Southern Co FERC Response

UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
Alabama Municipal Electric Authority

and Cooperative Energy
Complainants,
v. Docket No. EL18-147-000
Alabama Power Company,

Georgia Power Company,
Gulf Power Company,
Mississippi Power Company,
Southern Company Services, Inc.
Respondents.
RESPONDENTS’ ANSWER TO COMPLAINT
Christopher H. Demko Lyle D. Larson

Associate General Counsel Leonard C. Tillman
– Energy Regulation BALCH & BINGHAM LLP
Southern Company Services, Inc. 1710 Sixth Avenue North
30 Ivan Allen Jr., Blvd. NW Birmingham, Alabama 35203
Atlanta, Georgia 30308 (205) 251-8100 (telephone)
(404) 506-0241 llarson@balch.com
chdemko@southernco.com ltillman@balch.com
Attorneys for Respondents
June 18, 2018

TABLE OF CONTENTS
Page
I. SUMMARY OF COMPLAINT ............................................................................................... 2

II. EXECUTIVE SUMMARY ...................................................................................................... 2
A. Complainants fail to plead a prima facie case .................................................................... 2
B. Complainants’ DCF study is flawed and deficient ............................................................. 4
C. Complainants’ interpretation of DCF study results fails to follow Commission and
judicial precedent ................................................................................................................ 4
D. Southern Companies’ current ROE is well within the statutory zone of
reasonableness..................................................................................................................... 6
III. DISCUSSION ........................................................................................................................... 7
A. The Complaint fails to assert a prima facie case that Respondents’ current ROE
exceeds the statutory zone of reasonableness ..................................................................... 7
B. Assuming a prima facie case can be made without a statutory zone of
reasonableness, Complainants still fail to demonstrate Southern’s ROE is unjust
and unreasonable ............................................................................................................... 10
1. Complainants’ single-point ROE recommendation is skewed by material
omissions, flawed inputs and computational errors .............................................. 10
a. Unreasonably limited proxy group ........................................................... 11
b. Flawed input and computational errors..................................................... 12
c. Correction of Complainants’ errors and omissions produces a
revised DCF study that shows an upper midpoint of 12.71%, which
is substantially higher than Southern Companies’ current ROE .............. 12
2. Complainants have misinterpreted their flawed DCF results ............................... 14
a. Prevailing economic and capital market conditions remain
anomalous, supporting maintenance of Southern’s ROE in the
upper portion of the zone of reasonableness ............................................. 15
b. Complainants’ focus on the median also ignores investors’ view
that Southern Companies have above-average risks ................................. 17
c. The upper midpoint or upper median is the appropriate starting
place for determining the statutory zone of reasonableness as to
Southern Companies ................................................................................. 21
d. Complainants also err by drawing a negative inference from the
fact that Southern’s current ROE is the result of a settlement
agreement .................................................................................................. 23
i
3. A properly constructed single-stage DCF study is a useful additional
reference for considering whether an existing, filed ROE should be
investigated under Section 206 ............................................................................. 25
4. Alternative benchmarks reinforce that a statutory zone of reasonableness
for Southern is at or near the top of the DCF range .............................................. 27
C. Southern’s existing ROE is easily within—and Complainants’ proposed ROE is
substantially below—the statutory zone of reasonableness .............................................. 29
D. The Commission also should dismiss the Complaint on procedural grounds as it
fails to meet the requirements of FPA Section 206 .......................................................... 30
IV. ADMISSIONS, DENIALS, AND AFFIRMATIVE DEFENSES .......................................... 31
V. COMMUNICATIONS ........................................................................................................... 32
VI. CONCLUSION ....................................................................................................................... 32
ii
BEFORE THE

Complainants,

Gulf Power Company,
Respondents.
RESPONDENTS’ ANSWER TO COMPLAINT
Pursuant to Rules 206 and 213 of the Rules of Practice and Procedure of the Federal
Energy Regulatory Commission1 (“FERC” or “Commission”) and the Notice Granting Extension
of Time issued by the Commission on May 22, 2018,2 Southern Companies3 submit this Answer
to the Complaint filed on May 10, 2018,4 by Alabama Municipal Electric Authority and
Cooperative Energy (“Complainants”). As demonstrated below, the Complainants fail to plead a
prima facie case that the Commission-approved base return on common equity (“ROE”)
1
18 C.F.R. §§ 385.206 and 385.213 (2017).
2
Notice Granting Extension of Time, Alabama Municipal Electric Authority, et al. v. Alabama Power Co., et al.,
Docket No. EL18-147-000 (May 22, 2018).
3
For purposes of this Answer, “Southern Companies” and “Southern” refers to Southern Company Services, Inc.,
acting for itself and as agent for Alabama Power Company, Georgia Power Company, Gulf Power Company and
Mississippi Power Company.
4
Complaint of Alabama Municipal Electric Authority and Cooperative Energy, Alabama Municipal Electric
Authority, et al. v. Alabama Power Co., et al., Docket No. EL18-147-000 (May 10, 2018) (“Complaint”).
1
incorporated into Southern Companies’ Open Access Transmission Tariff5 is unjust and
unreasonable. Accordingly, the Commission should dismiss the Complaint without prejudice.
Alternatively, if the Commission establishes procedures to consider the Complaint, it should
establish the latest permissible refund effective date.
I. SUMMARY OF COMPLAINT
The Complaint asks the Commission to find under Section 206 of the Federal Power Act
(“FPA”)6 that the existing ROE under the Southern OATT is unjust and unreasonable and
establish a new, lower ROE.7 Complainants base their challenge on a single, mechanical
application of the Commission’s Discounted Cash Flow (“DCF”) model, which they assert
produces a DCF range with 8.65% at the median.8 They use this single pinpoint value to serve a
dual purpose of supporting the Complaint’s core allegation that Southern’s existing ROE is no
longer just and reasonable and as the recommended ROE to be established going forward.9 In
support, the Complainants offer the testimony and exhibits of Mr. Breandan T. Mac Mathuna.10
II. EXECUTIVE SUMMARY
A. Complainants fail to plead a prima facie case.
The Complaint fails to plead a prima facie case that Southern’s existing ROE is outside a
statutory zone of reasonableness and, hence, fails to raise a genuine issue of material fact that the
ROE may have become unjust and unreasonable. The Complainants, of course, bear the burden
under the first prong of Section 206 to show with substantial evidence that a filed and approved
5
Southern’s Open Access Transmission Tariff is identified as the following in FERC’s eTariff database: “Alabama
Power Company, OATT and Associated Service Agreements, Tariff Volume No. 5, Southern Companies OATT”
(“Southern OATT”).
6
16 U.S.C. § 824e (2018).
7
Complaint at pp. 1-2.
8
Id. at pp. 7-9.
9
Id. at 8.
10
Direct Testimony and Exhibits of Breandan T. Mac Mathuna, Exhibit Nos. JC-1 to JC-3 to Complaint (“Mac
Mathuna Testimony”).
2
ROE is unlawful.11 In attempting to discharge this duty, a well-pled complaint must “do more
than show that its single ROE analysis generated a new just and reasonable ROE and
conclusively declare that, consequently, the existing ROE was per se unjust and unreasonable.”12
Yet, the Complaint attempts only that much and, therefore, is materially and facially deficient.
This failure requires denial or dismissal.13
A properly-pled Section 206 complaint challenging an existing, filed and approved ROE
must first establish a statutory “zone of reasonableness” that reflects “a broad range of
potentially lawful ROEs rather than a single just and reasonable ROE.”14 Yet, the Complaint
rests its entire case on a single, flawed DCF study—which is used to determine a single-point
ROE touchstone by which Southern’s existing ROE is evaluated. This is exactly the kind of
Section 206 approach rejected last year in Emera Maine.15 As explained by the U.S. Court of
Appeals for the District of Columbia Circuit (“D.C. Circuit”), it is established that statutory
reasonableness of ROEs under the first prong of Section 206 involves ranges, not single ROE
pinpoints.16
11
Emera Me. v. FERC, 854 F.3d 9, 21 (D.C. Cir. 2017) (“Emera Maine”). See also Belmont Mun. Light Dep’t. v.
Cent. Me. Power Co., 162 FERC ¶ 63,026, PP 74-75 (2018) (“Belmont ID”).
12
Emera Maine, 854 F.3d at 27.
13
See, e.g., La. Pub. Serv. Comm’n v. Sys. Energy Res., Inc., 124 FERC ¶ 61,003, P 15 (2008). See also NextEra
Energy Res., LLC v. ISO New England Inc., 156 FERC ¶ 61,150, P 16 (2016) (“NextEra Energy Res.”) (complaint
failing to meet burden of proof under Section 206(a) is not ripe and should be dismissed “without prejudice”); Mich.
Elec. Transmission Co. v. Midcontinent Indep. Sys. Operator, Inc., LLC, 156 FERC ¶ 61,025 (2016) (dismissing a
complaint, without prejudice, as unripe). Compare NRG Power Mtkg., LLC v. F.E.R.C., 862 F.3d 108, 114 n.2 (D.C.
Cir. 2017) (“NRG Power Mtkg.”) (Section 206 requires predicate demonstration “that the existing rates are ‘entirely
outside the zone of reasonableness’” before imposing a new rate) (citing and quoting City of Winnfield v. F.E.R.C,
744 F.2d 871, 875 (1984) (“City of Winnfield”)) with Southern Maryland Elec. Coop., Inc., 162 FERC ¶ 61,048, P
15 (2018) (“Southern Maryland Elec.”) (deficient petition properly dismissed without prejudice as unripe because
petitioner can address deficiencies identified in answer in a new, subsequent filing).
14
15
Id. (“FERC concluded that the existing 11.14 percent base ROE was unlawful solely because it had determined
that 10.57 percent, which was ‘a numerical value below the existing numerical value,’ was a just and reasonable
base ROE. That conclusion, without any further explanation, is insufficient to prove that Transmission Owners’
existing base ROE was unlawful.” (internal citations omitted)).
16
Id. at 20 (citing F.P.C. v. Conway Corp., 426 U.S. 271, 278 (1976) (quoting Montana-Dakota Utils. Co. v. Nw.
Pub. Serv. Co., 341 U.S. 246, 251 (1951) (“Montana-Dakota”)) (“‘Statutory reasonableness is an abstract quality’”
3
B. Complainants’ DCF study is flawed and deficient.
To meet their burden, the Complainants need to set forth and support a “properly-
specified” DCF analysis.17 The DCF study evidence relied upon by Complainants contains
serious errors and omissions and fails to meet fundamental and long-standing ratemaking
principles. Among other problems, Complainants’ witness, Mr. Mac Mathuna’s, DCF study
contains a flawed proxy group, calculates adjusted dividend yield incorrectly and uses stale and
incorrect data. Together, these flaws and incorrect assumptions constitute a failure of proof.18
C. Complainants’ interpretation of DCF study results fails to follow

Commission and judicial precedent.
The Complainants’ mechanical application of the DCF studiously avoids addressing the
continuing anomalous conditions of capital markets and the above-average equity investment
risk profile of Southern Companies. Contrary to Commission guidance that a mechanical
application of the DCF model is biased downward in present-day anomalous capital market
conditions, the Complainants assert that capital markets are no longer “anomalous” by historical
standards and constitute a “new normal.”19 Upon this flawed predicate, the Complainants
construct their allegations so as to skirt the Commission’s guidance in the Opinion No. 531
series20 and Opinion No. 55121that mechanical application of the DCF model needs to be
checked and, if appropriate, re-calibrated with consideration of capital market conditions and
represented by an area, rather than a pinpoint. It allows “a substantial spread between what is unreasonable because
too low and what is unreasonable because too high.”).
17
See Belmont ID, 162 FERC ¶ 63,026 at P 73 (citing Emera Maine, 854 F.3d at 21); NextEra Energy Res., 156
FERC ¶ 61,150 at P 16 (citing 16 U.S.C. § 824e(b) (2012)).
18
See Belmont ID, 162 FERC ¶ 63,026 at P 74 (complainants’ sole responsibility to meet burden and not “the job of
the respondent utility . . . or the Commission, to come up with an ‘improved’ DCF analysis” (citing Union Oil Co. of
Cal., 16 FPC 100, 111 (1956) (“[U]ntil the applicants have presented a prima facie case opposing parties have no
burden of going forward.)).
19
Mac Mathuna Testimony, JC-1 at pp. 42-43.
20
Coakley v. Bangor Hydro-Elec. Co., Opinion No. 531, 147 FERC ¶ 61,234 (2014) (“Coakley”), order on paper
hearing, Opinion No. 531-A, 149 FERC ¶ 61,032 (2014), reh’g denied, Opinion No. 531-B, 150 FERC ¶ 61,165
(2015), vacated and remanded sub nom. Emera Me. v. FERC, 854 F.3d 9 (D.C. Cir. 2017) .
21
Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., Opinion No. 551, 156 FERC ¶
61,234 (2016) (“ABATE v. MISO”).
4
alternative measures of investor expectations. The other methods accepted by the Commission
for such a purpose include the Capital Asset Pricing Model (“CAPM”), expected earnings and
risk premium methods.22
Further, as explained more fully below and in the attached testimonies of Dr. James H.
Vander Weide23 and Mr. Steven M. Fetter,24 the ultimate test by which any ROE should be
evaluated is the Hope and Bluefield standard.25 That is, using the ROE level determined under a
properly constructed DCF study, would Southern Companies maintain capability to attract
investment with a return “commensurate” with “investments in other enterprises having
corresponding risks”?26
This standard is particularly important now in light of Southern Companies’ above-
average risk profile associated with ongoing nuclear generation facility construction and the
impacts of tax reform. Section 206 sets a high bar, entitling Southern’s existing ROE to a degree
of protection and, hence, stability.27 Yet, Complainants make no attempt to address capital
attraction for Southern Companies in context of existing capital markets or company-specific
relative risk. Therefore, even if the Commission disregarded the D.C. Circuit’s holding in Emera
Maine and considers a pinpoint ROE to be a sufficient touchstone, Mr. Mac Mathuna’s analysis
is still insufficient to meet the Complainants’ prima facie burden of proof.
22
See, e.g., Coakley, Opinion No. 531 at P 146.
23
Testimony of Dr. James H. Vander Weide, Exhibit No. SC-1 to this Answer (“Vander Weide Testimony”).
24
Testimony of Steven M. Fetter, Exhibit No. SC-2 to this Answer (“Fetter Testimony”). Mr. Fetter is former
Chairman of the Michigan Public Service Commission and was Group Head and Managing Director of the Global
Power Group at Fitch IBCA Duff & Phelps,
25
See Fed. Power Comm’n v. Hope Nat. Gas Co., 320 U.S. 591 (1944) (“Hope”); Bluefield Waterworks &
Improvement Co. v. Pub. Serv. Comm’n of W. Va., 262 U.S. 679 (1923) (“Bluefield”).
26
Hope, 320 U.S. at 603; see also Bluefield, 262 U.S. at 692.
27
City of Winnfield, 744 F.2d at 875.
5
Under these circumstances, allowing the Complaint to proceed would be contrary to the
requirements of Section 206. The administrative and judicially efficient course for the
Commission is to deny or dismiss the Complaint without prejudice, as unripe.28
D. Southern Companies’ current ROE is well within the statutory zone of

reasonableness.
Although Southern Companies do not bear any burden of proof at this stage, tendered
with this Answer is substantial evidence that their existing ROE is in a lawful just and reasonable
range. The attached testimony and supporting schedules and information, when considered in
relation to the flawed and incomplete averments in the Complaint, show also that Complainants
have failed to present a genuine issue of material fact. The attached Vander Weide Testimony
addresses the deficiencies of Mr. Mac Mathuna’s analysis, prepares a corrected and restated DCF
range and examines a series of DCF sensitivities, other cost of capital models and the relevant
risk profile of Southern Companies, and determines a statutory zone of reasonableness in
keeping with Emera Maine and meeting the Hope and Bluefield standards. Dr. Vander Weide
concludes that a statutory zone of reasonableness for Southern Companies presently is from
11.0% to 12.7%,29 which includes comfortably Southern Companies’ existing ROE of 11.25%.
Moreover, Complainants’ proposed 8.65% ROE is substantially lower than the bottom of Dr.
Vander Weide’s statutory zones of reasonableness.
The failure of Complainants’ pinpoint 8.65% ROE recommendation to pass muster under
the Commission’s precedent, as well as under Hope and Bluefield, also is addressed in the
attached Fetter Testimony. Mr. Fetter, explains that Southern’s higher-than-average relative risk
profile requires a commensurate ROE, which he opines should be at or near the top of Dr.
28
See, e.g., NextEra Energy Res., 156 FERC ¶ 61,150 at P 16; NRG Power Mtkg. 862 F.3d at 114 n.2; Southern
Maryland Elec., 162 FERC ¶ 61,048 at P 15.
29
Vander Weide Testimony, SC-1 at 57.
6
Vander Weide’s zone of reasonableness.30 In forming his opinion, Mr. Fetter reviewed updated
equity analyst evaluations of Southern Companies and confirmed that Southern is considered as
presenting greater equity investment risk than assumed by Mr. Mac Mathuna and generally
reflected in the median range of Complainants’ DCF study.31 In fact, Southern Companies
presently are viewed as having elevated or above-average risk relative to the proxy companies
identified under the Commission’s DCF precedent.32 Accordingly, if the Commission does not
dismiss the Complaint as materially deficient and unripe, the Commission should deny the
Complaint on the basis of the written record.
III. DISCUSSION
A. The Complaint fails to assert a prima facie case that Respondents’ current
ROE exceeds the statutory zone of reasonableness.
To justify initiation of hearing procedures to potentially modify Southern Companies’
current, filed and approved ROE, Complainants have the initial burden of showing that the ROE
is unjust and unreasonable. This showing, required at the complaint stage, required Complainants
to address the Supreme Court’s Hope and Bluefield requirements. Hope and Bluefield establish
the principle that a regulated public utility’s FERC regulated ROE shall be “commensurate with
returns on investment in other enterprises having corresponding risks, [and] sufficient to assure
confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract
capital.”33
Section 206 places the initial burden on complainants to establish by substantial evidence
that the ROE they challenge is unjust and unreasonable.34 The Complainants in this proceeding
30
Fetter Testimony, SC-2 at 6, 25-26.
31
Id. at 15-17.
32
Id.
33
Hope, 320 U.S. at 603 (emphasis added).
34
16 U.S.C. § 824e(a); 18 C.F.R. § 385.206(b)(1)-(2). See, e.g., FirstEnergy Serv. Co. v. F.E.R.C., 758 F.3d 346,
353 (D.C. Cir. 2014) (burden of demonstrating existing ROE is unlawful is on complainant, not the utility); Ameren
7
have failed to clear that statutory hurdle. An existing, filed ROE is entitled to a form of “statutory
protection” and should not be easily upset under Section 206.35 To establish a prima facie case,
the Complainants needed to offer specific, substantial, reliable and non-erroneous evidence to
support each element of their claim.36 The question at this initial stage is whether the
Complainants have provided specific, substantial, reliable and complete evidence that the existing
ROE is not just and reasonable in the context of a statutory zone of reasonableness.37 Here, even
if the allegations in the Complaint are taken as true and correct (which they are not), the
Complaint’s threshold ROE assertions are insufficient to the initial task of clearing this important
statutory requirement.38
In Emera Maine, the D.C. Circuit recently reaffirmed that to “satisfy its dual burden
under section 206,” one must “do more than show that its single ROE analysis generated a new
just and reasonable ROE and conclusively declare that, consequently, the existing ROE was per
se unjust and unreasonable.”39 Yet, the Complaint makes this exact mistake, and it should be
fatal. Because the Commission’s “single ROE analysis failed to include an actual finding as to
the lawfulness of Transmission Owners’ existing base ROE,” the court in Emera Maine found
the Commission “acted arbitrarily and outside of its statutory authority in setting a new base
ROE for Transmission Owners.”40 According to the court, “the showing required of FERC to
Servs. Co. v. Midwest Indep. Transmission Sys. Operator, Inc., 125 FERC ¶ 61,161, P 9 (2008) (complainant has
burden of proof to “demonstrate, on the basis of substantial evidence” that the filed rate is “unjust and
unreasonable”).
35
City of Winnfield, 744 F.2d at 875.
36
See Puget Sound Energy, Inc. v. All Jurisd. Sellers, Opinion No. 537, 151 FERC ¶ 61,173, P 98 (2015), aff’d in
relevant part on reh’g, 153 FERC ¶ 61,386 (2015). See also State of California, Ex Rel. Bill Lockyer, Opinion No.
512, 135 FERC ¶ 61,113, P 31 (2011) (defining three elements of claim and finding that, “to establish a prima facie
case, the California Parties were required to present evidence in their direct testimony as to all three elements”).
37
See, e.g., FirstEnergy Serv. Co. v. F.E.R.C., 758 F.3d at 353.
38
See Nantahala Power & Light Co., 19 FERC ¶ 61,152, 61,276 (1982) (“The test for prima facie evidence is
whether there are facts in evidence which if unanswered would justify men of ordinary reason and fairness in
affirming the question which the plaintiff is bound to maintain.”).
39
40
Id.
8
exercise its section 206 authority to change an existing rate is different from anything required
for FERC to approve a utility’s proposed rate adjustment under section 205.”41 The court
explained that the Commission must recognize that more than a single point ROE can be just and
reasonable in relation to the initial burden under Section 206:
FERC’s decision—that a single ROE analysis generating a new

just and reasonable ROE necessarily proved that Transmission
Owners’ existing ROE was unjust and unreasonable—relied on its
assumption that all ROEs other than the one FERC identifies as the
utility’s just and reasonable ROE are per se unlawful in a section
206 proceeding. See Opinion No. 531-B, 150 FERC ¶ 61,165 at P
33. But, as we have explained, the zone of reasonableness creates
a broad range of potentially lawful ROEs rather than a single just
and reasonable ROE, meaning that FERC’s finding that 10.57
percent was a just and reasonable ROE, standing alone, “did not
amount to a finding that every other rate of return was not.”42
Although filed more than a year after the D.C. Circuit clarified the showing and findings
required under Section 206, the Complaint asserts that Mr. Mac Mathuna’s single point
recommendation based on a single DCF study is sufficient to support a finding that Southern
Companies’ current ROE is unjust and unreasonable. The basis for such a finding, according to
the Complaint, is that Southern Companies’ ROE is greater than Mr. Mac Mathuna’s calculated
8.65% median of his skewed DCF proxy group range.43 However, the DCF proxy group range
utilized by Mr. Mac Mathuna is merely an embedded technical set of values used to construct a
DCF study and is not equivalent to the statutory zone of reasonableness described by the D.C.
Circuit in Emera Maine.44 Indeed, since the Emera Maine decision, the Commission has
41
Emera Maine at 25.
42
Id. at 26 (emphasis added) (internal citations omitted).
43
Complaint at pp. 7-8.
44
See Coakley, Opinion No. 531-B at P 24 (“the term ‘zone of reasonableness’ has a particular, more technical
meaning [under the DCF] that differs from its meaning when used in general descriptions of what constitutes a just
and reasonable rate. . . .”). Complainants do not present any evidence concerning a “statutory” zone of
reasonableness and the only zone they present is their (skewed) DCF proxy range (which is not a “statutory” zone of
reasonableness).
9
acknowledged “that the zone of reasonableness established by the DCF is not ‘coextensive’ with
the ‘statutory’ zone of reasonableness envisioned by the FPA.”45
Emera Maine made it clear that a properly-pled Section 206 challenge to an existing, filed
and approved ROE must “do more than show that its single ROE analysis generated a new just and
reasonable ROE and conclusively declare that, consequently, the existing ROE was per se unjust
and unreasonable.”46 In light of this precedent, even if each fact asserted by Complainants were
taken as true, the assertions set forth in the Complaint are insufficient to raise a material question
as to whether Southern’s current ROE is beyond a statutory zone of reasonableness. The
Complainants needed to assert a statutory zone of reasonableness rooted in Hope and Bluefield and
confirmed by examination of alternative benchmarks. They failed to do so and, therefore, the
Commission should dismiss the Complaint without prejudice, as deficient and unripe.47
B. Assuming a prima facie case can be made without a statutory zone of

reasonableness, Complainants still fail to demonstrate Southern’s ROE is
unjust and unreasonable.
Even if the Commission were to entertain the Complaint as pleading all the necessary
elements of a prima facie case, the errors and omissions contained in Mr. Mac Mathuna’s
testimony render the Complaint insufficient to present issues of material fact.
1. Complainants’ single-point ROE recommendation is skewed by

material omissions, flawed inputs and computational errors.
Complainants’ DCF study produces skewed results because it contains computational
errors, stale data and improperly excludes several proxy group companies.
45
ISO New England Inc., 161 FERC ¶ 61,031, P 7 (2017) (citing Emera Maine, 854 F.3d at 22-23); see also NRG
Power Mtkg., 862 F.3d at 114 n.2 (“Section 206 requires FERC to demonstrate that the existing rates are ‘entirely
outside the [statutory] zone of reasonableness’ before FERC imposes a new rate without the consent of the
utility….”) (citing City of Winnfield, 744 F.2d at 875) (emphasis in original)).
46
47
See, e.g., NextEra Energy Res., 156 FERC ¶ 61,150 at P 16.
10
a. Unreasonably limited proxy group.
Mr. Mac Mathuna’s criteria for selection of his proxy group includes (but is not limited
to) that any such company must be included in the Value Line electric utility industry, have bond
ratings one notch above and below those of Southern Company, have an I/B/E/S long-term
earnings per share estimate, and not be involved in any merger activity or speculation during his
six-month analysis period.48 Dr. Vander Weide concludes, however, that Mr. Mac Mathuna
improperly excludes Avangrid, Inc., even though it meets all of Complainants’ and the
Commission’s criteria for inclusion in a DCF study proxy group.49 An attempt to exclude
Avangrid from a DCF study group on similarly trumped-up grounds as the Complainants assert
here, was just recently rejected in Belmont ID.50
Complainants also improperly exclude Sempra Energy and Dominion Energy on the
basis of an erroneous application of the Commission’s precedent for excluding companies
engaged in merger and acquisition (“M&A”) activity during the study period. While it is correct
that Sempra and Dominion were engaged in M&A activity during the study period, the activity
was not “significant enough to distort the DCF inputs.”51 Complainants’ exclusion of those
proxy companies appears to be based solely on involvement in M&A activity, with no
assessment of whether or not such activity materially distorted DCF inputs. When impacts on
DCF inputs are evaluated, as was done by Dr. Vander Weide, it is apparent that any M&A
activity associated with Sempra or Dominion has not materially distorted the DCF inputs for
those companies.52
48
See Mac Mathuna Testimony, JC-1 at 16-17.
49
Vander Weide Testimony, SC-1 at 12, 14.
50
Belmont ID, 162 FERC ¶ 63,026 at P 192.
51
Coakley, Opinion No. 531 at PP 92, 114.
52
11
b. Flawed input and computational errors.
Complainants’ witness has made several computational and data errors that undermine
the quality of his DCF study. First, the correct first period dividend in the annual DCF model is
the current dividend multiplied by the factor (1 + growth rate), but Mr. Mac Mathuna uses the
current annualized dividend multiplied by the factor (1 + 0.5 times growth rate) as the first
period dividend in his DCF model.53 Second, Mr. Mac Mathuna has incorrectly calculated the
dividend yield component of his DCF model using historical dividends paid over the last four
quarters, rather than the current annualized dividend required by the Commission.54 In Opinion
No. 531, the Commission confirmed that the most recent annualized dividend should be used to
calculate dividend yield.55 Third, Mr. Mac Mathuna has calculated the adjusted dividend yield
on a composite basis by blending I/B/E/S and GDP growth rate (which reflects a general growth
rate for the most distant future), rather than using only I/B/E/S growth rates, which more
accurately reflects investor expectations, as found in Opinion No. 546.56 Lastly, Complainants’
witness used a stale estimate of long-term GDP growth dating from March 2017.57
c. Correction of Complainants’ errors and omissions produces a

revised DCF study that shows an upper midpoint of 12.71%,
which is substantially higher than Southern Companies’
current ROE.
The errors and omissions contained in Complainants’ DCF study cause Mr. Mac
Mathuna’s return range to be substantially lower than would be the case under a properly
constructed two-stage DCF study. Dr. Vander Weide has undertaken to correct Mr. Mac
53
54
Id. at 17.
55
Coakley, Opinion No. 531 at n.135.
56
See Vander Weide Testimony, SC-1 at 17 (citing and discussing Seaway Crude Pipeline Co., LLC, Opinion No.
546, 154 FERC ¶ 61,070, P 198 (2016) (the Commission found the “‘short-term IBES growth rate is far more
representative of the growth investors expect…”” and that “investors would be unlikely to place much weight on a
long-term GDP estimate for [investment analysis] purpose[s].”) (internal citations omitted)).
57
12
Mathuna’s errors and has prepared a corrected version of the Commission-specified two-stage
DCF model. Correcting and updating Complainants’ DCF study shows the following ROE
ranges and values:
Table 1
COMPARISON OF MAC MATHUNA DCF TO CORRECTED DCF MODEL RESULTS
A B C D
Corrected Adding Proxy Adding
Mac Dividend Yield Group I/B/E/S
Mathuna as and Updated Correction Growth Rate
Filed GDP Data Correction
1 Low 7.22% 7.38% 7.38% 7.13%
2 High 11.05% 11.20% 12.22% 14.56%
3 Average 8.76% 8.88% 9.39% 10.18%
4 Median 8.65% 8.66% 8.77% 9.31%
5 Upper Median (75th Percentile) 9.15% 9.33% 10.65% 12.10%
6 Midpoint Top Half of Array 10.09% 10.24% 11.01% 12.71%
The table above, adapted from Table 1 in Dr. Vander Weide’s testimony,58 shows in
Column A Complainants’ DCF study range, Column B corrects Mr. Mac Mathuna’s use of a
stale long-term GDP growth estimate (from 2017) and corrects his miscalculated dividend yields.
As can be seen by comparing Columns A and B, the effect of those errors alone involved an
approximately 15 basis point adjustment. Column C then reflects corrected DCF study results
resulting from including Avangrid, Sempra and Dominion in the proxy group. This change
shows that the proxy group composition and Complainants’ improper exclusions suppressed the
DCF range substantially. Correcting Mr. Mac Mathuna’s failure to follow Opinion No. 541 also
rectifies a material downward bias.
As summarized by Dr. Vander Weide, “correcting Mr. Mac Mathuna’s DCF application
increases the midpoint of the top half of the array from 10.09 percent to 12.71 percent.”59 The
Corrected DCF results prepared by Dr. Vander Weide and summarized above show that
58
59
Id. at 18.
13
Southern Companies’ current ROE of 11.25% is easily within a zone of reasonableness using
just the Commission’s DCF study framework.
2. Complainants have misinterpreted their flawed DCF results.
Even if Complainants’ DCF study were in line with Commission requirements, Mr. Mac
Mathuna’s focus on DCF range median and his refusal to articulate a statutory zone of
reasonableness is erroneous. Specifically, in support of their claim that an ROE of 11.25% is
unjust and unreasonable, Complainants submit only one type of evidence— Mr. Mac Mathuna’s
DCF study. Such study is interpreted to produce a single point of reasonableness at which
Southern’s ROE is just and reasonable, the median value of 8.65% (from a proxy range of 7.22%
to 11.05%). Mr. Mac Mathuna’s justification for reliance on the median of the DCF range,
rather than the mid-point or the median or midpoint of the upper portion of the range, is that: (a)
capital markets are no longer anomalous and have reached a “new normal” of suppressed interest
rates,60 and (b) Southern Companies are merely average risk utilities.61 Complainants also imply
that Southern’s current ROE should in some way be suspected as unjust and unreasonable
because it was filed and approved as a result of a 2003 settlement.62 According to Mr. Mac
Mathuna and the Complaint, these factors lead to a conclusion that only the median of the DCF
range63 should be used to evaluate Southern Companies’ current ROE for purposes of both
prongs of Section 206.64 Notwithstanding Mr. Mac Mathuna’s rationalizations, his DCF is
materially limited and unreliable (as discussed above), and his interpretations and single-point
recommended return are unsound.
60
Mac Mathuna Testimony, JC-1 at 11, 44.
61
Id. at 31, 52.
62
Id. at 11.
63
Id. at 10-13, 28-29 and 44.
64
Id. at 55; see also Complaint at p. 7.
14
a. Prevailing economic and capital market conditions remain
anomalous, supporting maintenance of Southern’s ROE in the
upper portion of the zone of reasonableness.
Although Complainants’ witness acknowledges that Hope and Bluefield require a balanced
assessment of both ratepayer interests and investor requirements, he concludes that this balancing
is inherent in the DCF model itself.65 Therefore, he skirts any pragmatic considerations on the
basis that capital markets have reached a “new normal” with historically low/suppressed interest
rates expected to continue.66 As explained by Dr. Vander Weide, however, Mr. Mac Mathuna’s
assumption of a “new normal” of historically low interest rates is belied by the existing
environment of climbing interest rates:
Investors are expecting that interest rates will increase because they
recognize that interest rates are heavily influenced by Federal
Reserve monetary policy, and the Federal Reserve’s monetary
policy has become significantly tighter in recent months as the
Federal Reserve has begun to unwind its unprecedented efforts to
stimulate the economy through enormous increases in the money
supply. In March 2018, the Federal Reserve raised its benchmark
interest rate for the sixth increase since 2015, forecasted two
additional rate increases in 2018, and forecasted three additional rate
hikes in 2019. Economists now project that the Federal Reserve will
raise the federal funds rate four times in 2018 (see, for example,
“Economists See Fed Raising Rates in June, Then September,
Forecasters surveyed by WSJ increasingly expect four Federal
Reserve rate increases in 2018” The Wall Street Journal, May 10,
2018). As investors had expected, the Federal Reserve announced
on June 13, 2018 that it was increasing the federal funds rate, and
the Federal Reserve signaled that it will likely raise rates at least
twice more during 2018.67
Dr. Vander Weide explains that there are various reasons for why interest rates are expected to
increase over the next several years, including an expanding economy with record employment and
consumer confidence:
65
Mac Mathuna Testimony, JC-1 at 12-13.
66
Id. at 37-46.
67
Vander Weide Testimony, SC-1 at 27-28.
15
First, the dramatic changes in the federal tax code enacted by the
Tax Cuts and Jobs Act of 2017 has caused many United States
companies to repatriate cash that had previously been held in
foreign countries and to invest repatriated dollars in domestic
business opportunities. The additional investment is stimulating the
economy at a time when the economy is already at full
employment. Second, the federal balance sheet currently contains
nearly three trillion dollars in Treasury securities and 1 trillion
dollars in mortgage-backed bonds (well above its pre-2008 peak of
$925 billion) creating an unprecedented market intervention that
has been exacerbated by both the European Central Bank and the
Bank of Japan, but the Federal Reserve considers the
unprecedented balances in held securities to be temporary and, as
noted above, has begun reducing the balances of securities held by
the Federal Reserve. As the Federal Reserve continues to reduce
the balances of Treasury securities, it is reasonable to expect that
interest rates will continue to rise. Third, the current, historically
low unemployment rate, 3.8 percent, is likely to create further
inflationary pressure on the economy. (As reported by The Wall
Street Journal, the unemployment rate previously has been this
low only two times during the last 50 years, in the late 1960s and
one month in 2000 (“The Fed’s Biggest Dilemma: Is the Booming
Job Market a Problem?” Nick Timiraos, The Wall Street Journal,
June 11, 2018.) Fourth, the consumer price index rose 2.8 percent
from the prior year, the highest year-over-year increase since
February 2012, when inflation was 2.9 percent (see “Consumer
Prices Post Largest Annual Growth in More Than Six Years,
Rising gas and rent prices are helping drive inflation higher,”
Sharon Nunn, The Wall Street Journal, June 12, 2018).68
In Opinion Nos. 531 and 551, the Commission found that unusual capital market
conditions yielded a midpoint of the DCF range that was too low to be just and reasonable and
that alternative methodologies should be utilized to ensure a just and reasonable ROE.69 In
addition to his incorrect assumption regarding Southern’s relative investment risk (as discussed
below) to justify his exclusive focus on the median of a single DCF analysis, Mr. Mac Mathuna
eschews any need for pragmatic adjustments by arguing that low interest rates referenced in his
68
69
Coakley, Opinion No. 531 at P 145; ABATE v. MISO, Opinion No. 551 at PP 120-22. These alternatives include
(i) the risk premium approach based on Commission-authorized ROEs for utilities, (ii) CAPM; (iii) the expected
earnings approach; and (iv) a review of state-approved ROEs. See Coakley, Opinion No. 531 at P 146; ABATE v.
MISO, Opinion No. 551 at PP 135-37.
16
testimony reflect retrenchment into a new normal, reminiscent of trends from the 1940s and
1950s. These arguments are counter-factual, to say the least. Interest rates are in an upward-
change environment, coupled with core tax reform impact uncertainty and clearly anomalous
capital market dynamics.70
As Dr. Vander Weide explains, capital market conditions continue to be anomalous with
an uncertain monetary policy direction.71 Investors continue to view present capital market
conditions as in a state of change, aberrational, and with consensus anticipation of increasing and
sustained higher interest rates in the near term and going forward.72 Among the most prevalent
indicators of the continued anomalous state of present capital markets is that the markets are in
the process of digesting “the dramatic changes in the federal tax code enacted by the Tax Cuts
and Jobs Act of 2017,”73 which changes are contributing an economic stimulus in the context of
an already growing economy with at or near full employment.74 This is a recipe for further
instability and change―hardly a “new normal” as concluded by Mr. Mac Mathuna.
Accordingly, Mr. Mac Mathuna should not have focused myopically on the median of his
downward-biased DCF range, and also should have considered alternative ROE benchmarks.75
b. Complainants’ focus on the median also ignores investors’

view that Southern Companies have above-average risks.
As described above, Hope and Bluefield and the Commission’s precedent requires that any
interpretation of a properly constructed DCF to discern the statutory zone of reasonableness must
consider relative risk of the company that is the subject of the study. Yet, Mr. Mac Mathuna’s
testimony does not reflect any investigation of investor assessment of Southern Companies’ risk as
70
See Vander Weide Testimony, SC-1 at 26-30.
71
Id.
72
Id.
73
Id. at 28.
74
Id.
75
See id. at 31.
17
an equity investment and whether that perception aligns with the norm of his DCF proxy group or
involves risks that are greater than the norm of his proxy group. Instead, Mr. Mac Mathuna
assumes, without support or citation, that Southern Companies present no unique investor risks that
would cause them to be perceived by equity investors as having above-average risk relative to
other companies in his limited DCF proxy group.76 As detailed below, Mr. Mac Mathuna’s
insistence that Southern is merely an average risk utility, and his failure to consider alternative cost
of equity methods and benchmarks, render his testimony unreliable.
Southern Companies’ witness, Steven M. Fetter, clearly establishes that Southern
Companies are perceived as having above-average risks. Specifically, Mr. Fetter notes the
“disparity between the nature of the Companies’ operations versus those carried out by
companies within Mr. Mac Mathuna’s proxy group,” to wit:
• “[S]ignificant risk beyond anything faced by other proxy group companies

by being a first mover” with respect to new nuclear and integrated
gasification combined cycle projects;77
• Financial impacts on Southern due to enactment of the Tax Cuts and Jobs
Act of 2017, “with an early indicator being the placement of a Negative
Outlook upon Southern’s credit ratings by a major rating agency, with
cautionary commentary coming from the two other major agencies;”78 and
• “Southern having four regulated electric utilities operating in four separate

regulatory jurisdictions.”79
Mr. Fetter’s testimony also sets forth a detailed review of investor perceptions of
Southern Companies, including very recent commentary (May 21, 2018) from the financial
community:
While the financial community generally viewed the recent

announced sale of Gulf Power Company by Southern to NextEra
76
Mac Mathuna Testimony, JC-1 at 31, 52.
77
Fetter Testimony, SC-2 at 6.
78
Id.
79
Id.
18
Energy, Inc. as credit and strategic positive, equity analysts did
note Southern’s continuing market risk due to the issues discussed
above:
UBS: “Risks specific to Southern Company include

execution of the Vogtle new nuclear construction project,
state level utility regulation (particularly in Georgia), the
outcome of the Mississippi rate process, execution of
growth opportunities or lack thereof at midstream and
power, interest rates, and weather.”
Deutsche Bank: “We believe a discount is merited given

credit challenges and the execution overhang presented by
the Vogtle nuclear project. Downside risks include the
potential cancellation of Vogtle, although we see this as
highly unlikely in the near-term, a negative outcome in the
2019 Georgia Power rate case, Vogtle construction
challenges, higher interest rates, higher financing needs and
reduced electric demand.”80
Accordingly, Mr. Fetter concludes that “the Commission should reject Mr. Mac
Mathuna’s argument that this Commission should set the Companies’ authorized ROE in this
proceeding at 8.65%, the median of ROEs authorized for companies in his selected proxy
group.”81 According to his review of financial community commentary and actions relating to
Southern Companies, and considering Mr. Mac Mathuna’s proxy group, Mr. Fetter observes that
use of a median value from an average risk proxy group is problematic:
Looking at Mr. Mac Mathuna’s proxy group, I do not see any

utility that has faced and continues to face risks of the magnitude
described above. Mr. Mac Mathuna has failed to adjust within his
proxy group findings for the fact that its median risk is in no way
reflective of the risks investors and rating agencies perceive in
analyzing investments in Southern. His use of the group median
for his recommendation illustrates clearly that he is ignoring the
analysis clearly available from the investment community.82
80
81
Id. at 5-6.
82
Id. at 16 (emphasis added).
19
Accordingly, “the Commission should accept an ROE at or near the top of the range
recommended by Dr. Vander Weide.”83
The Commission’s policy in evaluating a public utility’s ROE under Part II of the Federal
Power Act is to ensure that it satisfies the requirements articulated in Hope and Bluefield.84
Under Hope, an allowed ROE must be “commensurate with returns on investments in other
enterprises having corresponding risks” and “sufficient to assure confidence in the financial
integrity of the enterprise, so as to maintain its credit and to attract capital.”85 As both Dr.
Vander Weide and Mr. Fetter explain, Complainants’ proposed ROE of 8.65% would materially
undermine Southern’s ability to attract equity capital on reasonable terms.86 Tellingly, Mr. Mac
Mathuna does not even discuss the impacts of a substantially reduced ROE under the Hope and
Bluefield standard.
Given Southern Companies’ higher relative risk vis-à-vis their proxy group, Dr. Vander
Weide explains that a reliable ROE study should utilize more than Mr. Mac Mathuna’s DCF study
and adjust Southern Companies’ ROE upward.87 To evaluate the output of his DCF analysis,
form a statutory zone of reasonableness (that is not coextensive with a DCF zone of
reasonableness) and determine Southern Companies’ placement therein, Mr. Mac Mathuna should
have not only recognized continuing anomalous market conditions, but addressed Southern’s
particular circumstances. These circumstances show that Southern Companies, even with
supportive state regulation, have experienced bond ratings downgrades and have negative
outlooks by both Moody’s and Standard & Poor’s.88 Mr. Mac Mathuna’s dependence on one
83
84
See generally Revised Policy Statement on Treatment of Income Taxes, 162 FERC ¶ 61,227, P 5 & n.8 (2018);
Coakley, Opinion No. 531 at P 14.
85
86
See id. at 3; Fetter Testimony, SC-2 at 25-26.
87
88
See Fetter Testimony, SC-2 at 6, 14-17.
20
DCF study and use of a single pinpoint ROE touchstone render his testimony short of providing a
statutory “zone of reasonableness,” as required under Emera Maine and other judicial precedent.89
His academic focus on a single DCF analysis that does not consider pragmatic impacts and
Southern specific risk factors cannot be relied upon following the D.C. Circuit’s decision in
Emera Maine. (Dr. Vander Weide and Mr. Fetter, in contrast, have considered these impacts and
risk factors.) Mr. Mac Mathuna’s proposed 8.65% ROE would materially undermine investor
confidence and undermine Southern’s ability to attract and retain capital. Among other reasons,
such ROE is drastically too low and would be such a dramatic reduction from Southern’s current
ROE so as to shock the market.90 The Commission has rejected recent efforts to dramatically
reduce a utility’s ROE because such a change would undermine a utility’s ability to attract and
retain capital and should do likewise again.91
c. The upper midpoint or upper median is the appropriate

starting place for determining the statutory zone of
reasonableness as to Southern Companies.
As noted above, a fatal result of Mr. Mac Mathuna’s incorrect assumption about Southern
Companies’ relative equity risk profile is his reliance on the median of his DCF range rather than
the upper midpoint.92 Contrary to Mr. Mac Mathuna’s arguments, the median of the DCF range
is not a per se reflection of a utility’s cost of equity, and use of the median is not required under
Commission precedent. The requirements of Hope and Bluefield militate against mechanical
application of DCF when the resulting DCF zone of reasonableness and midpoint ROE may be
89
See ISO New England Inc., 161 FERC ¶ 61,031 at PP 7-8 (citing Emera Maine, 854 F.3d at 22-23, 26)
(recognizing predicate finding of “statutory zone of reasonableness” within which all ROEs would be lawful).
90
Vander Weide Testimony, SC-1 at 30; Fetter Testimony, SC-2 at 6 (“A reduction in the Companies’ authorized
ROE from 11.25% to 8.65% would undoubtedly shake investor confidence now and on into the future.”).
91
In Opinion No. 531, the Commission found that a 175 basis point decrease from the then-existing ROE of
11.14% to the 9.39% midpoint of its DCF range “could undermine the ability of [utilities] to attract capital for new
investment....” Coakley, Opinion No. 531 at P 150. See also ABATE v. MISO, Opinion No. 551 at P 262
(explaining that “an overly large ROE reduction could cause [RTO members’] credit ratings and/or other measures
of financial health to deteriorate”).
92
Complaint at p. 9.
21
insufficient to ensure the financial integrity of the enterprise so as to maintain its credit and to
attract capital.93 Mr. Mac Mathuna’s suggestion that Southern’s ROE must be evaluated against
the pinpoint median of his DCF range—regardless of evidence showing that the resulting ROE is
unjust and unreasonable and inconsistent with the requirements of Hope and Bluefield—
constitutes exactly the type of mechanical application of the DCF methodology that the
Commission rejected in Opinion Nos. 531 and 551.
Mr. Mac Mathuna’s artful dodge of company-specific risk factors avoids having to
confront the particular facts and circumstances that have created the above-average relative risk
assigned to Southern Companies by equity investors. However, reasoned decision-making
requires consideration of evidence that Southern has greater risk than the group average, which
requires pragmatic upward adjustment from the point of central tendency. As described by Mr.
Fetter:
Turning to Southern’s specific circumstances, I do not think that

any US regulated electric utility has been faced with greater
complexity and risk than has Southern and its regulated electric
subsidiaries – laid out across four separate regulatory jurisdictions.
As noted, that great amount of risk has resulted in unplanned
occurrences along the way, but Southern has sought to face up to
and be responsive to those negative events for the future benefit of
its customer base. No regulator determined at the outset of
Southern’s nuclear and IGCC activities that it was inappropriate
for Southern to proceed with its strategic plans, all risk factors
considered. Added to that operational risk is the newfound legal
and regulatory risk presented by the federal enactment of tax
reform legislation, which now places previously useful regulatory
and financial strategies into a potentially unfavorable light – with
possible negative financial impacts. As explained, Southern is one
of the electric utilities most affected by those changes in federal
law.
Dr. Vander Weide has testified to the proper placement of the

