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Key Points/Issues (cont.): <br /> <br /> 4. The inclusion of the TXU Gas transmission business in <br /> this rate case introduces additional business risk, which is <br /> not reflected in the ROE estimates derived from LDC <br /> industry group. There are currently few publicly traded <br /> -"pure play" pipelines not in financial distress available to <br /> serve as benchmarks in setting capital structure ratios, so <br /> an upward adjustment to ROE will be necessan/to reflect <br /> this additional risk. <br /> <br /> 5. An upward ROE adjustment for equity flotation costs is <br /> reversed as a result of a downward adjustment from the <br /> reduced risk associated with Mr. Goble's recommended <br /> rate structures. <br /> <br /> 6. Dr. Fairchild recommends an authorized rate of return on <br /> common equity of 11.5%. If Mr. Goble's proposed rate <br /> structures and Rate CIT are not approved, then Dr. <br /> Fairchild recommends a return on equity of at least <br /> 11.75%. <br /> <br />Summary/Recommendations: <br /> <br /> The appropriate return should be as follows: <br /> <br /> Percent Component Weighted <br /> Capital Component of Total Cost Cost <br /> Long-term Debt 51.0 6.71% 3.42% <br /> Preferred Stock 1.1 5.53% 0.06 <br /> Common Equity 47.9 11.50% 5.51 <br /> Total 100,0% 8,99% <br /> <br />Faimhild - Summary of Testimony Page 2 of 2 <br /> <br /> <br />