PREPARED DIRECT TESTIMONY OF ROGER A ... - SDGE

Company: San Diego Gas & Electric Company (U 902 M) Proceeding: 2020 Cost of Capital Application: A.19-04-XXX Exhibit No.: SDG&E-04

PREPARED DIRECT TESTIMONY OF ROGER A. MORIN, Ph.D.

ON BEHALF OF SAN DIEGO GAS & ELECTRIC COMPANY RETURN ON EQUITY

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

APRIL 2019

TABLE OF CONTENTS

I. INTRODUCTION AND SUMMARY ......................................................................1 II. REGULATORY FRAMEWORK AND RATE OF RETURN .................................8 III. COST OF EQUITY CAPITAL ESTIMATES ..........................................................14

A. DCF Estimates ...............................................................................................16 B. CAPM Estimates............................................................................................28 C. Historical Risk Premium Estimates ...............................................................43 D. Allowed Risk Premium Estimates .................................................................45 E. Need for Flotation Cost Adjustment ..............................................................49 IV. SUMMARY AND RECOMMENDATION..............................................................53 V. CAPITAL STRUCTURE ..........................................................................................60 VI. OPTIMAL BOND RATING AND CAPITAL STRUCTURE .................................62

EXHIBIT RAM-1 - Resume of Roger A. Morin EXHIBIT RAM-2 - Investment-Grade Dividend-Paying Combination Gas and Electric Utilities

Covered In Value Line's Electric Utility Industry Group EXHIBIT RAM-3 - Proxy Group for SDG&E EXHIBIT RAM-4 - Combination Elec & Gas Utilities - DCF Analysis Value Line Growth Rates EXHIBIT RAM-5 - Combination Elec & Gas Utilities - DCF Analysis Analysts' Growth

Forecasts EXHIBIT RAM-6 - Combination Elec & Gas Utilities Beta Estimates EXHIBIT RAM-7 - 2018 Utility Industry Historical Risk Premium EXHIBIT RAM-8 - Allowed Risk Premium Analysis APPENDIX A - CAPM, Empirical CAPM APPENDIX B - Flotation Cost Allowance

i

1 2 3 4 5 I. 6 Q. 7 A. 8 9 10 11 12 13 14 15 Q. 16 A. 17 18 19 Q. 20 A. 21 22 23 24 25

PREPARED DIRECT TESTIMONY OF ROGER A. MORIN, Ph.D. RETURN ON EQUITY

INTRODUCTION AND SUMMARY Please state your name, business address, and occupation. My name is Dr. Roger A. Morin. My business address is Georgia State University, Robinson College of Business, University Plaza, Atlanta, Georgia 30303. I am Emeritus Professor of Finance at the Robinson College of Business, Georgia State University and Professor of Finance for Regulated Industry at the Center for the Study of Regulated Industry at Georgia State University. I am also a principal in Utility Research International, an enterprise engaged in regulatory finance and economics consulting to business and government. I am testifying on behalf of San Diego Gas & Electric Company ("SDG&E" or the "Company"). Please describe your educational background. I hold a Bachelor of Engineering degree and an MBA in Finance from McGill University, Montreal, Canada. I received my Ph.D. in Finance and Econometrics at the Wharton School of Finance, University of Pennsylvania. Please summarize your academic and business career. I have taught at the Wharton School of Finance, University of Pennsylvania, Amos Tuck School of Business at Dartmouth College, Drexel University, University of Montreal, McGill University, and Georgia State University. I was a faculty member of Advanced Management Research International, and I am currently a faculty member of S&P Global Intelligence (formerly SNL Knowledge Center or SNL), where I continue to conduct frequent national executive-level education seminars throughout the United States. In the

1

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Q. 17 18 A. 19 20

last 30 years, I have conducted numerous national seminars on "Utility Finance," "Utility

Cost of Capital," "Alternative Regulatory Frameworks," and "Utility Capital Allocation,"

which I have developed on behalf of S&P Global Intelligence and its predecessors.

I have authored or co-authored several books, monographs, and articles in

academic scientific journals on the subject of finance. They have appeared in a

variety of journals, including The Journal of Finance, The Journal of Business

Administration, International Management Review, and Public Utilities Fortnightly. I

published a widely-used treatise on regulatory finance, Utilities' Cost of Capital,

Public Utilities Reports, Inc., Arlington, Va. 1984. In late 1994, the same publisher

released my book, Regulatory Finance, a voluminous treatise on the application of

finance to regulated utilities. A revised and expanded edition of this book, The New

Regulatory Finance, was published in 2006. I have been engaged in extensive

consulting activities on behalf of numerous corporations, legal firms, and regulatory

bodies in matters of financial management and corporate litigation. Please see

Exhibit RAM-1 to my testimony for my professional qualifications.

Have you previously testified on Cost of Capital before Utility Regulatory Commissions?

Yes, I have been a cost of capital witness before nearly 50 regulatory bodies in North

America, including the California Public Utilities Commission ("CPUC"). I have

testified before the following state, provincial, and other local regulatory commissions:

Alabama Alaska Alberta Arizona Arkansas

Florida Georgia Hawaii Illinois Indiana

Montana

Oregon

Nebraska

Pennsylvania

Nevada

Quebec

New Brunswick South Carolina

New Hampshire South Dakota

2

1 2 3 4 Q. 5 A. 6 7 8 9 10 11 12 13 14 15 Q. 16 A. 17

British Columbia California City of New Orleans Colorado CRTC Delaware District of Columbia FCC

FERC

Iowa Louisiana Maine Manitoba Maryland Michigan Minnesota Mississippi

Missouri

New Jersey New Mexico New York Newfoundland North Carolina North Dakota Nova Scotia Oklahoma

Ontario

Tennessee Texas Utah Vermont Virginia West Virginia Wisconsin

The details of my participation in regulatory proceedings are provided in Exhibit RAM-1 to my testimony. What is the purpose of your testimony in this proceeding? The purpose of my testimony in this proceeding is to present an independent appraisal of the fair and reasonable rate of return on common equity ("ROE") on the common equity capital invested in SDG&E's utility operations in the State of California. Based upon this appraisal, I have formed my professional judgment as to a return on such capital that would:

(1) be fair to customers; (2) allow SDG&E to attract the capital needed for infrastructure investments on

reasonable terms; (3) maintain SDG&E's financial integrity; and (4) be comparable to returns offered on comparable risk investments. Please briefly identify the exhibits and appendices accompanying your testimony. I have attached to my testimony Exhibits RAM-1 through RAM-8, and Appendices A and B. These exhibits and appendices relate directly to points in my testimony and are

3

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download