Companies’ authorized ROE within this proceeding. I view his
ROE recommendation as appropriately meeting investor
93
See Coakley, Opinion No. 531 at PP 143-144.
22
expectations in a way that will maintain investor confidence and
stabilize Southern’s credit ratings no lower than my minimum
recommended “BBB+” level.94
Based on his correction of Mr. Mac Mathuna’s DCF study and considering
relevant capital market factors and the relative higher risk attributed Southern
Companies, Dr. Vander Weide also concludes that Southern’s ROE statutory zone of
reasonableness—without even considering alternative benchmarks and using only the
Commission’s two-stage DCF framework—resides among the midpoints of the upper
half of the range of DCF model results, which is “11.0 percent to 12.7 percent.”95 Since
Southern’s current ROE of 11.25% is well within this range, and then when further
reinforced by his consideration of alternative benchmarks, Dr. Vander Weide
recommends that Southern Companies’ existing ROE should not be investigated for
potential downward adjustment, but rather that Southern “be allowed to earn a base return
on equity equal to 11.25 percent.”96
d. Complainants also err by drawing a negative inference from

the fact that Southern’s current ROE is the result of a
settlement agreement.
Complainants incorrectly rely on the manner in which Southern Companies’ current ROE
was reached as grounds for replacing it. Mr. Mac Mathuna asserts that Southern’s current
11.25% ROE is excessive because (i) current bond yields are lower than the bond yields in effect
during the six-month period immediately preceding the filing of the settlement agreement that set
Southern’s ROE at 11.25%,97 and (ii) Southern’s settled ROE of 11.25% was negotiated when
the Commission still used a single-stage DCF methodology, which has now been replaced with
94
95
96
Id. at 58.
97
Complaint at p. 8; Mac Mathuna Testimony, JC-1 at 10.
23
Opinion No. 531’s two-step DCF methodology.98 Under Mr. Mac Mathuna’s logic, because
these two predicates for Southern’s settled ROE are no longer true, this change provides a basis
to further investigate that ROE.
Contrary to Mr. Mac Mathuna’s assertions, neither of these two factors were predicates for
Southern’s settled ROE. There were no predicates to Southern’s settled ROE because the 11.25%
ROE was the product of “black box” settlement, which “do[es] not set forth the cost-of-service
elements or explain how the rates were derived.”99 In other words, “parties to black box
settlements agree to rates without identification or attribution of costs or adjustments for any
particular component of those rates.”100 When a question arises later about whether the
predicates for a black box rate have changed, the task is impossible because “it is impossible to
determine what ‘costs’ those rates include.”101 Where rates are set by a black box settlement, “it
would be impossible to determine which cost components are included in current rates and which
were excluded” and “[w]ithout knowledge of or access to this cost and revenue information, the
Commission cannot quantify the financial impact that cost elements” may have had on the
utility’s settlement rates.102 Here, the settlement agreement under which Southern’s ROE was
established and accepted provided for an 11.25% ROE without specifying any methodological
predicate.103
98
Mac Mathuna Testimony, JC-1 at 11.
99
El Paso Nat. Gas Co., 132 FERC ¶ 61,139, PP 81-82 (2010) (“El Paso”), petition for review denied sub nom.
Freeport-McMoRan v. F.E.R.C., 669 F.3d 302 (D.C. Cir. 2012).
100
El Paso at P 82.
101
Id. at P 81.
102
See Tri-State Generation and Transmission Ass’n, Inc. v. Public Serv. Co. of N.M., 143 FERC ¶ 61,226, P 21
(2013) (settlement rates, “like other black box settlement-based rates, do[] not set forth any cost-of-service elements
or explain how the stated rates were derived.”) (Id. at P 20) (internal citations omitted).
103
Southern Co. Services, Inc., 105 FERC ¶ 61,019, P 18 (2003).
24
3. A properly constructed single-stage DCF study is a useful additional
reference for considering whether an existing, filed ROE should be
investigated under Section 206.
The Commission in Opinion No. 531 acknowledged that the DCF analysis “may be
affected by potentially unrepresentative financial inputs to the DCF formula, including those
produced by historically anomalous capital market conditions.”104 The presence of these
anomalous capital market conditions may skew the outputs of the DCF methodology such that the
mechanical application of the DCF methodology provides an unjust and unreasonable ROE.105
There are other shortcomings associated with the DCF methodology, including its assumption
that investors reference long-term GDP growth rates in determining their expectations for utility
common stocks.106 Dr. Vander Weide recommends use of the I/B/E/S growth estimates instead
of GDP estimates because he has performed and published extensive studies on whether GDP
growth forecasts are used by investors. “[M]y studies indicate that the I/B/E/S growth forecasts
reflect the long-run growth expectations of investors. Thus, the I/B/E/S growth forecasts are the
best estimate of future growth for use in the DCF model.”107
There are important additional considerations that warrant caution with exclusive and
mechanical use of the DCF model to establish a statutory zone of reasonableness. Dr. Vander
Weide has identified a number of additional concerns with Mr. Mac Mathuna’s application of the
DCF methodology that: (i) warrant continued reliance on other, supplemental methodologies to
estimate investor-required ROE and/or (ii) require upward adjustments to a DCF-dependent zone
of reasonableness. In particular, Dr. Vander Weide explains:
104
Coakley, Opinion No. 531 at P 41.
105
ABATE v. MISO, Opinion No. 551 at P 66, 120.
106
107
Id. at 37.
25
• The use of GDP growth estimates in the second stage do not represent
investor expectations and suppresses the results of the DCF
calculations;108
• A flotation cost adjustment should be reflected in the computation

methodology;109 and
• Full recognition of quarterly payment of dividends is necessary to avoid

downward bias.110
To isolate the impacts of the foregoing pragmatic considerations, Dr. Vander Weide
conducted a constant growth DCF analysis that confirms the continuing reasonableness of
Southern’s 11.25% ROE within a DCF range of reasonableness. This constant growth DCF uses
a proxy group of electric utilities with investment grade bond ratings that: (1) paid dividends
during every quarter and did not decrease dividends during the last two years; (2) have positive
I/B/E/S growth forecasts; and (3) are not the subject of M&A activity that distorted DCF inputs
during the study period.111 In his constant growth DCF study, Dr. Vander Weide implements the
following pragmatic computational and data adjustments: (a) express reflection of quarterly
payment of dividends;112 (b) uses average of GDP growth rates from several widely-used
sources;113 (c) uses the average of the high and low stock prices for the most recent three-month
period rather than the most recent six-month period;114 and (d) includes an allowance for
flotation costs.115
Dr. Vander Weide explains the basis for these computational and data adjustments at
length in his testimony. He summarizes his results as follows: “As shown on Schedule 2, I
108
109
Id. at 38-39.
110
Id. at 33-34.
111
Id. at 39.
112
Id. at 33-34.
113
Id. at 37.
114
Id. at 37.
115
Id. at 38-39
26
obtain an average DCF result of 10.1 percent for my electric utility group. I note that the
midpoint of the upper half of the range of DCF results is 13.1 percent.”116
4. Alternative benchmarks reinforce that a statutory zone of

reasonableness for Southern is at or near the top of the DCF range.
The DCF methodology is just one of many tools available to evaluate a company’s cost
of equity. “[T]here is wide agreement among economists and practitioners that because the cost
of equity can only be estimated with uncertainty, it is best to: (1) use several economic models to
estimate the cost of equity; and (2) examine the range of results obtained from each method.”117
Alternative methods and ROE benchmarks have been used by the Commission to ensure the
DCF model produces results that meet the requirements of Hope and Bluefield, including in the
context of anomalous market conditions.118 These additional tools or benchmarks are useful
more generally to compensate for the risks that the DCF model fails to predict or represent the
real phenomenon being modeled.119 Dr. Vander Weide agrees, explaining:
Financial economists generally agree that an analyst should use

several methods to estimate the cost of equity because all cost of
equity methods require estimates of variables, such as investors’
growth expectations, future interest rates, and investors’ views of
risk, that can only be measured with uncertainty. Financial
economists take into account the uncertainty in all cost of equity
estimates by considering the range of results from applying several
cost of equity methods to estimate the target company’s cost of
equity. Reviewing the results of several cost of equity methods can
serve as a check on the reasonableness of the results from a single
method. I also note that state public utility commissions generally
review the results of several cost of equity methods to estimate a
regulated company’s cost of equity in state rate proceedings.120
116
Vander Weide Testimony, SC-1 at 40 (emphasis added).
117
Id. at 30.
118
Coakley, Opinion No. 531 at P 145; ABATE v. MISO, Opinion No. 551 at P 120.
119
Coakley, Opinion No. 531 at P 145 n.286.
120
27
In Emera Maine, the D.C. Circuit held that, to justify a finding that a utility’s existing
ROE is unjust and unreasonable, the Commission must “do more than show that its single ROE
analysis generated a new just and reasonable ROE[.]”121 On remand from Emera Maine, the
Commission has the authority to re-evaluate any aspect of how it measures a utility’s cost of
equity and is free to draw on any useful methodologies to satisfy the requirements of Hope and
Bluefield, so long as the Commission provides a reasoned basis for its approach. In this case, Dr.
Vander Weide has not only corrected the two-stage DCF analysis performed by Mr. Mac
Mathuna and prepared a constant growth DCF analysis, he also has considered alternative
benchmarks.
Consistent with Opinion Nos. 531 and 551, Dr. Vander Weide performed risk premium,
CAPM, and expected earnings analyses. Dr. Vander Weide also examined state-authorized
ROEs.122 Investors (and the Commission) view transmission investment as having higher risk
than state-regulated retail supply and, as such, investors expect transmission ROE generally to be
higher than average state-approved ROEs.123 To further corroborate his conclusion that
Southern’s ROE remains within a reasonable range for Southern, Dr. Vander Weide examines a
series of alternative benchmarks that should inform any reasonable and thorough assessment of a
utility’s filed and approved ROE. The details of this assessment and detailed supporting materials
are provided in Dr. Vander Weide’s testimony and associated schedules.124 Dr. Vander Weide’s
work confirms that Southern’s current ROE of 11.25% is comfortably within a reasonable range:
121
Emera Maine at 27.
122
123
Id. (discussing Opinion No. 531). Mr. Mac Mathuna provides no support for his contention that retail service
regulated by state commissions is riskier than FERC-regulated transmission service. This contention by Mr. Mac
Mathuna is contrary to Commission findings. See, e.g., ABATE v. MISO, Opinion No. 551 at P 250 (based on the
evidence presented, “interstate transmission is riskier than state-level distribution”). Dr. Vander Weide and Mr.
Fetter each address the myriad ways Mr. Mac Mathuna’s relative “risk” arguments are incorrect on multiple levels.
124
28
C. Southern’s existing ROE is easily within—and Complainants’ proposed ROE
is substantially below—the statutory zone of reasonableness.
The Complaint does not identify any statutory zone of reasonableness. Instead, the
Complaint identifies a pinpoint ROE, taken from the median of Mr. Mac Mathuna’s one DCF
study and argues that this singular value is the touchstone for initially determining whether the
Complaint makes a prima facie case that Southern Companies’ existing ROE is unjust and
unreasonable.125 The D.C. Circuit in Emera Maine established, and the Commission has
recognized, “that the zone of reasonableness established by the DCF is not ‘coextensive’ with the
‘statutory’ zone of reasonableness envisioned by the FPA.”126 Although the Respondents do not
bear any burden of proof at this stage, Southern Companies asked Dr. Vander Weide to evaluate
the evidence and to develop a statutory zone of reasonableness.
Dr. Vander Weide has prepared a statutory zone of reasonableness for Southern
Companies based on data and analysis described in his testimony. He opines that an ROE in a
range from 11.0% to 12.7% is the statutory zone of reasonableness. Therefore, the 8.65% ROE
touchstone recommended by Complainants is substantially lower than the bottom of Dr. Vander
Weide’s statutory zone of reasonableness. The graphic below provides a potentially useful
reference illustrating that an ROE of 11.25% is well within the range of reasonable returns
125
Complaint at p. 7.
126
ISO New England Inc., 161 FERC ¶ 61,031 at P 7 (citing and quoting Emera Maine, 854 F.3d at 22-23).
29
centered on the two-stage DCF, but tested and corroborated by reference to alternative
computational approaches and reference points:
D. The Commission also should dismiss the Complaint on procedural grounds

as it fails to meet the requirements of FPA Section 206.
Section 206(b)(4) requires a complaint to “[m]ake a good faith effort to quantify the
financial impact or burden (if any) created for the complainant as a result of the action or
inaction”.127 The Complaint only provides an estimated financial impact on Southern, which
estimate is egregiously inaccurate.
Section 206(b)(9)(i) requires a complaint to state whether dispute resolution procedures
were used, “or why these procedures were not used.”128 The Complaint states that the
Complainants and Southern “have not engaged in informal settlement discussions prior to
Complainants filing of this Complaint” but does not state why such procedures were not used.
Southern would have welcomed discussions with Complainants and was surprised such
discussions were not initiated by Complainants.
Section 206(c) provides that service of a copy of the compliant “must be simultaneous
with filing at the Commission for respondents”, and simultaneous service can be accomplished
by electronic mail, facsimile, express delivery or messenger.129 The Complaint was filed on May
127
18 C.F.R. § 385.206(b)(4) (emphasis added).
128
18 C.F.R. § 385.206(b)(9)(i) (emphasis added).
129
18 C.F.R. § 385.206(c) (emphasis added).
30
10, 2018, but Southern did not receive a copy of the Complaint on May 10, 2018, and the rules
do not provide for service grace-periods.
IV. ADMISSIONS, DENIALS, AND AFFIRMATIVE DEFENSES
Pursuant to Rule 213(c)(2) of the Commission’s Rules of Practice and Procedure,130
Southern admits or denies the alleged material facts stated in the Complaint as follows: to the
extent any material fact or allegation in the Complaint is not specifically admitted in this
Answer, it is denied. Southern reserves all rights to challenge any supplemental testimony that
may be submitted should this case be set for hearing.
Pursuant to Rule 213(c)(2)(ii) of the Commission’s Rules of Practice and Procedure,131
Southern asserts the following affirmative defenses:
1. Complainants have failed to present a prima facie case to support its claim that
Southern’s ROE is unjust and unreasonable.
2. Complainants have failed to satisfy their burden of proof under FPA Section 206
to show that Southern’s ROE is greater than a statutory zone of reasonableness, as required by
Emera Maine, or that Complainants’ recommended single-point ROE is just and reasonable.
3. Southern’s ROE remains within the statutory zone of reasonableness and, in light
of anomalous market conditions and Southern’s risk profile, appropriately, within the upper half
of such zone. Therefore, Southern’s ROE has not been shown to be excessive, unjust or
unreasonable under the requirements of FPA Section 206.
130
18 C.F.R. § 385.213(c)(2).
131
18 C.F.R. § 385.213(c)(2)(ii).
31
V. COMMUNICATIONS
Persons to whom correspondence and communications concerning this proceeding should
be addressed are as follows:
Christopher H. Demko Lyle D. Larson

Associate General Counsel BALCH & BINGHAM LLP
– Energy Regulation 1710 Sixth Avenue North
Southern Company Services, Inc. Birmingham, Alabama 35203
30 Ivan Allen Jr, Blvd NW (205) 251-8100 (telephone)
Atlanta, GA 30308 llarson@balch.com
(404) 506-0241
chdemko@southernco.com
Southern respectfully requests that these individuals be placed on the Commission’s official
service list in this proceeding.
VI. CONCLUSION
For the reasons stated herein, Southern respectfully requests that the Commission deny
the Complaint.
Respectfully submitted,
Southern Company Services, Inc.,

For itself and as agent for Alabama Power
Company, Georgia Power Company, Gulf
Power Company and Mississippi Power
Company
By: /s/ Lyle D. Larson

Lyle D. Larson
Leonard C. Tillman
BALCH & BINGHAM LLP
1710 Sixth Avenue North
Birmingham, Alabama 35203
June 18, 2018
32
CERTIFICATE OF SERVICE
I hereby certify that I have this day electronically served a copy of the foregoing
document on all parties to this proceeding, as listed on the official service list compiled by the
Commission Secretary.
Dated at Birmingham, Alabama this 18th day of June, 2018.
/s/ Lyle D. Larson

Exhibit No. SC-1
Direct Testimony of James H. Vander Weide
Exhibit No. SC-1

BEFORE THE

Complainants,

Gulf Power Company,
Respondents.
DIRECT TESTIMONY OF
JAMES H. VANDER WEIDE
On Behalf Of Respondents
June 14, 2018

Exhibit No. SC-1
SOUTHERN COMPANIES
RATE OF RETURN
TABLE OF CONTENTS
PAGE
I. INTRODUCTION AND PURPOSE ....................................................................................... 1

III. ECONOMIC AND LEGAL PRINCIPLES ............................................................................ 5
III. REBUTTAL OF MR. MAC MATHUNA............................................................................... 8
A. MAC MATHUNA COMPARABLE COMPANIES ................................................................. 9
B. MAC MATHUNA DCF ANALYSIS ...................................................................................... 15
C. MR. MAC MATHUNA’S FAILURE TO CONSIDER ALTERNATIVE COST OF
EQUITY METHODS ....................................................................................................................... 22
D. EVIDENCE ON AVERAGE STATE COMMISSION ALLOWED RETURNS ON
EQUITY............................................................................................................................................ 24
E. MR. MAC MATHUNA’S INCORRECT ASSESSMENT THAT INTEREST RATES
ARE EXPECTED TO REMAIN AT CURRENT LEVELS ............................................................ 26
IV. VANDER WEIDE COST OF EQUITY METHODS AND RESULTS ............................. 30
A. DISCOUNTED CASH FLOW METHOD ............................................................................... 32
B. RISK PREMIUM METHOD.................................................................................................... 40
1. Ex Ante Risk Premium Method ................................................................................................ 41
2. Ex Post Risk Premium Method ................................................................................................. 44
C. CAPITAL ASSET PRICING MODEL .................................................................................... 47
1. Historical CAPM ...................................................................................................................... 48
2. DCF-Based CAPM ................................................................................................................... 53
D. COMPARABLE EARNINGS METHOD ................................................................................ 54
V. CONCLUSION REGARDING THE FAIR RATE OF RETURN ON EQUITY ............. 56
Exhibit No. SC-1
Page 1 of 58

BEFORE THE
Docket No. EL18-147-000
TESTIMONY OF DR. JAMES H. VANDER WEIDE

ON BEHALF OF
SOUTHERN COMPANIES
I. INTRODUCTION AND PURPOSE
1 Q. Please state your name, title, and business address.
2 A. My name is James H. Vander Weide. I am President of Financial Strategy Associates, a
3 firm that provides strategic and financial consulting services to business clients. My
4 business address is 3606 Stoneybrook Drive, Durham, North Carolina 27705.
5 Q. Please describe your educational background and prior academic experience.
6 A. I graduated from Cornell University with a Bachelor’s Degree in Economics and from
7 Northwestern University with a Ph.D. in Finance. After joining the faculty of the School
8 of Business at Duke University, I was named Assistant Professor, Associate Professor,
9 Professor, and then Research Professor. I have published research in the areas of finance
10 and economics and taught courses in these fields at Duke for more than thirty-five years.
11 I am now retired from my teaching duties at Duke. A summary of my research, teaching,
12 and other professional experience is presented in Appendix 1.

Exhibit No. SC-1
Page 2 of 58
1 Q. Have you previously testified on financial or economic issues?
2 A. Yes. As an expert on financial and economic theory and practice, I have participated in
3 more than five hundred regulatory and legal proceedings before the public service
4 commissions of forty-five states and four Canadian provinces, the United States
5 Congress, the Federal Energy Regulatory Commission, the National Energy Board
6 (Canada), the Federal Communications Commission, the Canadian Radio-Television and
7 Telecommunications Commission, the National Telecommunications and Information
8 Administration, the insurance commissions of five states, the Iowa State Board of Tax
9 Review, the National Association of Securities Dealers, and the North Carolina Property
10 Tax Commission. In addition, I have prepared expert testimony in proceedings before the
11 United States District Court for the District of Nebraska; the United States District Court
12 for the District of New Hampshire; the United States District Court for the District of
13 Northern Illinois; the United States District Court for the Eastern District of North
14 Carolina; the United States District Court for the Northern District of California; the
15 United States District Court for the Eastern District of Michigan; the United States
16 Bankruptcy Court for the Southern District of West Virginia; the Montana Second
17 Judicial District Court, Silver Bow County; the Superior Court, North Carolina, and the
18 Supreme Court of the State of New York.
19 Q. What is the purpose of your testimony in this proceeding?
20 A. I have been asked by Southern Company Services, Inc., acting as an agent for the
21 transmission owning subsidiaries of The Southern Company (collectively, “Southern
22 Companies”), to review the direct testimony of Mr. Breandan T. Mac Mathuna, who
23 testifies on behalf of the Alabama Municipal Electric Authority (“AMEA”) and

Exhibit No. SC-1
Page 3 of 58
1 Cooperative Energy (collectively, “Joint Complainants”), and to respond to his
2 recommended rate of return on equity (“ROE”) for the Southern Companies’ FERC-
3 regulated transmission services.
4 Q. What is Mr. Mac Mathuna’s recommended ROE?
5 A. Mr. Mac Mathuna recommends a base ROE equal to 8.65 percent.
6 Q. Do you agree with Mr. Mac Mathuna’s recommended 8.65 percent base ROE?
7 A. No. Mr. Mac Mathuna’s recommended 8.65 percent base ROE significantly understates
8 Southern Companies’ required ROE, is well below a return that meets the Hope and
9 Bluefield fair return standards, and is inadequate to compensate for the risks of building
10 and maintaining electric transmission infrastructure.
11 Q. What are your major criticisms of Mr. Mac Mathuna’s testimony?
12 A. Mr. Mac Mathuna has failed to correctly apply the DCF method, failed to include
13 appropriate companies in his comparable company group, failed to consider alternative
14 cost of equity methods, failed to consider evidence on average allowed returns in state
15 utility proceedings, and failed to recognize the evidence that capital market conditions
16 continue to reflect investors’ expectations that interest rates will rise and that his assertion
17 that conditions that prevailed at the time of his analysis were not anomalous is not valid.
18 Q. Based on your corrections of Mr. Mac Mathuna’s application of the Commission’s
19 two-stage DCF method, what is your conclusion regarding Southern Companies’
20 cost of equity?
21 A. Based on my corrections of Mr. Mac Mathuna’s application of the Commission’s two-
22 stage DCF method, I conclude that Southern Companies’ cost of equity is in the range
Exhibit No. SC-1
Page 4 of 58
1 11.0 percent to 12.7 percent, the midpoints of the upper half of the range of DCF model
2 results.
3 Q. Do you also present evidence on Southern Companies’ cost of equity?
4 A. Yes. My studies support the conclusion that Southern Companies’ cost of equity is in the
5 range 9.8 percent to 11.7 percent.
6 Q. Have you read the direct testimony of Mr. Steven M. Fetter on behalf of Southern
7 Companies?
8 A. Yes.
9 Q. What is the purpose of Mr. Fetter’s testimony?
10 A. The purpose of Mr. Fetter’s testimony is to supplement my testimony by examining the
11 risk of investing in Southern Companies from the point of view of his experience as the
12 Chairman of the Michigan Public Service Commission, as the Group Head and Managing
13 Director of the Global Power Group at the credit rating agency, Fitch, Inc., and as
14 President of Regulation UnFettered.
15 Q. What does Mr. Fetter conclude from his analysis of the risk of investing in Southern
16 Companies?
17 A. Mr. Fetter concludes that the risk of investing in Southern Companies is well above
18 average, and, as a result, “the Commission should accept an ROE at or near the top of the
19 range recommended by Dr. Vander Weide.”
20 Q. Based on the results of your applications of the Commission’s two-stage DCF model,
21 your application of alternative cost of equity models, and your review of Mr.
22 Fetter’s analysis of the risk of investing in Southern Companies, what is your

Exhibit No. SC-1
Page 5 of 58
1 recommended allowed ROE for Southern Companies’ FERC-regulated
2 transmission services?
3 A. I recommend that Southern Companies be allowed to earn a base return on equity equal
4 to 11.25 percent. My recommendation reflects: (1) my finding that a reasonable
5 application of the Commission’s two-stage DCF model produces results in the range
6 11.0 percent to 12.7 percent; (2) my finding that applications of alternative cost of equity
7 models produce average results in the range 9.8 percent to 11.7 percent; and (3) Mr.
8 Fetter’s findings that the risk of investing in Southern Companies is greater than the risk
9 of investing in the proxy utilities and the allowed base ROE should be set at the upper
10 end of the range of results.
II. ECONOMIC AND LEGAL PRINCIPLES
11 Q. What is the economic definition of the cost of capital?
12 A. Economists define the cost of capital as the return investors expect to receive on
13 alternative investments of comparable risk.
14 Q. What role does the cost of capital play in the allocation of capital in the capital
15 markets?
16 A. The cost of capital is a hurdle rate, or cut-off rate, for investment in a company or project.
17 Investors will only invest in a company or project if they expect to earn a return on their
18 investment that is at least as large as the return they expect to receive on other
19 investments of comparable risk.
20 Q. Do all investors have the same position in the firm?
21 A. No. Debt investors have a fixed claim on a firm’s assets and income that must be paid
22 prior to any payment to the firm’s equity investors. Since the firm’s equity investors have
Exhibit No. SC-1
Page 6 of 58
1 only a residual claim on the firm’s assets and income, equity investments are riskier than
2 debt investments. Thus, the cost of equity exceeds the cost of debt.
3 Q. What is the overall or average cost of capital?
4 A. The overall or average cost of capital is a weighted average of the cost of debt and cost of
5 equity, where the weights are the percentages of debt and equity in a firm’s capital
6 structure.
7 Q. Can you illustrate the calculation of the overall or weighted average cost of capital?
8 A. Yes. Assume that the cost of debt is 7 percent, the cost of equity is 13 percent, and the
9 percentages of debt and equity in the firm’s capital structure are 50 percent and
10 50 percent, respectively. Then the weighted average cost of capital is expressed by
11 0.50 times 7 percent plus 0.50 times 13 percent, or 10.0 percent.
12 Q. How do economists define the cost of equity?
13 A. Economists define the cost of equity as the return investors expect to receive on
14 alternative equity investments of comparable risk. Since the return on an equity
15 investment of comparable risk is not a contractual return, the cost of equity is more
16 difficult to measure than the cost of debt. However, as I have already noted, there is
17 agreement among economists that the cost of equity is greater than the cost of debt. There
18 is also agreement among economists that the cost of equity, like the cost of debt, is both
19 forward looking and market based.
20 Q. Are the economic principles regarding the fair return for capital recognized in any
21 United States Supreme Court cases?
22 A. Yes. These economic principles, relating to the supply of and demand for capital, are
23 recognized in two United States Supreme Court cases: (1) Bluefield Water Works and
Exhibit No. SC-1
Page 7 of 58
1 Improvement Co. v. Public Service Comm’n.; and (2) Federal Power Comm’n v. Hope
2 Natural Gas Co. In the Bluefield Water Works case, the Court stated:
3 A public utility is entitled to such rates as will permit it to earn a return

4 upon the value of the property which it employs for the convenience of the
5 public equal to that generally being made at the same time and in the same
6 general part of the country on investments in other business undertakings
7 which are attended by corresponding risks and uncertainties; but it has no
8 constitutional right to profits such as are realized or anticipated in highly
9 profitable enterprises or speculative ventures. The return should be
10 reasonably sufficient to assure confidence in the financial soundness of the
11 utility, and should be adequate, under efficient and economical
12 management, to maintain and support its credit, and enable it to raise the
13 money necessary for the proper discharge of its public duties. (Bluefield
14 Water Works and Improvement Co. v. Public Service Comm’n. 262 U.S.
15 679, 692 (1923).)
16 The Court clearly recognized here that: (1) a regulated firm cannot remain
17 financially sound unless the return it is allowed to earn on the value of its property is at
18 least equal to the cost of capital (the principle relating to the demand for capital); and
19 (2) a regulated firm will not be able to attract capital if it does not offer investors an
20 opportunity to earn a return on their investment equal to the return they expect to earn on
21 other investments of the same risk (the principle relating to the supply of capital).
22 In the Hope case, the Court reiterates the financial soundness and capital
23 attraction principles of the Bluefield case:
24 From the investor or company point of view it is important that there be

25 enough revenue not only for operating expenses but also for the capital
26 costs of the business. These include service on the debt and dividends on
27 the stock... By that standard the return to the equity owner should be
28 commensurate with returns on investments in other enterprises having
29 corresponding risks. That return, moreover, should be sufficient to assure
30 confidence in the financial integrity of the enterprise, so as to maintain its
31 credit and to attract capital. (Federal Power Comm’n v. Hope Natural Gas
32 Co., 320 U.S. 591, 603 (1944).)
33 The Court clearly recognizes that the fair rate of return on equity should be:
34 (1) comparable to returns investors expect to earn on other investments of similar risk;
Exhibit No. SC-1
Page 8 of 58
1 (2) sufficient to assure confidence in the company’s financial integrity; and (3) adequate
2 to maintain and support the company’s credit and to attract capital.
3 Q. Does the Commission recognize the authority of the United States Supreme Court’s
4 fair rate of return standard in Martha Coakley, Mass. Attorney Gen., et al. v.
5 Bangor Hydro-Elec. Co., et al., Opinion No. 531, 147 FERC ¶ 61,234 (2014)
6 (“Opinion No. 531”)?
7 A. Yes. (See, for example, Opinion No. 531 at P 144, where the Commission states, “The
8 Commission’s ultimate task is to ensure that the resulting ROE satisfies the requirements
9 of Hope and Bluefield.”)
10 Q. Does the United States Supreme Court’s fair rate of return standard require the
11 Commission to use a single cost of equity formula to determine a regulated
12 company’s fair rate of return?
13 A. No. The Court affirmed in Hope that the Commission is “not bound to the use of any
14 single formula or combination of formulae in determining rates.” (Hope, 320 U.S. at
15 602)
III. REBUTTAL OF MR. MAC MATHUNA
16 Q. What is Mr. Mac Mathuna’s recommended base ROE for Southern Companies’
17 FERC-regulated transmission services?
18 A. Mr. Mac Mathuna recommends a base ROE equal to 8.65 percent.
19 Q. How does Mr. Mac Mathuna arrive at his recommended base 8.65 percent ROE?
20 A. Mr. Mac Mathuna arrives at his recommended base 8.65 percent ROE solely by applying
21 a two-stage DCF model to a proxy group of 14 electric utilities that have Standard &
22 Poor’s bond ratings in the range A to BBB+, that have Moody’s bond ratings in the range
Exhibit No. SC-1
Page 9 of 58
1 Baa1 to Baa3, and that receive at least 70 percent of revenues from rate-regulated
2 services.
3 Q. What areas of Mr. Mac Mathuna’s testimony will you address in your testimony?
4 A. I will address Mr. Mac Mathuna’s: (1) choice of comparable companies; (2) DCF
5 analysis of Southern Companies’ cost of equity; (3) failure to consider alternative cost of
6 equity methods, such as the Capital Asset Pricing Model (“CAPM”), risk premium, and
7 comparable earnings; (4) failure to test the reasonableness of his cost of equity
8 recommendation by comparing it to additional benchmarks, such as average state
9 commission allowed returns on equity; and (5) assessment that interest rates are expected
10 to remain at current levels for the foreseeable future, and, therefore, market conditions
11 have not been anomalous.
12 Q. Based on your assessment of the ROE analysis Mr. Mac Mathuna presents, what is
13 your opinion regarding Mr. Mac Mathuna’s recommended 8.65 percent ROE for
14 Southern Companies?
15 A. I conclude that his recommended 8.65 percent ROE is well below Southern Companies’
16 cost of equity and fails to meet the fair return standard.
A. MAC MATHUNA COMPARABLE COMPANIES
17 Q. What criteria does Mr. Mac Mathuna use to select his proxy companies?
18 A. Mr. Mac Mathuna first selects a group of 21 Value Line electric utilities that satisfy his
19 selection criteria that a company must: (1) be included in the Value Line electric utility
20 industry; (2) have an S&P corporate credit rating (“CCR”) of A to BBB+ and a Moody’s
21 long-term issuer or senior unsecured credit rating of Baa1 to Baa3; (3) have an I/B/E/S
22 analysts’ long-term earnings growth estimate; (4) receive at least 70 percent of revenues
23 from rate-regulated services; (5) not be engaged in major merger or acquisition activity
Exhibit No. SC-1
Page 10 of 58
1 during the six-month dividend yield analysis period; (6) pay dividends during the
2 dividend yield analysis period and not have announced a dividend cut; and (7) have a
3 DCF result that “pass threshold tests of economic logic” and that is not an outlier. (Mac
4 Mathuna at 16 – 17)
5 After selecting companies based on these criteria, Mr. Mac Mathuna then
6 eliminates five electric utilities, Dominion Energy, Great Plains Energy, Sempra Energy,
7 Vectren Corp., and Westar Energy because they were involved in merger and acquisition
8 activity; one utility, PG&E, because it suspended its dividend during the measurement
9 period; and one utility, Avangrid, because, in his opinion, there is insufficient Value Line
10 data to estimate Avangrid’s future growth and its ownership structure is different from
11 other utilities. Mr. Mac Mathuna’s final group includes 14 electric utilities.
12 Q. Do you agree with Mr. Mac Mathuna’s criteria for selecting comparable utilities for
13 the purpose of estimating Southern Companies’ cost of equity?
14 A. No. I disagree with Mr. Mac Mathuna’s criteria in three areas. First, I disagree with his
15 decision to eliminate companies such as Dominion and Sempra that are acquiring other
16 companies in merger transactions. Second, I disagree with his decision to eliminate
17 Avangrid based on his opinions regarding Avangrid’s lack of Value Line data and
18 Avangrid’s ownership structure. Third, I disagree with his decision to eliminate
19 companies with less than 70 percent revenues from rate-regulated services because the
20 risk, if any, from having less than 70 percent revenues from rate-regulated services is
21 already taken into consideration by bond rating agencies in assigning bond ratings.
Exhibit No. SC-1
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1 Q. Mr. Mac Mathuna eliminates companies that are involved in merger transactions.
2 Do you agree with Mr. Mac Mathuna’s decision to eliminate the target company in
3 a potential acquisition?
4 A. Yes. I agree with his criterion to eliminate the target company in a potential acquisition
5 because a merger offer generally involves a merger premium that is instantly
6 incorporated into the target company’s stock price, but the growth estimates for a target
7 company do not change to reflect potential merger cost savings or growth opportunities,
8 as the target company will no longer exist if the merger is completed. The use of a stock
9 price that includes the value of a potential merger in conjunction with a growth forecast
10 that does not include the growth enhancing prospects of potential mergers may produce a
11 DCF result that distorts the company’s cost of equity.
12 Q. Do you agree with Mr. Mac Mathuna’s decision to eliminate Dominion and Sempra
13 as the acquiring companies in potential acquisitions?
14 A. No. I disagree with his decision to eliminate Dominion and Sempra as the acquiring
15 companies in potential acquisitions because a potential acquisition typically has little
16 impact on the acquiring company’s stock price over the DCF measurement period, and
17 analysts do not change their growth forecasts for an acquiring company until after an
18 acquisition has been finalized. Analysts’ growth forecasts are necessarily related to
19 companies as they currently exist, and do not reflect investors’ views of the potential cost
20 savings and new market opportunities associated with mergers and acquisitions.
Exhibit No. SC-1
Page 12 of 58
1 Q. Did Mr. Mac Mathuna’s decision to eliminate Dominion and Sempra affect his cost
2 of equity estimate?
3 A. Yes. As I demonstrate below in TABLE 1, Section B., if Mr. Mac Mathuna had correctly
4 included Dominion and Sempra in his DCF proxy group, his cost of equity estimate
5 would have been higher because both Dominion and Sempra have higher than average
6 DCF results.
7 Q. Does Mr. Mac Mathuna explain his decision to eliminate Avangrid from his proxy
8 group?
9 A. Yes. Mr. Mac Mathuna states that he eliminates Avangrid because: (1) the Value Line
10 report dated February 16, 2018, for Avangrid does not contain Value Line’s forecast
11 earnings per share (“EPS”) and dividend per share (“DPS”) growth rates; (2) Avangrid’s
12 EPS was “depressed” in 2015 (Mac Mathuna at 20) and was forecast to double by year-
13 end 2017 (Mac Mathuna at 20); (3) Value Line “notes that Avangrid’s share price in
14 2017 increased by 34 percent” (Mac Mathuna at 21) and Value Line attributes the stock
15 price increase to “takeover speculation” (Mac Mathuna at 21); and (4) “trading in
16 Avangrid’s stock is relatively thin.” (Mac Mathuna at 21)
17 Q. Mr. Mac Mathuna argues that Avangrid should not be included in his proxy group
18 because the February 2018 Value Line report does not explicitly contain EPS and
19 DPS growth rates for Avangrid. Is this a sufficient reason for eliminating Avangrid
20 from the proxy group used to estimate a FERC DCF?
21 A. No. First, although Value Line does not explicitly report EPS and DPS growth rates for
22 Avangrid in the February 2018 report used by Mr. Mac Mathuna, Value Line does report
23 historical EPS and DPS values for 2016 and 2017, and also provides EPS and DPS
Exhibit No. SC-1
Page 13 of 58
1 forecast values for 2018, 2019, and the period 2021-2023. From these data, Mr. Mac
2 Mathuna and investors could easily calculate Value Line’s forecast growth rates for
3 Avangrid. Second, the FERC DCF method requires EPS growth forecasts reported by
4 I/B/E/S, not EPS growth forecasts reported by Value Line. Thus, Mr. Mac Mathuna’s
5 argument that the February 2018 Value Line report does not explicitly show EPS and
6 DPS growth forecasts for Avangrid is irrelevant to the application of the FERC DCF
7 model.
8 Q. Does Mr. Mac Mathuna’s observation that Avangrid’s EPS as reported in Value
9 Line was “depressed in 2015” and was forecast “to double by year end 2017”
10 support his decision to eliminate Avangrid from his proxy group?
11 A. No. Mr. Mac Mathuna has failed to take into account that the merger of Avangrid’s
12 predecessor companies, Iberdrola USA and UIL Holdings, did not occur until December
13 2015. Because the merger of Iberdrola USA and UIL Holdings did not occur until
14 December 2015, Value Line’s reported 2015 EPS for Avangrid actually reflects the 2015
15 EPS for UIL Holdings alone. Thus, Mr. Mac Mathuna’s comparison of Value Line’s
16 reported 2015 EPS to Value Line’s subsequent actual and forecast EPS values is
17 meaningless. Any comparison of 2015 values to those of subsequent years by necessity
18 reflects a comparison of completely different entities.
19 Q. Mr. Mac Mathuna notes that Avangrid’s share price increased by 34 percent in
20 2017. Is this increase in share price a valid reason for eliminating Avangrid from a
21 proxy group?
22 A. No. Although Avangrid’s share price increased during 2017, the share prices of other
23 electric utilities, and prices of the market as a whole as represented by the S&P 500, also
Exhibit No. SC-1
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1 increased during 2017. Mr. Mac Mathuna also fails to point out that an increase in share
2 price, all else equal, would lower a cost of equity estimate based on a DCF model, not
3 increase the estimate. With regard to Mr. Mac Mathuna’s reference to Value Line’s
4 speculation that in 2017 Avangrid may have been subject to takeover speculation which
5 contributed to the rise in Avangrid’s stock price, Mr. Mac Mathuna fails to acknowledge
6 that a higher stock price for Avangrid, all else equal, would decrease the calculated DCF
7 cost of equity for Avangrid.
8 Q. Mr. Mac Mathuna also argues that Avangrid should be eliminated because trading
9 in its shares is “thin.” Does he present any evidence that trading in Avangrid’s
10 shares is “thin” or that the degree of trading of Avangrid’s shares has had an
11 impact on Avangrid’s share price or its DCF cost of equity?
12 A. No.
13 Q. In summary, has Mr. Mac Mathuna justified his decision to eliminate Avangrid,
14 from his proxy group?
15 A. No. Avangrid meets all Mr. Mac Mathuna’s proxy company selection criteria: it is in the
16 Value Line electric utility industry group, it has bond ratings within his defined range,
17 there were no announced mergers or acquisitions during the six-month dividend period,
18 and it paid dividends during the period.
19 Q. Did Mr. Mac Mathuna’s failure to include Avangrid, Dominion, and Sempra in his
20 proxy group affect his cost of equity estimate?
21 A. Yes. His failure to include Avangrid, Dominion, and Sempra in his proxy group, apart
22 from other errors in his DCF application, reduced the average result for his proxy group
Exhibit No. SC-1
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1 because each of these companies has a higher than average DCF result (see TABLE 1 in
2 Section B. below).
B. MAC MATHUNA DCF ANALYSIS
3 Q. What DCF model does Mr. Mac Mathuna use to estimate Southern Companies’ cost
4 of equity?
5 A. Mr. Mac Mathuna uses an annual DCF model of the form, k = [D0 (1+.5g)/P0] + g,
6 where k is the cost of equity, D0 is the most recent annualized dividend per share, P0 is
7 the current stock price, and g is the expected future annual growth rate in dividends and
8 EPS.
9 Q. What are the basic assumptions of Mr. Mac Mathuna’s annual DCF model?
10 A. Mr. Mac Mathuna’s annual DCF model is based on the assumptions that: (1) a
11 company’s stock price is equal to the present value of the future dividends investors
12 expect to receive from their investment in the company; (2) dividends are paid annually
13 at the end of each year; (3) dividends, earnings, and book values are expected to grow at
14 the same constant rate forever; and (4) the first annual dividend is received one year from
15 the date of the analysis.
16 Q. Do you agree with Mr. Mac Mathuna’s use of an annual DCF model to estimate
17 Southern Companies’ cost of equity?
18 A. No. The annual DCF model is based on the assumption that companies pay dividends
19 only at the end of each year. Because Mr. Mac Mathuna’s proxy companies pay
20 dividends quarterly, Mr. Mac Mathuna should have used the quarterly DCF model to
21 estimate Southern Companies’ cost of equity.

