Opening Statement Dr. Julie A. Urban. capital is 66 basis points lower than the cost proposed by CenterPoint.

Transcription

1 Opening Statement Dr. Julie A. Urban My testimony in this rate case is on rate of return on equity and overall cost of capital. Based on my analysis, I recommend a return on equity of 9.34 percent and an overall cost of capital of 7.28 percent for CenterPoint Minnesota Gas. My proposed rate of return is 96 basis points lower than CenterPoint s proposed ROE of 10.3 percent. My proposed overall cost of capital is 66 basis points lower than the cost proposed by CenterPoint. The witnesses on rate of return have several areas of disagreement which explain the difference between the recommendations for return on equity and the overall cost of capital. The major areas of disagreement include proxy selection, flotation costs and capital structure. My proxy group consists of five companies as compared to seven companies in the proxy groups of both CenterPoint and the Department of Commerce. As explained in my previous testimony and in that of CenterPoint witness Mr. Hevert, 1 the size of the proxy is less important than the level of similarity between the companies included in the proxy group and CenterPoint. My proxy group does not include New Jersey Resources nor South Jersey Industries. I excluded these companies from my proxy because, unlike CenterPoint which is solely engaged in regulated gas distribution, these companies are engaged in numerous non-regulated activities. This will impact their risk profile and therefore their appropriate rate of return. Another significant departure from Mr. Hevert and the Department is my position on flotation costs. Flotation costs are the cost incurred by a company when issuing new stock. I do not think it is appropriate that flotation costs be recovered through an adjustment to return on equity. The Company s proposed adjustment for flotation costs increases the ROE by 14 basis 1 Hevert, Direct, at

2 points. None of CPEI s other utility subsidiaries receive flotation cost adjustments to their ROE. 2 CenterPoint s business model is likely to be very similar to the other CPEI utility subsidiaries and those utilities are able to provide utility service without flotation adjustments to their ROE. As a result, there does not appear to be any need to give CenterPoint preferential treatment by allowing a flotation cost adjustment to its return on equity. In addition, should CPEI issue shares in the future, it may seek recovery for the portion of flotation costs consisting of the out-of-pocket expenses, through a future rate case. The final significant disagreement between the OAG and CenterPoint is capital structure. The capital requirements of a utility are financed by a combination of debt and equity. A utility s decision on the allocation of financial capital between debt and equity involves a tradeoff between the higher cost of equity borne by rate payers versus the increased financial risk borne by the stockholders from an increase in debt. In an April 8, 2003 Order, the Commission ordered CenterPoint 3 to maintain approximately a 50 percent equity ratio. 4 CenterPoint is proposing an equity ratio of percent. This equity ratio is significantly greater than the equity ratio of my proxy group which is 50.3 percent and that of the Company and the Department which is 49.8 percent. I agree with Department witness Mr. Addonizio that the Commission should not adopt CenterPoint s proposed capital structure. I, however, recommend a more aggressive push back 2 See OAG Information Request 330, which is attached as Schedule JAU-11 to my direct testimony. One CenterPoint utility receives a type of flotation cost adjustment in Mississippi. That adjustment, however, did not come through a rate case and is instead related to an automatic review of the company s ROE, with a band of permissible ROEs that can trigger rate cases or sharing of earnings. As such, it is not comparable to the regulatory process in Minnesota. 3 CenterPoint was then known as Minnegasco. 4 Order Requiring Filings to Protect Minnesota Ratepayers, In the Matter of an Inquiry into Possible Effects of the Financial Difficulties at Reliant Energy, Inc. on Reliant Energy Minnegasco and its Customers, Docket No. G- 008/CI , at 12 (Apr. 8, 2003). 2

3 towards an equity ratio of 50 percent. I recommend that the Commission approve a capital structure of 50 percent debt and 50 percent equity. CenterPoint s high equity ratio puts undue burden on the ratepayers. Because they are regulated, utilities have lower risk profiles than other types of companies. Equity ratios for utilities are typically in the 40 to 50 percent range. It is therefore reasonable and prudent for CenterPoint as a regulated utility to take advantage of its lower risk profile and utilize a greater proportion of lower cost debt, not only to leverage its capital expenditure, but to benefit rate payers with lower revenue requirements. Based on an ROE of 9.34 percent and my recommended capital structure, the overall cost of capital is 7.28 percent. The annual burden on ratepayers under the CenterPoint proposal is almost $6 million greater than under the OAG proposal. With that, I close my opening statement. 3

4 LORI SWANSON ATTORNEY GENERAL STATE OF MINNESOTA OFFICE OF THE ATTORNEY GENERAL January 14, 2016 SUITE MINNESOTA STREET ST. PAUL, MN TELEPHONE: (651) The Honorable Eric L. Lipman Administrative Law Judge Office of Administrative Hearings 600 North Robert Street P. O. Box St. Paul, MN Re: In the Matter of the Application of CenterPoint Energy Resources Corp., d/b/a CenterPoint Energy Minnesota Gas, for Authority to Increase Natural Gas Rates in Minnesota MPUC Docket No. G-008/GR OAH Docket No Dear Judge Lipman: Enclosed and e-filed in the above-referenced matter please find Julie Urban s Opening Statement. By copy of this letter all parties have been served. An affidavit of service is enclosed. Sincerely, JOSEPH C. MEYER Assistant Attorney General (651) (Voice) (651) (Fax) Enclosure cc: Service List TTY: (651) Toll Free Lines: (800) (Voice), (800) (TTY) An Equal Opportunity Employer Who Values Diversity

5 AFFIDAVIT OF SERVICE RE: In the Matter of the Application of CenterPoint Energy Resources Corp., d/b/a CenterPoint Energy Minnesota Gas, for Authority to Increase Natural Gas Rates in Minnesota Docket No. G-008/GR OAH Docket No STATE OF MINNESOTA ) ) ss. COUNTY OF RAMSEY ) DEANNA DONNELLY, hereby states that on the 14th day of January 2016, I efiled with edockets Julie Urban s Opening Statement and served the same upon all parties listed on the attached service list by , and/or United States Mail with postage prepaid, and deposited the same in a U.S. Post Office mail receptacle in the City of St. Paul, Minnesota. s/ Julie Peick JULIE PEICK Subscribed and sworn to before me this 14th day of January, s/ Ruth M. Busch Notary Public My Commission expires: Jan. 31, 2020.

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