112.00 0.62%
14 IDACORP, Inc.55.2%$3,899 $2,152 57.5%$4,550 $2,616 4.0%$85.00 $60.00 $72.50 1.408 50.40 50.65 0.10%
15 NorthWestern Corp.48.0%$3,494 $1,677 52.0%$3,850 $2,002 3.6%$75.00 $50.00 $62.50 1.524 48.33 49.10 0.32%
16 Otter Tail Corp.57.0%$1,175 $670 60.0%$1,695 $1,017 8.7%$45.00 $35.00 $40.00 1.724 39.35 44.00 2.26%
17 Portland General Elec.51.6%$4,544 $2,345 49.5%$5,650 $2,797 3.6%$45.00 $35.00 $40.00 1.290 88.95 90.00 0.23%
18 Sempra Energy 47.3%$24,963 $11,807 40.0%$31,900 $12,760 1.6%$150.00 $110.00 $130.00 2.251 250.15 236.00 -1.16%
(a)The Value Line Investment Survey (Mar. 17, Apr. 28, & May 19, 2017).
(b)Computed using the formula 2*(1+5-Yr. Change in Equity)/(2+5 Yr. Change in Equity).
(c)Product of average year-end "r" for 2021 and Adjustment Factor.
(d)Product of change in common shares outstanding and M/B Ratio.
(e)Computed as 1 - B/M Ratio.
(f)Product of total capital and equity ratio.
(g)Five-year rate of change in common equity.
(h)Average of High and Low expected market prices divided by 2021 BVPS.
Common Shares2021 Price20162021
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 6, Page 2 of 2
CAPM - CURRENT BOND YIELD Schedule 7
Page 1 of 2
UTILITY GROUP
(a)(b)(c)(d)(e)(f)
Size
Div Proj.Cost of Risk-Free Risk Unadjusted Market Size Adjusted
Company Yield Growth Equity Rate Premium Beta Ke Cap Adjustment Ke
1 ALLETE 2.4%9.2%11.6%3.0%8.6%0.80 9.9%3,520.8$ 0.98%10.9%
2 Ameren Corp.2.4%9.2%11.6%3.0%8.6%0.70 9.0%13,415.8$ 0.61%9.6%
3 Avangrid, Inc.2.4%9.2%11.6%3.0%8.6%NA NA 13,599.0$ 0.61%NA
4 Avista Corp.2.4%9.2%11.6%3.0%8.6%0.70 9.0%2,675.9$ 1.51%10.5%
5 Black Hills Corp.2.4%9.2%11.6%3.0%8.6%0.85 10.3%3,607.6$ 0.98%11.3%
6 CMS Energy Corp.2.4%9.2%11.6%3.0%8.6%0.65 8.6%12,810.0$ 0.61%9.2%
7 Dominion Energy 2.4%9.2%11.6%3.0%8.6%0.65 8.6%49,263.3$ -0.35%8.2%
8 DTE Energy Co.2.4%9.2%11.6%3.0%8.6%0.65 8.6%18,896.6$ 0.61%9.2%
9 Edison International 2.4%9.2%11.6%3.0%8.6%0.60 8.2%25,400.2$ -0.35%7.8%
10 El Paso Electric Co.2.4%9.2%11.6%3.0%8.6%0.75 9.5%2,092.2$ 1.66%11.1%
11 Entergy Corp.2.4%9.2%11.6%3.0%8.6%0.65 8.6%13,595.6$ 0.61%9.2%
12 Exelon Corp.2.4%9.2%11.6%3.0%8.6%0.65 8.6%32,484.1$ -0.35%8.2%
13 Hawaiian Elec.2.4%9.2%11.6%3.0%8.6%0.70 9.0%3,509.2$ 1.51%10.5%
14 IDACORP, Inc.2.4%9.2%11.6%3.0%8.6%0.75 9.5%4,198.6$ 0.98%10.4%
15 NorthWestern Corp.2.4%9.2%11.6%3.0%8.6%0.65 8.6%3,130.8$ 1.51%10.1%
16 Otter Tail Corp.2.4%9.2%11.6%3.0%8.6%0.85 10.3%1,462.3$ 1.72%12.0%
17 Portland General Elec.2.4%9.2%11.6%3.0%8.6%0.70 9.0%4,014.3$ 0.98%10.0%
18 Sempra Energy 2.4%9.2%11.6%3.0%8.6%0.80 9.9%27,800.8$ -0.35%9.5%
Average (g)9.1%9.9%
Midpoint (h)9.2%9.9%
(a)
(b)
(c)
(d)The Value Line Investment Survey (Mar. 17, Apr. 28, & May 19, 2017).
(e)www.valueline.com (retrieved May 24, 2017).
(f)Duff & Phelps, 2017 Valuation Handbook-U.S. Guide to Cost of Capital (Preview Version), p. 19.
(g)Excludes highlighted figures.
(h)Average of low and high values.