Exhibit No. SC-1
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1 Q. Why is it incorrect to use an annual DCF model to estimate the cost of equity for
2 companies that pay dividends quarterly?
3 A. It is incorrect to apply an annual DCF model to companies that pay dividends quarterly
4 because: (1) the DCF model is based on the assumption that a company’s stock price is
5 equal to the present value of the expected future dividends associated with investing in
6 the company’s stock; and (2) the annual DCF model is not a correct equation for the
7 present value of expected future dividends when dividends are paid quarterly. (See
8 Appendix 2.)
9 Q. Recognizing your disagreement with Mr. Mac Mathuna’s use of an annual DCF
10 model, did Mr. Mac Mathuna apply the annual DCF model correctly?
11 A. No. The annual DCF model is based on the assumption that dividends are paid annually
12 at the end of each year. Under the assumption that dividends are paid annually and grow
13 at the same constant rate forever, the cost of equity is given by the equation, k = [D0 (1 +
14 g) ÷ P0] + g, where D0 is the current annualized dividend, P0 is the stock price, and g is
15 the expected constant annual growth rate. (See Appendix 2, which describes the
16 assumptions and derivation of both the annual and the quarterly DCF models.) Thus, the
17 correct first period dividend in the annual DCF model is the current annualized dividend
18 multiplied by the factor, (1 + growth rate). Instead, Mr. Mac Mathuna uses the current
19 annualized dividend multiplied by the factor (1 + 0.5 times growth rate) as the first
20 period dividend in his DCF model. This incorrect procedure alone, apart from other
21 errors in his DCF analysis, causes him to underestimate Southern Companies’ cost of
22 equity.
Exhibit No. SC-1
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1 Q. Mr. Mac Mathuna claims that he is precisely implementing the FERC’s preferred
2 two-stage DCF model. Has Mr. Mac Mathuna correctly implemented the FERC’s
3 two-stage DCF model?
4 A. No. Mr. Mac Mathuna has made several errors. First, Mr. Mac Mathuna has calculated
5 the dividend yield component of his annual DCF model using historical dividends paid
6 over the last four quarters rather than the current annualized dividend. The Commission
7 confirmed in Opinion No. 531 that the most recent annualized dividend should be used to
8 determine the dividend yield. (See Opinion No. 531 at P 77 fn 135, and Appendix.)
9 Second, Mr. Mac Mathuna has calculated the adjusted dividend yield using the weighted
10 average of the I/B/E/S and gross domestic product (“GDP”) growth rates rather than
11 using only the I/B/E/S growth rate. (See Seaway Crude Pipeline Company LLC, Opinion
12 No. 546, 154 FERC ¶ 61,070 (2016) Order on Initial Decision on Remand, at P 198.)
13 Third, Mr. Mac Mathuna has used a stale estimate of long-term GDP growth dating from
14 March 2017.
15 Q. How does Mr. Mac Mathuna estimate the expected future growth component of his
16 DCF model?
17 A. Mr. Mac Mathuna estimates the expected future growth component of his DCF model by
18 calculating a weighted average of the I/B/E/S analysts’ EPS growth forecasts and the
19 long-run GDP forecast, giving the analysts’ growth a two-thirds weight and the GDP
20 forecast a one-third weight.

Exhibit No. SC-1
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1 Q. Do you agree with Mr. Mac Mathuna’s method of estimating the growth component
2 of the annual DCF model?
3 A. No. As I discuss later in my testimony, I recommend using only the analysts’ growth
4 forecasts because my studies and the studies of others strongly support the conclusion
5 that stock prices are more highly correlated with analysts’ growth rates than with other
6 growth rates.
7 Q. What is the impact of Mr. Mac Mathuna’s failure to give full weight to analysts’
8 growth estimates on his cost of equity estimate?
9 A. Correcting Mr. Mac Mathuna’s DCF analysis and his proxy group by including
10 Avangrid, Dominion, and Sempra, and eliminating Fortis (because there is no I/B/E/S
11 long-term growth estimate available for Fortis) has the impact of increasing the midpoint
12 of the top half of the array by approximately 260 basis points. (See TABLE 1 below,
13 comparing the results in Column D to the results in Column A.)
14 Q. In Opinion 531, how did the Commission arrive at the appropriate allowed ROE?
15 A. The Commission set the allowed ROE at the 10.57 percent midpoint of the upper half of
16 the range of DCF results for the proxy companies.
17 Q. Please summarize the results of your analysis of Mr. Mac Mathuna’s DCF analysis.
18 A. Shown in TABLE 1, Column A, below are Mr. Mac Mathuna’s DCF results as filed. As
19 shown in TABLE 1, correcting Mr. Mac Mathuna’s DCF application increases the
20 midpoint of the top half of the array from 10.09 percent to 12.71 percent.
Exhibit No. SC-1
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TABLE 1
COMPARISON OF MAC MATHUNA DCF TO CORRECTED DCF MODEL RESULTS
A B C D
Mac Corrected
Mathuna Corrected Dividend
Corrected Dividend Yield,
Mac Dividend Yield, GDP I/B/E/S
Mathuna Yield, GDP Growth, Growth,
as Filed Growth Proxy Group Proxy Group
1 Low 7.22% 7.38% 7.38% 7.13%
2 High 11.05% 11.20% 12.22% 14.56%
3 Average 8.76% 8.88% 9.39% 10.18%
4 Median 8.65% 8.66% 8.77% 9.31%
5 Upper Median (75th Percentile) 9.15% 9.33% 10.65% 12.10%
6 Midpoint Top Half of Array 10.09% 10.24% 11.01% 12.71%
1
2 Q. Please explain the results shown in TABLE 1.
3 A. Shown in TABLE 1, Column A, are Mr. Mac Mathuna’s DCF results as filed. In Column
4 B, I show the results using Mr. Mac Mathuna’s data and proxy companies but correct his
5 DCF calculations with regard to the adjusted dividend yield and updating the GDP
6 growth estimate. In Column C, I show the results using the calculations and data from
7 Column B, but add Avangrid, Dominion, and Sempra to the proxy group and remove
8 Fortis (which has no I/B/E/S growth estimate) from the proxy group. In Column D, I
9 show the results using the same proxy group as in Column C, but also using the I/B/E/S
10 long-term growth estimates as the growth estimates in the DCF model. The DCF studies
11 underlying the results shown in TABLE 1 are provided in Schedule 1.
12 Q. Do you agree with Mr. Mac Mathuna’s reliance on the median DCF result rather
13 than the average DCF result?
14 A. No. I disagree because the median result is generally an unreliable estimate of the central
15 tendency of a range of results.

Exhibit No. SC-1
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1 Q. How is the “median” of a distribution of results defined?
2 A. The median value is the middle number in a distribution of numbers arranged in
3 numerical order; that is, there are an equal number of values above and below the median
4 value. For example, if the application of the DCF model to a proxy group of five
5 companies yields results equal to seven percent, eight percent, ten percent, twelve
6 percent, and thirteen percent, the median result is the value of ten percent, because there
7 are two results below ten percent and two results above ten percent.
8 Q. Can you illustrate how the median DCF result may be an unreliable estimate of a
9 company’s cost of equity?
10 A Yes. Suppose that at March 2016, the DCF results for a proxy group of five companies
11 are seven percent, eight percent, ten percent, twelve percent, and thirteen percent. Thus,
12 the median result for this distribution of results is ten percent.
13 Now suppose that in March 2017, the DCF results for four of these five proxy
14 companies have increased, so that the DCF results are now equal to eight percent, nine
15 percent, ten percent, thirteen percent, and fourteen percent. Most observers would agree
16 that the new DCF analysis indicates that the company’s cost of equity has increased
17 because four of the results have increased, and only one result is unchanged. However,
18 the use of the median result (ten percent) leads to the unreasonable conclusion that the
19 cost of equity is unchanged, while the average result provides the correct conclusion that
20 the cost of equity has increased (see TABLE 2 below).
21 Let us now assume that in March 2018 the DCF results for four of the five proxy
22 companies have decreased, and are equal to six percent, seven percent, ten percent,
23 eleven percent, and twelve percent. Most observers now would believe that the
Exhibit No. SC-1
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1 company’s indicated cost of equity has declined, because four of the individual DCF
2 results are lower, and one result has stayed the same. However, use of the median result
3 (ten percent) again leads to the unreasonable conclusion that the cost of equity remains
4 unchanged in all periods.
5 TABLE 2
6 ILLUSTRATION OF UNRELIABILITY OF MEDIAN RESULT
YEAR RANGE OF RESULTS MEDIAN AVERAGE
2016 7% 8% 10% 12% 13% 10% 10.0%
2017 8% 9% 10% 13% 14% 10% 11.0%
2018 6% 7% 10% 11% 12% 10% 9.0%
7
8 Q. Please explain why the median DCF result for a proxy group of companies is likely
9 to be an unreliable indicator of the cost of equity.
10 A. The median result is generally an unreliable indicator of the cost of equity because it
11 considers only the rank order of the results and not the values of any results other than
12 those of the one or two middle companies. In the case of Mr. Mac Mathuna’s proxy
13 electric utility group, Mr. Mac Mathuna’s group consists of 13 electric utilities (after his
14 elimination of a low outlier result for one company), but Mr. Mac Mathuna’s reliance on
15 the median result effectively eliminates 12 of his 13 results. Mr. Mac Mathuna’s method
16 relies exclusively on the DCF result for just a single company, Duke Energy’s result
17 equal to 8.65 percent. Thus, Mr. Mac Mathuna’s method excludes consideration of
18 market data for 12 companies, and includes market data for just one company.
19 Q. How does Mr. Mac Mathuna attempt to justify his use of the median DCF result
20 rather than the average DCF result?
21 A. Mr. Mac Mathuna attempts to justify his use of the median DCF result rather than the
22 average DCF result, stating:

Exhibit No. SC-1
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1 It is not the extreme ROEs from the proxy group that are representative of
2 the return required by investors for the average amount of risk represented
3 by the group, but rather the ROE around which the DCF results cluster.
4 The value that best represents this clustering of ROEs is the median,
5 which is determined by identifying the ROE value for which there is an
6 equal number of higher and lower calculated proxy group ROEs. It would
7 be incorrect to suggest that each and every particular point within the
8 proxy company ROE range is “just and reasonable” for current application
9 in the Southern Companies’ transmission formula rate simply because it
10 happens to fall within the range of the DCF results – including extreme
11 high and low points – calculated for the proxy group companies. (Mac
12 Mathuna at 25 – 26)
13 Q. Do you agree that the median result is the “value that best represents” the “ROE
14 around which the DCF results cluster”?
15 A. No. The problem with the median is that the median ignores all results other than the one
16 or two results in the center of the distribution. In short, the median does not consider the
17 values associated with any result other than the result in the center in the case of an odd
18 number in the distribution, or the two results in the center in the case of an even number
19 in the distribution. Statisticians would generally agree that the average or mean result, not
20 the median result, best represents the value around which the DCF results cluster.
C. MR. MAC MATHUNA’S FAILURE TO CONSIDER ALTERNATIVE

COST OF EQUITY METHODS
21 Q. Does Mr. Mac Mathuna consider the results of alternative cost of equity methods,
22 such as the CAPM, risk premium, and comparable earnings, in arriving at his
23 recommended 8.65 percent ROE for Southern Companies?
24 A. No.
25 Q. How does Mr. Mac Mathuna justify his sole reliance on the DCF method to estimate
26 Southern Companies’ cost of equity?
27 A. Mr. Mac Mathuna justifies his procedure on the basis of his claim that he is following the
28 Commission’s guidance:
Exhibit No. SC-1
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1 I followed the guidance provided by the Commission for determining the

2 allowable ROE to be used in setting wholesale electric rates. …This is the
3 methodology long used for natural gas and oil pipelines, and was set forth
4 for future application to electric utilities in the Commission’s Opinion
5 Nos. 531, 531-15 A, and 531-B. (Mac Mathuna at 14)
6 Q. Have you read Opinion No. 531?
7 A. Yes.
8 Q. Did the Commission rely solely on the results of the DCF model to set the allowed
9 ROE for the transmission services of the New England Transmission Owners
10 (“NETOs”) in Opinion No. 531?
11 A. No. In addition to reviewing the results of applying the DCF model, the Commission also
12 reviewed the results of applications of CAPM, risk premium, and comparable earnings
13 methods.
14 Q. How did the Commission use the results of applications of other cost of equity
15 methods, such as the CAPM, risk premium, and comparable earnings, in reaching
16 its decision in Opinion No. 531?
17 A. The Commission used the results of applications of alternative cost of equity methods to
18 justify its conclusion that the transmission utilities’ cost of equity was significantly above
19 the midpoint of the DCF range of results. Specifically, the Commission used the results
20 of alternative methods to justify its decision to set the allowed ROE equal to the midpoint
21 of the upper half of the DCF range of results, 10.57 percent, at the time of its decision.
22 Q. Have you performed cost of equity analyses using other models, such as CAPM, risk
23 premium, and comparable earnings, to estimate Southern Companies’ cost of
24 equity?
25 A. Yes. As I describe below in Section IV., I have performed cost of equity analyses using
26 models in addition to the DCF, including applications of risk premium, CAPM, and
Exhibit No. SC-1
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1 comparable earnings analyses. The range of all my cost of equity model results is
2 9.8 percent to 11.7 percent, and the 10.6 percent average result is nearly 200 basis points
3 higher than Mr. Mac Mathuna’s recommended 8.65 percent ROE.
4 Q. Do you agree with Mr. Mac Mathuna’s decision to rely solely on the result of his
5 DCF analysis to determine his recommended 8.65 percent allowed return on equity
6 for Southern Companies?
7 A. No. Financial economists generally agree that an analyst should use several methods to
8 estimate the cost of equity because all cost of equity methods require estimates of
9 variables, such as investors’ growth expectations, future interest rates, and investors’
10 views of risk, that can only be measured with uncertainty. Financial economists take into
11 account the uncertainty in all cost of equity estimates by considering the range of results
12 from applying several cost of equity methods to estimate the target company’s cost of
13 equity. Reviewing the results of several cost of equity methods can serve as a check on
14 the reasonableness of the results from a single method. I also note that state public utility
15 commissions generally review the results of several cost of equity methods to estimate a
16 regulated company’s cost of equity in state rate proceedings.
D. EVIDENCE ON AVERAGE STATE COMMISSION ALLOWED

RETURNS ON EQUITY
17 Q. Does Mr. Mac Mathuna express an opinion regarding the relevance of ROEs
18 allowed by state commissions in determining the allowed ROE for FERC-regulated
20 A. Yes. Mr. Mac Mathuna argues that evidence on ROEs allowed by state commissions are
21 irrelevant for the purpose of determining the appropriate ROE for FERC-regulated
Exhibit No. SC-1
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1 transmission service because, in his opinion, FERC-regulated transmission services are
2 less risky than state-regulated generation and distribution services. (Mac Mathuna at 51)
3 Q. Does the Commission support Mr. Mac Mathuna’s opinion that state utility
4 commission decisions are irrelevant because electric transmission services are less
5 risky than electric generation and distribution services?
6 A. No. Contrary to Mr. Mac Mathuna’s opinion, the Commission has expressly stated its
7 view that electric transmission service is more risky than electric distribution services:
8 The financial and business risks faced by investors in companies whose

9 focus is electric transmission infrastructure differ in some key respects
10 when compared to other electric infrastructure investment, particularly
11 state-regulated electric distribution. For example, investors providing
12 capital for electric transmission infrastructure face risks including the
13 following: long delays in transmission siting, greater project complexity,
14 environmental impact proceedings, requiring regulatory approval from
15 multiple jurisdictions overseeing permits and rights of way, liquidity risk
16 from financing projects that are large relative to the size of a balance
17 sheet, and shorter investment history. We find that these factors increase
18 the NETOs’ risk relative to the state-regulated distribution companies.
19 However, as noted above, the record in this proceeding indicates that the
20 vast majority of state commission-authorized ROEs reflected on this
21 record range from 9.8 percent to 10.74 percent, and our DCF analysis in
22 this proceeding produces a midpoint of 9.39 percent, we find that the
23 record evidence concerning state commission authorized ROEs supports
24 setting the NETOs’ base ROE above the midpoint. (Opinion No. 531 at P
25 149)
26 Q. Do allowed ROEs found by state utility commissions support Mr. Mac Mathuna’s
27 recommended 8.65 percent cost of equity?
28 A. No. As reported by S&P Global Market Intelligence on January 30, 2018, RRA
29 Regulatory Focus, Major Rate Case Decisions 2017, the average allowed ROE for state-
30 regulated electric utility service during 2017 is 9.74 percent. (RRA Regulatory Focus,
31 Major Rate Case Decisions 217, S&P Global, January 30, 2018, p. 5.)
Exhibit No. SC-1
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E. MR. MAC MATHUNA’S INCORRECT ASSESSMENT THAT INTEREST

RATES ARE EXPECTED TO REMAIN AT CURRENT LEVELS
1 Q. Does Mr. Mac Mathuna attempt to provide evidence that interest rates are not
2 expected to increase from current levels?
3 A. Yes. Mr. Mac Mathuna claims that: (1) the interest rate on 10-year Treasury bonds has
4 “hovered around the 2% mark for six-plus years;” (2) there is “a great deal of evidence
5 demonstrating that prevailing economic and capital market conditions are not
6 anomalous;” and (3) ten-year Treasury bond yields have “continued to remain low, even
7 as the Federal Reserve has begun a gradual process of increasing the Federal Funds target
8 rate.” (Mac Mathuna at 37 – 39)
9 Q. Do you agree with Mr. Mac Mathuna’s claim that 10-year Treasury bonds have
10 “hovered around the 2% mark for six-plus years”?
11 A. No. The average yield on 10-year Treasury bonds for the most recent six months, from
12 November 2017 through April 2018, is 2.65 percent. The average yield on 10-year
13 Treasury bonds for the first four months of 2018 through April is 2.8 percent.
14 Q. Why did the Commission in Opinion No. 531 choose a result in the upper half of the
15 range of DCF results?
16 A. The Commission chose a result in the upper half of the range of DCF results because:
17 (1) in its opinion, current interest rates were anomalous; and (2) its application of
18 alternative cost of equity methods, such as the CAPM, risk premium, and comparable
19 earnings methods, produced higher results than its application of its DCF model.
Exhibit No. SC-1
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1 Q. Is the interest rate on 10-year Treasury bonds expected to increase from the levels
2 experienced in 2017?
3 A. Yes. According to Value Line (June 1, 2018), the interest rate on 10-year Treasury bonds
4 was 2.3 percent in 2017, and is expected to increase to 3.1 percent in 2018, 3.5 percent in
5 2019, 3.7 percent in 2020, and 3.6 percent in 2021.
6 Q. What was the average interest rate on AAA-rated corporate bonds in 2017?
7 A. The average interest rate on AAA-rated corporate bonds in 2017 was 3.9 percent (Value
8 Line, June 1, 2018).
9 Q. What are Value Line’s forecasted interest rates on AAA-rated corporate bonds
10 from 2017 to 2022?
11 A. Value Line forecasts that the interest rate on AAA-rated corporate bonds will increase
12 from 3.9 percent in 2017 to 4.4 percent in 2018, 5 percent in 2019- 2020, and 4.8 percent
13 in 2022 (Value Line, June 1, 2018).
14 Q. Why are interest rates forecasted to increase over the next several years?
15 A. Investors are expecting that interest rates will increase because they recognize that
16 interest rates are heavily influenced by Federal Reserve monetary policy, and the Federal
17 Reserve’s monetary policy has become significantly tighter in recent months as the
18 Federal Reserve has begun to unwind its unprecedented efforts to stimulate the economy
19 through enormous increases in the money supply. In March 2018, the Federal Reserve
20 raised its benchmark interest rate for the sixth increase since 2015, forecasted two
21 additional rate increases in 2018, and forecasted three additional rate hikes in 2019.
22 Economists now project that the Federal Reserve will raise the federal funds rate four
23 times in 2018 (see, for example, “Economists See Fed Raising Rates in June, Then
Exhibit No. SC-1
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1 September, Forecasters surveyed by WSJ increasingly expect four Federal Reserve rate
2 increases in 2018” The Wall Street Journal, May 10, 2018). As investors had expected,
3 the Federal Reserve announced on June 13, 2018 that it was increasing the federal funds
4 rate, and the Federal Reserve signaled that it will likely raise rates at least twice more
5 during 2018.
6 Q. Are there other reasons why interest rates are expected to increase over the next
7 several years?
8 A. Yes. First, the dramatic changes in the federal tax code enacted by the Tax Cuts and Jobs
9 Act of 2017 has caused many United States companies to repatriate cash that had
10 previously been held in foreign countries and to invest repatriated dollars in domestic
11 business opportunities. The additional investment is stimulating the economy at a time
12 when the economy is already at full employment. Second, the Federal Reserve balance
13 sheet currently contains nearly three trillion dollars in Treasury securities and 1 trillion
14 dollars in mortgage-backed bonds (well above its pre-2008 peak of $925 billion) creating
15 an unprecedented market intervention that has been exacerbated by both the European
16 Central Bank and the Bank of Japan, but the Federal Reserve considers the unprecedented
17 balances in held securities to be temporary and, as noted above, has begun reducing the
18 balances of securities held by the Federal Reserve. As the Federal Reserve continues to
19 reduce the balances of Treasury securities, it is reasonable to expect that interest rates
20 will continue to rise. Third, the current, historically low unemployment rate, 3.8 percent,
21 is likely to create further inflationary pressure on the economy. (As reported by The Wall
22 Street Journal, the unemployment rate previously has been this low only two times
23 during the last 50 years, in the late 1960s and one month in 2000 (“The Fed’s Biggest
Exhibit No. SC-1
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1 Dilemma: Is the Booming Job Market a Problem?” Nick Timiraos, The Wall Street
2 Journal, June 11, 2018.) Fourth, the consumer price index rose 2.8 percent from the prior
3 year, the highest year-over-year increase since February 2012, when inflation was
4 2.9 percent (see “Consumer Prices Post Largest Annual Growth in More Than Six Years,
5 Rising gas and rent prices are helping drive inflation higher,” Sharon Nunn, The Wall
6 Street Journal, June 12, 2018). Higher inflation expectations translate into higher
7 expected long-term interest rates to accommodate the loss of value to investors created by
8 inflation.
9 Q. Mr. Mac Mathuna attempts to support his opinion that interest rates are likely to
10 remain at their current level for the foreseeable future by citing opinions of several
11 economists, including Dr. Bernanke, Dr. Summers, Dr. Krugman, and Dr. Brainard
12 (Mac Mathuna at pp. 43 - 44). Do the opinions he cites support Mr. Mac Mathuna’s
13 view that interest rates are likely to remain at current levels for the foreseeable
14 future?
15 A. No. Three of the statements cited by Mr. Mac Mathuna, those of Dr. Bernanke, Dr.
16 Summers, and Dr. Krugman, were published in mid-2015, at a time when economic
17 conditions were significantly less robust than they are at present, and the level of
18 unemployment was higher than at present. As noted above, at March 2018, the Federal
19 Reserve had already raised its benchmark interest rate six times since 2015, and has just
20 raised the rate again on June 13, 2018. The remaining statement, the October 12, 2017
21 quotation from Dr. Brainard, simply notes that the “neutral interest rate…appears to be
22 much lower than it was in the decades” prior to 2008 (Mac Mathuna at 44). None of the
23 statements quoted by Mr. Mac Mathuna relate to forecasted interest rates or whether
Exhibit No. SC-1
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1 market conditions are indeed changing from those previously recognized by the
2 Commission as anomalous, which made the low interest rates favored by Mr. Mac
3 Mathuna unreliable.
4 Q. What conclusion does Mr. Mac Mathuna reach from his assessment that interest
5 rates are likely to remain at current levels for the foreseeable future?
6 A. Mr. Mac Mathuna concludes that the Commission should formulaically set Southern
7 Companies’ allowed ROE equal to the median result from his application of the FERC
8 DCF model and ignore both the range of the DCF results and the results of other cost of
9 equity methods, such as the CAPM, risk premium, and comparable earnings.
10 Q. Do you agree with Mr. Mac Mathuna’s recommendation to formulaically set the
11 allowed ROE equal to the median result of his application of the FERC DCF model?
12 A. No. As I discuss above, there is wide agreement among economists and practitioners that
13 because the cost of equity can only be estimated with uncertainty, it is best to: (1) use
14 several economic models to estimate the cost of equity; and (2) examine the range of
15 results obtained from each method. As I describe below, the results from my application
16 of the DCF model and other cost of equity models demonstrate that Mr. Mac Mathuna’s
17 8.65 percent is far below a reasonable estimate of Southern Companies’ cost of equity,
18 and, consequently, fails to satisfy the Hope and Bluefield standards for a fair rate of
19 return.
IV. VANDER WEIDE COST OF EQUITY METHODS AND RESULTS
20 Q. In the previous sections of your testimony, you rebut Mr. Mac Mathuna’s
21 8.65 percent ROE recommendation, which was based on his application of the
22 FERC two-stage DCF method. Have you also evaluated Mr. Mac Mathuna’s ROE
Exhibit No. SC-1
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1 recommendation for Southern Companies by examining the results of alternative
2 cost of equity methods?
3 A. Yes. I also evaluate Mr. Mac Mathuna’s 8.65 percent ROE recommendation for Southern
4 Companies by examining the results of alternative cost of equity methods, including a
5 single-stage DCF model, the risk premium method, CAPM, and the Comparable Earnings
6 method.
7 Q. Did the Commission also consider the results of alternative cost of equity methods
8 and information on allowed ROEs in state commission rate decisions to determine
9 the New England electric utilities’ allowed ROE in Opinion No. 531?
10 A. Yes.
11 Q. What did the Commission conclude based on its consideration of alternative cost of
12 equity methods and its examination of allowed ROEs in state commission rate
13 decisions?
14 A. The Commission concluded that the midpoint of the range of DCF results from the
15 application of its two-stage DCF method does not satisfy the capital attraction standard of
16 the Hope and Bluefield decisions. As a result, the Commission determined that the
17 allowed ROE should be set above the midpoint of the range of results.
18 Q. Please describe the additional cost of equity evidence you examine to determine
19 Southern Companies’ cost of equity in this proceeding.
20 A. I present the results of my application of: (1) the constant growth DCF model; (2) the risk
21 premium method; (3) the CAPM; and (4) the comparable earnings method.
22 Q. Are you aware that the United States Court of Appeals for the District of Columbia
23 Circuit vacated Opinion No. 531 in an order dated April 14, 2017, and remanded
Exhibit No. SC-1
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1 the case to the Commission “for proceedings consistent with this opinion”? (Emera
2 Maine v. FERC, 854 F.3d 9 (D.C. Cir. 2017) (“Emera Maine”))
3 A. Yes. However, I am also aware that the Court of Appeals does not require that FERC
4 establish a new allowed ROE based on the median result of the two-stage DCF method.
5 Rather, the Court simply concludes that “…FERC failed to provide any reasoned basis
6 for selecting 10.57 percent as the new base ROE.” (Emera Maine at p. 32) Presumably,
7 the FERC may now consider anew what evidence may be used to establish a regulated
8 entity’s ROE consistent with the Hope and Bluefield fair rate of return standards.
A. DISCOUNTED CASH FLOW METHOD
9 Q. In TABLE 1 above, you show the results from applying the Commission’s two-stage
10 DCF method. Have you also estimated Southern Companies’ cost of equity using an
11 alternative DCF methodology?
12 A. Yes.
13 Q. How does your DCF method differ from the Commission’s methodology described
14 in Opinion No. 531?
15 A. My approach differs from that employed by the Commission in several ways. First, I
16 recommend using a quarterly DCF model rather than an annual DCF model. Second, I
17 rely on the I/B/E/S analysts’ earnings growth estimates as the estimate of growth in the
18 DCF model, rather than on a combination of the I/B/E/S and long-term GDP growth used
19 by the Commission. Third, I recommend the use of the average of the high and low stock
20 prices for the most recent three-month period rather than the most recent six-month
21 period. Fourth, I recommend including an allowance for flotation costs.

Exhibit No. SC-1
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1 Q. Please explain why you recommend use of a quarterly DCF model.
2 A. I recommend the use of a quarterly DCF model because it is the only model that produces
3 correct estimates of a firm’s cost of equity capital when the firm pays quarterly
4 dividends, whereas the annual DCF model of stock valuation produces correct estimates
5 of a firm’s cost of equity capital only when the firm pays dividends once a year. Because
6 most U.S. industrial and utility companies pay dividends quarterly, the annual DCF
7 model produces downwardly-biased estimates of the cost of equity. Investors can expect
8 to earn a higher annual effective return on an investment in a firm that pays quarterly
9 dividends than in one which pays the same amount of dollar dividends once at the end of
10 each year. An analysis of the implications of the quarterly payment of dividends on the
11 DCF model is provided in Appendix 1.
12 Q. Does the Commission’s DCF approach correctly recognize that dividends are paid
13 quarterly?
14 A. No. In multiplying the current dividend by one-half of the expected future growth rate,
15 the Commission states that it is recognizing that dividends are paid quarterly (see, for
16 example, Opinion No. 531 at P 15). However, the Commission’s approach fails to
17 recognize the time value of money associated with future quarterly dividend payments.
18 Thus, the Commission’s approach fails to discount the expected future dividends over the
19 next year for the time value of money. My quarterly DCF model corrects this deficiency.
20 Q. Please describe the quarterly DCF model you use.
21 A. The quarterly DCF model I use is described on Schedule 2 and in Appendix 2. The
22 quarterly DCF equation shows that the cost of equity is: the sum of the future expected
23 dividend yield and the growth rate, where the dividend in the dividend yield is the
Exhibit No. SC-1
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1 equivalent future value of the four quarterly dividends at the end of the year, and the
2 growth rate is the expected growth in dividends or EPS.
3 Q. How do you estimate the quarterly dividend payments in your quarterly DCF
4 model?
5 A. The quarterly DCF model requires an estimate of the dividends, d1, d2, d3, and d4,
6 investors expect to receive over the next four quarters. I estimate the next four quarterly
7 dividends by multiplying the previous four quarterly dividends by (1 + g), where g is the
8 expected growth rate.
9 Q. Can you illustrate how you estimate the next four quarterly dividends with data for
10 a specific company?
11 A. Yes. In the case of ALLETE, the first electric utility company shown in Schedule 3, the
12 last four quarterly dividends are equal to 0.535, 0.535, 0.535, and 0.560, and the growth
13 rate is 6.0 percent. Thus dividends, d1, d2, d3, and d4 are equal to 0.567 [0.535 x (1 + 0.06)
14 = 0.567] and 0.594 [0.560 x (1 + 0.06) = 0.594]. (As noted previously, the logic
15 underlying this procedure is described in Appendix 2.)
16 Q. How do you estimate the growth component of the quarterly DCF model?
17 A. I use the analysts’ estimates of future EPS growth reported by I/B/E/S Thomson Reuters.
18 Q. What are the analysts’ estimates of future EPS growth?
19 A. As part of their research, financial analysts working at Wall Street firms periodically
20 estimate EPS growth for each firm they follow. The EPS forecasts for each firm are then
21 published. Investors who are contemplating purchasing or selling shares in individual
22 companies review the forecasts. These estimates represent three to five-year forecasts of
23 EPS growth.
Exhibit No. SC-1
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1 Q. What is I/B/E/S?
2 A. I/B/E/S is a division of Thomson Reuters that reports analysts’ EPS growth forecasts for
3 a broad group of companies. The forecasts are expressed in terms of a mean forecast and
4 a standard deviation of forecast for each firm. Investors use the mean forecast as an
5 estimate of future firm performance.
6 Q. Why do you use the I/B/E/S growth estimates?
7 A. The I/B/E/S growth rates: (1) are widely circulated in the financial community,
8 (2) include the projections of reputable financial analysts who develop estimates of future
9 EPS growth, (3) are reported on a timely basis to investors, and (4) are widely used by
10 institutional and other investors.
11 Q. Why do you rely on analysts’ projections of future EPS growth in estimating the
12 investors’ expected growth rate rather than looking at past historical growth rates?
13 A. I rely on analysts’ projections of future EPS growth because there is considerable
14 empirical evidence that investors use analysts’ forecasts to estimate future earnings
15 growth.
Exhibit No. SC-1
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1 Q. Have you performed any studies concerning the use of analysts’ forecasts as an
2 estimate of investors’ expected growth rate, g?
3 A. Yes. I prepared a study with Willard T. Carleton, Professor Emeritus of Finance at the
4 University of Arizona, which is described in a paper entitled “Investor Growth
5 Expectations and Stock Prices: the Analysts versus History,” published in the Spring
6 1988 edition of The Journal of Portfolio Management.
7 Q. Please summarize the results of your study.
8 A. First, we performed a correlation analysis to identify the historically-oriented growth
9 rates which best described a firm’s stock price. Then, we did a regression study
10 comparing the historical growth rates with the average I/B/E/S analysts’ forecasts. In
11 every case, the regression equations containing the average of analysts’ forecasts
12 statistically outperformed the regression equations containing the historical growth
13 estimates. These results are consistent with those found by Cragg and Malkiel, the early
14 major research in this area (John G. Cragg and Burton G. Malkiel, Expectations and the
15 Structure of Share Prices, University of Chicago Press, 1982). These results are also
16 consistent with the hypothesis that investors use analysts’ forecasts, rather than
17 historically-oriented or sustainable growth calculations, in making stock buy and sell
18 decisions. They provide overwhelming evidence that the analysts’ forecasts of future
19 growth are superior to historically-oriented or sustainable growth measures in predicting
20 a firm’s stock price. Researchers at State Street Financial Advisors updated my study in
21 2004, and their results continue to confirm that analysts’ growth forecasts are superior to
22 historically-oriented growth measures in predicting a firm’s stock price.
23
Exhibit No. SC-1
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1 Q. How does the Commission estimate the growth component of the DCF model?
2 A. The Commission estimates the growth component in its DCF model by: (1) obtaining
3 data on the I/B/E/S long-term growth estimate for each proxy company; (2) obtaining
4 data on long-term GDP growth forecasts from the Energy Information Administration
5 (“EIA”), the Social Security Administration, and Global Insight; and (3) calculating a
6 weighted average of the I/B/E/S and GDP growth forecasts, with the I/B/E/S growth
7 forecast having a weight of two-thirds and the long-term GDP growth forecast a weight
8 of one-third.
9 Q. Do you agree with the Commission’s use of GDP growth forecasts in the DCF
10 model?
11 A. No. The DCF model requires the growth forecasts of investors, and my studies indicate
12 that the I/B/E/S growth forecasts reflect the long-run growth expectations of investors.
13 Thus, the I/B/E/S growth forecasts are the best estimate of future growth for use in the
14 DCF model.
15 Q. What price do you use in your DCF model?
16 A. I use a simple average of the monthly high and low stock prices for each firm for the
17 three-month period ending April 2018. These high and low stock prices were obtained
18 from Thomson Reuters.
19 Q. Why do you use the three-month average stock price in applying the DCF method?
20 A. I use the three-month average stock price in applying the DCF method because stock
21 prices fluctuate daily, while financial analysts’ forecasts for a given company are
22 generally changed less frequently, often on a quarterly basis. Thus, to match the stock
Exhibit No. SC-1
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1 price with an earnings forecast, it is appropriate to average stock prices over a three-
2 month period.
3 Q. Do you include an allowance for flotation costs in your DCF analysis?
4 A. Yes. I include a five percent allowance for flotation costs in my DCF calculations.
5 Q. Please explain your inclusion of flotation costs.
6 A. All firms that have sold securities in the capital markets have incurred some level of
7 flotation costs, including underwriters’ commissions, legal fees, printing expense, etc.
8 These costs are withheld from the proceeds of the stock sale or are paid separately, and
9 must be recovered over the life of the equity issue. Costs vary depending upon the size of
10 the issue, the type of registration method used and other factors, but in general these costs
11 range between three percent and five percent of the proceeds from the issue (see Lee,
12 Inmoo, Scott Lochhead, Jay Ritter, and Quanshui Zhao, “The Costs of Raising Capital,”
13 The Journal of Financial Research, Vol. XIX No 1 (Spring 1996), 59-74, and
14 Clifford W. Smith, “Alternative Methods for Raising Capital,” Journal of Financial
15 Economics 5 (1977) 273-307). In addition to these costs, for large equity issues (in
16 relation to outstanding equity shares), there is likely to be a decline in price associated
17 with the sale of shares to the public. On average, the decline due to market pressure has
18 been estimated at two percent to three percent (see Richard H. Pettway, “The Effects of
19 New Equity Sales upon Utility Share Prices,” Public Utilities Fortnightly, May 10, 1984,
20 35—39). Thus, the total flotation cost, including both issuance expense and market
21 pressure, could range anywhere from five percent to eight percent of the proceeds of an
22 equity issue. I believe a combined five percent allowance for flotation costs is a
23 conservative estimate that should be used in applying the DCF model in these
Exhibit No. SC-1
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1 proceedings. A complete explanation of the need for flotation costs is contained in
2 Appendix 3.
3 Q. How do you select your electric utility company group?
4 A. I select all the electric utilities followed by Value Line that: (1) paid dividends during
5 every quarter of the last two years; (2) did not decrease dividends during any quarter of
6 the past two years; (3) have a positive I/B/E/S long-term growth forecast; and (4) are not
7 the subject of a merger offer that has not been completed. In addition, each of the utilities
8 included in my comparable group has an investment grade bond rating and a Value Line
9 Safety Rank of 1, 2, or 3.
10 Q. Why do you eliminate companies that have either decreased or eliminated their
11 dividend in the past two years?
12 A. The DCF model requires the assumption that dividends will grow at a constant rate into
13 the indefinite future. If a company has either decreased or eliminated its dividend in
14 recent years, an assumption that the company’s dividend will grow at the same rate into
15 the indefinite future is questionable.
16 Q. Why do you eliminate companies that are the subject of a merger offer that has not
17 been completed?
18 A. A merger announcement can sometimes have a significant impact on a company’s stock
19 price because of anticipated merger-related cost savings and new market opportunities.
20 Analysts’ growth forecasts, on the other hand, are necessarily related to companies as
21 they currently exist, and do not reflect investors’ views of the potential cost savings and
22 new market opportunities associated with mergers. The use of a stock price that includes
23 the value of potential mergers in conjunction with growth forecasts that do not include
Exhibit No. SC-1
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1 the growth enhancing prospects of potential mergers produces DCF results that tend to
2 distort a company’s cost of equity.
3 Q. Please summarize the results of your application of the DCF model to your electric
4 utility group.
5 A. As shown on Schedule 2, I obtain an average DCF result of 10.1 percent for my electric
6 utility group. I note that the midpoint of the upper half of the range of DCF results is
7 13.1 percent.
B. RISK PREMIUM METHOD
8 Q. Please describe the risk premium method of estimating the cost of equity.
9 A. The risk premium method is based on the principle that investors expect to earn a return
10 on an equity investment that reflects a “premium” over the interest rate they expect to
11 earn on an investment in bonds. This equity risk premium compensates equity investors
12 for the additional risk they bear in making equity investments versus bond investments.
13 Q. Does the risk premium approach specify what debt instrument should be used to
14 estimate the interest rate component in the methodology?
15 A. No. The risk premium approach can be implemented using virtually any debt instrument.
16 However, the risk premium approach does require that the debt instrument used to
17 estimate the risk premium be the same as the debt instrument used to calculate the
18 interest rate component of the risk premium approach. For example, if the risk premium
19 on equity is calculated by comparing the returns on stocks to the interest rate on A-rated
20 utility bonds, then the interest rate on A-rated utility bonds must be used to estimate the
21 interest rate component of the risk premium approach.

Exhibit No. SC-1
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1 Q. Does the risk premium approach require that the same companies be used to
2 estimate the stock return as are used to estimate the bond return?
3 A. No. For example, many analysts apply the risk premium approach by comparing the
4 return on a portfolio of stocks to the income return on Treasury securities such as long-
5 term Treasury bonds. Clearly, in this widely accepted application of the risk premium
6 approach, the same companies are not used to estimate the stock return as are used to
7 estimate the bond return, since the United States government is not a company.
8 Q. How do you measure the required risk premium on an equity investment in your
9 group of publicly-traded electric utilities?
10 A. I use two methods to estimate the required risk premium on an equity investment in
11 electric utilities. The first is called the ex ante risk premium method and the second is
12 called the ex post risk premium method.
1. Ex Ante Risk Premium Method
13 Q. Please describe your ex ante risk premium approach for measuring the required
14 risk premium on an equity investment in electric utilities.
15 A. My ex ante risk premium method is based on studies of the DCF expected return on a
16 group of electric utilities compared to the interest rate on Moody’s A-rated utility bonds.
17 Specifically, for each month in my study period, I calculate the risk premium using the
18 equation,
19 RPPROXY = DCFPROXY – IA
20 where:
21 RPPROXY = the required risk premium on an equity investment in the proxy

22 group of companies,
23 DCFPROXY = average DCF estimated cost of equity on a portfolio of proxy
24 companies; and
25 IA = the yield to maturity on an investment in A-rated utility bonds.
Exhibit No. SC-1
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1 I then perform a regression analysis to determine if there is a relationship between
2 the calculated risk premium and interest rates. Finally, I use the results of the regression
3 analysis to estimate the investors’ required risk premium. To estimate the cost of equity, I
4 then add the required risk premium to the forecasted interest rate on A-rated utility bonds.
5 As noted above, one could use the yield to maturity on other debt investments to measure
6 the interest rate component of the risk premium approach as long as one uses the yield on
7 the same debt investment to measure the expected risk premium component of the risk
8 premium approach. I choose to use the yield on A-rated utility bonds because it is a
9 frequently-used benchmark for utility bond yields. A detailed description of my ex ante
10 risk premium studies is contained in Appendix 4, and the underlying DCF results and
11 interest rates are displayed in Schedule 3.
12 Q. What cost of equity do you obtain from your ex ante risk premium method?
13 A. As discussed above, to estimate the cost of equity using the ex ante risk premium method,
14 one may add the estimated risk premium over the yield on A-rated utility bonds to the
15 forecasted yield to maturity on A-rated utility bonds. I obtain the expected yield to
16 maturity on A-rated utility bonds, 6.16 percent, by averaging the most recent forecast
17 data from Value Line and the EIA. For my electric utility sample, my analyses produce
18 an estimated risk premium over the yield on A-rated utility bonds equal to 4.67 percent.
19 Adding an estimated risk premium of 4.67 percent to the expected 6.16 percent yield to
20 maturity on A-rated utility bonds produces a cost of equity estimate of 10.8 percent using
21 the ex ante risk premium method.

