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Ann E. Bulkley BEFORE the PUBLIC UTILITY COMMISSION of OREGON PACIFICORP

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Ann E. Bulkley BEFORE the PUBLIC UTILITY COMMISSION of OREGON PACIFICORP Docket No. UE 374 Exhibit PAC/400 Witness: Ann E. Bulkley BEFORE THE PUBLIC UTILITY COMMISSION OF OREGON PACIFICORP ___________________________________________________________ Direct Testimony of Ann E. Bulkley February 2020 PAC/400 Bulkley/i TABLE OF CONTENTS I. INTRODUCTION AND QUALIFICATIONS ............................................................. 1 II. PURPOSE AND OVERVIEW OF DIRECT TESTIMONY ........................................ 2 III. SUMMARY OF ANALYSES AND CONCLUSIONS ................................................ 4 IV. REGULATORY GUIDELINES.................................................................................... 8 V. CAPITAL MARKET CONDITIONS ......................................................................... 11 The Effect of Market Conditions on Valuations ............................................. 12 The Current and Expected Interest Rate Environment ................................... 19 Effect of Tax Reform on the ROE and Capital Structure................................ 26 VI. PROXY GROUP SELECTION .................................................................................. 34 VII. COST OF EQUITY ESTIMATION ............................................................................ 37 Importance of Multiple Analytical Approaches .............................................. 38 Constant Growth DCF Model ......................................................................... 43 Multi-Stage DCF Model ................................................................................. 46 Discounted Cash Flow Model Results ............................................................ 49 CAPM Analysis .............................................................................................. 52 Bond Yield Plus Risk Premium Analysis ........................................................ 59 Expected Earnings Analysis ............................................................................ 63 VIII. REGULATORY AND BUSINESS RISKS ................................................................. 64 Capital Expenditures ....................................................................................... 64 Regulatory Risk .............................................................................................. 67 Generation Ownership .................................................................................... 76 IX. CAPITAL STRUCTURE ............................................................................................ 81 X. CONCLUSIONS AND RECOMMENDATION ........................................................ 85 ATTACHED EXHIBITS Exhibit PAC/401—Resume and Testimony Listing of Ann E. Bulkley Exhibit PAC/402—Summary of Results Exhibit PAC/403—Proxy Group Selection Direct Testimony of Ann E. Bulkley PAC/400 Bulkley/ii Exhibit PAC/404—Constant Growth Discounted Cash Flow Model Exhibit PAC/405—Multi-Stage Discounted Cash Flow Model Exhibit PAC/406—Gross Domestic Product Growth Exhibit PAC/407—Projected Discounted Cash Flow Model Exhibit PAC/408—Capital Asset Pricing Model Exhibit PAC/409—Risk Premium Approach Exhibit PAC/410—Expected Earnings Analysis Exhibit PAC/411—Capital Expenditures Analysis Exhibit PAC/412—Regulatory Risk Analysis Exhibit PAC/413—Capital Structure Analysis Direct Testimony of Ann E. Bulkley PAC/400 Bulkley/1 1 I. INTRODUCTION AND QUALIFICATIONS 2 Q. Please state your name and business address. 3 A. My name is Ann E. Bulkley. My business address is 293 Boston Post Road West, 4 Suite 500, Marlborough, Massachusetts 01752. 5 Q. What is your position with Concentric Energy Advisors, Inc. (Concentric)? 6 A. I am employed by Concentric as a Senior Vice President. 7 Q. On whose behalf are you submitting this direct testimony? 8 A. I am submitting this direct testimony before the Public Utility Commission of Oregon 9 (Commission) on behalf of PacifiCorp, which is an indirect wholly owned subsidiary 10 of Berkshire Hathaway Energy Company (BHE). 11 Q. Please describe your education and experience. 12 A. I hold a Bachelor’s degree in Economics and Finance from Simmons College and a 13 Master’s degree in Economics from Boston University, with more than 20 years of 14 experience consulting to the energy industry. I have advised numerous energy and 15 utility clients on a wide range of financial and economic issues, with primary 16 concentrations in valuation and utility rate matters. Many of these assignments have 17 included the determination of the cost of capital for valuation and ratemaking 18 purposes. I have included my resume, a description of Concentric’s energy and utility 19 practice, and a summary of testimony that I have filed in other proceedings as Exhibit 20 PAC/401 to this testimony. Direct Testimony of Ann E. Bulkley PAC/400 Bulkley/2 1 Q. Have you previously testified before the Commission or other regulatory 2 authorities? 3 A. Yes. A list of proceedings in which I have provided testimony is provided in Exhibit 4 PAC/401 to this testimony. 5 II. PURPOSE AND OVERVIEW OF DIRECT TESTIMONY 6 Q. What is the purpose of your direct testimony? 7 A. The purpose of my direct testimony is to present evidence and provide a 8 recommendation regarding the appropriate Return on Equity (ROE)1 for PacifiCorp’s 9 electric utility operations in Oregon and to provide an assessment of its proposed 10 capital structure to be used for ratemaking purposes. A summary of my ROE 11 analyses results is provided in Exhibit PAC/402. My analyses and recommendations 12 are supported by the data presented in Exhibit PAC/403 through Exhibit PAC/413, 13 which were prepared by me or under my direction. 14 Q. Please provide a brief overview of the analyses that led to your ROE 15 recommendation. 16 A. As discussed in more detail in Section VII, I applied the Constant Growth, Multi- 17 Stage, and Projected forms of the Discounted Cash Flow (DCF) model, the Capital 18 Asset Pricing Model (CAPM), Empirical Capital Asset Pricing Model (ECAPM), the 19 Risk Premium approach, and the Expected Earnings analysis. My recommendation 20 also takes into consideration: (1) PacifiCorp’s capital expenditure requirements; 21 (2) the regulatory environment in which PacifiCorp operates; (3) PacifiCorp’s 22 adjustment mechanisms; and (4) the fuel sources of PacifiCorp’s generation portfolio. 1 Throughout my direct testimony, I interchangeably use the terms “ROE” and “cost of equity”. Direct Testimony of Ann E. Bulkley PAC/400 Bulkley/3 1 Finally, I considered PacifiCorp’s proposed capital structure as compared to the 2 capital structures of the proxy companies.2 While I did not make any specific 3 adjustments to my ROE estimates for any of these factors, I did take them into 4 consideration in aggregate when determining where PacifiCorp’s ROE falls within 5 the range of analytical results. 6 Q. How is the remainder of your direct testimony organized? 7 A. Section III provides a summary of my analyses and conclusions. Section IV reviews 8 the regulatory guidelines pertinent to the development of the cost of capital. Section 9 V discusses current and projected capital market conditions and the effect of those 10 conditions on PacifiCorp’s cost of equity in Oregon. Section VI explains my 11 selection of a proxy group of electric utilities. Section VII describes my analyses and 12 the analytical basis for the recommendation of the appropriate ROE for PacifiCorp. 13 Section VIII provides a discussion of specific regulatory, business, and financial risks 14 that have a direct bearing on the ROE to be authorized for PacifiCorp in this case. 15 Section IX assesses the proposed capital structure of PacifiCorp as compared with the 16 capital structures of the utility operating subsidiaries of the proxy group companies. 17 Section X presents my conclusions and recommendations for the market cost of 18 equity. 2 The selection and purpose of developing a group of comparable companies is discussed in detail in Section VI of my direct testimony. Direct Testimony of Ann E. Bulkley PAC/400 Bulkley/4 1 III. SUMMARY OF ANALYSES AND CONCLUSIONS 2 Q. What is your recommended ROE for PacifiCorp? 3 A. Based on the analytical results presented in Figure 1 below, I believe a range from 4 9.75 percent to 10.25 percent is reasonable. Within that range, a return of 5 10.20 percent is reasonable. This recommendation reflects the range of results for the 6 proxy group companies, the relative business, financial, and regulatory risk of 7 PacifiCorp’s electric operations in Oregon as compared to the proxy group, and 8 current capital market conditions. 9 Q. Please summarize the key factors considered in your analyses and upon which 10 you base your recommended ROE. 11 A. In developing my recommended ROE for PacifiCorp, I considered the following: 12 • The Hope and Bluefield decisions3 that established the standards for 13 determining a fair and reasonable allowed ROE, including consistency of the 14 allowed return with other businesses having similar risk, adequacy of the 15 return to provide access to capital and support credit quality, and that the end 16 result must lead to just and reasonable rates. 17 • The effect of current and projected capital market conditions on investors’ 18 return requirements. 19 • The results of several analytical approaches that provide estimates of 20 PacifiCorp’s cost of equity. 21 • PacifiCorp’s regulatory, business, and financial risks relative to the proxy 22 group of comparable companies and the implications of those risks. 23 Q. Please explain how you considered those factors.
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