Market Return (Rm)
Average of weighted average earnings growth rates from Value Line Investment Survey, IBES, and Zacks Investment Research for dividend-
paying stocks in the S&P 500 based on data from www.valueline.com (Apr. 7, 2017), http://finance.yahoo.com (retrieved Apr. 9, 2017),
and www.zacks.com (retrieved Apr. 7, 2017).
Weighted average for dividend-paying stocks in the S&P 500 based on data from www.zacks.com (retrieved Apr. 7, 2017).
Average yield on 30-year Treasury bonds for the six-months ending Apr. 2017 based on data from the Federal Reserve at
http://www.fred.stlouisfed.org.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 7, Page 1 of 2
CAPM - PROJECTED BOND YIELD Schedule 7
Page 2 of 2
UTILITY GROUP
(a)(b)(c)(d)(e)(f)
Size
Div Proj.Cost of Risk-Free Risk Unadjusted Market Size Adjusted
Company Yield Growth Equity Rate Premium Beta Ke Cap Adjustment Ke
1 ALLETE 2.4%9.2%11.6%4.1%7.5%0.80 10.1%3,520.8$ 0.98%11.1%
2 Ameren Corp.2.4%9.2%11.6%4.1%7.5%0.70 9.4%13,415.8$ 0.61%10.0%
3 Avangrid, Inc.2.4%9.2%11.6%4.1%7.5%NA NA 13,599.0$ 0.61%NA
4 Avista Corp.2.4%9.2%11.6%4.1%7.5%0.70 9.4%2,675.9$ 1.51%10.9%
5 Black Hills Corp.2.4%9.2%11.6%4.1%7.5%0.85 10.5%3,607.6$ 0.98%11.5%
6 CMS Energy Corp.2.4%9.2%11.6%4.1%7.5%0.65 9.0%12,810.0$ 0.61%9.6%
7 Dominion Energy 2.4%9.2%11.6%4.1%7.5%0.65 9.0%49,263.3$ -0.35%8.6%
8 DTE Energy Co.2.4%9.2%11.6%4.1%7.5%0.65 9.0%18,896.6$ 0.61%9.6%
9 Edison International 2.4%9.2%11.6%4.1%7.5%0.60 8.6%25,400.2$ -0.35%8.3%
10 El Paso Electric Co.2.4%9.2%11.6%4.1%7.5%0.75 9.7%2,092.2$ 1.66%11.4%
11 Entergy Corp.2.4%9.2%11.6%4.1%7.5%0.65 9.0%13,595.6$ 0.61%9.6%
12 Exelon Corp.2.4%9.2%11.6%4.1%7.5%0.65 9.0%32,484.1$ -0.35%8.6%
13 Hawaiian Elec.2.4%9.2%11.6%4.1%7.5%0.70 9.4%3,509.2$ 1.51%10.9%
14 IDACORP, Inc.2.4%9.2%11.6%4.1%7.5%0.75 9.7%4,198.6$ 0.98%10.7%
15 NorthWestern Corp.2.4%9.2%11.6%4.1%7.5%0.65 9.0%3,130.8$ 1.51%10.5%
16 Otter Tail Corp.2.4%9.2%11.6%4.1%7.5%0.85 10.5%1,462.3$ 1.72%12.2%
17 Portland General Elec.2.4%9.2%11.6%4.1%7.5%0.70 9.4%4,014.3$ 0.98%10.3%
18 Sempra Energy 2.4%9.2%11.6%4.1%7.5%0.80 10.1%27,800.8$ -0.35%9.8%
Average 9.4%10.2%
Midpoint (g)9.5%10.3%
(a)Weighted average for dividend-paying stocks in the S&P 500 based on data from www.zacks.com (retrieved Apr. 7, 2017).
(b)
(c)
(d)The Value Line Investment Survey (Mar. 17, Apr. 28, & May 19, 2017).
(e)www.valueline.com (retrieved May 24, 2017).
(f)Duff & Phelps, 2017 Valuation Handbook-U.S. Guide to Cost of Capital (Preview Version), p. 19.
(g)Average of low and high values.
Market Return (Rm)
Average of weighted average earnings growth rates from Value Line Investment Survey, IBES, and Zacks Investment Research for dividend-
paying stocks in the S&P 500 based on data from www.valueline.com (Apr. 7, 2017), http://finance.yahoo.com (retrieved Apr. 9, 2017), and
www.zacks.com (retrieved Apr. 7, 2017).
Average yield on 30-year Treasury bonds for 2018-22 based on data from the Value Line Investment Survey, Forecast for the U.S. Economy
(Mar. 3, 2017); IHS Global Insight (Feb. 2017); & Wolters Kluwer, Blue Chip Financial Forecasts, Vol. 35, No. 12 (Dec. 1, 2016).