Exhibit No. SC-1
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1 Q. How do you obtain the expected yield on A-rated utility bonds?
2 A. As noted above, I obtain the expected yield to maturity on A-rated utility bonds,
3 6.16 percent, by averaging forecast data from Value Line and the EIA. Value Line
4 Selection & Opinion (March 2, 2018) projects a Aaa-rated Corporate bond yield equal to
5 5.2 percent. Value Line Selection & Opinion (March 2, 2018) projects a AAA-rated
6 Corporate bond yield equal to 5.7 percent. The average spread between A-rated utility
7 bonds and Aaa-rated Corporate bonds is 32 basis points (A-rated utility, 4.17 percent, less
8 Aaa-rated Corporate, 3.85 percent, equals 32 basis points). Adding 32 basis points to the
9 5.7 percent Value Line Aaa Corporate bond forecast equals a forecast yield of 6.0 percent
10 for the A-rated utility bonds. The EIA forecasts an AA-rated utility bond yield equal to
11 6.11 percent. The spread between AA-rated utility and A-rated utility bonds is 18 basis
12 points (4.17 percent less 3.99 percent). Adding 18 basis points to EIA’s 6.11 percent AA-
13 utility bond yield forecast equals a forecast yield for A-rated utility bonds equal to
14 6.3 percent. The average of the forecasts (6.0 percent using Value Line data and
15 6.3 percent using EIA data) is 6.2 percent.
16 Q. Why do you use a forecasted yield to maturity on A-rated utility bonds rather than
17 a current yield to maturity?
18 A. I use a forecasted yield to maturity on A-rated utility bonds rather than a current yield to
19 maturity because the fair rate of return standard requires that a company have an
20 opportunity to earn its required return on its investment during the forward-looking
21 period during which rates will be in effect. Economists project that future interest rates
22 will be higher than current interest rates as the Federal Reserve allows interest rates to
23 rise in order to prevent inflation. Thus, the use of forecasted interest rates is consistent
Exhibit No. SC-1
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1 with the fair rate of return standard, whereas the use of current interest rates at this time is
2 not.
2. Ex Post Risk Premium Method
3 Q. Please describe your ex post risk premium method for measuring the required risk
4 premium on an equity investment in electric utilities.
5 A. I first perform a study of the comparable returns received by stock and bond investors
6 over the 81 years of my study. I estimate the returns on stock and bond portfolios, using
7 stock price and dividend yield data on the S&P 500 and bond yield data on Moody’s A-
8 rated Utility Bonds. My study consists of making an investment of one dollar in the S&P
9 500 and Moody’s A-rated utility bonds at the beginning of 1937, and reinvesting the
10 principal plus return each year to 2018. The return associated with each stock portfolio is
11 the sum of the annual dividend yield and capital gain (or loss) which accrued to this
12 portfolio during the year(s) in which it was held. The return associated with the bond
13 portfolio, on the other hand, is the sum of the annual coupon yield and capital gain (or
14 loss) which accrued to the bond portfolio during the year(s) in which it was held. The
15 resulting annual returns on the stock and bond portfolios purchased in each year from
16 1937 to 2018 are shown on Schedule 4. The average annual return on an investment in
17 the S&P 500 stock portfolio is 11.4 percent, while the average annual return on an
18 investment in the Moody’s A-rated utility bond portfolio is 6.7 percent. The risk premium
19 on the S&P 500 stock portfolio is, therefore, 4.7 percent (11.4 – 6.7 = 4.7).
20 I also conduct a second study using stock data on the S&P Utilities rather than the
21 S&P 500. As shown on Schedule 5, the average annual return on an investment in the
22 S&P Utility stock portfolio is 10.6 percent per year. Thus, the return on the S&P Utility
Exhibit No. SC-1
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1 stock portfolio exceeded the return on the Moody’s A-rated utility bond portfolio by
2 4.0 percent (10.6 – 6.7 = 4.0) (apparent discrepancy due to rounding).
3 Q. Why is it appropriate to perform your ex post risk premium analysis using both the
4 S&P 500 and the S&P Utilities stock indices?
5 A. I perform my ex post risk premium analysis on both the S&P 500 and the S&P Utilities
6 because I believe electric energy companies today face risks that are somewhere in
7 between the average risk of the S&P Utilities and the S&P 500 over the years 1937 to
8 2018. Thus, I use the average of the two historically-based risk premiums as my estimate
9 of the required risk premium for the Company in my ex post risk premium method.
10 Q. Would your study provide a different risk premium if you started with a different
11 time period?
12 A. Yes. The risk premium results vary somewhat depending on the historical time period
13 chosen. My policy is to use the largest set of reliable historical data. I thought it would be
14 most meaningful to begin after the passage and implementation of the Public Utility
15 Holding Company Act of 1935. This Act significantly changed the structure of the public
16 utility industry. Because the Public Utility Holding Company Act of 1935 was not
17 implemented until the beginning of 1937, I felt that numbers taken from before this date
18 would not be comparable to those taken after. (The repeal of the 1935 Act has not
19 materially impacted the structure of the public utility industry; thus, the Act’s repeal does
20 not have any impact on my choice of time period.)

Exhibit No. SC-1
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1 Q. Why is it necessary to examine the yield from debt investments in order to
2 determine the investors’ required rate of return on equity capital?
3 A. As previously explained, investors expect to earn a return on their equity investment that
4 exceeds currently available bond yields because the return on equity, as a residual return,
5 is less certain than the yield on bonds; and investors must be compensated for this
6 uncertainty. Investors’ expectations concerning the amount by which the return on equity
7 will exceed the bond yield may be influenced by historical differences in returns to bond
8 and stock investors. Thus, we can estimate investors’ expected returns from an equity
9 investment from information about past differences between returns on stocks and bonds.
10 In interpreting this information, investors would also recognize that risk premiums
11 increase when interest rates are low.
12 Q. What conclusions do you draw from your ex post risk premium analyses about the
13 required return on an equity investment in electric utilities?
14 A. My studies provide evidence that investors today require an equity return of at least 4.0 to
15 4.7 percentage points above the expected yield on A-rated utility bonds. As discussed
16 above, the expected yield on A-rated utility bonds is 6.2 percent. Adding a 4.0 to
17 4.7 percentage point risk premium to a yield of 6.2 percent on A-rated utility bonds, I
18 obtain an expected return on equity in the range 10.2 percent to 10.9 percent, with a
19 midpoint estimate equal to 10.5 percent. Adding a 21 basis point allowance for flotation
20 costs, I obtain an estimate of 10.7 percent as the ex post risk premium cost of equity. (I
21 determine the flotation cost allowance by calculating the difference in my DCF results
22 with and without a flotation cost allowance.)

Exhibit No. SC-1
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C. CAPITAL ASSET PRICING MODEL
1 Q. What is the CAPM?
2 A. The CAPM is an equilibrium model of the security markets in which the expected or
3 required return on a given security is equal to the risk-free rate of interest, plus the
4 company equity “beta,” times the market risk premium:
5 Cost of equity = Risk-free rate + Equity beta x Market risk premium
6 The risk-free rate in this equation is the expected rate of return on a risk-free government
7 security, the equity beta is a measure of the company’s risk relative to the market as a
8 whole, and the market risk premium is the premium investors require to invest in the
9 market basket of all securities compared to the risk-free security.
10 Q. How do you use the CAPM to estimate the cost of equity for your proxy companies?
11 A. The CAPM requires an estimate of the risk-free rate, the company-specific risk factor or
12 beta, and the expected return on the market portfolio. For my estimate of the risk-free
13 rate, I use a forecasted yield to maturity on 20-year Treasury bonds of 4.0 percent,
14 obtained using data from Value Line and the EIA. For my estimate of the company-
15 specific risk, or beta, I use both the current average 0.68 beta for the Value Line electric
16 utilities and the 0.88 beta estimated from the relationship between the historical risk
17 premium on utilities and the historical risk premium on the market portfolio. For my
18 estimate of the expected risk premium on the market portfolio, I use two approaches.
19 First, I estimate the risk premium on the market portfolio using historical risk premium
20 data reported in the 2018 Stocks, Bonds, Bills, and Inflation Valuation Handbook
21 “SBBI®” for the years 1926 through 2017. Second, I estimate the risk premium on the
22 market portfolio from the difference between the DCF cost of equity for the S&P 500 and
23 the forecasted yield to maturity on 20-year Treasury bonds.

Exhibit No. SC-1
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1 Q. How do you obtain the forecasted yield to maturity on 20-year Treasury bonds?
2 A. I obtain the forecasted yield to maturity on 20-year Treasury bonds using data from Value
3 Line and EIA. Value Line forecasts a yield on 10-year Treasury bonds equal to
4 3.8 percent. The spread between the average yield on 10-year Treasury bonds
5 (2.87 percent) and 20-year Treasury bonds (2.96 percent) is 9 basis points. Adding 9
6 basis points to Value Line’s 3.8 percent forecasted yield on 10-year Treasury bonds
7 produces a forecasted yield of 3.9 percent for 20-year Treasury bonds (see Value Line
8 Investment Survey, Selection & Opinion, March 2, 2018). EIA forecasts a yield of
9 4.07 percent on 10-year Treasury bonds. Adding the 9 basis point spread between 10-year
10 Treasury bonds and 20-year Treasury bonds to the EIA forecast of 4.07 percent for 10-
11 year Treasury bonds produces an EIA forecast for 20-year Treasury bonds equal to
12 4.1 percent. The average of the forecasts is 4 percent (3.9 percent using Value Line data
13 and 4.1 percent using EIA data).
1. Historical CAPM
14 Q. How do you estimate the expected risk premium on the market portfolio using
15 historical risk premium data developed by Ibbotson® SBBI®?
16 A. I estimate the expected risk premium on the market portfolio by calculating the difference
17 between the arithmetic mean total return on the S&P 500 from 1926 to 2018 (12.06
18 percent) and the average income return on 20-year United States Treasury bonds over the
19 same period (4.99 percent). Thus, my historical risk premium method produces a risk
20 premium of 7.07 percent (12.06 – 4.99 = 7.07).

Exhibit No. SC-1
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1 Q. Why do you recommend that the risk premium on the market portfolio be estimated
2 using the arithmetic mean return on the S&P 500?
3 A. I recommend that the risk premium on the market portfolio be estimated using the
4 arithmetic mean return on the S&P 500 because, in my opinion, the arithmetic mean
5 return is the best historically-based measure of the return investors expect to receive in
6 the future. For an investment which has an uncertain outcome, the arithmetic mean is the
7 best historically-based measure of the return investors expect to receive in the future
8 because the arithmetic mean is the only return which will make the initial investment
9 grow to the expected value of the investment at the end of the investment horizon. A
10 discussion of the importance of using arithmetic mean returns in the context of CAPM or
11 risk premium studies is contained in Schedule 6.
12 Q. Why do you recommend that the risk premium on the market portfolio be
13 measured using the income return on 20-year Treasury bonds rather than the total
14 return on these bonds?
15 A. As discussed above, the CAPM requires an estimate of the risk-free rate of interest. When
16 Treasury bonds are issued, the income return on the bond is risk free, but the total return,
17 which includes both income and capital gains or losses, is not. Thus, the income return
18 should be used in the CAPM because it is only the income return that is risk free.
19 Q. What CAPM result do you obtain when you estimate the expected risk premium on
20 the market portfolio from the arithmetic mean difference between the return on the
21 market and the yield on 20-year Treasury bonds?
22 A. Using a risk-free rate equal to 4.0 percent, an electric utility beta equal to 0.68, a risk
23 premium on the market portfolio equal to 7.1 percent, and a flotation cost allowance
Exhibit No. SC-1
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1 equal to 21 basis points, I obtain an historical CAPM estimate of the cost of equity equal
2 to 9.0 percent for my electric utility group (4.0 + 0.68 x 7.1 + 0.21 = 9.0) (see Schedule
3 7).
4 Q. Is there any evidence from the finance literature that the application of the
5 historical CAPM may underestimate the cost of equity?
6 A. Yes. There is substantial evidence that: (1) the historical CAPM tends to underestimate
7 the cost of equity for companies whose equity beta is less than 1.0; and (2) the CAPM is
8 less reliable the further the estimated beta is from 1.0.
9 Q. What is the evidence that the CAPM tends to underestimate the cost of equity for
10 companies with betas less than 1.0 and is less reliable the further the estimated beta
11 is from 1.0?
12 A. The original evidence that the unadjusted CAPM tends to underestimate the cost of
13 equity for companies whose equity beta is less than 1.0 and is less reliable the further the
14 estimated beta is from 1.0 was presented in a paper by Black, Jensen, and Scholes, “The
15 Capital Asset Pricing Model: Some Empirical Tests.” Numerous subsequent papers have
16 validated the Black, Jensen, and Scholes findings, including those by Litzenberger and
17 Ramaswamy (1979), Banz (1981), Fama and French (1992), Fama and French (2004),
18 Fama and MacBeth (1973), and Jegadeesh and Titman (1993).1
1 Fischer Black, Michael C. Jensen, and Myron Scholes, “The Capital Asset Pricing Model: Some Empirical Tests,” in
Studies in the Theory of Capital Markets, M. Jensen, ed. New York: Praeger, 1972; Eugene Fama and James MacBeth,
“Risk, Return, and Equilibrium: Empirical Tests,” Journal of Political Economy 81 (1973), pp. 607-36; Robert
Litzenberger and Krishna Ramaswamy, “The Effect of Personal Taxes and Dividends on Capital Asset Prices: Theory
and Empirical Evidence,” Journal of Financial Economics 7 (1979), pp. 163-95.; Rolf Banz, “The Relationship
between Return and Market Value of Common Stocks,” Journal of Financial Economics (March 1981), pp. 3-18;
Eugene F. Fama and Kenneth R. French, “The Cross-Section of Expected Returns,” Journal of Finance (June 1992),
47:2, pp. 427-465; Eugene F. Fama and Kenneth R. French, “The Capital Asset Pricing Model: Theory and Evidence,”
The Journal of Economic Perspectives (Summer 2004), 18:3, pp. 25 – 46; Narasimhan Jegadeesh and Sheridan Titman,
“Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency,” The Journal of Finance,
Vol. 48, No. 1. (Mar., 1993), pp. 65-91.
Exhibit No. SC-1
Page 51 of 58
1 Q. Can you briefly summarize these articles?
2 A. Yes. The CAPM conjectures that security returns increase with increases in security betas
3 in line with the equation:
4
[
ERi = R f + βi ERm − R f ],
5 where ERi is the expected return on security or portfolio i, Rf is the risk-free rate, ERm –
6 Rf is the expected risk premium on the market portfolio, and βi is a measure of the risk of
7 investing in security or portfolio i (see Figure 1 below).
FIGURE 1
AVERAGE RETURNS COMPARED TO BETA
FOR PORTFOLIOS FORMED ON PRIOR BETA
Average
Portfolio
Return Actual portfolio
returns
Average returns predicted by

Rf CAPM
0 0.7 1.0
Beta
8 Financial scholars have studied the relationship between estimated portfolio betas and the
9 achieved returns on the underlying portfolio of securities to test whether the CAPM
10 correctly predicts achieved returns in the marketplace. They find that the relationship
11 between returns and betas is inconsistent with the relationship posited by the CAPM. As
12 described in Fama and French (1992) and Fama and French (2004), the actual
13 relationship between portfolio betas and returns is shown by the dotted line in Figure 1
14 above. Although financial scholars disagree on the reasons why the return/beta
Exhibit No. SC-1
Page 52 of 58
1 relationship looks more like the dotted line in Figure 2 than the solid line, they generally
2 agree that the dotted line lies above the straight line for portfolios with betas less than 1.0
3 and below the solid line for portfolios with betas greater than 1.0. Thus, in practice,
4 scholars generally agree that the CAPM underestimates portfolio returns for companies
5 with betas less than 1.0, and overestimates portfolio returns for portfolios with betas
6 greater than 1.0.
7 Q. Do you have additional evidence that the CAPM tends to underestimate the cost of
8 equity for utilities with average betas less than 1.0?
9 A. Yes. As shown in Schedule 8, over the period 1937 to 2018, investors in the S&P
10 Utilities Stock Index have earned a risk premium over the yield on long-term Treasury
11 bonds equal to 5.52 percent, while investors in the S&P 500 have earned a risk premium
12 over the yield on long-term Treasury bonds equal to 6.28 percent. According to the
13 CAPM, investors in utility stocks should expect to earn a risk premium over the yield on
14 long-term Treasury securities equal to the average utility beta times the expected risk
15 premium on the S&P 500. Thus, the ratio of the risk premium on the utility portfolio to
16 the risk premium on the S&P 500 should equal the utility beta. However, the average
17 utility beta at the time of my studies is approximately 0.68, whereas the historical ratio of
18 the utility risk premium to the S&P 500 risk premium is 0.88 (5.52 ÷ 6.28 = 0.88). In
19 short, the current 0.68 measured beta for electric utilities significantly underestimates the
20 cost of equity for the utilities, providing further support for the conclusion that the CAPM
21 underestimates the cost of equity for utilities at this time.

Exhibit No. SC-1
Page 53 of 58
1 Q. Can you adjust for the tendency of the CAPM to underestimate the cost of equity
2 for companies with betas significantly less than 1.0?
3 A. Yes. I can implement the CAPM using the 0.88 beta I discuss above, which I obtain by
4 comparing the historical returns on utilities to historical returns on the S&P 500.
5 Q. What CAPM result do you obtain when you use a beta equal to 0.88 rather than an
6 electric utility beta equal to 0.68?
7 A. I obtain a CAPM result equal to 10.5 percent using a risk free rate equal to 4.0 percent, a
8 beta equal to 0.88, the historical market risk premium equal to 7.1 percent, and a flotation
9 cost allowance of 21 basis points (4.0 + 0.88 x 7.1+ 0.21= 10.5). (See Schedule 9.)
10 Q. What is the average of your two historical CAPM results?
11 A. The average of my two historical CAPM results is 9.8 percent ((9.0 percent +
12 10.5 percent) ÷ 2 = 9.8 percent). I use 9.8 percent as my estimate of the historical CAPM
13 cost of equity.
2. DCF-Based CAPM
14 Q. How does your DCF-Based CAPM differ from your historical CAPM?
15 A. As noted above, my DCF-based CAPM differs from my historical CAPM only in the
16 method I use to estimate the risk premium on the market portfolio. In the historical
17 CAPM, I use historical risk premium data to estimate the risk premium on the market
18 portfolio. In the DCF-based CAPM, I estimate the risk premium on the market portfolio
19 from the difference between the DCF cost of equity for the S&P 500 and the forecasted
20 yield to maturity on 20-year Treasury bonds.

Exhibit No. SC-1
Page 54 of 58
1 Q. What risk premium do you obtain when you calculate the difference between the
2 DCF-return on the S&P 500 and the risk-free rate?
3 A. Using this method, I obtain a risk premium on the market portfolio equal to 9.6 percent
4 (see Schedule 10).
5 Q. What CAPM result do you obtain when you estimate the expected return on the
6 market portfolio by applying the DCF model to the S&P 500?
7 A. Using a risk-free rate of 4.0 percent, an electric utility beta of 0.68, a risk premium on the
8 market portfolio of 9.6 percent, and a flotation cost allowance of 21 basis points, I obtain
9 a CAPM result of 10.8 percent for my electric utility group. Using a risk-free rate of
10 4.0 percent, an electric utility beta of 0.88, a risk premium on the market portfolio of
11 9.6 percent, and a flotation cost allowance of 21 basis points, I obtain a CAPM result of
12 12.7 percent. The average of these two results is 11.7 percent (10.8 + 12.7) ÷ 2 = 11.7),
13 and I use 11.7 percent as my estimate of the DCF-based CAPM cost of equity.
D. COMPARABLE EARNINGS METHOD
14 Q. What is the comparable earnings method for estimating the required rate of return
15 on equity?
16 A. The comparable earnings method estimates the required rate of return on equity by
17 calculating the expected rate of return on book equity for a group of comparable risk
18 companies. The United States Supreme Court states in the Hope case that the “return to
19 the equity owner should be commensurate with returns on investments in other
20 enterprises having corresponding risks.” (Hope, 320 U.S. at 603.) The comparable
21 earnings approach implements the Hope standard by calculating the expected rate of
22 return on equity for a group of comparable-risk companies.

Exhibit No. SC-1
Page 55 of 58
1 Q. To assess the reasonableness of the result of its two-stage DCF model described in
2 Opinion No. 531, did the Commission examine expected accounting rates of return
3 on equity for Value Line electric utilities?
4 A. Yes.
5 Q. Is the Commission’s method of testing the reasonableness of the result of its two-
6 stage DCF model in Opinion No. 531 equivalent to what you are calling the
7 “Comparable Earnings method” of estimating the cost of equity?
8 A. Yes.
9 Q. What comparable risk companies do you use to estimate Southern Companies’
10 required rate of return on equity using the comparable earnings method?
11 A. I use all the Value Line electric utilities with the exception of Great Plains, which did not
12 have the required data, and Avista, SCANA, Vectren, and Westar, which are being
13 acquired. (The Great Plains/Westar merger, originally announced on May 31, 2016, was
14 concluded on June 5, 2018, forming a new company, Evergy Inc.)
15 Q. How do you calculate the expected rate of return on book equity for these
16 comparable-risk electric utilities?
17 A. I estimate the expected rate of return on book equity for each company by calculating the
18 average expected rate of return on book equity reported by The Value Line Investment
19 Survey for the years 2017, 2018, 2019, and 2021 – 2023.
20 Q. Do you make any adjustments to Value Line’s reported expected rates of return on
21 book equity?
22 A. Yes. Value Line calculates its expected rates of return on book equity by dividing each
23 company’s expected earnings by its estimate of the company’s year-end equity. Because
Exhibit No. SC-1
Page 56 of 58
1 a rate of return based on year-end equity understates the rate of return on the average
2 equity investment during the year, I adjust Value Line’s estimates to reflect expected
3 rates of return on average equity for the year. My method for calculating the expected
4 rate of return on average book equity for the comparable companies is described in the
5 notes accompanying my exhibit.
6 Q. What average expected rate of return on book equity do you obtain for your group
7 of comparable-risk utilities?
8 A. The average expected rate of return on book equity for this group of comparable-risk
9 utilities is 10.5 percent (see Schedule 11).
10 Q. Please summarize the results of your application of alternative cost of equity
11 methods.
12 A. From my application of alternative cost of equity methods, I obtain cost of equity results
13 in the range 9.8 percent to 11.7 percent (see TABLE 3 below).
TABLE 3
COST OF EQUITY MODEL RESULTS
MODEL MODEL RESULT
Discounted Cash Flow 10.1%
Ex Ante Risk Premium 10.8%
Ex Post Risk Premium 10.7%
CAPM – Historical 9.8%
CAPM - DCF Based 11.7%
Comparable Earnings 10.5%
Range of Results 9.8% to 11.7%
14
V. CONCLUSION REGARDING THE FAIR RATE OF
RETURN ON EQUITY
15 Q. What is the fair rate of return on equity?
16 A. As discussed above, the fair rate of return on equity is a forward-looking return on equity
17 that provides the regulated company with an opportunity to earn a return on its
Exhibit No. SC-1
Page 57 of 58
1 investment over the period in which rates are in effect that is commensurate with returns
2 that investors expect to earn on other investments of similar risk. Because the fair rate of
3 return is a forward-looking return, the estimate of the fair return requires consideration of
4 investors’ expectations for a reasonably long period into the future.
5 Q. Based on your corrections of Mr. Mac Mathuna’s application of the Commission’s
6 two-stage DCF method, what is your conclusion regarding Southern Companies’
7 cost of equity?
8 A. Based on my corrections of Mr. Mac Mathuna’s application of the Commission’s two-
9 stage DCF method, I conclude that Southern Companies’ cost of equity is in the range
10 11.0 percent to 12.7 percent, the midpoints of the upper half of the range of DCF model
11 results (see TABLE 1 above, Column C and Column D).
12 Q. Based on your application of alternative cost of equity methods, what is your
13 conclusion regarding Southern Companies’ cost of equity?
14 A. Based on my application of alternative cost of equity methods, I conclude that Southern
15 Companies’ cost of equity is in the range 9.8 percent to 11.7 percent (see TABLE 3 above).
16 With regard to my application of a single-stage DCF model, I note that the average DCF
17 result is 10.1 percent, and the midpoint of the upper half of the range of DCF results is
18 13.1 percent.
19 Q. Based on the results of your applications of the Commission’s two-stage DCF model,
20 your application of alternative cost of equity models, and your review of Mr.
21 Fetter’s analysis of the risk of investing in Southern Companies, what is your
22 recommended allowed ROE for Southern Companies’ FERC-regulated
Exhibit No. SC-1
Page 58 of 58
1 A. I recommend that Southern Companies be allowed to earn a base return on equity equal
2 to 11.25 percent. My recommendation reflects: (1) my finding that a reasonable
3 application of the Commission’s two-stage DCF model produces results in the range
4 11.0 percent to 12.7 percent; (2) my finding that applications of alternative cost of equity
5 models produce average results in the range 9.8 percent to 11.7 percent; and (3) Mr.
6 Fetter’s findings that the risk of investing in Southern Companies is greater than the risk
7 of investing in the proxy utilities and the allowed base ROE should be set at the upper
8 end of the range of results.
9 Q. Does this conclude your testimony?
10 A. Yes, it does.
BEFORE THE

Complainants,

Gulf Power Company,
Respondents.
AFFIDAVIT OF DR. JAMES H. VANDER WEIDE
Dr. James H. Vander Weide, being first duly sworn, deposes and says that he is the
James H. Vander Weide referred to in the foregoing testimony, that he has read such testimony
and is familiar with the contents thereof and that the answers therein are true and correct to the
best of his knowledge, information and belief.
'6c---
Xa es H. Vander Weide
Subscribed and sworn to before me this 7 V day of June, 2018, by Dr. James H.
Vander Weide, proved to me on the basis of satisfactory evidence to be the person who appeared
before me.
DONNA S ROSE AZ(

Notary Public Notary Public
Person Co., North Carolina Commission Expires on: (3 ' - 0000
My Commission Expires March 22, 2020
Exhibit No. SC-1
Page 1 of 1
LIST OF SCHEDULES AND APPENDICES
Schedule 1 Corrected Mac Mathuna Discounted Cash Flow Analysis
Schedule 2 Summary of Discounted Cash Flow Analysis for Value

Line Investment-Grade Electric Utilities Electric Utilities
Using a Single-Stage DCF Model
Schedule 3 Comparison of the DCF Expected Return on an Investment

in Electric Utilities to the Interest Rate on Moody’s A-
Rated Utility Bonds
Schedule 4 Comparative Returns on S&P 500 Stock Index and

Moody’s A-Rated Utility Bonds 1937—2018
Schedule 5 Comparative Returns on S&P Utility Stock Index and

Moody’s A-Rated Utility Bonds 1937—2018
Schedule 6 Using the Arithmetic Mean to Estimate the Cost of Equity

Capital
Schedule 7 Calculation of Capital Asset Pricing Model Cost of Equity

Using an Historical 7.1 Percent Risk Premium
Schedule 8 Comparison of Risk Premia on S&P 500 and S&P Utilities

1937 – 2018

Using an Historical 7.1 Percent Risk Premium and 0.88
Utility Beta

Using DCF Estimate of the Expected Rate of Return on the
Market Portfolio
Schedule 11 Comparable Earnings Value Line Electric Utilities
Appendix 1 Qualifications of James H. Vander Weide
Appendix 2 Derivation of the Quarterly DCF Model
Appendix 3 Adjusting for Flotation Costs in Determining a Public

Utility’s Allowed Rate of Return on Equity
Appendix 4 Ex Ante Risk Premium Approach
Appendix 5 Ex Post Risk Premium Approach

Exhibit No. SC-1
Schedule 1
Page 1 of 4
SCHEDULE 1
SOUTHERN COMPANIES
CORRECTED MAC MATHUNA DISCOUNTED CASH FLOW ANALYSIS
TABLE 1: MAC MATHUNA EXHIBIT JC-2, PAGE 1, AS FILED
6-MO.
AVERAGE 6-MO
PRICE OCT. GDP AVE. YLD
2017 - ANNUAL DIVIDEND I/B/E/S GROWTH WTD. AVE. X (1+1/2 YIELD PLUS
MAR. 2018 DIVIDEND YIELD GROWTH FORECAST GROWTH G) GROWTH
1 Alliant Energy 41.54 1.34 3.11% 5.45% 4.22% 5.04% 3.19% 8.23%
2 Amer. Elec. Power 71.14 2.48 3.47% 5.63% 4.22% 5.16% 3.56% 8.72%
3 Ameren Corp. 58.44 1.83 3.10% 6.37% 4.22% 5.65% 3.19% 8.84%
4 CenterPoint Energy 28.21 1.11 3.85% 8.49% 4.22% 7.07% 3.98% 11.05%
5 CMS Energy 46.21 1.43 2.96% 7.04% 4.22% 6.10% 3.05% 9.15%
6 DTE Energy 107.64 3.53 3.22% 5.58% 4.22% 5.13% 3.30% 8.43%
7 Duke Energy 82.58 3.56 4.33% 4.24% 4.22% 4.23% 4.42% 8.65%
8 Entergy Corp. 80.64 3.56 4.41% -6.67% 4.22% -3.04% 4.34%
9 Fortis, Inc. 35.44 1.70 4.72% 5.27% 4.22% 4.92% 4.83% 9.75%
10 NextEra Energy 154.25 4.44 2.60% 8.85% 4.22% 7.31% 2.70% 10.00%
11 PNM Resources, Inc. 39.88 1.06 2.53% 5.80% 4.22% 5.27% 2.60% 7.87%
12 PPL Corp. 33.01 1.64 4.88% 2.14% 4.22% 2.83% 4.94% 7.78%
13 Public Serv. Enterprise 49.73 1.80 3.49% 3.39% 4.22% 3.67% 3.55% 7.22%
14 Southern Co. 47.71 2.32 4.89% 2.70% 4.22% 3.21% 4.97% 8.17%
15 Average 8.76%
16 Low - 13 Companies 7.22%
17 High - 13 Companies 11.05%
18 Median 8.65%
19 Upper Median (75th Percentile) 9.15%
20 Midpoint Top Half Array 10.09%
Exhibit No. SC-1
Schedule 1
Page 2 of 4
SCHEDULE 1
SOUTHERN COMPANIES
TABLE 2: USE MAC MATHUNA DATA WITH CORRECTED DIVIDEND YIELD

CALCULATION, CORRECTED GDP GROWTH
6-MO.
AVERAGE 6-MO
MAR. 2018 DIVIDEND YIELD GROWTH FORECAST GROWTH IBES G) GROWTH
1 Alliant Energy 41.54 1.34 3.23% 5.45% 4.30% 5.07% 3.31% 8.38%
2 Amer. Elec. Power 71.14 2.48 3.49% 5.63% 4.30% 5.19% 3.58% 8.77%
3 Ameren Corp. 58.44 1.83 3.13% 6.37% 4.30% 5.68% 3.23% 8.91%
5 CMS Energy 46.21 1.43 3.09% 7.04% 4.30% 6.13% 3.20% 9.33%
6 DTE Energy 107.64 3.53 3.28% 5.58% 4.30% 5.15% 3.37% 8.53%
7 Duke Energy 82.58 3.56 4.31% 4.24% 4.30% 4.26% 4.40% 8.66%
8 Entergy Corp. 80.64 3.56 4.41% -6.67% 4.30% -3.01% 4.27%
9 Fortis, Inc. 35.44 1.70 4.80% 5.27% 4.30% 4.95% 4.92% 9.87%
10 NextEra Energy 154.25 4.44 2.88% 8.85% 4.30% 7.33% 3.01% 10.34%
12 PPL Corp. 33.01 1.64 4.97% 2.14% 4.30% 2.86% 5.02% 7.88%
14 Southern Co. 47.71 2.32 4.86% 2.70% 4.30% 3.23% 4.93% 8.16%
15 Average 8.88%
16 Low 7.38%
17 High 11.20%
18 Median 8.66%
20 Midpoint Top Half Array 10.24%
Exhibit No. SC-1
Schedule 1
Page 3 of 4
SCHEDULE 1
SOUTHERN COMPANIES
TABLE 3: CORRECT DIVIDEND YIELD, GDP GROWTH, CORRECT PROXY GROUP
6-MO.
AVERAGE 6-MO
MAR. 2018 DIVIDEND YIELD GROWTH FORECAST GROWTH IBES G) GROWTH
1 Alliant Energy 41.54 1.34 3.23% 5.45% 4.30% 5.07% 3.31% 8.38%
2 Amer. Elec. Power 71.14 2.48 3.49% 5.63% 4.30% 5.19% 3.58% 8.77%
3 Ameren Corp. 58.44 1.83 3.13% 6.37% 4.30% 5.68% 3.23% 8.91%
5 CMS Energy 46.21 1.43 3.09% 7.04% 4.30% 6.13% 3.20% 9.33%
6 DTE Energy 107.64 3.53 3.28% 5.58% 4.30% 5.15% 3.37% 8.53%
7 Duke Energy 82.58 3.56 4.31% 4.24% 4.30% 4.26% 4.40% 8.66%
8 Entergy Corp. 80.64 3.56 4.41% -6.67% 4.30% -3.01% 4.27%
9 Fortis, Inc. 35.44 1.70 4.80% 5.27% 4.30% 4.95% 4.92%
10 NextEra Energy 154.25 4.44 2.88% 8.85% 4.30% 7.33% 3.01% 10.34%
12 PPL Corp. 33.01 1.64 4.97% 2.14% 4.30% 2.86% 5.02% 7.88%
14 Southern Co. 47.71 2.32 4.86% 2.70% 4.30% 3.23% 4.93% 8.16%
15 Avangrid, Inc. 49.85 1.73 3.47% 10.70% 4.30% 8.57% 3.65% 12.22%
16 Dominion Energy 77.87 3.34 4.29% 7.61% 4.30% 6.51% 4.45% 10.96%
17 Sempra Energy 111,47 3.58 3.21% 11.00% 4.30% 8.77% 3.39% 12.16%
18 Average 9.39%
19 Low 7.38%
20 High 12.22%
21 Median 8.77%
22 Upper Median (75th Percentile) 10.65%%
23 Midpoint Top Half of Array 11.01%
Exhibit No. SC-1
Schedule 1
Page 4 of 4
SCHEDULE 1
SOUTHERN COMPANIES
TABLE 4: CORRECT DIVIDEND YIELD, USE I/B/E/S GROWTH, CORRECT PROXY GROUP
6-MO.
AVERAGE 6-MO
PRICE OCT. AVE. YLD
2017 - ANNUAL DIVIDEND I/B/E/S X (1+ IBES YIELD PLUS
MAR. 2018 DIVIDEND YIELD GROWTH G) GROWTH
1 Alliant Energy 41.54 1.34 3.23% 5.45% 3.31% 8.85%
2 Amer. Elec. Power 71.14 2.48 3.49% 5.63% 3.58% 9.31%
3 Ameren Corp. 58.44 1.83 3.13% 6.37% 3.23% 9.70%
4 CenterPoint Energy 28.21 1.11 3.93% 8.49% 4.10% 12.76%
5 CMS Energy 46.21 1.43 3.09% 7.04% 3.20% 10.35%
6 DTE Energy 107.64 3.53 3.28% 5.58% 3.37% 9.04%
7 Duke Energy 82.58 3.56 4.31% 4.24% 4.40% 8.73%
8 Entergy Corp. 80.64 3.56 4.41% -6.67% 4.27%
9 Fortis, Inc. 35.44 1.70 4.80% 5.27% 4.92%
10 NextEra Energy 154.25 4.44 2.88% 8.85% 3.01% 11.98%
11 PNM Resources, Inc. 39.88 1.06 2.66% 5.80% 2.74% 8.61%
12 PPL Corp. 33.01 1.64 4.97% 2.14% 5.02% 7.21%
13 Public Serv. Enterprise 49.73 1.80 3.62% 3.39% 3.68% 7.13%
14 Southern Co. 47.71 2.32 4.86% 2.70% 4.93% 7.69%
15 Avangrid, Inc. 49.85 1.73 3.47% 10.70% 3.65% 14.54%
16 Dominion Energy 77.87 3.34 4.29% 7.61% 4.45% 12.23%
17 Sempra Energy 111,47 3.58 3.21% 11.00% 3.39% 14.56%
16 Average 10.18%
17 Low 7.13%
18 High 14.56%
19 Median 9.31%
Exhibit No. SC-1
Schedule 2
Page 1 of 2
SCHEDULE 2
SOUTHERN COMPANIES
SUMMARY OF DISCOUNTED CASH FLOW ANALYSIS FOR VALUE LINE
INVESTMENT-GRADE ELECTRIC UTILITIES ELECTRIC UTILITIES
USING A SINGLE-STAGE DCF MODEL
FORECAST OF
MOST RECENT FUTURE
QUARTERLY STOCK EARNINGS DCF MODEL
COMPANY DIVIDEND (d0) PRICE (P0) GROWTH RESULT
1 ALLETE 0.560 71.152 6.0% 9.5%
2 Alliant Energy 0.335 39.873 5.8% 9.6%
3 Amer. Elec. Power 0.620 67.264 5.6% 9.8%
4 Ameren Corp. 0.458 55.428 6.3% 10.1%
5 AVANGRID Inc. 0.432 49.536 10.6% 14.9%
6 CenterPoint Energy 0.278 26.750 7.9% 12.6%
7 CMS Energy Corp. 0.358 44.048 7.1% 10.6%
8 Consol. Edison 0.715 77.373 3.5% 7.6%
9 Dominion Energy 0.835 70.467 7.4% 12.6%
10 DTE Energy 0.883 102.796 5.6% 9.5%
11 Duke Energy 0.890 76.977 4.3% 9.4%
12 El Paso Electric 0.335 49.967 5.2% 8.3%
13 Eversource Energy 0.505 59.008 5.7% 9.5%
14 Exelon Corp. 0.345 37.924 4.9% 8.8%
15 Hawaiian Elec. 0.310 33.698 8.5% 12.9%
16 NextEra Energy 1.110 157.382 8.9% 11.9%
17 NorthWestern Corp. 0.550 52.892 3.1% 7.6%
18 OGE Energy 0.333 31.852 5.8% 10.5%
19 Otter Tail Corp. 0.335 42.300 8.0% 11.6%
20 Pinnacle West Capital 0.695 78.175 3.6% 7.6%
21 PPL Corp. 0.410 28.948 2.1% 8.2%
22 Public Serv. Enterprise 0.450 49.347 4.0% 7.9%
23 Sempra Energy 0.895 108.903 9.7% 13.4%
24 Southern Co. 0.580 44.383 2.7% 8.5%
25 WEC Energy Group 0.553 61.956 5.6% 9.5%
26 Xcel Energy Inc. 0.380 44.505 6.2% 9.9%
27 Average 10.1%
Exhibit No. SC-1
Schedule 2
Page 2 of 2
Notes:
d0 = Most recent quarterly dividend.
d1,d2,d3,d4 = Next four quarterly dividends, calculated by multiplying the last four quarterly
dividends by the factor (1 + g).
P0 = Average of the monthly high and low stock prices during the three months ending
April 2018 per Thomson Reuters.
FC = Flotation cost allowance (five percent) as a percent of stock price.
g = I/B/E/S forecast of future earnings growth April 2018 from Thomson Reuters.
k = Cost of equity using the quarterly version of the DCF model.
d1 (1 + k ).75 + d 2 (1 + k ).50 + d 3 (1 + k ).25 + d 4

k= +g
P0 (1 − FC )
In my analysis, I eliminate companies that are in the process of being acquired, companies with negative
long-term growth forecasts, and outlier results, including results that are less than one hundred basis points
above forecasted bond yields for the companies’ ratings or results that exceed 17.7 percent. The forecasted
utility bond yields at the time of Dr. Vander Weide’s studies are 6.2 percent, 6.4 percent, and 6.6 percent
for A-rated, BBB+-rated, and BBB-rated. Thus, results for A-rated companies that are equal to or below
7.2 percent, results for BBB+-rated companies that are equal to or below 7.4 percent, and results for BBB-
rated companies that are equal to or below 7.6 percent are eliminated from the summary results.
Exhibit No. SC-1
Schedule 3
Page 1 of 6
SCHEDULE 3
SOUTHERN COMPANIES
COMPARISON OF DCF EXPECTED RETURN ON AN INVESTMENT IN ELECTRIC
UTILITIES TO THE INTEREST RATE ON MOODY’S A-RATED UTILITY BONDS
In this analysis, I compute an electric utility equity risk premium by comparing the DCF estimated cost of equity
for an electric utility proxy group to the interest rate on A-rated utility bonds. For each month in my September
1999 through April 2018 study period:
DCF = Average DCF-estimated cost of equity on a portfolio of proxy companies;

