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NEW TWISTS ON THE DCF or THE C IN DCF Society of Utility and Regulatory Financial Analysts Georgetown University P. Moul & Associates Conference Center.

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Presentation on theme: "NEW TWISTS ON THE DCF or THE C IN DCF Society of Utility and Regulatory Financial Analysts Georgetown University P. Moul & Associates Conference Center."— Presentation transcript:

1 NEW TWISTS ON THE DCF or THE C IN DCF Society of Utility and Regulatory Financial Analysts Georgetown University P. Moul & Associates Conference Center April 28, 2006

2 Discounted Cash Flow Attributes Attributes Deficiencies Deficiencies NEW TWISTS ON THE DCF or THE C IN DCF NEW TWISTS ON THE DCF or THE C IN DCF

3 NEW TWISTS ON THE DCF or THE C IN DCF Role in Public Utility Ratesetting Must have evidence Must have evidence Dominates rate of return evidence Dominates rate of return evidence Susceptible to manipulation Susceptible to manipulation

4 NEW TWISTS ON THE DCF or THE C IN DCF NEW TWISTS ON THE DCF or THE C IN DCF C is for CASH It is what utilities require to sustain the business and provide investors It is what utilities require to sustain the business and provide investors

5 NEW TWISTS ON THE DCF or THE C IN DCF NEW TWISTS ON THE DCF or THE C IN DCF Distribution of Cash Receipts

6 NEW TWISTS ON THE DCF or THE C IN DCF NEW TWISTS ON THE DCF or THE C IN DCF Why does ROR and specifically DCF get so much attention? Largest swing item in rate Largest swing item in rate case COS case COS Results must conform with common sense outcome Results must conform with common sense outcome

7 NEW TWISTS ON THE DCF or THE C IN DCF NEW TWISTS ON THE DCF or THE C IN DCF C is also for Common Sense What other methods say What other methods say Reaction of investment community Reaction of investment community

8 NEW TWISTS ON THE DCF or THE C IN DCF NEW TWISTS ON THE DCF or THE C IN DCF SoCal Edison (2000) Company Proposed 11.6% Company Proposed 11.6% Staff 8.71% Staff 8.71% ALJ 9.68% ALJ 9.68% Further Proceedings 9.47% Further Proceedings 9.47% Commission determined 11.73% Commission determined 11.73% Commission Granted 11.6% Commission Granted 11.6% Kern River (2006) Company Proposed 15.1% Staff & Intervenors 9.0% to 9.4% ALJ 9.34% Commission (?) HIOS (2005) 11.22%

9 NEW TWISTS ON THE DCF or THE C IN DCF

10 ku = ke - (((ku - i ) 1-t) D / E ) - (ku - d ) P/E where: ku= cost of equity for an all-equity firm ke = market determined cost equity i = cost of debt d = dividend rate on preferred stock D = debt ratio P = preferred stock ratio E = common equity ratio Modigliani and Miller

11 NEW TWISTS ON THE DCF or THE C IN DCF NEW TWISTS ON THE DCF or THE C IN DCF So could we have rate cases without DCF? Sure, no DCF in Bluefield or Hope Sure, no DCF in Bluefield or Hope Customers are probably unaware of the arcane processes of utility ratesetting Customers are probably unaware of the arcane processes of utility ratesetting Investors are aware, and do act Investors are aware, and do act The C word is cash, and also Common Sense The C word is cash, and also Common Sense


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