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 7, Page 2 of 2
EMPIRICAL CAPM - CURRENT BOND YIELD Schedule 8
Page 1 of 2
UTILITY GROUP
(a)(b)(c)(d)(e)(d)(f)(g)
Size
Div Proj.Cost of Risk-Free Risk Total Unadjusted Market Size Adjusted
Company Yield Growth Equity Rate Premium Weight RP1 Beta Weight RP2 RP Ke Cap Adjustment Ke
1 ALLETE 2.4%9.2%11.6%3.0%8.6%25%2.2%0.80 75%5.2%7.3%10.3%3,520.8$ 0.98%11.3%
2 Ameren Corp.2.4%9.2%11.6%3.0%8.6%25%2.2%0.70 75%4.5%6.7%9.7%13,415.8$ 0.61%10.3%
3 Avangrid, Inc.2.4%9.2%11.6%3.0%8.6%25%2.2%NA 75%NA NA NA 13,599.0$ 0.61%NA
4 Avista Corp.2.4%9.2%11.6%3.0%8.6%25%2.2%0.70 75%4.5%6.7%9.7%2,675.9$ 1.51%11.2%
5 Black Hills Corp.2.4%9.2%11.6%3.0%8.6%25%2.2%0.85 75%5.5%7.6%10.6%3,607.6$ 0.98%11.6%
6 CMS Energy Corp.2.4%9.2%11.6%3.0%8.6%25%2.2%0.65 75%4.2%6.3%9.3%12,810.0$ 0.61%10.0%
7 Dominion Energy 2.4%9.2%11.6%3.0%8.6%25%2.2%0.65 75%4.2%6.3%9.3%49,263.3$ -0.35%9.0%
8 DTE Energy Co.2.4%9.2%11.6%3.0%8.6%25%2.2%0.65 75%4.2%6.3%9.3%18,896.6$ 0.61%10.0%
9 Edison International2.4%9.2%11.6%3.0%8.6%25%2.2%0.60 75%3.9%6.0%9.0%25,400.2$ -0.35%8.7%
10 El Paso Electric Co.2.4%9.2%11.6%3.0%8.6%25%2.2%0.75 75%4.8%7.0%10.0%2,092.2$ 1.66%11.6%
11 Entergy Corp.2.4%9.2%11.6%3.0%8.6%25%2.2%0.65 75%4.2%6.3%9.3%13,595.6$ 0.61%10.0%
12 Exelon Corp.2.4%9.2%11.6%3.0%8.6%25%2.2%0.65 75%4.2%6.3%9.3%32,484.1$ -0.35%9.0%
13 Hawaiian Elec.2.4%9.2%11.6%3.0%8.6%25%2.2%0.70 75%4.5%6.7%9.7%3,509.2$ 1.51%11.2%
14 IDACORP, Inc.2.4%9.2%11.6%3.0%8.6%25%2.2%0.75 75%4.8%7.0%10.0%4,198.6$ 0.98%11.0%
15 NorthWestern Corp.2.4%9.2%11.6%3.0%8.6%25%2.2%0.65 75%4.2%6.3%9.3%3,130.8$ 1.51%10.9%
16 Otter Tail Corp.2.4%9.2%11.6%3.0%8.6%25%2.2%0.85 75%5.5%7.6%10.6%1,462.3$ 1.72%12.4%
17 Portland General Elec.2.4%9.2%11.6%3.0%8.6%25%2.2%0.70 75%4.5%6.7%9.7%4,014.3$ 0.98%10.6%
18 Sempra Energy 2.4%9.2%11.6%3.0%8.6%25%2.2%0.80 75%5.2%7.3%10.3%27,800.8$ -0.35%10.0%
Average 9.7%10.5%
Midpoint (h)9.8%10.6%
(a)Weighted average for dividend-paying stocks in the S&P 500 based on data from www.zacks.com (retrieved Apr. 7, 2017).
(b)
(c)
(d)Morin, Roger A., "New Regulatory Finance," Public Utilities Reports, Inc. at 190 (2006).
(e)The Value Line Investment Survey (Mar. 17, Apr. 28, & May 19, 2017).
(f)www.valueline.com (retrieved May 24, 2017).
(g)Duff & Phelps, 2017 Valuation Handbook-U.S. Guide to Cost of Capital (Preview Version), p. 19.
(h)Average of low and high values.
Average yield on 30-year Treasury bonds for the six-months ending Apr. 2017 based on data from the Federal Reserve at http://www.fred.stlouisfed.org.
Market Return (Rm)Market
Beta Adjusted RPUnadjusted RP
Average of weighted average earnings growth rates from Value Line Investment Survey, IBES, and Zacks Investment Research for dividend-paying stocks in the S&P
500 based on data from www.valueline.com (Apr. 7, 2017), http://finance.yahoo.com (retrieved Apr. 9, 2017), and www.zacks.com (retrieved Apr. 7, 2017).
