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`UNITED STATES OF AMERICA
`BEFORE THE
`FEDERAL ENERGY REGULATORY COMMISSION
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`Southwest Power Pool, Inc. ) Docket No. ER24-254-002
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`INITIAL BRIEF OF MISSOURI RIVER ENERGY SERVICES
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`Philip Mone
`Randolph Elliott
`McCarter & English, LLP
`1301 K Street, NW
`Suite 1000 West
`Washington, DC 20005
`(202) 753-3400
`pmone@mccarter.com
`relliott@mccarter.com
`Attorneys for Missouri River Energy Services
`Washington, D.C.
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`July 9, 2025
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`TABLE OF CONTENTS
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`A. STATEMENT OF THE CASE ........................................................................................... 1
`B. LEGAL STANDARD ......................................................................................................... 3
`C. ARGUMENT ...................................................................................................................... 4
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`PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW ...................................... 28
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`TABLE OF AUTHORITIES
` Page(s)
`Court Cases
`Ala. Elec. Coop., Inc. v. FERC,
`684 F.2d 20 (D.C. Cir. 1982) .....................................................................................................5
`Ala. Power Co. v. FERC,
`993 F.2d 1557 (D.C. Cir. 1993) .................................................................................................4
`Bluefield Water Works & Improvement Co. v. Pub. Serv. Comm’n of W. Va.,
`262 U.S. 679 (1923) ...................................................................................................................6
`Boroughs of Ellwood City, Grove City, New Wilmington, Wampum, & Zelienople,
`Pa. v. FERC,
`731 F.2d 959 (D.C. Cir. 1984) ...................................................................................................6
`Charlottesville v. Fed. Energy Regulatory Com.,
`249 U.S. App. D.C. 236, 774 F.2d 1205 (1985) ......................................................................22
`City of Chicago v. FPC,
`458 F.2d 731 (1971) ...........................................................................................................22, 27
`Emera Me. v. FERC,
`854 F.3d 9 (D.C. Cir. 2017) .......................................................................................................2
`FPC v. Hope Nat. Gas Co.,
`320 U.S. 591 (1944) ......................................................................................................... passim
`MISO Transmission Owners v. FERC,
`45 F.4th 248 (D.C. Cir. 2022) .....................................................................................................6
`Morgan Stanley Capital Grp. Inc. v. Pub. Util. Dist. No. 1,
`554 U.S. 527 (2008) .................................................................................................................22
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`Administrative Cases
`Arkansas La. Gas Co.,
`31 FERC ¶ 61,318 (1985) ........................................................................................................23
`Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc.,
`Opinion No. 569, 169 FERC ¶ 61,129 (2019) ...........................................................................6
`Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc.,
`Opinion No. 569‑A, 171 FERC ¶ 61,154 (2020). .....................................................................6
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` Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator,
`Inc.,
`Opinion No. 569‑B, 173 FERC ¶ 61,159 (2020). .....................................................................6
`Ass’n of Businesses Advocating Tariff Equity v. Midcontinent Indep. Sys.
`Operator, Inc.,
`Opinion No. 551, 156 FERC ¶ 61,234 (2016) ...........................................................................8
`Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc.,
`189 FERC ¶ 61,036 (2024) (MISO Order on Remand), clarified & reh’g
`denied, 190 FERC ¶ 61 (2025) ..................................................................................................6
`City of Vernon,
`109 FERC ¶63,057 (2004) .................................................................................................23, 26
`Constellation Mystic Power, LLC,
`172 FERC ¶ 61,044 (2020) ......................................................................................................27
`Ky. W. Va. Gas Co.,
`2 FERC ¶ 61,139 (1978) ..........................................................................................................23
`Midcontinent Indep. Sys. Operator, Inc.,
`170 FERC ¶ 61,265 (2020) ..........................................................................................24, 25, 26
`Midcontinent Indep. Sys. Operator, Inc.,
`172 FERC ¶ 61,242 (2020) ..........................................................................................23, 25, 26
`Pac. Gas & Elec. Co.,
`178 FERC ¶ 61,175 (2022) ........................................................................................................3
`Panda Stonewall LLC,
`174 FERC ¶ 61,266 (2021) ..................................................................................................4, 23
`San Diego Gas & Elec. Co. v. Sellers of Energy & Ancillary Servs.,
`149 FERC ¶ 61,116 (2014) ........................................................................................................4
`Sw. Power Pool, Inc.,
`190 FERC ¶ 61,089 (2025) ........................................................................................................1
`Va. Elec. & Power Co.,
`123 FERC ¶ 61,098 (2008) ......................................................................................................23
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`Agency Orders
`FERC Order No. 679 .....................................................................................................................24
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`Statutes
`Federal Power Act
`16 U.S.C. § 824d(e) ...................................................................................................................4
`16 U.S.C. § 824d (2018) ............................................................................................................1
`16 U.S. Code § 824j-1..............................................................................................................27
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`Regulations
`18 C.F.R. § 35.13 (2023) .................................................................................................................2
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`1
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`UNITED STATES OF AMERICA
`BEFORE THE
`FEDERAL ENERGY REGULATORY COMMISSION
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`Southwest Power Pool, Inc. ) Docket No. ER24-254-002
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`INITIAL BRIEF OF MISSOURI RIVER ENERGY SERVICES
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`TO: The Honorable Andrea McBarnette
` Presiding Administrative Law Judge
`Pursuant to Rule 706 of the Rules of Practice and Procedure of the Federal Energy
`Regulatory Commission (“Commission”), and pursuant to the order establishing a procedural
`schedule issued by the Presiding Administrative Law Judge in this proceeding, Missouri River
`Energy Services (“Missouri River”) submits this Initial Brief. This brief addresses the issues in
`the participants’ Joint Stipulation of Issues submitted on April 7, 2025,1 namely what is the just
`and reasonable return on equity (“ROE”) and capital structure for Central Power Electric
`Cooperative (“Central Power”) for the “locked-in” period, January 1, 2024 through December
`31, 2024.2
`A. STATEMENT OF THE CASE
`While the full procedural history of this proceeding is set forth in the Joint Procedural
`History, List of Appearances, and Index of Exhibits, the key procedural fact is that Central Power
`initiated this proceeding by filing pursuant to section 205 of the Federal Power Act (“FPA”)3 and
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`1 Joint Filing, Docket No. ER24-254-002 at 2 (April 7, 2025). Per the Order Establishing Hearing Rules, the
`Argument section of this Initial Brief, follows the wording and number-letter outline from the Joint Stipulation of
`Issues.
`2 Pursuant to Sw. Power Pool, Inc., 190 FERC ¶ 61,089 (2025), a Commission order in a rate case subsequently filed
`by Central Power, the above-captioned proceeding concerns a locked-in period.
`3 16 U.S.C. § 824d (2018).
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`section 35.13 of the Commission’s regulations4 to modify just two aspects Central Power’s cost-
`based transmission revenue requirement which it recovers through its transmission formula rate:
`ROE and capital structure.5 If accepted, together the two proposed tariff revisions would
`increase Central Power’s annual transmission revenue requirement by approximately $1,080,000,
`an approximately 9.8% increase.6
`Missouri River respectfully requests that, applying Commission policy and precedent to
`the record in this proceeding, the Presiding Judge and the Commission find that: 1) Central
`Power is of materially lower risk compared to the proxy group and therefore the just and
`reasonable base ROE is the median of the lower third of the composite zone of reasonableness,
`9.72%, and 2) that the just and reasonable capital structure is Central Power’s actual capital
`structure of 34.22% equity, 65.68% debt.
`Regarding the just and reasonable ROE, applying the Commission’s ROE methodology
`in a section 205 rate case for a cost-based transmission revenue requirement of a single utility
`with no credit rating is a matter of first impression. The Presiding Judge and the Commission
`should find that the following has been proven on the record in this proceeding:
`1) Central Power has strong financial metrics relative to the proxy group;
`2) Central Power has zero risk from new investments in transmission projects in SPP
`and thus is lower risk relative to the proxy group;
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`4 18 C.F.R. § 35.13 (2023).
`5 Because ROE is component of utility’s cost of service, ROE is sometimes referred to as cost of equity or cost of
`equity capital. For an investor-owned utility, the ROE equates to the cost of the equity securities issued by the
`utility. See Emera Me. v. FERC, 854 F.3d 9, 262 (D.C. Cir. 2017) (“An ROE is the cost to the utility of raising
`capital.”)
`6 Ex. CP-0001 (Kossan Direct) at 7:17-18.
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`3) Central Power has zero risk from direct ownership of generation facilities and thus is
`lower risk relative to the proxy group;
`4) The latitude Central Power possesses to set its own rates in response to changing
`costs lowers its risk relative to the proxy group;
`5) Central Power’s Rural Utilities Service (“RUS”) loans at low rates and with generous
`terms lower its risk relative to the proxy group of investor-owned utilities;
`6) Given the above facts, Central Power has materially lower risks than the average of
`the proxy group companies.
`Given these facts, the Presiding Judge and the Commission should apply the Commission’s ROE
`methodology as further refined in Pac. Gas & Elec. Co.,7 and conclude that for Central Power,
`the just and reasonable ROE should be equal to the median of the lower third of the composite
`zone of reasonableness, 9.72%, as calculated by Dr. Lesser.
`Regarding the just and reasonable capital structure, Central Power’s proposal to increase
`the equity component of its capital structure to a hypothetical equity component of 48.22% is a
`substantial departure from the Commission’s well established policy and precedent of cost-based
`ratemaking. Based on the record in this case, Central Power has not met its burden to prove that
`its equity increase proposal is a just and reasonable departure from cost-based ratemaking and is
`distinguishable from contrary Commission precedent directly on point. Therefore, the Presiding
`Judge and the Commission should find that that the just and reasonable capital structure is
`Central Power’s actual capital structure of 34.22% equity, 65.68% debt.
`B. LEGAL STANDARD
`As the filing party, Central Power bears the burden of proof and the ultimate burden of
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`7 Pac. Gas & Elec. Co., 178 FERC ¶ 61,175 (2022).
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`persuasion to demonstrate that its tariff proposals are just and reasonable.8 Central Power will
`prevail only if the preponderance of evidence supports its position.9 Regarding Issue 1, given
`that Central Power has no credit rating, applying the Commission’s revised ROE methodology to
`Central Power is a matter of first impression. Hope Natural Gas and Pac. Gas & Elec. Co.
`indicate that to determine a just and reasonable ROE for a single utility “commensurate with
`returns on investments in other enterprises having corresponding risks,” the Commission needs
`evidence in the record to establish the filing party’s risk relative to the proxy group, whether
`materially lower, average, or higher risk relative to the proxy group.10
`C. ARGUMENT
`1. Issue 1: Central Power’s proposed return on equity (“ROE”) of 10.79%,
`reflecting a base ROE of 10.29% and a 50-basis point adder for its membership
`in Southwest Power Pool, Inc. (“SPP”).
`This section 205 rate case requires the Presiding Judge and Commission to determine the
`just and reasonable ROE component of Central Power’s cost-based transmission revenue
`requirement. Applying the Commission’s revised ROE methodology in a section 205 rate case
`for a transmission revenue requirement of a single utility with no credit rating is a matter of first
`impression. While the Commission’s ROE methodology involves multiple models and a
`significant amount of market data, there is broad agreement amongst the three ROE witnesses on
`the vast majority of aspects of applying the Commission’s ROE methodology in this proceeding.
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`8 Ala. Power Co. v. FERC, 993 F.2d 1557, 1571 (D.C. Cir. 1993) (“[T]he party filing a rate adjustment with the
`Commission under § 205 bears the burden of proving the adjustment is lawful[.]”); 16 U.S.C. § 824d(e).
`9 San Diego Gas & Elec. Co. v. Sellers of Energy & Ancillary Servs., 149 FERC ¶ 61,116, at P 45 (2014); See also
`Panda Stonewall LLC, 174 FERC ¶ 61,266, at P 30 (2021).
`10 FPC v. Hope Nat. Gas Co., 320 U.S. 591 at 603 (1944); Pac. Gas & Elec. Co., 178 FERC ¶ 61,175 at P 121
`(2022).
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`The only substantive disagreement amongst the witnesses is the question of Central Power’s risk
`profile relative to the proxy group.
`Missouri River respectfully requests that, applying Commission policy and precedent to
`the record in this proceeding, the Presiding Judge and the Commission find that Central Power is
`of materially lower risk compared to the proxy group and therefore the just and reasonable base
`ROE is the median of the lower third of the composite zone of reasonableness, 9.72%.11 Central
`Power’s proposal to set its ROE at the median result of the entire composite zone of
`reasonableness, 10.29%,12 is not just and reasonable. Central Power’s proposal is based on a
`mere assumption by Central Power’s ROE witness that Central Power’s risk is similar to the
`average of the proxy group. Central Power submitted no evidence support this assumption or to
`otherwise prove its risk profile. As such, Central Power has not met its burden, as the filing
`party, to prove that Central Power’s risk is materially equivalent to the average of the proxy
`group. Therefore, it has not proven that its proposed 10.29% base ROE is just and reasonable.
`a. Commission policy and precedent require that the ROE for a single utility be
`commensurate with the ROE of companies with corresponding risks.
`Under the FPA, it is “well established that electrical rates should be based on the costs of
`providing service to the utility’s customers, plus a just and fair return on equity.”13 The statutory
`“rate-making process … i.e., the fixing of ‘just and reasonable’ rates, involves a balancing of the
`investor and the consumer interests.”14 With respect to ROE, the Supreme Court’s landmark
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`11 Ex. CP-0043 at tab “EX MR-0020p1Updated” Line 7, Col. G. Mr. Nye calculated the median of the lower third
`of the composite zone of reasonableness to be 9.78%. See Ex. MR-0038 at Tab “Summary December” at Column N
`Line 11; see also Tr.494:4-10.
`12 Ex. CP-0005 (Smith Direct) at 25:7-9.
`13 Ala. Elec. Coop., Inc. v. FERC, 684 F.2d 20, 27 (D.C. Cir. 1982).
`14 FPC v. Hope Nat. Gas Co., 320 U.S. 591, 603 (1944).
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`opinion in FPC v. Hope Natural Gas Company established the Commission’s policy that “the
`return to the equity owner should be commensurate with returns on investments in other
`enterprises having corresponding risks.”15
`Recently, through a series of court and Commission proceedings, the Commission
`revised its methodology for evaluating the ROE component of electric public utility rates under
`the FPA. Specifically, in Opinion No. 569,16 as modified in Opinion Nos. 569-A17 and 569-B,18
`and subsequently confirmed on remand19 after a court of appeals vacated and remanded because
`of one (now irrelevant) issue,20 the Commission developed what it refers to as “the
`Commission’s ROE methodology”21 which, among other details, relies principally on the results
`of two models, the discounted cash flow (“DCF”) model and the capital asset pricing model
`(“CAPM”). In a 2022 order, Pac. Gas & Elec. Co., the Commission applied its revised ROE
`methodology in a section 205 rate case to a single utility with a credit rating.22 Based on that
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`15 Id.; see also Bluefield Water Works & Improvement Co. v. Pub. Serv. Comm’n of W. Va., 262 U.S. 679, 693
`(1923); Boroughs of Ellwood City, Grove City, New Wilmington, Wampum, & Zelienople, Pa. v. FERC , 731 F.2d
`959, 967 (D.C. Cir. 1984) (the Commission must “set a rate of return commensurate with other enterprises of
`comparable risk and sufficient to assure that enough capital is attracted to the utility to enable it to meet the public’s
`needs”) (citing Hope and Bluefield).
`16 Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., Opinion No. 569, 169 FERC
`¶ 61,129 (2019).
`17 Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., Opinion No. 569‑A, 171 FERC
`¶ 61,154 (2020).
`18 Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., Opinion No. 569‑B, 173 FERC
`¶ 61,159 (2020).
`19 Ass’n of Bus. Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc., 189 FERC ¶ 61,036 (2024)
`(MISO Order on Remand), clarified & reh’g denied, 190 FERC ¶ 61, 184 (2025).
`20 See MISO Transmission Owners v. FERC, 45 F.4th 248 (D.C. Cir. 2022).
`21 MISO Order on Remand, 189 FERC ¶ 61,036, at P 1.
`22 Pac. Gas & Elec. Co., 178 FERC ¶ 61,175 (2022); Id. at P 93 (“The Commission developed its revised ROE
`methodology in the context of an FPA section 206 proceeding. Because the instant filing is a section 205 filing, only
`the second prong of the Commission’s ROE methodology is relevant to the analysis undertaken here. Under the
`ROE methodology adopted in Opinion No. 569-A, the Commission establishes DCF, CAPM, and Risk Premium
`zones of reasonableness and produces a composite zone of reasonableness by averaging the top and bottom of the
`DCF, CAPM, and Risk Premium zones of reasonableness.”)
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`order, in a section 205 rate case concerning a single utility with a credit rating, the Commission’s
`ROE methodology involves the following steps:
` First, applying various screens established in earlier Commission precedent, develop a proxy
`group of comparable-risk utility companies. In most cases, this involves using a credit-risk
`screen that selects publicly traded electric utilities with credit ratings within one notch above
`or below the credit rating of the filing utility.23
` Second, obtain financial data on the market cost of equity for the proxy-group companies for
`the most recently available six-month study period for which there is complete data in the
`record.24
` Third, use the Commission’s two-step DCF model from the revised ROE methodology
`established in Opinion No. 569‑A and 569‑B to calculate the ROE for each proxy-group
`company and use the Commission’s revised tests to exclude any low-end and high-end
`outliers, subject to a “natural break” analysis.25 The result is the DCF “zone of
`reasonableness.”
` Fourth, use the Commission’s CAPM from the revised ROE methodology established in
`Opinion No. 569‑A and 569‑B to determine the CAPM zone of reasonableness.26
` Fifth, average the top values of the DCF and CAPM zones and the bottom values of the
`zones to calculate a composite zone of reasonableness.27
` Sixth, divide the composite zone of reasonableness into three segments (“tertiles”) to
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`23 See Id., 178 FERC ¶ 61,175 at PP 65, 88-91, 121, citing Opinion No. 569 et al.
`24 See Id., 178 FERC ¶ 61,175 at PP 138, 171-178 citing Opinion No. 569 et al.
`25 See Id., 178 FERC ¶ 61,175 at P 165 citing Opinion No. 569.
`26 See Id., 178 FERC ¶ 61,175 at P 196 citing Opinion No. 569-A.
`27 See Id., 178 FERC ¶ 61,175 at PP 24, 93, 120, 266 and Appendix A, citing Opinion No. 569-A.
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`calculate the ranges of presumptively just and reasonable ROEs for a utility of below-average
`risk, average risk, and above-average risk, respectively.28
` Seventh, determine the filing utility’s risk profile relative to the proxy group companies by
`assessing both business and financial risk, and then set the just and reasonable ROE at the
`median of the appropriate tertile. 29
`Notably, both the first and last steps require comparing the risk of the filing utility to a
`proxy group, underscoring that the filing utility’s risk relative to the proxy group is key, as
`established in the Supreme Court’s Hope Natural Gas which declared that the ROE of the filing
`utility should be “commensurate with returns on investments in other enterprises having
`corresponding risks.”30
`To determine the filing utility’s risk relative to the proxy group, where the filing utility
`has a credit rating (and thus a “risk-comparable” proxy group was developed), the evidence the
`Commission principally relies on is the filing utility’s credit rating itself. For example, in Pac.
`Gas & Elec. Co., where the filing utility had a credit rating, the Commission noted that “[t]he use
`of the credit rating screen allows the Commission to objectively measure risk and avoids the
`subjective determinations of a utility’s risk level,” and that “[i]n the majority of instances, the
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`28 See Id., 178 FERC ¶ 61,175 at PP 12, 93, citing Opinion No. 569-A (“The Commission’s ROE methodology also
`incorporates three ranges of presumptively just and reasonable base ROEs, which are constructed by dividing the
`overall zone of reasonableness into three equal segments. Placement of a utility’s ROE within the composite zone of
`reasonableness is dependent upon its risk profile. To determine the just and reasonable ROE for a single utility that is
`considered to be of average risk, the Commission then averages the point estimate of the Risk Premium model and
`the medians of the CAPM and DCF models. However, for above-and below-average risk utilities, the Commission
`may consider setting the ROE within the top third and the bottom third of the composite zone of reasonableness,
`respectively.”)
`29 See Id., 178 FERC ¶ 61,175 at PP 12, 93, 120-126; 136-137, citing Opinion No. 569-A; see also Ass’n of
`Businesses Advocating Tariff Equity v. Midcontinent Indep. Sys. Operator, Inc ., Opinion No. 551, 156 FERC ¶
`61,234, at P 286 (2016)(“While the Commission has indeed adjusted a company’s base ROE above or below the
`central tendency of the zone of reasonableness based on the relative risk analysis, it does so only after a full
`evaluation of all relevant factors including both business and financial risk. This is because lower financial risk
`may be offset by higher business risk or vice versa.”) (Internal citations omitted, emphasis added).
`30 FPC v. Hope Nat. Gas Co., 320 U.S. 591 at 603 (1944).
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`credit rating screen sufficiently captures a utility’s risk.”31 In that case, the Commission
`considered additional evidence, market betas, to assess the filing utility’s relative risk profile.
`Specifically, the Commission explained that even where the utility possesses a credit rating, the
`Commission may still examine other factors:
`In addition to credit ratings, the Commission can examine other factors, in particular
`those that may not be captured in the credit rating, when determining utility risks.
`For instance, we note that the CAPM Model relies on market betas, which measure
`the volatility or systematic risk of a company’s stock. PG&E featured a 0.65 market
`beta, which is the median of the proxy group and is shared by six other proxy group
`companies.32
`Thus, to prove a filing utility’s risk relative to the proxy group, examples of proof the
`Commission has relied on include the filing utility’s credit rating and market beta data.
`In Pac. Gas & Elec. Co., the Commission also established its standard for proving which third,
`the lower, middle, or upper, is appropriate, explaining:
`The Commission has traditionally accounted for a utility’s risk profile by first
`comparing a utility to other utilities facing similar risks through the development of
`a proxy group of comparable risk companies. To the extent a utility or other
`participants then demonstrate that the utility has materially higher or lower risks than
`other proxy group companies, the Commission may then determine that such utility
`is of higher or lower risk.33
`The Commission was clear that even with a “risk-comparable” proxy group using the filing
`utility’s credit rating, it can still be demonstrated that the filing utility has materially lower or
`higher risk warranting its placement in the lower or upper third. Thus, the filing utility having a
`credit rating (and thus a “risk-comparable” proxy group) does not establish a “high threshold”34
`that a participant must overcome to prove the utility is of higher or lower risk than the proxy
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`31 Pac. Gas & Elec. Co., 178 FERC ¶ 61,175 at P 94.
`32 Id. at 122.
`33 Id. at 121.
`34 Ex. S-0008 (Nye Cross-Answering) at 6:4-5.
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`group; rather the participant merely must show by a preponderance of the evidence a material
`difference in risk.
`Where the filing utility has no credit rating, it is impossible to apply the first step of the
`Commission’s process, the Commission’s credit-rating screen, to develop a “risk-comparable”
`proxy group.35 Instead, a proxy group of all investment-grade U.S. electric utilities is used.36 In
`assessing the unrated filing utility’s risk profile relative to the proxy group, given the proxy
`group is not risk-comparable and thus does not necessarily “hav[e] corresponding risks” to the
`filing utility, it would be illogical for the Commission to require a standard higher than the
`ordinary “materially higher or lower” standard applied in cases with a risk-comparable proxy
`group. While the Commission has not applied its revised ROE methodology to a filing utility
`with no credit rating and thus this is a matter of first impression, the Commission’s policy and
`precedent suggests that the standard to demonstrate the filing party’s risk relative to the proxy
`group, whether average, above, or below, is merely that the preponderance of the evidence must
`show a material difference in risk.
`b. The record establishes that Central Power has not met its burden to prove Central
`Power’s risk profile is average relative to the proxy group and that Missouri River
`has proven that Central Power has materially lower risk.
`Central Power submitted no evidence to prove that its risk profile is average relative to
`the proxy group. Notably, Central Power does not contend that it has submitted such evidence;
`indeed in response to a discovery request, Mr. Smith admitted he did not review any information
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`35 Ex. MR-0001 (Lesser Direct) at 42:10-15; Ex. CP-0005 (Smith Direct) at 14:4-6 (“in the absence of credit ratings
`for Central Power, it is not possible to identify a risk-comparable subset of Value Line electric utilities using the
`Commission’s established credit rating screen.”) (emphasis added).
`36 Ex. MR-0001 (Lesser Direct) at 9:13-10:3.
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`to determine that Central Power’s business and financial risk was similar to the proxy group
`companies.37 Central Power’s ROE witness Mr. Smith declined to offer his opinion on Central
`Power’s risk profile and instead made an assumption with no evidentiary support:
`Q. What is Central Power’s relative risk as compared to the proxy group?
`
`A. As discussed above, in the absence of credit ratings for Central Power, it was
`not possible to identify a risk-comparable subset of Value Line electric utilities
`using the Commission’s established credit rating screen. As an alternative, I suggest
`that all investment grade companies considered to be electric utilities by Value Line
`be included, subject to exclusion based on the Commission’s remaining selection
`screens. Under this construct, where we cannot directly apply the Commission’s
`primary risk-comparability screen, it is appropriate to assume that Central Power’s
`risk is similar to the average of the proxy group that contains electric utilities with
`a wide breadth of risk profiles, as measured by their respective credit ratings.38
`To be clear, Mr. Smith did not testify that, in his opinion, Central Power’s risk is similar to the
`average of the proxy group. Rather, he assumed it is and provided no evidentiary support. Both
`of Central Power’s witnesses included some limited testimony concerning generalized risks to
`the electric cooperative industry, or asserted that Dr. Lesser’s conclusions are wrong, but neither
`testified specifically to Central Power’s risk profile relative to the proxy group.39
`As discussed above, where the filing party has a credit rating, the filing party’s credit
`rating generally constitutes sufficient proof to demonstrate its risk relative to a “risk-comparable”
`proxy group.40 But where the filing party has no credit rating and the proxy group is therefore
`not “risk-comparable,” the Commission needs evidence in the record to establish the filing
`party’s risk relative to the proxy group, whether materially lower, average, or higher risk relative
`
`37 Ex. MR-0001 (Lesser Direct) citing Ex. MR-0005 at 14-15, Mr. Smith’s response to data request MR-CP-1.5. In
`addition, Central Power’s fact witness Mr. Kossan does not include a recommendation about the appropriate
`placement within the composite zone of reasonableness or testify to Central Power’s risk profile relative to the proxy
`group companies.
`38 Ex. CP-0005 (Smith Direct) at 30:3-12 (internal citations omitted, emphasis added).
`39 E.g. Ex.CP-0022 (Smith Rebuttal) at 25:1-17, 28:3-5; Ex. CP-0013 (Kossan Rebuttal) at pp.10-14.
`40 Pac. Gas & Elec. Co., 178 FERC ¶ 61,175 at P 94.
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`to the proxy group.41 Despite Mr. Smith’s contention,42 as the filing party, Central Power bears
`the burden of proof and production to support its ROE proposal, and a mere assumption, without
`more, does not meet the standard of proof and thus Central Power has failed to meet its burden.
`Central Power’s failure to meet its burden of proof is all the more evident because Central Power
`has not produced sufficient evidence to counter Missouri River’s evidence that Mr. Smith’s
`unsupported assumption was erroneous.
`For the reasons identified below, the record established in this proceeding proves that that
`Central Power has a materially lower risk than the proxy group companies. Missouri River’s
`ROE witness, Dr. Lesser, filed testimony and supporting exhibits which prove that Central
`Power has materially lower risk than the proxy group companies based on the following factors
`and evidence:
` Central Power has strong financial metrics relative to the proxy group: As Dr.
`Lesser testified, Central Power has low cash flow volatility.43 Dr. Lesser testified that
`business risk is typically measured as the volatility of a firm’s revenues or net income
`relative to its average net income, because volatile cash flows can impede a firm’s ability
`to meet its fixed cost obligations, including debt service.44 Trial Staff’s witness Mr. Nye
`agreed with that definition.45 Thus, Central Power’s low cash flow volatility is an
`
`41 FPC v. Hope Nat. Gas Co., 320 U.S. 591 at 603 (1944); Pac. Gas & Elec. Co., 178 FERC ¶ 61,175 at P 121
`(2022).
`42 Tr. 247:19-21.
`43 Ex. MR-0001 (Lesser Direct) at 14: 9-10. Notably, while Missouri River’s exhibit quantifying Dr. Lesser’s
`opinion that Central Power has low cash flow volatility were rejected, neither Trial Staff nor Cen