NEW TWISTS ON THE DCF or THE “C” IN DCF

1. Society of Utility and Regulatory Financial Analysts NEW TWISTS ONTHE DCF or THE “C” IN DCF Georgetown University P. Moul & Associates Conference Center 856-428-7515 April 28, 2006 prmoul@aol.com

2. NEW TWISTS ON THE DCF or THE “C” IN DCF Discounted Cash Flow • Attributes • Deficiencies

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

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

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

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

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

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

9. NEW TWISTS ON THE DCF or THE “C” IN DCF

10. NEW TWISTS ON THE DCF or THE “C” IN DCF Modigliani and Miller ku = ke - (((ku - i ) 1-t) D / E ) - (ku - d ) P/E where: ku = cost of equity for an all-equity firm ke = market determined cost equity i = cost of debt d = dividend rate on preferred stock D = debt ratio P = preferred stock ratio E = common equity ratio

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