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 8, Page 1 of 2
EMPIRICAL CAPM - PROJECTED BOND YIELD Schedule 8
Page 2 of 2
UTILITY GROUP
(a)(b)(c)(d)(e)(d)(f)(g)
Size
Div Proj.Cost of Risk-Free Risk Total Unadjusted Market Size Adjusted
Company Yield Growth Equity Rate Premium Weight RP1 Beta Weight RP2 RP Ke Cap Adjustment Ke
1 ALLETE 2.4%9.2%11.6%4.1%7.5%25%1.9%0.80 75%4.5%6.4%10.5%3,520.8$ 0.98%11.5%
2 Ameren Corp.2.4%9.2%11.6%4.1%7.5%25%1.9%0.70 75%3.9%5.8%9.9%13,415.8$ 0.61%10.5%
3 Avangrid, Inc.2.4%9.2%11.6%4.1%7.5%25%1.9%NA 75%NA NA NA 13,599.0$ 0.61%NA
4 Avista Corp.2.4%9.2%11.6%4.1%7.5%25%1.9%0.70 75%3.9%5.8%9.9%2,675.9$ 1.51%11.4%
5 Black Hills Corp.2.4%9.2%11.6%4.1%7.5%25%1.9%0.85 75%4.8%6.7%10.8%3,607.6$ 0.98%11.7%
6 CMS Energy Corp.2.4%9.2%11.6%4.1%7.5%25%1.9%0.65 75%3.7%5.5%9.6%12,810.0$ 0.61%10.2%
7 Dominion Energy 2.4%9.2%11.6%4.1%7.5%25%1.9%0.65 75%3.7%5.5%9.6%49,263.3$ -0.35%9.3%
8 DTE Energy Co.2.4%9.2%11.6%4.1%7.5%25%1.9%0.65 75%3.7%5.5%9.6%18,896.6$ 0.61%10.2%
9 Edison International2.4%9.2%11.6%4.1%7.5%25%1.9%0.60 75%3.4%5.3%9.4%25,400.2$ -0.35%9.0%
10 El Paso Electric Co.2.4%9.2%11.6%4.1%7.5%25%1.9%0.75 75%4.2%6.1%10.2%2,092.2$ 1.66%11.9%
11 Entergy Corp.2.4%9.2%11.6%4.1%7.5%25%1.9%0.65 75%3.7%5.5%9.6%13,595.6$ 0.61%10.2%
12 Exelon Corp.2.4%9.2%11.6%4.1%7.5%25%1.9%0.65 75%3.7%5.5%9.6%32,484.1$ -0.35%9.3%
13 Hawaiian Elec.2.4%9.2%11.6%4.1%7.5%25%1.9%0.70 75%3.9%5.8%9.9%3,509.2$ 1.51%11.4%
14 IDACORP, Inc.2.4%9.2%11.6%4.1%7.5%25%1.9%0.75 75%4.2%6.1%10.2%4,198.6$ 0.98%11.2%
15 NorthWestern Corp.2.4%9.2%11.6%4.1%7.5%25%1.9%0.65 75%3.7%5.5%9.6%3,130.8$ 1.51%11.1%
16 Otter Tail Corp.2.4%9.2%11.6%4.1%7.5%25%1.9%0.85 75%4.8%6.7%10.8%1,462.3$ 1.72%12.5%
17 Portland General Elec.2.4%9.2%11.6%4.1%7.5%25%1.9%0.70 75%3.9%5.8%9.9%4,014.3$ 0.98%10.9%
18 Sempra Energy 2.4%9.2%11.6%4.1%7.5%25%1.9%0.80 75%4.5%6.4%10.5%27,800.8$ -0.35%10.1%
Average 10.0%10.7%
Midpoint (h)10.1%10.8%
(a)Weighted average for dividend-paying stocks in the S&P 500 based on data from www.zacks.com (retrieved Apr. 7, 2017).
(b)
(c)
(d)Morin, Roger A., "New Regulatory Finance," Public Utilities Reports, Inc. at 190 (2006).
(e)The Value Line Investment Survey (Mar. 17, Apr. 28, & May 19, 2017).
(f)www.valueline.com (retrieved May 24, 2017).
(g)Duff & Phelps, 2017 Valuation Handbook-U.S. Guide to Cost of Capital (Preview Version), p. 19.
(h)Average of low and high values.
Market Return (Rm)Market
Average yield on 30-year Treasury bonds for 2018-22 based on data from the Value Line Investment Survey, Forecast for the U.S. Economy (Mar. 3, 2017); IHS Global
Insight (Feb. 2017); & Wolters Kluwer, Blue Chip Financial Forecasts, Vol. 35, No. 12 (Dec. 1, 2016).
Beta Adjusted RPUnadjusted RP
Average of weighted average earnings growth rates from Value Line Investment Survey, IBES, and Zacks Investment Research for dividend-paying stocks in the S&P
500 based on data from www.valueline.com (Apr. 7, 2017), http://finance.yahoo.com (retrieved Apr. 9, 2017), and www.zacks.com (retrieved Apr. 7, 2017).
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 8, Page 2 of 2
ELECTRIC UTILITY RISK PREMIUM Schedule 9
Page 1 of 4
CURRENT BOND YIELD
Current Equity Risk Premium
(a)Avg. Yield over Study Period 8.38%
(b)Average Utility Bond Yield 4.26%
Change in Bond Yield -4.12%
(c)Risk Premium/Interest Rate Relationship -0.4301
Adjustment to Average Risk Premium 1.77%
(a)Average Risk Premium over Study Period 3.67%
Adjusted Risk Premium 5.44%
Implied Cost of Equity
(b)Baa Utility Bond Yield 4.63%
Adjusted Equity Risk Premium 5.44%
Risk Premium Cost of Equity 10.07%
(a)Schedule 9, page 3.