Bond Yield = Yield to maturity on an investment in A-rated utility bonds; and
Risk Premium = DCF – Bond yield.
A more detailed description of my ex ante risk premium method is contained in Appendix 4.
BOND RISK
LINE DATE DCF YIELD PREMIUM
1 Sep-99 0.1157 0.0793 0.0364
2 Oct-99 0.1161 0.0806 0.0355
3 Nov-99 0.1192 0.0794 0.0398
4 Dec-99 0.1236 0.0814 0.0422
5 Jan-00 0.1221 0.0835 0.0386
6 Feb-00 0.1269 0.0825 0.0444
7 Mar-00 0.1313 0.0828 0.0485
8 Apr-00 0.1237 0.0829 0.0408
9 May-00 0.1227 0.0870 0.0357
10 Jun-00 0.1242 0.0836 0.0406
11 Jul-00 0.1247 0.0825 0.0422
12 Aug-00 0.1228 0.0813 0.0415
13 Sep-00 0.1164 0.0823 0.0341
14 Oct-00 0.1170 0.0814 0.0356
15 Nov-00 0.1191 0.0811 0.0380
16 Dec-00 0.1166 0.0784 0.0382
17 Jan-01 0.1194 0.0780 0.0414
18 Feb-01 0.1203 0.0774 0.0429
19 Mar-01 0.1207 0.0768 0.0439
20 Apr-01 0.1233 0.0794 0.0439
21 May-01 0.1279 0.0799 0.0480
22 Jun-01 0.1285 0.0785 0.0500
23 Jul-01 0.1295 0.0778 0.0517
24 Aug-01 0.1302 0.0759 0.0543
25 Sep-01 0.1321 0.0775 0.0546
26 Oct-01 0.1313 0.0763 0.0550
27 Nov-01 0.1296 0.0757 0.0539
28 Dec-01 0.1292 0.0783 0.0509
29 Jan-02 0.1274 0.0766 0.0508
30 Feb-02 0.1285 0.0754 0.0531
31 Mar-02 0.1248 0.0776 0.0472
32 Apr-02 0.1227 0.0757 0.0470
33 May-02 0.1236 0.0752 0.0484
Exhibit No. SC-1
Schedule 3
Page 2 of 6
BOND RISK
34 Jun-02 0.1254 0.0741 0.0513
35 Jul-02 0.1337 0.0731 0.0606
36 Aug-02 0.1300 0.0717 0.0583
37 Sep-02 0.1272 0.0708 0.0564
38 Oct-02 0.1291 0.0723 0.0568
39 Nov-02 0.1242 0.0714 0.0528
40 Dec-02 0.1226 0.0707 0.0519
41 Jan-03 0.1195 0.0706 0.0489
42 Feb-03 0.1233 0.0693 0.0540
43 Mar-03 0.1212 0.0679 0.0533
44 Apr-03 0.1170 0.0664 0.0506
45 May-03 0.1095 0.0636 0.0459
46 Jun-03 0.1047 0.0621 0.0426
47 Jul-03 0.1072 0.0657 0.0415
48 Aug-03 0.1064 0.0678 0.0386
49 Sep-03 0.1029 0.0656 0.0373
50 Oct-03 0.1009 0.0643 0.0366
51 Nov-03 0.0985 0.0637 0.0348
52 Dec-03 0.0946 0.0627 0.0319
53 Jan-04 0.0921 0.0615 0.0306
54 Feb-04 0.0916 0.0615 0.0301
55 Mar-04 0.0912 0.0597 0.0315
56 Apr-04 0.0925 0.0635 0.0290
57 May-04 0.0962 0.0662 0.0300
58 Jun-04 0.0961 0.0646 0.0315
59 Jul-04 0.0953 0.0627 0.0326
60 Aug-04 0.0966 0.0614 0.0352
61 Sep-04 0.0951 0.0598 0.0353
62 Oct-04 0.0953 0.0594 0.0359
63 Nov-04 0.0918 0.0597 0.0321
64 Dec-04 0.0920 0.0592 0.0328
65 Jan-05 0.0925 0.0578 0.0347
66 Feb-05 0.0917 0.0561 0.0356
67 Mar-05 0.0918 0.0583 0.0335
68 Apr-05 0.0924 0.0564 0.0360
69 May-05 0.0910 0.0553 0.0356
70 Jun-05 0.0911 0.0540 0.0371
71 Jul-05 0.0899 0.0551 0.0348
72 Aug-05 0.0900 0.0550 0.0350
73 Sep-05 0.0923 0.0552 0.0371
74 Oct-05 0.0934 0.0579 0.0355
75 Nov-05 0.0981 0.0588 0.0393
76 Dec-05 0.0980 0.0580 0.0400
77 Jan-06 0.0980 0.0575 0.0405
78 Feb-06 0.1071 0.0582 0.0489
79 Mar-06 0.1055 0.0598 0.0457
80 Apr-06 0.1075 0.0629 0.0446
Exhibit No. SC-1
Schedule 3
Page 3 of 6
BOND RISK
81 May-06 0.1087 0.0642 0.0445
82 Jun-06 0.1117 0.0640 0.0477
83 Jul-06 0.1110 0.0637 0.0473
84 Aug-06 0.1072 0.0620 0.0452
85 Sep-06 0.1111 0.0600 0.0511
86 Oct-06 0.1074 0.0598 0.0476
87 Nov-06 0.1078 0.0580 0.0498
88 Dec-06 0.1071 0.0581 0.0490
89 Jan-07 0.1096 0.0596 0.0500
90 Feb-07 0.1085 0.0590 0.0495
91 Mar-07 0.1094 0.0585 0.0509
92 Apr-07 0.1042 0.0597 0.0445
93 May-07 0.1068 0.0599 0.0469
94 Jun-07 0.1123 0.0630 0.0493
95 Jul-07 0.1130 0.0625 0.0505
96 Aug-07 0.1104 0.0624 0.0480
97 Sep-07 0.1078 0.0618 0.0460
98 Oct-07 0.1084 0.0611 0.0473
99 Nov-07 0.1116 0.0597 0.0519
100 Dec-07 0.1132 0.0616 0.0516
101 Jan-08 0.1193 0.0602 0.0591
102 Feb-08 0.1133 0.0621 0.0512
103 Mar-08 0.1170 0.0621 0.0549
104 Apr-08 0.1159 0.0629 0.0530
105 May-08 0.1162 0.0627 0.0535
106 Jun-08 0.1136 0.0638 0.0499
107 Jul-08 0.1172 0.0640 0.0532
108 Aug-08 0.1191 0.0637 0.0554
109 Sep-08 0.1185 0.0649 0.0536
110 Oct-08 0.1280 0.0756 0.0524
111 Nov-08 0.1312 0.0760 0.0552
112 Dec-08 0.1301 0.0654 0.0647
113 Jan-09 0.1241 0.0639 0.0602
114 Feb-09 0.1269 0.0630 0.0639
115 Mar-09 0.1286 0.0642 0.0644
116 Apr-09 0.1266 0.0648 0.0617
117 May-09 0.1242 0.0649 0.0593
118 Jun-09 0.1220 0.0620 0.0600
119 Jul-09 0.1174 0.0597 0.0577
120 Aug-09 0.1158 0.0571 0.0587
121 Sep-09 0.1152 0.0553 0.0599
122 Oct-09 0.1153 0.0555 0.0598
123 Nov-09 0.1196 0.0564 0.0633
124 Dec-09 0.1095 0.0579 0.0516
125 Jan-10 0.1112 0.0577 0.0535
126 Feb-10 0.1091 0.0587 0.0504
127 Mar-10 0.1076 0.0584 0.0492
Exhibit No. SC-1
Schedule 3
Page 4 of 6
BOND RISK
128 Apr-10 0.1111 0.0582 0.0529
129 May-10 0.1093 0.0552 0.0541
130 Jun-10 0.1088 0.0546 0.0541
131 Jul-10 0.1078 0.0526 0.0552
132 Aug-10 0.1057 0.0501 0.0557
133 Sep-10 0.1059 0.0501 0.0558
134 Oct-10 0.1044 0.0510 0.0534
135 Nov-10 0.1051 0.0536 0.0514
136 Dec-10 0.1053 0.0557 0.0497
137 Jan-11 0.1044 0.0557 0.0487
138 Feb-11 0.1041 0.0568 0.0473
139 Mar-11 0.1044 0.0556 0.0488
140 Apr-11 0.1020 0.0555 0.0465
141 May-11 0.0994 0.0532 0.0462
142 Jun-11 0.1043 0.0526 0.0517
143 Jul-11 0.1019 0.0527 0.0492
144 Aug-11 0.1050 0.0469 0.0581
145 Sep-11 0.1016 0.0448 0.0568
146 Oct-11 0.1032 0.0452 0.0580
147 Nov-11 0.1014 0.0425 0.0589
148 Dec-11 0.1024 0.0435 0.0589
149 Jan-12 0.1016 0.0434 0.0582
150 Feb-12 0.0974 0.0436 0.0538
151 Mar-12 0.0971 0.0448 0.0523
152 Apr-12 0.0994 0.0440 0.0554
153 May-12 0.0981 0.0420 0.0561
154 Jun-12 0.0962 0.0408 0.0554
155 Jul-12 0.0963 0.0393 0.0570
156 Aug-12 0.0972 0.0400 0.0572
157 Sep-12 0.0968 0.0402 0.0566
158 Oct-12 0.0978 0.0391 0.0587
159 Nov-12 0.0935 0.0384 0.0551
160 Dec-12 0.0962 0.0400 0.0562
161 Jan-13 0.0968 0.0415 0.0553
162 Feb-13 0.0956 0.0418 0.0538
163 Mar-13 0.0976 0.0420 0.0556
164 Apr-13 0.0966 0.0400 0.0566
165 May-13 0.0970 0.0417 0.0553
166 Jun-13 0.0990 0.0453 0.0537
167 Jul-13 0.0978 0.0468 0.0510
168 Aug-13 0.0958 0.0473 0.0485
169 Sep-13 0.0950 4.80% 0.0470
170 Oct-13 0.0925 4.70% 0.0455
171 Nov-13 0.0931 4.77% 0.0454
172 Dec-13 0.0931 4.81% 0.0450
173 Jan-14 0.0922 4.63% 0.0459
174 Feb-14 0.0944 4.53% 0.0491
Exhibit No. SC-1
Schedule 3
Page 5 of 6
BOND RISK
175 Mar-14 0.0983 4.51% 0.0532
176 Apr-14 0.0970 4.41% 0.0529
177 May-14 0.0983 4.26% 0.0557
178 Jun-14 0.0972 4.29% 0.0543
179 Jul-14 0.0966 4.23% 0.0543
180 Aug-14 0.0978 0.0413 0.0565
181 Sep-14 0.0962 0.0424 0.0538
182 Oct-14 0.1013 0.0406 0.0607
183 Nov-14 0.0995 0.0409 0.0586
184 Dec-14 0.0984 0.0395 0.0589
185 Jan-15 0.0972 0.0358 0.0614
186 Feb-15 0.0983 0.0367 0.0616
187 Mar-15 0.0985 0.0374 0.0611
188 Apr-15 0.1005 0.0375 0.0630
189 May-15 0.0983 0.0417 0.0566
190 Jun-15 0.0963 0.0439 0.0524
191 Jul-15 0.0956 0.0440 0.0516
192 Aug-15 0.0966 0.0425 0.0541
193 Sep-15 0.0941 0.0439 0.0502
194 Oct-15 0.0937 0.0429 0.0508
195 Nov-15 0.0938 0.0440 0.0498
196 Dec-15 0.0941 0.0435 0.0506
197 Jan-16 0.0981 0.0427 0.0554
198 Feb-16 0.0977 0.0411 0.0566
199 Mar-16 0.0974 0.0416 0.0558
200 Apr-16 0.0960 0.0400 0.0560
201 May-16 0.0943 0.0393 0.0550
202 Jun-16 0.0940 0.0378 0.0562
203 Jul-16 0.0930 0.0357 0.0573
204 Aug-16 0.0930 0.0359 0.0571
205 Sep-16 0.0932 0.0366 0.0566
206 Oct-16 0.0946 0.0377 0.0569
207 Nov-16 0.0933 0.0408 0.0525
208 Dec-16 0.0940 0.0427 0.0513
209 Jan-17 0.0934 0.0414 0.0520
210 Feb-17 0.0944 0.0418 0.0526
211 Mar-17 0.0942 0.0423 0.0519
212 Apr-17 0.0930 0.0412 0.0518
213 May-17 0.0970 0.0412 0.0558
214 Jun-17 0.0965 0.0394 0.0571
215 Jul-17 0.0956 0.0399 0.0557
216 Aug-17 0.0936 0.0386 0.0550
217 Sep-17 0.0960 0.0387 0.0573
218 Oct-17 0.0963 0.0391 0.0572
219 Nov-17 0.0924 0.0383 0.0541
220 Dec-17 0.0928 0.0379 0.0549
221 Jan-18 0.0954 0.0386 0.0568
Exhibit No. SC-1
Schedule 3
Page 6 of 6
BOND RISK
222 Feb-18 0.1013 0.0409 0.0604
223 Mar-18 0.0999 0.0413 0.0586
224 Apr-18 0.1009 0.0417 0.0592
Notes: Utility bond yield information from Mergent Bond Record (formerly Moody’s). See Appendix 4 for
a description of my ex ante risk premium approach. DCF results are calculated using a quarterly DCF
model as follows:
d0 = Latest quarterly dividend per Value Line, Thomson Reuters, Yahoo Finance.
P0 = Average of the monthly high and low stock prices for each month per Thomson
Reuters.
FC = Flotation cost allowance (five percent) as a percent of stock price.
g = I/B/E/S forecast of future earnings growth for each month.
k = Cost of equity using the quarterly version of the DCF model.
4
 (1+ g 41 
 d ) 4 
1
k= 0
+ (1 + g ) - 1
 P0 (1 − FC ) 
 
Exhibit No. SC-1
Schedule 4
Page 1 of 2
SCHEDULE 4
SOUTHERN COMPANIES
COMPARATIVE RETURNS ON S&P 500 STOCK INDEX
AND MOODY’S A-RATED UTILITY BONDS 1937 – 2018
A-
S&P 500 STOCK RATED
STOCK DIVIDEND STOCK BOND BOND RISK
LINE YEAR PRICE YIELD RETURN PRICE RETURN PREMIUM
1 2018 2,789.80 0.0198 $102.46
2 2017 2,275.12 0.0209 24.71% $96.13 10.75% 13.97%
3 2016 1,918.60 0.0222 20.80% $95.48 4.87% 15.93%
4 2015 2,028.18 0.0208 -3.32% $107.65 -7.59% 4.26%
5 2014 1,822.36 0.0210 13.39% $89.89 24.20% -10.81%
6 2013 1,481.11 0.0220 25.24% $97.45 -3.65% 28.89%
7 2012 1,300.58 0.0214 16.02% $94.36 7.52% 8.50%
8 2011 1,282.62 0.0185 3.25% $77.36 27.14% -23.89%
9 2010 1,123.58 0.0203 16.18% $75.02 8.44% 7.74%
10 2009 865.58 0.0310 32.91% $68.43 15.48% 17.43%
11 2008 1,378.76 0.0206 -35.16% $72.25 0.24% -35.40%
12 2007 1,424.16 0.0181 -1.38% $72.91 4.59% -5.97%
13 2006 1,278.72 0.0183 13.20% $75.25 2.20% 11.01%
14 2005 1,181.41 0.0177 10.01% $74.91 5.80% 4.21%
15 2004 1,132.52 0.0162 5.94% $70.87 11.34% -5.40%
16 2003 895.84 0.0180 28.22% $62.26 20.27% 7.95%
17 2002 1,140.21 0.0138 -20.05% $57.44 15.35% -35.40%
18 2001 1,335.63 0.0116 -13.47% $56.40 8.93% -22.40%
19 2000 1,425.59 0.0118 -5.13% $52.60 14.82% -19.95%
20 1999 1,248.77 0.0130 15.46% $63.03 -10.20% 25.66%
21 1998 963.35 0.0162 31.25% $62.43 7.38% 23.87%
22 1997 766.22 0.0195 27.68% $56.62 17.32% 10.36%
23 1996 614.42 0.0231 27.02% $60.91 -0.48% 27.49%
24 1995 465.25 0.0287 34.93% $50.22 29.26% 5.68%
25 1994 472.99 0.0269 1.05% $60.01 -9.65% 10.71%
26 1993 435.23 0.0288 11.56% $53.13 20.48% -8.93%
27 1992 416.08 0.0290 7.50% $49.56 15.27% -7.77%
28 1991 325.49 0.0382 31.65% $44.84 19.44% 12.21%
29 1990 339.97 0.0341 -0.85% $45.60 7.11% -7.96%
30 1989 285.41 0.0364 22.76% $43.06 15.18% 7.58%
31 1988 250.48 0.0366 17.61% $40.10 17.36% 0.25%
32 1987 264.51 0.0317 -2.13% $48.92 -9.84% 7.71%
33 1986 208.19 0.0390 30.95% $39.98 32.36% -1.41%
34 1985 171.61 0.0451 25.83% $32.57 35.05% -9.22%
35 1984 166.39 0.0427 7.41% $31.49 16.12% -8.72%
36 1983 144.27 0.0479 20.12% $29.41 20.65% -0.53%
37 1982 117.28 0.0595 28.96% $24.48 36.48% -7.51%
38 1981 132.97 0.0480 -7.00% $29.37 -3.01% -3.99%
39 1980 110.87 0.0541 25.34% $34.69 -3.81% 29.16%
40 1979 99.71 0.0533 16.52% $43.91 -11.89% 28.41%
Exhibit No. SC-1
Schedule 4
Page 2 of 2
A-
S&P 500 STOCK RATED
41 1978 90.25 0.0532 15.80% $49.09 -2.40% 18.20%
42 1977 103.80 0.0399 -9.06% $50.95 4.20% -13.27%
43 1976 96.86 0.0380 10.96% $43.91 25.13% -14.17%
44 1975 72.56 0.0507 38.56% $41.76 14.75% 23.81%
45 1974 96.11 0.0364 -20.86% $52.54 -12.91% -7.96%
46 1973 118.40 0.0269 -16.14% $58.51 -3.37% -12.77%
47 1972 103.30 0.0296 17.58% $56.47 10.69% 6.89%
48 1971 93.49 0.0332 13.81% $53.93 12.13% 1.69%
49 1970 90.31 0.0356 7.08% $50.46 14.81% -7.73%
50 1969 102.00 0.0306 -8.40% $62.43 -12.76% 4.36%
51 1968 95.04 0.0313 10.45% $66.97 -0.81% 11.26%
52 1967 84.45 0.0351 16.05% $78.69 -9.81% 25.86%
53 1966 93.32 0.0302 -6.48% $86.57 -4.48% -2.00%
54 1965 86.12 0.0299 11.35% $91.40 -0.91% 12.26%
55 1964 76.45 0.0305 15.70% $92.01 3.68% 12.02%
56 1963 65.06 0.0331 20.82% $93.56 2.61% 18.20%
57 1962 69.07 0.0297 -2.84% $89.60 8.89% -11.73%
58 1961 59.72 0.0328 18.94% $89.74 4.29% 14.64%
59 1960 58.03 0.0327 6.18% $84.36 11.13% -4.95%
60 1959 55.62 0.0324 7.57% $91.55 -3.49% 11.06%
61 1958 41.12 0.0448 39.74% $101.22 -5.60% 45.35%
62 1957 45.43 0.0431 -5.18% $100.70 4.49% -9.67%
63 1956 44.15 0.0424 7.14% $113.00 -7.35% 14.49%
64 1955 35.60 0.0438 28.40% $116.77 0.20% 28.20%
65 1954 25.46 0.0569 45.52% $112.79 7.07% 38.45%
66 1953 26.18 0.0545 2.70% $114.24 2.24% 0.46%
67 1952 24.19 0.0582 14.05% $113.41 4.26% 9.79%
68 1951 21.21 0.0634 20.39% $123.44 -4.89% 25.28%
69 1950 16.88 0.0665 32.30% $125.08 1.89% 30.41%
70 1949 15.36 0.0620 16.10% $119.82 7.72% 8.37%
71 1948 14.83 0.0571 9.28% $118.50 4.49% 4.79%
72 1947 15.21 0.0449 1.99% $126.02 -2.79% 4.79%
73 1946 18.02 0.0356 -12.03% $126.74 2.59% -14.63%
74 1945 13.49 0.0460 38.18% $119.82 9.11% 29.07%
75 1944 11.85 0.0495 18.79% $119.82 3.34% 15.45%
76 1943 10.09 0.0554 22.98% $118.50 4.49% 18.49%
77 1942 8.93 0.0788 20.87% $117.63 4.14% 16.73%
78 1941 10.55 0.0638 -8.98% $116.34 4.55% -13.52%
79 1940 12.30 0.0458 -9.65% $112.39 7.08% -16.73%
80 1939 12.50 0.0349 1.89% $105.75 10.05% -8.16%
81 1938 11.31 0.0784 18.36% $99.83 9.94% 8.42%
82 1937 17.59 0.0434 -31.36% $103.18 0.63% -31.99%
83 Average 11.4% 6.7% 4.7%
Note: See Appendix 5 for an explanation of how stock and bond returns are derived and the source of the
data presented.
Exhibit No. SC-1
Schedule 5
Page 1 of 3
SCHEDULE 5
SOUTHERN COMPANIES
COMPARATIVE RETURNS ON S&P UTILITY STOCK INDEX
AND MOODY’S A-RATED UTILITY BONDS 1937 – 2018
S&P A-
UTILITY STOCK RATED
1 2018 $102.46
2 2017 11.72% $96.13 10.75% 0.97%
3 2016 17.44% $95.48 4.87% 12.57%
4 2015 -3.90% $107.65 -7.59% 3.69%
5 2014 28.91% $89.89 24.20% 4.71%
6 2013 13.01% $97.45 -3.65% 16.66%
7 2012 2.09% $94.36 7.52% -5.43%
8 2011 19.99% $77.36 27.14% -7.15%
9 2010 7.04% $75.02 8.44% -1.40%
10 2009 10.71% $68.43 15.48% -4.77%
11 2008 -25.90% $72.25 0.24% -26.14%
12 2007 16.56% $72.91 4.59% 11.96%
13 2006 20.76% $75.25 2.20% 18.56%
14 2005 16.05% $74.91 5.80% 10.25%
16 2003 23.48% $62.26 20.27% 3.21%
17 2002 -14.73% $57.44 15.35% -30.08%
18 2001 307.70 0.0287 -17.90% $56.40 8.93% -26.83%
19 2000 239.17 0.0413 32.78% $52.60 14.82% 17.96%
20 1999 253.52 0.0394 -1.72% $63.03 -10.20% 8.48%
21 1998 228.61 0.0457 15.47% $62.43 7.38% 8.09%
22 1997 201.14 0.0492 18.58% $56.62 17.32% 1.26%
23 1996 202.57 0.0454 3.83% $60.91 -0.48% 4.31%
24 1995 153.87 0.0584 37.49% $50.22 29.26% 8.23%
25 1994 168.70 0.0496 -3.83% $60.01 -9.65% 5.82%
26 1993 159.79 0.0537 10.95% $53.13 20.48% -9.54%
27 1992 149.70 0.0572 12.46% $49.56 15.27% -2.81%
28 1991 138.38 0.0607 14.25% $44.84 19.44% -5.19%
29 1990 146.04 0.0558 0.33% $45.60 7.11% -6.78%
30 1989 114.37 0.0699 34.68% $43.06 15.18% 19.51%
31 1988 106.13 0.0704 14.80% $40.10 17.36% -2.55%
32 1987 120.09 0.0588 -5.74% $48.92 -9.84% 4.10%
33 1986 92.06 0.0742 37.87% $39.98 32.36% 5.51%
34 1985 75.83 0.0860 30.00% $32.57 35.05% -5.04%
35 1984 68.50 0.0925 19.95% $31.49 16.12% 3.83%
36 1983 61.89 0.0948 20.16% $29.41 20.65% -0.49%
37 1982 51.81 0.1074 30.20% $24.48 36.48% -6.28%
38 1981 52.01 0.0978 9.40% $29.37 -3.01% 12.41%
39 1980 50.26 0.0953 13.01% $34.69 -3.81% 16.83%
40 1979 50.33 0.0893 8.79% $43.91 -11.89% 20.68%
41 1978 52.40 0.0791 3.96% $49.09 -2.40% 6.36%
Exhibit No. SC-1
Schedule 5
Page 2 of 3
S&P A-
UTILITY STOCK RATED
42 1977 54.01 0.0714 4.16% $50.95 4.20% -0.04%
43 1976 46.99 0.0776 22.70% $43.91 25.13% -2.43%
44 1975 38.19 0.0920 32.24% $41.76 14.75% 17.49%
45 1974 48.60 0.0713 -14.29% $52.54 -12.91% -1.38%
46 1973 60.01 0.0556 -13.45% $58.51 -3.37% -10.08%
47 1972 60.19 0.0542 5.12% $56.47 10.69% -5.57%
48 1971 63.43 0.0504 -0.07% $53.93 12.13% -12.19%
49 1970 55.72 0.0561 19.45% $50.46 14.81% 4.64%
50 1969 68.65 0.0445 -14.38% $62.43 -12.76% -1.62%
51 1968 68.02 0.0435 5.28% $66.97 -0.81% 6.08%
52 1967 70.63 0.0392 0.22% $78.69 -9.81% 10.03%
53 1966 74.50 0.0347 -1.72% $86.57 -4.48% 2.76%
54 1965 75.87 0.0315 1.34% $91.40 -0.91% 2.25%
55 1964 67.26 0.0331 16.11% $92.01 3.68% 12.43%
56 1963 63.35 0.0330 9.47% $93.56 2.61% 6.86%
57 1962 62.69 0.0320 4.25% $89.60 8.89% -4.64%
58 1961 52.73 0.0358 22.47% $89.74 4.29% 18.18%
59 1960 44.50 0.0403 22.52% $84.36 11.13% 11.39%
60 1959 43.96 0.0377 5.00% $91.55 -3.49% 8.49%
61 1958 33.30 0.0487 36.88% $101.22 -5.60% 42.48%
62 1957 32.32 0.0487 7.90% $100.70 4.49% 3.41%
63 1956 31.55 0.0472 7.16% $113.00 -7.35% 14.51%
64 1955 29.89 0.0461 10.16% $116.77 0.20% 9.97%
65 1954 25.51 0.0520 22.37% $112.79 7.07% 15.30%
66 1953 24.41 0.0511 9.62% $114.24 2.24% 7.38%
67 1952 22.22 0.0550 15.36% $113.41 4.26% 11.10%
68 1951 20.01 0.0606 17.10% $123.44 -4.89% 21.99%
69 1950 20.20 0.0554 4.60% $125.08 1.89% 2.71%
70 1949 16.54 0.0570 27.83% $119.82 7.72% 20.10%
71 1948 16.53 0.0535 5.41% $118.50 4.49% 0.92%
72 1947 19.21 0.0354 -10.41% $126.02 -2.79% -7.62%
73 1946 21.34 0.0298 -7.00% $126.74 2.59% -9.59%
74 1945 13.91 0.0448 57.89% $119.82 9.11% 48.79%
75 1944 12.10 0.0569 20.65% $119.82 3.34% 17.31%
76 1943 9.22 0.0621 37.45% $118.50 4.49% 32.96%
77 1942 8.54 0.0940 17.36% $117.63 4.14% 13.22%
78 1941 13.25 0.0717 -28.38% $116.34 4.55% -32.92%
79 1940 16.97 0.0540 -16.52% $112.39 7.08% -23.60%
80 1939 16.05 0.0553 11.26% $105.75 10.05% 1.21%
81 1938 14.30 0.0730 19.54% $99.83 9.94% 9.59%
82 1937 24.34 0.0432 -36.93% $103.18 0.63% -37.55%
83 Average 10.6% 6.7% 4.0%
Exhibit No. SC-1
Schedule 5
Page 3 of 3
Note: See Appendix 5 for an explanation of how stock and bond returns are derived and the source of the
data presented. Standard & Poor’s discontinued its S&P Utilities Index in December 2001. In this study, the
stock returns beginning in 2002 are based on the total returns for the EEI Index of United States
shareholder-owned electric utilities, as reported by EEI on its website.
http://www.eei.org/whatwedo/DataAnalysis/IndusFinanAnalysis/Pages/QtrlyFinancialUpdates.aspx
Exhibit No. SC-1
Schedule 6
Page 1 of 1
SCHEDULE 6
SOUTHERN COMPANIES
USING THE ARITHMETIC MEAN TO ESTIMATE
THE COST OF EQUITY CAPITAL
Consider an investment that in a given year generates a return of 30 percent with probability
equal to .5 and a return of -10 percent with a probability equal to .5. For each one dollar invested,
the possible outcomes of this investment at the end of year one are:
WEALTH AFTER ONE YEAR PROBABILITY

$1.30 0.50
$0.90 0.50
At the end of year two, the possible outcomes are:
WEALTH AFTER TWO WEALTH x

YEARS PROBABILITY PROBABILITY
(1.30) (1.30) = $1.69 0.25 0.4225
(1.30) (.9) = $1.17 0.25 0.2925
(.9) (1.30) = $1.17 0.25 0.2925
(.9) (.9) = $0.81 0.25 0.2025
Expected Wealth = $1.21
The expected value of this investment at the end of year two is $1.21. In a competitive capital
market, the cost of equity is equal to the expected rate of return on an investment. In the above
example, the cost of equity is that rate of return which will make the initial investment of one
dollar grow to the expected value of $1.21 at the end of two years. Thus, the cost of equity is the
solution to the equation:
1(1+k)2 = 1.21 or
k = (1.21/1).5 – 1 = 10%.
The arithmetic mean of this investment is:
(30%) (.5) + (-10%) (.5) = 10%.
Thus, the arithmetic mean is equal to the cost of equity capital.
The geometric mean of this investment is:

[(1.3) (.9)].5 – 1 = .082 = 8.2%.
Thus, the geometric mean is not equal to the cost of equity capital.
The lesson is obvious: for an investment with an uncertain outcome, the arithmetic mean is the
best measure of the cost of equity capital
.
Exhibit No. SC-1
Schedule 7
Page 1 of 2
SCHEDULE 7
SOUTHERN COMPANIES
CALCULATION OF CAPITAL ASSET PRICING MODEL COST OF EQUITY
USING AN HISTORICAL 7.1 PERCENT RISK PREMIUM
VALUE RISK- MARKET BETA X

LINE FREE RISK RISK CAPM COST
LINE COMPANY BETA RATE PREMIUM PREMIUM OF EQUITY
1 ALLETE 0.75 4.0% 7.1% 5.3% 9.5%
2 Alliant Energy 0.70 4.0% 7.1% 4.9% 9.2%
3 Amer. Elec. Power 0.65 4.0% 7.1% 4.6% 8.8%
4 Ameren Corp. 0.65 4.0% 7.1% 4.6% 8.8%
5 AVANGRID Inc. 0.35 4.0% 7.1% 2.5% 6.7%
6 Black Hills 0.90 4.0% 7.1% 6.4% 10.6%
7 CenterPoint Energy 0.85 4.0% 7.1% 6.0% 10.2%
8 CMS Energy Corp. 0.65 4.0% 7.1% 4.6% 8.8%
9 Consol. Edison 0.50 4.0% 7.1% 3.5% 7.8%
10 Dominion Energy 0.65 4.0% 7.1% 4.6% 8.8%
11 DTE Energy 0.65 4.0% 7.1% 4.6% 8.8%
12 Duke Energy 0.60 4.0% 7.1% 4.2% 8.5%
13 Edison Int'l 0.60 4.0% 7.1% 4.2% 8.5%
14 El Paso Electric 0.75 4.0% 7.1% 5.3% 9.5%
15 Entergy Corp. 0.65 4.0% 7.1% 4.6% 8.8%
16 Eversource Energy 0.65 4.0% 7.1% 4.6% 8.8%
17 Exelon Corp. 0.70 4.0% 7.1% 4.9% 9.2%
18 FirstEnergy Corp. 0.70 4.0% 7.1% 4.9% 9.2%
19 Fortis Inc. 0.70 4.0% 7.1% 4.9% 9.2%
20 G't Plains Energy 0.70 4.0% 7.1% 4.9% 9.2%
21 Hawaiian Elec. 0.65 4.0% 7.1% 4.6% 8.8%
22 IDACORP Inc. 0.70 4.0% 7.1% 4.9% 9.2%
23 MGE Energy 0.70 4.0% 7.1% 4.9% 9.2%
24 NextEra Energy 0.65 4.0% 7.1% 4.6% 8.8%
25 NorthWestern Corp. 0.65 4.0% 7.1% 4.6% 8.8%
26 OGE Energy 0.95 4.0% 7.1% 6.7% 10.9%
27 Otter Tail Corp. 0.85 4.0% 7.1% 6.0% 10.2%
28 Pinnacle West Capital 0.65 4.0% 7.1% 4.6% 8.8%
29 PNM Resources 0.70 4.0% 7.1% 4.9% 9.2%
30 Portland General 0.65 4.0% 7.1% 4.6% 8.8%
31 PPL Corp. 0.75 4.0% 7.1% 5.3% 9.5%
32 Public Serv. Enterprise 0.70 4.0% 7.1% 4.9% 9.2%
33 Sempra Energy 0.80 4.0% 7.1% 5.7% 9.9%
34 Southern Co. 0.55 4.0% 7.1% 3.9% 8.1%
35 WEC Energy Group 0.60 4.0% 7.1% 4.2% 8.5%
38 Xcel Energy Inc. 0.60 4.0% 7.1% 4.2% 8.5%
37 Historical CAPM Result 0.68 4.0% 7.1% 4.8% 9.0%
Historical Ibbotson® SBBI® risk premium including years 1926 through year-end 2017 from 2018 Stocks, Bonds, Bills,
and Inflation. Value Line beta for comparable companies from Value Line Investment Analyzer. Flotation cost
allowance of 21 basis points. Treasury bond yield forecast from data in Value Line Selection & Opinion, March 2,
2018, and Energy Information Administration, determined as follows. Value Line forecasts a yield on 10-year Treasury
bonds equal to 3.8 percent. The spread between the average yield on 10-year Treasury bonds (2.87 percent) and 20-year
Exhibit No. SC-1
Schedule 7
Page 2 of 2
Treasury bonds (2.96 percent) is 9 basis points. Adding 9 basis points to Value Line’s 3.8 percent forecasted yield on
10-year Treasury bonds produces a forecasted yield of 3.9 percent for 20-year Treasury bonds (see Value Line
Investment Survey, Selection & Opinion, March 2, 2018). EIA forecasts a yield of 4.07 percent on 10-year Treasury
bonds. Adding the 9 basis point spread between 10-year Treasury bonds and 20-year Treasury bonds to the EIA
forecast of 4.07 percent for 10-year Treasury bonds produces an EIA forecast for 20-year Treasury bonds equal to
4.1 percent. The average of the forecasts is 4 percent (3.9 percent using Value Line data and 4.1 percent using EIA
data).
Exhibit No. SC-1
Schedule 8
Page 1 of 5
SCHEDULE 8
SOUTHERN COMPANIES
COMPARISON OF RISK PREMIA ON
S&P 500 AND S&P UTILITIES 1937 – 2018
S&P 10-YR.
SP500 UTILITIES MARKET
UTILITIES TREASURY
YEAR STOCK RISK RISK
STOCK BOND
RETURN PREMIUM PREMIUM
RETURN YIELD
2017 0.1172 0.2471 0.0233 0.0939 0.2238

2016 0.1744 0.2080 0.0184 0.1560 0.1896
2015 -0.0390 -0.0332 0.0214 -0.0604 -0.0546
2014 0.2891 0.1339 0.0254 0.2637 0.1085
2013 0.1301 0.2524 0.0235 0.1066 0.2289
2012 0.0209 0.1602 0.0180 0.0029 0.1422
2011 0.1999 0.0325 0.0278 0.1721 0.0047
2010 0.0704 0.1618 0.0322 0.0382 0.1296
2009 0.1071 0.3291 0.0326 0.0745 0.2965
2008 -0.2590 -0.3516 0.0367 -0.2957 -0.3883
2007 0.1656 -0.0138 0.0463 0.1193 -0.0601
2006 0.2076 0.1320 0.0479 0.1597 0.0841
2005 0.1605 0.1001 0.0429 0.1176 0.0572
2004 0.2284 0.0594 0.0427 0.1857 0.0167
2003 0.2348 0.2822 0.0401 0.1947 0.2421
2002 -0.1473 -0.2005 0.0461 -0.1934 -0.2466
2001 -0.1790 -0.1347 0.0502 -0.2292 -0.1849
2000 0.3278 -0.0513 0.0603 0.2675 -0.1116
1999 -0.0172 0.1546 0.0564 -0.0736 0.0982
1998 0.1547 0.3125 0.0526 0.1021 0.2599
1997 0.1858 0.2768 0.0635 0.1223 0.2133
1996 0.0383 0.2702 0.0644 -0.0261 0.2058
1995 0.3749 0.3493 0.0658 0.3091 0.2835
1994 -0.0383 0.0105 0.0708 -0.1091 -0.0603
1993 0.1095 0.1156 0.0587 0.0508 0.0569
1992 0.1246 0.0750 0.0701 0.0545 0.0049
1991 0.1425 0.3165 0.0786 0.0639 0.2379
1990 0.0033 -0.0085 0.0855 -0.0822 -0.0940
1989 0.3468 0.2276 0.0850 0.2618 0.1426
1988 0.1480 0.1761 0.0884 0.0596 0.0877
1987 -0.0574 -0.0213 0.0838 -0.1412 -0.1051
1986 0.3787 0.3095 0.0768 0.3019 0.2327
1985 0.3000 0.2583 0.1062 0.1938 0.1521
1984 0.1995 0.0741 0.1244 0.0751 -0.0503
1983 0.2016 0.2012 0.1110 0.0906 0.0902
1982 0.3020 0.2896 0.1300 0.1720 0.1596
1981 0.0940 -0.0700 0.1391 -0.0451 -0.2091
1980 0.1301 0.2534 0.1146 0.0155 0.1388
1979 0.0879 0.1652 0.0944 -0.0065 0.0708
Exhibit No. SC-1
Schedule 8
Page 2 of 5
S&P 10-YR.
SP500 UTILITIES MARKET
UTILITIES TREASURY
YEAR STOCK RISK RISK
STOCK BOND
RETURN PREMIUM PREMIUM
RETURN YIELD
1978 0.0396 0.1580 0.0841 -0.0445 0.0739

1977 0.0416 -0.0906 0.0742 -0.0326 -0.1648
1976 0.2270 0.1096 0.0761 0.1509 0.0335
1975 0.3224 0.3856 0.0799 0.2425 0.3057
1974 -0.1429 -0.2086 0.0756 -0.2185 -0.2842
1973 -0.1345 -0.1614 0.0684 -0.2029 -0.2298
1972 0.0512 0.1758 0.0621 -0.0109 0.1137
1971 -0.0007 0.1381 0.0616 -0.0623 0.0765
1970 0.1945 0.0708 0.0735 0.1210 -0.0027
1969 -0.1438 -0.0840 0.0667 -0.2105 -0.1507
1968 0.0528 0.1045 0.0565 -0.0037 0.0480
1967 0.0022 0.1605 0.0507 -0.0485 0.1098
1966 -0.0172 -0.0648 0.0492 -0.0664 -0.1140
1965 0.0134 0.1135 0.0428 -0.0294 0.0707
1964 0.1611 0.1570 0.0419 0.1192 0.1151
1963 0.0947 0.2082 0.0400 0.0547 0.1682
1962 0.0425 -0.0284 0.0395 0.0030 -0.0679
1961 0.2247 0.1894 0.0388 0.1859 0.1506
1960 0.2252 0.0618 0.0412 0.1840 0.0206
1959 0.0500 0.0757 0.0433 0.0067 0.0324
1958 0.3688 0.3974 0.0332 0.3356 0.3642
1957 0.0790 -0.0518 0.0365 0.0425 -0.0883
1956 0.0716 0.0714 0.0318 0.0398 0.0396
1955 0.1016 0.2840 0.0282 0.0734 0.2558
1954 0.2237 0.4552 0.0240 0.1997 0.4312
1953 0.0962 0.0270 0.0281 0.0681 -0.0011
1952 0.1536 0.1405 0.0248 0.1288 0.1157
1951 0.1710 0.2039 0.0241 0.1469 0.1798
1950 0.0460 0.3230 0.0205 0.0255 0.3025
1949 0.2783 0.1610 0.0193 0.2590 0.1417
1948 0.0541 0.0928 0.0215 0.0326 0.0713
1947 -0.1041 0.0199 0.0185 -0.1226 0.0014
1946 -0.0700 -0.1203 0.0174 -0.0874 -0.1377
1945 0.5789 0.3818 0.0173 0.5616 0.3645
1944 0.2065 0.1879 0.0209 0.1856 0.1670
1943 0.3745 0.2298 0.0207 0.3538 0.2091
1942 0.1736 0.2087 0.0211 0.1525 0.1876
1941 -0.2838 -0.0898 0.0199 -0.3037 -0.1097
1940 -0.1652 -0.0965 0.0220 -0.1872 -0.1185
1939 0.1126 0.0189 0.0235 0.0891 -0.0046
1938 0.1954 0.1836 0.0255 0.1699 0.1581
1937 -0.3693 -0.3136 0.0269 -0.3962 -0.3405
Risk Premium 1937 to 2018 0.0552 0.0628
RP Utilities/RP SP500 0.88
Exhibit No. SC-1
Schedule 8
Page 3 of 5
SCHEDULE 8 (CONTINUED)
SUMMARY OF DISCOUNTED CASH FLOW ANALYSIS
FOR S&P 500 COMPANIES
FORECAST
OF FUTURE
STOCK EARNINGS MODEL MARKET
COMPANY PRICE (P0) D0 GROWTH RESULT CAP $(MILS)
1 ABBOTT LABORATORIES 59.61 1.12 11.86% 14.0% 104,981
2 ACTIVISION BLIZZARD 69.13 0.34 15.97% 16.5% 51,344
3 AETNA 176.25 2.00 10.17% 11.4% 57,710
4 AGILENT TECHS. 68.51 0.60 10.69% 11.7% 21,919
5 AMERICAN AIRLINES GROUP 50.53 0.40 12.44% 13.3% 21,926
6 AMERICAN EXPRESS 95.45 1.40 11.63% 13.3% 88,075
7 AMERISOURCEBERGEN 91.31 1.52 10.10% 11.9% 20,141
8 AMETEK 74.96 0.56 11.33% 12.2% 17,720
9 ANTHEM 231.50 3.00 15.09% 16.6% 58,101
10 APPLE 169.81 2.92 13.23% 15.2% 876,789
11 AT&T 35.90 2.00 10.52% 16.8% 213,944
12 AUTOMATIC DATA PROC. 115.07 2.76 13.18% 15.9% 52,195
13 AVERY DENNISON 110.32 2.08 12.20% 14.3% 9,488
14 BALL 39.47 0.40 10.34% 11.5% 14,340
15 BANK OF NEW YORK MELLON 54.08 0.96 9.35% 11.3% 55,657
16 BAXTER INTL. 66.62 0.64 13.26% 14.4% 36,022
17 BECTON DICKINSON 222.99 3.00 14.16% 15.7% 62,631
18 BRISTOL MYERS SQUIBB 62.04 1.60 11.62% 14.5% 84,359
19 CAPITAL ONE FINL. 96.20 1.60 13.95% 15.9% 47,836
20 CENTERPOINT EN. 26.75 1.11 7.26% 11.8% 11,641
21 CH ROBINSON WWD. 92.24 1.84 9.86% 12.1% 13,146
22 CHURCH & DWIGHT CO. 48.39 0.87 10.43% 12.4% 11,894
23 CIGNA 182.92 0.04 13.76% 13.8% 41,704
24 CISCO SYSTEMS 42.75 1.32 9.42% 12.8% 214,668
25 CITIGROUP 72.36 1.28 13.94% 16.0% 179,209
26 CLOROX 128.56 3.84 8.32% 11.6% 15,432
27 COCA COLA 44.03 1.56 7.66% 11.5% 188,960
28 COGNIZANT TECH.SLTN.'A' 80.29 0.80 13.66% 14.8% 48,438
29 CONAGRA BRANDS 36.53 0.85 11.71% 14.3% 14,426
30 CONSTELLATION BRANDS 'A' 221.70 2.08 13.30% 14.4% 38,589
31 COSTCO WHOLESALE 187.52 2.28 11.74% 13.1% 85,601
32 DARDEN RESTAURANTS 91.07 2.52 13.53% 16.7% 11,111
33 DELTA AIR LINES 53.63 1.22 12.00% 14.6% 38,685
34 DISCOVER FINANCIAL SVS. 74.08 1.40 11.70% 13.8% 25,912
35 DOMINION ENERGY 70.47 3.34 6.45% 11.6% 44,423
36 DR PEPPER SNAPPLE GROUP 117.99 2.32 10.77% 13.0% 21,648
37 ECOLAB 135.66 1.64 12.47% 13.8% 42,958
38 ELI LILLY 78.45 2.25 11.65% 14.9% 87,143
39 ESTEE LAUDER COS.'A' 143.49 1.52 14.97% 16.2% 34,095
40 EXPEDIA GROUP 111.74 1.20 15.19% 16.4% 15,315
41 FEDEX 244.66 2.00 14.81% 15.8% 67,229
42 FIDELITY NAT.INFO.SVS. 97.07 1.28 12.64% 14.1% 32,112
Exhibit No. SC-1
Schedule 8
Page 4 of 5
FORECAST
OF FUTURE
43 FMC 80.80 0.66 15.41% 16.4% 11,044
44 GAP 31.44 0.93 10.82% 14.1% 11,504
45 HCA HEALTHCARE 98.64 1.40 12.21% 13.8% 34,662
46 HERSHEY 98.81 2.62 9.62% 12.6% 13,969
47 HP 22.02 0.56 9.08% 11.9% 35,552
48 HUMANA 276.21 2.00 14.63% 15.5% 40,616
49 ILLINOIS TOOL WORKS 159.13 3.12 13.23% 15.5% 54,331
50 INTEL 49.46 1.20 9.03% 11.7% 243,345
51 INTERCONTINENTAL EX. 72.28 0.96 13.93% 15.5% 43,352
52 INTERNATIONAL PAPER 55.51 1.90 12.10% 16.0% 22,191
53 INTERPUBLIC GROUP 23.41 0.84 7.37% 11.3% 9,503
54 JACOBS ENGR. 60.23 0.60 11.72% 12.8% 8,571
55 JP MORGAN CHASE & CO. 111.66 2.24 10.91% 13.2% 380,382
56 JUNIPER NETWORKS 25.24 0.72 8.18% 11.3% 8,428
57 KIMBERLY-CLARK 109.08 4.00 7.02% 11.0% 36,100
58 KRAFT HEINZ 65.34 2.50 7.17% 11.3% 72,800
59 L BRANDS 41.83 2.40 8.41% 14.8% 10,023
60 MATTEL 14.93 0.60 9.87% 14.4% 4,627
61 MCCORMICK & COMPANY NV. 106.10 2.08 10.48% 12.7% 12,911
62 MICROSOFT 91.61 1.68 10.87% 12.9% 740,027
63 MOLSON COORS BREWING 'B' 76.03 1.64 9.51% 11.9% 14,292
64 MONDELEZ INTERNATIONAL CL.A 42.74 0.88 10.86% 13.2% 60,827
65 NETAPP 61.26 0.80 14.78% 16.3% 18,489
66 NEXTERA ENERGY 157.38 4.44 8.85% 12.0% 76,627
67 NORTHROP GRUMMAN 340.70 4.40 12.45% 13.9% 62,433
68 OMNICOM GROUP 74.74 2.40 7.47% 11.0% 17,054
69 PACKAGING CORP.OF AM. 115.54 2.52 11.29% 13.7% 10,963
70 PAYCHEX 63.19 2.24 9.10% 13.0% 21,891
71 PEPSICO 110.09 3.71 7.96% 11.6% 149,682
72 PERKINELMER 75.51 0.28 12.03% 12.4% 8,299
73 PHILIP MORRIS INTL. 98.95 4.28 10.47% 15.3% 133,124
74 PNC FINL.SVS.GP. 152.38 3.00 12.20% 14.4% 68,032
75 PPG INDUSTRIES 112.30 1.80 10.18% 12.0% 27,397
76 PROCTER & GAMBLE 78.84 2.87 6.97% 10.9% 188,469
77 PVH 150.42 0.15 12.40% 12.5% 12,346
78 QUEST DIAGNOSTICS 101.22 2.00 9.17% 11.3% 13,784
79 REPUBLIC SVS.'A' 66.14 1.38 13.68% 16.1% 21,720
80 ROCKWELL AUTOMATION 178.86 3.68 10.55% 12.8% 21,914
81 ROCKWELL COLLINS 135.22 1.32 11.91% 13.0% 21,834
82 S&P GLOBAL 187.13 2.00 14.93% 16.2% 48,361
83 SEAGATE TECH. 55.72 2.52 8.41% 13.4% 17,061
84 SKYWORKS SOLUTIONS 101.35 1.28 14.43% 15.9% 17,102
85 STANLEY BLACK & DECKER 154.40 2.52 10.93% 12.8% 23,852
86 STRYKER 161.09 1.88 9.98% 11.3% 61,120
87 SYMANTEC 26.74 0.30 11.82% 13.1% 17,310
Exhibit No. SC-1
Schedule 8
Page 5 of 5
FORECAST
OF FUTURE
88 T ROWE PRICE GROUP 109.41 2.80 12.57% 15.5% 26,620
89 TAPESTRY 50.97 1.35 12.17% 15.2% 15,181
90 TE CONNECTIVITY 99.16 1.60 9.91% 11.7% 35,477
91 TEXAS INSTRUMENTS 104.32 2.48 12.26% 15.0% 99,579
92 THERMO FISHER SCIENTIFIC 210.74 0.68 11.47% 11.8% 87,300
93 TIFFANY & CO 100.13 2.00 9.58% 11.8% 12,205
94 TIME WARNER 95.02 1.61 9.78% 11.7% 75,318
95 TOTAL SYSTEM SERVICES 86.11 0.52 15.09% 15.8% 15,995
96 TRACTOR SUPPLY 64.60 1.08 14.46% 16.4% 7,492
97 UNITED PARCEL SER.'B' 109.05 3.64 10.82% 14.6% 75,487
98 VERIZON COMMUNICATIONS 49.36 2.36 6.50% 11.7% 200,108
99 WALGREENS BOOTS ALLIANCE 68.09 1.60 11.82% 14.5% 64,736
100 WALT DISNEY 102.57 1.68 11.26% 13.1% 151,706
101 WASTE MANAGEMENT 84.06 1.86 12.23% 14.7% 35,633
102 WELLS FARGO & CO 55.78 1.56 9.37% 12.5% 251,314
103 XILINX 69.82 1.44 9.47% 11.7% 16,538
104 ZOETIS 80.94 0.50 14.54% 15.2% 41,457
105 Market-weighted Average 13.6%
Notes: In applying the DCF model to the S&P 500, I include in the DCF analysis only those companies in the S&P 500 group which
pay a dividend, have a positive growth rate, and have at least three analysts’ long-term growth estimates. I also eliminate those twenty-
five percent of companies with the highest and lowest DCF results, a decision which had no impact on my CAPM estimate of the cost
of equity.
D0 = Current dividend per Thomson Reuters.
P0 = Average of the monthly high and low stock prices during the three months ending April 2018 per
Thomson Reuters.
g = I/B/E/S forecast of future earnings growth April 2018.
k = Cost of equity using the quarterly version of the DCF model shown below:
4
 (1+ g ) 41 
k =  d0 + (1 + g ) 4  - 1
1
 P0 
 
