Document vm9gzeaaowR1B4y5VMRkG226

Federal Register / Vol. 51, No. 119 / Friday. June 20, 1986 / Rules and Regulations 22307 the result of the Order No..442 overall WCC'8 suggestion to use only data for growth rate analysis. those companies issuing common stock WCC claims that the 1.13 industry average market-to-book ratio used in Order No. 442 does not justify a positive estimate of "sv" because this average reflects high (above one) market-to-book ratios of utilities that are not issuing common stock. Utilities that are issuing or are projected to be issuing common stock in the future, WCG claims, generally have market-to-book ratios lower than one. Therefore. WCG claims the Commission's estimated "sv" calculation is biased upwards. As a in the base period would also lead to an inaccurate estimate of the industry average growth rate, which was the objective of the analysis. To the extent that the utilities that were expected to issue common stock in the base period were the utilities whose stock wa9 selling below book value, as WCG alleges, they would not have been generally representative of the industry, since the industry average market-tobook ratio was slightly above unity during the base year.6 WCG'a suggested implementation remedy, WCG claims that the market-to- methodology would have the book ratios of only those utilities, Commission use a non-representative expected to be issuing new common sample of utilities (i.e., only those stock should be considered in measuring issuing stock) on which to base the any "equity accretion" and that such industry average cost of common equity. considerations would show a negative "sv," or dilution rather than accretion. In Order No. 442, an industry average "s" (measure of new stock issuance growth rate) was multiplied by an industry average "v" (measure of market price relative to book value). Since most utilities' stocks were selling above book value, the resulting estimated "sv" had a positive value. The industry average should also reflect the fact that most utilities now publicly issue common stock, on average, less frequently than annually. To base the "sv" growth component solely on data for those utilities that issue common stock in a particular year would wrongly ignore the utilities that did not expect to issue stock in that year. In any event, the growth rate ultimately used to determine the The Commission agrees that accretion benchmark was not the 4.7% resulting (or dilution) occurs only upon issuance from the "br+sv" analysis, but rather of new stock. As WCC points out, if 4.5%, which also reflected the most utilities.are not issuing stock, most Commission's analysis of historical utilities do not experience accretion (or growth rates and analysts' projections. dilution).6 If "s" and "v" were The 4.5% growth rate used in Order No. individually estimated only for those 442 is therefore based upon analysis utilities that expect to issue stock, and if independent of the outcome of the those utilities that are issuing common "br+sv" analysis. Concerning WCG's stock are likely to have market-to-book ratios below unity, then the product of "s" and "v" based upon such data might well have a slightly negative value rather than the positive .155% indicated by the analysis in Order No. 442. WCG did.not, however, support its claim that only those utilities issuing common stock have market-to-book ratios below one. Verification of such an assumption would require separate computations of the "s" and "v" factors for each company in the sample. The purpose of the generic approach is to argument that the full flotation cost percentage should be deducted in computing the "sv" component, the. Commission is not persuaded as to the validity of this argument at this time. Since the Commission's choice of the growth component of 4.5 percent is based upon the results of analyses independent of the "br+sv" growth analysis, the'Commission need not address this point further. WCG's request for rehearing on this issue will therefore be denied. D. Ratemaking Rate of Return estimate the industry average cost of equity, not the cost of common equity for each electric utility. To estimate "s" and "v" for individual companies, rather than on an industry average basis, would be counterproductive and inconsistent with this purpose.7. 1. Summary Petitioners raise numerous arguments with regard to the Commission's ratemaking rate of return concept. This topic in Order No. 442 has promoted the most opposition. EEI, the Southern Company, and BEC argue, on various bases, that parties - * WCC Request for Rehearing at p. 2. were given inadequate notice of the T "v" could be readily calculated individually for issue, and that it is not fair for the each company as it is merely a function of the price* to-book ratio. Estimating **$" individually for up to tOO utilities would appear to be a prohibitive task. Order No.442, 51 FR 343 81357 11988). Commission to adopt this concept in the final rule when it was not proposed in the NOPR or raised by any party in the comment process. They also object to the extent and nature of the support upon which the Commission relied to justify its final decision. BEC and NEP argue that the Commission has not supported the basic predicate for the ratemaking rate of return concept, insofar as it has not adequately demonstrated the need for consistency in the definitions and estimates of the allowed rate of return and the rate base. They argue that there is no need for the Commission to base the rate of return determination on its method for computing rate base; the determinations are said to be independent of one another. BEC, the Southern Company, EEI, and NEP also argue that the Commission has not adequately demonstrated that there . is an inconsistency that needs a remedy. Petitioners argue that the hypothetical example used in Order No. 442 to explain the ratemaking rate of return concept was flawed in its assumptions, did not adequately reflect the real world, and therefore did not prove an inconsistency exists. For example, they state that the assumption of a forwardlooking test period does not adequately reflect the effects of regulatory lag. Alternatively, EEI, BEC, and NEP argue that stock market prices reflect the way rate base is defined end estimated. They claim that any inconsistency between the way rate base is computed and the allowed rate of return is already adjusted for the cost of capital estimate - of the Commission. EEI and BEC contend that even if there is an inconsistency between the rate of return and the rate base, there are probably many other aspects of the cost of service that could likewise be evaluated for consistency which might offset the adjustment being made to the rate of. return. . The Southern Company, EEI, and NEP further assert that, if an adjustment is to be made, the formula adopted by the Commission is not the right one with which to make the adjustment. They argue that the formula is based on erroneous assumptions about the way rate base is defined and estimated. For example, they challenge the assumption that the average test year rate base incorporates monthly compounding. Finally, applicants raise two additional arguments. First, BEC argues that application of the ratemaking rate of return concept to a company with a growing rate base would require that it make an annual rate increase filing in order to update its allowed rate of GLEASON-000772