(b)
(c)Schedule 9, page 4.
Average bond yield on all utility bonds and Baa subset for the six-months
ending Apr. 2017 based on data from Moody's Investors Service at
www.credittrends.com.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 9, Page 1 of 4
ELECTRIC UTILITY RISK PREMIUM Schedule 9
Page 2 of 4
PROJECTED BOND YIELD
Current Equity Risk Premium
(a)Avg. Yield over Study Period 8.38%
(b)Average Utility Bond Yield 2018-2022 5.72%
Change in Bond Yield -2.66%
(c)Risk Premium/Interest Rate Relationship -0.4301
Adjustment to Average Risk Premium 1.14%
(a)Average Risk Premium over Study Period 3.67%
Adjusted Risk Premium 4.81%
Implied Cost of Equity
(b)Baa Utility Bond Yield 2018-2022 6.09%
Adjusted Equity Risk Premium 4.81%
Risk Premium Cost of Equity 10.90%
(a)Schedule 9, page 3.
(b)
(c)Schedule 9, page 4.
Yields on all utility bonds and Baa subset based on data from IHS Global
Insight (Feb. 2017); Energy Information Administration, Annual Energy
Outlook 2017 (Jan. 5, 2017); & Moody's Investors Service at
www.credittrends.com.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 9, Page 2 of 4
ELECTRIC UTILITY RISK PREMIUM Schedule 9
Page 3 of 4
AUTHORIZED RETURNS
(a)(b)
Allowed Average Utility Risk
Year ROE Bond Yield Premium
1974 13.10%9.27%3.83%
1975 13.20%9.88%3.32%
1976 13.10%9.17%3.93%
1977 13.30%8.58%4.72%
1978 13.20%9.22%3.98%
1979 13.50%10.39%3.11%
1980 14.23%13.15%1.08%
1981 15.22%15.62%-0.40%
1982 15.78%15.33%0.45%
1983 15.36%13.31%2.05%
1984 15.32%14.03%1.29%
1985 15.20%12.29%2.91%
1986 13.93%9.46%4.47%
1987 12.99%9.98%3.01%
1988 12.79%10.45%2.34%
1989 12.97%9.66%3.31%
1990 12.70%9.76%2.94%
1991 12.55%9.21%3.34%
1992 12.09%8.57%3.52%
1993 11.41%7.56%3.85%
1994 11.34%8.30%3.04%
1995 11.55%7.91%3.64%
1996 11.39%7.74%3.65%
1997 11.40%7.63%3.77%
1998 11.66%7.00%4.66%
1999 10.77%7.55%3.22%
2000 11.43%8.09%3.34%
2001 11.09%7.72%3.37%
2002 11.16%7.53%3.63%
2003 10.97%6.61%4.36%
2004 10.75%6.20%4.55%
2005 10.54%5.67%4.87%
2006 10.36%6.08%4.28%
2007 10.36%6.11%4.25%
2008 10.46%6.65%3.81%
2009 10.48%6.28%4.20%
2010 10.34%5.56%4.78%
2011 10.29%5.13%5.16%
2012 10.17%4.26%5.91%
2013 10.02%4.55%5.47%
2014 9.92%4.41%5.51%
2015 9.85%4.37%5.48%
2016 9.77%4.11%5.66%
Average 12.05%8.38%3.67%
(a)
(b)Moody's Investors Service.
Major Rate Case Decisions, Regulatory Focus, Regulatory Research
Associates; UtilityScope Regulatory Service, Argus.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 9, Page 3 of 4
ELECTRIC UTILITY RISK PREMIUM Schedule 9
Page 4 of 4
REGRESSION RESULTS
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.9309653
R Square 0.8666965
Adjusted R Square 0.8634452
Standard Error 0.004962
Observations 43
ANOVA
df SS MS F Significance F
Regression 1 0.006563352 0.0065634 266.56874 1.51943E-19
Residual 41 0.001009486 2.462E-05
Total 42 0.007572838
Coefficients Standard Error t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%
Intercept 0.072712 0.002333891 31.154833 3.636E-30 0.067998588 0.0774254 0.067998588 0.077425364
X Variable 1 -0.430142 0.026345519 -16.32693 1.519E-19 -0.483347378 -0.376936 -0.483347378 -0.37693567
y = -0.4301x + 0.0727
R² = 0.8667
-1%
0%
1%
2%
3%
4%
5%
6%
7%
5%7%9%11%13%15%
Eq
u
i
t
y

R
i
s
k

P
r
e
m
i
u
m
s
Average Utility Interest Rates
Authorized Equity Risk Premiums vs. Utility Interest
Rates
(1974-2016)
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 9, Page 4 of 4
EXPECTED EARNINGS APPROACH Schedule 10
Page 1 of 1
UTILITY GROUP
(a)(b)(c)Mid-Year
Expected Return Adjustment Adjusted Return
Company on Common Equity Factor on Common Equity
1 ALLETE 9.0%1.0218 9.2%
2 Ameren Corp.10.0%1.0190 10.2%
3 Avangrid, Inc.5.0%1.0060 5.0%
4 Avista Corp.8.0%1.0181 8.1%
5 Black Hills Corp.10.5%1.0440 11.0%
6 CMS Energy Corp.13.5%1.0356 14.0%
7 Dominion Energy 19.0%1.0025 19.0%
8 DTE Energy Co.10.5%1.0254 10.8%
9 Edison International 11.0%1.0228 11.3%
10 El Paso Electric Co.9.5%1.0208 9.7%
11 Entergy Corp.10.0%1.0150 10.2%
12 Exelon Corp.9.0%1.0280 9.3%
13 Hawaiian Elec.9.0%1.0174 9.2%
14 IDACORP, Inc.9.0%1.0195 9.2%
15 NorthWestern Corp.9.5%1.0177 9.7%
16 Otter Tail Corp.9.5%1.0417 9.9%
17 Portland General Elec.9.5%1.0176 9.7%
18 Sempra Energy 13.5%1.0078 13.6%
Average (d)10.3%
Midpoint (d,e)11.1%
(a)The Value Line Investment Survey (Mar. 17, Apr. 28, & May 19, 2017).
