before the new york public service commission in the matter of the

Rebuttal Testimony and SchedulesMr. Robert B. Hevert

Before the New York Public Service Commission

In the Matter of the Application o£ Consolidated Edison Company of New York

Case No. 09-S-0794 and 09-G-0795

Return on Equity

March 24, 2010

II.

III.

TABLE OF CONTENTS

WITNESS IDENTIFICATION ...............................................................................1

SUMMARY AND OVERVIEW ...............................................................................5

RESPONSE TO THE DIRECT TESTIMONY OF MS. PRYLO ..................... .... 12

Areas of Agreement ............ . .....................................................................................12

Areas of Disagreement .............................................................................................14

(1) Proxy Group Se/ection and Composition ..............................................................................14

(2) Relevance of the Constant Growth DCF Model ...................................................................22

(3) Growth Rates Used in DCTF Models ...................................................................................27

(4) Application of the Multi-Stage DCF Model ........................................................................35

(5) Risk-Free Rate Comj~onent of the Capita/Asset P,idng Model ...........................................43

(6) Market Risk Premium Used in CAPM .............................................................................46

(7) Beta Estimates Used in CAPM ..........................................................................................50

(8) Credit Quali~y Adjustment ..................................................................................................55

(9) Stay-Out Premium ..............................................................................................................61

(10) Flotation Cost Adjustment ..................................................................................................66

RESPONSE TO MESSRS. LIBERTY AND RADIGAN .......................................69

SUMMARY AND CONCLUSIONS ........................................................................71

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I. WITNESS IDENTIFICATION

PLEASE STATE YOUR NAME, AFFILIATION, AND BUSINESS ADDRESS.

My name is Robert 13. Hevert.

("Concentric"), located at 293

Massachusetts 01752.

I am President of Concentric Energy Advisors, Inc.

Boston Post Road West, Suite 500, Marlborough,

ARE YOU THE SAME ROBERT B. HEVERT THAT SUBMITTED DIRECT

TESTIMONY IN THESE PROCEEDINGS?

Yes, I submitted Direct TeslS_rnony on behalf of CorxsoIidated Edison Company of New

York, Inc., a New York corporation ("CECONY" or the "Company") and wholly owned

subsidiary of Consolidated Edison, Inc. ("CEI") regaxding the Company’s Cost of Eqmty

(sometimes referred to herein as the "Return on Equity", or "ROE"), and its proposed

capital structuxe. With respect to the Company’s ROE, my Direct TeslJmoW also

addressed the New York Public Service Commission’s (the "Commissior,") practice of

adjusting the authorized ROE based on the credit quality of the proxy gmnp (ie., the

¯ "credit quality adjustmesat"), and proposed a "Stay-Out Premium" to be added to the

authorized ROE if the Company were to agree r~ot to seek additional rate relief for a

period of three years m the case o£the natural gas opescations and four years in the case of

the steam operatior~s.

PLEASE STATE THE PURPOSE OF YOUR REBUTTAL TESTIMONY.

The purpose of my Rebuttal Testimony is to respond to the Direct Testimony submitted

by Ms. K~istme Prylo on behalf o£ the Department of Public Service, M_t. Tatiq Niazi on

bel~alf of the New York State Consumer Protection Board ("CPB"), and Mess~cs. Liberty


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and Radigan on behalf of the County of Westchester ("County") (sometimes collectively

referred to herein as the "opposing wimesses"), as they reIate to the appropriate ROE in

this proceedixxg.* My Rebuttal Testimony also updates the calculations contained in my

Direct Testimony to reflect data presented by the opposing wimesses (primarily Ms.

Prylo), and includes several additional analyses developed in response to certain points

raised by t_he opposing wimesses.

HAVE YOU PREPARED ANY REBUTTAL EXHIBITS?

Yes. Rebuttal Exhibits Nos.(RBH-9) through (RBH-20) have been prepared by me or

under my direct supervision.

PLEASE PROVIDE AN OVERVIEW OF THE PRINCIPAL OBSERVATIONS

AND CONCLUSIONS CONTAINED IN YOUR REBUTTAL TESTIMONY.

For reasons explained more fully in the balmxce of my Rebuttal Testimony, mygeneral

observations and principal conclusions are as follows:

While my Rebuttal Testimony updates the data contained in my Direct Testimony

and includes several additional analyses developed in response to certain points

raised by the opposing wimesses, none of those updates or modifications has

caused me to alter my recommended ROE or Stay-Out Premium.

¯ The ROE recommendations made by the opposing wimesses in this proceeding

are unxeasonably low and carmot be reconciled with observable, rdevant market

Consumer Power Advocates wimess Mx. Dowlmg proposes (I3. 5) to reduce the Company’s requested ROEto 10.15%. The sole basis for this adjustment appeaxs to be llaat 10.15% is rite ROE contaL~ed ~ the JoLntProposal submitted to the Commission in the Company’s current electric base rate case (i.e., Case 09E0428). Given M_~. Dowlmg’s lack of experlise on cost of capital and capital stracmre, and the fact that hehas not offered any independem evidence in support of his recommendation, however, the Commissionshould disregard that recommendation.


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data. Moreover, in several instances the data and assumptions contained in the

opposing witnesses’ testimony contradict, or axe highly inconsistent with, their

recommendations.

¯ Small and reasonable adjustments to Ms. Prylo’s multi-stage Discounted Cash

Flow ("DCF") analysis produce cost o£ equity estimates that axe very sLmilar to

my 10.80 percent ROE recommendation.

¯ Ms. Prylo’s primary criticisms o£ my Dkect Testimony, that my proxy group is

too restrictive, that the growth rates in my DCF analyses are "subjective" and

"excessive", and that the Market Risk Premium contained my Capital Asset

Pricing Model ("CAPM") is inappropriate, are without merit. As to the

composition of my proxy group, Ms. Prylo’s assertion that a laxger group

necessarily is more reliable is inconsistent with industry practice, and fails to

recogr~e that as a practical matter, her DCF zesNts are considerably more

variable than those presented in my Direct Testimony. Regarding the DCF

growth rates, Ms. Prylo’s conclusions fail to consider other, highly relevant data

that support the estimates used in my a~alyses. With respect to the Market Risk

Premium, using data provided in Ms. Prylo’s exhibits produces results that axe

comparable to tl~ose contained in my Direct Testimony.

¯ The "credit quality adjustment" proposed by Ms. Prylo assumes a relationship

that, based on actual data, does not exist. Contrary to Ms. Prylo’s assertion that

there is a "’real" and "quantifiable" rdationship between credit ratings and the

cost of equity, her own ROE estimates have no statistical relationship to the

credit scores included in her testimony; the same holds true fox the most recent

authorized term-us for her proxy group companies. Consequently, the premise of

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Ms. Prylo’s credit quality adjustment is without foundation, and her

recommended adjustment should be disregarded.

The Stay-Out Premium proposed by Ms. Prylo fails to recognize the yield curve

inversion that occurred during the financial market dislocation, and therefore

assumes that such usa inversion also will occur during the Stay-Out period.

Moreover, the use of a five-yea, averaging period to calculate the Stay Out

Premium con~adicts Ms. Prylo’s assertion that cu_trent interest rates are the best

predictor of future interest rates.

¯ While Ms. Prylo disagrees that a flotation cost adjustment is appropriate, she fails

to ,ecognize the underwritten equity offering closed by CEI in the period during

which she calculated the stock prices used m her DCF analyses, and that her

"sustainable growth" calculations assume additional equity issuances by CEI in

the neat term.

¯ Since Messrs. Liberty and Radigan acknowledge that they are not financial experts

and have provided no analyses in support o£ their recommended 9.70 percent

ROE, that recommendation should be disregarded. Moreover, their suggestion

that the Company’s revenue decoupling mechanism merits a negative adjustment

to the ROE has no analytical basis and fails to consider the prevailing tendency of

regulatory commissions to make no specific ROE adjustment for such structures.

HOW IS THE BALANCE OF YOUR REBUTTAL TESTIMONY ORGANIZED?

My remainhag testimony is organized as follows: In Section II, I provide an overview of

my Rebuttal Testimony, including a sutmnmy of my updated results and calculations;

Sections III and IV contain my spedfic responses to Ms. Prylo, and Messrs. Liberty and

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Radigan, respectively; and Section V provides a summary of my conclusions and

recommendations.

II. SUMlVlARY AND OVERVIEW

PLEASE PROVIDE .AN OVERVIEW OF MS. PRYLO’S TESTIMONY IN THIS

PROCEEDING.

Ms. Prylo recommends an ROE of 9.40 percent, based on her application of the "two-

stage" DCF model, and two forms of the CAPM. As with the analyses contained in my

Direct Testimony, Ms. Prylo weights her respective DCF and CAPM median results

according to the Commission’s two-thirds, one-third weighting convention.2 Based on

her ROE estimates and observed debt yields, Ms. Prylo reduces her weighted average

9.77 percent ROE by 39 basis points to reflect a "credit quality adjustment", and arrives

at an (unrounded) ROE recommendation of 9.38 percent.3 As to her recommended Stay

Out Premium, Ms. Prylo relies on five year average differences between short-term

Treasury yields to arrive at her recommended premiums of 13 and 21 basis points for

three and four-year stay-out periods, respectively.4

Regarding her review of my Direct Testimony, Ms. Prylo identifies three areas of

disagreement: (1) the composition of my proxy group; (2) the growth rates used in my

Constant Growth and Multi-Period DCF analyses; and (3) the ex-ante Market Risk

Premium estimate contained in my CAPM analyses,s Regarding the composition of my

proxy group, Ms. Prylo appears most concerned with the number of companies included

Prepared Testimony ofKristme A. Prylo, at 4. See also Exhibit (KAP-5), Page 3 0£3.Exhibit _CKAP-5), Page 3 of 3Prepared Testimony ofKristme A. Prylo, at 109. See also Exhibit _(KAP-7)Ibld., at 93.

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in my group, reasoning that a lager proxy group creates monte "confidence" m analytical

results than would a smaller group.6 With respect to the growth rates used in my DCF

analyses, Ms. Prylo considers them to be "subjective" and "excessive", Largely as a result

of her reference to a single external data point. Regarding the Market Risk Premium

estimate, Ms. Prylo is most concerned with the ex-ante estimate calculated .by my

application of the Sharpe Ratio] Ms.

adjustment, reasoning that such costs

Prylo further disagrees with my flotation cost

should only be recovered if a common stock

issuance is planned for the rate year.s As discussed more fia]ly m Section III, Ms. PiTlo’s

concerns and criticisms are misplaced, and often ~consistent with the analyses and data

presented in he~ own testimony.

PLEASE NOW PROVIDE AN OVERVIEW OF MR. NIAZI’S TESTIMONY IN

THIS PROCEEDING.

Mr. Niazi applied the two-stage DCF model, together with two forms of the CAPM, and

based on the weighted average of the two, arrived at an ROE estimate of 9.40 percent.9

Although Mr. Niazi applies a "credit quality" adjustment to his ROE estimates, he applies

that adjustment only to his DCF results and amves at an adjustment of approximately 20

basis points. Based on that adjustment, Mr. Niazi calc~ates an adjusted ROE estimate of

9.36 percent, which he then rounds to 9.40 percent)° Regarding the composition of my

proxy group, Mr. Niazi suggests that my use of a credit rating screening criterion is

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Ibid., at 48.Ibid., at I03, 104.Ibid., at I05.Direct Testimony and Exhibit of Tariq N. Niazi, at 5.Ibid., at 20.


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responsible for the differences in our two groups.11 Unlike Ms. Prylo, however, Mr. Niazi

does not suggest that a proxy group of 12 companies, 20er se, is inappropriate.

Nonetheless, neither Mr. Niazi nor Ms. Ptylo recognizes that screening criteria other than

credit ratings have meaningful effects on the composition of my proxy group.

Fmally, please note that because the methodologies used by Ms. Prylo and Mr. Niazi are

so similar, and given that their ROE recommendations axe identical, m order to avoid

redundancy and to reduce the scope of my Rebuttal Testimony, my comments will focus

primarily on the testimony of Ms. Prylo. In light of the similarity of their analyses and

recommendations, the obsergations contained herein regarding Ms. Prylo’s testimony also

generally may be viewed as applying to the testimony of Mr. Niazi.

PLEASE ALSO PROVIDE A BRIEF SUMMARY OF THE TESTIMONY

PROVIDED BY MESSERS. LIBERTY AND RADIGAN AS IT ~TES TO THE

COMPANY’S COST OF EQUITY.

Messrs. Liberty and Radigan preface their comments by noting that they are not claiming

to provide expert testimony as it relates to the cost of eqmty and accordingly, do not offer

any quantitative analyses of the Company’s ROE in the current market environment.~a In

lieu of providing such analyses, Messrs. IAbercy and Radigan review returns in five

Commission proceedings, ranging in time from September 2007 to the Company’s

Mr. Niazi also asserts that I did not appropriately foItow my own sc,eening as it relates to the c~edit rating.While my Direct Teslimony stated tt~at the rating was applied both S&P and Moody’s, the Moody’s ratingwas only applied in those instances in which no S&P rating was available. Thus, wtfile !vlx. Niazi’sconfusion on this poir~t is understandable, the composition of my gmttp would not change based on tttatobservation.Direct Testimony of Ronald J. Liberty and Frank W. Radigan, at 22.


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currently pending elecmic rate proceeding.13 Based on that review, Messrs. Liberty and

Radigan conclude that the authorized return of 9.70 percent under the Company’s current

gas rate plan is reasonable)4 With respect to tile incremental effect of revenue

decouplmg mechanisms, Messrs. Liberty and Radigan assert that had the Commission

been able to quantify the effect of such mechamsms on the cost of equity, it would have

further reduced the ROEs authorized in those cases.

Inasmuch as Messrs. Liberty and Radigan failed to provide quantitative analytical support

for their recommendation, my response to their testimony will focus on the rdevance of

authorized returns from regulatory jurisdictions in addition to New York from the

perspective of equity investors, and the relationship between revenue decoupling

mechanisms and investors’ required return on equity. As to the first point, if investors

"give great weight to the analysis performed by regulatory bodies",is it is quite clear that

the return recommended by Messrs. Liberty and Radigan is deficient. Regarding the

effect of revenue decoupling mechanisms on the cost of equity, Messrs. Liberty and

Radigan fail to consider positions taken by other regulatory jurisdictions. As discussed in

Section IV, the vast majority of such decisions resulted in no such adjustment.

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ARE THERE ANY PRACTICAL

REASONABLE PERSPECTIVE

RECOMMENDATIONS?

BENCHMARKS THAT PROVIDE A

ON THE OPPOSING WITNESSES

Yes. It is my experience that xetums authorized in other jnrisdictions a~e important to

investors and therefore provide a ,elevant benchmark for the purposes of assessing the.

reasonableness of analytical results and ROE recommendations, tn that regard, the 9.40

percent ROE recommended by both Ms. Ptylo arid Mr. Niazi is brow 51 of the 52

authorized returns duxitag the period from 2009 through 2010, and the 9.70 percent ROE

recommended by Messrs. Liberty and Radigan is below 50 o£ the 52 authorized returrls,16

The inadequacy of the 9.40 percent ROE recommended by Ms. Ptylo and Mx. Niazi, and

the 9.70 percent ROE recommended by Messrs. Liberty and Radigan also can be made

apparent by considering the equity premium implied by those returns relative to the yield

on A-rated, long-term utility debt. As Ms. Prylo notes, as of December 2009, the five-

yea average yield on A-mated utility debt was approximately 6.24 percent]7 As reported

by Citigroup Global Markets, Inc. ("Cifigroup"), m 2003 and 2007 the annual yidd on A-

rated utility debt averaged 6.22 percent, or orfly two basis points below Ms. Prylo’s five-

year average..8 During those two years, the authorized ROE for electric utilities averaged

10.64 percent, ~esulting in an implied equity premium of 4.42 percent (i.e., 442 basis

points). For the five years ended December 2009 (i.e., the period referenced by Ms.

Prylo), the average authorized ROE was 10.41 percent.19 As shown on Table 1 (below),

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Source: RegulatorT Reseaxch Associates. _As discussed later in my Rebuttal Testimony, differences in creditratings do not account for such diffe,ences.Pzepa~ed Testimony of Ktistine A. Prylo, at 109.Citigmup Global Magkets, Inc., UriC@ ROEs:A~ Overview, April 2008, at 8.Source: Regulatory Research Associa*es.


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the average o£ those three time periods produces an implied equity premium of 4.33

percent which, when applied to Ms. Prylo’s 6.24 percent cost of debt estimate, results m

an ROE of 10.57 percent.

Table 1: Implied Equity Premia

Five years ended 200920072003Average

A-Rated Utility Implied Equity AverageDebt YieM Premium Authorized Roe

6.24% 4.17% I0.41%6.16% 4.15% 10.31%6.28% 4.68% 10.96%6.23% 4.33% 10.56%

Ms. Prylo’s Estimated Debt Yield 6.24% 4.33% 10.57%

As a practica2 matter, the fact that financial institutions such as Citigroup provide analyses

focused or~ the implied equity risk premium based on average authorized returns indicates

the usefulness of that information to investors in forming their investment decisions and

return requirements.

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IN LIGHT OF THAT DATA, WHAT ARE YOUR PRINCIPAL CONCLUSIONS

REGARDING THE OPPOSING WITNESSES’ ROE RECOMMENDATIONS?

As noted m my Direct Testimony, it is important to recogr~e that investors consider a

broad range of data, including authorized returns from alternative jurisdictions, both in

establishing their return requi~emertts and as a means of assessing the regulatory risk

associated with any given jurisdiction,z° As each of the ROE wimesses in this proceeding

undoubtedly is aware, equity investors have many options available to them, and will

allocate thek capital based on the expected risk-adjusted returns associated with those

alternatives. While I am not suggesting that this Commission should be bound by the

Direct Testimony and Schedules of Robert B. Hevert, at 22, 23.


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decisions of other regulatory jurisdictions, given that investors consider such data in

framing their investment decisions, remm recommendations that mater~ally deviate from

observed industry norms should be supported by dear and unambiguous reasons

explaining those deviations. None of the opposing wimesses, however, has done so.

From an analytical perspective, it is important that the inputs and assumptions used to

arrive at an ROE recommendation are consistent with the recommendation itself. In

addition, while I appreciate that every analysis necessarily requires an element of

judgment, the application of that judgment must be made in the context of the

quantitative and qualitative information available to the analyst. In my view, the 9.40

pexcent ROE recommended by both Ms. Prylo and Mr. Niazi, and the 9.70 percent ROE

recommended by Messrs. Libe~’y and Radigan cannot be reconciled with the data and

assumptions underlying their recommendations, or the breadth of market data typically

relied upon by industry practitioners.

PLEASE SUMMARIZE THE UPDATES AND MODIFICATIONS MADE TO THE

ANLAYSES CONTAINED IN YOUR DIRECT TESTIMONY.

In o~cder to remove the effect of timing on differences in our analytical results, to the

extent possible I have relied upon the data provided by Ms. Prylo as the basis for my

updated and revised analyses. Based on that data, I have updated my DCF (both Multi-

Stage and Constant Growth) and CAPM analyses (both traditional and Zero Beta), and

have continued to apply the Commission’s two-thirds/one-third weighting convention to

those results. For the purposes of my CAPM analyses, I have used data provided in Ms.

Prylo’s testimony to update my ex-ante Market Risk Premium, and have provided Beta


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coefficients based on more recent market data. I have performed those analyses using my

proxy group, as well as Ms. Prylo’s proxy group.

In addition, I have updated my flotation cost adjustment m reflect CEI’s recent

undeiav~itten equity offering. Regarding the Stay-Out Premium, I again have relied upon

data provided by Ms. Prylo, and have concluded that the 50 basis point premium

~ecommended in my Direct Testimony continues to be appropriate. Table 2 (below)

summarizes my updated calculation of the Company’s ROE based on the Commission’s

weighting convention.

Table 2: Summary of Results

Average DCF ResultsAverage CAPM- Current Beta

NYPSC Averaging Convention 2/3 DCF+ 1/3 CAPMFlotation Cost

Remm on Equity

Hevert Proxy Prylo ProxyGroup Group10.93% 10.82%

10.13% I0.74%10.66% 10.80%0.08% 0.08%

10.75% 10.88%

My testimony also contains many other analyses that mxpport and corroborate my

recommended ROE; those analyses are contained m exhibits or work papers to my

testimony.

III. RESPONSE TO THE DIRECT TESTIMONY OF MS. PRYLO

Areas of Agreement

Q. PLE2xSE SUMMAPdZE THE ARF_AS OF AGREEMENT BETWEEN YOU AND

MS. PRYLO.

There are several points on which Ms. Prylo and I are in agxeement:

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* We agree upon certain aspects of out DCF analyses, including the averaging

period used to estimate the individual companies’ stock p~ices, and the fact that a

multi-period DCF model can provide important information in arriving at ROE

detem3inations. While the analyses contained in my Direct Testimony were based

on an earlier time period, in order to remove the effect of timing differences on

out respective analytical results, the analyses contained in my Rebuttal Testimony

adopts the data presented in Ms. Prylo’s testimony.

¯ Ms. Prylo and I agree that when viewed in the context o£ recent market volatility,

Market Risk Premium estimates based on historical risk premia produce counter-

intuitive results. Cor~sequenfly, Ms. Prylo and I agree that it is appropriate to

focus on expected, or ex-ante, Market Risk Premium estimates. Although we rely

on different sources, Ms. Prylo correctly points out that the expected market

return developed by my DCF approach is "nearly identical" to her own.21 Ms.

Prylo objects, however, to my application of the Sharpe Ratio to develop a second

ex-ante estimate. As discussed below, using Ms. Prylo’s own data produces a

Sharpe Ratio that is slightly above the result contained in my Direct Testimony.

¯ As a general proposition, Ms. Prylo and I agree that long term Treasury yields are

the appropriate measure of the Risk-Free Rate in CAPM. While Ms. Prylo’s

CAP~¢I analysis assumes a Risk-Free Rate based on the yield orl 20-year TreasmT

securities, for reasons discussed more fully later in my testimony, the CAPM

analyses contained in my D~tect Testimony continue to reflect the 30-year

Treasury yield.

Prepared Testimony of Kfisiine A. Prylo, at 104-105.

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I have applied (as has Ms. Prylo) the Commission’s approacla of weighting DCF

and CAPM results by factors of two-thirds, and one-third, respectively.

Areas of Disagreement

Q. ARE THERE AREAS IN YOUR RESPECTIVE ANALYSIS ON WHICH YOU AND

MS. PRYLO DISAGREE?

A. Yes, there are. Notwithstanding the areas of agreement and the analytical modificationS

noted above, there remain a number of areas in which Ms. Prylo and I disagree. Each of

those areas of disagreement is discussed below.

Pro¢~ Group Selection and Composition

PLEASE SUMMARIZE THE CRITERIA BY WHICH MS. PRYLO SELECTED HER

PROXY GROUP.

Similar to my approach, Ms. Prylo began with the mfiverse of companies included in

Value Line’s electric utility segment. Ms. Ptylo arrived at her 34-company comparison

gronp by applying screens to exclude companies that:

1. Have senior unsecttted debt ratings from Standard and Poor’s and Moody’s that

are bdow investment grade;

2. Do not pay dividends;

3. Do not receive at least 70.00 percent of their ~evenue from regulated operations;

and

4. Were in the midst of merger-related or corporate restructuring activity during the

time period of her analysis,22

Ibid,, at 50.


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ARE THE SCOPE AND DEFINITION OF THE SCREENS APPLIED BY MS.

PRYLO GENERALLY CONSISTENT WITH THOSE APPLIED IN YOUR

DIRECT TESTIMONY?.

While certain of the screening criteria are common to our analyses, there are sgsaificant

differences between our approaches. In my view, Ms. Prylo’s screening criteria are far

too general and result in a proxy group that, taken as a whole, is not sufficiently

comparable to the Company.

DOES MS. PRYLO COMMENT ON THE SCREENING C1LITEtLIA CONTAINED

IN YOUR DIRECT TESTIMONY AND THE COMPOSITION OF YOUR PROXY

GROUP?

Yes, Ms. Prylo identifies two primary concerns with my proxy group: (1) the size of the

group; and (2) the credit rating criterion used to develop the group. With respect to the

size o£ my proxy group, Ms. Prylo suggests that because she relies on a much larger

group, the results of my analyses axe less reliable than her results,as

WHAT IS YOUR RESPONSE TO MS. PRY’LO’S CONCERN IN THAT REGARD?

In effect, Ms. Ptylo has traded size for comparability under the assumption that her larger

proxy group necessarily produces more ~celiable results. While Ms. Prylo acknowledges

the importance of maintaining the appropriate balance of sufficient sample size and

comparability of the group,24 in practice she has selected a group that is overly broad and

not representative of the Company.

Ibid., at 93.tbida, at 47.

Moreover, Ms. Prylo fails to recognize that the

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stnlcture and underlying assumptions of the analytical approach employed contributes

significantly to the variability of results, regardless of the size of the proxy group.

The issue of proxy group size relafve to the fundamental comparability of the individual

proxy companies has been addressed in several jurisdictions. The conclusion quite often

reached is that the comparability of the sample group, not the number of compames m

the group, should be the controlling factor. In fact, the overriding objective o£

establishing a proxy group that is comparable in overall financial and business risk to the

subject company was endorsed by the United States Court of Appeals for the District of

Columbia (the "’Court of Appeals") in the Petal Gas Storage decision. In that decision,

the Court of Appeals acknowledged that in developing a proxy group, the goal is to rely

on companies that are of similar risk to the subject company:

That proxy group arrangements must be risk-appropriate is the commontheme in each argument. The principle is well-established. See HopeNatural Gas Co., 320 U.S. at 603 ("~f]he return to the equity ownershould be commensurate with returns on investments in otherenterprises having corresponding risks."); CAPP I, 254 F.3d at 293 ("[A]utility must offer a risk- adjusted expected rate of return sufficient toattract investors."). The prindple captures what proxy groups do,namely, provide market-determined stock and dividend figures frompublic companies comparable to a target company for which thosefigures are unavailable. CAPP I, 254 F.3d at 293-94. Mar~iet determinedstock figures reflect a company’s risk level and, when combined withdividend values, permit calculation of the "risk-adjusted expected rate ofreturn sufficient to attract investors.’’2s

What matters is that the overall proxy group arrangement makes sense interms of relative risk and, even more importantly, in terms of thestatutory command to set "just and reasonable" rates, 15 U.S.C. ~ 717c,that are "commensurate with returns on investments in other enterpriseshaving corresponding risks" and "sufficient to assure confidence in thefinancial integrity of the enterprise . . . [and] maintain its credit and . . .attract capital," Hope Natural Gas Co., 320 U.S. at 603.26

25

26Petal Gas Slorage v. FERC, 496 F.3d 695,Ibid.

699 (D.C. Cir. 2007).

16 CaseNo. 09-G-0795Hevert Rebuttal

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To that point, and as discussed in my Direct Testimony, even a brief search reveals that

several regulatory commissions rely on proxy groups of 12 or fewer companies in arriving

¯ 27at ROE detezminattons.

2728

ARE INDUSTRY PRACTITIONERS INCLINED TO TRADE PROXY GROUP

SIZE FOR COMPARABILITY TO THE SUBJECT COMPANY?

No, they are not. In order to assess the number of companies included in the proxy

groups typically used by industry practitioners, I reviewed two sources o£ publicly

available data. The first source includes the proxy groups used by each of the 54

companies comprising the Value Line electric utility universe as set forth in their most

recendy filed annual Defirfifive Proxy Statements (SEC Form DEF-14A). As part of

those filings, companies disclose the peer groups to which they compare their own

market performance. The mean and median number of companies included in the

comparison groups is approximately 17, and the most frequently observed number is 12.~8

None of the companies developed comparison groups as large as Ms. Prylo’s 34-member

group.

I also considered the comparison groups used by financial advisors in assessing the

fairness of the fi~ancial ter*ns associated with New York regulated utility merger and

acquisition transactions. While fairness opinions typically derive estimates of value from

multiple sources, one element o£ the overall determination of value is a comparable

company analysis, which analyzes and applies key market multiples from a proxy group of

Direct Testimony and Schedules of Robert t3. Hevert, at 20.Includes companies that have specifically developed proxy gxoups.


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293O

similar transactions to derive an estimated value for the transaction being considered.

Based on my review of nine comparables analyses for utility mergers or acquisition

transactions in New York State since 1998, the proxy groups ranged m size from four to

twelve companies, with a single instance in which 22 transactions were considered.

WHAT CONCLUSIONS DO YOU DRAW FROM THOSE ANALYSES?

