STATE OF NEW JERSEY BOARD OF PUBLIC UTILITIES I/M/O THE PETITION OF ...

STATE OF NEW JERSEY BOARD OF PUBLIC UTILITIES

I/M/O THE PETITION OF ATLANTIC )

CITY ELECTRIC COMPANY FOR

)

APPROVAL OF AN INFRASTRUCTURE )

INVESTMENT PROGRAM, AND

)

RELATED COST RECOVERY

)

MECHANISM, PURSUANT TO

)

N.J.A.C. 14:3-2A.1 et. seq.

)

BPU DOCKET NO. EO18020196

______________________________________________________________________________

DIRECT TESTIMONY OF MARLON F. GRIFFING, PH.D. ON BEHALF OF THE

DIVISION OF RATE COUNSEL ______________________________________________________________________________

STEFANIE A. BRAND, ESQ. DIRECTOR, DIVISION OF RATE COUNSEL

DIVISION OF RATE COUNSEL 140 East Front Street, 4th Floor P. O. Box 003 Trenton, New Jersey 08625 Phone: 609-984-1460 Email: njratepayer@rpa.

FILED: September 4, 2018

TABLE OF CONTENTS

I. INTRODUCTION ................................................................................................... 1 II. ACE IIP BACKGROUND....................................................................................... 6 III. ACCELERATED RECOVERY AND RISK........................................................... 9 IV. BOARD TREATMENT OF A CLAUSE RECOVERY MECHANISM

IN A PRIOR DOCKET............................................................................................ 13 V. FINDING THE APPROPRIATE ROE FOR THE ACE IIP.................................... 14 VI. ROE ANALYSIS ..................................................................................................... 15 VII. SELECTING THE COMPARISON GROUP.......................................................... 20 VIII. DCF OVERVIEW.................................................................................................... 28 IX. DCF ANALYSIS FOR THE COMPARISON GROUP .......................................... 30 X. REASONABLENESS CHECK AND RECOMMENDED ROE ............................ 36

1. CAPM Analysis .............................................................................................. 37 2. ECAPM Analysis ............................................................................................ 43 3. Authorized ROEs Comparison........................................................................ 45 XI. RECOMMENDED ROE ......................................................................................... 49 XII. ADJUSTMENT FOR RELATIVELY LOWER RISK OF THE ACE IIP .............. 50 XIII. RECOMMENDED CAPITAL STRUCTURE......................................................... 53 XIV. RESPONSE TO THE TESTIMONY OF ACE WITNESS KEVIN M. MCGOWAN ......................................................................................... 54 XV. SUMMARY ............................................................................................................. 56

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EXHIBITS:

MFG-1..............................Qualifications and Prior Testimony

MFG-2..............................Data Request RCR-ROR-7, Response of Kevin M. McGowan to Part b.

MFG-3..............................Moody's Investor's Service, Ratings Action: Moody's revises Atlantic City Electric's outlook to positive; affirms existing ratings

MFG-4..............................S&P Global Ratings, "Exelon Corp. And Subsidiaries Outlooks Revised to Positive, Ratings Affirmed On Expectation For Reduced Business Risk," August 2, 2018.

MFG-5..............................Exelon, "May 2018 Investor Meetings," Slide 11

MFG-6.............................."In the Matter of the Petition of Public Service Electric and Gas Company for Approval of the Energy Strong Program," Order Approving Stipulation of Settlement, page 7.

MFG-7.............................."In the Matter of the Petition of Public Service Electric and Gas Company for Approval of the Energy Strong Program," Stipulation, page 24.

MFG-8..............................Value Line Electric Utilities Publicly Traded, Dividend, Merger, and Operating Territory status

MFG-9..............................S&P Global, Westar, Great Plains complete merger of equals, form Evergy

MFG-10............................Bay Area News Group, "Wildfires: Utility blocked from charging customer for wildfire costs"

MFG-11............................S&P Global, "California lawmakers send wildfire bill to governor as regional grid bill dies"

MFG-12............................PG&E suspends dividend

MFG-13............................Regulated Electric Percentage Screen

MFG-14............................S&P Credit Ratings

MFG-15............................Comparison Group

MFG-16............................Common-Equity Prices

MFG-17............................Dividends

MFG-18, Schedule 1........Initial Discounted Cash Flow (DCF) Analysis

MFG-18, Schedule 2 ........DCF Returns on Equity versus Bond Yield

MFG-18, Schedule 3........Final DCF Analysis

MFG-18, Schedule 4 ........Congressional Budget Office Gross Domestic Product (GDP) Forecast

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MFG-18, Schedule 5 ........U.S. Energy Information Administration GDP Forecast MFG-18, Schedule 6 ........New Regulatory Finance, Multistage DCF Model, p. 309 MFG-18, Schedule 7........Multistage DCF Analysis MFG-19, Schedule 1 ........Daily Treasury Yield Curve, Risk-Free Rate Analysis MFG-19, Schedule 2 ........Value Line Betas MFG-19, Schedule 3 ........Value Line Dividend-Paying Stocks and DCF Return MFG-19, Schedule 4 ........Value Line Dividend-Paying Stocks Adjusted for Sustainable

Return and DCF Return MFG-19, Schedule 5 ........Duff & Phelps 2018 Yearbook, Long-Term Bond Income

Return, 1926-2017, p. 2-8/2-9 MFG-19, Schedule 6 ........Duff & Phelps 2018 Yearbook, Large-Cap Stocks Return,

1926-2017, p. 2-6 MFG-19, Schedule 7 ........New Regulatory Finance, MRP, p. 157-159 MFG-19, Schedule 8 ........New Regulatory Finance, ECAPM excerpt, p. 190-191 MFG-19, Schedule 9 ........CAPM/ECAPM Analyses Outcomes MFG-20, Schedule 1 ........Regulatory Research Associates 2018, 2017, and 2016

Authorized ROEs MFG-20, Schedule 2 ........ROE Analysis Summary MFG-20, Schedule 3 ........Rate of Return (ROR) Analysis

WORKPAPERS:

MFG Workpapers, pages 1-54: Zacks, Yahoo! Finance, Value Line EPS estimates; Zacks and Value Line dividends; Value Line betas

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1

I. INTRODUCTION

2

Q. Please state your name, occupation and business address.

3

A. My name is Dr. Marlon F. Griffing. I am a Senior Consultant with the economic

4

consulting firm of PCMG & Associates Inc. ("PCMG"). My business address is

5

22 Brookes Drive, Gaithersburg, MD 20785.

6

7

Q. Please describe PCMG.

8

A. PCMG was founded in 2015 to conduct research on a consulting basis into the

9

rates, revenues, costs and economic performance of regulated firms and

10

industries. The firm has a professional staff of five economists, accountants,

11

engineers and cost analysts. Most of its work involves the development,

12

preparation, and presentation of expert witness testimony before federal and state

13

regulatory agencies.

14

15

Q. Have you prepared a summary of your qualifications and experience?

16

A. Yes. Exhibit MFG-1 is a summary of my qualifications, experience, and

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testimony given before state regulatory agencies regarding cost of capital.

18

19

Q. For whom are you appearing in this proceeding before the New Jersey Board

20

of Public Utilities ("the Board")?

21

A. I am appearing on behalf of the New Jersey Division of Rate Counsel ("Rate

22

Counsel".

23

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