(b)Adjustment to convert year-end return to an average rate of return from Schedule 6.
(c)(a) x (b).
(d)Excludes highlighted values.
(e)Average of low and high values.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 10, Page 1 of 1
DCF MODEL - NON-UTILITY GROUP Schedule 11
Page 1 of 3
DIVIDEND YIELD
(a)(b)
Company Industry Group Price Dividends Yield
1 AT&T Inc.Telecommunications 40.95$ 1.97$ 4.8%
2 Church & Dwight Household Products 50.07$ 0.76$ 1.5%
3 Coca-Cola Beverage 42.71$ 1.50$ 3.5%
4 Colgate-Palmolive Household Products 73.56$ 1.62$ 2.2%
5 Gen'l Mills Food Processing 58.40$ 1.94$ 3.3%
6 Hormel Foods Food Processing 34.58$ 0.69$ 2.0%
7 Kellogg Food Processing 72.63$ 2.10$ 2.9%
8 Kimberly-Clark Household Products 132.11$ 3.88$ 2.9%
9 Lilly (Eli)Drug Industry 83.82$ 2.08$ 2.5%
10 PepsiCo, Inc.Beverage 112.54$ 3.08$ 2.7%
11 Procter & Gamble Household Products 89.88$ 2.76$ 3.1%
12 Public Storage REIT 223.51$ 8.15$ 3.6%
13 Smucker (J.M.)Food Processing 130.20$ 3.00$ 2.3%
14 Sysco Corp.Wholesale Food 52.26$ 1.36$ 2.6%
15 Verizon Communic.Telecommunications 48.70$ 2.31$ 4.7%
16 Wal-Mart Stores Retail Store 72.46$ 2.04$ 2.8%
17 Waste Management Environmental 72.79$ 1.70$ 2.3%
Average 2.9%
(a)Average of closing prices for 30 trading days ended Apr. 28, 2017.
(b)The Value Line Investment Survey, Summary & Index (Apr. 28, 2017).
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 11, Page 1 of 3
DCF MODEL - NON-UTILITY GROUP Schedule 11
Page 2 of 3
GROWTH RATES
(a)(b)(c)
Company V Line IBES Zacks
1 AT&T Inc.5.50%7.90%4.40%
2 Church & Dwight 7.50%8.24%9.20%
3 Coca-Cola 4.50%4.83%6.20%
4 Colgate-Palmolive 12.00%8.58%9.20%
5 Gen'l Mills 5.00%6.21%7.40%
6 Hormel Foods 10.50%9.88%9.30%
7 Kellogg 6.50%5.67%6.00%
8 Kimberly-Clark 12.00%6.07%6.90%
9 Lilly (Eli)11.00%12.33%11.90%
10 PepsiCo, Inc.7.00%6.41%7.40%
11 Procter & Gamble 7.50%5.97%7.90%
12 Public Storage NA 11.10%5.00%
13 Smucker (J.M.)7.00%4.91%6.20%
14 Sysco Corp.11.50%12.16%8.20%
15 Verizon Communic.3.00%2.46%9.00%
16 Wal-Mart Stores 4.00%5.50%6.10%
17 Waste Management 7.00%10.41%9.50%
(a)
(b)
(c)www.zacks.com (retrieved May 25, 2017).
Earnings Growth
The Value Line Investment Survey (Mar. 17, Mar. 24, Apr. 7, Apr.
21, Apr. 28, & May 26, 2017).
www.finance.yahoo.com (retrieved May 25, 2017).