Exhibit No. SC-1
Schedule 9
Page 1 of 1
SCHEDULE 9
SOUTHERN COMPANIES
CALCULATION OF CAPITAL ASSET PRICING MODEL (CAPM) COST OF EQUITY
USING AN HISTORICAL 7.1 PERCENT RISK PREMIUM AND 0.88 UTILITY BETA
VALUE RISK- MARKET BETA X

LINE FREE RISK RISK CAPM
LINE BETA RATE PREMIUM PREMIUM RESULT
1 Historical Utility Beta 0.88 4.0% 7.1% 6.2% 10.4%
Historical Ibbotson® SBBI® risk premium including years 1926 through year-end 2017 from 2018 SBBI. Historical
utility beta per Schedule 7. Flotation cost allowance of 21 basis points. Treasury bond yield forecast from data in Value
Line Selection & Opinion, March 2, 2018, and Energy Information Administration, determined as follows. Value Line
forecasts a yield on 10-year Treasury bonds equal to 3.8 percent. The spread between the average yield on 10-year
Treasury bonds (2.87 percent) and 20-year Treasury bonds (2.96 percent) is 9 basis points. Adding 9 basis points to
Value Line’s 3.8 percent forecasted yield on 10-year Treasury bonds produces a forecasted yield of 3.9 percent for 20-
year Treasury bonds (see Value Line Investment Survey, Selection & Opinion, March 2, 2018). EIA forecasts a yield of
4.07 percent on 10-year Treasury bonds. Adding the 9 basis point spread between 10-year Treasury bonds and 20-year
Treasury bonds to the EIA forecast of 4.07 percent for 10-year Treasury bonds produces an EIA forecast for 20-year
Treasury bonds equal to 4.1 percent. The average of the forecasts is 4 percent (3.9 percent using Value Line data and
4.1 percent using EIA data).
Exhibit No. SC-1
Schedule 10
Page 1 of 2
SCHEDULE 10
SOUTHERN COMPANIES
CALCULATION OF CAPITAL ASSET PRICING MODEL COST OF EQUITY
USING DCF ESTIMATE OF THE EXPECTED RATE OF RETURN
ON THE MARKET PORTFOLIO
VALUE RISK- MARKET BETA X CAPM

LINE FREE DCF S&P RISK RISK COST OF
LINE COMPANY BETA RATE 500 PREMIUM PREMIUM EQUITY
1 ALLETE 0.75 4.0% 13.6% 9.6% 7.20% 11.4%
2 Alliant Energy 0.70 4.0% 13.6% 9.6% 6.72% 11.0%
3 Amer. Elec. Power 0.65 4.0% 13.6% 9.6% 6.24% 10.5%
4 Ameren Corp. 0.65 4.0% 13.6% 9.6% 6.24% 10.5%
5 AVANGRID Inc. 0.35 4.0% 13.6% 9.6% 3.36% 7.6%
6 Black Hills 0.90 4.0% 13.6% 9.6% 8.64% 12.9%
7 CenterPoint Energy 0.85 4.0% 13.6% 9.6% 8.16% 12.4%
8 CMS Energy Corp. 0.65 4.0% 13.6% 9.6% 6.24% 10.5%
9 Consol. Edison 0.50 4.0% 13.6% 9.6% 4.80% 9.0%
10 Dominion Energy 0.65 4.0% 13.6% 9.6% 6.24% 10.5%
11 DTE Energy 0.65 4.0% 13.6% 9.6% 6.24% 10.5%
12 Duke Energy 0.60 4.0% 13.6% 9.6% 5.76% 10.0%
13 Edison Int'l 0.60 4.0% 13.6% 9.6% 5.76% 10.0%
14 El Paso Electric 0.75 4.0% 13.6% 9.6% 7.20% 11.4%
15 Entergy Corp. 0.65 4.0% 13.6% 9.6% 6.24% 10.5%
16 Eversource Energy 0.65 4.0% 13.6% 9.6% 6.24% 10.5%
17 Exelon Corp. 0.70 4.0% 13.6% 9.6% 6.72% 11.0%
18 FirstEnergy Corp. 0.70 4.0% 13.6% 9.6% 6.72% 11.0%
19 Fortis Inc. 0.70 4.0% 13.6% 9.6% 6.72% 11.0%
20 G't Plains Energy 0.70 4.0% 13.6% 9.6% 6.72% 11.0%
21 Hawaiian Elec. 0.65 4.0% 13.6% 9.6% 6.24% 10.5%
22 IDACORP Inc. 0.70 4.0% 13.6% 9.6% 6.72% 11.0%
23 MGE Energy 0.70 4.0% 13.6% 9.6% 6.72% 11.0%
24 NextEra Energy 0.65 4.0% 13.6% 9.6% 6.24% 10.5%
25 NorthWestern Corp. 0.65 4.0% 13.6% 9.6% 6.24% 10.5%
26 OGE Energy 0.95 4.0% 13.6% 9.6% 9.12% 13.4%
27 Otter Tail Corp. 0.85 4.0% 13.6% 9.6% 8.16% 12.4%
28 Pinnacle West Capital 0.65 4.0% 13.6% 9.6% 6.24% 10.5%
29 PNM Resources 0.70 4.0% 13.6% 9.6% 6.72% 11.0%
30 Portland General 0.65 4.0% 13.6% 9.6% 6.24% 10.5%
31 PPL Corp. 0.75 4.0% 13.6% 9.6% 7.20% 11.4%
32 Public Serv. Enterprise 0.70 4.0% 13.6% 9.6% 6.72% 11.0%
33 Sempra Energy 0.80 4.0% 13.6% 9.6% 7.68% 11.9%
34 Southern Co. 0.55 4.0% 13.6% 9.6% 5.28% 9.5%
35 WEC Energy Group 0.60 4.0% 13.6% 9.6% 5.76% 10.0%
36 Xcel Energy Inc. 0.60 4.0% 13.6% 9.6% 5.76% 10.0%
37 DCF CAPM Result 0.68 4.0% 13.6% 9.6% 6.53% 10.8%
Using Beta Equal to 0.88

1 Historical Utility Beta 0.88 4.0% 13.6% 9.6% 8.44% 12.68%
Average DCF CAPM Result 11.72%

Exhibit No. SC-1
Schedule 10
Page 2 of 2
Risk-free Rate 4.0%
Flotation 0.21%
DCF S&P 500 February 2018 13.6%
Value Line beta for comparable companies from Value Line Investment Analyzer. Flotation cost allowance of 21 basis
points. Treasury bond yield forecast from data in Value Line Selection & Opinion, March 2, 2018, and Energy
Information Administration, determined as follows. Value Line forecasts a yield on 10-year Treasury bonds equal to
3.8 percent. The spread between the average yield on 10-year Treasury bonds (2.87 percent) and 20-year Treasury
bonds (2.96 percent) is 9 basis points. Adding 9 basis points to Value Line’s 3.8 percent forecasted yield on 10-year
Treasury bonds produces a forecasted yield of 3.9 percent for 20-year Treasury bonds (see Value Line Investment
Survey, Selection & Opinion, March 2, 2018). EIA forecasts a yield of 4.07 percent on 10-year Treasury bonds. Adding
the 9 basis point spread between 10-year Treasury bonds and 20-year Treasury bonds to the EIA forecast of 4.07
percent for 10-year Treasury bonds produces an EIA forecast for 20-year Treasury bonds equal to 4.1 percent. The
average of the forecasts is 4 percent (3.9 percent using Value Line data and 4.1 percent using EIA data).
Exhibit No. SC-1
Schedule 11
Page 1 of 2
SCHEDULE 11
SOUTHERN COMPANIES
COMPARABLE EARNINGS VALUE LINE ELECTRIC UTILITIES
AVERAGE FORECASTED
FORECAST RETURN ON
ROE 2018 TO ADJUSTMENT AVERAGE
COMPANY 2021-2023 FACTOR EQUITY
1 ALLETE 8.2% 1.0288 8.4%
2 Alliant Energy 11.2% 1.0040 11.2%
3 Amer. Elec. Power 10.2% 1.0278 10.4%
4 Ameren Corp. 10.0% 1.0258 10.3%
5 AVANGRID Inc. 5.2% 1.0090 5.2%
6 Black Hills 9.7% 1.0359 10.0%
7 CenterPoint Energy 14.2% 1.0254 14.5%
8 CMS Energy Corp. 13.8% 1.0391 14.4%
9 Consol. Edison 8.3% 1.0191 8.5%
10 Dominion Energy 14.3% 1.0266 14.7%
11 DTE Energy 10.5% 1.0338 10.9%
12 Duke Energy 8.0% 1.0159 8.1%
13 Edison Int'l 12.3% 1.0214 12.6%
14 El Paso Electric 8.7% 1.0187 8.8%
15 Entergy Corp. 10.7% 1.0313 11.0%
16 Eversource Energy 9.2% 1.0178 9.3%
17 Exelon Corp. 8.8% 1.0266 9.1%
18 FirstEnergy Corp. 12.5% 1.0931 13.7%
19 Fortis Inc. 8.0% 1.0352 8.3%
20 G't Plains Energy 7.8% 0.9674 7.6%
21 Hawaiian Elec. 9.7% 1.0255 9.9%
22 IDACORP Inc. 9.0% 1.0172 9.2%
23 MGE Energy 10.0% 1.0409 10.4%
24 NextEra Energy 12.2% 1.0420 12.7%
25 NorthWestern Corp. 9.2% 1.0195 9.3%
26 OGE Energy 10.5% 1.0153 10.7%
27 Otter Tail Corp. 10.2% 1.0437 10.6%
28 Pinnacle West Capital 10.2% 1.0196 10.4%
29 PNM Resources 9.2% 1.0274 9.4%
30 Portland General 8.5% 1.0159 8.6%
31 PPL Corp. 12.8% 1.0410 13.4%
32 Public Serv. Enterprise 11.0% 1.0233 11.3%
33 Sempra Energy 10.2% 1.0505 10.7%
34 Southern Co. 11.8% 1.0319 12.2%
35 WEC Energy Group 11.2% 1.0167 11.4%
36 Xcel Energy Inc. 10.5% 1.0244 10.8%
37 Average 10.5%
38 Average Mac Mathuna Proxy Companies 11.3%
Exhibit No. SC-1
Schedule 11
Page 2 of 2
Source of Data: The Value Line Investment Survey, East Electric Utilities, May 18, 2018;
Central Electric Utilities, March 16, 2018; West Electric Utilities, April 27, 2018. The
adjustment factor is computed using the formula: 2 x (1 + 5-year change in equity) ÷ (2 +
5-year change in equity). The adjustment factor is required to convert the Value Line
ROE data, which are based on year-end equity, to a rate of return on equity based on
average equity for the year.
Exhibit No. SC-1
Appendix 1
Page 1 of 6
APPENDIX 1
QUALIFICATIONS OF JAMES H. VANDER WEIDE, PH.D.
3606 Stoneybrook Drive
Durham, NC 27705
TEL. 919.383.6659 OR 919.383.1057
jim.vanderweide@duke.edu
James H. Vander Weide is President of Financial Strategy Associates, a consulting firm that
provides financial and economic consulting services, including cost of capital and valuation studies, to
corporate clients. Dr. Vander Weide holds a Ph.D. in Finance from Northwestern University and a Bachelor
of Arts in Economics from Cornell University. After receiving his Ph.D. in Finance, Dr. Vander Weide
joined the faculty at Duke University, the Fuqua School of Business, and was named Assistant Professor,
Associate Professor, Professor, and then Research Professor of Finance and Economics.
As a Professor at Duke University and the Fuqua School of Business, Dr. Vander Weide has
published research in the areas of finance and economics and taught courses in corporate finance,
investment management, management of financial institutions, statistics, economics, operations research,
and the theory of public utility pricing. Dr. Vander Weide has been active in executive education at Duke
and Duke Corporate Education, leading executive development seminars on topics including financial
analysis, cost of capital, creating shareholder value, mergers and acquisitions, capital budgeting, measuring
corporate performance, and valuation. In addition, Dr. Vander Weide designed and served as Program
Director for several executive education programs, including the Advanced Management Program,
Competitive Strategies in Telecommunications, and the Duke Program for Manager Development for
managers from the former Soviet Union. He is now retired from his teaching responsibilities at Duke.
As an expert financial economist and industry expert, Dr. Vander Weide has participated in
approximately five hundred regulatory and legal proceedings, appearing in United States courts and federal
and state or provincial proceedings in the United States and Canada. He has testified as an expert witness
on the cost of capital, competition, risk, incentive regulation, forward-looking economic cost, economic
pricing guidelines, valuation, and other financial and economic issues. His clients include investor-owned
electric, gas, and water utilities, natural gas pipelines, oil pipelines, telecommunications companies, and
insurance companies.
Publications. Dr. Vander Weide has written research papers on such topics as portfolio
management, capital budgeting, investments, the effect of regulation on the performance of public utilities,
and cash management. His articles have been published in American Economic Review, Journal of
Finance, Journal of Financial and Quantitative Analysis, Management Science, Financial Management,
Journal of Portfolio Management, International Journal of Industrial Organization, Journal of Bank
Research, Journal of Accounting Research, Journal of Cash Management, Atlantic Economic Journal,
Journal of Economics and Business, and Computers and Operations Research. He has written a book
Exhibit No. SC-1
Appendix 1
Page 2 of 6
entitled Managing Corporate Liquidity: An Introduction to Working Capital Management published by
John Wiley and Sons, Inc.; and he has written a chapter titled “Financial Management in the Short Run” for
The Handbook of Modern Finance, and a chapter titled “Principles for Lifetime Portfolio Selection:
Lessons from Portfolio Theory” for The Handbook of Portfolio Construction: Contemporary Applications
of Markowitz Techniques. The Handbook of Portfolio Construction is a peer-reviewed collection of
research papers by notable scholars on portfolio optimization, published in 2010 in honor of Nobel Prize
winner Harry Markowitz.
Professional Consulting Experience. Dr. Vander Weide has provided financial and economic
consulting services to firms in the electric, gas, insurance, oil and gas pipeline, telecommunications, and
water industries for more than thirty years. He has testified on the cost of capital, competition, risk,
incentive regulation, forward-looking economic cost, economic pricing guidelines, valuation, and other
financial and economic issues in more than five hundred regulatory and legal proceedings before the public
service commissions of forty-five states and four Canadian provinces, the United States Congress, the
Federal Energy Regulatory Commission, the National Energy Board (Canada), the Federal
Communications Commission, the Canadian Radio-Television and Telecommunications Commission, the
National Telecommunications and Information Administration, the insurance commissions of five states,
the Iowa State Board of Tax Review, the National Association of Securities Dealers, and the North
Carolina Property Tax Commission. In addition, he has prepared expert testimony in proceedings before
the United States District Court for the District of Nebraska; the United States District Court for the District
of New Hampshire; the United States District Court for the District of Northern Illinois; the United States
District Court for the Eastern District of North Carolina; the United States District Court for the Northern
District of California; the United States District Court for the Eastern District of Michigan; the United
States Bankruptcy Court for the Southern District of West Virginia; the Montana Second Judicial District
Court, Silver Bow County; the Superior Court, North Carolina, and the Supreme Court of the State of New
York. Dr. Vander Weide testified in thirty states on issues relating to the pricing of unbundled network
elements and universal service cost studies and consulted with Bell Canada, Deutsche Telekom, and
Telefónica on similar issues. Dr. Vander Weide has provided consulting and expert witness testimony to
the following companies:
Exhibit No. SC-1
Appendix 1
Page 3 of 6
ELECTRIC, GAS, PIPELINE, WATER COMPANIES
Alcoa Power Generating, Inc. MidAmerican Energy and subsidiaries
Alliant Energy and subsidiaries National Fuel Gas
AltaLink, L.P. Nevada Power Company
Ameren Newfoundland Power Inc.
American Water Works and subsidiaries NICOR
Atmos Energy and subsidiaries North Carolina Natural Gas
BP p.l.c. North Shore Gas
Buckeye Partners, L.P. Northern Natural Gas Company
Central Illinois Public Service NOVA Gas Transmission Ltd.
Citizens Utilities PacifiCorp
Consolidated Edison and subsidiaries Peoples Energy and its subsidiaries
Consolidated Natural Gas and subsidiaries PG&E
Dominion Resources and subsidiaries Plains All American Pipeline, L.P.
Duke Energy and subsidiaries Progress Energy and subsidiaries
Empire District Electric and subsidiaries PSE&G
EPCOR Distribution & Transmission Inc. Public Service Company of North Carolina
EPCOR Energy Alberta Inc. Sempra Energy/San Diego Gas and Electric
FortisAlberta Inc. South Carolina Electric and Gas
FortisBC Utilities Southern Company and subsidiaries
Hope Natural Gas Spectra Energy
Iberdrola Renewables Tennessee-American Water Company
Interstate Power Company The Peoples Gas, Light and Coke Co.
Iowa Southern Trans Québec & Maritimes Pipeline Inc.
Iowa-American Water Company TransCanada
Iowa-Illinois Gas and Electric Union Gas
Kentucky Power Company United Cities Gas Company
Kentucky-American Water Company Virginia-American Water Company
Kinder Morgan Energy Partners West Virginia-American Water Company
Maritimes & Northeast Pipeline Westcoast Energy Inc.
Wisconsin Energy Corporation
Xcel Energy
TELECOMMUNICATIONS COMPANIES
ALLTEL and subsidiaries Phillips County Cooperative Tel. Co.
Ameritech (now AT&T new) Pine Drive Cooperative Telephone Co.
AT&T (old) Roseville Telephone Company (SureWest)
Bell Canada/Nortel SBC Communications (now AT&T new)
BellSouth and subsidiaries Sherburne Telephone Company
Centel and subsidiaries Siemens
Cincinnati Bell (Broadwing) Southern New England Telephone
Cisco Systems Sprint/United and subsidiaries
Citizens Telephone Company Telefónica
Concord Telephone Company Tellabs, Inc.
Contel and subsidiaries The Stentor Companies
Deutsche Telekom U S West (Qwest)
Exhibit No. SC-1
Appendix 1
Page 4 of 6
TELECOMMUNICATIONS COMPANIES
GTE and subsidiaries (now Verizon) Union Telephone Company
Heins Telephone Company United States Telephone Association
JDS Uniphase Valor Telecommunications (Windstream)
Lucent Technologies Verizon (Bell Atlantic) and subsidiaries
Minnesota Independent Equal Access Corp. Woodbury Telephone Company
NYNEX and subsidiaries (Verizon)
Pacific Telesis and subsidiaries
INSURANCE COMPANIES
Allstate
North Carolina Rate Bureau
United Services Automobile Association (USAA)
The Travelers Indemnity Company
Gulf Insurance Company
Other Professional Experience. Dr. Vander Weide has conducted in-house seminars and training
sessions on topics such as creating shareholder value, financial analysis, competitive strategy, cost of
capital, real options, financial strategy, managing growth, mergers and acquisitions, valuation, measuring
corporate performance, capital budgeting, cash management, and financial planning. Among the firms for
whom he has designed and taught tailored programs and training sessions are ABB Asea Brown Boveri,
Accenture, Allstate, Ameritech, AT&T, Bell Atlantic/Verizon, BellSouth, Progress Energy/Carolina Power
& Light, Contel, Fisons, GlaxoSmithKline, GTE, Lafarge, MidAmerican Energy, New Century Energies,
Norfolk Southern, Pacific Bell Telephone, The Rank Group, Siemens, Southern New England Telephone,
TRW, and Wolseley Plc. Dr. Vander Weide has also hosted a nationally prominent conference/workshop
on estimating the cost of capital. In 1989, at the request of Mr. Fuqua, Dr. Vander Weide designed the
Duke Program for Manager Development for managers from the former Soviet Union, the first in the
United States designed exclusively for managers from Russia and the former Soviet republics.
Early in his career, Dr. Vander Weide helped found University Analytics, Inc., one of the fastest
growing small firms in the country at that time. As an officer at University Analytics, he designed cash
management models, databases, and software used by most major United States banks in consulting with
their corporate clients. Having sold his interest in University Analytics, Dr. Vander Weide now
concentrates on strategic and financial consulting, academic research, and executive education.
Exhibit No. SC-1
Appendix 1
Page 5 of 6
PUBLICATIONS
JAMES H. VANDER WEIDE
The Lock-Box Location Problem: a Practical Reformulation, Journal of Bank Research, Summer,
1974, pp. 92-96 (with S. Maier). Reprinted in Management Science in Banking, edited by K. J. Cohen
and S. E. Gibson, Warren, Gorham and Lamont, 1978.
A Finite Horizon Dynamic Programming Approach to the Telephone Cable Layout Problem,
Conference Record, 1976 International Conference on Communications (with S. Maier and C. Lam).
A Note on the Optimal Investment Policy of the Regulated Firm, Atlantic Economic Journal, Fall,
1976 (with D. Peterson).
A Unified Location Model for Cash Disbursements and Lock-Box Collections, Journal of Bank
Research, Summer, 1976 (with S. Maier). Reprinted in Management Science in Banking, edited by K.
J. Cohen and S. E. Gibson, Warren Gorham and Lamont, 1978. Also reprinted in Readings on the
Management of Working Capital, edited by K. V. Smith, West Publishing Company, 1979.
Capital Budgeting in the Decentralized Firm,’ Management Science, Vol. 23, No. 4, December 1976,
pp. 433-443 (with S. Maier).
A Monte Carlo Investigation of Characteristics of Optimal Geometric Mean Portfolios, Journal of

Financial and Quantitative Analysis, June, 1977, pp. 215-233 (with S. Maier and D. Peterson).
A Strategy which Maximizes the Geometric Mean Return on Portfolio Investments, Management
Science, June, 1977, Vol. 23, No. 10, pp. 1117-1123 (with S. Maier and D. Peterson).
A Decision Analysis Approach to the Computer Lease-Purchase Decision, Computers and Operations
Research, Vol. 4, No. 3, September, 1977, pp. 167-172 (with S. Maier).
A Practical Approach to Short-run Financial Planning, Financial Management, Winter, 1978 (with S.
Maier). Reprinted in Readings on the Management of Working Capital, edited by K. V. Smith, West
Publishing Company, 1979.
Effectiveness of Regulation in the Electric Utility Industry,’ Journal of Economics and Business, May,
1979 (with F. Tapon).
On the Decentralized Capital Budgeting Problem Under Uncertainty, Management Science, September
1979 (with B. Obel).
Expectations Data and the Predictive Value of Interim Reporting: A Comment, Journal of Accounting
Research, Spring 1980 (with L. D. Brown, J. S. Hughes, and M. S. Rozeff).
General Telephone’s Experience with a Short-run Financial Planning Model, Cash Management
Forum, June 1980, Vol. 6, No. 1 (with J. Austin and S. Maier).
Deregulation and Oligopolistic Price-Quality Rivalry, American Economic Review, March 1981 (with
J. Zalkind).
Forecasting Disbursement Float, Financial Management, Spring 1981 (with S. Maier and D.
Robinson).
Recent Developments in Management Science in Banking, Management Science, October 1981 (with
K. Cohen and S. Maier).
Exhibit No. SC-1
Appendix 1
Page 6 of 6
Incentive Considerations in the Reporting of Leveraged Leases, Journal of Bank Research, April 1982
(with J. S. Hughes).
A Decision-Support System for Managing a Short-term Financial Instrument Portfolio, Journal of

Cash Management, March 1982 (with S. Maier).
An Empirical Bayes Estimate of Market Risk, Management Science, July 1982 (with S. Maier and D.
Peterson).
The Bond Scheduling Problem of the Multi-subsidiary Holding Company, Management Science, July
1982 (with K. Baker).
Deregulation and Locational Rents in Banking: a Comment, Journal of Bank Research, Summer 1983.
What Lockbox and Disbursement Models Really Do, Journal of Finance, May 1983 (with S. Maier).
Managing Corporate Liquidity: an Introduction to Working Capital Management, John Wiley and
Sons, 1984 (with S. Maier)
Financial Management in the Short Run, Handbook of Modern Finance, edited by Dennis Logue,
published by Warren, Gorham, & Lamont, Inc., New York, 1984.
Measuring Investors’ Growth Expectations: Analysts vs. History, The Journal of Portfolio
Management, Spring 1988 (with W. Carleton).
Entry Auctions and Strategic Behavior under Cross-Market Price Constraints, International Journal of
Industrial Organization, 20 (2002) 611-629 (with J. Anton and N. Vettas).
Principles for Lifetime Portfolio Selection: Lessons from Portfolio Theory, Handbook of Portfolio
Construction: Contemporary Applications of Markowitz Techniques, John B. Guerard, (Ed.), Springer,
2009.
Exhibit No. SC-1
Appendix 2
Page 1 of 9
APPENDIX 2
DERIVATION OF THE QUARTERLY DCF MODEL
The simple DCF Model assumes that a firm pays dividends only at the end of each
year. Since firms in fact pay dividends quarterly and investors appreciate the time value of
money, the annual version of the DCF Model generally underestimates the value investors
are willing to place on the firm’s expected future dividend stream. In these workpapers, we
review two alternative formulations of the DCF Model that allow for the quarterly payment
of dividends.
When dividends are assumed to be paid annually, the DCF Model suggests that the
current price of the firm’s stock is given by the expression:
where
P0 = current price per share of the firm’s stock,

D1, D2,...,Dn = expected annual dividends per share on the firm’s stock,
Pn = price per share of stock at the time investors expect to sell the
stock, and
k = return investors expect to earn on alternative investments of the
same risk, i.e., the investors’ required rate of return.
Unfortunately, expression (1) is rather difficult to analyze, especially for the purpose of
estimating k. Thus, most analysts make a number of simplifying assumptions. First, they
assume that dividends are expected to grow at the constant rate g into the indefinite
future. Second, they assume that the stock price at time n is simply the present value of
all dividends expected in periods subsequent to n. Third, they assume that the investors’
required rate of return, k, exceeds the expected dividend growth rate g. Under the above
simplifying assumptions, a firm’s stock price may be written as the following sum:
Exhibit No. SC-1
Appendix 2
Page 2 of 9
where the three dots indicate that the sum continues indefinitely.
As we shall demonstrate shortly, this sum may be simplified to:
D 0 (1 + g)
P0 =
(k - g)
First, however, we need to review the very useful concept of a geometric progression.
Geometric Progression
Consider the sequence of numbers 3, 6, 12, 24,…, where each number after the first
is obtained by multiplying the preceding number by the factor 2. Obviously, this sequence
of numbers may also be expressed as the sequence 3, 3 x 2, 3 x 22, 3 x 23, etc. This sequence
is an example of a geometric progression.
Definition: A geometric progression is a sequence in which each term after the first
is obtained by multiplying some fixed number, called the common ratio, by the preceding
term.
A general notation for geometric progressions is: a, the first term, r, the common
ratio, and n, the number of terms. Using this notation, any geometric progression may be
represented by the sequence:
a, ar, ar2, ar3,…, arn-1.
In studying the DCF Model, we will find it useful to have an expression for the sum of n
terms of a geometric progression. Call this sum Sn. Then
However, this expression can be simplified by multiplying both sides of equation (3) by r
and then subtracting the new equation from the old. Thus,
Exhibit No. SC-1
Appendix 2
Page 3 of 9
rSn = ar + ar2 + ar3 +… + arn
and
Sn - rSn = a - arn ,
or
(1 - r) Sn = a (1 - rn) .
Solving for Sn, we obtain:
a(1 - r n )
Sn = (4)
(1 - r)
as a simple expression for the sum of n terms of a geometric progression. Furthermore, if
|r| < 1, then Sn is finite, and as n approaches infinity, Sn approaches a ÷ (1-r). Thus, for a
geometric progression with an infinite number of terms and |r| < 1, equation (4) becomes:
a
S= (5)
1-r
Application to DCF Model
Comparing equation (2) with equation (3), we see that the firm’s stock price (under
the DCF assumption) is the sum of an infinite geometric progression with the first term
(1 + g)
a = D0
(1 + k)
and common factor
(1 + g)
r =
(1 + k)
Applying equation (5) for the sum of such a geometric progression, we obtain
1 (1 + g) 1 (1 + g) 1 + k (1 + g)
S = a• = D0 • = D0 • = D0
(1 - r) (1 + k) 1+ g (1 + k) k-g k-g
1-
1+ k
as we suggested earlier.
Exhibit No. SC-1
Appendix 2
Page 4 of 9
Quarterly DCF Model
The Annual DCF Model assumes that dividends grow at an annual rate of g% per year
(see Figure 1).
Figure 1
Annual DCF Model
D0 D1
0 1
Year
D0 = 4d0 D1 = D0(1 + g)
Figure 2
Quarterly DCF Model (Constant Growth Version)
d0 d1 d2 d3 D1
0 1
Year
d1 = d0(1+g).25 d2 = d0(1+g).50
d3 = d0(1+g).75 d4 = d0(1+g)
In the Quarterly DCF Model, it is natural to assume that quarterly dividend
payments differ from the preceding quarterly dividend by the factor (1 + g).25, where g is
expressed in terms of percent per year and the decimal .25 indicates that the growth has only
Exhibit No. SC-1
Appendix 2
Page 5 of 9
occurred for one quarter of the year. (See Figure 2.) Using this assumption, along with the
assumption of constant growth and k > g, we obtain a new expression for the firm’s stock
price, which takes account of the quarterly payment of dividends. This expression is:
where d0 is the last quarterly dividend payment, rather than the last annual dividend
payment. (We use a lower case d to remind the reader that this is not the annual dividend.)
Although equation (6) looks formidable at first glance, it too can be greatly
simplified using the formula [equation (4)] for the sum of an infinite geometric progression.
As the reader can easily verify, equation (6) can be simplified to:
1
d 0 (1 + g ) 4 (7)
P0 = 1 1
(1 + k ) - (1 + g )
4 4
Solving equation (7) for k, we obtain a DCF formula for estimating the cost of equity
under the quarterly dividend assumption:
4
 (1 + g 41 1 
 d0 )
k= + (1 + g )4  - 1 (8)
 P0 
 
Exhibit No. SC-1
Appendix 2
Page 6 of 9
An Alternative Quarterly DCF Model
Although the constant growth Quarterly DCF Model [equation (8)] allows for the
quarterly timing of dividend payments, it does require the assumption that the firm increases
its dividend payments each quarter. Since this assumption is difficult for some analysts to
accept, we now discuss a second Quarterly DCF Model that allows for constant quarterly
dividend payments within each dividend year.
Assume then that the firm pays dividends quarterly and that each dividend payment
is constant for four consecutive quarters. There are four cases to consider, with each case
distinguished by varying assumptions about where we are evaluating the firm in relation to
the time of its next dividend increase. (See Figure 3.)

Exhibit No. SC-1
Appendix 2
Page 7 of 9
Figure 3
Quarterly DCF Model (Constant Dividend Version)
Case 1
d0 d1 d2 d3 d4
0 1
Year
d1 = d2 = d3 = d4 = d0(1+g)
Case 2
d0 d1 d2 d3 d4
0 1
Year
d1 = d0
d2 = d3 = d4 = d0(1+g)
Exhibit No. SC-1
Appendix 2
Page 8 of 9
Figure 3 (continued)
Case 3
d0 d1 d2 d3 d4
0 1
Year
d1 = d2 = d0
d3 = d4 = d0(1+g)
Case 4
d0 d1 d2 d3 d4
0 1
Year
d1 = d2 = d3 = d0
d4 = d0(1+g)
Exhibit No. SC-1
Appendix 2
Page 9 of 9
If we assume that the investor invests the quarterly dividend in an alternative investment
of the same risk, then the amount accumulated by the end of the year will in all cases be
given by
D1* = d1 (1+k)3/4 + d2 (1+k)1/2 + d3 (1+k)1/4 + d4
where d1, d2, d3 and d4 are the four quarterly dividends. Under these new assumptions, the
firm’s stock price may be expressed by an Annual DCF Model of the form (2), with the
exception that
D1* = d1 (1 + k)3/4 + d2 (1 + k)1/2 + d3 (1 + k)1/4 + d4 (9)
is used in place of D0(1+g). But, we already know that the Annual DCF Model may be
reduced to
D 0 (1 + g)
P0 =
k-g
Thus, under the assumptions of the second Quarterly DCF Model, the firm’s cost of
equity is given by
*
k = D1 + g (10)
P0
with D1* given by (9).
Although equation (10) looks like the Annual DCF Model, there are at least two
very important practical differences. First, since D1* is always greater than D0(1+g), the
estimates of the cost of equity are always larger (and more accurate) in the Quarterly Model
(10) than in the Annual Model. Second, since D1* depends on k through equation (9), the
unknown “k” appears on both sides of (10), and an iterative procedure is required to solve
for k.
Exhibit No. SC-1
Appendix 3
Page 1 of 17
APPENDIX 3
ADJUSTING FOR FLOTATION COSTS IN DETERMINING
A PUBLIC UTILITY’S ALLOWED RATE OF RETURN ON EQUITY
I. Introduction
Regulation of public utilities is guided by the principle that utility revenues should be
sufficient to allow recovery of all prudently incurred expenses, including the cost of
capital. As set forth in the 1944 Hope Natural Gas Case (Federal Power Comm’n v.
Hope Natural Gas Co. 320 U. S. 591 (1944) at 603), the U. S. Supreme Court states:
From the investor or company point of view it is important that

there be enough revenue not only for operating expenses but also
for the capital costs of the business. These include service on the
debt and dividends on the stock.…By that standard the return to the
equity owner should be commensurate with returns on investments
in other enterprises having corresponding risks.
Since the flotation costs arising from the issuance of debt and equity securities are an
integral component of capital costs, this standard requires that the company’s revenues be
sufficient to fully recover flotation costs.
Despite the widespread agreement that flotation costs should be recovered in the
regulatory process, several issues still need to be resolved. These include:
1. How is the term “flotation costs” defined? Does it include only the out-of-
pocket costs associated with issuing securities (e. g., legal fees, printing
costs, selling and underwriting expenses), or does it also include the
reduction in a security’s price that frequently accompanies flotation (i. e.,
market pressure)?
2. What should be the time pattern of cost recovery? Should a company be
allowed to recover flotation costs immediately, or should flotation costs be
recovered over the life of the issue?
3. For the purposes of regulatory accounting, should flotation costs be
included as an expense? As an addition to rate base? Or as an additional
element of a firm’s allowed rate of return?
4. Do existing regulatory methods for flotation cost recovery allow a firm
full recovery of flotation costs?
In this paper, I review the literature pertaining to the above issues and discuss my own
views regarding how this literature applies to the cost of equity for a regulated firm.
Exhibit No. SC-1
Appendix 3
Page 2 of 17
II. Definition of Flotation Cost
The value of a firm is related to the future stream of net cash flows (revenues minus
expenses measured on a cash basis) that can be derived from its assets. In the process of
acquiring assets, a firm incurs certain expenses which reduce its value. Some of these
expenses or costs are directly associated with revenue production in one period (e. g.,
wages, cost of goods sold), others are more properly associated with revenue production
in many periods (e. g., the acquisition cost of plant and equipment). In either case, the
word “cost” refers to any item that reduces the value of a firm.
If this concept is applied to the act of issuing new securities to finance asset purchases,
many items are properly included in issuance or flotation costs. These include: (1)
compensation received by investment bankers for underwriting services, (2) legal fees,
(3) accounting fees, (4) engineering fees, (5) trustee’s fees, (6) listing fees, (7) printing
and engraving expenses, (8) SEC registration fees, (9) Federal Revenue Stamps, (10)
state taxes, (11) warrants granted to underwriters as extra compensation, (12) postage
expenses, (13) employees’ time, (14) market pressure, and (15) the offer discount. The
finance literature generally divides these flotation cost items into three categories,
namely, underwriting expenses, issuer expenses, and price effects.
III. Magnitude of Flotation Costs
The finance literature contains several studies of the magnitude of the flotation costs
associated with new debt and equity issues. These studies differ primarily with regard to
the time period studied, the sample of companies included, and the source of data. The
flotation cost studies generally agree, however, that for large issues, underwriting
expenses represent approximately one and one-half percent of the proceeds of debt issues
and three to five percent of the proceeds of seasoned equity issues. They also agree that
issuer expenses represent approximately 0.5 percent of both debt and equity issues, and
that the announcement of an equity issue reduces the company’s stock price by at least
two to three percent of the proceeds from the stock issue. Thus, total flotation costs
2
represent approximately two percent of the proceeds from debt issues, and five and one-
half to eight and one-half percent of the proceeds of equity issues.
Lee et. al. [14] is an excellent example of the type of flotation cost studies found in the
finance literature. The Lee study is a comprehensive recent study of the underwriting and
issuer costs associated with debt and equity issues for both utilities and non-utilities. The
results of the Lee et. al. study are reproduced in Tables 1 and 2. Table 1 demonstrates that
the total underwriting and issuer expenses for the 1,092 debt issues in their study
averaged 2.24 percent of the proceeds of the issues, while the total underwriting and
issuer costs for the 1,593 seasoned equity issues in their study averaged 7.11 percent of
the proceeds of the new issue. Table 1 also demonstrates that the total underwriting and
issuer costs of seasoned equity offerings, as a percent of proceeds, decline with the size
[2] The two percent flotation cost on debt only recognizes the cost of newly-issued debt. When
interest rates decline, many companies exercise the call provisions on higher cost debt and reissue
debt at lower rates. This process involves reacquisition costs that are not included in the academic
studies. If reacquisition costs were included in the academic studies, debt flotation costs could
increase significantly.
Exhibit No. SC-1
Appendix 3
Page 3 of 17
of the issue. For issues above $60 million, total underwriting and issuer costs amount to
from three to five percent of the amount of the proceeds.
Table 2 reports the total underwriting and issuer expenses for 135 utility debt issues and
136 seasoned utility equity issues. Total underwriting and issuer expenses for utility bond
offerings averaged 1.47 percent of the amount of the proceeds and for seasoned utility
equity offerings averaged 4.92 percent of the amount of the proceeds. Again, there are
some economies of scale associated with larger equity offerings. Total underwriting and
issuer expenses for equity offerings in excess of 40 million dollars generally range from
three to four percent of the proceeds.
The results of the Lee study for large equity issues are consistent with results of earlier
studies by Bhagat and Frost [4], Mikkelson and Partch [17], and Smith [24]. Bhagat and
Frost found that total underwriting and issuer expenses average approximately four and
one-half percent of the amount of proceeds from negotiated utility offerings during the
period 1973 to 1980, and approximately three and one-half percent of the amount of the
proceeds from competitive utility offerings over the same period. Mikkelson and Partch
found that total underwriting and issuer expenses average five and one-half percent of the
proceeds from seasoned equity offerings over the 1972 to 1982 period. Smith found that
total underwriting and issuer expenses for larger equity issues generally amount to four to
five percent of the proceeds of the new issue.
The finance literature also contains numerous studies of the decline in price associated
with sales of large blocks of stock to the public. These articles relate to the price impact
of: (1) initial public offerings; (2) the sale of large blocks of stock from one investor to
another; and (3) the issuance of seasoned equity issues to the general public. All of these
studies generally support the notion that the announcement of the sale of large blocks of
stock produces a decline in a company’s share price. The decline in share price for initial
public offerings is significantly larger than the decline in share price for seasoned equity
offerings; and the decline in share price for public utilities is less than the decline in share
price for non-public utilities. A comprehensive study of the magnitude of the decline in
share price associated specifically with the sale of new equity by public utilities is
reported in Pettway [19], who found the market pressure effect for a sample of 368 public
utility equity sales to be in the range of two to three percent. This decline in price is a real
cost to the utility, because the proceeds to the utility depend on the stock price on the day
of issue.
In addition to the price decline associated with the announcement of a new equity issue,
the finance literature recognizes that there is also a price decline associated with the
actual issuance of equity securities. In particular, underwriters typically sell seasoned
new equity securities to investors at a price lower than the closing market price on the
day preceding the issue. The Rules of Fair Practice of the National Association of
Securities Dealers require that underwriters not sell shares at a price above the offer
price. Since the offer price represents a binding constraint to the underwriter, the
underwriter tends to set the offer price slightly below the market price on the day of issue
to compensate for the risk that the price received by the underwriter may go down, but
cannot increase. Smith provides evidence that the offer discount tends to be between 0.5
and 0.8 percent of the proceeds of an equity issue. I am not aware of any similar studies
for debt issues.
Exhibit No. SC-1
Appendix 3
Page 4 of 17
In summary, the finance literature provides strong support for the conclusion that total
underwriting and issuer expenses for public utility debt offerings represent approximately
two percent of the amount of the proceeds, while total underwriting and issuer expenses
for public utility equity offerings represent at least four to five percent of the amount of
the proceeds. In addition, the finance literature supports the conclusion that the cost
associated with the decline in stock price at the announcement date represents
approximately two to three percent as a result of a large public utility equity issue.
IV. Time Pattern Of Flotation Cost Recovery
Although flotation costs are incurred only at the time a firm issues new securities, there is
no reason why an issuing firm ought to recognize the expense only in the current period.
In fact, if assets purchased with the proceeds of a security issue produce revenues over
many years, a sound argument can be made in favor of recognizing flotation expenses
over a reasonably lengthy period of time. Such recognition is certainly consistent with the
generally accepted accounting principle that the time pattern of expenses match the time
pattern of revenues, and it is also consistent with the normal treatment of debt flotation
expenses in both regulated and unregulated industries.
In the context of a regulated firm, it should be noted that there are many possible time
patterns for the recovery of flotation expenses. However, if it is felt that flotation
expenses are most appropriately recovered over a period of years, then it should be
recognized that investors must also be compensated for the passage of time. That is to
say, the value of an investor’s capital will be reduced if the expenses are merely
distributed over time, without any allowance for the time value of money.
V. Accounting For Flotation Cost In A Regulatory Setting
In a regulatory setting, a firm’s revenue requirements are determined by the equation:
Revenue Requirement = Total Expenses + Allowed Rate of Return x Rate Base
Thus, there are three ways in which an issuing firm can account for and recover its
flotation expenses: (1) treat flotation expenses as a current expense and recover them
immediately; (2) include flotation expenses in rate base and recover them over time; and
(3) adjust the allowed rate of return upward and again recover flotation expenses over
time. Before considering methods currently being used to recover flotation expenses in a
regulatory setting, I shall briefly consider the advantages and disadvantages of these three
basic recovery methods.
Expenses. Treating flotation costs as a current expense has several advantages. Because
it allows for recovery at the time the expense occurs, it is not necessary to compute
amortized balances over time and to debate which interest rate should be applied to these
balances. A firm’s stockholders are treated fairly, and so are the firm’s customers,
because they pay neither more nor less than the actual flotation expense. Since flotation
costs are relatively small compared to the total revenue requirement, treatment as a
current expense does not cause unusual rate hikes in the year of flotation, as would the
introduction of a large generating plant in a state that does not allow Construction Work
in Progress in rate base.
Exhibit No. SC-1
Appendix 3
Page 5 of 17
On the other hand, there are two major disadvantages of treating flotation costs as a
current expense. First, since the asset purchased with the acquired funds will likely
generate revenues for many years into the future, it seems unfair that current ratepayers
should bear the full cost of issuing new securities, when future ratepayers share in the
benefits. Second, this method requires an estimate of the underpricing effect on each
security issue. Given the difficulties involved in measuring the extent of underpricing, it
may be more accurate to estimate the average underpricing allowance for many securities
than to estimate the exact figure for one security.
Rate Base. In an article in Public Utilities Fortnightly, Bierman and Hass [5] recommend
that flotation costs be treated as an intangible asset that is included in a firm’s rate base
along with the assets acquired with the stock proceeds. This approach has many
advantages. For ratepayers, it provides a better match between benefits and expenses: the
future ratepayers who benefit from the financing costs contribute the revenues to recover
these costs. For investors, if the allowed rate of return is equal to the investors’ required
rate of return, it is also theoretically fair since they are compensated for the opportunity
cost of their investment (including both the time value of money and the investment risk).
Despite the compelling advantages of this method of cost recovery, there are several
disadvantages that probably explain why it has not been used in practice. First, a firm will
only recover the proper amount for flotation expenses if the rate base is multiplied by the
appropriate cost of capital. To the extent that a commission under or over estimates the
cost of capital, a firm will under or over recover its flotation expenses. Second, it is may
be both legally and psychologically difficult for commissioners to include an intangible
asset in a firm’s rate base. According to established legal doctrine, assets are to be
included in rate base only if they are “used and useful” in the public service. It is unclear
whether intangible assets such as flotation expenses meet this criterion.
Rate of Return. The prevailing practice among state regulators is to treat flotation
expenses as an additional element of a firm’s cost of capital or allowed rate of return.
This method is similar to the second method above (treatment in rate base) in that some
part of the initial flotation cost is amortized over time. However, it has a disadvantage not
shared by the rate base method. If flotation cost is included in rate base, it is fairly easy to
keep track of the flotation cost on each new equity issue and see how it is recovered over
time. Using the rate of return method, it is not possible to track the flotation cost for
specific issues because the flotation cost for a specific issue is never recorded. Thus, it is
not clear to participants whether a current allowance is meant to recover (1) flotation
costs actually incurred in a test period, (2) expected future flotation costs, or (3) past
flotation costs. This confusion never arises in the treatment of debt flotation costs.
Because the exact costs are recorded and explicitly amortized over time, participants
recognize that current allowances for debt flotation costs are meant to recover some
fraction of the flotation costs on all past debt issues.
VI. Existing Regulatory Methods
Although most state commissions prefer to let a regulated firm recover flotation expenses
through an adjustment to the allowed rate of return, there is considerable controversy
about the magnitude of the required adjustment. The following are some of the most
frequently asked questions: (1) Should an adjustment to the allowed return be made every
Exhibit No. SC-1
Appendix 3
Page 6 of 17
year, or should the adjustment be made only in those years in which new equity is raised?
(2) Should an adjusted rate of return be applied to the entire rate base, or should it be
applied only to that portion of the rate base financed with paid-in capital (as opposed to
retained earnings)? (3) What is the appropriate formula for adjusting the rate of return?
This section reviews several methods of allowing for flotation cost recovery. Since the
regulatory methods of allowing for recovery of debt flotation costs is well known and
widely accepted, I will begin my discussion of flotation cost recovery procedures by
describing the widely accepted procedure of allowing for debt flotation cost recovery.
Debt Flotation Costs
Regulators uniformly recognize that companies incur flotation costs when they issue debt
securities. They typically allow recovery of debt flotation costs by making an adjustment
to both the cost of debt and the rate base (see Brigham [6]). Assume that: (1) a regulated
company issues $100 million in bonds that mature in 10 years; (2) the interest rate on
these bonds is seven percent; and (3) flotation costs represent four percent of the amount
of the proceeds. Then the cost of debt for regulatory purposes will generally be calculated
as follows:
Interest expense + Amortizat i on of flotation costs