Simply that in practice, financial analysts and advisors are more focused on the

comparability of proxy companies to the subject company than they are with the number

of companies in the group. That inclination to focus or, comparability tends to produce

proxy groups that are much closer in number to my group than to that used by Ms. Prylo.

TURNING NOW TO SPECIFIC SCREENING CRITERIA, DOES MS. PRYLO

BELIEVE THAT DIFFERENCES IN CREDIT RATINGS ARE IMPORTANT IN

DETERMINING THE COMPANY’S ROE?

Yes. In fact, Ms. Ptylo believes that differences in credit ratings are so important, that it

warrants a reduction to the Company’s ROE of 39 basis points:29

DOES MS. PRYLO SUGGEST YOUR CREDIT SCREEN, AS APPLIED, DOES

NOT ACCOMPLISH THE GOALS OF THE GENERIC FINANCE CASE?

No. In fact, Ms. Prylo acknowledges that it could be argued that the credit screen that I

applied is similar to the goals outlined in the Generic Finance Case Recommended

Decision.~°

Prepared Testimony of Kaisfne A. Pzylo, at 91.Ibid., at 94.


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WHAT, THEN, DO YOU UNDERSTAND MS. PRYLO’S CONCERN TO BE AS IT

RELATES TO YOUR CREDIT SCREEN?

As I tmderstand her testimony, Ms. Prylo’s concern is not with the cmerion per se.

Rather, Ms. Prylo objects to the resulting proxy group, which she acknowledges is a

subset of her group, because it contains fewer companies than have been used in prior

proceedings.3t

WHAT IS YOUR RESPONSE TO MS. PRYLO’S POSITION ON THAT POINT?

My main concern is that Ms. Prylo’s approach essentially standardizes the proxy group

for all combination gas and electric utilities, rather than specifically developing a proxy

group based on the business and financial risks of the subject company. In her criticism

of my credit screen, Ms. Prylo states that "£or the purposes of fairness and reasonabieness

it is important to provide each of the New York State eIectric and gas combination

utilities with rates of return that are determined in a reliabIe and consistent manner".3~

Ms. Prylo further states that the use of my credit screen is % major flaw’’ because it has

the effect of excluding "’22 compames that the Commission has previously found to be

reasonable surrogates for Con Edison".33 Ms. P~lo also reasons that the credit screen

raises "significant concerns because it would requite the use of varying size proxy groups,

depending upon the particular c~edit quality of the company in question,^".~4

Ms. Prylo’s concern, therefore, appears to be with any screening criterion that results in a

proxy group that is different from or smaller than that which was relied upon in prior

3132

3334

tbid, at 96.tbid, at 95, 96.Ibid., at 95.Ibid, at 95.

i9 Case No. 09-G-0795Hevert Rebuttal

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cases. That notion is inconsistent with the generally accepted goal, wt~ch she herself

endorses, of establishing a proxy group that has "generally similar business and financial

~isks to Con Edison.’’~s

MS. PRYLO ALSO ASSERTS THAT YOU ELIMINATED 22 COMPANIES FROM

THE PROXY GROUP THROUGH THE APPLICATION OF YOUR CREDIT

SCREEN. IS THAT ASSERTION CORRECT?

No, it is not. As I discuss in my Direct Testimony, in order to develop a proxy group

that is reasonably representative of the business and financial risks of CECONY, I relied

on several screening c~iteria.~6 Table 3 (below) provides a comparison of the companies

used in our respective proxy g~oups and the reasons why certain of Ms. Prylo’s proxy

companies were eliminated from my final proxy group. As shown in Table 3, while Ms.

Prylo is correct that my proxy group does not include 22 companies that are included in.

her group, many of those companies were eliminated based on multiple screening criteria.

In fact, of those 22 companies, 12 were eliminated solely on the basis of the credit rating

screen, while 10 were e]Jminated as the result of otlae~ criteria.

35 Ibid., at 50.Dkect Testimony and Schedules of Robert B. Here,t, at 18.


1 Table 3: Proxy Group Composition

23456789

Allete

Atliant Energy Cot-p:

Ameren Corp.

American Electric Power

Avista Corp.Black Hills Corp.Cleco Corp.Consolidated Edison

DPL, Inc.

DTE Energy Co.

Duke Energy Corp.

Edison International

Empire District Electric

Entergy Corp.

First Energy Corp.FPL Group, Inc.Great Plains Energy Inc.Hawaiian ElectricIDACORP, Inc.MGE Energy, Inc.Northeast Utilities

NSTAR

PG&E CorpPinnacle West Capital

Portland GeneralProgress EnergySempra EnergySouthern Co.TECO Energy, Inc.United £llttrninatingVectren Corp.

Westax Energy

Wisconsin Energy

Xcel Energy, Inc.

B][2][31[41

ALELNTAEEAEPAVABKHCNLEDDPLDTEDUKEIXEDEETRFEFPLGXP

IDAMGEE

NUNSTPCGPNWPORPGNSRESOTEUILWC

HevertDirect

Proxy Group4

4

Insuffident revenue or income fxom regulated operations

Prylo ProxyGroup

4

.4r11,[21,[31

,4131

-4131

.413]

.k/[1],[3]

~i[lt

~112],[3]

NiaziProxy Group

4[11;[2],[3]

-k/[11,[31

Has a history of not paying dividends oz do not have positive earnings growth projectionsCorporate zafing is not between 131313+ mad AANot cove~ed by at least two generally recogrfized utility industry equity analystsCurrently known to be party to a merger. Please note that First E=e,gy Corp. and Allegheny Energyentered into an Agreement and Plan of Merger on February 10, 2010. See First Energy Coxp. SEC Form 8-K dated February 10, 2010.


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PLEASE SUMMARIZE YOUR CONCLUSIONS REGARDING THE PROXY

GROUP TO BE USED IN THIS PROCEEDING.

In my view, the principal issne is whether financial analysts are, or should be, willing to

trade fundamental comparability for size in developing the proxy groups used t-or the

purpose of ROE determinations. As discussed above, that is not the case for industry

practitioners, who are far more likely to establish proxy groups based on comparability

than size. Moreover, the notion that the credit sc~:een included in my criteria is

responsible for the entkety of the difference between out respective gronps simply is not

correct; other relevant screening criteria also contribnted substantially to that difference.

Relevance of the Constant Growth DCF Model

PLEASE PROVIDE A BRIEF OVERVIEW OF THE CONSTANT GROWTH DCF

MODEL CONTAINED IN YOUR DIRECT TESTLMONY.

The Constant Growth DCF model estimates the cost of equity as the sum of (1) the

expected divide,ad yield, and (2) the expected long-term growth rate.~7 _As Ms. Ptylo

points out, and as noted m my Direct Testimony, the Constant Growth Model relies on a

series of assumptions including: (1) constant earnings, dividend and book value growth

rates; (2) a stable dividend payout ratio; (3) a constant price-to-earnings multiple; and (4) a

discount rate greater than the expected growth rate.~a As with all financial models,

considered judgment must be applied in setting the assumptions used in the model, and

in selecting the appropxiate ROE from the range of results produced by the modal.

37

38


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1718192021222324252627

DOES THE FACT THAT THE CONSTANT GROWTH MODEL IS SUBJECT TO

CERTAIN ASSUMPTIONS OBVIATE ITS USEFULNESS IN PRACTICE?

No, it does not. As r~oted in my Direct Testimony, all models used to estimate the cost

of equity are subject to constraints or limiting assumptions; it is for that reason that

analysts tend to use multiple approaches in estimating the cost of equity.39 Given that the

cost of equity is an unobservable parameter, the mere fact that o~e model may allow for

more inputs or is subject to a different set of assumptions does not necessarily prove that

its results are somehow more reliable than other models. To that point, and as discussed

in more detail below, the results of the two-stage model presented by Ms. Prylo are far

more variable than the results of the Constant Growth model presented in my Direct

Testimony. That result is not surprising, given that multi-stage model results by their

nature are quite sensitive to inputs and assumptions.

The observation that multi-stage models (sometimes referred to as "Dividend Discount

Models") may produce highly variable results has been reported by several authors. As

noted by Cohen, Zinbarg and Zeikel:

Despite its proven usefulness, many professional investors shy away fromthe dividend discount framework of analysis because of a number ofinherent complexities.

...even smaI1 differences key assumptions ~egarding stages 1 and 2produce large differences in calculated intrinsic values.

For example, in a model that has been utilized by Prudential InsuranceCompany, every change of one percentage point of growth assumed instage two produces, on average, a 10 percent change in intrinsic value.4°

394O

Ibid.Jerome B. Cohen, Edward D. Zinbarg, Arthux Ziekel, Investment Analysis mad Portfolio ManagemgCt, 5ttEd. (Homeward: Richard D. Irwin Inc., 1987), at 354-355.


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Similarly, an article in FinanciM Analysts Jonmal noted that due to the non-linear nature

of the model, and in pat-ticular the non-linear relationship between expected growth and

the stock prices, the effect of uncertain growth rates can ampli~ the variability in the

Cost of Equity estimate produced by the model.41 Consistelat with that point, as I discnss

later in this section Ms. Prylo’s unreasonably low long-term growth estimate produces an

unduly low ROE estimate.

IS THE CONSTANT GROWTH DCF MODEL TYPICAllY USED IN

REGULATORY PROCEEDINGS TO ESTIMATE THE COST OF EQUITY?.

Yes, it is. In my experience, it is the most widely used method of estimating the cost of

equity.

IS IT YOUR VIEW, THEN, THAT THE MULTI-STAGE MODEL SHOULD NOT

BE USED IN THIS PROCEEDING?

No, it is not. My point simply is that the multi-stage form of the DCF model only

increases the reliability of results vis-a-vis the Constant Growth form of the modal to the

extent that the inputs and assumptions are reasonable and appropriate. _As noted in my

Direct Testimony, for example, I do not believe it is reasonable to assume that growth

will transition f~om the first stage to the long-term estimate in a single year; that is why I

have included an intermediate o~ "transition" stage in my multi-period model. Nor do I

believe that the results of a multi-stage model should be accepted as given, without

checking for reasonable consistency ac*oss the input var2ables.42 Thus, a multi-stage

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See, fo~ example, Adam K. Gehz, Jr., A Bias in Dividend Discount Moddr, Financial Analysts Journal,JanuaxyiFebruary, 1992.Direct Testimoxly and Schedu]es of Robert B. Hevert, at 30.


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model that calculates the implied Price-Earnings ratio in the terminal stage provides a

useful check on the reasonableness of the assumptions and calculations contained in the

balance of the model.

HAVE YOU CONSIDERED _ANY BENCHMARKS BY WHICH ONE MIGHT

ASSESS THE REASONABLENESS AND RELIABILITY OF YOUR CONSTANT

GROWTH DCF RESULTS?

Yes, t have considered two metrics. The first calculates the vaziability of Ms. Prylo’s two-

stage model results relative to my Constant Growth DCF results. The second compares

my Constant Growth DCF result used in the calculation of my ex-ante Market Risk

Premium to the expected market return provided in the Bank of America Merrill Lynch

("BofAML") Quantitative Profiles report relied upon by Ms. Prylo for the purpose of

estimating the Market Risk Premium component of her CAPM analysis.

PLEASE DISCUSS THE VARIABILITY OF YOUR CONSTANT GROWTH

RESULTS RELATIVE TO MS. PRYLO’S MULTI-STAGE RESULTS.

To assess the relative variability of the resttlts across companies in our respective proxy

groups, I calculated the coefficient of variation for Ms. Prylo’s "Long Form ROE" as

presented on Page 2 of 3 of Exhibit __(KAP-5), and for the Constant Growth DCF

results presented in Exhibit No.__ (RBH-2) to my Direct Testimony. The Coefficient of

Variation ("CoV") simply is the ra6o of the standard deviation of a data series to the

average of that series. The CoV is useful when comparing the variability of two different

data series since it "standardizes" the measure of variability (i.e., the standard deviafon)

25 Case No. 09-G-0795Hevert RebuttaI

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by reference to the average. As shown in TaMe 4 (below), the CoV of Ms. Prylo’s results

is nearly three times that of my Constant Growth DCF model.

Table 4: Coefficient of Variation - ROE Estimates

PryloLong Form ROE

10.04%

HevertConstant Growth DCF

11.17%

0.79%

7.03%

AverageStandard Deviation 2.10%

Coefficient of Variation 20.92%

PLEASE NOW EXPLAIN YOUR REFERENCE TO THE MERRJJ~ LYNCH

ANALYSIS IN ASSESSING YOUR CONSTANT GROWTH DCF RESULTS.

As noted earlier, Ms. Prylo correctly observed that the expected market return estimate

used to develop the ex-ante Market Risk Premium estimate in my CAPM analysis was

"nearly identical" to the Bo£AML estimate. As noted on page 39 of my Direct

Testimony (see also Exhibit No.__ (R_BH-5)), my expected market return is based on the

Constant Growth DCF model. The fact that my estimate is "nearly identical" to the

BofAML estimate which, I understand, reflects a muJti-stage DCF ~esult, provides

additional comfort that the Constant Growth model, properly specified, is a reasonable

analytical approach. That said, I understand the Commission’s preference for the multi-

period model, and as such, my Rebuttal Testimony continues to reflect the multi-stage

DCF results.

WHAT ARE YOUR CONCLUSIONS ON THIS ISSUE?

My conclusion is quite straightforward: it is not necessarily appropriate to take greater

comfort in the results of muifi-stage models simply because those models provide the

oppommity to provide additional assumptions. As discussed above, functional forms of


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such models can result in highly variable results depending on the underlying

assumptions. That said, I agree that if properly implemented, multi-stage models may

provide important information to be considered in arzivmg at an ROE deten’nination.

Growth Rates Used in DCtv Models

PLEASE SUMMARIZE MS. PRYLO’S COMMENTS CONCERNING THE

GROWTH RATES USED IN YOUR DCF MODELS.

As a preliminary matter, it is important to r~ote the distinction between the earnings

growth rate used in my Constant Growth DCF modal and in the first stage Of my Multi-

Stage DCF model, and the long-term (i.e., nominal Gross Domestic Product, or "GDP")

growth estimate used in the third stage in my Multi-Stage model. I will adckess Ms.

Prylo’s positions regarding the projected Iong term nominal GDP growth later in this

sectioEt.

Regarding the earnings growth rate used in my DCF analyses, Ms. Prylo suggests that my

Direct Testimony provided no "concrete evidence from financial publications as to why

earnings growth estimates is better than using dividend projections", wlaile her testimony

points to a single publication in support of her position.4~ Ms. Prylo f~ther asserts that

since analysts’ earnings growth rates are "short-term in natuace mad sometimes prone to

grave inaccuracies, it is unreasonable to assume that investors would blithely assume the

ability o£ these companies to maintain such growth rates well out into the future...’’44

Finally, Ms. Prylo suggests that my growth estimates ate "subjective" and result m

43 Prepared Testimony of Kristhae A. Pzyto, at 64.Ibid., at 64-65.


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"excessive" DCF results.4~ ~71-tile I address each of those points below, m summary, Ms.

Prylo’s objections and conclusions are misplaced, and often contradict the data and

analyses presented in her own testimony.

PLEASE FIRST Rt~SPOND TO MS. PRYLO’S OBSERVATION THAT YOUR

DIRECT TESTIMONY DID NOT INCLUDE ANY REFERENCES TO

FINANCLAL PUBLICATIONS SUPPORTING THE USE OFEARNINGS

GROWTH RATES.

There have been many publishedarticles that specifically support the use o£ analysts’

ea~aings growth projections in theDCF model in general, and as a method of calculating

the expected Market Risk Premiumin particular,a~ A 1986 article entitled Using Analysts’

Growth Forecasts to Estimate Shareholders Required Rates of Return by Dr. Robert Harris, for

example, demonstrated that financial analysts’ earnings forecasts (re£erted to in the article

as "’FAF") in a Constant Growth DCF formula is an appropriate method of calculating

the expected market risk premium.47 In that ~egard, Dr. Harris noted that "’...a growing

body of knowledge shows that analysts’ earnings forecasts are indeed reflected in stock

prices. Such studies typically employ a consensus measure of FAF calculated as a simple

average of forecasts by individual analysts.’’~s Dr. Harris fxtrther noted that "[g]iven the

demmlstrated relationship of FAF to equity prices and t_he direct theoretical appeal of

45

46

47

48

Ibki., at 96, 98.I note that in pages 104 and 105 of her testimony, Ms. Pzylo expresses her concern that while my expectedmarket retrain as caIculated fox the purpose of the market risk premium component of the CAPM is "nearlyidentical" to her own, my esttmate was based on the use o£ earnings growth rates in the Constant GrowthDCF modal.Robert S. Harris, Udng Ana~sts" Growth F~r~casts t~ Estimate Shareholder Required RaZes ~f Return, FinancialManagement, 1986, at 66/Ibid., at 59. Emphasis added. As noted in my Direct Testimony, Zacks, the source of earnings growthprojections that I use in addifio~t to Value Line, is a consensus forecast.


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expectational data, it is no surprise that FAF have been used in conjunction xvith DCF

models to estimate equity remm requirements?’49

In a somewhat later article, P~o£essors Carleton and Vander Weide performed a study to

determine whether projected earnings growth rates are superior to historical measures of

growth in the implementation of the DCF model,s° Although the purpose of that study

was to "investigate what growth expectation is embodied in the firm’s current stock

price",sl the authors cleaxly indicate the importance 0£ earnings projections m the context.

of the DCF model. Professors Carleton and Vander Weide concluded that "...our

studies affirm the superiority of analysts’ forecasts over simple historical growth

extrapolations in the stock price formation process. Indirectly, this finding lends support

to the use of valuation models whose input includes expected growth rates."s2

Similarly, in an article entitled Estimating Shareholder Risk Premia Udng Analysts Growth

Forecasts, Harris and Marston presented "estimates of shareholder requgted rates of return

and risk premia which are derived using forccard-looking analysts’ growth forecasts",sz In

addition to other findings, Harris and Marston reported that "...in addition to fitting the

theoretical tequirement of being forward-looking, the utilization of analysts’ forecasts in

estimating remm requirements provides reasonable empirical results that can be useful in

practical applications.’’~4

50

5152

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Ibid., at 60.James H. Vander Weide, Willard T. Carleton, Investar grozvtb ex~OectaZions: Ana[Tsts vs. history, The Journal ofPortfolio Management, Spring, 1988.Ibid., at 78.Ibid., at 82.Robert S. Harris, Felicia C. M_azrston, Estimating Shareholder Risk Premia Udng ~4na~sts’ Growth Farecasts,Financial Management, Summe~ 1992.Ibid., at 63.


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More recently (2004), the CarIetor~ and Vander Weide study was updated to determine

whether the finding that analysts’ earnings growth forecasts are relevant in the stock

valuation process still holds. The results of that updated study continued to demonstrate

the importance of analysts" eamJ_ngs forecasts, including the applicatio,a of those forecasts

to utility companies,ss Here again, the finding was dear: analysts’ earnings forecasts are

highly related to stock price valuations and, therefore, are appropriate inputs to stock

valuation arid ROE estimation models.

HAVE YOU PERFORMED YOUR OWN ANALYSIS OF THE RELATIONSHIP

BETWEEN EARNINGS GROWTH RATES AND STOCK VALUATION LEVELS?

Yes, I have. I recogrtize that while the articles noted above are clear in their findings, it

would be instructive to determine whether eam~ growth projections are statistically

related to the stock valuation levels of the companies used in Ms. Prylo’s DCF analysis.

To the extent that is the case, then, as each of the articles summarized above concluded,

analysts’ earnings projections are appropriate measures of growth to be used in DCF

models.

My analysis was structured based on the approach used by Professors Carleton and

Vander Weide, who (as noted above) conducted a comparison of the predictive capability

of historical growth estimates and analysts’ consensus forecast of five-year earnings on

the stock prices of sixty five utility companies. WIfile the use of historical growth rates is

not at issue m this proceeding, the general methodology established by Professors

Advanced Research Center, Investor Growth Expectalions, Summer, 2004.

3O Case No. 09-G-0795Hevert Rebuttal

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Carleton and Vander Wedde can be used to determine whether earnings growtla estimates

affect the comparison companies’ stock prices. To do so, I conducted a regression

analysis in which the Market to Book Ratios contained in Ms. Prylo’s DCF analysis

(Exhibit __(KAP-5)) were modeled as a function of the average earnings growth rate

forecasts used in my DCF analyses. That analysis was structured, therefore, to determine

whether the eamiiags growth projections used m my DCF analyses are statistically related

to the valuation multiples assumed by Ms. Prylo.

WHAT DID THAT ANALYSIS REVEAL?

As shown in Rebuttal Exhibit No.__ (RBH-10), the relationship was statistically

significant at the 95.00 percent level. That is, the earnings growth projection used in my

DCF model are highly rented to the valuation multiples assumed in Ms. Prylo’s DCF

model

WHAT CONCLUSIONS DO YOU DRAW FROM THAT ANALYSIS?

Since the foma of the DCF model used by Ms. Prylo is predicated on the assumption that

stock prices are directly related to the growth rates assumed in the analysis,s6 it is

importaxit m determine whethe~ the earnings growth rates contained m my DCF analyses

(that is, the average of the Value Line and Zacks growth rates) have a statistically

significant ~elationship to the valuation multiples assumed in Ms. Prylo’s model. As

noted above, the regression equation resulting from that analysis indicates a positive,

statistically significant relationship between earnings growth and valuation multiples.

See P,ep~ed TestimoW of Kristine A. Prylo, at 57.

31 CaseNo. 09 G-0795Hevert Rebuttal

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Consequently, Ms. PiTlo’s assertion that the use of earnings growth rate estimates is

somehow "subjective" is misguided and shoed be given no weight.

WHAT IS YOUR RESPONSE TO MS. PRYLO’S ASSERTION THAT EARNINGS

GROWTH RATES SUCH AS THOSE USED IN YOUR DCF ANALYSES ARE

"SOMETIMES PRONE TO GRAVE INACCURACIES"?

First, wl:dle Ms. Prylo has asserted that the earnings growth rates used in my analyses may

be inaccurate, she has provided absolutely no evidence to support that assertion. Rather,

Ms. Prylo reasons that because they are higher than her long-term GDP growth estimate,

they are not sustainable.57 That is, other than her "sustainable growth rate" estimate, Ms.

Prylo’s only point o£ reference in concluding that earnings growth projections are

"inaccurate" or "excessive" is a single growth rate estimate from a single source. Since

Ms. Prylo has relied on Value Line exclusively for the projections used in her DCF

analysis, I assume that the use of Value Line earnings growth estimates is not at issue.

Rather, I assume that the point o£ contention is my use of the Zacks consensus earnings

forecast (which, as clearly noted in my Direct Testimony, I average together with the

Value Line earnings growth rate projections to arrive at my growth rate assumption.)

To assess the accuracy of the Zacks projections, t calculated the average quarterly and

annual "earnings surprise" for each o£ my proxy companies.5s As shown in Rebuttal

Exhibit No. (1LBH-11), for the I2 companies in my proxy group, on average the

ana2ysts’ projections resulted in slightly ypasitive earrings surprises. That is, on balance,

a~xalysts were more likely to under-estimate, than over-estimate actual earnings. In fact,

Ibig, at 99.The "earnings sxlrpfise" meas~tres the extent to which actual eamLngs deviate from projected earnings.

32 Case No. 09-G 0795Hevert Rebuttal

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that finding held not only t:or the average earnings surprise, but also for the number o£

companies that had positive earnings surprises; only four of the 12 proxy companies saw

negative earnings surprises o£ any magnitude. In my view, those findings dixectIy

contradict Ms. Prylo’s position that by relying on analysts’ £orecasts, investors are

’~blithely" assuming an input that, according to her reaso~ng, they shonld substantially

discount.

I also note that the Value Line projected TotaI Return estimates for Ms. Prylo’s

comparables group implies a growth rate that well exceeds the 4.70 percent growth rate

that she considers to be reasonable. RebuttaI Exhibit No.__ (RBH-12) contains Value

Line’s three to five-year Total Annual Return and Expected Dividend Yield £or each o£

Ms. Prylo’s comparable companies. As that Exhibit demonstrates, Value Line projects an

average Total Retuxn of 10.74 percent for her comparable group (only 6 basis points

below my recommended 10.80 percent ROE, but over 130 basis points above Ms. Prylo’s

9.40 percent recommended ROE), and an expected dividend yield of 4.58 percent over

that time. Since the growth component of the DCF modal is a measure o£ capital

appreciatior~, the Value Line Total Return estimate includes an average growth

component o£ 6.16 percent, which is 21 basis points above the 5.95 percent long-term

growth rate used in my analyses, and nearly 200 basis points above Ms. Ptylo’s suggested

4.70 percent growth rate.


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HAS MS, PRYLO CONSIDERED WHETHER CERTAIN OF THE GROWTH

RATES CALCULATED IN EXHIBIT __(KAP-5) ARE SO LOW AS TO BE

UNSUSTAINABLE?

No, she has not. For example, several of the companies provided m that Exhibit have

"’sust.a)mable" growth estimates that axe below the current Blue Chip projected rate of

inflation (2.40 percent)59, indicating a negative real growth rate. In my view, it is not

reasonable to assume that investors would be willing to commit capital to a company with

negative real growth rates, or, for that matter, marginally positive real growth rates in

perpetuity.

WHAT IS THE EFFECT OF REMOVING COMPANIES WITH UNSUSTA1NABLY

LOW GROWTH RATES FROM MS. PYLO’S ANALYSIS?

To assess the effect of such companies, I removed both DPL as wetl as any company

whose "sustainable" growth rate implies a real growth rate of 1.00 percent or less. Given

the current Biue Chip long term inflation rate of 2.40 percent, the latter criterion removed

any company with a sustzinable nominal growth rate at or below 3.40 percent. That

process removed 12 companies (including DPL), and resulted in mean and median DcF

results of 10.22 percent and 10.17 percent, respectively. The relative proximity of the

median to the mean suggests that this set of companies produces far less variable results,

both with respect to the growth rate and the calculated ROE.

59 Blue Chip Economic Indicators, Vol. 35, No. 3, March 10, 2010 at 14.

34 CaseNo. 09-G-0795Hevert Rebnttal

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WHAT ARE YOUR GENERAL CONCLUSIONS REGARDING THIS ISSUE?

First, the key analytical issue is not whether Ms. Pryto or I believe that a certain estimate

is "excessive" or "subjective". Rather, the relevant issue is whether investors rely on

analysts’ earnings growth rate projections in forming their investment decisions. The

academic articles cited earlier provide substantial evidence that in general, analysts’

earnings growth projections axe appropriately used in DCF models. Moreover, based orl

the valuation multiples included in Ms. Prylo’s testimony, it is cleat that earnings growth

projections, ~cIuding both Value Line and consensus estimates from Zacks, ate

significantly related to Ms. Prylo’s proxy compames’ valuation levels. Those findings

substantially contradict Ms. Prylo’s assertion that those growth rates axe "subjective". In

addition, if Ms. Prylo is concerned about results that are not sustainable, she also should

consider the effect of unxeasonably low growth estimates. Given that 11 of her 34

companies have real growth rates at or below 1.00 percent, it is not surprising that

removing those companies from her results (as well as the unreasonably high result)

substantially increases her mean and median DCF results.

Application of the Multi-Stage DCF Model

PLEASE PROVIDE A BRIEF SUMMARY OF THE MULTI-STAGE DCF MODEL

INCLUDED IN YOUR DIRECT TESTIMONY.

The Multi-stage DCF model included in my Direct Testimony is a three-stage model that

sets the stock price equal to the present value of projected casla flows over thxee separate,

but related, stages. In all three stages, cash flows ate represented by expected dividends,

although the thixd stage includes the "terminal value", or the price at which the stock

would be expected to be sold at the end of the forecast period. The tenmnal stock price

35 Case No. 09-G-0795Hevett Rebuttal

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is calculated by the Gordon model, which sets the price equal to the expected dividend

divided by the difference between the discount rate (that is, the ROE) and the expected

growth rate. Since the first stage projects earnings and dividends based on analysts’

projections (including Value Line) and the third stage is based on long term nominal

GDP growth, the second stage allows for a transition between the two. Similaxly, the first

stage Payout Ratios are based o~ Value Line’s company specific projections, and the third

stage assumes the industry average long-term Payout Ratio; the second stage allows for

the transition between the two.