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 11, Page 2 of 3
DCF MODEL - NON-UTILITY GROUP Schedule 11
Page 3 of 3
DCF COST OF EQUITY ESTIMATES
(a)(a)(a)
Company V Line IBES Zacks
1 AT&T Inc.10.3%12.7%9.2%
2 Church & Dwight 9.0%9.8%10.7%
3 Coca-Cola 8.0%8.3%9.7%
4 Colgate-Palmolive 14.2%10.8%11.4%
5 Gen'l Mills 8.3%9.5%10.7%
6 Hormel Foods 12.5%11.9%11.3%
7 Kellogg 9.4%8.6%8.9%
8 Kimberly-Clark 14.9%9.0%9.8%
9 Lilly (Eli)13.5%14.8%14.4%
10 PepsiCo, Inc.9.7%9.1%10.1%
11 Procter & Gamble 10.6%9.0%11.0%
12 Public Storage NA 14.7%8.6%
13 Smucker (J.M.)9.3%7.2%8.5%
14 Sysco Corp.14.1%14.8%10.8%
15 Verizon Communic.7.7%7.2%13.7%
16 Wal-Mart Stores 6.8%8.3%8.9%
17 Waste Management 9.3%12.7%11.8%18
Average (b)10.7%10.5%10.6%
Midpoint (c)11.3%11.0%11.4%
(a)
(b)Excludes highlighted figures.
(c)Average of low and high values.
Earnings Growth
Sum of dividend yield (Schedule 11, p. 1) and respective growth rate
(Schedule 11, p. 2).
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 11, Page 3 of 3
REGULATORY MECHANISMS Schedule 12
Page 1 of 3
UTILITY GROUP
Company AMS BDR DSM ECA ESM FCA FRP FTY ICR NDT PCR PGA RDM SCR TAX TCR WNA Other
1 ALLETE √√√√√√
2 Ameren Corp.√√√√√√√√√√√
3 Avangrid, Inc.√√√√√√√
4 Black Hills Corp.√√√√√√√√√√Vegetation mgmt. tracker
5 CMS Energy Corp.√√√√√√
6 Dominion Resources √√√√√√√Nuclear decomm.
7 DTE Energy Co.√√√√√√
8 Edison International √√√√√√√√√√√
9 El Paso Electric Co.√√√√
10 Entergy √√√√√√√√√√
11 Exelon Corp.√√√√√√√√√√√
12 Hawaiian Elec.√√√√√√
13 IDACORP, Inc.√√√√√√
14 NorthWestern Corp.√√√√
15 Otter Tail Corp.√√√√√√
16 Portland General Elec.√√√√√√
17 Sempra Energy √√√√√√√√√√√√
GLOSSARY OF TERMS
AMS--Advanced Metering System Recovery Rider NDT -- Nuclear Decomissioning Tracker
BDR -- Bad Debt Cost Recovery Rider PCR -- Pension Cost Recovery Mechanism
DSM -- Demand Side Management / Conservation / Energy Efficiency Adj Clause PGA -- Gas Cost Adjustment Clause
ECA -- Environmental and/or Emissions Cost Adjustment Clause RDM -- Revenue Decoupling Mechanism
ESM -- Earnings Sharing Mechanism SCR - Storm Cost Recovery Tracker
FCA -- Fuel and/or Power Cost Adjustment Clause TAX--Property / Franchise Tax Recovery Mechanism
FRP--Formula Rate Plan TCR -- Transmission Cost Recovery Tracker
FTY - Jurisdiction allows for future test year WNA -- Weather Normalization Adjustment or other mitigants
ICR -- Infrastructure Investment / Renewables Cost Recovery Mechanism
Sources:
Company 10-K reports;
Regulatory Research Associates, Regulatory Focus, "Adjustment Clauses-A State-by-State Overview," Aug. 22, 2016;
Edison Electric Institute, "Alternative Regulation for Emerging Utility Challenges: 2015 Update," Nov. 11, 2015.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 12, Page 1 of 3
Schedule 12
Page 2 of 3REGULATORY MECHANISMS
UTILITY GROUP
Type
of
Svc State
Elec. Fuel/
Gas/
Purch. Pwr
Conserv.
Program
Expense Full Partial
Renew-
ables
Expense
Environ-
mental
Compliance
Gener-
ation
Capacity
Generic
Infra-
structure
Trans-
mission
Expense Other
Future
Test
Year
(b)
ALLETE
Minnesota Power Elec.MN √√√√√C
AMEREN
Ameren Illinois Elec.IL D √√√√Bad debts, taxes, franchise fees O
Ameren Illinois Gas IL √√√√√√Bad debts, taxes, franchise fees
Union Electric Elec.MO √√√√√√Taxes, fees P
Union Electric Gas MO √√Taxes, fees
AVANGRID
Central Maine Pwr Elec.ME D √Storm cost rider C
New York State E&G Elec.NY D √√C
New York State E&G Gas NY √√
Rochester G&E Elec.NY D √√C
Rochester G&E Gas NY √√
United Illuminating Elec.CT D √√√C
BLACK HILLS CORP.
