Return on Equity (ROE) Item Nos: E-7, E-8, E-9, E-10, E-11, E-12, - PDF document

S lide 1 Return on Equity (ROE) Item No’s: E-7, E-8, E-9, E-10, E-11, E-12, E-24 Meeting Date: June 19, 2014 Good morning, Madame Chairman and Commissioners.

S lide 2 E-7 Draft Order on Initial Decision in Docket No. EL11-66-001  Adopts two-step DCF methodology for public utility ROEs, thus  incorporating long-term growth rates into analysis Establishes paper hearing and reopens the record to allow  participants to submit evidence on appropriate long-term growth rate Eliminates Commission’s practice of making post-hearing ROE  adjustments based on changes in U.S. Treasury bond yields Finds, based on the record in this docket, New England transmission  owners’ base ROE should be set halfway between midpoint of zone of reasonableness and top of that zone Total ROE still capped at the upper end of the revised zone  E-7 is a draft order affirming in part and reversing in part an init ial decision concerning the New England Transmission Owners’ base ret urn on equit y as provided for in IS O New England’ s t ariff. The draft order changes t he Commission’ s approach t o det ermining t he base ret urn on equit y for public ut ilit ies, applies t his approach t o t he fact s of this proceeding, and instit ut es a paper hearing t o allow t he part icipant s an opportunit y t o submit evidence on a limit ed issue concerning the applicat ion of t his approach in this proceeding. Hist orically in public ut ilit y rat e cases, t he Commission has used a one-step discounted cash flow met hodology t o det ermine a public utilit y’ s base ret urn on equit y. The draft order changes t he Commission’ s approach by adopt ing for public ut ilit ies the t wo-step discounted cash flow met hodology t hat t he Commission uses t o determine the ret urn on equit y for nat ural gas pipelines and oil pipelines. The difference bet ween the one-st ep and t wo-step discount ed cash flow met hodologies is t hat t he one-st ep methodology relies on short -term growt h rat es, whereas the t wo- st ep methodology incorporat es both a short -t erm and a long-t erm growt h rate est imat e. In nat ural gas and oil pipeline cases, t he Commission uses gross domest ic product , or GDP, as t he long-t erm growt h rat e est imate. The draft order applies t he t wo-st ep discount ed cash flow met hodology t o t his proceeding, t ent at ively using GDP as t he long-t erm growt h rate est imat e, but direct s a paper hearing t o allow part icipant s t o present evidence on t he appropriat e long- t erm growt h rate t o use in applying t he t wo-st ep discount ed cash flow met hodology in t his case. Furt her, while t he Commission t ypically places t he base ret urn on equit y at

t he cent ral t endency of t he zone of reasonableness produced by a discount ed cash flow analysis, t he draft order finds, based on t he record in t his proceeding -- including t he exist ence of unusual capit al market condit ions -- that placement of the base ret urn on equit y halfway bet ween the midpoint of t he zone of reasonableness and the t op of that zone result s in a j ust and reasonable rate. Applying this analysis, and subj ect t o t he long-t erm growt h rate set for hearing, t he draft order t ent at ively finds t hat a j ust and reasonable base ret urn on equit y for the New England Transmission Owners is 10.57 percent . The draft order also eliminates t he Commission’ s past pract ice of using U.S . Treasury bond yields t o make a final adj ust ment to a public ut ilit y’ s base ret urn on equit y t o reflect changes in capit al market conditions aft er t he close of t he record in a hearing proceeding. The draft order explains t hat t here is not necessarily a one-t o-one correlat ion bet ween U.S . Treasury bond yields and public ut ilit y ret urns on equit y. The draft order inst ead allows part icipant s in a rate case t o present at t heir hearing t he most recent financial dat a available at the time of the hearing, including post - t est period financial dat a then available. This approach ensures t hat all participant s have an opport unit y to present evidence and argument s concerning t he financial data used t o determine the public ut ilit y’ s ret urn on equit y, while allowing t he return on equit y t o be based on t he most recent financial dat a available at the time of the hearing, consistent wit h t he due process right s of t he part icipant s. Finally, t he draft order indicat es t hat a utility’ s t ot al ROE will st ill be capped at t he upper end of t he revised zone.

S lide 3 E-8, E-9, E-10, E-11, E-12  Draft orders address complaints challenging public utility ROEs  Draft orders establish hearing and settlement judge procedures  Draft orders note changes in the Commission’s approach set forth in E-7 and indicate that the Commission expects the evidence and any DCF analysis presented by the participants be guided by the decision in E-7 It ems E-8, E-9, E-10, E-11, and E-12 are draft orders set t ing for hearing and set t lement j udge procedures ot her complaint s challenging public ut ilities’ base ret urn on equit y. Those draft orders indicate that the Commission expects t he evidence and any DCF analyses presented by t he part icipant s in these other proceedings be guided by our decision in E-7.

S lide 4 E-24  Draft order on Remand from D.C. Circuit  Draft order notes the change in approach announced in E-7 concerning post-hearing ROE adjustments; draft order reverses a 2010 Commission decision to apply the U.S. Treasury bond yield adjustment to Southern California Edison Company’s ROE It em E-24 is a draft order reversing a prior Commission decision on remand from t he United S tat es Court of Appeals for t he D.C. Circuit, involving an order in which t he Commission made a U.S . Treasury bond-based post -hearing adj ustment to S out hern California Edison Company’s return on equity. As in E-7, t he draft order in E-24 explains that t he Commission is changing it s pract ice in public ut ilit y cases t o no longer make post-hearing adj ust ment s t o the ret urn on equit y based on changes in U.S . Treasury bond yields. Accordingly, t he draft order reverses t he Commission’s previous decision t o make such an adj ust ment t o S out hern California Edison Company’s ret urn on equit y. Thank you. We are happy t o answer any quest ions you might have.