As stated in my DJ_tect Testimony, the projected dividends ha all three stages axe modeled

as the product of the expected Earnings Per Share ("EPS") and the expected Payout Ratio

(for which Value Line was the source).6° Because the average Payout Ratio decreased

over the first stage of the model, the average dividend growth rate is considerably lower

than the projected earnings growth rate. In fact, the average dividend growth rate in the

initial stage is less than 3.00 percent, while the average projected earnings growth is 5.90

percent.61 In addition, because the temainal value is based on the Gordon model, there is

no difference in analytical results between my specification (i.e., a model that assumes a

terminal value), and projecting expected cash flows essentially ~to perpetuity..2

As discussed in my Direct Testimony, a principal advantage o£ the three-stage model with

a terminal value is the ability to calculate the projected PiE ratio in the terminal stage.

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See Direct Testimony and Exhibits of Robert B. Hevert, at 29 - 33.See Exhibit__(R_BH-3), Page 1 of 2.In my experience, such models typically project cash flows for 100 to 200 years. Beyond that, the discountfactors as so small as to have no effect on the calcnlated ROE. As discussed later in my testimony, myreplication of Ms. P~ylo’s spreadsheet found no difference between the use of a Gordon model temamalvalue and nmning the projections for 200 years.


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At

To the extent that the projected P/E ratio is consistent with expected valuation levels, the

analyst can take greate~ comfort in the reasonableness of the model’s results. Similarly;

and quite importantly, t_h_is structure enables the analyst to model the terminal value as the

product of the expected P/E ratio and the projected EPS. As discussed below, doing so

mitigates the need to arrive at a "correct" long-term growth eslirnate.

PLEASE NOW SUMMARIZE MS. PRYLO’S CRITICISM OF YOUR MULTI-

STAGE DCF MODEL.

Ms. Prylo’s concerns appear to be focused on short and long-term growth rates used in

my analyses. While Ms. Prylo considers my short-term growth estimates to be

"subjective" and "’excessive", for the reasons discussed above, her concerns are misplaced

and should be disregarded. For the reasons discussed bdow, Ms. Ptylo’s concerns

regarding the long term growth rate included in my analysis also are misplaced.

PLEASE RESPOND TO MS. PRYLO’S CONCERN REGARDING THE FIRST

STAGE GROWTH R_ATE ESTIMATES USED IN YOUR MULTI-STAGE DCF

MODEL.

Ms. Prylo’s testimony does not appeax to recognize that the model projects dividends as

the product of the expected earnings growth rate and the expected Payout Ratio. And

while Ms. Prylo’s testimoW expressed her concern with the use o£ analysts’ eaxnings

projections, her testimony failed to consider that the earnings growth rate used in the first

stage was the average of the Value Line EPS growth rate, and the Zacks consensus

growth rate. As noted in my Dixect Testimony, a common and legitimate criticism of

DCF models that rely exclusively on projected dividend growth rates is that Value Line is


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the sole provider of those projections.63 Consequently, but for the use of Zacks earnings

projections, all of the model’s assumptions would be derived from Value Line, thereby

introducing the potential for significant bias. Since, as noted earlier in my testimony,

there is no evidence that the consensus earnings growth rates are biased, and given that

there is a stafistically .significant ~elationship between the average of the Zacks and Value

Line EPS growth rates and the Market to Book Ratios used in Ms. Prylo’s model, there is

no ,eason to believe that the use of Zacks projections is inconsistent xvith investors’

growth expectations.

WHAT ARE MS. PRYLO’S CONCERNS WITH YOUR LONG-TERM GROWTH

RATE PROJECTION?

Ms. Prylo’s model relies on company specific "Sustainable Growth’" estimates as of 2014

for her estimate of long-term growth, whereas (as noted above) I use an estimate of long-

term nominal GDP growth. Importantly, Ms. Prylo and I agree that long-term nominal

GDP growth is a reasonable measure of expected long-term growth; we disagree,

however, as to a ,easonable estimate of that growth rate.64 While Ms. P~ylo relies or~ the

Btue Chip Economic Indicators ("Blue Chip") for the period 2016 through 2020,~5 rny

estimate is based on the combination of the historical lmag-term real growth in the

domestic economy since 1928, the expected rate of inflation as ~eported by.Blue Chip,

and the projected rate of inflation assumed by the Energy Information Administration in

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64Direct Testimony of Robert B. Hevert, at 31.See, Direct Testimony of Robert 13. Hevert, at 31; Prepared Testimony of Kfistine A Ptylo, at 56. WhileMs. Prylo does ,tot use nominal GDP growth as an input to her model, she assesses the reasonableness ofour respective long term growth estimates by reference to that rate.Prepared Tes6_mony of t<2tistme A Prylo, at 61. Please note that Ms. Prylo relies on the October 2009edition of the 131ue Chip Economic Indicators.


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its Annual Energy Outlook.6~ The difference in those two approaches is meaningfi~l; Ms.

Prylo’s estimate of long-term nominal GDP growth is 4.70 percent, whereas my estimate

is 5.95 percent.

WHAT ARE YOUR CONCERNS WITH MS. PRYLO’S USE OF THE 2014

SUSTAINABLE GROWTH R2kTE ESTLM_ATE AS A MEASURE OF LONG-TERM

GROWTH?

The first issue is a matter of timing. As noted earlier, multi stage DCF models, as a

practical matter, have projection horizons o£ 100 to 200 years.6v Ms. Ptylo’s calculations,

however, are based on a projection pemiod of only four years. Since, as noted earlier,

multi-stage DCF modeI results can be very sensitive to near-term inputs, the bias

associated with a comparatively low growth rate in the near term is substantial; changing

Ms. Prylo’s long-term growth rate to 5.95 percent increases her mean and median DCF

results to 10.82 percent, and 10.97 percent, respectively.

In addition, it is important to realize that £or the purpose of setting utility rates, the

Sustainable Growth method of estimating long-term growth requixes an estimate of the

return on common eq~ty. As Ms. Pryl~’s Exhibit __(Ig_AP-5) indicates, the Sustainable

Growth estimate is sometimes ~eferred to as the "BR + SV" approach, in which the first

term (BR) is the product o£ the Retention Ratio and the projected Return on Equity, and

the second term (SV) relates to the growth associated with issuing additional common

67Direct Testimony of Robext B. Fleverq at 33.The long-term nat-me o£ the multi-stage models is a reason why my calculation of the long-term real growthrate is appropriate. That is, since the model projects cash flows for 100 to 200 years, and there is noforecast o£which I am aware bat includes such a period, it is reasonable to assume that the real grow-tl~ ,ateobserved over the past 80 years is an appropriate proxy o£ the futttre real growth rate.


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eqmty. Since the "R" in the ’°BR" approach refers to the return on common eq~ty, Ms.

Prylo has effectively pre-supposed the return on common equity projected by Value Line

for all of the proxy group companies. Notwithstanding that Ms. Prylo has assttmed the

reasonableness of those projections, as demonslzated in Rebuttal Exhibit No.__ (R_BH-

13), her median DCF result of 9.80 percent is 144 basis points below the mean Value

Line Remm on Equity estimate o£ 11.24 percent, which is used to derive her results. In

stark contrast, the average DCF result (presented in my Direct Testimony) of 11.09

perce~tt is within 15 basis points of Value Line’s 11.24 expected return on common equity

for Ms. Prylo’s proxy group. The rather substantial difference between the return on

common equity assumed by Ms. Prylo and her DCF results calls into question the

reasonableness of her analytical results and recommendation.

HAVE YOU PERFORMED ANY OTHER ANALYSES TO ASSESS THE

REASONABLENESS OF MS. PRYLO’S PROJECTED LONG-TERM GROWTH

RATE?

Yes, I have. As noted earlier, one of the benefits of the three-stage model is that the

terminal stock price estimate can be used to calculate the expected PiE ratio. To the

extent that the P/E ratio is inconsistent with expected levels, including those provided by

Vatue Line, it is an indicator that other assumptions, principally tlae tong-term growth

rate, may be biased. As also noted earlier, based on the Gordon method of calculating

the terminal value, there should be no difference in the calculated ROE vcJaether a

terminal value is used, ot the projections are run for 100 to 200 yeats.6a

Fox the purposes of this discussion, I will adopt Ms. Prylo’s conveation of referring to that model as the"Long Form" model.


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In order to assess whether Ms. Prylo’s lontterm growth estimate is consistent with Value

Line’s expected P!E ratios, I first ~epticated Exhibit __(K~_P-5), assuming that the total

projection period was 200 yeas. As shown in Rebuttal Exhibit No.__ (RBH-13), the

~esults of that model were neatly identical to Ms. Prylo’s model. Using only the data and

assumptior~s in Exhibit __(K_AP 5), I then calculated a tetmmaI value in the tenth year of

the forecast period, using the Gordon model as the means of calculating the terminal

price. As expected, and as shown in Rebuttal Exhibit No.__ (RBH-13), those results also

were nearly identical to the Long Form modal results. Having replicated Ms. Prylo’s

Long Form ROE model, based on her Sustainable Growth estimate, I then escalated the

EPS amount provided in column (E) of Exhibit __(I4,,AP-5) to arrive at the expected EPS

at the terminal year. I then divided the expected price by the projected EPS to arrive at

the expected PiE ratio for each of the companies in Ms. Prylo’s proxy group.

WHAT DID THAT ANALYSIS REVEAL?

As shown in Rebuttal Exhibit No.__ (R_BH-13), the mean implied PiE ratio was

approximately 12.50. Value Line’s average three to five year projected P/E ratio for the

same group, however, is approximately 13.22. Using the Value Line expected P/E ratio

as the basis of the ternainal price calculation (that is, multiplying each company’s

projected EPS by its expected P/E zatio) changes the DCF results substantially, such that

the mean and median ROE estimates are 10.57 percent, and 10.47 percent, zespectively.

The long-term expected industry P/E ratio (also provided by Value Line) ot7 13.50

produces mean and median ROE estimates of 10.77 percent and 10.65 percent,

xespectively.


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In addition, the terminal price can be used to solve for the long-term growth rate implied

by the current dividend and the expected PiE ratio. As Rebuttal Exhibit No.__ (RBFI-

13) also demonstrates, that implied growth rate is approximately 5.40 percent, which is

approximately 85 basis points above Ms. Prylo’s assumed 4.55 perce~xt long-term

(sustainable) growth rate. The long-term growth rate implied by the expected industry

P/E ratio is 5.65 percent, which is far closer to my long-term growth estimate than Ms.

Prylo’s 4.70 percent estimate.

WHAT CONCLUSIONS DO YOU DRAW FROM THOSE ANALYSES?

Considering the inherent difficulty in estimating long-term growth rates, the use of Value

Line’s expected P/E ratios provides a reasonable basis of estimating the terminal value

and, therefore, the multi-stage DCF model results. Using those expected PiE ratios, the

"Long Form" DCF results (based on Ms. Prylo’s model) range from 10.47 percent to

10.77 percent.69 Using my proxy group (and using mean results), the DCF results range

from 10.84 percent to 11.03 percent. Thus that one change, which is based on the da~a

source on which Ms. P*TIo exclusively relies for her DCF assnmptions, produces results

that are substantially similar to my ROE recommendation.

69

DO YOU HAVE ANY FINAL OBSERVATIONS ON THIS POINT?

Yes. It is interesting to note that Exhibit __(KAP 16), which is the BofAMLQuantitative

Profiles repozt, provides estimates of the "Implied Retom", the "Required Return" and the

’°Yield" for the S&P 500. As Exhibit __(Ig~P-5), Page 3 of 3 points out, the average of

the Implied and Reqnired returns for the three months ended December, 2009 was 11.77

Please note that I am not suggesting that 10.47% or 10.77% is an appropriate DCF result since I disagreewith the composition of Ms, Prylo’s proxy group and he, reliance on median, as opposed m .mean, results,


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percent. The average Yield over that time period, as reported in the Quanlitative Profiles

report, was 2.00 percent. Since the total remm consists of capital appreciation (i.e.,

gzowth) and yield, that data suggests an expected market growth rate of approximately

9.77 percent. While I am ~ot suggesting that the long-term growth rate to be used in the

DCF models should be 9.77 percent, that data again calls into question Ms. Prylo’s

assertion that my long-term growth estimate is somehow "excessive".

Risk Free Rate Component of the Capitat Asset P~idng Model

PLEASE BRIEFLY SUMMAKIZE THE METHOD BY WHICH MS. PRYLO

CALCULATES THE RISK FREE RATE COMPONENT OF HER CAPM.

Ms. Prylo uses the tl~ee-month average yield on t0-yeaz and 30-yea T~easury securities

for the period of October 2009 through Decembe, 2009 as the Risk-Free Rate

component of her CAPM. In support of hez method, Ms. Prylo notes that this practice

was adopted by the Commission in the Company’s 2009 Electric Rate Order, on the basis

that "different investors have di£ferent time horizons for holding stocks"]°

IS IT THtS CASE THAT THE TERM OF THE RISK FREE, RATE SHOULD

MATCH INVESTORS’ ASSUMED HOLDING PERIODS?

No, it is not. As discussed in my Direct Testimony, the term of the Treasury security

used to establish the Risk F~:ee rate should match the life of the tmderlying investment,

not the holding period of the investor. In my Direct TestimoW, I provided a citation to

Mom_ingstar, Inc. (formerly Ibbotson Associates), which noted that:

The horizon of the chosen Treasury security should match the horizonof whatever is being valued...I£ an investor plans to hold stock in a

P~epazed Testimony of ~£7_~isfine A. Prylo, at 69.


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company for only five years, the yield on a five-year Treasury note wouldnot be appropriate since the compa~ny will continue to exist beyond thosefive years.

I further noted that "utility companies represent long duration investments and as such,

the 30-year Treasury yield is the appropriate rate for the purposes of the CAPM".v*

IS MS. PRYLO’S ASSUMPTION THAT IO-YEAR AND 30-YEAR TREASURY-

YIELDS ARE EQUALLY VALID MEASURES OF THE RISK FREE RATE

SUPPORTED BY HER DATA?

No, it is not. Ms. Prylo’s Exhibit __(KAP-I6) shows that, according to Bof_AML, the

equity duration of all utility stocks is approximately 25.1 years and 24.8 years for "multi-

utilities", while the same measure is approximately 30 years for all stocks in the BofAML

Universe and the S&P 500 index,v2 Those observations support the position in my Direct

Testimony that utility companies are "long duration investments".

PLEASE DESCRIBE THE TERM "EQUITY DURATION" AND ITS RELEVANCE

TO THE SELECTION OF THE RISK FREE TERM OF THE CAPM.

In finance, "durafon’" (whether for bonds or equity) typically refers to the present value

weighted time to receive the security’s cash flows,w In terms of its practical application,

duraton is a measure of the percentage change in the market price of a given stock in

response to a change m the implied long-term return of that stock. A common

investment strategy is to match the duration of investments with the term of the

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Direct Testimony mad Schedules o£ Robert B. Hevert, at 36.See, Exhibit (KAP !6), at 6.See Cohen, Zinbaxg and Zeikel, Investment Analysis and Portfolio Management, Irwin, 5% Ed., 1987, at450 - 452.


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underlying asset in which the funds are being invested, or the term of a liability being

funded. Since the term of the risk free rate should match the life of the underlying

investment, it is appropriate to consider the eqmty duration of the proxy companies when

selecting the Treasury yield used as the risk free rate in the CAPM.

WERE YOU ABLE TO ESTIMATE THE EQUITY DURATION USING YOUR

REPLICATION OF THE "LONG FORM" ROE MODEL CONTAINED IN

EXHIBIT __(KAP-5)?

Yes I was. As shown in Rebuttal Exhibit No.__ (RBH-13), based on the projected

average cash flows for Ms. Prylo’s proxy group (Exhibit __(KAP-5)), Ms. Prylo’s 9.40

percent ROE recommendation, and the long-term growth rate implied by the Value Line

expected industry P/E =atio, the average equity duration is approximately 28.8 years.

That result ctearly supports the 30-year Treasury rate included in my CAPM analyses];

WHAT CONCLUSIONS DO YOU DRAW AS TO THE APPROPRIATE RISK-

FREE RATE TO EMPLOY WITH THE CAPM IN THIS CASE?

As I noted in my Direct Testimony, the tenor of the Risk Free Rate employed in the

CAPM analysis should match the expected life of the assets underlying the entity being

valued.7s As also noted in my Direct Testimony, (and as discussed later in my Rebuttal

Testimony), there is a strong statistical relationship between the proxy group average

dividend yietd and the 30 year Treasury yield. Given that strong sta6stical relationship,

knowing that utility assets tend to have quite long useful lives, having reviewed the equity.

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That finding is yet another indicator that Ms. Prylo’s 4.70 percent long term growth rate is unreasonably

Direct Testimony and Schedules o£Robert B. Hevert, at 36.


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Q.

duration estimates included in the Quantitative Profiles report, and having estimated the

equity duration derived from Ms. Prylo’s data, it continues to be my view that the 30-year

Treasury yietd is a reasonable measure of the Risk Free rate for the purposes of the

CAPM models.

Market Risk Premium Used in CAPM

HOW DOES MS. PRYLO DETERMINE THE MARKET RISK PREMIUM TO BE

USED IN THE CAPM?

Ms. Prylo calculates the Market Risk Premium as the difference between average of the

required and implied market return as caJculated by Bof_AM_L, and the average of the

three-month 10-year and 30-year Treasury yields as the ~isk free rate. In describing her

analysis, Ms. Prylo notes that in the Company’s 2009 electric rate case, due to the

volatility of estimates derived by t_his methodology, the Commission questioned whether

the Market Risk P,eminm was properly calculated, and specifically called for the Staff to

address the use of a single measure o£ the Market Risk Premium in subsequent rate

76cases.

DOES MS. PRYLO ADDRESS THE COMMISSION’S CONCERNS REGARDING

THE VOLATILITY OF THE CALCULATED MARKET RISK PREMIUM USING

HER PREFERRED METHODOLOGY?

Ms. Prylo addresses the Commission’s concern by considering the Market Risk Premium

in the context of the recent equity market volatility. Ms. Prylo concludes that her

methodology adequately accounts for changes in market sen~ent, and that the use of

Ibid., at 75.

46 Case No. 0%G 0795Hevert Rebuttal

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alternative measures of the Market Risk Premium, particularly the use of the historical

average Market Risk Premium, is not necessary. Ms. Prylo fuxther notes that because o£

the degree of judgment required m estimating the Market Risk Premium, the Staff has

historically recommended that the CAPM be given "half the weight of the DCF-derived

cost of, equity estimate.’’77

DO YOU HAVE ANY CONCERNS WITH THE USE OF A SINGLE MEASURE

OF THE MARKET RISK PREMIUM THAT THE COMMISSION SHOULD

CONSIDER IN THIS CASE?

Yes, I do. Because she does not consider alternative measures of the Market Risk

Premium, Ms. Prylo ignores information that may be useful m developing a more robust

estimate. Specifically, by relyimg solely on estimates of tlae implied and required market

returns provided by BofAML, Ms. Prylo adopts the methodology employed by that

particular analyst, while giving no weight to alternative methodologies that may be equally

appropriate, bat p~ovide somewhat different results.

PLEASE DESCRIBE THE APPROACH TO ESTIMATING THE MARKET RISK

PREMIUM PRESENTED IN YOUR DIRECT TESTIMONY.

In my Direct Testimony, I developed two measures of the Market Risk Premium. Both

of those measures are fotwarddooking estimates based on relationships and estimates

derived from the current market environment. In my first approach, I used the ratio o£

the Market Risk Premium to market volatility (the market Shaxpe Ratio) to calculate the

forward-looking Market Risk Premium. As noted m my Direct Testimony, that approach

77 Ibid., at 80.


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involves mOtiplying the long tem~ (or "constang’) Sharpe ratio by expected (or forward-

looking) market volatility. While Ms. P*’ylo is correct in pointing out that my measure of

the long-term Sharpe Ratio includes historical data, the other important term of the

model (the expected market volatility) is based on the V-IX and futures contracts o13 the

VIX.

PLt~ASE BRIEFLY DESCRIBE THE VIX, FUTURES CONTRACTS ON THE VEX,

AND THEIR RELEVANCE TO THIS ISSUE.

As noted in my Direct Testimony, the Chicago Board Options Exchange VoLatility Index,

or ’WI[X", is a measure o£ expected market vohtility, and is calculated based on the

pricing of options on the S&P 500 Index.v8 Because it relies on future-dated options, this

index provides insight as to the market’s view of expected volatility. In addition, because

they are publicty kraded, V-IX futures prices axe a transparent measure of the markets’

view of expected volatility. Consequently, the second term in my Sharpe Ratio analysis,

the expected market volatility as measured by the VIX and fiatures contracts on that

index, is a forward looking, market-based measure of expected volatility.

PLEASE NOW BRIEFLY DESCRIBE YOUR SECOND APPROACH TO

ESTLMATING THE EX-ANTE MARKET RISK PREMIUM.

My second approacla incorporated the calculation of the implied market return using

long-term projected analyst growth rates and cu~rrent expected dividend yields (that is, the

Constant Growth DCF model) for eacla company in the S&P 500 Index m calculate the

imptied market remm on a market cap-weighted basis. From that implied market return,

78 See Direct Testimony and Schedules of Robert B. Hevert at 13, 14.


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I calculated the Market Risk Premium by subtracting the cuxrent yield on 30-year

Treasury securities. As Ms. Prylo pointed out, the results of that analysis are "nearly

identical" to her own.

HOW DO THOSE TWO MEASUILES OF THE EXANTE MARKET RISK

PREMIUM ADDRESS THE ISSUES RAISED BY THE COMMISSION?

As discussed above, both measures are based on market expectations, and therefore

directly address the Commission’s preference for forward-looking methodologies.

Moreover, my use of alternative measures of the Market Risk Premium directly addresses

the Commission’s concern with using a single method of estimation. In that regard,

rather than relying on one specific analyst’s methodology, my approaches use established

market relationships, forward-looking publicly traded estimates of volatility in the form of

forward VIX prices, and consensus long-term growth and dividend yield estimates.

ARE YOUR METHODS OF CALCULATING THE MARKET RISK PREMIUM

CORROBORATED BY MS. PRYLO’S DATA AND ANALYSES?

Yes, both methods are supported by the analysis and data presented by Ms. Prylo. M.s.

Prylo acknowledges that the implied return calculated by my second approach, relying on

a constant growth DCF of the S&P 500 Index, is very similar to the implied return

calculated by BofA_ML As shown in Exhibit No.__ (KBH-2) of my Direct Tesffmow,

my Constant Growth DCF approach produces similar implied market return estimates to

those calculated by BofAML for the time period relied upon by Ms. Prylo in her analysis.


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Ms. Prylo takes issue with the measurement of the Market Risk Pxemium using the

Sharpe Ratio, which she states, is "based or~ an historic average.’’v9 In that xegard, Ms.

Prylo states that the "correiatior~ between past histoxical market retuxns and current

market volatility is irrelevant as past performance is not indicative of fuvate returns.’’8°

As discussed above, however, the Sharpe Ratio approach does not produce a furore

remm estimate m a vacuum, but rather estimates the Market Risk Premium based on the

established risk/return relationship and investor expectations for future risk (i.e., volatility)

by incorpo, atmg forward VIX pricing data. Nonethdess, to adckess Ms. Prylo’s concerns

in that regard, I have recreated Exhibit __(KAP-8), and used that data to calc~ate the

Sharpe Ratio based on her maxket data. As shown in Rebuttal Exhibit No.__ (RBHr14),

over 40 periods, the average Sharpe Ratio (calculated as the Implied Market Risk.

Premium for the periods where such a figuxe was provided, divided by the VIX for the

same period) is approximately 32.10 percent, while the historical Sharpe Ratio included ha

my Direct Testimony was 31.77 percent. For the pttrposes of the CAPM analyses

presented in my Rebuttal Testimony, I have used the 32.10 percent Sharpe Ratio (i.e., that

which is based on Ms. Prylo’s data).

ao

7980

Beta Estimates Used in CAPM

WHAT MEASURE OF THE BETA COEFFICIENT DOES MS. PRYLO RELY

UPON?

Whereas my Direct Testimony considered Beta estimates £rom both Value Line and

Bloomberg, Ms. Prylo excIusively relies on Value Line for the Beta in her CAPM analyses.

In support of her decision to rely on a single source, Ms. Prylo asserts a "shortcoming of


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using beta is the dispari~- of betas between the various firms that report this

measure..."~a and reasons that because the Value Line estimates are comparatively lower,

the Bloomberg Beta estimates "...appear to be over-stated.’’s2 Other than their level

relative to the Value Line estimates, however, Ms. Prylo offers no explanation as to why

Bloomberg Beta estimates may not be reasonable.

DO YOU AGREE WITH MS. PRYLO’S ASSESSMENT IN THAT REGARD?

No, I do not. First, Ms. Prylo and I agree that the estimation of the Company’s Cost of

Equity is a market driven exercise. The fact is that Bloomberg is a widely retied upon

source of mfomaation and analysis in the financial community. One only has to observe

the overwhelming presence of Bloombe,g terminals in financial institutions to realize that

it is an important source of reformation for analysts and investors. In that regard, I have

no reason to believe that investors are disinclined m consider Beta estimates from

Bloomberg simply because such estimates also are available from Value Line.

From a methodological perspective, Bloomberg calculates Beta coefficients using more

recent data and in that sense, may provide more current information as to investors’

views of expected market conditiorls. As Ms. Prylo points out, "Beta is supposed to

represem the future volatility of a given stock relative to the market index.’’s3 Ms. Prylo

further notes that "the problem with using historicaIly-de~ived betas is that when the

systematic risks of a fn-m or an industry change, historical betas will likely not be good

8283

Ibid., at 77.Ibid, at 10~1Ibid., at 77.


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indicators of future voL~l~[i~y.’’84 As discussed below, because Bloomberg relies on more

recentdata, it may well address Ms. Prylo’s concern with the timeliness of data,

PLEASE BRIEFLY EXPLAIN THE DIFFERENCES BETWEEN THE VALUE

LINE AND BLOOM-BERG CALCULATIONS OF BETA COEFFICIENTS.

The difference between the Beta coefficients reported by Value Line and Bloomberg

relates to differences in the calculation period, holding return period, and market index

used by each firm m their calculations. Value Line calculates Beta coefficients based on a

regression equation of five years of monthly returns of the subject stock to the monthly

returns of the New York Stock Exchange All Stocks Index. Bloomberg calculates Beta

coefficients based on a regression equation of two yeas of weeldy returns for the subject

stock to the weekly tetui’ns of the 8&I3 500 Index over the same period. As noted in my

Direct Testimony (and as pointed out by Ms. Prylo), both. data services adjust their "taw"

Beta coefficients to address "the tendency of the CAPM to underestimate the cost of

capital for companies with ’tmadjusted’ or ’raw’ Betas significantly less than 1.0.’’Ss

HAVE YOU CONDUCTED YOUROWN ANALYSES OF THE BETA

COEFFICIENTS USED IN THE CAPM?

Yes, I have. As noted by Ms. Prylo, the cm:rent market conditions are such that the

calculation of Beta over long periods of time may no longer represent the current

expectation of the proxy gto,xp’s volatility relative to the broader market. On that basis

done, the Bloomberg Beta estimate may provide a more current representation of

investor sentiments. In that regard, the volatility of Ms. Prylo’s proxy companies’ stock

Ibid.Ibid., at 37,


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prices recently has been increasing relative to the broad market. Consequendy, Beta

coefficients calcuLated over a more recent time period may provide a more current view

as to investors’ perspectives with respect to "systematic" risk.

To address Ms. Pryto’s concerns regarding the timing of the underlying data, I used the

same general methodology as that employed by Value Line and Bloomberg, but appfied

that methodology to more recent data for my group of proxy companies.86 As shown in

Rebuttal Exhibit No.__ (RBH-15), that approach results in a proxy group mean raw Beta

o£ 0.527. Adjusting the raw Beta for the tendency to regress toward the market Beta of

1.0 produces an adjusted Beta of 0.685.

HOW AND WHY DID YOU ADJUST THE RAW BETA?

I adjusted my raw Beta coefficient based on the methodology used by Bloomberg, which

multiplies the raw Beta by 0.67, and adds 0.33 to that product. The purpose of such

adjustments is to reflect the results of substantial academic research indicating that over

time raw Beta tends to regress to the market mean of 1.00.8v

PLEASE F~XPLAIN WHY YOU RELIED ON A TWELVE-MONTH ESTIMATE

OF THE PROXY GROUP MEAN ADJUSTED BETA.