Black Hills Power Elec.SD √√√√√
Cheyenne Light Fuel & Power Elec.WY √√√√O
Cheyenne Light Fuel & Power Gas WY √√√
Black Hills/Colorado Electric Elec.CO √√√√√CWIP in rate base rider
SourceGas Arkansas Gas AR √√√√Taxes, franchise fees
Black Hills Gas Distribution Gas CO √√
Black Hills Gas Distribution Gas NE √√Franchise fees
Black Hills Gas Distribution Gas WY √√
Black Hills Iowa Gas Utility Gas IA √√√Taxes, franchise fees
Black Hills/Kansas Gas Utility Gas KS √√√Bad debts, taxes, franchise fees
Black Hills Nebraska Gas Utility Gas NE √√Franchise fees
CMS ENERGY
Consumers Energy Elec.MI √√√√C
Consumers Energy Gas MI √√
DOMINION ENERGY
Virginia Electric & Pwr Elec VA √√√√√Taxes, franchise fees
DTE ENERGY
DTE Electric Elec.MI √√√√C
DTE Gas Gas MI √√
EDISON INTERNATIONAL
Southern California Edison Elec.CA √√C
Southern California Gas Gas CA √√
EL PASO ELECTRIC
El Paso Electric Elec.NM √√Taxes, franchise fees O
El Paso Electric Elec.TX √√√Recovery of military base discounts
ENTERGY
Entergy Arkansas Elec.AR √√√√√√Storm charges rider, taxes, franchise fees P
Entergy New Orleans Elec.LA √√√√√√Storm reserve rider O
Entergy New Orleans Gas LA √Storm reserve rider O
Entergy Louisiana Elec.LA √√√√√√Securitization-related riders O
Entergy Louisiana Gas LA √√√Securitization-related riders O
Entergy Mississippi Elec.MS √√√√√Storm cost rider, ad valorem tax rider O
Entergy Texas Elec.TX √√√Storm cost rider
Type of Adjustment Clause (a)
Decoupling New Capital
Holding Company/
Operating Company
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 12, Page 2 of 3
Schedule 12
Page 3 of 3REGULATORY MECHANISMS
UTILITY GROUP
Type
of
Svc State
Elec. Fuel/
Gas/
Purch. Pwr
Conserv.
Program
Expense Full Partial
Renew-
ables
Expense
Environ-
mental
Compliance
Gener-
ation
Capacity
Generic
Infra-
structure
Trans-
mission
Expense Other
Future
Test
Year
(b)
Type of Adjustment Clause (a)
Decoupling New Capital
Holding Company/
Operating Company
EXELON CORP.
Delmarva Power and Light Elec.DE D √P
Delmarva Power and Light Gas DE √√
Delmarva Power and Light Elec.MD D √√√Taxes and fees P
Baltimore Gas & Electric Co.Elec.MD D √√√Taxes and fees P
Baltimore Gas & Electric Co.Gas MD √√√√Taxes and fees
Commonweath Edison Co.Elec.IL D √√√√√Bad debts, taxes, franchise fees O
PECO Energy Co.Elec.PA D √√Taxes, franchise fees, nuclear decomm, bad debts O
PECO Energy Co.Gas PA √√√Taxes, franchise fees
Potomac Electric Power Co.Elec.DC D √√√Taxes and fees P
Potomac Electric Power Co.Elec.MD D √√√Taxes and fees P
Atlantic City Electric Co.Elec.NJ D √√√Taxes and fees P
HAWAIIAN ELECT. INDUSTRIES
Hawaiian Electric Co.Elec.HE √√√√√√Recovery of integrated resource plan costs C
Hawaii Electric Light Elec.HE √√√√√√Recovery of integrated resource plan costs C
Maui Electric Elec.HE √√√√√√Recovery of integrated resource plan costs C
IDACORP
Idaho Power Elec.ID √√√P
Idaho Power Elec.OR √√C
NORTHWESTERN CORP.
NorthWestern Corp.Elec.MT √√Recovery of out-of-market purch pwr costs
NorthWestern Corp.Gas MT √√Recovery of out-of-market purch pwr costs
NorthWestern Corp.Elec.SD √√
Northwestern Energy Gas NE √Franchise fees
OTTER TAIL CORP.
Otter Tail Power Co.MN Elec.√√√√√C
Otter Tail Power Co.ND Elec.√√√√O
PORTLAND GENERAL ELEC.
Portland General Electric Elec.OR √√√C
SEMPRA ENERGY
San Diego G&E Elec.CA √√C
San Diego G&E Gas CA √√
Notes:
D - Delivery-only utility.
C - Fully-forecasted test years commonly used in the state listed for this operating company.
O - Fully-forecasted test years occasionally used in the state listed for this operating company.
P - Partially-forecasted test years commonly or occasionally used in the state listed for this operating company.
LIR - Limited issue reopeners.
Sources:
(a)Regulatory Research Associates, Regulatory Focus, "Adjustment Clauses-A State-by-State Overview," Aug. 22, 2016.
(b)Edison Electric Institute, "Alternative Regulation for Emerging Utility Challenges: 2015 Update," Nov. 11, 2015.
Exhibit No. 3
Case Nos. AVU-E-17-01/AVU-G-17-01 A. McKenzie, Avista
Schedule 12, Page 3 of 3