Cost of Debt =
Principal value - Unamortize d flotation costs
$ 7,000 ,000 + $ 400 ,000
=
$ 100 ,000 ,000 − $ 4,000 ,000
= 7 .71 %
Thus, current regulatory practice requires that the cost of debt be adjusted upward by
approximately 71 basis points, in this example, to allow for the recovery of debt flotation
costs. This example does not include losses on reacquisition of debt. The flotation cost
allowance would increase if losses on reacquisition of debt were included.
The logic behind the traditional method of allowing for recovery of debt flotation costs is
simple. Although the company has issued $100 million in bonds, it can only invest $96
million in rate base because flotation costs have reduced the amount of funds received by
$4 million. If the company is not allowed to earn a 71 basis point higher rate of return on
the $96 million invested in rate base, it will not generate sufficient cash flow to pay the
seven percent interest on the $100 million in bonds it has issued. Thus, proper regulatory
treatment is to increase the required rate of return on debt by 71 basis points.
Equity Flotation Costs
The finance literature discusses several methods of recovering equity flotation costs.
Since each method stems from a specific model, (i. e., set of assumptions) of a firm and
its cash flows, I will highlight the assumptions that distinguish one method from another.
Arzac and Marcus. Arzac and Marcus [2] study the proper flotation cost adjustment
formula for a firm that makes continuous use of retained earnings and external equity
financing and maintains a constant capital structure (debt/equity ratio). They assume at
the outset that underwriting expenses and underpricing apply only to new equity obtained
Exhibit No. SC-1
Appendix 3
Page 7 of 17
from external sources. They also assume that a firm has previously recovered all
underwriting expenses, issuer expenses, and underpricing associated with previous issues
of new equity.
To discuss and compare various equity flotation cost adjustment formulas, Arzac and
Marcus make use of the following notation:
k = an investors’ required return on equity

r = a utility’s allowed return on equity base
S = value of equity in the absence of flotation costs
Sf = value of equity net of flotation costs
Kt = equity base at time t
Et = total earnings in year t
Dt = total cash dividends at time t
b = (Et-Dt) ÷ Et = retention rate, expressed as a fraction of
earnings
h = new equity issues, expressed as a fraction of earnings
m = equity investment rate, expressed as a fraction of
earnings,
m=b+h<1
f = flotation costs, expressed as a fraction of the value of an
issue.
Because of flotation costs, Arzac and Marcus assume that a firm must issue a greater
amount of external equity each year than it actually needs. In terms of the above notation,
a firm issues hEt ÷ (1-f) to obtain hEt in external equity funding. Thus, each year a firm
loses:
Equation 1
hE t f
L= − hE t = × hE t
1− f 1− f
due to flotation expenses. The present value, V, of all future flotation expenses is:
Equation 2
∞
fhEt fh rK 0
V =∑ = ×
t =1 (1 − f )(1 + k )
t
1 − f k − mr
To avoid diluting the value of the initial stockholder’s equity, a regulatory authority
needs to find the value of r, a firm’s allowed return on equity base, that equates the value
of equity net of flotation costs to the initial equity base (Sf = K0). Since the value of
equity net of flotation costs equals the value of equity in the absence of flotation costs
Exhibit No. SC-1
Appendix 3
Page 8 of 17
minus the present value of flotation costs, a regulatory authority needs to find that value
of r that solves the following equation:
S f = S − L.
This value is:
Equation 3
k
r =
fh
1−
1− f
To illustrate the Arzac-Marcus approach to adjusting the allowed return on equity for the
effect of flotation costs, suppose that the cost of equity in the absence of flotation costs is
12 percent. Furthermore, assume that a firm obtains external equity financing each year
equal to 10 percent of its earnings and that flotation expenses equal 5 percent of the value
of each issue. Then, according to Arzac and Marcus, the allowed return on equity should
be:
.12
r = = .1206 = 12 .06 %
(. 05 ).(. 1)
1−
.95
Summary. With respect to the three questions raised at the beginning of this section, it is
evident that Arzac and Marcus believe the flotation cost adjustment should be applied
each year, since continuous external equity financing is a fundamental assumption of
their model. They also believe that the adjusted rate of return should be applied to the
entire equity-financed portion of the rate base because their model is based on the
assumption that the flotation cost adjustment mechanism will be applied to the entire
equity financed portion of the rate base. Finally, Arzac and Marcus recommend a
flotation cost adjustment formula, Equation (3), that implicitly excludes recovery of
financing costs associated with financing in previous periods and includes only an
allowance for the fraction of equity financing obtained from external sources.
Patterson. The Arzac-Marcus flotation cost adjustment formula is significantly different

from the conventional approach (found in many introductory textbooks) which
recommends the adjustment equation:
Equation 4
Dt
r = +g
Pt −1(1 − f )
where Pt-1 is the stock price in the previous period and g is the expected dividend growth
rate. Patterson [18] compares the Arzac-Marcus adjustment formula to the conventional
approach and reaches the conclusion that the Arzac-Marcus formula effectively expenses
issuance costs as they are incurred, while the conventional approach effectively amortizes
them over an assumed infinite life of the equity issue. Thus, the conventional formula is
similar to the formula for the recovery of debt flotation costs: it is not meant to
Exhibit No. SC-1
Appendix 3
Page 9 of 17
compensate investors for the flotation costs of future issues, but instead is meant to
compensate investors for the flotation costs of previous issues. Patterson argues that the
conventional approach is more appropriate for rate making purposes because the plant
purchased with external equity funds will yield benefits over many future periods.
Illustration. To illustrate the Patterson approach to flotation cost recovery, assume that a
newly organized utility sells an initial issue of stock for $100 per share, and that the
utility plans to finance all new investments with retained earnings. Assume also that: (1)
the initial dividend per share is six dollars; (2) the expected long-run dividend growth rate
is six percent; (3) the flotation cost is five percent of the amount of the proceeds; and
(4) the payout ratio is 51.28 percent. Then, the investor’s required rate of return on equity
is [k = (D/P) + g = 6 percent + 6 percent = 12 percent]; and the flotation-cost-adjusted
cost of equity is [6 percent (1/.95) + 6 percent = 12.316 percent].
The effects of the Patterson adjustment formula on the utility’s rate base, dividends,
earnings, and stock price are shown in Table 3. We see that the Patterson formula allows
earnings and dividends to grow at the expected six percent rate. We also see that the
present value of expected future dividends, $100, is just sufficient to induce investors to
part with their money. If the present value of expected future dividends were less than
$100, investors would not have been willing to invest $100 in the firm. Furthermore, the
present value of future dividends will only equal $100 if the firm is allowed to earn the
12.316 percent flotation-cost-adjusted cost of equity on its entire rate base.
Summary. Patterson’s opinions on the three issues raised in this section are in stark
contrast to those of Arzac and Marcus. He believes that: (1) a flotation cost adjustment
should be applied in every year, regardless of whether a firm issues any new equity in
each year; (2) a flotation cost adjustment should be applied to the entire equity-financed
portion of the rate base, including that portion financed by retained earnings; and (3) the
rate of return adjustment formula should allow a firm to recover an appropriate fraction
of all previous flotation expenses.
VII. Conclusion
Having reviewed the literature and analyzed flotation cost issues, I conclude that:
Definition of Flotation Cost: A regulated firm should be allowed to recover both the
total underwriting and issuance expenses associated with issuing securities and the cost of
market pressure.
Time Pattern of Flotation Cost Recovery. Shareholders are indifferent between the
alternatives of immediate recovery of flotation costs and recovery over time, as long as
they are fairly compensated for the opportunity cost of their money. This opportunity cost
must include both the time value of money and a risk premium for equity investments of
this nature.
Regulatory Recovery of Flotation Costs. The Patterson approach to recovering flotation

costs is the only rate-of-return-adjustment approach that meets the Hope case criterion
that a regulated company’s revenues must be sufficient to allow the company an
opportunity to recover all prudently incurred expenses, including the cost of capital. The
Exhibit No. SC-1
Appendix 3
Page 10 of 17
Patterson approach is also the only rate-of-return-adjustment approach that provides an
incentive for investors to invest in the regulated company.
Implementation of a Flotation Cost Adjustment. As noted earlier, prevailing

regulatory practice seems to be to allow the recovery of flotation costs through an
adjustment to the required rate of return. My review of the literature on this subject
indicates that there are at least two recommended methods of making this adjustment: the
Patterson approach and the Arzac-Marcus approach. The Patterson approach assumes that
a firm’s flotation expenses on new equity issues are treated in the same manner as
flotation expenses on new bond issues, i. e., they are amortized over future time periods.
If this assumption is true (and I believe it is), then the flotation cost adjustment should be
applied to a firm’s entire equity base, including retained earnings. In practical terms, the
Patterson approach produces an increase in a firm’s cost of equity of approximately thirty
basis points. The Arzac-Marcus approach assumes that flotation costs on new equity
issues are recovered entirely in the year in which the securities are sold. Under the Arzac-
Marcus assumption, a firm should not be allowed any adjustments for flotation costs
associated with previous flotations. Instead, a firm should be allowed only an adjustment
on future security sales as they occur. Under reasonable assumptions about the rate of
new equity sales, this method produces an increase in the cost of equity of approximately
six basis points. Since the Arzac-Marcus approach does not allow the company to recover
the entire amount of its flotation cost, I recommend that this approach be rejected and the
Patterson approach be accepted.
Exhibit No. SC-1
Appendix 3
Page 11 of 17
BIBLIOGRAPHY
1. Armknecht, Raymond, Fred Grygiel and Patrick Hess, “Market Pressure: The Sales of New Common
Equity and Rate of Return Regulation, “Proceedings of the Business and Economic Statistics Section
of the American Statistical Association, 1974, pp. 80—91.
2. Arzac, E. R., and M. Marcus, “Flotation Cost Allowance in Rate of Return Regulation: A Note,”
Journal of Finance, December 1981, pp. 1199—1202.
3. Barclay, M. J. and R. H. Litzenberger, 1988, “Announcement Effects of New Equity Issues and the
Use of Intraday Price Data,” Journal of Financial Economics 21, 71—99.
4. Bhagat, S. and P. A. Frost, 1986, “Issuing Costs to Existing Shareholders in Competitive and
Negotiated Underwritten Public Utility Equity Offerings,” Journal of Financial Economics 15, 233—
59.
5. Bierman, H., and J. E. Hass, “Equity Flotation Cost Adjustments in Utilities’ Cost of Service,” Public
Utilities Fortnightly, March 1, 1983, pp. 46—49 .
6. Bowyer, Jr., John W., and Jess B. Yawitz, “The Effect of New Equity Issues on Utility Stock Prices,”
Pubic Utilities Fortnightly, May 22, 1980.
7. Brigham, Eugene F., Dana Aberwald, and Louis C. Gapenski, “Common Equity Flotation Costs and
Rate Making,” Public Utilities Fortnightly, May 2, 1985, pp. 28—26.
8. Calomiris, C. W. and D. M. G Raff, 1995, “The Evolution of Market Structure, Information, and
Spreads in American Investment Banking,” in M. B. Bordo and R. Sylla, eds., Anglo-American
Finance: Financial Markets and Institutions in 20th Century North America and the U. K. (Business
One-Irwin Homewood, IL), 103—60.
9. Dunbar, C. G., 1995, “The Use of Warrants as Underwriter Compensation in Initial Public Offerings,”
Journal of Financial Economics 38, 59—78.
10. Evans, Robert E., “On the Existence, Measurement, and Economic Significance of Market Pressure in
the Pricing of New Equity Shares,” unpublished dissertation, University of Wisconsin, 1978.
11. Howe, K. M., “Flotation Cost Allowance in Rate of Return Regulation: Comment,” Journal of
Finance, March 1984, pp. 289—290.
12. Howe, K. M., “Flotation Cost Allowance for the Regulated Firm: A Comparison of Alternatives,”
unpublished working paper, School of Business, Iowa State University.
13. Ibbotson, R. C., “Price Performance of Common Stock New Issues,” Journal of Financial Economics,
1975, pp. 235—272.
14. Lee, Inmoo, Scott Lochhead, Jay Ritter, and Quanshui Zhao, “The Costs of Raising Capital,” The
Journal of Financial Research, Vol XIX No 1 (Spring 1996), 59—74
15. Logue, D. E., “On the Pricing of Unseasoned Equity Offerings: 1965—1969,” Journal of Financial
and Quantitative Analysis, January 1973, pp. 91—103.
16. McDonald, J. G. and A. K. Fisher, “New Issue Stock Price Behavior,” Journal of Finance, March
1972, pp. 97—102.
17. Mikkelson, Wayne H. and M. Megan Partch, “Valuation Effects of Security Offerings and the Issuance
Process,” Journal of Financial Economics 15 (1986), pp. 31-60.
18. Patterson, C. S., “Flotation Cost Allowance in Rate of Return Regulation: Comment,” Journal of
Finance, September 1983, pp. 1335—1338.
19. Pettway, R. H., “The Effects of New Equity Sales Upon Utility Share Prices,” Public Utilities
Fortnightly, May 10, 1984, pp. 35—39.
20. Reilly, F. K. and K. Hatfield, “Investor Experience with New Stock Issues,” Financial Analysts’
Journal, September--October 1969, pp. 73—80.
Exhibit No. SC-1
Appendix 3
Page 12 of 17
21. Richter, P. H., “The Ever Present Need for an Underpricing Allowance,” Public Utilities Fortnightly,
February 18, 1982, pp. 58—61.
22. Scholes, M., “The Market for New Securities: Substitution versus Price Pressure and the Effects of
Information on Share Prices,” Journal of Business, April 1972, pp. 179—211.
23. Securities and Exchange Commission, Report of Special Study on Securities Markets, U. S.
Government Printing Office, Washington, D. C. 1963.
24. Smith, Clifford W. Jr., “Alternative Methods for Raising Capital,” Journal of Financial Economics 5
(1977) 273-307.
Exhibit No. SC-1
Appendix 3
Page 13 of 17
Table 1
Direct Costs as a Percentage of Gross Proceeds
for Equity (IPOs and SEOs) and Straight and Convertible Bonds
3
Offered by Domestic Operating Companies 1990—1994
Equities
IPOs SEOs
No. Other Total No. Other Total
Line Proceeds of Gross Direct Direct of Gross Direct Direct
No. ($ in millions) Issues Spreads Expenses Costs Issues Spreads Expenses Costs
1 2-9.99 337 9.05% 7.91% 16.96% 167 7.72% 5.56% 13.28%
2 10-19.99 389 7.24% 4.39% 11.63% 310 6.23% 2.49% 8.72%
3 20-39.99 533 7.01% 2.69% 9.70% 425 5.60% 1.33% 6.93%
4 40-59.99 215 6.96% 1.76% 8.72% 261 5.05% 0.82% 5.87%
5 60-79.99 79 6.74% 1.46% 8.20% 143 4.57% 0.61% 5.18%
6 80-99.99 51 6.47% 1.44% 7.91% 71 4.25% 0.48% 4.73%
7 100-199.99 106 6.03% 1.03% 7.06% 152 3.85% 0.37% 4.22%
8 200-499.99 47 5.67% 0.86% 6.53% 55 3.26% 0.21% 3.47%
9 500 and up 10 5.21% 0.51% 5.72% 9 3.03% 0.12% 3.15%
10 Total/Average 1,767 7.31% 3.69% 11.00% 1,593 5.44% 1.67% 7.11%
Bonds
Convertible Bonds Straight Bonds

No. Other Total No. Other Total
Line Proceeds of Gross Direct Direct of Gross Direct Direct
No. ($ in millions) Issues Spreads Expenses Costs Issues Spreads Expenses Costs
1 2-9.99 4 6.07% 2.68% 8.75% 32 2.07% 2.32% 4.39%
2 10-19.99 14 5.48% 3.18% 8.66% 78 1.36% 1.40% 2.76%
3 20-39.99 18 4.16% 1.95% 6.11% 89 1.54% 0.88% 2.42%
4 40-59.99 28 3.26% 1.04% 4.30% 90 0.72% 0.60% 1.32%
5 60-79.99 47 2.64% 0.59% 3.23% 92 1.76% 0.58% 2.34%
6 80-99.99 13 2.43% 0.61% 3.04% 112 1.55% 0.61% 2.16%
7 100-199.99 57 2.34% 0.42% 2.76% 409 1.77% 0.54% 2.31%
8 200-499.99 27 1.99% 0.19% 2.18% 170 1.79% 0.40% 2.19%
9 500 and up 3 2.00% 0.09% 2.09% 20 1.39% 0.25% 1.64%
10 Total/Average 211 2.92% 0.87% 3.79% 1,092 1.62% 0.62% 2.24%
[3] Inmoo Lee, Scott Lochhead, Jay Ritter, and Quanshui Zhao, “The Costs of Raising Capital,”
Journal of Financial Research Vol 19 No 1 (Spring 1996) pp. 59-74.
Exhibit No. SC-1
Appendix 3
Page 14 of 17
Notes:
Closed-end funds and unit offerings are excluded from the sample. Rights offerings for SEOs are also excluded. Bond
offerings do not include securities backed by mortgages and issues by Federal agencies. Only firm commitment
offerings and non-shelf-registered offerings are included.
Gross Spreads as a percentage of total proceeds, including management fee, underwriting fee, and selling concession.
Other Direct Expenses as a percentage of total proceeds, including management fee, underwriting fee, and selling
concession.
Total Direct Costs as a percentage of total proceeds (total direct costs are the sum of gross spreads and other direct
expenses).
Exhibit No. SC-1
Appendix 3
Page 15 of 17
Table 2
Direct Costs of Raising Capital 1990—1994
4
Utility versus Non-Utility Companies
Equities
Non-Utilities IPOs SEOs
Line Proceeds No. Total Direct No. Gross Total Direct

No. ($ in millions) of Issues Gross Spreads Costs Of Issues Spreads Costs
1 2-9.99 332 9.04% 16.97% 154 7.91% 13.76%
2 10-19.99 388 7.24% 11.64% 278 6.42% 9.01%
3 20-39.99 528 7.01% 9.70% 399 5.70% 7.07%
4 40-59.99 214 6.96% 8.71% 240 5.17% 6.02%
5 60-79.99 78 6.74% 8.21% 131 4.68% 5.31%
6 80-99.99 47 6.46% 7.88% 60 4.35% 4.84%
7 100-199.99 101 6.01% 7.01% 137 3.97% 4.36%
8 200-499.99 44 5.65% 6.49% 50 3.27% 3.48%
9 500 and up 10 5.21% 5.72% 8 3.12% 3.25%
10 Total/Average 1,742 7.31% 11.01% 1,457 5.57% 7.32%
11 Utilities Only
12 2-9.99 5 9.40% 16.54% 13 5.41% 7.68%
13 10-19.99 1 7.00% 8.77% 32 4.59% 6.21%
14 20-39.99 5 7.00% 9.86% 26 4.17% 4.96%
15 40-59.99 1 6.98% 11.55% 21 3.69% 4.12%
16 60-79.99 1 6.50% 7.55% 12 3.39% 3.72%
17 80-99.99 4 6.57% 8.24% 11 3.68% 4.11%
18 100-199.99 5 6.45% 7.96% 15 2.83% 2.98%
19 200-499.99 3 5.88% 7.00% 5 3.19% 3.48%
20 500 and up 0 1 2.25% 2.31%
21 Total/Average 25 7.15% 10.14% 136 4.01% 4.92%
[4] Lee et al, op. cit.

Exhibit No. SC-1
Appendix 3
Page 16 of 17
Table 2 (continued)
Direct Costs of Raising Capital 1990—1994
5
Utility versus Non-Utility Companies
Bonds
Non- Utilities Convertible Bonds Straight Bonds
Line Proceeds No. of Total Direct No. of Total Direct
No. ($ in millions) Issues Gross Spreads Costs Issues Gross Spreads Costs
1 2-9.99 4 6.07% 8.75% 29 2.07% 4.53%
2 10-19.99 12 5.54% 8.65% 47 1.70% 3.28%
3 20-39.99 16 4.20% 6.23% 63 1.59% 2.52%
4 40-59.99 28 3.26% 4.30% 76 0.73% 1.37%
5 60-79.99 47 2.64% 3.23% 84 1.84% 2.44%
6 80-99.99 12 2.54% 3.19% 104 1.61% 2.25%
7 100-199.99 55 2.34% 2.77% 381 1.83% 2.38%
8 200-499.99 26 1.97% 2.16% 154 1.87% 2.27%
9 500 and up 3 2.00% 2.09% 19 1.28% 1.53%
10 Total/Average 203 2.90% 3.75% 957 1.70% 2.34%
11 Utilities Only
12 2-9.99 0 3 2.00% 3.28%
13 10-19.99 2 5.13% 8.72% 31 0.86% 1.35%
14 20-39.99 2 3.88% 5.18% 26 1.40% 2.06%
15 40-59.99 0 14 0.63% 1.10%
16 60-79.99 0 8 0.87% 1.13%
17 80-99.99 1 1.13% 1.34% 8 0.71% 0.98%
18 100-199.99 2 2.50% 2.74% 28 1.06% 1.42%
19 200-499.99 1 2.50% 2.65% 16 1.00% 1.40%
6
20 500 and up 0 1 3.50% na
21 Total/Average 8 3.33% 4.66% 135 1.04% 1.47%
Notes:
Total proceeds raised in the United States, excluding proceeds from the exercise of over allotment options.
Gross spreads as a percentage of total proceeds (including management fee, underwriting fee, and selling concession).
Other direct expenses as a percentage of total proceeds (including registration fee and printing, legal, and auditing
costs).
[5] Lee et al, op. cit.

[6] Not available because of missing data on other direct expenses.
Exhibit No. SC-1
Appendix 3
Page 17 of 17
Table 3
Illustration of Patterson Approach to Flotation Cost Recovery
Earnings Earnings
Line Rate @ @ Amortization
No. Time Period Base 12.32% 12.00% Dividends Initial FC
1 0 95.00
2 1 100.70 11.70 11.40 6.00 0.3000
3 2 106.74 12.40 12.08 6.36 0.3180
4 3 113.15 13.15 12.81 6.74 0.3371
5 4 119.94 13.93 13.58 7.15 0.3573
6 5 127.13 14.77 14.39 7.57 0.3787
7 6 134.76 15.66 15.26 8.03 0.4015
8 7 142.84 16.60 16.17 8.51 0.4256
9 8 151.42 17.59 17.14 9.02 0.4511
10 9 160.50 18.65 18.17 9.56 0.4782
11 10 170.13 19.77 19.26 10.14 0.5068
12 11 180.34 20.95 20.42 10.75 0.5373
13 12 191.16 22.21 21.64 11.39 0.5695
14 13 202.63 23.54 22.94 12.07 0.6037
15 14 214.79 24.96 24.32 12.80 0.6399
16 15 227.67 26.45 25.77 13.57 0.6783
17 16 241.33 28.04 27.32 14.38 0.7190
18 17 255.81 29.72 28.96 15.24 0.7621
19 18 271.16 31.51 30.70 16.16 0.8078
20 19 287.43 33.40 32.54 17.13 0.8563
21 20 304.68 35.40 34.49 18.15 0.9077
22 21 322.96 37.52 36.56 19.24 0.9621
23 22 342.34 39.77 38.76 20.40 1.0199
24 23 362.88 42.16 41.08 21.62 1.0811
25 24 384.65 44.69 43.55 22.92 1.1459
26 25 407.73 47.37 46.16 24.29 1.2147
27 26 432.19 50.21 48.93 25.75 1.2876
28 27 458.12 53.23 51.86 27.30 1.3648
29 28 485.61 56.42 54.97 28.93 1.4467
30 29 514.75 59.81 58.27 30.67 1.5335
31 30 545.63 63.40 61.77 32.51 1.6255
32 Present Value@12% 195.00 190.00 100.00 5.00
Exhibit No. SC-1
Appendix 4
Page 1 of 4
APPENDIX 4
EX ANTE RISK PREMIUM APPROACH
My ex ante risk premium method is based on studies of the DCF expected return
on proxy companies compared to the interest rate on Moody’s A-rated utility bonds.
Specifically, for each month in my study period, I calculate the risk premium using the
equation,
RPPROXY = DCFPROXY – IA
where:
RPPROXY = the required risk premium on an equity investment in the

proxy group of companies,
DCFPROXY = average DCF estimated cost of equity on a portfolio of

proxy companies; and
IA = the yield to maturity on an investment in A-rated utility

bonds.
For my ex ante risk premium electric proxy group DCF analysis, I first began this
analysis using the Moody’s group of twenty-four electric utilities as of the time I first
began the studies, shown in Table 1. I used the Moody’s group of electric utilities
because they are a widely followed group of electric utilities, and using this constant
group greatly simplified the data collection task required to estimate the ex ante risk
premium over the months of my study. Simplifying the data collection task was desirable
because the ex ante risk premium approach requires that the DCF model be estimated for
every company in every month of the study period. However, because many of the
companies that were formerly included in the Moody’s electric utility group have been
eliminated due to mergers and acquisitions, and because it is desirable to have a larger set
of companies in the analysis than are now available in the Moody’s group, beginning in
January 2016 I have used the same proxy group of electric utilities in my ex ante risk
Exhibit No. SC-1
Appendix 4
Page 2 of 4
premium analysis as used in my discounted cash flow analysis. The Ex Ante Risk
Premium exhibit in my direct testimony displays the average DCF estimated cost of
equity on an investment in the portfolio of electric utilities and the yield to maturity on A-
rated utility bonds in each month of the study.
Previous studies have shown that the ex ante risk premium tends to vary inversely
with the level of interest rates, that is, the risk premium tends to increase when interest
rates decline, and decrease when interest rates go up. To test whether my studies also
indicate that the ex ante risk premium varies inversely with the level of interest rates, I
performed a regression analysis of the relationship between the ex ante risk premium and
the yield to maturity on A-rated utility bonds, using the equation,
RPPROXY = a + (b x IA) + e
where:
RPPROXY = risk premium on proxy company group;
IA = yield to maturity on A-rated utility bonds;
e = a random residual; and
a, b = coefficients estimated by the regression procedure.
Regression analysis assumes that the statistical residuals from the regression
equation are random. My examination of the residuals revealed that there is a significant
probability that the residuals are serially correlated (non-zero serial correlation indicates
that the residual in one time period tends to be correlated with the residual in the previous
time period). Therefore, I made adjustments to my data to correct for the possibility of
serial correlation in the residuals.
The common procedure for dealing with serial correlation in the residuals is to
estimate the regression coefficients in two steps. First, a multiple regression analysis is
used to estimate the serial correlation coefficient, r. Second, the estimated serial
Exhibit No. SC-1
Appendix 4
Page 3 of 4
correlation coefficient is used to transform the original variables into new variables
whose serial correlation is approximately zero. The regression coefficients are then re-
estimated using the transformed variables as inputs in the regression equation. Based on
my knowledge of the statistical relationship between the yield to maturity on A-rated
utility bonds and the required risk premium, my estimate of the ex ante risk premium on
an investment in my proxy electric company group as compared to an investment in A-
rated utility bonds is given by the equation:
RPPROXY = 8.52 - .063 x IA.
(13.58) (-6.81) 7
Using the forecast 6.16 percent yield to maturity on A-rated utility bonds, the
regression equation produces an ex ante risk premium based on the electric proxy group
equal to 4.68 percent (8.52 – .063 x 6.16 = 4.68.
To estimate the cost of equity using the ex ante risk premium method, one may
add the estimated risk premium over the yield on A-rated utility bonds to the yield to
maturity on A-rated utility bonds. The forecast yield on A-rated utility bonds is
6.16 percent. As noted above, my analyses produce an estimated risk premium over the
yield on A-rated utility bonds equal to 4.68 percent. Adding an estimated risk premium of
4.68 percent to the 6.16 percent average yield to maturity on A-rated utility bonds
produces a cost of equity estimate of 10.8 percent for the electric company proxy group
using the ex ante risk premium method.
7 The t-statistics are shown in parentheses.

Exhibit No. SC-1
Appendix 4
Page 4 of 4
TABLE 1
MOODY’S ELECTRIC UTILITIES
American Electric Power

Constellation Energy
Progress Energy
CH Energy Group
Cinergy Corp.
Consolidated Edison Inc.
DPL Inc.
DTE Energy Co.
Dominion Resources Inc.
Duke Energy Corp.
Energy East Corp.
FirstEnergy Corp.
Reliant Energy Inc.
IDACORP. Inc.
IPALCO Enterprises Inc.
NiSource Inc.
OGE Energy Corp.
Exelon Corp.
PPL Corp.
Potomac Electric Power Co.
Public Service Enterprise Group
Southern Company
Teco Energy Inc.
Xcel Energy Inc.
Exhibit No. SC-1
Appendix 5
Page 1 of 1
APPENDIX 5
EX POST RISK PREMIUM APPROACH
Source
Stock price and yield information is obtained from Standard & Poor’s Security Price
publication. Standard & Poor’s derives the stock dividend yield by dividing the aggregate
cash dividends (based on the latest known annual rate) by the aggregate market value of the
stocks in the group. The bond price information is obtained by calculating the present value
of a bond due in thirty years with a $4.00 coupon and a yield to maturity of a particular year’s
indicated Moody’s A-rated utility bond yield. The values shown in the schedules are the
January values of the respective indices.
Calculation of Stock and Bond Returns
Sample calculation of “Stock Return” column:
 Stock Price (2018) - Stock Price (2017) + Dividend (2017) 

Stock Return (2017) =  
 Stock Price (2017) 
where Dividend (2017) = Stock Price (2017) x Stock Div. Yield (2017)
Sample calculation of “Bond Return” column:
 Bond Price (2018) - Bond Price (2017) + Interest (2017) 

Bond Return (2017) =  
 Bond Price (2017) 
where Interest = $4.00.

Exhibit No. SC-2
Direct Testimony of Steven M. Fetter
Exhibit No. SC-2

BEFORE THE

Complainants,

Gulf Power Company,
Respondents.
DIRECT TESTIMONY OF
STEVEN M. FETTER
June 4, 2018
Exhibit No. SC-2
Page ii
TABLE OF CONTENTS
I. INTRODUCTION .................................................................................................... 1
II. SUMMARY OF PURPOSE AND CONCLUSION ............................................. 5
III. CREDIT RATINGS AND THEIR IMPORTANCE TO

REGULATED UTILITIES................................................................................... 7
IV. INVESTOR PERCEPTIONS ............................................................................. 13
V. THE COMPANIES’ FORWARD-LOOKING GENERATION

STRATEGIES ...................................................................................................... 15
VI. POTENTIAL NEGATIVE EFFECTS FROM THE TAX ACT..................... 17
VII. THE DETAILS OF SOUTHERN’S OPERATIONS AND

OPERATING RISKS .......................................................................................... 24
VIII. CONCLUSION ................................................................................................. 25

Exhibit No. SC-2
Page iii
LIST OF ATTACHMENTS
Attachment No. Description
SMF-1 Educational and Professional Background of

Steven M. Fetter
Exhibit No. SC-2

BEFORE THE

Complainants,

Gulf Power Company,
Respondents.
DIRECT TESTIMONY OF
STEVEN M. FETTER
June 4, 2018
Exhibit No. SC-2
Page 1
I. INTRODUCTION
1 Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
2 A. My name is Steven M. Fetter. My business address is 1240 West Sims Way,
3 Port Townsend, Washington 98368.
5 Q. ON WHOSE BEHALF ARE YOU PROVIDING DIRECT TESTIMONY?
6 A. I am testifying on behalf of Alabama Power Company, Georgia Power
7 Company, Gulf Power Company, Mississippi Power Company, and Southern
8 Company Services, Inc. (the “Companies”). For purposes of simplicity, I will
9 use the term “Southern” in this testimony to refer to The Southern Company,
10 parent of the Companies. I will also often refer to Southern’s credit ratings in
11 this testimony, since its ratings generally reflect the combined credit profiles of
12 the Companies.
13
14 Q. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY?
15 A. I am President of Regulation UnFettered, a utility advisory firm I started in
16 April 2002. Prior to that, I was employed by Fitch, Inc. (“Fitch”), a credit
17 rating agency based in New York and London. Prior to that, I served as
18 Chairman of the Michigan Public Service Commission (“Michigan PSC”).

Exhibit No. SC-2
Page 2
1 Q. PLEASE BRIEFLY DESCRIBE YOUR EDUCATIONAL
2 BACKGROUND.
3 A. I graduated with high honors from the University of Michigan with an A.B. in
4 Communications in 1974. I graduated from the University of Michigan Law
5 School with a J.D. in 1979.
7 Q. PLEASE DESCRIBE YOUR SERVICE ON THE MICHIGAN PUBLIC
8 SERVICE COMMISSION.
9 A. I was appointed as a Commissioner to the three-member Michigan PSC in
10 October 1987 by Democratic Governor James Blanchard. In January 1991, I
11 was promoted to Chairman by incoming Republican Governor John Engler,
12 who reappointed me in July 1993. During my tenure as Chairman, timeliness
13 of commission processes was a major focus, and my colleagues and I achieved
14 the goal of eliminating the agency’s case backlog for the first time in 23 years.
15 While on the Michigan PSC, I also served as Chairman of the Board of the
16 National Regulatory Research Institute (“NRRI”), the research arm of the
17 National Association of Regulatory Utility Commissioners, which was then
18 located at The Ohio State University. After leaving regulatory service, I was
19 appointed to the NRRI Board as a public member.
20
21 Q. WHAT WAS YOUR ROLE IN YOUR EMPLOYMENT WITH FITCH?
22 A. I was Group Head and Managing Director of the Global Power Group within
23 Fitch. In that role, I served as group manager of the combined 18-person New
Exhibit No. SC-2
Page 3
1 York and Chicago utility team. I was originally hired to interpret the impact of
2 regulatory and legislative developments on utility credit ratings, a
3 responsibility I continued to have throughout my tenure at the rating agency.
4 In April 2002, I left Fitch to start Regulation UnFettered.
6 Q. HOW LONG WERE YOU EMPLOYED BY FITCH?
7 A. I was employed by Fitch from October 1993 until April 2002. In addition,
8 Fitch retained me as a consultant for a period of approximately six months
9 shortly after I resigned.
10
11 Q. PLEASE DESCRIBE YOUR ROLE AS PRESIDENT OF REGULATION
12 UNFETTERED.
13 A. I formed a utility advisory firm to use my financial, regulatory, legislative, and
14 legal expertise to aid the deliberations of regulators, legislative bodies, and the
15 courts, and to assist them in evaluating regulatory issues. My clients have
16 included investor-owned and municipal electric, natural gas and water utilities,
17 state public utility commissions and consumer advocates, non-utility energy
18 suppliers, international financial services and consulting firms, and investors.
19
20 Q. HOW DOES YOUR EXPERIENCE RELATE TO YOUR TESTIMONY
21 IN THIS PROCEEDING?
22 A. My experience as Chairman and Commissioner on the Michigan PSC and my
23 subsequent professional experience with financial analysis and ratings of the

Exhibit No. SC-2
Page 4
1 U.S. electric and natural gas sectors – in jurisdictions involved in restructuring
2 activity as well as those still following a traditional regulated path – have given
3 me solid insight into the importance of a regulator’s role vis-à-vis regulated
4 utilities, both in setting their rates as well as the appropriate terms and
5 conditions for the service they provide. In addition, for almost 20 years, I have
6 served as a member of the Wall Street Utility Group, an organization
7 comprised of debt and equity analysts assigned to cover and make
8 recommendations on companies within the utility sector.
10 Q. HAVE YOU PREVIOUSLY GIVEN TESTIMONY BEFORE
11 REGULATORY AND LEGISLATIVE BODIES?
12 A. Since 1990, I have testified on numerous occasions before the U.S. Senate, the
13 U.S. House of Representatives, the Federal Energy Regulatory Commission
14 (“FERC” or “Commission”), federal district and bankruptcy courts, and
15 various state and provincial legislative, judicial, and regulatory bodies on the
16 subjects of credit risk and cost of capital within the utility sector, electric and
17 natural gas utility restructuring, fuel and other energy cost adjustment
18 mechanisms, regulated utility mergers and acquisitions, construction work in
19 progress and other interim rate recovery structures, utility securitization bonds,
20 and nuclear energy. I have previously filed testimony before the FERC on
21 behalf of Nevada Power Company and Sierra Pacific Power Company v. Enron
22 Power Marketing Inc., Docket Nos. EL04-1-000 and EL03-180-000; on behalf
23 of the Maine Public Utilities Commission, Vermont Department of Public

Exhibit No. SC-2
Page 5
1 Service, Maine Public Advocate, and Vermont Public Service Board in Devon
2 Power LLC, et al., Docket Nos. ER03-563-000 and EL04-102-000; in
3 Oklahoma Corporation Commission v. (on behalf of) American Electric Power
4 Service Corporation, Docket No. EL08-80-000; and on behalf of Entergy
5 Services, Inc., Docket No. ER-08-1056-002. In addition, I have previously
6 filed testimony or participated in public meetings on behalf of the Companies.
7 My full educational and professional background is presented in
8 Southern Attachment SMF-1.
II. SUMMARY OF PURPOSE AND CONCLUSION
9 Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
10 A. The Companies have asked me to supplement the authorized return on equity
11 (“ROE”) testimony of Dr. James H. Vander Weide utilizing my past
12 experience as a state utility regulator, head of a major utility ratings practice,
13 and consultant to all sides in the utility sector. Specifically, I have been asked
14 to review the direct testimony of Breandan T. Mac Mathuna, on behalf of
15 Alabama Municipal Electric Authority and Cooperative Energy, and provide
16 rebuttal with regard to his recommendation that the Companies’ authorized
17 ROE should be reduced from 11.25% to 8.65%.
18
19 Q. WHAT DID YOU CONCLUDE?
20 A. I concluded that the Commission should reject Mr. Mac Mathuna’s argument
21 that this Commission should set the Companies’ authorized ROE in this
22 proceeding at 8.65%, the median of ROEs authorized for companies in his

Exhibit No. SC-2
Page 6
1 selected proxy group. Rather, the Commission should accept an ROE at or
2 near the top of the range recommended by Dr. Vander Weide. In coming to
3 that conclusion, I focused on the following factors, including uncertainty
4 evidenced by Southern’s current credit ratings and the disparity between the
5 nature of the Companies’ operations versus those carried out by companies
6 within Mr. Mac Mathuna’s proxy group:
7 • Inconsistency, unfairness, and uncertainty are the bane of utility investors.
8 A reduction in the Companies’ authorized ROE from 11.25% to 8.65%
9 would undoubtedly shake investor confidence now and on into the future;
10 • Southern faced significant risk beyond anything faced by other proxy group
11 companies by being a first mover on new nuclear and integrated
12 gasification combined cycle (“IGCC”) construction projects;
13 • Potential negative financial impacts on Southern due to enactment of the
14 Tax Cuts and Jobs Act of 2017 (“Tax Act”), with an early indicator being
15 the placement of a Negative Outlook on Southern’s credit ratings by a
16 major rating agency, with cautionary commentary coming from the two
17 other major agencies; and
18 • Southern having four regulated electric utilities operating in four separate
19 regulatory jurisdictions.1
1
Pending regulatory review of the May 21, 2018 announcement of the sale of Southern’s Gulf Power
Company subsidiary to NextEra Energy, Inc.
Exhibit No. SC-2
Page 7
III. CREDIT RATINGS AND THEIR IMPORTANCE

