Document 30gMrE2xdwNXybORJa2y2wYx

22508 Federal Register /. Voli 51, No. 119 / Friday, June 20, 1986 / Rules and Regulations which determined: (1) The average cost BEC, EEI, NEP, and the Southern method used to allow for the recovery of of common equity for the jurisdictional Company object to the "ratemaking rate flotation costs through the allowed rate operations of public utilities for the year of return" concept as implemented in the of return was explained in Order No. ending June 30,1985 (hereafter the "base final rule. The Southern Company also 442. No reason has been shown why the year"); (2) the average "ratemaking rate reiterates positions previously Commission's prior disposition of this of return"* on common equity for the expressed in its comments regarding' issue should be changed. The Southern jurisdictional operations of public growth rate, flotation cost, and the Company's request for rehearing utilities for the base year; and (3) a quarterly indexing procedure. In regarding the flotation cost adjustment quarterly indexing procedure to update addition, the WCG objects to the equity will therefore be denied. the cost estimate and establish benchmark rates of return on common equity for use in individual rated cases.5 Order No. 442 was the second annual accretion component of the growth rate. til. Summary and Analysis of Issue9 Raised in Requests for Rehearing C. Equity Accretion WCC challenges the Commission's use of a 1.13 average market-to-book proceeding for evaluating the rate of A. Growth Rate and Indexing Procedure ratio to increase the growth rate used in return issue on a generic basis.*4 *Th3e benchmark rates of return established are advisory only. As provided in I 37.7 of the Commission's regulations, the third proceeding will determine a rate of return on equity that will constitute a rebuttable presumption in rate cases. In Order No. 442, the Commission decided to adopt a procedure for determining and updating the benchmark rate of return that was different in three respects from the procedure used in the first annual proceeding: As noted, the Southern Company has restated earlier arguments regarding the Commission's treatment of growth rate and has argued in favor of a "total recalculation of the generic [rate] using data as of the end of each quarter for the price and dividend figures." The rehearing request presents nothing new that would cause the Commission to reconsider the prior disposition of these issues. Because the Southern Company's position was considered and addressed in the original order, its request for rehearing on these issues will be denied. the fundamental analysis from 4.5% to 4.7% to account for "equity accretion." Equity accretion (or conversely, dilution) occurs when a company issues new stock at a price above (or below) book value per share. Its contribution to the growth rate of book value is equal to the product of one factor which reflects the annual rate of new stock issuance ("s") and another factor which reflects whether and to what extent the company's stock is selling above or below book value ("v"). If the company's stock is selling above book (1) It used a formulation of the Discounted Cash Flow (DCF) model that was somswhut different from the one that the Commission adopted in the last proceeding and proposed in the NOPR, In an effort to reflect more accurately the iiming and growth of quarterly dividend payments and to recognize a relationship between nominal and effective B. Flotation Cost Adjustment The Southern Company also repeats its recommendations that the flotation cost adjustment should include the effects of market pressure and be applied to total equity capital. However, value, "v" is positive; if it is selling below book value, "v" is negative. If the stock is issued at book value, `V is zero and "sv" is zero. Thus, if the stock is selling above book value and "s" is assumed to be greater than zero, "sv" is positive and there is accretion; if it is required rates of return: the Southern Company makes one selling below book value, "sv" is - (2) it adjusted the average effective cost of additional point in support of its negative and there is dilution. WCG also common equity determined by the new DCF model to reflect certain ratemaking practices of this Commission and obtain what was referred to as the "ratemaking rate of return" to be used as' the basis for the quarterly recommendation that the adjustment be applied to all equity. It notes that the Commission requires that the expenses associated with issuance and sale of contends that because accretion only occurs when net proceeds from a stock issuance exceed book value, the full flotation cost percentage should be benchmark rates of return: and stock be included in Account No. 214 deducted from the market-to-book ratio (3) it used the most recent two calendar and that there is no provision for the for purposes of computing "sv" in the quarters of data on dividend yields as the separate recovery of expenses included external growth analysis. II1il busis for updating the benchmark rate of return: in contrast, the NOPR proposed to use only the most recent quarter's dividend yields. Five of the commentera have requested rehearing of the order. (1) A group of utilities made up of Boston Edison Company, El Paso Electric Company, Florida Power Corporation. Montaup Electric Company, and Wisconsin Electric Power Company (hereinafter referred to as "BEC"); (2) Edison Electric Institute (EEI); (3) New England Power Company (NET1); (4) the Southern Company; and (5) the Wholesale Customer Croup (WCC). in Account No. 214 as part of a utility's cost of service. Therefore, according to the Southern Company, this treatment of flotation costs results in a permanent reduction in common equity so that the flotation cost adjustment should be applied to all equity. It is correct that flotation costs are not recovered as part of the company's cost of service; rather, they are considered part of the cost of common equity and recovered through the company's allowed rate of return. The issue here is not whether those costs should be recovered through the.company's allowed rate of return; the issue Is how WCG contends that the Commission erred in its earlier disposition of WCG's argument by citing to an argument not in fact made by any other commenter. The Commission, in responding to WCG, had cited BEC as rebutting WCG's suggestion that the "sv" component of the fundamental analysis should be negative.5 WCG claims that this was in error because BEC only suggested that the median rather than the mean average market-to-book ratios should be used. WCG argues that nothing in any of the comments or in Order No. 442 refutes its argument. an adjustment for such recovery should The Commission agrees that it * As discussed in greater detail below, this term hea been used to refer to the rate of return on be made. The Southern Company does misstated the contention of BEC in not explain why it believes the fact that response to WCG on this point. Upon common-equity that, when applied to rate base, will such costs are not recovered as part of further consideration, however, the F give investors the opportunity to receive the required rate of return on common equity end give firms the opportunity to recover flotation costs. the company's cost of service supports its position regarding how those costs Commission finds that WCG's position docs not warrant rehearing regarding 3 Order No. 442,51 FR 343 (1888). should be recovered through the 4 Order No.>420, 50 FR 21.602 (1985). company's allowed rate of return. The 4 Order No. 442. 51 FR 343 et footnote 107 GLEASON-000771