As discussed above, Beta estimates reported by Value Line and Bloomberg calculate the

Beta for each company over historical periods of 60 and 24 months, respectively. Prior

It is worthwhile notixxg that averaging the individual Betas for each of the proxy group companies wouldproduce the same result as first averaging the individual covafiances, then dividing by the variasace of theS&P 500’s weekly returns.The regression tendermy of Betas to converge to 1.0 over lime is well kaxown and widely discussed ~financial literature. See Blnme, Marshall E., On theAssessraent 0fRbk, The ~oumal of Finance, Vol. 26, No. 1,March 1971, at 1-10. See also Prepared Testimony ofKfistine A. Prylo, at 77.


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to October 2009, the relationship between the returns of the proxy group companies and

the S&P 500 was considerably different than has been experienced in the current market

environment, ha order to develop a cost of equity estimate that does not reflect an

anomalous historical period, it is ,easonable to rely on a near-term calculation of Beta to

reflect the cur_rent relationship between the proxy group companies and the S&P 500.

Given that Bloomberg uses a two year calcnlation period, I based my analysis on a one-

year calculation period.

IS THE CALCULATED BETA OF 0.685 FOR YOUR PROXY GROUP

REASONABLE IN LIGHT OF LEVELS THAT WERE OBSERVED PRIOR TO

THE FINANCIAL MARKET CRISIS?

Prior to the financial market crisis, the average Beta for my proxy group companies, as

reported by Value Line, was considerably higher than what I have calculated using the

most recent 12 months of market data. For example, prior to the Lehman Brothers

bankruptcy filing in September 2008, the average Beta for my proxy group was 0.80 (see

Rebuttal Exhibit No. (RBH-16)). Based on that historical measure, it is my view that

the twelve-month average Beta of 0.685 is conservative.

DID YOU CONDUCT A SIMILAR ANALYSIS OF THE CALCULATED

CURRENT BETAS FOR MS. PRYLO’S PROXY COMPANIES?

Yes, I did. While that estimate is somewhat higher than the 0.70 Beta estimate used by

Ms. Prylo, it is based on more current market data and as such, addtesses the concern

associated with Beta coefficients that are calculated on less timely market information.

54 CaseNo. 09-G 0795Hevert Rebuttal

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Applying the same methodology described above produces a raw Beta coefficient o£

0.659, which becomes 0.772 when adjusted.

Q.

Ovdit QuaIi~y Adjustment

PLEASE PROVIDE A BRIEF SUMMARY OF THE "CREDIT QUALITY

ADJUSTMENT" MADE BY MS. PRYLO IN ARRIVING AT HER COST OF

EQUITY RECOMMENDATION.

With respect to her methodological approach, Ms. Prylo first calculated the ratio of her

cost of equity estimate (based on the Commission’s two-thJxds, one third weighting

convention) of9.77 percent to her estimate of the proxy companies cost of debt (6.10

percent), to arrive at an adjustment factor of 160.20 percent. Ms. Prylo then calculated

the five-year average difference in yields for the Company ~celative to the proxy gzoup,

which she determined to be 25 basis points. Applying the 160.20 percent adjustment

factor to the 25 basis point yield diffe~cential produced a negative 39 basis point

adjustment. Ms. Prylo then applied that rmgative 39 basis point adjustment m her 9.77

percent ROE estimate, to active at her recommended (unfounded) ROE estimate o£ 9.38

percent,as

DO YOU AGREE WITH MS. PRYLO’S "CREDIT QUALITY" ADJUSTMENT?

No, I do not. Putting aside the fundamental question of whether the risks faced by debt

and equity holders are so similar that an adjustment of the nature recommended by Ms.

Pxylo is appropriate in the first place, Ms. Prylo’s ov, m data and analyses completely

contradict the premise of her analysis and conclusions.

Prepaxed Testimo,~y of Ktistine A P*ylo, at 87. See also Exhibit__(t<ZAP 6).9.38% estimate to arrive at he, ~ecommended ROE of 9.40%.

55

Ms. Prylo rounded up the

Case No, 09-G-0795Hevert Rebuttal

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PLEASE ELABORATE ON YOUR LAST POINT.

In explaining the rationale for her adjustment, Ms. Prylo states that "...there is a

quantifiable difference between the business and financial risks face by Con Edison and

the proxy group.’’a9 Ms. Prylo further states that she based her adjustment "...upon the

fimdamental concept that tlae return requirements of common equity investors are

commensvtrate with the riskiness of their investment", and that °’...real and quantifiable

differences [among the proxy companies] do exist and should be reflected m the cost of

equity determination accordiogly.’’9° Ms. Pryto reasons that since Moody’s and S&P

regularly assess utklities’ business arid financial risks, differences in credit ratings are an

appropriate means of quantifying differences in the cost of equity. The fundamental

premise of Ms. Prylo’s analysis, thezefore, is that "real and quantifiabld" differences in the

cost of equity are dixecdy related to differences in credit ratings. To the extent that is not

the case, the premise of her analysis is significantly undermined, and her adjustment ,is

without empirical foundation or analyticaI meaning.

DID YOU PERFORM ANY ANALYSES TO DETERMINE WHETHER MS.

PRYLO’S ANALYTICAL RESULTS SUPPORT HER ASSERTION THAT

QUANTIFIABLE DIFFERENCES IN THE COST OF EQUITY ARE RELATED

TO CREDIT RATINGS FOR HER PROXY COMPANIES?

Yes, I did. I first reproduced Ms. Prylo’s DCF and CAPM results, and applied the two-

thirds, one-third weighting factor, by company. I then applied "credit scores" to those

companies, consistent with the approach used by Ms. Prylo in Exhibit __(KAP-4). If Ms.

Ibid., at 84.Ibid.~ at 84, 85. [cla_6_ficafion added]

56 Case No. 0%G-0795Hevert Rebuttal

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Ptylo is correct, there should be a statistically significant, positive relationship between

the credit score and the cost of eqaity estimates.91 That is, as credit quality deteriorates

(resulting in a higher score), the cost of equity should increase. To test that hypothesis, t

co,aducted a regression analysis, in which the dependent variable was the weighted

average ROE estimate, and the explanatory variable was the credit score. As noted earlier

in my Rebuttal testimony, since Ms. Prylo is of the view that her larger proxy group

enhances analytical reliability, the results of the regression analysis (which is based on

more than 30 observations) should be sufficiendy robust to draw conclusions. _As shown

on Chart 1 (below), the regression equation actually has a negative slope (suggesting that

the cost of equity increases as credit ratings improve). Nonetheless, Table 5 indicates that

both the slope coefficient and the regression as a whole are statistically insignificant. That

is, Ms. Prylo’s cost of equity estimates have no statistical relationship to credit rating scores.

As a consequence, there is no empirical basis for the 160.20 percent adjustment factor

and as such, Ms. Prylo’s credit quality adjustment should be dismissed.

91 ~ks noted in Extzibit__(IgP~P 4), Ms. Prylo’s credit scoring convention associates lower numbers with highercredit ratings. For example, a company rated AAPiiAaa by S&P and Moody’s, respectively would ~eceive ascore of"1", while a company with a score o£B1313-iBaa3 would receive a score of "10".


1 Chart 1: Estimated ROE vs. Credit Score

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Eq

ity

25.00%

20,00%

15.00%

I0.00%

5.00%

0.00%

y= -O.004x + 0.137R= = 0.084

1.0 2.0 3.0 4,0 5.0 6.0 7.0 8.0 9.0

Average Credit Rating Score

Table 5: Regression Results

Intercept

Slope Coefficient

Coefficients

0.137061321

-0.0043305

StandardError

0.02165205

0.00252252

T Stat

6.33017631

-1.7167366

10.0

BBB-

HAVE YOU PERFORMED ANY OTHER ANALYSES TO CORROBORATE

YOUR FINDINGS?

Yes, I have. While the findings noted above are based on Ms. Prylo’s ROE estimates, I

performed a second analysis to determine whether that finding is specific to Ms. Prylo’s

ROE estimates and credit scores. To do so, t examined the relationship between the

most recently authorized ROE for all of the electric utility operating companies held by

the companies in Ms. Prylo’s proxy group, and their credit score at the time of the orders

authorizing those returns. As show~ in Chart 2 and Table 6 (below), those results

strongly support the findings associated with Ms. Prylo’s ROE estimates: there is no


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statistically significant relationship between the proxy companies’ authorized returns and

their credit rating scores.

Chart 2: Authorized Electric ROEs (Prylo Proxy Group) vs. Credit Score

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25.00%

20.00%

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10.00%

5.00%

¥= -0.000x + 0.114R2 = 0.021

0.00% " , ’ ’ --

1,0 2.0 3,0 4,0 S.O 6.0 7,0 8,0 9.0 10.0AAA BBB-

Average Cred it Rating Score

Table 6: Regression Results

" StandardCoefficients Error T Stat

Intercept 0.1143991 0.006442865 17.75606135

Slope Coefficient -0.0086183 0.000765267 1.126176553

In addition to the regression analyses discussed above, I conducted one other analysis

that simply calculated the differences in Ms. Prylo’s ROt~s for companies with better or

worse credit ratings than CEI. To do so, I segregated Ms. Prylo’s proxy group and

associated ROE estimates, including the company-specific weighted DCF and CAPM

results, into two groups: one with ratings equal to or higher than CEI’s credit ratings, and


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those with lower credit ratings. As shown on Table 7, Ms. Prylo’s mean and median

ROE results are measurably higher for the companies with the better credit ratings than for

companies with worse credit ratings. (See also Rebuttal Exhibit No. (R_BH-17)). Again,

that finding contradicts the premise of Ms. Prylo’s credit adjustment.

Table 7: Mean and Median ROE Estimates by Credit Rating

Mean Median

Credit Rating Equal to or Better Than CEI (8 co.’s) 10.83% 10.10%

Credit Rating Bdow CEI (26 co.’s) 9.67% %61%

WHAT EXPLANATION MIGHT THERE BE FOR THE FINDINGS THAT ROE

ESTIMATES ARE STATISTIC_ALLY UNRELATED TO CREDIT SCORES?

In my view, the simple explanation is that Ms. Prylo’s adjustment mechanism fails to

recognize the senior position that debt holders have relative to equity holders, and the

investment horizon considered by equity holders. _A long-term issuer credit rating is ma

opinion of the subject company’s overall financial capadty to pay its financial obligations

as they come due and payable.92 Because equity holders bear the residual risk of

mvnership, when bondholders are given more comfort in the probability that the subject

company will be able to meet its neai-terrn financial obligations (and thus have higher

credit ratings), equity holders bear an incremental risk of insufficient or increasingly

volatile cash flows because the claims of equity holders are subordinate to the claims o£

debt holders. Consequently, there is no reason to believe that credit ratings will be

directly related to the cost o£ equity for investment grade regulated lxtilities.

92 Standard & Poor’s RatingsDirect, Standard & Poo~’5 Ratings Defi_mfiotls, Decembe= 1, 2008, at 8.

60 Case No. 09-G-0795Flevert Rebuttal

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q.

Stay-Out Premium

PLEASE SUMMARIZE MS. PRYLO’S POSITION WITH RESPECT TO THE

STAY-OUT PREMIUM IN THIS PROCEEDING.

As a preliminary matter, Ms. Prylo notes tJaat the purpose of the Stay-Out Premium is to

"compensate the Company’s shareholders for any additiozlal financial and business risk

which is introduced due to a multi-year rate plan...,,9~ Ms. Prylo goes on to note that the

particular finandal risk to be addressed is that "the cost of equity could go up in the out-

years of the rate plan.’’94 Ms. Prylo calculates her recommended premium based on the

five-year average difference between the interpolated four year Treasury yield and tlae

one-year Treasury yield (that difference adjusted by 50.00 percent) to arrive at a 21 basis

point premium for a four-year rate plan. Similarly, Ms. Prylo calculates the premium

associated with a two-year plan as the difference between the five-year average yield on

three and one-year Treasury yields, again adjusting the difference by 50.00 percent, to

arrive at a recommended 13 basis point adjustment. Ms. Prylo disagrees with an

approach taken in my Direct Testimony, which derived the premium based on the

current yield on 30-year Treasury securities ,eLative to the projected yield on tlaose

securities on the basis that "long-term interest rates are very difficult to forecast.’’gs

WHAT IS YOUR RESPONSE TO MS. PRYLO’S POSITION REGARDING THE

STAY-OUT PREMIUM?

First, I agree with Ms. Pulo that the intent of the Stay-Out Premimm is to compensate

the Company’s shareholders for increases in the cost of equity during the pendency of the

93

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Prepared Testimony of Ktistme A Prylo, at 108.Ibid., at 109.Ibid., at t08.

61 Case No. 09-G-079.5Hevert Rebuttal

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stay-out period. I strongly disagxee, however,

reference to short-tema Treasury yields.

that such risks are best measuxed by

H_AVE YOU ANALYZED WHETHER SHORT OR LONG-TERM TREASURY

YIELDS ARE MORE LIKELY TO AFFECT UTILITY VALUATION LEVELS?

Yes, I have. In my Direct Testimony, I performed an analysis to determine which of the

10 and 30-year Treasury yields had the greater ability to explain my proxy average

dividend yield. While both had some degree of explanatory power (as measured by the Rz

of the regression equations in which the dividend yield was the dependent variable, and

Treasmy yields were the explanatory variable), the 30-yeax Treasury yield had the greater

ability to explain changes in the average dividend yield.96 To determine whether shorter-

term Treasury securities had a greater or weaker ability than longer-term securities to

explain dividend yields, I performed the same analysis using the one, two, three, five and

30Tear Treasury yields, respectively, for the period including 1990 through 2009. As

Table 8 (below) indicates, the explanatory value increases significantly as the term of the

Treasury security becomes longer. That finding leads me to conclude that long-term

Treasury securities, not short-term securities, axe best used to assess the risk of increasing

costs of capital.

96 Direct Testimony and Exhibits of Robezt B. Hevert, at 38.


1 Table 8: Dividend Yield vs. Treasury Yield Regression R-Squared

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Treasury Yield Term R-Squared1 Year 0.4116

2-Year 0.50613-Year 0.56515-Year 0.6530

30-Year 0.7671.

Given the supefio~ty of long-term Treasury yields to explain dividend yields, it follows

that the risk assodated with changes m the cost of capital are better measured by

expected changes m long-telm interest rates. That being the case, the relevant amalyfical

question becomes whether consensus proiections o£ increasing long-term Treasury yields

are reasonable relative to the current level of long-tema Treasury yields.

In that regard, there is little question that long-term Treasury yields remain at historically

low Ievds; the three month average 30-year Treasury yield of 4.33 percent (as of

December 2009) was lower than 336 of the 348 months in which that yield has been

reported by the Federal Reserve Board. From that perspective, it is far more likely that

long-term ~fields will measurably increase, rather than decrease, over the coming three to

four years. To that point, the Blue Chip Fina~lcial Forecast consensus projection of the

30Tear Treasury yield averages 5.575 percent for the years 2011 through 2014.

Measuring the poten~al risk of i~creases in the Company’s cost of equity by reference to

the difference between the current and expected 30-year Treasury yield indicates a

projected increase of approximately 125 basis points. Fifty percent of the difference


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results in a premium ot7 approximately 62 basis points, which is 12 basis points higher

than the basis point adjustment recommended in my Direct Testimolay.9v

DID YOU ALSO CONSIDER THE DATA PROVIDED BY MS. PRYLO IN

ASSESSING THE STAY-OUT PREMIUM?

Yes, I did. As noted in my Direct Testimony, the relatively flat yieId curve in 2005

through 2007 substantially biases the Stay-Out Premium results, assuming the calculation

adopted by Ms. P~lo.98 Consequently, focusing on recent data (in this case, calendar year

2009) reflecting a more normal upward-sloping yield curve, the premium would increase

to 53 and 67 basis points for three and fou~-yeaxs stay-out periods, respectively (see Table

9, below; see also Rebuttal Exhibit No. (RBHq 8))

Table 9: Stay-Out Premia Over Varying Calculation Periods

Calculation Three Year Four YearPeriod Premium Premium

5 Years 0.13% 0.21%

4 Years 0.13% 0.21%3 Years 0.20% 0.32%2 Years 0.34% 0.51%

1 Year 0.48% 0.67%

If, as the 1980 article by JamesPesando cited by Ms. Prylo is correct and the "no

change" prediction is appropriate, it follows that the one year Stay-Out Premium

calculations of 48 and 67 basis points are the most appropriate. That is especially the case

given that the older data represents periods of flat, or even inverted yieId cur~es.

97

98Please note that my use of the 50.00% adjustment factor does not suggest that I agree with that approacla.Prepared Testimony and Schedules o£Robert 13. Hevezt, at 60.

64 Case No. 0%G 0795Hevert Rebuttal

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PLEASE FURTHER EXPLAIN YOUR CONCERN REGARDING THE USE OF

DATA FROM PERIODS DURING WHICH THE YIELD CURVE WAS FLAT OR

INVERTED.

As Ms. Prylo points out, investment securities of longer temas tend to have higher

yields;99 indeed inverted yield curves (in which Ionger term yidds are lower than short-

term yields) are unusual and often considezed to be precursors to pexiods of economic

distxess. The data provided by Ms. Prylo in Exhibit __(I<LAP-8), however, indicates a

number of periods in which the yields on longer-termed Treasury securities were lower

thaxx the yields on shorter-term Treasury securities. Given that the intent of the. Stay-Out

Premium is m compensate the Company’s shareholders for future increases in the cost o£

equity, the use of flat or inverted yields in the calculation of the premium assumes that

there will be periods of flat or in,retted rates dm:ing the pendency of the Stay-Out perio&

While Ms. Prylo has not indicated that she expects an inverted yield curve during the

Stay Out period, the four year (interpolated) Treasury yietd was less than the one year

Treasury yield in 20 of the 60 months included in her Stay-Out Premium calculation.

It also is interesting to note that from 1976 through 2009, the average difference between

the five and two-year Treasury yields (the "term spread") has been approximately 45 basis

points.1°° ~at ~storical term spread is somewhat lower than the projecmd average te~m

spread between the five and two year Treasury yield for the years 2011 thxough 2014 (as

provided by Blue Chip Financial Forecasts) of approximately 65 basis points. During that

forecast period (i.e., 2011 through 2014) Blue Chip projects a minimum five yea/two

99

100Prepared Teslimony of l<2ristine A Prylo, at 109.Soarce: Federal Reserve Board Statistical Release H.15.1Zelease H.15 historical data.

Data from 1976 thxough 2009, as provided in


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yea, term spread of 50 basis points. Assuming that the "normal" term spread is 50 basis

points, and eliminating from Ms. Prylo’s analysis any month m which the term spread was

50 basis points or less produces a four year Stay-Out Premium of 53 basis points (see

Rebuttal Exhibit No.__ (RBH 18)), which clearly supports the 50 basis point premium

included in my Direct Testimony.

Flotation Cost Adjustment

DOES MS. PRYLO AGREE WITH THE RECOVERY OF FLOTATION COSTS

FOR CECONY?.

No, she does not. Ms. Prylo argues that the recovery of ~lotation costs is inappropriate in

light of Commission precedent, noting that in the past, "the Commission has provided

for recovery of flotation costs only when a public common stock issuance is planned

during the rate year.’’~°* Ms. Prylo further asserts that, because the Company has no plans

for equity issuances in the test year, any e£fort to account for flotation costs in the cost of

equity mounts to retroact*ve ratemaking, a practice that has previottsly been rejected

by the Commission.~2 Ms. P*’ylo thus reasons that any attempt to capture flotation costs

in the Company’s cost of equity is "obviously flawed," and should be given no weight. ~0~

WI-IAT IS YOUR RESPONSE TO MS. PRYLO ON THESE POINTS?

Common stock is closely analogous to long term debt, both in the sense that its purpose

is to provide fianding £o~ long-term investments that are part o£ the Company’s rate base,

and that it remains a part o£ the Company’s cost of doing business long after the initial

101

102

103

See Prepared Testimoay of KAstine A. Pzylo, at 105.Ibid, at 106.tbic~

66 Case No. 0%G-0795Hevert Rebuttal

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placement of the securities. Consequently, it is inconsistent to think of flotation costs as

appropriately recovered only if stock is issued duxing the test period. Rather, flotation

costs are borne by the utility in each year afte, the issuance o£ common stock, just as the

issuance expenses of long-term debt are a legitimate part of the utility’s costs in

succeeding yeats. There is no basis to limit the recovery o£ issuance costs for long term

debt placed in a given test period, and there is similatly no basis in financial theory to

limit recovery of common stock flotatior, costs to common stock issued in the rate

period.

HAS THE COMPANY RECENTLY ISSUED COMMON EQUITY FOR WHICH

THERE WERE ASSOCIATED FLOTATION COSTS?

Yes. Subsequent to the filing o£ my Direct Testimony, CEI closed an underwritten

common stock o/feting in Novembe, of 2009,1°4 which is vcithJI1 the time pet’iod used by

Ms. Prylo to calculate her ROE estimates. Exhibit No.__ (RBH-7) to my Direct

Testimony provides a calculation o£ the flotation costs incurred by compardes within the

proxy group, including four equity issuances by CEI)°s That exhibit quantifies the actual

flotation costs incurred by CEI and the proxy group companies in connection with its

issugx, ce of common equity. Updating that exhibit to include the most recent equity

issuance, produces an average fiotafiorx cost~,t-r ~.,,~a ~ n~,~ percent. ~,aseun on that ~,~,,tttano,l,~" ~ " ~

an adjustment of 8 basis points is reflective of flotation costs for the Company.

Consolidated Edison, Inc. Prospectus Supplement fried at the Securities and Exchange Commission onNovember 30, 2009.See Direct Testimony and SchednIes of Robext B. Hevezt at 48 and F.xb_ibit No. __(RBH-7).


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DOES MS. PRYLO’S DCF ANALYSIS ASSUME FUTURE EQUITY ISSUANCES

FOR CEI?

Yes, it does. Ms. Prylo incorporates the calculation of expansion of commor~ shares

through the application of the sustainable growth rate in her DCF calculation, which she

relies upon to develop her recommended ROE]°~ Specifically, in her second stage of the

two-stage DCF model, Ms. Prylo calculates a sustainable growth rate for each of her

proxy companies, including CEI, "based upon its projected retention of earrfings and

growth in common stock balances.’’1°7 As such, Ms. Prylo accounts for future equity

issuances in her DCF calculation, and consequently her ROE recommendatior~, but does

not consider the costs of those issuances.

WHAT IS YOUR CONCLUSION REGARDING THE TREATMENT OF

FLOTATION COSTS IN THIS PROCEEDING?

The Company has recently issued stock,, and should continue to recover those costs over

the period xates are expected to be in effect, a period which may be longe~ than the rate

year on which Ms. Prylo bases all of her assumptions. Ms. Prylo’s insistence that no

flotation costs should be recovered because no equity issuances are planned is

inconsistent with her own data, which relies on the very expectation that CEI’s common

si~ares outstanding wili grow over the next several years. As shown in Rebut’~ual Exhibit

No. .(RBH-19), my analysis of flotation costs suggests an adjustment to the ROE of

0.08 percent (8 basis points) wouid be appropriate.

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107See Prepared Teslimony of Kristine A. Prylo, at 60,Ibid, at 60. It is worth noting that Value Line projects Consolidated Edison’s common shares outstandingto grow by approximately two million shares between 2010 and 2011, and a£other six million shares from2011 to the 2013-2015 timeframe.


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IV. RESPONSE TO MESSRS. LIBERTY AND RADIGAN

PLEASE PROVIDE A BRIEFSUMMARY OF MESSRS. LIBERTY AND

RADIGAN’S TESTIMONY _AS ITKEI~TES TO THE COMPANY’S COST OF

EQUITY.

At the outset, Messrs. Libei-ty and Radigan point out that they are not expert in deriving

Cost of Equity estimates based on financial models and as such, place "great weight’’ on

the analyses and decisions by regulatory commissions. :es Rather than developing

quantitative cost of equity estimates, therefore, Messrs. Liberty and Radigan point to prior

decisions by the Commission, suggesting that in several instances, the Commission would

have lowered the axzthorized ROE had it been able

mitigating effect of revenue decoupling mechauisms,l°9

to q~aimtify the assumed ~isk-

Messrs. Liberty and Radigan

further assert that "Con Edison is a financially healthy company that has continued to

prosper with ar~ ROE of 9.7%".11°

WHAT IS YOUR RESPONSE TO iVI]ESSRS. LIBERTY AND RADIGAN ON

THOSE POINTS?

Company witness Perkins will respond to the assumption that the Company has, or will

be able to "prosper" with a 9.70 percent ROE. I would simply point out that, as noted

~,~L- __1~ _.. ,~,: ....,,ly ,,~, ~,~za~ ~t...~ ~ ~v, es~,,,,,~ ..........,,~.~.~a ~ ~� 9.70 *,~t~ ....nt is mate~a!ty below

industry norms. While I appredate Messrs. Liberty and Radigan’s candor regarding their

quaIifications to provide expert testimony o~ this issue, I note that they have not

provided any reasonable explanation as to why investors should be comfortable with an

!08109t10

Direct Testimony of Ronald J. Libe,ty and Frank W. Radiga~, at 22.Ibid., at 23 24.Ibid., at 25.

69 Case No. 09-G-0795Hevert Rebuetal

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equity return that is so materially different than the prevailing return available m other

jurisdictions.

Regarding the question of whether the Commissio~ should consider any assumed equity

risk-mitigating effects of &coupling structures on the cost of equity, I note that while

Messrs. Liberty and Radigan rely substantially on the decisions of regulatory bodies in

arriving at their recommendation, they neither consider decisions in jurisdictions beyond ..

New York, nor do they assess equity investors’ expectations with respect to the

interaction of revenue decoupling mechanisms and authorized returns based on those

derisions. In that regard, I have reviewed 77 rate proceedings in which the final order

addressed the issue of decoupling mechanisms and the cost of equity. The purpose Of

that review was to determine the probability o£ a specific ROE adjustment, based on the

number of orders that called for a specific reduction of any magnitude. As shown in

Rebuttal Exkibit No.__ (RBH-20), of the 77 orders reviewed, only 18 (that is, fewer than

25.00 percent) authorized a specific adjustment. Based on that review (and in fight of

Messrs. Liberty and Radigan’s heaW reliance on regulatory derisions), it appears that

investors would consider it far more likely than rmt that there would be no ROE ¯

adjustment.

WHAT ARE YOUR GENERAL CONCLUSIONSREGARDING MESSRS.

LIBERTY AND tLADIGAN’S RECOMMENDATION?

From the perspective of an investor with the ability to commit capital to utilities in

multiple regulatory jurisdictions, there is little rdevant analytical information provided by

Messrs. Liberty and Radigan’s summary review of prior orders regarding either the

7O CaseNo. 09-G-0795Hevert ]Rebuttal

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reasonableness of rheim ROE recommendation, or their suggestion that decouplmg

mechanisms necessarily result in reduced equity return requirements. As to the latter

point, when considered in the context of the breadth of regulatory orders that have

addressed the issue of rate design and the cost of equity, it is apparent that the vast

majority of decisions have made no specific adjustment and as such, there is no basis to

assume that equity investors would expect or accept such an adjustment.

V. SUMMARY AND CONCLUSIONS

PLEASE SUMMARIZE THE UPDATED ANALYSES CONTAINED IN YOUR

REBUTTAL TESTIMONY AS THEY RF_J~TE TO Tt-IE COST OF EQUITY.

As noted earlier, in order to remove the effect of timing on differences in out agalytical

results, to the extent possible I have relied upon the data provided by Ms. Prylo as the

basis for my up&ted and revised analyses. Based on that data, I have updated my DCF

(both Multi-Stage and Constant Growth) and CAPM analyses, and have continued m

apply the Commissio,a’s preferred two-thirds/one-third weighting conventioxa m those

results. For the purposes of my CAPM analyses, I have used data provided in Ms. Prylo"s

testimony to update my ex-ante Market Risk Premium, a~ad have provided Bern

coefficients based on more recent maxket data. I have per£ormed those analyses using my

proxy g~oup, as well as Ms. Prylo’s proxy group. In addition, I have updated my flotation

cost adjustment to reflect CEI’s recent maderw~itter~ equity offering. Regarding the Stay-

Out Premium, I again have relied upon data provided by Ms. Prylo, and have concluded

that the 50 basis point premium ~ecomme~ded ka my Direct Testimony conthmes to be

appropriate.

71 Case No. 09-G-0795t-Ievert Rebuttal

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In addition to the analyses described above, I also have calculated weighted average ROE

results based on my repJ_ication o£ Ms. Prylo’s "Long Form" DCF modal, but using the

Value Line expected P/I~ ~atios for the individual proxy companies in one scenario, ~md

the Value Line expected industry P/E ratio in a second scenario. In both cases 1 have

used the calculated current Beta estimates for the purposes of the CAPM analyses.

As shown in Table 10 (below) and Rebuttal Exhibit No.__ (RBH-9), the range of results,

including analyses based on Ms. Prylo’s proxy group, continues to support my 10.80

percent recommended ROE.Consequently, I see no need to modify my

recommendation in this proceeding.

Table 10: Summary of Results

Average DCF ResultsAverage CAPM- Current BetaNYPSC Averaghxg Convention 2/3 DCF+I/3 CAPMHotation CostReturn on Equity

Hevert PryloProxy ProxyGroup Group10.93% 10.82%.10.13% 10.74%10.66% 10.80%

0.08% 0.08%

DCF Result - Prylo Model Terminal Value- P/E 13.22Average CAPM- Cttttent BetaN ~(I’bC Averaging Convention 2/3 .....~,r-r~/o’* t~t-~v, .....Flotation CostReturn on Equity

10.84% 10.57%I0.13% 10.74%10.60% !0.62%0.08% 0.08%.~ 10.71%

DCF Result - Prylo Model Terminal Value= Value Line LT Industry P/EAverage CAPM Current BetaNYPSC Averaghag Convention 2/3 DCF+I/3 CAPMFIotation Cost

Return on Equity

11.03% 10.77%10.13% 10.74%

10.73% 10.76%0.08% 0,08%

10.82% ~

72 Case No. 09-G-0795I-Ievert Rebuttal

2

DOES THIS CONCLUDE YOUR TESTIMONY?.

Yes, it does.


SUMMARY OF RESULTSRebuttal Exhibit No. __(RBH-9)

Page 1 of 9

DCF RESULTSConstant Growth DCFMulti-Stage DCF

5.65% Long-Term Growth RateAverage DCF Results

CAPM RESULTS

Market Based CAPM- Current BetaZero Beta CAPM- Current Beta

Average CAPM- Current BetaAverage Flotation Cost

HEVERT PROXY GROUP PRYLO PROXY GROUPMean Mean

11.08% 10.83%

10.78%10.93%

S&P 500 Ex-Sharpe Ratio Ante Derived

MRP Mean MRP

10.21% 9.81%10.88% 10,44%

10.13%0.08%

NYPSC A VERA GING CONVENTION (2/3 *DCF) +(1/3*CAPM)

10.82%10.82%

Sharpe S&P 500 Ex-Ratio Ante DerivedMRP Mean MRP

9.42% 10.96%10.00% 11.45%

10.51% 10.07%10.97% 10.49%10.74%O.O8%

Average DCF & Average CAPM Current Beta

Constant Growth and Average CAPM- Current Beta

Multi-Stage (5.65%) and Average CAPM- Current Beta

,, Average Return including Flotation Cost

10.66%

10.77%

10.56%

10.75%

10.80%

10.80%

10.79%

10.88%

SUMMARY OF RESULTSRebuttal Exhibit No. __.(RBH-9)

Page 2 of 9

SUMMARY OF RESULTS

Average DCF ResultsAverage CAPM- Current BetaNYPSC Averaging Convention 2/3 DCF+I/3 CAPMFlotation CostReturn on Equity

Hevert ProxyGroup

10.93%10.13%10.66%0.08%10.75%

Prylo ProxyGroup

10.83%10.74%10.80%0.08%10.88%

DCF Result - Prylo Model Terminal Value= P/E 13.22 10.84% 10.57%Average CAPM- Current Beta 10.13% 10.74%NYPSC Averaging Convention 2/3 DCF+I/3 CAPM 10.61% 10.62%Flotation Cost 0.08% 0.08%Return on Equity 10.69% 10.71%

DCF Result - Prylo Model Terminal Value= Value Line LT Industry P/EAverage CAPM- Current BetaNYPSC Averaging Convention 2/3 DCF+I/3 CAPMFlotation CostReturn on Equity

11.03%10.13%10.73%0.08%10.82%

10.77%10.74%10.76%0.08%10.84%

CONSTANT GROWTH DCF RESULTS

Rebuttal Exhibit No. (RBH-9)Page 3 of 9

Company

Allele ALEAlliant Energy Corp. LNTDPL, inc. DPLDuke Energy Corp. DUKNSTAR NSTPG&E Corp PCGPort~an~ General PORProgress Energy PGNSouthern Co. SOVectren Corp. VVCWisconsin Energy WECXce] Enerqy, Inc. XEL

HEVERT FILED PROXY GROUP3-MONTH CONSTANT GROWTH DCF

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]

Annualized Expected Zacks EPS Value Line EPS Average Low DCF Mean DCF High DCFDividend Stock Price Dividend Yield Dividend Yield Growth Growth Growth Rate ROE ROE ROE

$I .76 $33.67 5.23% 5.33% 4.00% NA 4.00% 9.33% 9,33% 9.33%$1.50 $28.00 5.36% 5.45% 3.00% 4.00% 3.50% 8,44% 8.95% 9.46%$1.21 $26.76 4,52% 4.69% 6.20% 9.00% 7.60% 10.86% 12.29% 13.73%$0.96 $16.47 5.83% 5.96% 4.30% 5.00% 4.65% 10.25% 10.61% 10.97%$1,60 $32.98 4.85% 5.02% 6.00% 8.00% 7.00% 11.00% 12.02% 13.05%$1.68 $42.45 3.96% 4.10% 7.70% 6.50% 7.10% 10.59% 11.20% 11.81%$1.02 $19.69 5.18% 5.31% 6.70% 3.50% 5.10% 8.77% 10,41% 12.05%$2.48 $38.88 6.38% 6.55% 4.50% 6.00% 5.25% 11.02% 11.80% t2.57%$1.75 $32.46 5.39% 5.55% 7.60% 4.50% 6.05% 10.01% 11.60% !3.20%$1.36 $23.63 5.76% 5.94% 7.50% 5.00% 6.25% 10.90% 12.19% 13.47%$1.35 $45.60 2.96% 3.08% 8.70% 8.00% 8.35% 11.08% 11.43% 11.79%$0.98 $20.03 4.89% 5.04% 5.70% 6.50% 6.10% 10.73% 11.14% 11.55%

PROXY GROUP MEAN 5.03% 5.17% 5.99% 6.00% 5.91% 19.25% 11.08% 11.92%PROXY GROUP MEDIAN 5.20% 5.32% 6.10% 6.00% 6.08% 10.66% 11.32% 11.93%

Notes[1] Source: Bloomberg[2] Source: Bloomberg. Based on indicated number of days historical average.[3] Equals Col. [1]lCol. [2][4] Equals (Col. [1] x (1+(0.5 x Col. [7])))tCol. [2][5] Source: Zacks[6] Source: Value Line[7] Equals Avg (Col. [5],[8] Equals (Col. [3] x (1 + (0.5 x Minimum (Col. [5], [6])))) + Minimum (Col. [5], [6])[9] Equals Col. [4] + Col. [7][I0] Equals (Col. [3] x (1 + (0.5 x Maximum (CoL [5], [6])))) + Maximum (Col. [5], [6])

CONSTANT GROWTH DCF RESULTS

Rebuttal Exhibit No. (RBH-9)Page 4 of 9

PRYLO PROXY GROUP3-MONTH CONSTANT GROWTH DCF

Company

Allete ALEAlliant Energy Corp. LNTAmeren Corp, AEEArnedcan Electric Power AEPAvista Corp, AVABlack Hills Corp. BKHCleco Corp. CNLConsolidated Edison EDDPL, Inc. DPLDTE Energy Co. DTEDuke Energy Corp. DUKEdison International EIXEmpire District Electric EDEEntergy Corp. ETRFirst Energy Corp. FEFPL Group, Inc. FPLGreat Plains Energy Inc, GXPHawaiian Electric HEIDACORP, Inc. IDAMGE Energy, Inc. MGEENortheast Utilities NUNSTAR NSTPG&E Corp PCGPinnacle West Capital PNWPortland General PORProgress Energy PGNSempra Energy SRESouthern Co. SQTECO Energy, Inc. TEUIL Holdings Corp. UlLVectren Corp. VVCWestar Energy WRWisconsin Energy WECXcel Energy, Inc. XEL

Annualized Expected Zacks EPS Value Line EPS Average Low DCF Mean DCF High DCFDividend Stock Price Dividend Yield DMdend Yield Growlh Growlh Orowlh Ra~e ROE ROE ROE

$1.76 }33.67$1.50 328.00$1.54 325.81$1.64 ~32.13$0,84 }20.40$1.42 }24.93$0.90 ~25.64$2.36 342.51$1.21 ~26.76$2.12 ~39.27$0.96 16.47$1.26 33.74$1.28 318.44$3.00 379.68$2.2O 344.44$1.89 $52.32$0.83 $!8.11$1.24 $19.28$1.20 $29.70$I .47 $35.42$0.95 $24.02$1.60 $32.98$1.68 $42.45$2.10 $34.27$1.02 $!9.69$2.48 $38,88$1.56 $52.75$1.75 $32.46$0.80 $14.80$1.73 $26.96$1.36 $23.63$1.2O $20.40$1.35 $45.60$0.98 $20.03

PRO.X"Y GROUP MEANPROXY GROUP MEDIAN

5.23% 5.33% 4.00% NA 4.00% 9.33% 9.33% 9.33%5.36% 5.45% 3.00% 4.00% 3.50% 8.44% 5.95% 9.46%5.97% 6.04% 4.00% 1.00% 2.50% 7.00% 8.54% 10,09%5.10% 5.18% 3.30% 3.00% 3.15% 8.18% 8.33% 8.49%4.12% 4.24% 5.00% 6.50% 5.75% 9.22% 9.99% 10.75%5.70% 5.92% 6.00% 10.00% 8.00% 11.87% 13.92% 15.98%3.51% 3.67% 9.00% 9.50% 9.25% 12.67% 12.92% 13.18%5.55% 5.64% 3.60% 3.00% 3.30% 8.83% 8.94% 9.25%4.52% 4.69% 6.20% 9.00% 7.60% 10.86% 12.29% 13.73%5,40% 5.57% 4,50% 8.50% 6,50% 10.02% 12.07% 14.13%5.83% 5.96% 4.30% 5.00% 4.65% 10.25% 10.61% 10,97%3.73% 3,82% 5.00% 4.50% 4.75% 8 32% 8,57% 8.83%6.94% 7.15% NA 6.00% 6.00% 13.15% 13.15% 13.15%3.77% 3.87% 4.70% 6.00% 5.35% 8,55% 9.22% 9.88%4,95% 5.04% 4.00% 3.00% 3.50% 8.02% 8.54% 9.05%3.61% 3,75% 7.20% 8.00% 7.60% 10.94% 11.35% 11.76%4.58% 4.65% 5.00% 0.50% 2.75% 5.09% 7.40% 9.70%6.43% 6.73% 11.30% 7.00% 9.15% 13.66% 15.88% 18.09%4.04% 4.14% 5.00% 4.50% 4.75% 8.63% 8.89% 9.14%4.16% 4.27% 5.00% 6.00% 5.50% 9.26% 9.77% 10.29%3.96% 4.12% 8.g0% 8.00% 8.45% 12.11% 12.57% 13.03%4.85% 5.02% 6.00% 8.00% 7.00% 11.00% 12.02% 13.05%3.96% 4.10% 7.70% 8.50% 7.10% 10.59% ! 1.20% 11.81 %6.13% 6.30% 8.00% 3.00% 5.50% 9.22% 11.80% 14.37%5.18% 5.31% 6.70% 3.50% 5.10% 8.77% 10.41% 12.05%6.38% 6.55% 4.50% 6.00% 5.25% 11.02% 11.80% !2.57%2.96% 3.05% 7.00% 5.50% 6.25% 8.54% 9,30% 10.06%5.39% 5.55% 7.60% 4.50% 6.05% 10.01% 11.60% 13.20%5.41% 5.61% 10.80% 4.50% 7.65% 10.03% 13.26% 16.50%6.41% 6.53% 4.00% 3.50% 3.75% 10.02% 10.28% 10.54%5.76% 5.94% 7.50% 5.00% 6.25% 10.90% 12.19% 13.47%5.88% 6.01% 5.00% 4.00% 4.50% 10.00% 10.51% 11.03%2.96% 3.08% 8.70% 8.00% 8.35% 11.08% 11.43% 11.79%4.89% 5.04% 5.70% 6.50% 6.10% 10.73% 11.14% 11.55%

5.01% 5.50% 5.73% 9.89% 10.83% 11.77%5.00% 5.50% 5.63% 10.02% 10.88% 11.65%

Notes[1] Source: Bloomberg[2] Source: B!oomberg. Based on indicated number of days historical average.[3] Equals Col. [1]/Col. [2][4] Equals (CoL [1] x (1+~0.5 x Col. [7])))i0ol. [2][5] Source: Zacks[6] Source: Value Line[7] Equals Avg (Col. [5], [6])[8] Equals (Col. [3] x (t + (0.5 x Minimum (Col. [5], [6])))) + Minimum (Col. [5], [6])[9] Equals Col. [4] + Col, [7][10] Equals (Col. [3] x (1 + (0.5 x Maximum (Col. [5], [6])))) ~’ Maximum (Col. [5], [6])

mm OO

oooo oo oooooooooooooooo

z

m

o

RESULTS OF MULTISTAGE MODELPRYLO PROXY GROUP

OCTOBER-DECEMBER 2009

Rebuttal Exhibit Ne (RBH 9)Page 7 of 9

2010 EPS $ustanable GDP PayeutRatio SolverOells NearTerm InLelmediate LengTerm

(008)((3

P~oieoted Annuai Data/Eau6n~s Per Shale

CompanyAlleteAlliaat Energy Co[p.Ameren CropAmerican Electric PowerAv~sta co~pBlack HIIs Corp.

2 26255

205200

1 3(33251 406753 454 251 4O1 50

2 401.902.453140

5102 381 202001851 703 701 50

2011

2332 61

221

3412643731 363 401 48

3 574 57144! 64262 274253 2672.08 2.232.62 2.81

2.95 3.121.73 1.82318 332542 $ 578249 2641 29 1 392.(38 2.15

1.78 1.83401 4341 70 1 80

20122382.412683191 782392393.522843971 423 57I 577 493 704£21 481 78

20132472.492 75329188258281364308423

3 741 67

3 83

I 85

2822423.004,18

1.823 506.122801 50 $2.232.22

471

257 2682.58 2.68

3.40 3 522.(30 2.122.79 3(302.85 3.103.73 3.903.28 3.524.50 4.791 58 1 633.91 4.101 77 187831 878396 411570 611

213 231301 316297 314263 2 84321 3434.47 $ 4.783472(31 212

287 315

232 241

2.63 2,12

203 2.15

20162812.79

3662243223.344.063.77

4.31

9244288541 5725O3323313053 555103832 23400¯ 323341 852 522 65223591228

2017 2018294 309292 3.07313 327382 400236 250344 3.66358 3.34424 4.44402 4.27540 5.721 80 1 904.54 4.782.10 2.22£.75 10 294.48 4.70897 7411 74 1 82268 286349 368350 3693 27 3 48388 4125.42 $ 5.754.08 4312.354.31 $ 455775 8213.53 $ 3741 97 2 10264 277281 2 982,34 246633 6.74241 255

2(]193 263.233 444 212.843884.034.884.538082005O4235

10874957851923 04

$ 3 883 903694386094552624808683.052222923152,e07.152.70

2020 2021344 364341 3.60363 384445 4702 79 2.954 10 4334.31 4.55494 5.22478 5.05639 8.75212 2.24533 5.33248 2.6211 48 12.13523 5.538 29 8762o2 2143 21 340410 433412 435390 412461 4876.44 6804.81 5082.76 29"25.07 5369.17 96O4.17 441235 2483.08 3 25333 3812.74 2.907.58 7882.85 301

Terminal2022 2O23 2024 Growth384 406 $ 428 5&S%381 4.02 $ 4.25 5 65%405 428 $ 452 565%4 97 5 25 $ 5 5~ 5 65%311 329 $ 3A8 565%458 483 $ 511 ~65%481 5.08 $ 5.37 565%552 5.83 5 5.16 565%534 5.64 S 5.96 565%713 7.53 $ 7.56 565%236 2.50 $ 2.54 565%595 628 $ 8.84 5.65%217 2.92 $ 3.09 5.65%

1281 13.54 $ 14.30 5.65%584 6.17 $ 0.52 5.65%£ 26 978 $ 1033 5.65%2 26 2 39 $ 2 52 5 65%3 59 379 $ 4 08 5.08%457 483 $ 51(3 565%46(3 485 $ 513 565%436 $ 460 $ 4 85 565%5.15 $ 544 $ 574 565%7.18 $ 759 $ 802 565%5.3¯ $ 567 $ 5 99 5,55%3.08 $ 828 $ 344 5.65%5.36 $ 598 $ 632 5,85%

10.23 $ 1081 $ 1142 3.65%4.88 $ 492 $ 5 20 5,85%262 $ 2 77 $ 293 585%

3 71 3 92 4 14 5657.3.08 $ 324 $ 342 565%8,43 $ 891 $ 941 5,55%3,18 $ 336 $ 355 55"5%

RESULTS OF MULTi STAGE MODELPRYLO PROXY GROUP

OCTOBER DECEMBER 2009

Rebuttal Exhibit No. (RBH-g)Page 8 of g

Allete ALEAl~iant Energy Corp. LNT

2010 2011 2012 201386.00% 83.25% 80.50% 77.75%FOOD% 78 00% 73 00% 70 O0%5900% 5800% 5700% 56 00%5500% 54,75% 5450% 54 25%5900% 61375% 62.50% 6425%6300% 5975% 5650% 53.25%4900% 5275% 5650% 6025%7200% 6975% 6750% 6525%4800% 47 50% 47 O0% 46 5O%61 00% 60 50% 6000% 5950%

2014 201575.00% 7200%67 00% 65 60%55 00% 56 00%5400% 5520%6&00% 64 80%50.00% 32.00%6¢.00% 6320%63.00% 62.40%46 00% 48 80%59.00% 59.20%79.00% 75.20%3300% 38.40%f500% Z2.O9%

2016 2017 2018 2019 2020 2021 2022 2023 2024O3O9% 6600% 6300% 60.00% 60.00% 60O0% 60.00% 60 00% 60 00%

Proi~ted Annual Dat~,’Dividends Per Share & Terminal Market

Company I icker 2010Al[ete ALE $ 1.89Allisnt E~rgy Cord LNT $ 1 78Ameran Cord AE£ $ 150Am~dcaa E[ectSc P=~er AEP $ 1 55Avista Cord AVA $ D 94Black Hills Corn BKH $ 1 29Cleoo Corp CNL $ 0 98Co~,s~Jidated Edison ED $ 2.38DRL. Inc DPL $ 118DTE Energy Co DTE $ 2,14Duke E~rgy Corp DUK $ 1 O8Edison ntema5onal EIX $ 1 27Empire District E’,ectSc EDE $ 1 29Entelgy Cold ETR $ 297First Energy Corp. B~ = $ 235FPL Group~ Inc FPL $ 1 91Great Plains Ehergy Inc GXP $ 084Ha~iian Electric 14E $ 1 26IOACORP, Inc iDA $ 1 20MG£ Energy, Inc MGEE $ 1 4~N~rtheast U~lit es NU $ 1 01NSTAR NST $ ! 57PG&E Corp PCG $ ! 8OP nnaole West Cap]tal P NW $ 210

2011

1 771 521 69

1 32

2.581 25

1 28I 303.132.282.O7

1 331 301 53

215

2 44

1 75$ 1 42

1 25

1.02

2012 2013 2014

1 76 $ 1 75 $ 1 73

1 74 5 1.79 $ 1 83

1 35 $ 1 38 $ 1 39$ 1 35 $ 157 $ 1 82

2.58 $ 2.37 $ 2.37

2.38 2.52 $ 2,66

3.30 3.47$ 3.66220 2.11 $ 2.022.24 2.42 $ 2.52

1 39 1 46 $ 1 53

1,56 ! .6O $ 1.64116 1 25 $ 134lf4 1.53 $ 193

$ 203 2.15$ 228220 224 $ 229

092 $ 097 1 021 75 1 76 $ 1 76

1£3 218$ 24.51 04 I O7 $ 1 O9

20151931 76

1941 371 56

2431 722.841 231.551 354.142.172.98

1 741.761.502.052.52$

1 27270

$ 2 702 04

$ 1 o81 76I 64

$ 1 382 77

20161.941 79

1 42t 74

2511 943021 231 091 374 662.343.57

1 651871.891.572.19

$ 2.782 45

2.75$ 3 25

212$ 114

1 751 70

$ I 423121 28

20171.941 84

2201 48

22125921g3221222231 38

253379

2.031.842.333.062 55

2.79$ 3 85

2 20

1 75I 77

2018

1581.932351 53212

269244342

2611 4O5852.744.24

2152.182.032.47

2.641.492.844 502 291 271 75153

150

2019

194206253

2 33

2.812 723,63

3.02

6 522.974.21

2332.342.222.82

273

2Cr202.062 05

2.67I 672 40

2.g62 873.83

3.2O1 496 5g314498

1932462472.342/7

304

250

20O

453

2021

2.302821 77

273313

4051343351 577 28332526

$ 1 282042 602.612,472.92

$ 4.083 05

321

1 95

479

2022 20232,30 ~ 2.43228 2.412.43 $ 2.572.98 $ 3.151 87 $ 1 97

2.57 67.6

15.71

255 57.0 13.42.71 55.2 12.2333 69.~ 12.5209 433 124

RESULTS OF MULTI~STAGE MODELPRYLO PROXY GROUP

OCTOBER DECEMBER 2009

Rebuttal Exhibit No. (RBH-g)Page 9 of 9

2013 2014

1 54 1 55

237 237

252 2.66119 123

1 32 1.33347 3,66211 202242 2B21 03 1 091 46 1 531 51 1631 60 1 641 25 1 341 83 1 93215 228224 2 29

258 265

0.9( 1 02

2.18 2,45

20151931 761 62

1 371 56

243

2.841 23

4.14

1.50

2.522.371 27

22O

1941 79

1 421 74

251

1 23

1 374,66

337

1 60

1.89

2.19

$ 2.48

2 75$ 3.25

2.12

1 75$ 110

1 423121 28

20171 941 84

!48!922 21

$ 219

1 22

1 30523253

I 742.012.03

3.062.05

2 79$ 3.85

2 2o

$ 1.463.491 39

2018 20!9

1 88 1941 93 $ 206235 $ 2531 53 $ 1 55212$ 233233 $ 245260 $ 281244 $ 2723.42 $ 363

$ 2.61 $ 3O2

5.85$ 6522 74 2 974 24 4 71

129 1 832,16 2332.18 2342.03 2222.4f 2.623 35 3 662.64 2.731 49 1 57

45O 5 2!229 $ 2371 27 1 33

183$ 189$ 1 51 $ 1.56

388 4.20

2020 2021 2022

205 216 228218 $ 23O $ 243267 $ 282 $ 298

2 46 260 275

296 3.13 331287 $ 303 $ 320383 $ 4.(25 $ 4281 27 $ 1.34 $ 1 42320 338 $ 3571 4£ 157 $ 1 66

314 332 $ 350

1 21 1.28 $ 1 36$ 193 2.04 $ 215

246 2.00 $ 274247 261$ 2 76234 $ 2.47 $ 261277 292 $ 309386 408 $ 4312.88 3.05 $ 3 221 66 1 75 $ 1 85304 3 21$ 340550 551 $ 6!4250 265 $ 279

1 85 1 95 $ 2 062O0 211 $ 223

4.53 4 79 $

2023 2024243 7026241 5964257 579~315 $ 73001 97 45 442 90 5951305 6025350 9207338 06 11452 9030159 3411377 84 961 75 9874812 191933 70 99 93587 127.981.43 $ 38.012.27 42572.90 68./~’2 92 80.302.76 57.883 26 75 08455 100803.40 74911 96 44 243 59 52 95649 136072 95 71 171 86 $ 33 57218 $ 55752 35 $ 51 9Q194 4432535 11238202 4620

Notes:[1]- Prylo data[2] 4aluelb~e reports November De~mber 2000[3] Derived from recreation of Prylo DDM model

Rebuttal Exhiibt No. __(RBH-10)REGRESSION RESULTS Page I of 1

EARNINGS PER SHARE AND MARKET-TO-BOOK

Average EPS Exhibit __ (KAP-5)Growth Rate Market-to Book Ratio

ALE 4.00% 1.33LNT 3.50% 1.04AEE 2.50% 0.78AEP 3.!5% 1.17AVA 5.75% 1.08BKH 8.00% 0.89CNL 9.25% 1.4ED 3.30% 1.18

DPL 7.60% 2.99DTE 6.50% 1.05

DUK 4.65% 1.01EIX 4.75% 1.12EDE 600% 1.19ETR 5.35% 1.9FE 3.50% 1.57

FPL 7.60% 1.7GXP 2.75% 0.87HE 9.15% 1.27IDA 4.75% 1.02

MGEE 5.50% 1.65NU 8,45% 1.18NST 7.00% 1.87PCG 7.10% 1.54PNW 5.50% 1.04POR 5.!0% 0.95PGN 5.25% 1.22SRE 6.25% 1.48SO 6,05% 1.8TE 7.65% 1.53UIL 3.75% 1.39

WC 6.25% 1.39WR 4.50% 0.97

WEC 8.35% 1.51XEL 6.10% 1.26

SUMMARY OUTPUT

Reqression StatisticsMultiple R 0.37501847R Square 0.14063885Adjusted R Square 0.11378381Standard Error 0.39072353Observations 34

ANOVA

df SS MS F Significance FRegression 1 0.7995 0.7995 5.236964 0.028860977Residual 32 4.885276 0,152665Total 33 5.684776

InterceptX Variable 1

S~ndard Upper LowerCoefficients Error t Stat P-value Lower95% 95% 95.0% Upper95.0%0.85218243 0.220754 3.860325 0.000518 0.402521067 1.301844 0.402521 1.3018437868.39917757 &670261 2.288441 0.028861 0.923100057 15.87526 0.9231 15.87525509

Dependent variable = Market-to-Book ratioExplanatory variable = Average EPS Growth Rate

Rebuttal Exhibit No. __(RBH-11)Page 1 of 1

ALE

LNT

DPL

DUK

NST

PCG

POR

PGN

SO

WC

WEC

XEL

ReportedEstimateDifferenceSurprise












EARNINGS SURPRISES

12/1/2009 9/1!2009 6/1/2009 3/1!2009 Annual

AverageQuarterlySurprise

0.56 0.49 0.29 0.66 2.000.52 0,52 0.29 0.69 2,020.04 (0.03) 0.00 (0.03) (0.02)

7.69% -5.77% 0.00% -4.35% -0.99% -0.61%

0.43 0.77 0.34 0.30 1.840.43 0.83 0.33 0.54 2.130.00 (0.06) 0.01 (0.24) (0.29)

0.00% -7.23% 3,03% -44.44% -13.62% -12.16%

0.43 0.59 0.37 0.81 2.000.57 0.48 0.34 0.61 2.00

(0.14) 0.11 0,03 0.00 0.00-24.56% 22.92% 8.82% 0.00% 0.00% 1.79%

0.28 0.40 0.27 0.28 1.230.26 0.39 0.25 0.32 1.220.02 0.01 0.02 (0.04) 0.01

7.69% 2.56% 8.00% -12.50% 0.82% 1.44%

0.43 0.82 0.53 0.57 2.350.45 0.83 0.50 0.55 2.33

(0.02) (0.01) 0.03 0.02 0.02-4.44% -1.20% 6.00% 3.64% 0.86% 1.00%

0.80 0,93 0.83 0.66 3.220.74 0.91 0.84 0.72 3.210.06 0.02 (0.01) (0.06) 0.01

8.11% 2.20% -1.19% -8.33% 0.31% 0.20%

0.11 0.43 0.32 0.50 1.360.17 0.23 0.36 0.53 1.29

(0.06) 0.20 (0.04) (0.03) 0.07-35.29% 86.96% -11.11% -5.66% 5.43% 8.72%

0.50 1.22 0.64 0.66 3.020.50 1.19 0.69 0.62 3.000.00 0.03 (0.05) 0.04 0.02

0.00% 2.52% -7.25% 6.45% 0.67% 0.43%

0.31 0.99 0.61 0.42 2.330.30 0.98 0.59 0.43 2.300.01 0.01 0.02 (0.01) 0.03

3.33% 1.02% 3,39% -2.33% 1.30% 1.35%

0.67 0.15 0.06 0.90 1.780.52 0.21 0.09 0.82 1.640.15 (0.06) (0.03) 0.08 0,14

28.85% -28.57% -33.33% 9.76% 8.54% -5.83%

0.96 0.50 0.49 1.20 3.t50.88 0.52 0.45 !.01 2.860.08 (0.02) 0.04 0.19 0.29

9.09% -3.85% 8.89% 18.81% 10.14% 8.24%

0.37 0.48 0.25 0,38 1.480.36 0.51 0.25 0,37 1.490.01 (0.03) 0.00 0.01 (0.01)

2.78% -5,88% 0.00% 2.70% -0.67% -0,10%

PositiveDifference =

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

! .00

Negative PositiveDifference Difference

-0.61%

-12.16%

-5.83%

-0.I0%

1.79%

1.44%

1.00%

0.20%

8.72%

0.43%

1.35%

8.24%

AVERAGEMedian

NotesSource: Zacks

0.27% 5.47% -t.23% -3.02% 1.07%

Total Observations

0.37%0.71%

12

8.00 -4.67% 2.90%

IMPLIED CAPITAL APPRECIATION RATERebuttal Exhibit No. ~(RBH-12)

Page 1 of 1

Proj 3-5 Yr %Annual Total Proj 3-5 Yr

Company Ticker Return Dividend YieldAmeren Corp, AEE 10.00 4.90Amer. Elec. Power AEP 10.00 4.80ALLETE ALE 10,00 4,50Avista Corp, AVA 15.00 4,80Black Hills BKH 9.00 5.00Cleco Corp. CNL 10.00 4,60DPL Inc. DPL 14.00 5,00DTE Energy DTE 8.00 4.70Duke Energy DUK 12.00 3.60Consol. Edison ED 7.00 5.00Empire Dist. Elec. EDE 12.00 5.20Edison Int’l EIX 14.00 3.00Entergy Corp. ETR 14.00 5.50FirstEnergy Corp. FE 13.00 3.30FPL Group FPL 17.00 3.80G’t Plains Energy GXP 13.00 3.50Hawaiian Elec. HE 9.00 5,70IDACORP, Inc. IDA 6.00 5.50Alliant Energy LNT 600 3.90MGE Energy MGEE 11.00 4.60NSTAR NST 13.00 3.50Northeast Utilities NU 11.00 4.50PG&E Corp. PCG 9.00 4.50Progress Energy PGN 8.00 5,50Pinnacle West Capital PNW 12.00 4,80Portland General POR 8.00 6.00Southern Co. SO 17,00 2.50Sempra Energy SRE 12.00 5.00TECO Energy TE 11.00 4.80UIL Holdings UIL 7.00 5.40Vectren Corp. WC 11,00 4.70Wisconsin Energy WEC 8.00 5,30Westar Energy WR 12.00 3,40Xcel Energy Inc. XEL 600 4.80Average 10.74 4.58

ImpliedGrowth

5.105.205.50

10.204.005.409.003,308.402.006.80

11.008.509.70

13.209.503.300.502.106.409.506.504.502.507.202.00

14.507.006.201.606.302.708.601.206.16

Source: Value Line Stock Screener

Rebuttal Exhibit No. __(RBH-13)REPLICATED EXHIBIT__ (KAP 5) Page 3 of 9

INDUSTRY AVERAGE PIE AS TERMINAL VALUE

prylo GroupGrowth Role Prylo BR+SV

1077%Mean10.65%

EPS DPSBeta 10/09 - 12J69 Price 2012-2614 2009

ALE 070 $LNT 070 $AEE 0.80 $AEP 0.70 $AVA 0.70 $BKH 0.80 $CNL 0.65ED O65 $DPL 0.60 $DTE 075 $DUK 0.65EIX 0 80 $EDE 0.75 $ETR 0.70 $FE 0B9 $FPL 0.75 $GXP 0.75 $HE 0.70IDA 0.70MGEE 0.65 $NU 0.70NST 0.65 $PCG 0.55 SPNW 0.75 $POR 0 70 $PGN 065 $SRE 0.85 $so 0.55 $TE 0.85 $UIL 0.70 $WC 075 $WR 0.75 $WEC 6.65 $XEL O 66 $

DPS DPS BPS BPS BPS2610 2012 2014 2009 2010 2012 2014

3367 $ 2 75 $ 1.76 $ 1.78 $ 1.90 $ 25,35 $ 26.00 $ 28.2528 00 $ 3 10 $ 150 $ 1.60 $ 1.92 $ 27,05 $ 28.55 $ 51.082581 $ 3.00 $ 1.54 $ 154 $ 170 $ 33.10 $ 34.00 $ 37.2532.13 $ 350 $ 1 84 $ 1 66 $ 1 90 $ 27.40 $ 28.78 $ 33.25 478.00 495.0020.40 $ 1,75 $ 0,81 $ 098 $ 1.2{~ $ 1895 $ 19 65 $ 21.50 55.00 58.5024.93 $ 3.00 $ 1.42 $ 1.44 $ 1 56 $ 2785 $ 28.65 $ 32.00 39.00 40.0025.64 $ 2.50 $ 0.90 $ 1.00 $ 1.60 $ 18.35 $ 19.20 $ 2150 61.O0 65.0042 51 $ 385 $ 236 $ 238 $ 2.44 $ 66.10 $ 37.25 $ 41.05 277.00 285 002676 $ 2.60 $ 114 $ 1.18 $ 1.30 $ 8.95 $ 9.45 $ 10.30 120.00 126.003927 $ 425 $ 2.12 $ 2.12 $ 2.50 $ 37.45 $ 38.40 S 42.50 166.00 178.001647 $ 140 $ 0.94 $ 098 $ 1.I0 $ 16.25 $ 16.45 S 17,25 1~305.00 1,815.003374 $ 450 $ 1 25 $ 128 $ 1.50 $ 30,10 $ 31.85 6 58.751844 $ 1 75 $ 128 $ 128 $ 1.35 $ 15.50 $ 16,00 $ 17.2579.68 $ 8.00 $ 3 00 $ 360 $ 350 $ 41.85 $ 43.95 $ 57.5044 44 $ 566 $ 2 26 $ 220 $ 2.60 $ 28.25 $ 29.30 $ 35.7552 32 $ 560 $ 1 89 $ 2 00 $ 2.30 $ 30.85 $ 33,40 $ 4118.11 $ 1.60 $ 883 $ 083 $ 1.10 $ 20.70 $ 21 20 $ 22.001928 $ 1.75 $ 1,24 $ 124 $ 1.24 $ 15.15 $ 1545 $ 16752970 $ 275 $ 120 $ 1.20 $ 1.40 $ 29.20 $ 31.00 $ 36.0035.42 $ 230 $ 1.46 $ 1.49 $ 1.58 8 21.50 S 22.85 $ 21.6524 02 $ 225 $ 0£5 $ 1 00 $ 1.15 $ 20.30 S 21 20 $ 24.5032 98 $ 325 $ 1 53 $ 1.63 S t.95 $ 17.60 $ 18,50 $ 22.0042.45 $ 4.25 $ 1.68 $ 1.80 S 2 20 S 27.60 $ 2925 $ 35 7534.27 $ 3.25 $ 2.!0 $ 2.16 $ 228 $ 33.05 $ 33,75 $ 37 2519.69 $ 2.00 $ 1.01 $ 1.05 $ 1.20 $ 20.75 $ 2135 $ 237538.88 $ 3.60 $ 2.48 $ 2.50 $ 2.56 $ 31.80 $ 32,90 $ 368052~75 $ 6 O0 $ !.56 $ 1.72 $ 2.10 $ 35,75 $ 39,25 $ 51 2532.46 $ 3 00 $ 1.73 $ I 80 $ 2.00 $ 18.05 $ 18,95 $ 21.7514.80 $ 1.40 $ 080 $ 0.80 $ 090 $ 955 $ 1000 $ /17526.96 $ 2.30 $ 1.73 $ t.73 $ 1.73 $ 1935 $ 1985 $ 21.75

# of Shales # of Shares DPS Growth Reten~on Return on Increase in MBR2009 2012-2014 2012-2014 Rate2013 Equily2013 BxR shares

30.00 42.06 220 0.31 9.87 3.05111.00 116.00 627 038 10.12 3.85238.00 252.06 3.35 0,43 8.18 3.54 1.44 0.76

4.60 0.46 10.78 4.93 0.85 1.177 72 0.31 8.26 2.60 1.55 1.08276 0.48 9.55 4.58 0.63 0.90

16 96 0.36 11.85 4.27 1.60 1,400.83 0.37 9.53 3.49 0,71 1.183 28 0.54 2757 14.77 1.23 2,995.65 0.41 1017 4.19 1.76 1,053.93 0 21 8.18 1.75 019 1.015.43 0.67 11.73 7 82 1.12t.79 0.23 1027 2.35 253 1.18

2009 S Factor V Factor S x V Growth ROE4.66 1.33 6,19 0.25 1.53 4.58 9.54t .11 1.04 1.15 0,03 0,04 3.89 9.96

112 (0 28) (032) 3.23 9.211 O3 0 15 615 5.08 I0.181 67 0.07 012 2 71 8.070.57 (012) (007) 4.52 10.032.24 0.28 O64 4 96 10 160.84 0.15 0.13 3.62 8.823,67 0.67 2.44 17.21 20.281.85 0.05 008 4.27 9.870.19 0,01 0.00 1.76 8.05

3.01 0.16 048 2.83 9 596.27 0.55 1454 8.00 (121) 1 90 (2.30) 0.47 (1.69] 6.91 10.60

23.63 $ 2.20 $ 1.35 $ t.37 $ 1.50 $ 1700 $ 1750 $ 205020.40 $ 2.10 $ 1.20 $ t.24 $ 140 $ 2110 $ 2225 $ 272045.60 $ 4.50 8 1.38 $ 1.55 $ 2 15 $ 30 20 $ 32 28 $ 38.0020.03 $ 2.00 $ 0.97 $ 1.00 $ 1.10 $ 15.90 $ 16.60 $ 19.00

328.81 325.8138.00 42.00

189,00 180.00304,84 304.8441&00 438,0013600 156.009200 945048.00 520023.20 25.00

176.00 188.00106.81 t06.8136900 400.0010150 118.00

75 25 600028000 288 OO246.00 250 OO796.00 823.00214.00 218,003000 30,8081 00 83.00 3.07

10900 114.00 4.1311700 117.00 11.52456.00 46400 3 23

"iV Method892% 955%

11 95% 9,98%11.88% 9.21%11.81% 10.18%

B 29% 8 67%1270% 1003%1064% 1016%

9 37% 882%17 59% 20 28%1161% 987%852% 805%

14.16% !138%1067% 9.59%10.96% 10.61%15.99% 11.75%10.91% 1125%8.11% 7.44%985% 9.17%8.66% 8.07%8,89% 10.62%9.44% 9.05%

11.46% 11,03%11.52% 11.25%9.98% 8.91%

10.35% 8.85%9 98% 9.10%

12.42% 11 29%10.80% 10.66%10,49% 9.94%0.36 025

025 1.39 0 26 292 9,14% 8.86%0.32 11,01 3.50 0.61 1.39 0.85 028 024 374 9.44 1012% 9.44%0.33 7.98 2.66 1.13 0.97 1.09 (0.03) (0.04) 2.62 894 1070% 894%0.52 12.17 6.36 - 1.51 - 0~4 - 636 1023 1052% 1023%0.45 10.77 4 85 0.44 1.26 0.55 0.2t 0.11 4.96 9.73 10.57% 9.73%

[Median4.55 9.80 1060% 9.80%1Mean 560 10.04 1077% 1004%

Standa[d Deviation 2.79 2.10 1 86% 2 10%Coefficient of Variation 55.82% 20,92% 1728% 2092%

TERMINAL VALUE CALCULATIONUSING EXHIBIT __(KAP-5)


ALELNTAEEAEPAVABKHCNLEDDPLDTEDUKEIXEDEETRFEFPLGXPHEIDAMGEENUNSTPCGPNWPORPGNSRESOTEUILWCWRWECXEL

10/09 - EPSBeta 12/09 Price 2012-2014

0.70 33.67 2.750.70 28.00 3.100.80 25.81 3.000.70 32.13 3.500.70 20.40 1.750.80 24.93 3.000.65 25.64 2.500.65 42.51 3.850.60 26.76 2.800.75 39.27 4.250.65 16.47 1.400.80 33.74 4.500.75 18.44 1.750,70 79.68 8.000.80 44.44 5.000.75 52.32 5.000.75 18.11 1.600.70 19.28 1.750.70 29.70 2.750.65 35.42 2.800.70 24.02 2.250.65 32.98 3.250.55 42.45 4.250.75 34.27 3.250.70 19.69 2.000.65 38.88 3.600.85 52.75 6.000.55 32.46 3.000.85 14.80 1.400.70 26.96 2.300.75 23.63 2.200.75 20.40 2.100.65 45.60 4.500.65 20.03 2.00

DPS DPS DPS2009 2010 2012 - 2014

1.76 1.78 1.901.50 1.60 1.921.54 1.54 1.701.64 1.66 1.900.81 0.96 1.201.42 1.44 1.560.90 1.00 1.602.36 2.38 2.441.14 1.18 1.302.12 2.12 2.500.94 0.98 1.101.25 1.28 1.501.28 1.28 1.353.00 3.00 3.602.20 2.20 2.601.89 2.00 2.300.83 0.83 1.101.24 1.24 1.241.20 1.20 1.401.46 1.49 1.580.95 1,00 1.151.53 1.63 1.951 ~68 1.80 2.202.10 2.10 2.201.01 1.05 1.202.48 2.50 2.561.56 1.72 2.101.73 1.80 2.000.80 0.80 0.901.73 ! .73 1.731.35 1.37 1.501.20 1.24 1.401.35 1.55 2.150.97 1.00 1.10

BPS BPS2009 2010

25.35 26.0027.05 28.5533.10 34.0027.40 28.7818.95 19.6527.85 28.6518.35 19.2036.10 37.25

8.95 9.4537.45 38.4016.25 16.4530.10 31.9515.50 16.0041.95 43.9528.25 29.3030.85 33.4020.70 21.2015.15 15.4529.20 31.0021.50 22.8520.30 21.2017.60 18.5027.60 29.2533.05 33.7520.75 21.3531.90 32.9035.75 39.2518.05 18.959.65 10.00

19.35 !9.8517.00 17.5021.10 22.2530.20 32,2515.90 16.50

DPSBPS # of Shares # of Shares Growth Retention Return on

2012-2014 2009 2012-20!4 2012- 2014 Rate 2013 Equity 201328.25 35.00 42.00 2.20 0.31 9.8731.05 111.00 116.00 6.27 0.38 10.1237.25 238.00 252.00 3.35 0.43 8.1833.25 478.00 495.00 4.60 0.46 10.7821.50 55.00 58.50 7.72 0.31 8.2632.00 39.00 40.00 2.70 0.48 9.5521.50 61.00 65.00 16.96 0.36 11.8541.05 277.00 285.00 0.83 0.37 9.5310.30 120.00 126.00 3.28 0.54 27.5742.50 166.00 178.00 5.65 0.41 10.1717.25 1,305.00 1,315.00 3.93 0.21 8.1839.75 325.81 325.81 5.43 0.67 11.7317.25 38.00 42.00 1.79 0.23 10.2757.50 189.00 180.00 6.27 0.55 !4.5435.75 304.84 304.84 5.73 0.48 14.4541.25 415.00 438.00 4.77 0.54 12.5522.00 136.00 158.00 9.84 0.31 7.3216.75 92.00 94.50 0.29 !0.5936.00 48.00 52.00 5.27 0.49 7.8321.05 23.20 25.00 ! .97 0.44 13.1224.50 176.00 188.00 4.77 0.49 9.4122.00 106.81 106.81 6.16 0.40 15.2035.75 369.00 400.00 6.92 0.48 12.2937.25 101.50 118.00 1.56 0.32 8.8723.75 75.25 80.00 4.55 0.40 8.5736.80 280.00 288.00 0.79 0.29 9.9751.25 246.00 250.00 6.88 0,65 12.2321.75 796.00 823,00 3.57 0.33 14.1111.75 214.00 218.00 4.00 0.36 12.2421.75 30.00 30.80 0.25 10.7420.50 81.00 83.00 3.07 0.32 11.0127.20 109.00 114.00 4.13 0.33 7.9838.00 117.00 117.00 11.52 0.52 12.1719.00 456.00 464.00 3.23 0.45 10.77



ALELNTAEEAEPAVA8KHCNLEDDPLDTEDUKEIXEDEETRFEFPLGXPHEIDAMGEENUNSTPCGPNWPORPGNSRESOTEUILWCWRWECXEL

BxR3.053.853.544.932.604.584.273.49

14.774.191,757.822.358.006.946.782.293.093.845.724.606.085.932.873.432.887.954.704.372.663.502.666.364.85

Increase inshares

MBR2009 S Factor V Factor S x V

4.66 1.33 6.19 0.25 1.531.11 1.04 1.15 0.03 0.041.44 0.78 1.12 (0.28) (0.32)0.88 1.17 1.03 0.15 0.151.55 1.08 1.67 0.07 0.120.63 0.90 0.57 (0.12) (0.07)1.60 1.40 2.24 0.28 0.640.71 1.18 0.84 0.15 0,13

Sustainable Long-FormGrowth ROE

4.58 9.543.89 9.963,23 9.215.08 10.182,71 8.074.52 10.034.90 10.163.62 8.82

Solver Cell Price$ (0.00) 33.67$ 0.00 28.00$ 0.00 25.81$ 0.00 32.13$ 0.00 20.40$ 0.00 24.93$ 0.00 25.64$ 0.00 42.51

Calc’d Price$33.67$28.00$25.81$32.13$20.40$24.93$25.64$42.51$26.76$39.27$16.47$33.74$18.44$79.68$44.44$52.32$!8.11$19.28$29.70$35.42$24,02$32.98$42.45$34.27$19.69$38.88$52.75$32.46$14.80$26.96$23.63$20.40$45.60$20.03

1.23 2.99 3.67 0,67 2.44 17.21 20.281~76 1,05 1,85 0.05 0.09 4.27 9.870.19 1.01 0.19 0.01 0.00 1.76 8.05

1.12 0.11 7.82 11.382.53 1.19 3.01 0.16 0.48 2.83 9.59(1.21) 1.90 (2.30) 0.47 (1.09) 6.91 10,60

1.57 0.36 6.94 11.731.36 1.70 2.30 0.41 0.94 7.72 11.253.82 0.87 3.34 (0.14) (0.48) 1.81 7,440,67 1.27 0.86 0,21 0.18 3.27 9.172.02 1.02 2.06 0.02 0.03 3,88 8.071.89 1.65 3.11 0.39 1.22 6.94 10.621.66 1.18 1.97 0.15 0.30 4.91 9.05

1.87 0.47 6.08 11.032.04 1.54 3.13 0.35 1.10 7.02 11.253.84 1.04 3.98 0.04 0.14 3.01 8.911.54 0.95 1,46 (0,05) (0.08) 3.35 8.850.71 1.22 0.86 0.18 0.15 3.03 9.100.40 1.48 0.60 0.32 0.19 8.14 11.280.84 1.80 1.51 0.44 0.67 5.37 10.660.46 1.53 0.71 0.35 0.25 4.62 9.940.66 1.39 0.92 0.28 0.26 2.92 8.860.61 1.39 0.85 0.28 0.24 3.74 9.441.13 0.97 1.09 (0.03) (0.04) 2.62 8,94

1.51 0:34 6.36 10.230.44 1,26 0.55 0.21 0.11 4.96 9.73

5.004.55

$ (0.00) 26.76$ 0.00 39.27$ 0.00 16.47$ 0.00 33.74$ 0.00 18.44$ 0.00 79.68$ 0.00 44.44$ 0.00 52.32SSSsS$$$

(o.oo)0.000.00(o.oo)0.000.00(0.00)0.00

18.1119.2829.7035.4224.0232.9842,4534.27

$$$$S$$$$$

0.00(0.00)0.000.00(0.00)0.000.000.000.00(0.00)

19.6938.8852.7532.4614.8026.9623.6320.4045.6020.03

K(e)9.22o/

11.64°/10.88°/10.78°/

8.29°/12.030/10.32°/9.37°/

17.22°/10.61°/8.81°/

13.02°/10,96°/10.96°/13.09°/11.57°/7.17°/9.55°/8.33°/9.821‘

10.971‘12.381’10.1199.3599.70’~9.04£,

12.780,11.11°X9.84°/~9.43 °/~

10.71°/~I O.08°A10.85 °/~

9.30°/~Mean

Median

Differenceto Prylo k(e

0.32°/-1.68~-1.671‘-0.601‘-0.221‘-2.001‘-0.169-0,5593,069-0,749-0,769-1.64°4-1.37°A-0.36°~-1.36°/~-0.32o/0.27°/~

-0.38°/~-0.26°/0.80°/

-1.92°/-1.35°/1.14°/

-0.44%-0.85%0.06°/,

-1.500/-0.45°/,0.10°/

-0.570/-1.27%-1.140/-0.62°/0.43°/

-0.53%

20101.781.601.541.660.961.441.002.381.182.120.981.281.283.002.202.000.831.241.201.491.001.631,802.101.052.501.721.800.801.731.371.241.551.001.541,52



2011 2012 2013 2014 2015 2016 2017 2018ALE 1,82 1.86 1.90 1.99 2.08 2.17 2.27 2.38LNT 1.70 1.81 1.92 1.99 2.07 2.15 2.24 2.32AEE 1.59 1.64 1.70 1.75 1.81 1.87 1.93 1.99AEP 1.74 1.82 1.90 2.00 2.10 2.20 2.32 2.43AVA 1.03 1.11 1.20 1,23 1.27 1.30 1.34 1.37BKH 1.48 1.52 1.56 1.63 1.70 1.78 1.86 1.95CNL 1.17 1.37 1.60 1.68 1.76 1.85 1.94 2.03ED 2.40 2.42 2.44 2.53 2.62 2.71 2.81 2.91DPL 1.22 1.26 1.30 1.52 1.79 2.09 2.45 2.88DTE 2.24 2.37 2.50 2.61 2.72 2.83 2.96 3.08DUK 1.02 1.06 1.10 1.12 1.14 1.16 1.18 1.20EIX 1.35 1.42 1.50 1.62 1.74 1.88 2.03 2.19EDE 1.30 1.33 1.35 1.39 1.43 1.47 1.51 1.55ETR 3.19 3.39 3.60 3.85 4.11 4.40 4.70 5.03FE 2.33 2.46 2.60 2.78 2.97 3,18 3.40 3.64FPL 2. I 0 2.20 2.30 2.48 2.67 2.88 3.10 3.34GXP 0.91 1.00 1.10 1.12 1 ~14 1.16 1.18 1.20HE 1.24 1.24 1.24 1.28 1.32 1.37 1.41 1.46IDA 1.26 1.33 1.40 1.45 1.51 1.57 1.63 1.69MGEE 1.52 1.55 1.58 1.69 1.81 1.93 2.07 2,21NU 1.05 1.10 1.15 1.21 1.27 1.33 1.39 1.46NST 1.73 1.84 1.95 2.07 2.19 2.33 2.47 2.62PCG 1.92 2.06 2.20 2.35 2.52 2.70 2.89 3.09PNW 2.13 2.17 2.20 2.27 2.33 2.40 2.48 2,55POR 1.10 1.15 1.20 1.24 1.28 1.32 1.37 1.41PGN 2.52 2.54 2.56 2.64 2.72 2.80 2.88 2.97SRE 1.84 1.96 2.10 2.27 2.46 2.66 2,87 3.11SO 1.86 1.93 2.00 2.11 2.22 2.34 2.47 2.60TE 0.83 0.87 0.90 0.94 0.98 1.03 1.08 1,13UIL 1.73 1.73 1.73 1.78 1.83 1.89 1.94 2.00WC 1.41 1.46 1.50 1.56 1.61 1.67 1.74 1.80WR 1.29 1.34 1.40 1.44 1.47 1.51 1.55 1.59WEC 1.73 1,93 2,15 2.29 2.43 2.59 2.75 2.93XEL 1.03 1.07 1.10 1.15 1.21 1.27 1.34 1.40

1.61 1.68 1,76 1.85 1.95 2.05 2.16 2.281.56 1.60 1.65 1.72 1.81 1.91 2.05 2.20

CAGR ==> 5.00%CAGR ==> 4.76%

2019

IMPLEDTERMINAL

P/E14.0013.0012.0012.0013.5012.5013.0013.5013.0012.0014.0012.0014,00

52.8653.0945.6259.1029.1550.9245.4467.3497.7668.7722.9887.1930.56

IMPLIEDTERMINAL

PRICE50.3750.6743.5656.5427.7448.8843.3164.3394.3965.5621.7684.8428,96

TERMINALEPS

3.603.903.634.712.063.913.334.767.265.461.557.072.07

ImpliedLong-

APPLIED TermP/E Growth14.00 4.06%13.00 6.69%12.00 6.01%12.00 6,03%13,50 3.07%12.50 7.68%13.00 5.16%13.50 4.50%13.00 13.04%12.00 5.50%14.00 3.10%12.00 10.02%14.00 5.29%13.50 7.39%13.50 8,97%14.50 8.16%12.00 1,34%13.00 3.92%13.00 4.27%15.00 5.80%16.00 7.61%15.00 8.14%11.50 5.29%12.50 3.78%12.50 4.74%12.00 2.94%14.00 10.07%14.00 6.09%12,50 4.46%14.00 3.90%14.50 5,84%12.50 4.60%14.00 7.22%11.50 4.28%13.22 5.85%13,00 5.40%

166.61104.82116.88

13.5013.5014.5012.0013.0013.0015.0016.0015.0011.5012.5012.5012.00

22.6129.1046.6865.1749.5272.2576.7551.1631.9354.75

161.23100.94’113.2821.3827.5944.9262.8147.9869.4773.4548.5330.4651.69

134.3557.4922.9538.2739.7730.6691.1830.75

137.7160.2324.1340.3341.6432.3094.2932.22

14.0014.0012.5014.0014.5012.5014.0011.5013.2213.00

11.947.487.811.782.123,464.193.004.636.393.882.444.3!9.604.111.842.732.742.456.512,67

Rebuttal Exhibit No. ~(RBH-13)Page 9 of 9

VALUE LINE PROJECTED PIE RATIOS

Proj 3-5 YrCompany Ticker P/EALLETE ALE 14.00Alliant Energy LNT 13.00Amer. Elec. Power AEP 12.00Ameren Corp. AEE 12.00Avista Corp. AVA 13.50Black Hills BKH 12.50Cleco Corp. CNL 13.00Consol. Edison ED 13.50DPL Inc. DPL 13.00DTE Energy DTE 12.00Duke Energy DUK 14.00Edison Int’l EIX 12.00Empire Dist. Elec. EDE 14.00Entergy Corp. ETR 13.50FirstEnergy Corp. FE 13.50FPL Group FPL 14.50G’t Plains Energy GXP 12.00Hawaiian Elec. HE 13.00IDACORP, Inc. IDA 13.00MGE Energy MGEE 15.00Northeast Utilities NLI 16.00NSTAR NST 15.00PG&E Corp. PCG 11.50Pinnacle West Capital PNW 12.50Portland General POR 12.50Progress Energy PGN 12.00Sempra Energy SRE 14.00Southern Co. SO 14.00TECO Energy TE 12.50UIL Holdings UIL 14.00Vectren Corp. WC 14.50Westar Energy WR 12.50Wisconsin Energy WEC 14.00Xcel Energy Inc. XEL 11.50Mean 13.22

Source: Value Line


CALCULATION OF THE SHARPE RATIO USING EXHIBIT __ (KAP-8)

Jan-05Feb-05Mar-05Apt-05

May-05Jun-05Jul-05

Aug-05Sep-05Oct-05Nov-05Dec-05Jan-06Feb-06Mar-06Apr-06

May-06Jun-06Jul-06


May-07Jun-07Jul-07

Aug-07Sep-07Oct-07Nov-07Dec-07Jan-08Feb-08Mar-08Apt-08

May-08Jun-08Jul-08


May-09Jun-09Jul-09

Aug-09Sep-09Oct-09Nov-09Dec-09Jan-10

AAPAA2" DebtCost

5.685.555.765.565.395.055.185.235.275.505.595.555.505,555.716.026.166.166.135.975.815.805.615.625.785.735.665.635.866,186.116.116.106,045.876.035.876,045.995.996.076.196.136.096.136.956.835.936.016.1!6.146.206.236.135.635.335.155.235.335.525.55

A/"A2" DebtCost

5.785.615,835.645.535.405.515.505.525.795.885.795755.825.986.296.426.406.376.206.005.985.805.815.965.905.855.975.996.306.256.246.186.115.976.166.026.216.216.296.276.386.406.376.497.567.606.546.396.306.426.486.496,205.975.715.535.555.645.795.77

BBB/"Baa2" 20 Year AA/Aa2 Vs A/A2 Vs BBB/Baa2 Merrill Implied VlX VlX SharpeDebt Cost Treasury Treas Treas Vs Treas Lynch MRP INDEX Ratio

5.95 4.77 0.91 1,01 !.18 13.525,76 4.61 0.94 1.00 t.15 I2.056.01 4,89 0.87 0.94 1.12 10.90 6.01 13.28 0,4535.95 4.75 0.81 0.89 1.20 14905.88 4.56 0.83 0.97 1.32 14,685.70 4.35 0.70 1.05 1.35 10.85 6.50 12,06 0,5395,81 4.48 0,70 1.03 1.33 1 ! .905.80 4.53 0.70 0.97 1.27 12.895.83 4.51 0.76 1,01 1.32 11.10 6,59 I2.73 0.5186.08 4.74 0.76 1.05 1.34 14.596.19 4.83 0.76 1.05 1.36 13.086.14 4.73 0.82 1,06 1.41 11.30 6.57 11.30 0.5816.06 4.65 0.85 1.10 1.41 12.696.11 4.73 0.82 1.09 1.38 12.436.26 4.91 0.80 1.07 1.35 11.55 6.64 11.94 0.5566.54 5.22 0.80 1.07 1.32 12.066.59 5.35 0.81 1.07 1.24 15.536.61 529 0.87 1.11 1.32 11.65 6.36 18.28 0.3486.61 5.25 0.88 1.12 1.36 16.186.43 5.08 0.89 1.12 1.35 13.866.26 4.93 0.88 1.07 ! .33 11.35 6.42 12.62 0.5096.24 4.94 0.86 1.04 1.30 11.686.04 4.78 0.83 1.02 1.26 11.186.05 4.78 0.84 1.03 1.27 11.046.16 4.95 0.83 1.0! 1.21 10.05 5.10 11.35 0.4496.10 4.93 0.80 0.97 1.17 10.10 5.17 14.36 0.3606.10 4.81 0.85 1.04 1.29 10.90 6.09 16.23 0.3756.24 4.95 0.88 1.02 1.29 10.90 5.95 13.46 0.4426.23 4.98 0.88 1.01 1.25 10.80 5.82 13.57 0.4296.54 5.29 0.89 1.01 !.25 10.85 5.56 15.71 0.3546.49 5.19 0.92 1.06 !.30 10,95 5.76 19.42 0.2976.51 5.00 1.11 1.24 1.51 28.426.45 4.84 1.26 1.34 1.61 10.75 5.91 22.87 0.2586.36 4.83 1.21 1.28 !.53 10.65 5.82 20.12 0.2896.27 4.56 1.31 1.41 1.71 24.246.51 4.57 1.46 1.59 1.94 10.70 6.13 21.57 0.2846.35 4.35 1.52 1.67 2.00 11.00 6,65 29.84 0.2236.60 4.49 1.55 1.72 2.11 11.30 6.81 25.67 0.2656.68 4.36 1.63 1.85 2.32 11.45 7.09 29.45 0.2416.81 4.44 1.55 1.85 2.37 11,25 6.81 22.41 0.3046.79 4.60 1.47 1.67 2.19 11.30 6.70 18.39 0.3646.93 4.74 1.45 1.64 2.19 11.50 6.76 21.20 0.3196.97 4.62 1.51 1.78 2.35 11.50 6.88 25.23 0.2736.98 4.53 1.56 1.84 2.45 11.50 6.97 21.25 0.3287.15 4.32 1.81 2.17 2.83 11.55 7.23 34.44 0.210858 4.45 2.50 3.11 4.13 12.05 7.60 64.46 0,1188.98 4.27 2.56 3.33 4.71 12.20 7.93 62.87 0.1268.13 3.18 2.75 3.36 4.95 12.00 8.82 53.28 0.1667.90 3.46 2.55 2.93 4.44 12.25 8.79 45.56 0.1937.74 3,83 2.28 2.47 3,91 12.90 9.07 46.95 0.t938.00 3.78 2.36 2,64 4.22 12.75 8.97 46.02 0.1958.03 3.84 2.36 2.64 4.19 12.55 8.71 39.64 0.2207.76 4.22 2.01 2.27 3.54 31.737.30 4.51 1.62 1.69 2.79 12.40 7.89 28.90 0.2736.87 4.38 1.25 1.59 2.49 12.05 7.67 28.03 0.2746.36 4.33 t.00 1.38 2.03 11.95 7.62 25,49 0,2996.12 4.14 1.01 1.39 1.98 11.85 7.71 26.03 0.2966.14 4,16 1.07 1.39 1.98 11.95 7.79 25,85 0.3016.!8 4,24 t.09 !.40 !.94 !1.75 7.51 25.95 0.2896.26 4,40 1.12 1.39 1.86 11.60 7.20 21,88 0.3296.16 4.50 1.05 1,27 1.66 22.44

Mean t 1.45 6.94 22.31 0.3213-Mo. Avg. 11.79 7.55 24.93 0.30


CAPM UTILIZING ALTERNATIVE MARKET RISK PREMIUM CALCULATIONSOcteber- December Data

Three Month Average 30 Year Treasury Yield

RESULTS- HEVERT FILED PROXY GROUPSharpe Ratio Derived Market Risk Premi,~mEx-Ante Approach Derived Market Risk Prem um

RESULTS- PRYLO FILED PROXY GROUP8harpe Ratio Derived Market Risk PremiumSx-Ante Approach Derived Mal ket Risk Prem um

Market R~sk Premium

4.34%

Current Beta

8 6959 685

07720 772

Current CAPM Resu8

1021%942%

lo 96%1007%

MARKET RISK PREMIUM UTILIZING EXPECTED MARKET SHARPE RATIO

VOLe * S

VOL~ Expected Market Sharpe Ratie [1]28,71% 03210 8.57%

Average 2871

Netes:Source: Derived frem Pregared Testimony Kristine A #rylo, Exh]bit__(KAP-8), See, Rebgttal Exhibh Ne __{RBH-6)

VXV 04110 VIX FutureB 05/10 V’,X Futures 06110 VIX Futures

12t31~2999 2889 283 2635 26.312t30/2009 2266 259 259 25912/29,~099 2263 25 6 25.8 25.712t28/2009 2249 25.65 25,75 258!2/2412009 2241 25 8 25.85 25.8512/23/2009 2268 26 25 28,t12/22/2009 22.75 261 25,2 282512/21/2009 2353 269 26.55 26,7512/1812009 24 52 27 4 27 5 27.5512/17t2009 2478 278 2785 27912115t2099 2425 27.5 27,55 27 712i15!2009 24.73 279 27.85 27.9512/!4t2008 2456 2825 2815 28.1512/I 112009 25.12 28.4 28.25 28212/10/2009 25.34 28.5 28,35 28.2512t912009 25.80 28.5 28,45 283512/812009 26.13 2855 28 5 284512/7/2009 25.30 28 05 27.9 2785121412009 24.76 28.1 27.9 27912/312009 25.51 2815 27 95 27.9121212009 24.80 28.2 29 27.812/1/2009 24.94 2805 27 85 277

! 1139/2009 2&24 28.7 28.S 28.2511/27/2009 26.04 2865 28 35 28 15

11125/2009 2366 27 $5 27.5 274511t24/2008 23.74 27,7 27.6 278

1112312009 24.11 27 8 27.7 276511/20/2908 24,66 28.25 2805 2795

2911t19/2008 25.1! 28.25 2811t18/2009 2472 27 95 2785 27.7

Rebuttal Exhibit No, __(RBH-15)Page 2 ef 7

ESTIMATED MARKET RISK PREM UM DERIVED FROM

Est mated Weighted IP, dex Weighted Index Long-Dividend Yield Term Grov~h Rate

108% 9.80%

S&P 500 Estimated

96.59%]

Thrae Month Average 30 Year Treasury Yield

Implied Market Risk Premtum

Standard and Poor’s 5O0 Indexweight in the Long-Term

Ticker Name index (%) Growth Estirnat~MMM UN Equity 3~tCo 056% 1088%AST UN Equdy Abbott Laboratories 0 80% 1118%ANF UN Equrty Abercrembie & Fitch Co 003% 1527%

Cap-WeightedLon,q-Term Growth

009%0.00%0 02%

oo1%0.02%

003%0O2%002%0.00%000%0.01%0.01%000%0.01%0.02%0.01%0.01%003%0.13%0.00%oo1%006%001%003%0 Ol %ooi%0,05%

000%001%0.01%0.03%6.00%0.02%0.34%0.02%0.02%0.00%0.06%001%0.02%0.00%0.01%00t%0 00%oo1%0 o!%000%o O4%012%004%001%0,02%oo1%0,00%002%0.00%oo1%0.00%0.00%oo1%0.03%0 00%0.02%0.02%002%0.01%0.04%0.01%

000%oo1%o 02%

Estimated 2009 Cap-WeightedDividend Yield (%) Dividend Yield

2 57%320%2 43%000%000%o 00%0.08%oco%2.33%000%2.28%1,42%0.85%0.00%0.85%2,68%146%o 40%266%097%5 94%0 00%

473%! 72%3.34%0.00%158%

0.00%0.13%0,55%2.58%1.64%0.58%233%000%o 00%1.67%

0.01%0 03%0.00%0.00%0 00%0.00%0 00%0.00%001%000%000%o 00%000%o 00%000%000%000%0.00%0.00%O,g0%0.03%0.00%0.00%0.01%0.01%0.01%0.00%000%000%o 00%0.00%000%000%000%0.00%0.00%0.00%0.00%0.00%

0.00%0.09%0.00%oo1%000%000%0.00%0.00%

CLF UN Equity Citigrcup Inc 0.00% 18.00%CLX UN Equity Citrix Systems tnc 0.03% £50%CME UW Equity CIorox Co 0.22% 9.48%

o.o1%o.o1%o 02%

o,o2%

o.o1%0.02%004%004%0 00%

o o1%

0 o1%o o1%o oi%000%0.04%0.03%0.00%0.01%0.02%0.01%0 06%0.03%o.o1%oo1%0.00%O 02%0 03%000%001%001%o o1%003%006%oo1%oo1%o.ot%003%0,00%

0.00%0.03%0.01%

0.00%o.00%o,o1%0.04%o.o1%

0.42%3.18%138%377%0 80%3 17%1 56%0 00%230%202%0.61%0 00%

000%o 00%o 00%000%0.00%0.04%o,oo%0.00%ooi%

000%000%000%O 03%

Rebuttal Exhibit No __(RBH-15)Page 3 of 7

HEP UN Equity Home Depot In� g.D8% t3 58%HST UN Equity Hene~e~ ~nternationa~ ln~ 005% No Long Term GrowthHCBK UW Equity H~rme] Fooc~ Corp 0.07% 2167%HUM UN Equity Hospira ~nc 005% 9 67%HBAN UW Equity Host Hot~ls & Reso’ts In� 0.03% NO Long-Term GrowthIBM UN Equity Hudson City Bancorp Inc I 82% 002%ITS’ UN EqJity Humane Inc g 23% 11 67%RX UN Equrty Nuntingion Bancshare~ In~ 004% 800%TEG UN Equity Illinois Teal Works Inc 003% 500%[NTC UW EquJ~ tMS Health In{; 108% 11~0%ICE UN Equty lntegrys Energy Group Ino O 07% 1455%IPG UN Equity ~ntel Corp 003% 11.00%~FF UN Equity n er¢ongne~to Ex¢hange ’, 003% 6.00%IGT UN Equity International Btlsiness Mac 0 05% 18,75%IP UN Equity Internatiol~ai Flavors & Fro 011% 5,50%~NTd UW Equity Ihternationa Game Teehn~ 0 09% 14~2%ISRG UW Equity I~ternationa Paper Co 011% 19.43%IVZ UN Equity Ir,terp~blic Group of Cos Jr 0 00% 11.50%IRM UN Equity Intu~ Inc g 05% !5.00%FT UN Eq~y Intuitive Surgical Inc 009% 9.00%JCP UN Equity 01vesco Ltd 0 05% 11.75%JBL UN Equity Iron Mountain Inc 004% 15.00%JEC UN Equity ]~" Corp 005% 14.00%JNS UN Equity Jabil Circuit Inc 002% 9.25%JDSU bW Equky Jaaobs Etlgiheeriilg Group ~.02% 14.50%SJM UN Equity Janus Capr[al Group ]nc 0.07% 7.88%JCI UN Equity JC Penney Co [nc 0.18% 17,50%JNJ UN Equity JDS Uniphase Corp 168% 773%JPM UN Equity JM Smucker Co/The 175% 850%JNPR UN Equity Johnson & Johnson 0.13% 17.89%K UN Equity Johnson Controls Inc E119% 9.83%KEY UN Equity JPMo[g~n Chase & Co 0.05% 5.33%KMB UN Equi~t Juniper Networks Inc 0,25% 9 51%KIM UN Equity KB Home 0 05% 243%KG UN Equity Kellogg Co 0.03% 7,87%KLAC UW Equity Keyeorp 006% 1000%KS$ UN Equity Kimberly-Clark Corp ~3.16% 1356%KFT UN Equity Kimco Realty Cor~ 0.40% 843%KR UN Equit~ King Pharmaceuticals Inc 013% 894%LLL UN Equity Kl~-Tencor Corp 0,10% 10,16%LH UN Equ~y Kohl’s Corp 0.07% 12 50%LM UN Equity Kra~ Foods Inc 005% 772%LEG UN Equity Kroger Co/The 003% 1500%LEN UN Equity L-3 Corn~’~unicalions Holdi 002% 1500%LUK UN Equity Laboratory, Corp of Algeria, 0,06% 1’4o Long-Term GrowthLXK UN Equity Legg Mason Inc 002% 250%LIFE UW Equity Legge~ & Platt ]nc 009% 085%LNC UN Equity Lennar Corp 008% g,57%LLTC UW Equity Leucadia National Carp 0 66% t329%LMT UN Equity Lexmark ]atematJonal Inc 027% 7.54%L UN Equity Life Techt~olegies C~p 015% No Long-Term GrowthLO UN Equity Lincoln Natimlal Corp 012% 800%LOW UN Equity Lineal Technology Corp 0.33% 11.62%LSI UN Equity Lockheed Martin Corp 804% NO Long-Term GrowthLTD UN Equity Loews Corp 0.06% 12.07%MTB UN Equity Lorlllard Ino 0.08% 4.73%M UN Equity Lewe’s Cos Inc 0,07% 10.00%MRO UN Equity LSi Corp 0.22% 8.03%MAR UN Equffy Ltd Brand~ In~ 0,09% 517%MMC UN Equity M&T Bank Corp 0.11% 12,00%M] UN Equity Macy’s Inc 0.03% 833%

00!%

O 02%ooi%

6.15%0.03%0.00%o.oo%0.12%001%0.00%000%o.o1%001%o o1%0,02%001%0.0!%001%001%001%

0 0O%121%4 50%000%0.93%1.71%2.7t%

2.90%0 00%0.00%247%1.37%03T%0.00%000%193%000%

o o0%0 00%o 00%000%g 00%003%0 oi%000%0.00%0.03%0.00%0.00%0.00%5.00%000%0.00%000%000%o 00%000%000%o 00%0,00%000%000%000%000%0.05%002%000%o.o1%000%o.o1%000%0.00%0.00%0.00%0.02%

Rebuttal Exhib~ NO. __(RBH-!5)Page 4 of 7

PLL UN EquityPH UN EqL~ity=DCO UW Equity~AYX UW EquityBTU UN Equity

PSA L~N Equity

Oracle Corp 0.04% 1375% 0 01% 1,04% 0.00%

Owensqilinois Inc 0,08% 967% 0 01% 1.88% 000%

PACCAR Inc 003% 1433% 0.00% 000% 000%

P aetiv Corp 0.11% 1266% 0.01% 3.93% 000%

P~li Corp 013% 11 00% 0.01% 0.52% 0 00%

Rebuttal Exhibit No. __(RBH-15)Pa#e 5 of 7

VFC UN Equr{y VF C~rp 0.08% 1092%V,~JB UN Equity Viacom IP, c 0.16% 73t%V UN Equity V~rn~do Reaity Trust 0 39% 1964%VNO JN Equity V~,lcan Mate#als Ce 0.12% 567%VMC UN Equity WaI-Mart Stores ~nc 0.06% 5315%WMT UN Equ;ty Walgreen Ce 1,94% 1092%WAG Ut< Eau!ty Wait Disney CofThe 0.35% t450%DIS UN EquRy Washington Post Co,q’h~ 0.56% g 78%WPO UN Eawty Waste Management Inc 0.05% No Longo~erm GrowthWM UN Equity Waters Corp 0.16% 1037%WAT UN Equr~y Watson pharmaceuticals h 006% 1537%WPi UN Equity WellP~int Inc 0.05% 843%WLP UN Equity Wells Fargo & Co 0 25% 11 67%WFC UN Equity We~tern Digital Corp 141% 11 75%WDC LIN Equity Western Union Co£-h~ 010% 800%WU UN Equity Weyerhaeus~l Co 013% 1253%WY UN Equriy Whirlpool Corp 009% 4.00%WHR UN Equity Whole Foods Market Jne O05% 15.00%WFMI UW Equity W~lliams Cos incfThe 004% 16.67%WMB UN Equity Wndstream Cerp 012% 12,50%WIN UW Equity Wlscans n E e gy Corp 004% 029%WEC UN Equity WW Graiager In¢ 0 05% 8.90%G~V UN Equity Wyeth 007% 11.00%WYN UN Equgy ~kt~ndham Worldwide Ceq: 0.04% No Long-qerm GrowthWYNN UW Equity Wynn Resorts Ltd 008% No L~ng-Term GrowthXEL UN Equity Xcel Energy Inc 0 (39% 5.55%XRX UN Equity Xerox Oorp 007% 0.50%XLNX UW Equ~y Xil[hx Inc 0 06% 13.33%XL UN Equity XL Capital Ltd 0 06% No Long-Term GrowthXTO UN Equity XTO Energy Inc 02~% 14.00%YHOO UW Equi~ Yahoo! Inc 0 22% 16.11%YUM UN Equ~y Yum! Brands Ino 015% 11.61%ZMH UN Equity Zimmer Holdings Inc 013% g.56%ZiON UW Equity Zior~s Bancorporation 0.02% 6.20%

0.01%

008%0.01%0.03%0.21%0,05%005%

0.02%001%0,00%o 03%

3.15%0.00%056%3,70%1 69%2.04%150%1.05%0,00%355%00o%000%000%069%000%028%0.45%208%000%202%9 11%315%I g5%0.77%000%

0.00%000%000%0.00%g.oo%0.04%COl%o.o1%0.00%o.o1%o.oo%o.oo%000%

Rebuttal Exhibit No __(RBH-15)Page 6 of 7

ZERO BETA CAPITAL ASSET PRICING MODELRebuttal Exhibit No. __(RBH-15)

Page 7 of 7

Ke = Rf + 0.75~(Rr~ - Rf) + 0.25(Rm- rf)

Ke = the required market ROERf = the risk free rate of returnRr~ = the required return on the market as a whole.~ = Beta of Proxy Group

PREMIUM - HISTORICAL BETA

Factor

Rf = the risk free rate of returnRm = Sharpe Ratio Derived Risk Premium~3 = Beta of Proxy Group

Ke = the required market ROE

PROXY GROUPHevert Filed Prylo Filed

4.34% 4.34%8.57% 8.57%

0.68 0.77

10.88% 11.45%

ZERO-BETA CAPITAL ASSET PRICING MODEL- EX-ANTE RISK PREMIUM- HISTORICALPROXY GROUP

Factor Hevert Filed Prylo Filed

Rf = the risk free rate of returnRm = Ex-Ante Market Risk Premium!3 = Beta of Proxy Group

1% = the required market ROE

Rf- Risk-free Calculation

Three Month Average 30-Year Treasury

4.34%7.42%

0.68

10.00%

Three Month Avg

4.34%

4.34%7.42%

0.77

10.49%

ZERO-BETA CAPITAL ASSET PRICING MODEL

1% = Rf + 0.7513(Rm - Rf) + 0.25(Rm - q)

I% = the required market ROERf = the risk free rate of returnRrn = the required return on the market as a whole.~3 = Beta of Proxy Group

PROXY GROUP BETAS

BetaALE 0.90LNT 0.80DPL 0.80DUK NMFNST 0.80PCG 0.85POR 0.80PGN 0.75SO 0.65VVC 0.90WEC 0.80XEL 0.80Mean 0.80Median 0.80

DateJune, 2008June, 2008June, 2008August, 2008August, 2008August, 2008August, 2008August, 2008August, 2008June, 2008June, 2008August, 2008

Souce: Value Line

Issue55511

11111155

11

Rebuttal Exhibit No. ~(RBH-16)Page 1 of 1

Rebuttal Exhibit No. (RBH-17)ROE VS. CREDIT SCORE Page 1 ef 2REGRESSION RESULTS

Credit Credit CreditRating Rating Rating

Long-Form Moody’s Average Above Below ThresholdROE [1] CAPM W£td, A’~:J. S&P [2] Mood~/’s I2] S&P Scere Scole Scole Thresho}d Threshold ScoreCompany

ALE 9 64% 9.70% 9.59% BBB÷ Baal 8 8 8.0 9.59% 7.5LNT 9 96% 9 70% 9 87% BBB÷ Baal 8 8 8.0 9.87%AEE 9.21% 10.39% 9.60% BBB- Baa3 10 10 10.0 9.60%AEP 10.18% 9.70% 10.02% BBB Baa2 9 9 9.0 19.02%AVA 807% 970% 861% BBB- Baa3 10 19 18.9 8.61%BHP 10.08% 10.39% 10.15% BBB- Baa3 10 10 10.8 10.15%CNL 10,I6% 9.36% 9,89% BBB Baa3 9 10 9.5 9.89%ED 8.82% 9.36% 9.90% A- Baal 7 6 7.5 9 00%DPL 20.28% 9.02% 16.63% A- Baal 7 8 7.5 16.53%DTE 9.87% 10 05% 993% BBB Baa2 9 9 9.0 9,93%DUK 805% 936% 6.49% A- Baa2 7 9 8.0 8.49%EIX I1 38% 1039% 11 05% BBB- Baa2 10 9 95 11.05%EDE 9.59% 1005% 9.74% BBB- Baa2 10 9 95 974%ETR 10.60% 9.70% 10,30% BBB Baa3 9 10 9.5 1030%FE 11.73% 10.39% 1126% BBB Baa3 9 10 95 1128%FPL 11.25% 10.06% 1086% A A2 6 6 6.0 10.85%GXP 7.44% 1005% 831% BBB Baa3 9 10 9.5 8.31%HE 9.17% 9.70% 935% BBB Baa2 9 9 9.0 9.35%IDA 8.07% 9.70% 8.61% BBB Baa2 9 9 90 861%MGEE 10.62% 9.36% 1020% AA- Aa3 4 4 40 10.20%NU 9.05% 9.70% 927% BBB Baa2 9 9 9.0 927%NST 1103% 9.36% 1047% A+ A2 5 6 6.6 10.47%PCG 11.25% 6.67% 10.39% BBB+ Baal 8 8 8.0 10.39%PNW 8.91% 10.05% 9.29% BBB- Baa3 113 10 10.0 929%POR 8.85% 9.70% 9.13% BBB÷ Baa2 8 9 8.5 9.13%PGN 9.10% 9.36% 9.19% BBB+ Baa2 8 9 8.5 9.19%SRE 11 28% 10 74% 1!.10% BBB+ Baal 8 8 8.0 11 10%SO 10.66% 8.67% 10.00% A A3 6 7 6.5 10.00%TE 9.94% 10.74% 10.21% BBB Baa3 9 !9 9,5 !0.21%UiL 8.86% 9.70% 9.14% BBB Baa3 9 10 9,5 9.14%WC 9.44% 1005% 9.84% A- Baal 7 8 7.5 9.64%~t 8.94% 10.05% 9.31% BBB- Baa3 10 19 10.6 9.31%WEC 10,23% 9.36% 9.94% BBB+ A3 8 7 7.5 9.94%XEL 9.73% 936% 961% BBB+ Baal 8 8 8.0 9.61%Median 980% 9.70% 9 61% 8.6 10.10% 9.61%Mean 10.04% 9.75% 9.94% 10.83% 967%Standard Deviation 2.10%Coefficient of Variation 2I .43%

SUMMARY OUTPUT

Regression StatisticsMultiple R 029040064R Square 0 08433253Adjusted R Square 005571792Standard Error 0.0204107Observations 34

ANOVA

RegressionResidualTotal

df SS MS F S~nificance F1 0.0012278 0.0012278 2.9471844 0,095693701

32 0.0133311 0.000416633 00145589

S~ndard Upper Lower UpperCee~cieets En’or t S~t P-value Lower95% 95% 95.0% 95.0%

In~ept 013706132 00216521 6.3301763 4.188E-07 0.09295783 0.1811651 0 0929575 0.1811651X Variable 1 -0.0043305 0.0025225 -1,716737 0.0956937 -0.009468709 0.0008077 -0009469 0.0008077

NOTES[1] Extiibil_(KAP-6) Page 2 of 3[2] Exhibil=(KAP-4) Page 2 of 2

Legend [2]AAA Aaa 1AA+ Aal 2AA Aa2 3AA- Aa3 4A+ A1 5A A2 6A- A3 7

BBB+ Baal 9BBB Baa2

1.90BBB- Baa3

2500% I

Rebuttal Exhibit No. __(RBH-17)AUTHORIZED ROE VS. CREDIT SCORE Page 2 of 2

REGRESSION RESULTS

Dataseto Rating

1 BBB÷2A-3 BBB-4 BBB-5 BBB-6 BBB-7 BBB8 BBB9 BBB

10 BBB11 BBB12 BBB+13A-14 BBB15 BBB16 BBB17 BBB-18 BBB19A20 A-21 BBB+22 BBB23 A-24 A-25 BBB+26 A-27 BBB+28 BBB-29 BBB30 BBB31 BBB-32 A33 BBB-34 BBB35 BBB36 BBB37 BBB38 A39 BBB40 BBB41 AA-42 BBB43 BBB44 BBB45 BBB-46 BBB+47 BBB÷48 A49 A50 A51 A52 BBB-53 A-54 BBB-55 A-

56A-57 BBB+58 BBB+59 BBB+

Rating Score ROE8.0 10,80%7.0 10.40%

10.0 10.65%10.0 10.65%10.0 10.65%10.0 10.76%9.0 9.96%9.0 10.20%9.0 10.50%9.0 12.46%9.0 10.50%8.0 13.00%7.0 12.81%9.0 10,50%9.0 10.25%

10.0 10,50%10.0 10.20%9.0 10.70%7.0 10.00%7.0 9.40%8.0 13.00%9.0 11.00%7.0 10.70%7.0 10.70%8.0 10.50%7.0 10,63%8.0 11.50%

10.0 10.80%9.0 9.90%9.0 11.75%

10.0 11.10%6.0 10.50%

10.0 9.75%9.0 10.10%9.0 10.50%9.0 10.10%9.0 10.50%6.0 10.00%9.0 10.50%9.0 10.18%4.0 10.40%9.0 9.40%9,0 9.67%9,0 11.35%

10.0 11.00%8.0 10.00%8.0 10.50%6.0 10.70%6.0 11.25%6.0 12.00%6.0 12.88%

10.0 11.25%7.0 10.40%

10.0 10.40%7.0 10.40%

7,0 10.40%8,0 10.88%8,0 10.75%8.0 10.50%

Authorized ROEs of Prylo Proxy Group Operating Companies versus Operating Company Credit Ratings

25.00%

cost

E

u

tY

20.00%

i5.00%

lo.00%

5,00%

y = -0.O00£x + 0.1!44R2 = 0.0218

0.00%

AAA2.0 3.0 4.0 5.0 6,0 7,0 8.0 9.0 10,0

BBB-Average Credit Rating Score

Ranking

AAA 1AA+ 2AA 3AA- 4A+ 5A 6A- 7BBB+ 8BBB 9

. BBB- 10

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.147533418R Square 0.02176611Adjusted R Square 0.004604111Standard Error 0.008117189Observations 59

ANOVAdf SS MS F 7gnificance F

Regression 1 8.3565E-05 8.3565E-05 1.268273628 0.26481Residual 57 0.003755659 6,58888E-05Total 58 0.003839224

Lower Upper Lower UpperCoe~den~ S~ndardEtror tS~t P-value 95% 95% 95.0% 960%

Interoept 0.11439991 0.006442865 !7.75606135 6.75439E-25 0.101498 0.127302 0.101498 0.127302X Vadable 1 -0.00086183 0.000765267 -1.126176553 0.264810014 -0.00239 0.000671 -0.00239 0.000671

STAYOUT PREMIUM CALCULATION


Treasury Yields

Date 1-Year 2-Year 3-Year 4-Year2005-01 2,66 3.22 339 3.552005-02 3,03 3.38 3.54 3.662005-03 3.30 3.73 3,91 4.042005-04 3.32 3.65 3.79 3.902008-05 3.33 3.64 3.72 3.792005-06 3.36 3.64 3 69 3.732005-07 3,64 3.87 3.91 3.952005-08 3.87 4.04 4,08 4.102005-09 3.85 3.95 3,96 3.992005-10 4.18 4.27 429 4.312005-11 4.33 4.42 443 4.442005-12 4.35 4.40 4.39 4.392006-01 4.45 4.40 435 4.352006-02 4.68 4.67 4.64 4.612006-03 4.77 4.73 4.74 4.732006-04 4.90 4.8£ 489 4.902006-05 5100 4.97 497 4.992006-06 5.16 5.12 509 5.082006-07 5.22 5.12 5.07 5.062006-08 5.08 4~90 485 4.842006-09 4.97 4.77 4.6£ 4.682006-10 5.01 4.80 472 4.712006-11 5.01 4.74 4.64 4.6!-)006-12 4.94 4.67 4.58 4.562007-01 5.06 4.88 4.79 4.772007-02 5.05 4.85 4.75 4.732007-93 4.92 4.57 451 4.502007-04 4.93 4.67 4,60 4.602007-05 4.91 4.77 4,69 4.682007-06 4.96 4.98 500 5.022007-07 436 4.82 4.82 4.852007-08 4.47 4.31 434 4.392007-09 4.!4 4.01 4.06 4.132007-10 4.10 3.97 4.01 4.11-~007-11 3.50 3.34 3.35 3.512007-12 3.26 3.12 313 3.312008-01 2.71 2,48 251 2.752008-02 2.05 1.97 2.19 2.492008-03 1.54 1.62 1 80 2.142006-04 1.74 2.05 2,23 2.542008-05 2.06 2.45 2.6£ 2.922008-06 2.42 2.77 308 3.292008-07 2.28 2.57 2.87 3.092008-08 2.18 2,42 270 2.92!008-09 1.91 2.08 2.32 2.60

2008-10 1.42 1.61 1 86 2.302008-11 1.07 1.21 1.51 1.902008-12 0.49 0.82 1 07 1.392009-01 0.44 0.81 1.13 1.372009-02 0.62 0.98 ! .37 1.622009-03 0.64 0.93 1 31 1.572009-04 0.58 0.93 1.32 1.592009-05 0.50 0.93 1.39 1.762009-06 0.51 1.18 1.76 2.242009-07 0.48 1.02 1.55 2.012009-08 0.46 1.12 1.65 2.112009-09 0.40 0.96 1.48 1.932009-10 0.37 0.95 1.46 1.902009-11 0.31 0.80 1.32 1.782006-12 0.37 0.87 1 38 t,862010-01 0,35 0.93 1.49 1.992010-02 0.35 0.86 1 40 1.885-Yr. Avg. 3.07 3.20 334 3.49

Differential 0.27 0.42

[I] Treasury Yields [1]

3-Yearl-Year

2051 541.74206242228218

1 421,070490440620640.550500.510480.460400 370.310370350351.08

Differential

8-Yr./2-Yr. Spread5-Year Term Spread Threshold [2]

3,71 0.49 0.503.77 0.39 0.504.17 0.44 0.504,00 0.35 0.503.85 0.21 0.503.77 0.13 0.503.98 0.11 0.604.12 0.08 0.504.01 0.06 0.504.33 0.06 0.504.45 0.03 0.504.39 (0.01) 0.504.35 (0.05) 0.504.57 (0.i0) 0.504.72 (0.01) 0.504,90 0.0i 8.505.00 0.03 0.505.07 (0,05) 0.505.04 (0.08) 0.504.82 (0.08) 0.504.67 (0.10) 0.504.89 (0.t 1) 0.504.58 (0.16) 0.504.53 (0.14) 0.504.75 (013) 0.504.71 (o14) 0.504.48 (009) 0.504.59 (008) 0.504,67 (0.10) 0.505.03 0.05 0.504.88 0.06 0.504.43 0,12 0.504.20 0.19 0.504.20 0.23 0.503.67 0.33 0.50349 0.37 0.502.98 0.50 0.502.78 0.81 0.502.48 i 0.86 0.502.84 I 0.79 0.503.15 0.70 0.503,49 0.72 0.503.30 0,73 0.503.!4 0.72 0.502.88 0.80 0.502.73 1.!2 0.502.29 1.08 0.501.52 0,70 0.501.60 0.79 0.501,87 0.89 0.501,82 0.89 0.501 86 093 0.502.13 1.20 0.50271 1.53 0.50246 1.44 0.50257 1,45 0.50237 1,41 0.50233 1 38 0.50223 1.43 0.502.34 1.47 0.50248 i 55 0,50236 1.50 0.50

2191 802.232693082872702.321 861 511 071,131 371.311 321 391.761.551.65i 481.461.32i 381.49i 401.609.72

Stay-Out Premium (.5 x Differential) 0.13 0.214-Yr. Avg. 2.94 3.03 3.19 3.37

Differential 026 0.43Stay-Out Premium (.5 x Differential) 0.13 0.21

3-Yr. Avg 2.27 2.44 2.67 2.90Differen0al 039 0.63

Stay-Out Premium (.5 x Differential) 0.20 0.322-Yr. Avg. 1.15 1.48 1.83 2.16

Differential 0.68 1,02Stay-Out Premium (.5 x Differential} 0.34 0.51

i-Yr. Avg. 0.47 0.96 1.43 1.81Differential 0.96 1.34

Stay-Out Premium (.5 x Differential) 048 0.67

Stay-Out premium (.5 x Differential) 0.36

4-Year

2.492.142.542.923.293.092.922.602.301.901.301.371.621.571.591.762.242.012.1t1.931.901.781.861.991.882.141.960.53

[!] Federel Reserve Statistica! Release H.!5[2] Blue Chip Financial Forecasts. December 1,200£, minimum 5-yead2-year Treasury yield spread, 2011 - 2014.

FLOTATION COST ADJUSTMENT

Rebuttal Exhiibt No. __{RBH-19)Page 1 of 2

Flotation Costs

2/27/2009 Allete, Inc, 5,000,000 $27.98 $0.003711!2003 Alliant Energy Corp. 15,000,006 $1925 $0.770 $370,000

1/16~’1994 DPL, Inc. 3,200,000 $20.38 $0.600 $200,0008/1t2007 Portland General Electdc Co 12,477,500 $14.19 $0.494 $375,009

11118t2068 Progress Enelgy, Inc. 14,375,000 $37.50 $1.125 $389,00012/6/2000 Southern Co. 20,000,000 $28.91 $0 369 $375,0002222/2807 Vedren Corp. 4,600.000 $28.33 $0.~90 $425,0009/9/2908 Xcel Energy Inc 15,000,O00 $20.25 $8610 $600.900

Weighted A~mge Flotation Costs

$27.977 $15,000 $139,908,000 $139,885,000 0.011%$18.455 $11,920,000 $288,750,000 $276,839,000 4.128%$19.713 $2,120~000 $65,200,680 $63,080,000 3.252%$13.576 $0,532,648 $175,932,750 $!69,400,104 3.7!3%$36.354 $16.471,875 $539,062,500 $522,590,625 3.056%$28.531 $7,575,000 $578,200,000 $570,625,000 1.310%$27.248 84,979,060 $130,318,606 $t25,339,000 3.821%$19.600 $9,758,0OO $303,758,000 $294,000,O90 3.210%

$59,363,521 $2,221,113,250 $2,161,749,729 2673%FLOTATION COSTS 2.673eA

FIolatio~] Cost Adjustment - Gas Proxy GroupIll L2] [31

A~nualized Dividend Stock Price Dividend YietdELECTRIC UTILITIES:

At.E Allot 8 $1.76 $33.67 5 23%LNF Alliant Enelgy CalF. $1.50 $28.00 5.36%ED Consolidated Edison, Inc. $2.36 $42.51 5.55%DPL DPL, Inc. $1.21 $26.76 4.52%DUK Duke Energy Corp. $0.96 $16.47 9.83%NST NSTAR $1.80 $32.98 4.85%PCG PG&E Corp $1,68 $42.45 3.96%PeR Portland General Electdc Co. $1.02 $19,69 5.18%PGN Progress Energy, Inc. $2.48 $38.88 6.38%SO The Southern Company $1.75 $32,46 5,39%

WC Vectren Corp $1.36 $23.63 5.76%V~EC Wlsconsin Energy $1.35 $45.60 2.96%

_ _~X~.L ___~£#1. F ~e_r~Ll~l ~o. $0.98 $20.03 4.89%MEDIAN

[4] 151 161 17]Expected Dividend

Expected Dividend Yield Adjusted for Proj EPS Growth Proj EPS Growth Average GrowthYield Ftelatiell Costs (Zacks) (Value Line) Estimate DCF

[101

Flotation AdjusledDCF k(e)

Notes on Flotation Cost Adjustment Calculation:[1] Source: Bloomberg

[3] = [1] / [2] el [Anllualized Div~de~ld] ! [Price][4] = [3J x [1÷ .59] or |Dividend yield] x [1 + (.5 x average growth rate)][5] = [4] / [! - &0267] Or [Expeded Dividend Yield] / [1- Flelatien Cost PercentageJ[6] Source: Zacks Research[7] Source: Vatue Line[8] Average of c~lumns [6], [7][9] - (Column [4] + Column [8])[10] = (Column [5] + Column [811

5.33% 5.48% 4.00% NA 4.00% 9.33% 9.48%5.45% 5,60% 3.00% 4.90% 359% 8.95% 9.10%5:64% 5.80% 3~60% 3.00% 3.39% 8.94% 9.10%4.69% 4.82% 620% 6.00% 7.69% 12.29% 12.42%5,96% 6.13% 4.30% 5.00% 4.65% 10.61% 10.78%5.02% 5.19% 6.08% 8.00% 7.00% 12,02% 12.16%4.10% 4.21% 7.70% 650% 7.10% 11.26% 11.31 %5.31% 5.46% 6.70% 3.50% 5.10% 1041% 1056%6.55% 6.73% 4.59% 6.00% 5.95% 11.80% 11 98%5.55% 5.71% 7.60% 4.50% 6.05% 11.60% 11.76%5.94% 6.10% 7.50% 5 00% 6.25% 12.19% 12.35%3.08% 3.17% 8.70% 8.00% 8.35% 11,43% 11.52%5 04% 5,18% 5.70% 8.50% 8.10% 11.14% 11.28%

6.05% 11 20% tl.31%

FLOTATION ADJUSTED MEDIAN CONSTANT GROV~rfH DCF RESULTUNADJUSTED MEDIAN CONSTANT GROWTH DCF RESULT

DIFFERENCE (FLOTATION COST ADJUSTMENT)

11.31%1120%0.11%

FLOTATION COST ADJUSTMENT

Rebuttal Exhiibt No. __(RBH-19)Page 2 of 2

Flotation Costs

Date Issuing Erltity Shares tsslJed Offering Price Discount Offedng ExpeDse Share Costs before Costs Net P.)c~.eds Pe~celgage

1113012009 Consofidaled Edison, Inc. 5,000,000 $42.63 ${3.280 $500,000 $42.250 $1,900,000 $213,150,000 $211,250,800 0.891’5/lO/20o7 Consolidated Edison, Inc. 11,000,006 $50.73 $0,190 $400,000 $50.504 $2,490,000 $55a,03o,oo6 $565,540,000 0.4469t20/2006 Consolidated Edison, Inc. 9,715,000 $45.96 $0.360 $400,000 $45.559 $3,597,400 $446,501,400 $442,604,000 0.8735/11/2004 Consolidated Edison, 01c. 14,000,000 $37.74 $! .132 $400,000 $86.579 $16,250,800 $528,360,000 $512,109,200 30765119/2003 Consolidated Edison, Inc. 8,700,000 $39.80 $0.345 $350,000 $39.415 $3,351,500 $346,260,000 $342,908,500 0 968

Weighted Average Flo~alien Costs S27,889,700 $2,092,301,400 $2,064,411,700 1.333FLOTATION COSTS

Flotation Cosl Adjuslment - Gas Proxy Group

Annualized Dividend Stock Pdce Dividend Yield

141 5] I61 FI [8} [9] 1101Expected Dvdend

Expected Dividend Yield Adjusted for Pro| EPS Growth Pro| EPS Growth Average Growth Fld|ation AdjustedYield Flotation Costs (Zacks) (Value Line) Estimate DCF k(e) DCF k(e)

ELECTRIC UTILITIES:ALE AIlete $1.76 $3367 5.23% 5.33% 5.40% 4.00% NA 4.00% 9.33% 9,40%LNT Alliaul Enelay Corp $1.50 $28.00 5.36% 545% 5.52% 3,00% 4.00% 3.50% 8.95% 9 02%ED Consolidated Edlson, hlc $2.36 $42.51 5.55% 5.64% 5,72% 3.60% 3,00% 3.30% 8 94% 9 02%DPL DPL, Inc $1.21 $26.76 4.52% 4.69% 4.76% 6.20% 9.00% 7.60% 12.29 Y~ 1236%DUK Duke Energy Corp. $0.96 $16.47 5.83% 5.96% 6.04% 430% 5.00% 465% 10,61% 10.69%NST NSTAR $1.60 $3298 4.85% 5.02% 509% 6.00% 8.00% 7.00% 12.02% 12.09%PCG PG&E Corp. $1.68 $42.45 3.96% 4.10% 4.15% 7.70% 6.50% 7.10% 1120% 11.25%POR Portiaed General Electric Co. $1.02 $19.69 5.18% 5.31% 5.38% 6.70% 3.58% 5.10% 10.41% 1048%PGN Progress Energy, lac. $2.48 $38.88 6.38% 6,55% 6.63% 4.50% 600% 5.25% 11,80% 11.88%SO The Southern Company $1.75 $32.46 5.39% 555% 5.63% 7.60% 4.50% 6 05% 11.60% 11.68%VVC Vect[en Corp. $1.36 $23.63 5.76% 5.94% 6.02% 7.50% 5.00% 6.25% 12 19% 12 27%WEC Wisconsin Enelgy $1.35 $45,60 2.£6% 3.08% 3.13% 8.70% 8.00% 8.35% 11.43% 11.48%XEL Xcel Energy Inc. $0.£8 $20.03 4.89% 5.04% 5.11% 5.70% £.50% 6.10% 11.14% 1121%

MEDIAN 6.05% 11 20% 11 25%

FLOTATION ADJUSTED MEDIAN CONSTANT GRO~/TH DCF RESULT ! t .25%UNADJUSTED MEDIAN CONSTANT GROW fH DCF RESULT 11.20%

DIFFERENCE (FLO FATION COST ADJUSTMENT) 006%

Notes on Flotation Cost Adjustment Calculation:[I] Source: Bldombelg[2] Source: 8ldembe~g[3] = [I] ! [2} or [Annualized Dividend] ! [Price]14J = [3] x [1 * 56[ or [Dividend Yield] × [1 + (.5 x average glowth rate)]|5] = [4] / [1 ~ 0.01333] or [Expected Dividend Yield| t [1 - Fldtation Cost Pelcentage][6] Source: Zacks Resealch[7] Source: Value Line[8] Average of columns [6], [7|[9] = (Column [4] + ColulTtn [8])[10] = (Coldm~ [5] + Column[11] Equals median Adjusted DCF, Column [10] - Median Unadjusled DCF, Column [9]

Rebuttal Exhiibt No. _(RBH-20)Page 1 of 2

SUMMARY OF REGULATORY ORDERS ADDRESSING REVENUE STABILIZATION MECHANISMS

Specific Adjustmentto ROE DocketState Utility

1 MS Atmos NO 92-UN-0230 10/1/1992

2 GA Atlanta Gas Light NO 8390-U 6/25/1998

3 OR NW Natural Gas NO% UG-143 I 9/12/2002

4 CA Pacific Gas & Electric NO Application 02-02-012[2] 311612004

5 CA San Diego Gas & Etectdc NO Application 02-02-012[=l 3/I6/2004

6 CA Southern California Gas NO Application 02-02-012[21 3/1612004

7 CA Southwest Gas NO Application 02-02-012[2] 3/16/2004

8 ND 4oflhem States Power Not4] PU-04-578b 6/1/2005

9 OK Oklahoma Natural Gas Co. NO PUD 200400610 10/412005

10 MD Baltimore Gas & Electric NO 9036 12/21/2005

11 OR Cascade Natural Gas NO[4] 06-191 4/19/2006

I2 LA Atmos NO U-28814 5/28/2008

13 SC Piedmont Natural Gas NO 2005-125-G 9/27/2008

14 NJ NJ Natural Gas (New Jerse}, Resources) NO GR05121020 12/12/2006

15 NJ South Jersey Gas NO GR05121019 12/12/2006

16’ WA Cascade Natural Gas NO[q UG-060256 1/t2/2007

17~ WA Avista NO UG-060518 2/1/2007

18 MO Atmos Energy NO GR-2006-0387 2/22/2007

19 MO Missouri Gas Energy 32.5 basis points GR-2C 3/22/2007

20 CO PSC of Colorado NO 06S-656G 5/31/2007

21 AR Arkansas Western 25 basis points 06-124-U 7/13/2007

22 MD Delmarva Power & L ght 50 basis points C-9093 7/19/2007

23 MD PEPCO 50 basis points C-9092 7/19/2007

24 IN Vectren Indiana/Southern Indiana NO 43112 8/112007

25 IN Citizens Gas & Coke NOt4] 42767 8/29/2007

26 NY Consolidated Edison NO 06-G-1332 9/25/2007

27 AR Centerpoint Energy Arkansas 10 basis points 06-161-U 10/25/2007

28 MD WGL NO 8990 11/16/2007

1 AR Arkansas Oklahoma 10 basis points 07-026-U 11/20/2007

2 CA Pacific Gas & Electdc NO Application 07-05-003~2] 12/20/2007

3 CA San Diego Gas & Electric NO Application 07-05-003~2] 12/20/2007

4 CA Southern California Edison NO Application 07-05-(303[2] !2/20/2007

5 NY National FueI Gas Dist. 10 basis points 07-G-0141 12/21/2007

6 IL North Shore Gas - ntegr,/s 10 basis points D-07-0241 2t5/2008

7 IL Peoples Gas - Integrys 10 basis points D-07-0242 2/5/2008

8 MD Elkton Gas NO 9!26 4/3!2008

9 OH Duke Energy Ohio NO 07-0589-GA-AIR 5/28/2008

10 Questar Gas NO 07-057-13 6/27/2008

1 ! NY Orange & Rockland Utilities NO 7/23/2008

12 NC PS Co. of North Carolina NO[~] 10/24/2008

13 NC Piedmont Natural Gas NOl~’l 10/24/200811/3/2005

25 basis points

NO[4]

NO[4]

25 basis pointsNO[1

10 basis pointsNO

6.5 basis pointsNONO

NO[7]

NO(ZlNot applicableNot applicableNo[ applicable

50 basis points

Not applicableNot applicable

25 basis points

NO[1]

NO[8]

NONot applicable

NO1~]

NO[~l

Not applicableNot applicableNot applicableNot applicableNot applicable

G-5, Sub 495G-9, Sub 550

G-9, Sub 499[4]

G-21, Sub 461G-44 Rub "1

08-0072-GA-AIR07-829-GA-AI R

PUE-2008-000606690-UR-119[61

07-1080-GA-AIR08-07-04UE 197

IPC-E08-0363

08-E-053930010-94-GR-08

D-08-12-06D-08-i2-07

C-AVU-G-09-01R-2008-2079675R-2008-2079660

C-1053-E-549C-08-G-1398

C-2009-0014"1D-UG-18609-04003

D-09-04003 (Southern)D-09-04003 (Nor[hem)

D.P.U. 09-30DPU 09-30

U-15645C-08-1783-G-42T

D.P.U 09-39D.P,U 09-39

Ca-PUD200900110C-U-15990

D-GR-09030195D-5-UR-104 (WEP-GAS)

D-5-UR-104 (WG)D-6680-UR-117 (gas)

Date of Final Order

14 OH Columbia Gas of Ohio15 OH Dominion East Ohio16 VA Virginia Natural Gas17 WI Wisconsin Public Service Co18 OH Vectren Ohio19 CT United Illuminating Company20 OR Portland General EIectric21 ID Idaho Power Company22 IL ,tiCOR Gas23 NY Consolidated Edison24 WY Questar Gas25 CT CT Natural Gas Corp.26 CT Southern Connecticut Gas Co.27 ID Avista Corp.28 PA UGI Central Penn Gas29 PA lUG! Penn Natural Gas3O DC PEPCO31 NY Orange & Rockland Utlts Inc.32 KT Columbia Gas of Kentucky Inc33 OR Avista Corp.34 NV I Southwest Gas35 NV Southwest Gas Corp.36 NV Southwest Gas Corp.37 MA Bay State Gas38 MA Bay State Gas Co.39 MI Consumers Energy Corp.40 WV Hope Gas Inc41 MA Massachusetts Electdc Company42 MA Nantucket Electric Company43 OK ONEOK Inc.44 MI Michigan Gas Utilities Corp45 NJ Pivotal Utitl[y Holdings Inc.46 WI W;sconsin Electric Power Co.47 W~ W;sconsin Gas LLC48 W] W~sconsin Power and Light Co

12/3/200812/19/200812/23/200812/30/20081/7/2009

1/20/20091/22/20091/30/20093/25/20094/24120096/16/20096/30/20097/I 7/20097/17/20098/27/20098/27/20099/28/2009

10/"16/200910/26/2009t 0/261200910/28/200910/281200910/28/200910/30/200910/30/20091112/2009

11/20/200911130/200911130/200912/14/200912/16/200912/17/200912/18/200912/18/200912/18/2009

Litigated or SettledSettled

Liti,qatedSettledLitigatedLitigatedLitigatedLitigated

Litigaled[31

SettledLitigatedSettledSettledSettledSettledSettledSettledSettled

LitigatedLitigatedSettledSettled

LitigatedLitigatedSettledSettledSettledSettledSettledSettled

LitigatedLitigatedLitigatedLitigatedLitigatedLitigatedSettledSettled

LitigatedSettledSettIedSettled

SettledSettledSettledSetfiedSettled

LitigatedSettled

LitigatedLitigatedLitigatedLitigatedLitigatedLitigated

SettlementSettlementSettlementLitigated

SettlementSettlementSettlementLitigatedLitigatedLitigatedLitigatedLitigatedLitigatedLitigatedLitigatedLitigated

SettlementPartial Settlement

SettIementLitigatedLitigated

gated

Rebuttal Exhiibt No. __(RBH-20)Page 2 of 2

49 WA Avista Corp.50 W; Madison Gas and Electric Co.51 KT Duke Energy Kentucky Inc.52 MN CenterPoint Energy Resources53 MO Empire District Gas Co.54 IL Nodh Shore Gas Co.55 IL Peoples Gas Light & Coke Co.56 TX Atmos Energy Corp.57 MO Missouri Gas Energy58 MO Southern Union Co.59 TX CenterPoint Energy Resources60 TX Texas-New Mexico Power Co.61 TX Oncor Electric Delivery Co.61 LA Cleco Power LLC62 MN Northern States Power Co. - MN62 MI Consumers Energy Co.63 CA Sierra Pacific Power Co.63 AR Southwestern Electric Power Co64 ND Otter Tail Coq3.6~’ MA Massachusetts Electdc Co.65 CO Public Service Co. of CO65 NC i Duke Energy Carolinas LLC66 NM El Paso Electric Co.66 AZ Arizona Public Service Co.67 MI Upper Peninsula Power Co.67 WA PacifiCorp68 WI Wisconsin Electric Power Co,68 WI Wisconsin Power and Light Co69 WA Avista Corp.69 W] I Madison Gas and Electdc Co.70 W] Northern States Power Co - WI70 MD Delmarva Power & Light Co.71 IA Interstate Power & Light Co.71 SD Northern States Power Co. - MN72 FL Florida Power Corp.72 MI Detroit Edison Co.73 FL Florida Power & Light Co.73 OR PacifiCorp74 KS Kansas Gas and Electric Co.74 KS Westar Energy Inc.75 SC Duke Energy Carolinas LLC75 RI Narragansett Electric Co.76 UT PacifiCorp76 OR Idaho Power Co.77 DC Potomac Electric Power Co.

NONot applicableNot applicable

NO:a]

10 basis points10 basis pointsNot applicable

NONO

Not applicableNot applicableNot applicableNot applicable

.. Not applicableNO[ro]

Not applicableNot applicableNot applicable

NO[q

Not applicableNot applicableNot applicableNot applicable

NO[10]

Not applicableNot applicableNot applicable

NO~]

Not applicableNot applicableNot applicableNot applicableNot applicableNot applicable

NOr’~]

Not applicableNot applicableNot applicableNot applicableNot applicable

Not applicableNot applicable50 basis points

D-UG-090135D-3270-UR-116 (gas)

C-2009-00202D-G-008/GR-08-1075

C-GR-2009-0434D-09-0166D-09-0167GUD 9869

GR-2009-0355C-G

GUD 9902D-36025D-35717

D-U-30689D-E-002/GR-08-1065

C-U-15645AP-08-08-004D-09-OO8-U

C-PU-08-862DPU 09-39

D-09AL-299ED-E-7, Sub 909C-O9-00171-UT

D-E-01345A-08-0172C-U-15988

D-UE-090205D-5-UR-104 (WEP-EL)D-6680 UR-117 (elec)

D-UE-090134D-3270-UR-116 (elec)D-4220-UR-116 (elec)

C-9192D-RPU-2009-0002

D-EL09-009D-090079-EIC-U-15768

D-080677-EID-UE-210(KG&E)

D-0g-WSEE-925-RTS (WR)D-2009-226-E

D-4065D-09-035-23

D-UE-213F.C. 1076

12/22/200912/22/200912/29120091/11/20101/20/20101/21/20101/21/20101126/20102/10120102/10/’20102/23t20108/21/20098/31/2009

10/14/200910/23/200911/21200911/3/2009

11/24/200911/25/200911/30/200912/3/200912/7/2009

12/10/200912/16/200912/16/20091 2/16/200912/I 8/200912/18/200912/22/200912/22/200912/22/200912/30/2009

114t20101/5/2010

1/11/20101/11/20101/13/20101/26/20101/27/20101/27/20101/27/20102/9/2010

2/18/20102/24/20103/2/2010

Partial SettlementLitigated

SettlementLitigated

Partial SettlementLitigatedLitigatedLitigatedLitigatedLi~gatedLitigatedLitigatedLitigated

SettledLitigatedSettledSettledSettled

LitigatedLitigatedLitigatedLitigatedSettledSettledSettledLitigatedLitigated

Partial SettlementLitigatedLitigatedLitigatedLitigatedLitigated

PostponedLitigated

PostponedSettledSettledSettledSettted

SettledSettled

, Litigated

[1] The ROE was reduced due to the implementation of a decoup/ing mechanism but the adjustment was not specified.[2] Decoupling in California has been an ongoing process since 1978. As such, there is no consensus as to which order, series of orders or legislations established "true"decoupling. American Gas Association cites Application 02-02-012 in its literature as the California decoupling order because it is the most recent.[3] The Settlement Agreement proposed two options; the Commission chose Option B (Single Fixed Residential Delivery Service Rate)[4] RQE was not discussed or determined in the order approving decoupling.[5] The overall Rate of Return was reduced by 20 basis points primarily to accommodate a number of factors including deteriorating economic conditions[6] WPSCo tiled for decoupling of both its Gas and Electric utilities in the same docket.[7] The proposed decoupling mechanism was denied.[8] The ROE was reduced due to the implementation of a decoupling mechanism but the adjustment was not specified. Staffs proposed 50 basis point

reduction was rejected.[9] The ROE was reduced due to the implementation of a decoupling mechanism but the adjustment was not specified. Staffs proposal of at least a 27

basis point reduction was rejected.[!0] The decoup!!ng proposal adopted is for a pilot program[11] The decoupling system provides for a partial recovery of deferred margin. ROE was not adjusted.

before the new york public service commission in the matter of the

Documents