TO REGULATED UTILITIES
1 Q. FIRST OFF, YOU HIGHLIGHT ABOVE SOUTHERN’S CREDIT
2 RATINGS LEVELS AS A CONCERN. COULD YOU EXPLAIN WHAT
3 A CREDIT RATING IS AND WHY IT IS IMPORTANT?
4 A. A credit rating reflects an independent judgment of the general
5 creditworthiness of an obligor or of a specific debt instrument. While credit
6 ratings are important to both debt and equity investors for a variety of reasons,
7 their most important purpose is to communicate to investors the financial
8 strength of a company or the underlying credit quality of a particular debt
9 security issued by that company.
10 Credit rating determinations are made by credit rating agencies through
11 a committee process involving individuals with knowledge of a company, its
12 industry, and its regulatory environment. Corporate rating designations of
13 Standard and Poor’s Financial Services LLC (“S&P”) and Fitch have ‘AAA’,
14 ‘AA’, ‘A’ and ‘BBB’ category ratings within the investment-grade ratings
15 sphere, with ‘BBB-’ as the lowest investment-grade rating and ‘BB+’ as the
16 highest non-investment-grade rating. Comparable rating designations of
17 Moody’s Investors Service, Inc. (“Moody’s”) at the investment-grade dividing
18 line are ‘Baa3’ and ‘Ba1’, respectively. The following chart illustrates the
19 comparability of ratings between the three agencies.
20
Exhibit No. SC-2
Page 8
1 CHART 1
2 Ratings Categories – Comparability Between Agencies

3
4 S&P & Fitch Moody’s
5
6 Investment Grade
7
8 AAA Aaa
9 AA+ Aa1
10 AA Aa2
11 AA- Aa3
12 A+ A1
13 A A2
14 A- (2) A3
15 BBB+ (3) Baa1
16 BBB Baa2 (4)
17 BBB- Baa3
18
19 Below Investment Grade
20
21 BB+ Ba1
22 BB Ba2
23 BB- Ba3
24 B+ B1
25 B B2
26 B- B3
27 CCC Caa
28 CC Ca
29 C C
30 D [C]
31 Corporate credit rating analysis considers both qualitative and quantitative
32 factors to assess the financial and business risks of fixed-income debt issuers
33 and other credit providers. A credit rating is an indication of an issuer’s ability
34 to service its debt, both principal and interest, on a timely basis. It also at times
35 incorporates some consideration of ultimate recovery of investment in case of
36 default or insolvency. Ratings can also be used by contractual counterparties
2
Southern corporate rating from S&P with a Negative outlook.
3
Southern corporate rating from Fitch with a Stable outlook.
4
Southern corporate rating from Moody’s with a Negative outlook.
Exhibit No. SC-2
Page 9
1 to gauge both the short-term and long-term financial health and viability of a
2 company, including decisions related to required collateral levels, with higher-
3 rated entities facing lower requirements.
5 Q. WHAT CREDIT RATINGS DOES SOUTHERN NOW HOLD?
6 A. As noted on the chart above, Southern currently holds corporate credit ratings
7 of “Baa2” with a Negative outlook from Moody’s, an “A-” with a Negative
8 outlook from S&P, and a “BBB+” with a Stable outlook from Fitch.
10 Q. WHY ARE CREDIT RATINGS IMPORTANT TO REGULATED
11 UTILITIES AND THEIR CUSTOMERS?
12 A. A utility’s credit ratings have a significant impact on its ability to raise capital
13 on a timely basis and with reasonable terms. As economist Charles F. Phillips
14 states in his treatise on utility regulation:
15 Bond ratings are important for at least four reasons: (1) they are
16 used by investors in determining the quality of debt investment;
17 (2) they are used in determining the breadth of the market, since
18 some large institutional investors are prohibited from investing
19 in the lower grades; (3) they determine, in part, the cost of new
20 debt, since both the interest charges on new debt and the degree
21 of difficulty in marketing new issues tend to rise as the rating
22 decreases; and (4) they have an indirect bearing on the status of
23 a utility’s stock and on its acceptance in the market.5
24 Thus, a utility with strong credit ratings is not only able to access the capital
25 markets on a timely basis at reasonable rates, it is also able to share the benefit
5
Phillips, Charles F., Jr., The Regulation of Public Utilities, Arlington, Virginia: Public Utilities
Reports, Inc., 1993, at p. 250 (emphasis supplied). See also Public Utilities Reports Guide: “Finance,”
Public Utilities Reports, Inc., 2004 at pp. 6-7 (“Generally, the higher the rating of the bond, the better
the access to capital markets and the lower the interest to be paid.”).
Exhibit No. SC-2
Page 10
1 from those attractive interest rate levels with customers since cost of capital is
2 factored into customer rates. Conversely, but of equal importance, the lower a
3 utility’s credit rating, the more the utility must pay to raise funds from debt and
4 equity investors to carry out its capital-intensive operations, which results in
5 higher costs included in customer rates. Continuing to provide support for
6 Southern’s credit profile is especially important in view of Southern’s ongoing
7 financial support for the Companies on an as needed basis, along with the
8 stresses placed upon the entire regulated utility sector due to passage of federal
9 tax reform legislation, as I discuss below. A regulated utility, such as each of
10 the Companies, is required to raise funding even during periods of rising costs
11 and market volatility. Accordingly, I have long advocated that a regulated
12 utility should maintain credit ratings no lower than “BBB+” / “Baa1”, a level
13 that should allow a utility to access the capital markets upon reasonable terms,
14 even during most of the times of stress within the capital markets – with a
15 longer term goal of improving ratings into the “A” category.6 Southern’s credit
16 ratings currently straddle the “BBB+” threshold level. I note that Southern’s
17 ratings have historically resided within the “A” category.
18
6
See, e.g., Steven M. Fetter, “The ‘A’ Rating,” EEI Electric Perspectives, May/June 2009.
Exhibit No. SC-2
Page 11
1 Q. WHAT ARE THE KEY QUANTITATIVE MEASURES THAT ARE
2 USED BY THE RATING AGENCIES TO ESTABLISH UTILITY
3 CREDIT RATINGS?
4 A. The rating agencies use several financial measures within their utility financial
5 analysis. S&P currently highlights the following two core financial ratios as its
6 key indicators: Funds from Operations to Debt (FFO / Debt), which focuses on
7 cash flow; and Debt to Earnings Before Interest, Taxes, Depreciation and
8 Amortization (Debt / EBITDA), which provides a comparative measure of
9 leverage and profitability.7 A focus on these two ratios is consistent with
10 S&P’s long-held belief that “Cash flow analysis is the single most critical
11 aspect of all credit rating decisions.”8 Moody’s and Fitch place similar reliance
12 on cash flow within their ratings processes. I note that rating agencies often
13 adjust these key ratios to reflect imputed debt and interest-like fixed charges
14 related to operating leases and certain other off-balance sheet obligations.
15
16 Q. WHAT QUALITATIVE FACTORS ARE USED IN THE CREDIT
17 RATING PROCESS?
18 A. The most important qualitative factors are regulation, management and
19 business strategy, and access to energy, gas and fuel supply with recovery of
20 associated costs.
21
7
S&P Research: “Corporate Methodology,” November 19, 2013.
8
S&P Research: “A Closer Look at Ratings Methodology,” November 13, 2006.
Exhibit No. SC-2
Page 12
1 Q. HOW DO YOU VIEW SOUTHERN’S CREDIT RATINGS AS THEY
2 STAND NOW?
3 A. It is very unusual for a major US utility to have credit ratings at three different
4 levels from the three major rating agencies. Time will tell which agency has its
5 future expectations aligned with what will actually occur. But for now, as a
6 former head of the Fitch utility ratings group, I believe that such an array of
7 ratings shows a high degree of uncertainty among both debt and equity
8 investors that does not accrue to the benefit of the Companies’ large customer
9 base. The decision in this case will be watched as a sign of the direction that
10 Southern’s ratings will soon be taking. Mr. Mac Mathuna’s recommendation
11 forebodes a weakening credit profile for Southern, with the likelihood of
12 increasing rates for customers down the line, and the potential that Southern
13 will once again have to increase the equity level at its regulated subsidiaries to
14 support their credit profiles. Alternatively, stabilization of all three ratings no
15 lower than “BBB+”, the minimum target level that I view to be appropriate,
16 should place Southern in a situation to deal with most of the stresses arising
17 from its day-to-day operations or volatility within the capital markets. Thus, I
18 encourage the Commission to issue a steady-state decision that does not
19 increase the stress on Southern’s ratings, consistent with the evidence put
20 forward by Dr. Vander Weide.

Exhibit No. SC-2
Page 13
IV. INVESTOR PERCEPTIONS
1 Q. YOU REFERENCE CONCERNS THAT INVESTORS HOLD WITH
2 REGARD TO INVESTING IN UTILITIES. COULD YOU PLEASE
3 EXPLAIN?
4 A. Yes. During the past decade, FERC has promulgated policies to encourage
5 electric transmission owners to expand and enhance their systems with support
6 from the financial community. As a former utility commission chairman, I
7 know full well why such incentives are important and warranted. There are
8 few utility regulatory issues as sensitive to the local populace as the siting of
9 transmission lines. Even generation takes a backseat to transmission among
10 concerns in local communities, since power plants at least bring along jobs and
11 support for the local economy. Thus far, FERC’s encouragement has been
12 successful – transmission expansion has accelerated and investors have stepped
13 forward to help that along. Southern has been a beneficiary of such lowering
14 of barriers and has made substantial investments in transmission over the past
15 five years. In addition to the necessity of raising both external debt and equity
16 funding, along with managing the complexity of transmission construction,
17 Southern has had to deal with siting issues in four separate jurisdictions where
18 its regulated electric utilities operate. And with transmission siting being such
19 a purely local issue, “one size fits all” does not apply regardless of the utility
20 involved. Thus, in Southern’s case, it has had to deal with local laws and
21 regulations – along with the sometimes extralegal “wants” of local officials –
22 in differing ways with regard to transmission construction in each of the four

Exhibit No. SC-2
Page 14
1 states. This alone sets Southern apart from the majority of the companies that
2 Mr. Mac Mathuna has relied upon within his proxy group.
4 Q. COULD YOU OPINE ON HOW THE INVESTMENT COMMUNITY
5 WOULD REACT IF THE COMMISSION WERE TO ACCEPT MR.
6 MAC MATHUNA’S RECOMMENDATION?
7 A. Yes. In addition to the supportive policies of FERC for transmission
8 investment during the recent past, the consistency of its decision-making has
9 created a level of confidence that encourages ongoing support from investors.
10 The lowering of the Companies’ authorized ROE by 260 basis points would be
11 a major shock to the investment community. Such a decision would cause that
12 confidence to be shaken in one instant. Make no mistake though – once
13 shaken, that support will not immediately return. It would take time for the
14 Commission to rebuild a consistent supportive track record in order to recover
15 its current reputation for consistency and fairness with regard to transmission
16 investment.
17
18 Q. DO YOU SEE ANY SIGNS OF GROWING UNCERTAINTY WITH
19 REGARD TO SOUTHERN?
20 A. I do. Credit ratings are based upon expected future events and financial
21 forecasts. Southern’s credit ratings currently show two notches between its
22 S&P and Moody’s ratings, with S&P at “A-” (Negative outlook) and Moody’s
23 at “Baa2” (Negative outlook). As a former bond rater, I can say that, while this
Exhibit No. SC-2
Page 15
1 occurs at times, for a utility of Southern’s size and scope, a two-notch
2 differential represents an unusual occurrence.
V. THE COMPANIES’ FORWARD-LOOKING

GENERATION STRATEGIES
3 Q. WHILE MR. MAC MATHUNA REPEATEDLY REFERS TO
4 SOUTHERN’S RISK AS “AVERAGE” WITHIN HIS PROXY GROUP,
5 YOU REFERENCE THE SIGNIFICANT RISKS THAT SOUTHERN
6 HAS FACED BY BEING A FIRST MOVER WITH REGARD TO NEW
7 NUCLEAR AND IGCC DEVELOPMENT. WOULD YOU EXPLAIN?
8 A. Yes. I have been involved with Georgia Power Company’s efforts at the
9 Vogtle nuclear project and Mississippi Power Company’s Kemper IGCC plant,
10 both of which entail major generation and transmission investments. By being
11 a first mover among US electric utilities with these two projects, Southern took
12 on significant risks – with the support of its regulators – to utilize “new”
13 technologies for the benefit of its customer base. As we now know, those
14 projects have faced major ups and downs and modifications along the way.
15 Rating commentary from S&P, which maintains the highest of Southern’s
16 ratings, exhibits well the major operational and financial risks that both
17 Southern and the Companies continue to face:
18 S&P re Vogtle: “The decision appears to be positive for credit

19 quality, but our negative outlook on Southern and its utility
20 subsidiaries is tied to the possibility that the project could go
21 forward without the same regulatory support for eventual cost
22 recovery as there was before the bankruptcy of the project
23 constructor. After a thorough review of the GPSC’s order, we
24 expect to assess whether the decision to proceed with Vogtle
Exhibit No. SC-2
Page 16
1 construction does have the same regulatory support and is

2 consistent with the current ratings and a stable outlook.”9
3
4 S&P re Kemper: “On Aug. 2, 2017, Southern announced that it
5 had impaired the majority of its remaining investment in the
6 Kemper integrated gasification combined cycle unit (Kemper
7 IGCC) in Mississippi given its decision not to complete the
8 gasification portion of the plant and the likelihood that it will
9 not recover any costs associated with it. While the decision
10 eliminates the risk of more cash outflow to bring the gasifier on
11 line, we see higher regulatory risk for Mississippi Power given
12 the company's inability to recover anything but a very small
13 amount of its total investment in the plant.”10
14 Moody’s agrees that both Vogtle and Kemper represent continuing risk for
15 Southern, with “Credit Challenges” including:
16 “Decision to recommend Vogtle nuclear project completion

17 is credit negative with no fixed price contract in place,
18 Southern assuming additional construction risk, and Georgia
19 Power ceding some control to its Vogtle co-owners;”
20 and
21 “Mississippi Power’s regulatory environment and financial

22 condition have been negatively affected by several years of
23 delays and cost increases at the Kemper IGCC project.”11
24 Looking at Mr. Mac Mathuna’s proxy group, I do not see any utility that has
25 faced and continues to face risks of the magnitude described above. Mr. Mac
26 Mathuna has failed to adjust within his proxy group findings for the fact that its
27 median risk is in no way reflective of the risks investors and rating agencies
28 perceive in analyzing investments in Southern. His use of the group median
29 for his recommendation illustrates clearly that he is ignoring the analysis
30 clearly available from the investment community.
9
S&P Research: “Southern Co. and Utility Subsidiaries Ratings Are Not Affected by Commission’s
Decision,” December 21, 2017.
10
S&P Research: “Southern Co. and Subsidiaries Outlook Still Negative Pending Vogtle Decision;
Ratings Affirmed,” August 4, 2017.
11
Moody’s Research: “Southern Company,” November 17, 2017.
Exhibit No. SC-2
Page 17
1 Q. DOES THE EQUITY SIDE AGREE WITH THE RATING AGENCIES’
2 AND YOUR RISK ASSESSMENT?
3 A. Yes, they do. While the financial community generally viewed the recent
4 announced sale of Gulf Power Company by Southern to NextEra Energy, Inc.
5 as credit and strategic positive, equity analysts did note Southern’s continuing
6 market risk due to the issues discussed above:
7 UBS: “Risks specific to Southern Company include execution

8 of the Vogtle new nuclear construction project, state level utility
9 regulation (particularly in Georgia), the outcome of the
10 Mississippi rate process, execution of growth opportunities or
11 lack thereof at midstream and power, interest rates, and
12 weather.”12
13
14 Deutsche Bank: “We believe a discount is merited given credit
15 challenges and the execution overhang presented by the Vogtle
16 nuclear project. Downside risks include the potential
17 cancellation of Vogtle, although we see this as highly unlikely
18 in the near-term, a negative outcome in the 2019 Georgia Power
19 rate case, Vogtle construction challenges, higher interest rates,
20 higher financing needs and reduced electric demand.”13
VI. POTENTIAL NEGATIVE EFFECTS FROM

THE TAX ACT
21 Q. DOES MR. MAC MATHUNA’S VIEW ABOUT “AVERAGE” RISK AT
22 SOUTHERN SHOW A DISCONNECT WITH REGARD TO THE
23 RECENT FEDERAL TAX REFORM LEGISLATION AND ITS
24 EFFECTS ON THE REGULATED UTILITY SECTOR?
25 A. Yes, it does. It has become clear over the past few months that the recent
26 federal tax reform legislation will have varying negative effects depending
27 upon policies in particular jurisdictions. Based upon recent rating agency
12
UBS Research: “Southern Co: Executing on Lower Cost of Capital Equity Options,” May 21, 2018.
13
Deutsche Bank Research: “Southern Company: So Long Sunshine State!,” May 21, 2018.
Exhibit No. SC-2
Page 18
1 actions and commentary, I believe that the manner in which that legislation is
2 factored into customer rates might further stress Southern’s credit profile, and
3 thus its market risk.
5 Q. PLEASE EXPLAIN.
6 A. Generally speaking, while the enacted tax reductions hold out the promise of
7 lower utility rates for customers, the manner in which those benefits are
8 provided will have an effect on both the financial strength of a regulated utility,
9 as well as the timing and size of those reductions once all relevant issues have
10 been factored into the equation. Specifically, two policy provisions in the Tax
11 Act will have a significant impact on cash flow for most regulated utilities: the
12 cessation of bonus depreciation and the lowering of tax rates that might require
13 the near-term refunding to customers of currently deferred tax liabilities. With
14 cash flow in most cases being the most important financial factor in the
15 assigning of utility credit ratings, the structuring of refunds related to these
16 items could have either a negative or neutral impact on regulated utility credit
17 profiles.
18
19 Q. HAVE THE MAJOR RATING AGENCIES REACTED TO THE NEW
20 LAW?
21 A. Yes, they all have, with Moody’s offering up the most specific and severe
22 reaction to the Tax Act, stating:
23 The new tax bill is credit negative for US investor-owned

24 regulated utilities because the lower 21% statutory tax rate
Exhibit No. SC-2
Page 19
1 reduces cash collected from customers, while the loss of bonus

2 depreciation reduces tax deferrals, all else being equal. We
3 calculate that the recent changes in tax laws will dilute a
4 utility’s ratio of cash flow before changes in working capital to
5 debt by approximately 150 – 250 basis points on average, …
6 [and that] debt to total capitalization ratios will increase… We
7 recently placed negative outlooks on 24 companies [including
8 Southern].14 The rating action primarily reflects the incremental
9 cash flow shortfall caused by the new legislation on projected
10 financial metrics that were already weak, or were expected to
11 become weak, given the existing rating for those companies.
12 The negative outlooks also consider the uncertainty over the
13 timing of any regulatory actions or other changes to corporate
14 finance policies made to offset the financial impact.15
15 I have followed utility credit ratings for over 30 years, and I am hard-pressed to
16 recall any other singular event that led a rating agency to effectuate such a
17 large-scale negative rating action – the assignment of 24 Negative outlooks
18 simultaneously.
19 Fitch’s position is consistent in that, barring mitigative steps on the part of
20 either regulators or the utilities themselves, or both, negative consequences will
21 likely ensue:
22 The [Tax Act] has negative credit implications for regulated

23 utilities and utility holding companies over the short to medium
24 term. A reduction in customer bills to reflect lower federal
25 income taxes and return of excess accumulated deferred income
26 taxes (ADIT) is expected to lower revenues and FFO [funds
27 from operations] across the sector. Absent mitigating strategies
28 on the regulatory front, this is expected to lead to weaker credit
29 metrics and negative rating actions for issuers with limited
30 headroom to absorb the leverage creep.…
31
32 Fitch’s rating actions will be guided by both the regulatory and
33 management responses. A majority of states have opened
34 dockets or requested all utilities in the state to submit an
35 analysis on the implications of the tax reform. While regulators
14
Moody’s Research: “Moody’s changes outlooks on 25 US regulated utilities primarily impacted by
tax reform,” January 19, 2018.
15
Moody’s Research: “FAQ on the credit impact of new tax law,” January 24, 2018.
Exhibit No. SC-2
Page 20
1 will be keen to provide some sort of rate relief for customers,

2 such actions could take many forms and vary in time frame.
3 Some jurisdictions may be open to a negotiated outcome that
4 focuses more on benefits of rate stability and creditworthy
5 utilities rather than immediate rate reductions.16
6 S&P, while also harboring concerns about the Tax Act, has taken a more
7 measured approach, focusing as much on regulatory responses to tax reform as
8 it has on the effects of the tax law changes themselves:
9 The impact of tax reform on utilities is likely to be negative to

10 varying degrees depending on a company’s tax position going
11 into 2018, how its regulators react, and how the company reacts
12 in return. It is negative for credit quality because the
13 combination of a lower tax rate and the loss of stimulus
14 provisions related to bonus depreciation or full expensing of
15 capital spending will create headwinds in operating cash-flow
16 generation capabilities as customer rates are lowered in
17 response to the new tax code. The impact could be sharpened or
18 softened by regulators depending on how much they want to
19 lower utility rates immediately instead of using some of the
20 lower revenue requirement from tax reform to allow the utility
21 to retain the cash for infrastructure investment or other
22 expenses. Regulators must also recognize that tax reform is a
23 strain on utility credit quality, and we expect companies to
24 request stronger capital structures and other means to offset
25 some of the negative impact.…
26
27 [I]f the regulatory response does not adequately compensate for
28 the lower cash flows, we will look to the issuers, especially at
29 the holding company level, to take steps to protect credit metrics
30 if necessary. Some deterioration in the ability to deduct interest
31 expense could occur at the parent, making debt there relatively
32 more expensive. More equity may make sense and be necessary
33 to protect ratings if financial metrics are already under pressure
34 and regulators are aggressive in lowering customer rates. It will
35 probably take the remainder of this year to fully assess the
36 financial impact on each issuer from the change in tax liabilities,
37 the regulatory response, and the company’s ultimate response.17
16
Fitch Research: “Tax Reform Impact on the U.S. Utilities, Power & Gas Sector – Tax Reform Creates
Near-Term Credit Pressure for Regulated Utilities and Holding Companies,” January 24, 2018.
[Emphasis supplied.]
17
S&P Research: “U.S. Tax Reform: For Utilities’ Credit Quality, Challenges Abound,” January 24,
2018.
Exhibit No. SC-2
Page 21
1 Then, recently, Moody’s followed up with an “Update Following Negative
2 Outlook,”18 bringing together all of the risks facing Southern going forward,
3 illustrating well the concerns that the financial community holds with regard to
4 investing in Southern and its subsidiaries:
5 Credit challenges
6 » High business and operating risk as the Southern moves forward with the
7 Vogtle new nuclear project without a fixed price contract and assumes more
8 of a nuclear construction management role
9 » Recently passed tax reform legislation will negatively affect financials absent
10 mitigation measures and pressure Southern’s ability to maintain metrics
11 supportive of rating, including CFO pre-working capital to debt of at least 15%;
12 the 30 September 2017 LTM ratio of 12.2% could fall to the 10% range
13 without mitigation
14 » High percentage of debt at the Southern parent company of around 25% of
15 consolidated debt could increase as equity levels at the utilities are raised to
16 offset the impact of tax reform
17 » Negative outlooks at its two largest subsidiaries, Georgia Power Company
18 (A3) and Alabama Power Company (A1)
19 » Debt incurred to fund substantial capital expenditures at Southern Power
20 has negatively but temporarily affected that subsidiary’s cash flow coverage
21 metrics
22 Rating outlook
23 The negative rating outlook on Southern primarily reflects the pressure that
24 recent tax reform legislation will have on financial metrics, absent mitigation
25 measure, which will adversely affect the ability of Southern to maintain CFO
26 pre-working capital to debt at or above 15%. The negative rating outlook also
27 considers the negative outlooks on Southern’s two largest utility subsidiaries,
28 Georgia Power and Alabama Power.
29 Factors that could lead to an upgrade
30 An upgrade of Southern’s rating is unlikely while it faces financial and
31 execution risk at the Vogtle new nuclear project and CFO preworking capital
32 to debt remains at 15% or below. Southern's rating outlook could be stabilized
33 if there are credit supportive regulatory actions at the state level to mitigate
34 the impact of tax reform, or there is a change in Southern’s corporate finance
35 policies such that parent level debt is reduced or cash flow coverage metrics
36 improve materially, including CFO pre-working capital to debt in the high
37 teens to 20%.
38 Factors that could lead to a downgrade
39 Southern's rating could be downgraded if either Alabama Power, Georgia
40 Power, or Southern Gas are downgraded; if there is a material debt financed
41 acquisition, further increasing parent company leverage; if there are
42 additional delays or cost increases at the Vogtle nuclear project; if recent tax
43 reform legislation or other developments cause consolidated coverage metrics
18
Moody’s Research: “Southern Company,” February 11, 2018.
Exhibit No. SC-2
Page 22
1 to show a sustained decline, including CFO pre-working capital to debt below

2 15%.
3 The bottom line is that substantial reduction in Southern’s ROE, as called for
4 by Mr. Mac Mathuna, exacerbated by significant operating and regulatory risks
5 and negative tax law impacts, which, along with the perception of a less
6 supportive federal regulatory environment, would likely lead Moody’s and
7 S&P to act on their Negative outlooks and downgrade Southern’s credit rating
8 to “Baa3” (the lowest investment-grade level) at Moody’s, and “BBB+” at
9 S&P. This would place all three of Southern’s ratings out of the “A” category,
10 taking away the protection that “A” ratings would provide for Southern’s
11 customers and investors during periods of significant capital markets
12 instability.19
13
14 Q. HOW DO YOU INTERPRET MOODY’S STATEMENTS AND
15 ACTIONS VIS-À-VIS THE PROXY GROUP RELIED UPON BY MR.
16 MAC MATHUNA?
17 A. I find that a comparison between Moody’s Negative outlook actions and Mr.
18 Mac Mathuna’s selected proxy group illustrates that his recommendation that
19 Southern’s ROE should be set at the level of the median ROE of the proxy
20 group is misplaced. Matching up the 14 utilities in the proxy group with the 24
21 utilities receiving Negative outlooks generates an overlap of only three
22 utilities: Southern, Duke Energy, and Entergy Corp., as shown in the following
23 chart:
19
See “The ‘A’ Rating,” cited above.
Exhibit No. SC-2
Page 23
1 CHART 2
2
3 Overlap [in Bold] Between Proxy Group and Moody’s Negative Outlooks
4
5 Proxy Group Moody’s
6
7 Alabama Power Capital Trust V
8 Alabama Power Co.
9 Alliant Energy
10 Ameren Corp.
11 American. Elec. Power
12 American Water Capital Corp.
13 American Water Works Co., Inc.
14 Avista Corp.
15 Avista Corp. Capital II
16 Brooklyn Union Gas Co.
17 Centerpoint Energy
18 CMS Energy
19 Con Ed Co. of NY, Inc.
20 Con Ed, Inc.
21 DTE Energy
22 Duke Energy Duke Energy
23 Entergy Corp. Entergy Corp.
24 Fortis, Inc.
25 Keyspan Gas East Corp.
26 New Jersey Natural Gas Co.
27 NextEra Energy
28 Northwest Natural Gas Co.
29 ONE Gas, Inc.
30 Orange and Rockland Utils., Inc.
31 Piedmont Natural Gas Co., Inc.
32 PNM Resources, Inc.
33 PPL Corp.
34 Public Service Co. of Oklahoma
35 Public Serv. Enterprise
36 Questar Gas Co.
37 South Jersey Gas Co.
38 Southern Company Southern Company
39 Southern Elect. Generating Co.
40 Southwestern Public Service Co.
41 Wisconsin Gas LLC
Exhibit No. SC-2
Page 24
1 Thus, Moody’s selection places these three utilities out of the 14 as having
2 significantly higher risk going forward as regulators consider how to address
3 the potential negative financial risks from the federal tax legislation, if those
4 risks are to be addressed at all. Thus, using simple math, Southern would be at
5 approximately the 80th percentile towards the top of the appropriate risk range
6 as discussed by Dr. Vander Weide. But, doing a deeper dive in the data, shows
7 that, of the three proxy group utilities negatively affected by Moody’s actions,
8 Southern and Entergy share the lowest ratings from Moody’s: “Baa2” with
9 Negative outlooks. Thus, carrying out the calculation further, the incorporation
10 of the risks flowing from the tax law changes would support placement of
11 Southern at or near the top end of the appropriate ROE range, as calculated by
12 Dr. Vander Weide.20
VII. THE DETAILS OF SOUTHERN’S OPERATIONS

AND OPERATING RISKS
13 Q. YOU MAKE REFERENCE TO THE DETAILS OF SOUTHERN’S
14 OPERATIONS AND THE IMPACT ON ITS COMPANIES’ MARKET
15 RISK. COULD YOU PLEASE EXPLAIN?
16 A. Yes. As a former utility commission chairman and head of a utility ratings
17 group, I fully appreciate that each individual regulatory jurisdiction presents its
18 own specific laws, regulations, policies, and procedures – not to mention its
19 particular “unspoken” expected steps and mores. I have had the opportunity to
20 testify on behalf of Southern’s regulated electric companies in each of its four
20
I included the “near” descriptor to reflect the fact that one other proxy group company – Fortis, Inc. –
holds a lower rating (Baa3) than do Southern and Entergy, and PPL has the same rating (Baa2).
Moody’s, though, did not treat either company as warranting a caution with regard to the Tax Act.
Exhibit No. SC-2
Page 25
1 regulatory jurisdictions. I have seen and operated within its systems of dealing
2 with the risk inherent in having to approach policy and procedural issues in
3 varying ways depending upon where it is litigating. Interestingly, among Mr.
4 Mac Mathuna’s proxy group, the only other utilities that are equally challenged
5 vis-à-vis differing US jurisdictional norms are American Electric Power, Duke
6 Energy, and Entergy, all utility parent companies for whom I have testified in
7 multiple jurisdictions in the past. Thus, I can speak from personal experience
8 of the increased risk that these utilities face in their day-to-day regulatory
9 activities. Accordingly, it would make sense that this subset of the proxy
10 group would be appropriately placed at or at least toward the top end of the
11 ROE range flowing from Dr. Vander Weide’s analysis.
VIII. CONCLUSION
12 Q. DO YOU HAVE CONCLUDING THOUGHTS?
13 A. Yes, I do. Regulatory decision-making calls for a careful weighing of facts,
14 law, and assessment of past performance and potential future scenarios. If
15 FERC were to move off of its strong encouragement of transmission
16 investment, such action would undermine investor confidence and undercut the
17 Commission’s efforts to incent the financial community’s interest in providing
18 such support. As detailed in Dr. Vander Weide’s testimony, acceptance of Mr.
19 Mac Mathuna’s ROE level of 8.65% would represent a level well below
20 investor return requirements, causing concern across both the utility sector and
21 the financial community.

Exhibit No. SC-2
Page 26
1 Turning to Southern’s specific circumstances, I do not think that any
2 US regulated electric utility has been faced with greater complexity and risk
3 than has Southern and its regulated electric subsidiaries – laid out across four
4 separate regulatory jurisdictions. As noted, that great amount of risk has
5 resulted in unplanned occurrences along the way, but Southern has sought to
6 face up to and be responsive to those negative events for the future benefit of
7 its customer base. No regulator determined at the outset of Southern’s nuclear
8 and IGCC activities that it was inappropriate for Southern to proceed with its
9 strategic plans, all risk factors considered. Added to that operational risk is the
10 newfound legal and regulatory risk presented by the federal enactment of tax
11 reform legislation, which now places previously useful regulatory and financial
12 strategies into a potentially unfavorable light – with possible negative financial
13 impacts. As explained, Southern is one of the electric utilities most affected by
14 those changes in federal law.
15 Dr. Vander Weide has testified to the proper placement of the
16 Companies’ authorized ROE within this proceeding. I view his ROE
17 recommendation as appropriately meeting investor expectations in a way that
18 will maintain investor confidence and stabilize Southern’s credit ratings no
19 lower than my minimum recommended “BBB+” level. For the reasons I have
20 discussed in this testimony, I am in full accord with his recommendation.
21
22 Q. DOES THIS CONCLUDE YOUR REBUTTAL TESTIMONY?
23 A. Yes, it does.
. UNITED STATES OF AMERICA
BEFORE THE

Complainants,
V. Docket No. EL18-147-000

Gulf Power Company,
Respondents.
AFFIDAVIT OF STEVEN M. FETTER
Steven M. Fetter, being first duly sworn, deposes and says that he is the Steven M. Fetter
referred to in the foregoing testimony, that he has read such testimony and is familiar with the
contents thereof and that the answers therein are true and correct. to the best of his knowledge,
information and belief.
Steven M. Fetter
Subscribed and sworn to before me this 4th day of June, 2018, by Steven M. Fetter,
proved to me on the basis of satisfactory evidence to be the person who appeared before me.
"ANAKA R OFSTEDAL.
NOTARY PUBLIC Notary Public .
STATE OF WASHINGTON Commission Expires on: ~ ~ ( 1 \ '1.. q \"2.dZ l
COMMISSION EXPIRES
~ APRIL 29, 2021 ,
Exhibit No. SC-2
Attachment SMF-1
Page 1
STEVEN M. FETTER
1240 West Sims Way

Port Townsend, WA 98368
732-693-2349
RegUnF@gmail.com
www.RegUnF.com
Education University of Michigan Law School, J.D. 1979

Bar Memberships: U.S. Supreme Court, New York, Michigan
University of Michigan, A.B. Media (Communications) 1974
April 2002 – Present

President - Regulation UnFettered- Port Townsend, Washington
Founder of advisory firm providing regulatory, legislative, financial, legal and

strategic planning advisory services for the energy, water and telecommunications
sectors, including public utility commissions and consumer advocates; federal
and state testimony; credit rating advisory services; negotiation, arbitration and
mediation services; skills training in ethics, negotiation, and management
efficiency.
Service on Boards of Directors of: Central Hudson (Fortis Inc. subsidiary)

(Chairman, Governance and Human Resources Committee); and Previously CH
Energy Group (Lead Independent Director; Chairman, Audit Committee,
Compensation Committee, and Governance and Nominating Committee);
National Regulatory Research Institute (Chairman); Keystone Energy Board; and
Regulatory Information Technology Consortium; Member, Wall Street Utility
Group; Participant, Keystone Center Dialogues on RTOs and on Financial
Trading and Energy Markets.
October 1993 – April 2002

Group Head and Managing Director; Senior Director -- Global Power
Group, Fitch IBCA Duff & Phelps -- New York / Chicago
Manager of 18-employee ($15 million revenue) group responsible for credit

research and rating of fixed income securities of U.S. and foreign electric and
natural gas companies and project finance; Member, Fitch Utility Securitization
Team.
Led an effort to restructure the global power group that in three years’ time
resulted in 75% new personnel and over 100% increase in revenues, transforming
a group operating at a substantial deficit into a team-oriented profit center through
a combination of revenue growth and expense reduction.
Exhibit No. SC-2
Attachment SMF-1
Page 2
Achieved national recognition as a speaker and commentator evaluating the

effects of regulatory developments on the financial condition of the utility sector
and individual companies; Cited by Institutional Investor (9/97) as one of top
utility analysts at rating agencies; Frequently quoted in national newspapers and
trade publications including The New York Times, The Wall Street Journal,
International Herald Tribune, Los Angeles Times, Atlanta Journal-Constitution,
Forbes and Energy Daily; Featured speaker at conferences sponsored by Edison
Electric Institute, Nuclear Energy Institute, American Gas Assn., Natural Gas
Supply Assn., National Assn. of Regulatory Utility Commissioners (NARUC),
Canadian Electricity Assn.; Frequent invitations to testify before U.S. Senate (on
C-Span) and House of Representatives, and state legislatures and utility
commissions.
Participant, Keystone Center Dialogue on Regional Transmission Organizations;

Member, International Advisory Council, Eisenhower Fellowships; Author, "A
Rating Agency's Perspective on Regulatory Reform," book chapter published by
Public Utilities Reports, Summer 1995; Advisory Committee, Public Utilities
Fortnightly.
March 1994 – April 2002

Consultant -- NYNEX -- New York, Ameritech -- Chicago, Weatherwise
USA -- Pittsburgh
Provided testimony before the Federal Communications Commission and state

public utility commissions; Formulated and taught specialized ethics and
negotiation skills training program for employees in positions of a sensitive
nature due to responsibilities involving interface with government officials,
marketing, sales or purchasing; Developed amendments to NYNEX Code of
Business Conduct.
October 1987 - October 1993

Chairman; Commissioner -- Michigan Public Service Commission --
Lansing
Administrator of $15-million agency responsible for regulating Michigan’s public

utilities, telecommunications services, and intrastate trucking, and establishing an
effective state energy policy; Appointed by Democratic Governor James
Blanchard; Promoted to Chairman by Republican Governor John Engler (1991)
and reappointed (1993).
Initiated case-handling guideline that eliminated agency backlog for first time in
23 years while reorganizing to downsize agency from 240 employees to 205 and
Exhibit No. SC-2
Attachment SMF-1
Page 3
eliminate top tier of management; MPSC received national recognition for

fashioning incentive plans in all regulated industries based on performance,
service quality, and infrastructure improvement.
Closely involved in formulation and passage of regulatory reform law (Michigan

Telecommunications Act of 1991) that has served as a model for other states;
Rejuvenated dormant twelve-year effort and successfully lobbied the Michigan
Legislature to exempt the Commission from the Open Meetings Act, a
controversial step that shifted power from the career staff to the three
commissioners.
Elected Chairman of the Board of the National Regulatory Research Institute (at
Ohio State University); Adjunct Professor of Legislation, American University’s
Washington College of Law and Thomas M. Cooley Law School; Member of
NARUC Executive, Gas, and International Relations Committees, Steering
Committee of U.S. Environmental Protection Agency/State of Michigan Relative
Risk Analysis Project, and Federal Energy Regulatory Commission Task Force
on Natural Gas Deliverability; Eisenhower Exchange Fellow to Japan and
NARUC Fellow to the Kennedy School of Government; Ethics Lecturer for
NARUC.
August 1985 - October 1987

Acting Associate Deputy Under Secretary of Labor; Executive Assistant to
the Deputy Under Secretary -- U.S. Department of Labor -- Washington DC
Member of three-person management team directing the activities of 60-

employee agency responsible for promoting use of labor-management
cooperation programs. Supervised a legal team in a study of the effects of U.S.
labor laws on labor-management cooperation that has received national
recognition and been frequently cited in law reviews (U.S. Labor Law and the
Future of Labor-Management Cooperation, w/S. Schlossberg, 1986).
January 1983 - August 1985

Senate Majority General Counsel; Chief Republican Counsel -- Michigan
Senate -- Lansing
Legal Advisor to the Majority Republican Caucus and Secretary of the Senate;
Created and directed 7-employee Office of Majority General Counsel; Counsel,
Senate Rules and Ethics Committees; Appointed to the Michigan Criminal Justice
Commission, Ann Arbor Human Rights Commission and Washtenaw County
Consumer Mediation Committee.
Exhibit No. SC-2
Attachment SMF-1
Page 4
March 1982 - January 1983

Assistant Legal Counsel -- Michigan Governor William Milliken -- Lansing
Legal and Labor Advisor (member of collective bargaining team); Director,

Extradition and Clemency; Appointed to Michigan Supreme Court Sentencing
Guidelines Committee, Prison Overcrowding Project, Coordination of Law
Enforcement Services Task Force.
October 1979 - March 1982

Appellate Litigation Attorney -- National Labor Relations Board --
Washington DC
Other Significant Speeches and Publications
Filing for Bankruptcy Isn’t the Right Solution for Puerto Rico (Forbes Online,
November 2015)
The “A” Rating (Edison Electric Institute Perspectives, May/June 2009)
Perspective: Don’t Fence Me Out (Public Utilities Fortnightly, October 2004)
Climate Change and the Electric Power Sector: What Role for the Global
Financial Community (during Fourth Session of UN Framework Convention on
Climate Change Conference of Parties, Buenos Aires, Argentina, November 3,
1998)(unpublished)
Regulation UnFettered: The Fray By the Bay, Revisited (National Regulatory

Research Institute Quarterly Bulletin, December 1997)
The Feds Can Lead…By Getting Out of the Way (Public Utilities Fortnightly,
June 1, 1996)
Ethical Considerations Within Utility Regulation, w/M. Cummins (National

Regulatory Research Institute Quarterly Bulletin, December 1993)
Legal Challenges to Employee Participation Programs (American Bar

Association, Atlanta, Georgia, August 1991) (unpublished)
Proprietary Information, Confidentiality, and Regulation's Continuing

Information Needs: A State Commissioner's Perspective (Washington Legal
Foundation, July 1990)

Southern Co FERC Response

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Southern Co FERC Response

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UNITED STATES OF AMERICA

Alabama Municipal Electric Authority

v. Docket No. EL18-147-000

Alabama Power Company,

RESPONDENTS’ ANSWER TO COMPLAINT

Christopher H. Demko Lyle D. Larson

Attorneys for Respondents

June 18, 2018

I. SUMMARY OF COMPLAINT ............................................................................................... 2

Alabama Municipal Electric Authority

v. Docket No. EL18-147-000

Alabama Power Company,

RESPONDENTS’ ANSWER TO COMPLAINT

Cooperative Energy (“Complainants”). As demonstrated below, the Complainants fail to plead a

Alternatively, if the Commission establishes procedures to consider the Complaint, it should

establish the latest permissible refund effective date.

II. EXECUTIVE SUMMARY

A. Complainants fail to plead a prima facie case.

This failure requires denial or dismissal.13

C. Complainants’ interpretation of DCF study results fails to follow

risk profile of Southern Companies. Contrary to Commission guidance that a mechanical

risk premium methods.22

investment with a return “commensurate” with “investments in other enterprises having

This standard is particularly important now in light of Southern Companies’ above-

attraction for Southern Companies in context of existing capital markets or company-specific

is still insufficient to meet the Complainants’ prima facie burden of proof.

Commission is to deny or dismiss the Complaint without prejudice, as unripe.28

D. Southern Companies’ current ROE is well within the statutory zone of

risk profile of Southern Companies, and determines a statutory zone of reasonableness in

Vander Weide’s statutory zones of reasonableness.

Complaint on the basis of the written record.

To justify initiation of hearing procedures to potentially modify Southern Companies’

reasonable in relation to the initial burden under Section 206:

FERC’s decision—that a single ROE analysis generating a new

the ‘statutory’ zone of reasonableness envisioned by the FPA.”45

as to whether Southern’s current ROE is beyond a statutory zone of reasonableness. The

confirmed by examination of alternative benchmarks. They failed to do so and, therefore, the

B. Assuming a prima facie case can be made without a statutory zone of

testimony render the Complaint insufficient to present issues of material fact.

1. Complainants’ single-point ROE recommendation is skewed by

Complainants’ DCF study produces skewed results because it contains computational

here, was just recently rejected in Belmont ID.50

basis of an erroneous application of the Commission’s precedent for excluding companies

proxy companies appears to be based solely on involvement in M&A activity, with no

c. Correction of Complainants’ errors and omissions produces a

ranges and values:

rectifies a material downward bias.

just the Commission’s DCF study framework.

2. Complainants have misinterpreted their flawed DCF results.

reasonableness is erroneous. Specifically, in support of their claim that an ROE of 11.25% is

recommended return are unsound.

environment of climbing interest rates:

capital market dynamics.70

instability and change―hardly a “new normal” as concluded by Mr. Mac Mathuna.

b. Complainants’ focus on the median also ignores investors’

of equity methods and benchmarks, render his testimony unreliable.

Southern Companies’ witness, Steven M. Fetter, clearly establishes that Southern

companies within Mr. Mac Mathuna’s proxy group,” to wit:

• “[S]ignificant risk beyond anything faced by other proxy group companies

• “Southern having four regulated electric utilities operating in four separate

While the financial community generally viewed the recent

UBS: “Risks specific to Southern Company include

Deutsche Bank: “We believe a discount is merited given

use of a median value from an average risk proxy group is problematic: