control number 41850 item number: 207

Control Number : 41850

Item Number: 207

Addendum StartPage : 0

PUC DOCKET NO. 41850

UPDATED APPLICATION §OF ENTERGY TEXAS, INC., §ITC HOLDINGS CORP., MID SOUTH §TRANSCO LLC, TRANSMISSION §COMPANY TEXAS, LLC, AND §ITC MIDSOUTH LLC FOR §APPROVAL OF CHANGE OF §OWNERSHIP AND CONTROL OF §TRANSMISSION BUSINESS, §TRANSFER OF CERTIFICATION §RIGHTS, AND RELATED RELIEF §

e m^

20iG' Npy 13 pm f. 26

BEFORE THE

PUBLIC UTILITY COMMISSION

4F TEXAS

REDACTED DIRECT TESTIMONY OF

SLADE CUTTER

RATE REGULATION DIVISION

PUBLIC UTILITY COMMISSION OF TEXAS

NOVEMBER 13, 20I3

zoj0000001

PUC Docket No. 41850

November 13, 2013

Page 2 of 15

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Direct Testimony of Slade Cutter 0000002

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PUC Docket Na. 41850 Page 3 of 15

DIRECT TESTIMONY OF SLADE CUTTER

TABLE OF CONTENTS

1. Introduction. ............-.... ........................................................................................... 4

II. Recommendation ............................................................................................................6

III. Financial Analysis .......................................................................................................... 7

A. Gain to Entergy's Stockholders .......................................................................... 7

B. Increased Expenses to Entergy's Ratepayers ...................................................... 9

C. Inadequacy of the Rate Mitigation Plan ............................................................. 9

IV, Valuation of ETI's Assets to be Transferred is Reasonable ......................................... 14

V. ConcIusion .................................................................................................................... 15

LIST OF ATTACHMENTS

November 13, 2013 Direct Testimony of Slade Cutter

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PUC Docket No. 41850 Nap 4 nf 1 t

1. INTRODUCTION

Q. Please state your name and business address.

A. My name is Slade Cutter; my business address is 1701 N. Congress Avenue, Austin,

Texas.

By whom are you employed and in what capacity?

I am employed by the Public Utility Commission of Texas (the "PUC," or the

"Commission") as a senior financial analyst.


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PUC Docket No, 41850 Parre 5 nf 1 ^

they requested in Docket No. 41223, in which I also testified.

Are you adopting your testimony in Docket No. 41223 in this proceeding, Docket

No. 41850?

Yes. It is included as Attachment SC-3.

What did you review to arrive at the conclusions contained in your testimony in

this proceeding, Docket No. 41850?

In preparing my testimony for this proceeding, I examined: The testimony and

applications of Entergy Texas, Inc., ITC Holdings Corp., Mid South Transco LLC,

IApplication of ErrterSO= Teras, Inc., ITC Holdings Corp., IVlitl.S6111h Transco LLC, Transtrtission Comparay 7'e-vas,

LLC, and ITC Afietsotath LLC fearApproval of Change ofOwnership and Control of Transmission Business, Transferof Certification Rights, Certain Cost-Recovery Approvals, and Related Relief (Filed February 13, 2012).


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PUC Docket No. 41850 Pape, 6 rsf 14

Transmission Company Texas, LLC, and ITC Midsouth LLC in this docket and in

Docket No. 4I223; responses to requests for information (" Is°°) in this docket,

Docket No. 4I223, and dockets regarding the Transaction in jurisdictions other than

Texas; and, the testimonies and Is from parties to this docket and Docket No.

41223, and dockets regarding the Transaction in other jurisdictions.

H. RECOMMENDATION

I recommend that the Commission not approve the transfer of ownership and related

activities (the "Transaction") described in the Application in this docket. I consider

the rate-mitigation plan ("RMP") offered by the Applicants in this docket as wholly

inadequate as a response to the concerns the PUC Commissioners expressed about the

Transaction in their remarks during their consideration of Docket No. 41223. Most

importantly, I recommend that the Commission not approve the requested transfer

because the RMP does not attempt to mitigate the inequity of ETI ratepayers incurring

an ongoing additional expense while Entergy's stockholders realize a significant

financial gain as a result of the Transaction.

Of lesser concern from the perspective of rate impact is the presence of flawed

financial calculations and inappropriate weighted average costs of capital in the R.MP.

The effect of both of these concerns would be to deprive ratepayers of compensation

for increased costs that they would experience as a direct result of the Transaction

from which ITC's, and especially Entergy's, stockholders would gain.


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PUC Docket No. 41850 Page 7 of 15

Q. Did you make any other determinations that are responsive to the ^Poorelhninary

Order in this docket in your financial analysis?

Yes, I determined that the value of the assets that would be transferred is

$677,553,613.' This is calculated using more recent data than was used for the

amount I determined in Docket No. 41223.

III. FINANCIAL ANALYSIS

Q. How is your financial analysis organized?

In my flnancial analysis of the Transaction and the associated P,1 first describe the

gain Entergy's stockholders would realize if the Transaction were to close. I then

discuss some of the benefits that the Transaction would have from ITC's perspective

and the process by which the company acquired its claim on those benefits. Finally, I

evaluate the integrity of the proposed RMP and its adequacy to compensate Entergy's

ratepayers for the increased costs they would experience if Entergy were to sell the

assets, which were paid for in large part by Entergy's ratepayers and are essential to

the electric-utility service that the regulatory compact obligates Entergy to provide.

A. THE GAIN TO ENTERGY'S STOCKHOLDERS AND THEBENEFITS TO ITC

Q. What would be the return to Entergy's stockholders be if the Transaction were to

occur?

'' See ETI Response to Staff RFI 1-3 at Attachment A.


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PUC Docket No. 41 850 G1*srrn 4 eaf' 1 a

.*** This total company

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Q• How does the return Entergy's stockholders would realize if the Transaction

were to close compare to the expectation of investors in the financial markets in

regard to regulated electric-utility securities?

In my opinion, the return that Entergy stockholders are expected to realize if the

Transaction were to close is far greater than their investors could have reasonably

expected at the time they assessed the risk of investing in Entergy and bought the

company's stock. This return would occur nearly completely because the Federal

Energy Regulatory Commission ("FERC") regulation does not serve as a substitute for

competition in regard to the financial markets for utility stock.

3 Docket No. 41223, ETI Response to Cities RFI I-34, page LR237.

' Docket No. 39896, Application of Enterg3, Tc:ras, htc. for Arrthcarit,y to Change Rates, Reconcile Fuel Costs,and t)btahr Deferred.9ecatrtuiaag 7'reatirrerrt. (Order on Rehearing, November 2, 2012.)


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PUC Docket No. 41850 L}^ r Ct ^4 t

B. INCREASED EXPENSES TO ENTERGY'S RATEPAYERS

^. Please describe the increased expenses Ente 's ratepayers would experience if

How would the level of rate mitigation provided by the RMP be determined

during the first five years of the plan?

During the first five years of the P, the level of rate mitigation would be increased

because ITCs weighted average cost of capital ("WACC") is higher than ETI's and its

rate base is larger than ETI's, The Applicants argue that the increase caused by these

factors would be reduced by the effect of removal of the cost associated with Schedule

MSS-2, which only ETI and not ITC would experience.

November 13, 2013Direct Testimony of Slade Cutter

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1) 1)

PUC Docket No. 41850 pang. IA nf 14

Does the P correctly account for ITC's and ETI's relative WACCs and rate

bases?

No. The RMP underestimates both the cost differential of 1TC`s WACC being higher

than ETi's and the differential in cost caused by 1~'ERC's use of a forward test year

("FTY") in determining rate base for ITC.

What causes the RMP to underestimate the added cost of ITC's WACC relative


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^1)

PUC Docket No. 41850 C'-If." 1 1 -f° 3

Q. Do you agree with the Applicants about the amount of rate m itigation dedicated

to the effects of the FTY?

A. No. The amount of rate mitigation the Applicants calculated for the effects of the

FTY is less than 15% of the amount I determined, as shown in Attachment SC-4.

How they arrived at their estimate is not clear. ETI witness Jay Lewis explains in his

November 13, ?013 Direct Testimony of Slade Cutter

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PUC Docket No. 41850 1?- ...- 111 .,C 't. ..^. . . .,. ^testimony that the amount of mitigation for the FTY effects should be a net present

value calculation, an assertion with which I disagree; however, that only partially

explains the difference in our calculations.

Q• Why do you disagree that the Y excess should be a net present value

calculation?

I believe that the quantification of the FTY mitigation in the P should be expressed

timing of its repayment. Specifically, ITC discounted the amount of rate mitigation,

making it a present value calculation as though it were to be paid as a lump sum at the

beginning of the P. ITC then divided it by three to determine the amount to be

paid each year, which is a form of presentation that should use nominal dollars.

During the second stage of the P, what is the formula by which excess cost to

ratepayers would be recognized?

Excess cost to ratepayers that would be caused by the Transaction during the second

stage of the RMP would be determined by calculating the difference between only the

excess cost of ITC's WACC in comparison to ETl`s and a number representing

benefits that would be realized from three types of savings. These savings would be

quantified by a benefits test administered by an independent third party. The three

types of benefits the third party administrator would evaluate are generally beyond the


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PUC Docket No. 41850 „ ., ^..

Q. Why is this inconsistent with financial theory?

A. This test is inconsistent with financial theory because it inappropriately quantifies the

benefit by expressing it as the average of 40 years of benefits whose dollar value

would vary greatly. Any given year, the appropriate means of quantifying the benefit

of a future cash flow is heavily dependent upon when that cash flow is expected to

occur. Future cash flows in the distant future are less valuable than those of the same

magnitude in the near future because of the time value of money. This characteristic

would further misstate savings in a manner that would be helpful to ITC's passing the

test because it is reasonable to presume that projected savings from ITC's management

would be greater in later years. Averaging as opposed to discounting -would overvalue

those years.

ivavem oer I i, lu 1;3Direct Testimony of Slade Cutter

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PUC Docket No. 41850 L}srsn I 'l -P '

^. What is the amount of the net book value of the transmission assets that are to be

transferred?

Q. Would ETl receive consideration equal to the reasonable value of the assets if the

transaction takes place?

Entergy shareholders would receive consideration much greater than the value of the

assets. The transfer would take place at the book value of the transmission assets and

the tax basis of deferred taxes associated with the assets would be unchanged.

Therefore, rate base would be unchanged. As discussed above, ETI and Entergy

shareholders would receive consideration far in excess of the reasonable value of the

assets being transferred.

Public Utility Rc=gtrltttmyAct, Title 1!, Texas Utilities Code, (A s Amended), effective September !, 2013." See ETI Response to Staff RFt 1-3 at Attachment A.


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PUC Docket No. 41850 tan,,,, 7 c ,.#''

Yes.


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June, 1988- Instructor, Collegiate Test PrepNovember, 1988:

December, 1987- Administrator,June, 1988: Central Texas Biotechnology Cr,nsortiurn.

November, 1983- Project Manager,June, 1986: General Western Corporation

March, 1983- Project Manager,November, 1983: Loughborough Engineering

July, 1382- Investor, Self-employedMarch. 1983:

February, 1982-July, 1982:

Engineering Manager,Hussmann Insulated Panel

May, 1981-February, 1982:

Pricing Manager,Network Steel Corporation

May, 1976- Pricing SupervisorMay, 1981:

,Mesco Metal Buildings Corporation

September, 1973- Estimator,May, 1976: Mesco Metal Buildings Corporation

EDUCATION

Master of Business Administration,University of Texas at San Antonio, 1987

Bachelor of Arts in Economics,University of Texas at Arlington, 1973

3

0000016

PUC Docket No. 41850ATTACHMENT SC-2

DIRECT TESTIMONY BY SLADE CUTTER FILEDPAGE I OF 2

FOR THE PUBLIC UTILITY COMMISSION OF TEXAS

Utility DocketDate

Filed Subject AreaTri-County Elec. Co-op 8437 11/88 Financial IntegritySam Rayburn G&T Elec. Co-op 8595 1/89 Rate of ReturnLamar County Elec. Co-op 8717 4/89 Rate of ReturnIndustry Telephone Co. 8987 9/89 Sale of StockSouthwestern Elec. Ser, Co. 9040 12/89 Cost of CapitalPanola-l-larrison Elec. Co-op 9214 4/90 Rate of ReturnSam Rayburn G&T Elec, Co-op 9447& 3/90 Financial Integrity

9448 Rate of ReturnPedernales Elec. Co-op 9456 3/90 Eco. Incentive RateHouston Lighting & Pwr Co. 9850 2/91 Cost of CapitalBrazos Elec. Pwr. Co-op 10059 2/91 Notice of IntentNorth Texas Tel. Co. 10223 4/91 TariffTexas-New Mexico Pwr. Co. 10200 4/91 Cost of CapitalHouston Lighting & Pwr Co. 10473 9/91 Notice of IntentBrazos Elec. Pwr. Co-op 10883 1092 Certificate of

Conven. & NecessityBrazos Elec. Pwr. Co-op 10921 10/92 Avoided CostHouston Lighting & Pwr Co, 11000 3/92 Certificate of

Conven. & NecessityTexas Utilities Co. 11735 8/93 Rate ModerationEast Texas Electric Co-op 12456 7/94 Certificate of

Conven. & NecessityTexas Utilities Co. 12852 11/94 Cost of CapitalMasters Financial Services 15810 5/96 Financial IntegrityCity Public Service 15613 9/96 Transmission CostBoard of San Antonio

Rate of Return

0000017

PUC Docket No. 41850ATTACHMENT SC-2

PAGE 2 OF 2City of Austin 15645 9/96 Transmission Cost

Rate of ReturnHino Electric Power Company 20314 1 l/99 Certificate of

Convert. & NecessityReliant Energy HL&P 22355 12100 Unbundling

Cost of ServiceCap Rock Electric 24577 5/02 Certificate of

Convert. & NecessityDenton Municipal Electric 26672 2/03 Transmission Cost

Rate of ReturnAEP Texas Central Company 28840 2/04 Rate of ReturnSouthwestern Public Service Company 32766 1/07 Rate of ReturnEntergy Gulf States 33687 5/07 Transition to

CompetitionEntergy Gulf States 34800 1/08 Rate of Return, Nuclear

DecommissioningPNM Resources 35460 6i08 MergerPUC Staff 35665 10/08 Selection of Competitive

Renewable Energy Zone

Transmission ProvidersOncor Electric Delivery 35717 10/08 Rate of ReturnTexas-New Mexico Pwr. Co. 36025 6109 Rate of ReturnSouthwestern Electric Power Co. 37364 2/15/10 Rate of ReturnEntergy Texas Electric Power Company 37482 1/29/10 Power Cost RecoveryFactor

Entergy Gulf States 37744 6/16f10 Rate of Retum, Nuclear

DecommissioningCenterPoint Energy 38339 9/10 Rate of ReturnTexas-New Mexico Pwr. Co. 38480 11/10 Rate of ReturnEl Paso Electric Company 38361 7/16/l0 Fuel ReconciliationEntergy Texas 39896 4/12 Rate of ReturnSouthwestern Electric Power Co. 40443 11/12 Rate of ReturnEntergy Texas 4 i 223 5113 Sale of AssetsEntergy Texas 4 l 850 11113 Sale of Assets

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PUC Docket No. 41850ATTACHMENT 5G-3

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SOAH DOCKET NO. 473-13-2879PUC DOCKET NO. 41223

APPLICATION OF ENTERGY TEXAS, §INC., ITC HOLDINGS CORP., MID §SOUTH TRANSCO LLC, §TRANSMISSION COMPANY TEXAS, §LLC, AND ITC MIDSOU°I`H LLC FOR §APPROVAL OF CHANGE OF §OWNERSHIP AND CONTROL OF §TRANSMISSION BUSINESS, §TRANSFER OF CERTIFICATION §RIGHTS, CERTAIN COST-RECOVERY §APPROVALS, AND RELATED RELIEF §

BEFORE THE STATE OFFICE

OF

ADMINISTRATIVE HEARINGS

REDACTED DIRECT TESTIMONY OF

SLADE CUTTER



MAY 7, 2013

0000020

PUC Docket 41223

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Page 2 of 23

May 7, 2013Redacted Direct Testimony of Slade Cutter

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PUC Docket 41 223

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rage j at ZiREDACTED DIRECT TESTIMONY OFF SLA DEDE CU ER

TABLE OF CONTENTS

1. Introduction . . ... . .. .................. .......................<..<......,,,,,..........,....,..........,.,,..,........,,....... 4if. Recommendation ............... .................................<.......,,,..,,,...............,.............,........,..... ^III. Financial Analysis ...................................... ....> .......................................<.......,.,..,...<...,., 6

A. Risk and Return ........................<...,,,,.,...,... ......................................................... tB. Valuation of ETl's Assets is Reasonable (Issues* 5a and 5e) ......................... 15C. Cost of Texas Transmission Service Would Increase

(Issues 6c, 8u, 8b, urt, 9a, 94, and 9e) ............................ .................................. 16

D. ETI's Financial Condition is Adequate ................................... ....................<..,. 19IV. Conclusion ..................... ...< ............................<,............<.......,...,,,.......<....,...,................. 22

LIST OF ATTACHMENTS

Attch. SC-1 Transmission Retail Revenue Requirement Effect

Attch. SC-2 Employment History of Slade Cutter

Attch. SC-3 List of Testimonies by Slade Cutter

*Public Utility Commission of Texas Docket No. 41223, Preliminary Order.

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Redacted Direct Testimony of Slade Cutter

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PU(: Docket 41223

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Q. What are your principal areas of responsibility in this capacity?

A.I am responsible for recommending fair rates of return on invested capital, evaluating

financial integrity requirements, conducting various financial analyses, and preparing

testimony concerning financial matters relevant to public utilities regulated by this

Commission.

Q. Please briefly state your educational background and professional qualifications.

A. I received a Master of Business Administration degree with a concentration in finance

from the University of Texas at San Antonio and a Bachelor of Arts in Economics

degree with a minor in mathematics from the University of Texas at Arlington. Before

receiving my Master's degree, I was employed for five years as the pricing supervisor

at a manufacturing firm and for three years as a project manager at a real-estate-

development company. My employment history appears as Attch. SC-2. Since

joining the Commission Staff (Staff) at the PUC in 1988, I have read extensively about

public-utility finance and attended seminars on the subject.

A,tn.. 'r 7nl^)


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PUC Docket 41223 D--- C -F,,Q. Have you testified before this Commission previously?

A. Yes, a list of the dockets on which I have testified appears as Attch. SC-3.

The purpose of my testimony in this docket is to present my financial analysis and

recommendation regarding the transfer of ownership for which PUC approval is

requested in this proceeding. This transfer, if approved, would be of essentially all the

transmission assets of Entergy Texas, Inc. (ETI) to ITC Holdings Corp. (ITC). My

assessment responds to Issues: 5a, 5e, 6c, Sa, $b, 8d, 9a, 9d and 9e in the

Commission's Preliminary Order (the Preliminary order) in this proceeding, PUC

Docket No. 41223.

Q. What items did you review to arrive at the conclusions contained in your

testimony?

In preparing my testimony, I examined the initial filing (the Application) of Entergy

Texas, Inc., ITC Holdings Corp., Mid South Transco LLC, Transmission Company

Texas, LLC, and ITC Midsouth LLC; responses to various requests for information

(RFIs) made in this proceeding; the testimony of various intervening parties in this

docket; and relevant testimony and orders in other jurisdictions, which are included in

my workpapers.

May 7, 2013 Redacted Direct Testimony of Slade Cutter

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PUC Docket 41223

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• The effect of the financial aspects of the Applicants' request would be to increase

the cost of service of electric-transmission service in Texas; and,

• ETI's financial condition is adequate to economically meet its foreseeable future

financial needs, including those that might arise from any reasonable forecast of

extraordinary circumstances.

Q. Did you make any other determinations that are responsive to the Preliminary

Order in your financial analysis?

A. Yes, I determined that the value of the assets and consideration that would be

transferred is reasonable.

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PUC Docket 41223rage 1 of 23

Fdist ing new debt to replace old debt, issuing new debt without reglacing cald debt,

distributing cash to ITC stockholders, and distributing ITC stock tQ ETI stockholders.

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distribution of ITC stock to ETI's shareholders.

Q. How are financial markets competitive?

The required return on an investment from a security issued by an electric utility or

any other publicly traded company is ultimately determined in the capital markets.

Through the interaction of buyers and sellers of a company's securities, the return that

investors require to invest in the securities is determined.

When an investment has a higher return than other securities with similar risk,

the security's price is bid up - a competitive process -- until the differential in returns is

gone. Mathematically, this occurs because the rate of return is the quotient that is

determined by the division of an estimate of fixed future cash flows, which is the

numerator, by the security's price, which is the denominator, Therefore, raising the

price while keeping the cash flows constant, reduces the quotient.

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a.aa,Y r , 4tt 1 J Redacted Direct Testimony of Slade Cutter

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PUC Docket 41223

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C^. What factorsinfluence the probability of investors' expectations about a

security?

Investors consider all the information available to them in deciding the return they will

require to make a particular investment. Important among this information are: the

business and financial risk of the company, its history and the history of its industry,

and the opinions of experts on investing, such as bond-rating agencies and stock

advisories,

In the case of regulated utilities, part of the business risk investors consider is

A sS.... 17 -%f% t t+*.xs.^ s y ec,viJ


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PUC Docket 41223 p.,- n ^r oviw .s^v e M4 irJ

thought to limit the risk of investing in a utility. As a consequence of this perception

of limited risk, investors are willing to buy utility securities on which they expect a

relatively modest return.

Risk and Return in ThisProceProceeding

Q. How do the principles of risk and return that you described in the previous

section apply to this proceeding?

In my opinion, the return that Entergy stockholders are expected to realize if the

Transaction is approved is far greater than they could have reasonably expected at the

time they assessed the risk of investing in Entergy and bought the company's stock. It

would occur nearly completely because FERC regulation does not serve as a substitute

for competition in regard to the financial markets for utility stock.

What is the return to Entergy's stockholders that is expected from the

Transaction?

regulated holding company, has included in its regulated revenue requirement a

Commission-approved, rate-case-litigated return on equity (ROE) of 9.80%' for ETI

and that this ROE is meant to completely compensate investors for their investment in

Entergy's Response to Cities 1-34, pages LR237.Docket No. 39896, Application of Entergy Texas. Inc. for Authority to Change Rates, Reconcile Fuel Costs,

and Obtain Deferred Accounting Treatment. (Order on Rehearing. November 2, 2€312.)


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F[IC Docket 41223

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Q. What is the source of this uneconomic and above-market return?

A. The basic source of excess return is the nature of the FERC rate construct.

Q. Please describe the rate construct.

A. In the context of this proceeding, "rate construct" is the term ITC uses in its testimony

for the combination of treatments that FERC regulation uses that are favorable to

utilities relative to state regulation.The ratemaking determinants in the rate construct

that FERC treats favorably for utilities include: the level of the ROE; capital structure,

in terms of percent of equity and permissibility of double leverage; forward-looking

test year; and, depreciation rate. In asking for approval of the Transaction, ITC has

effectively applied to the PUC for approval of this rate construct in determining

transmission rates in Texas.

What ROE and capital structure are specified by the rate construct?

The ROE that ITC is requesting is 12.38%, and the capital structure it is requesting is

60% equity and 40% debt.

it fi..... ar nnywa*au.Y t, G.V 1.7


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PUC Docket 41223 P'90rs 11 nf')".

What would the expected effect of using a forward-looking test year as

opposed to an historical one?

In periods of rising costs and additions to transmission assets that exceed their

depreciation, the effect of a forward-looking test year would be to increase rates, In

periods of declining costs and additions that are exceeded by depreciation, its effect

would be to reduce rates. If these factors were mixed, one increasing rates and the

other reducing them, the net effect could go either way, depending on which factor has

a greater influence. Historically, costs for most transmission providers have been

increasing and additions to transmission assets have exceeded depreciation; therefore,

the effect of a forward-looking test year would be to increase rates. For the reasonably

foreseeable future, that is what I would expect for the transmission assets whose

change in ownership is being considered in this docket.

Is there a reason specific to ITC why would you expect a forward-looking test

year to increase rates relative an historic test year?

Yes. ITC has testified in this proceeding that it plans to invest in improvements to the

transmission assets it hopes to acquire, and has demonstrated in the service areas it

acquired through previous mergers that this has been its strategy.


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PUC Docket 41223

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ROE & Equity Ratio

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1 3 SNL Financial L.C.

Mn v °7 an1 zltedacted Direct Testimony of Slade Cutter

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PUC Docket 41223

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Q. What would be the overall effect on Texas transmission rates if using the rate

construct was standard PUC regulatory practice?

Transmission rates in Texas would increase dramatically. The ROE used in the rate

construct in this proceeding would contribute more to higher rates than any ROE that

has recently been allowed by any state's electric-utility regulatory authority of which I

am aware. Likewise, the capital structure the rate construct would allow contributes

more to higher rates than any capital structure that has recently been allowed by any

state regulatory authority of which I am aware. The total effect of using the FERC-

allowed ROE and the F:ERC-allowed capital structure within a single rate construct

would compound their individual effects because the two are multiplied together in the

determination of a utility's cost of service. I am certain that the PUC has not recently

allowed a ROE or capital structure that would contribute as much to higher rates as

IC

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1 R- __ +wxriuy !E GV4J


0000032

PUC Docket 41223

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Q. Can you Provide an example that illustrates the difference in return between

investing in transmission assets at the rate construct's level versus at an economic

level?

A. Yes. The following table illustrates the difference in return under FERC regulation

and state regulation. The row labeled Pre-Tax Cost of Capital illustrates the much

higher cost that a utility would collect for its capitalization underRC regulation,

while the row labeled ROE with Double Leverage shows the dramatic effect double

leverage has on equity returns at the parent level.

tvuix 1, LVJ[J Redacted Direct Testimony of Slade Cutter

0000033

PUC Docket 41223

Regulation Authority ComparisonPage 15 of 23

tate URCRe ulat"an Retrulation

Cost of Equity 10.00% 12.38%Cost of Debt 4,50% 4.50%Tax Rate (CombinedState and Federal) 40% 40%

Capital Structure(Equity/Debt) 50%150% % a 60%/40%

Pre-Tax Cost ofCapital 10.58^`0 14.Z8^'o

Invested Capital $1,000 $1 000Revenue

,

Requirement $105.80 $141.80

ROE with DoubleLeverage NA 22.06%4

1

Table 1

?3

B• VALUATION OF ETI'SREASONABLE

ASSETS TO BE TRANSFERRED IS

4 Q. At what value would ETI's transmi iss on assets be transferred?5 A. ETI's transmission assets would be transferred to 1TC at the net bo k lo va ue at which6 they would be recorded on ETI's audited financial statements, which are prepared7 according to Generally Accepted Accounting Principles (GAAP) as required by8 PURA.'

`t ROE with Double Leverage =(FERC Rev.' Public Utility Regulatory Act.

Req. - interest expense) *7_111e ft, Texas Utilities Code, (As Amended), Effective September ^ !^t 2011.

May 7, 2013Redacted Direct Testimony of Slade Cutter

0000034

PUC Docket 4(223

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FttgC Lo of L,iQ. What is the amount of the net book value of the transmission assets that would be

transferred?

A. _...-

^9 ® „^,, ip^n !!?This value may change slightly as the list of

transmission assets to be transferred is updated pursuant to the Merger Agreement.

Q. Would ETI receive consideration equal to the reasonable value of the assets if the

transaction takes place?

A. As structured. Entergy Corporation and its shareholders will receive the consideration.

The transfer would take place at the book value of the transmission assets and the tax

basis of deferred taxes associated with the assets would be unchanged. Therefore, rate

base would be unchanged. As demonstrated by the confidential testimony of

intervenor witnesses, Entergy Corporation and its shareholders would receive

consideration worth a good deal more than the net book value of the assets being

transferred.

C. COST OF TEXAS TRANSMISSION SERVICE WOULD INCREASE

Q. How would transmission rates in Texas be affected if the Transaction were to

occur?

A. Transmission rates in Texas would increase significantly.

may /, ZUI ,1Redacted Direct Testimony of Slade Cutter

0000035

PUC Docket 41223

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Q. How have you modified Mr. Bready's forecast?

A. I revised ETI's pre-tax cost of debt.

Why did you feel it was necessary to revise Mr. Bready's for ecast?

Because the pre-tax cost of debt for ETI is uncertain, but clearly lower than the values

that Mr. Bready used. I also revised Mr. Bready's forecast because of Entergy's

replies to RFI Question Nos. LPSC 11-19 and LPSC 11 -20, which were made by ETI's

sister companies, Entergy Gulf States Louisiana, L.L.C. and Entergy Louisiana, L.L.C.

in Docket No. TJ-3253$ before the Louisiana Public Service Commission. These

answers are included as pages 3 and 4 of Appendix B in the testimony of Texas

Industrial Energy Consumers witness Michael Gonnan in this proceeding.

aTg^x It 4tJd.3


0000036

PUC Docket 41223

7 Q.How did you determine the values to use for ETI's pre-tax cost of debt in your

3 revision?

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I averaged the 6.73% value Mr. Bready used for 2014, with the 4.43°1o cost of long-

term debt for Baa-rated utilities that Moody's reportedfor April 15, 2013. The

average is 5.58%. Thisapproach is not intended to create a precise estimate of ETI's

cost of debt, but rather to illustrate the impact on Mr. Bready's analysis of using a

more realistic estimate of ETI's cost of debt.

Q. What were the results of your modification?

A. My modification to Mr. Bready's estimate of the difference in the retail revenuerequirement of ETI due to the change in pre-tax WACC ($MM) changed that estimatefrom an increase of $60.4 million to $78.7 million.

Does the Pre-tax cost of debt cause the increase in the cost of service that would

occur if ITC were to be the owner of ETI's transmission assets?

No. In fact, even with my revision, the pre-tax cost of debt in Mr. Bready's forecast is the

only elementof ITC's planned "rate construct" that would reduce the increase to the cost

mnv 7 "3t11 't

Kedacted Direct Testimony of Slade Cutter

0000037

PUC Docket 41223Tt.. _ , ri

a u^G 1.7 iJt GJ

of service. Unfortunately, its effect is overwhelmed by the ROE and capital structure

components of the WACC in the FERC rate construct.

4

6

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D. ETI'S FINANCIAL CONDITION IS ADEQUATE

Q. What are the ratings assigned by the major credit rating agencies to ITC,

Entergy and the EOCs?

The ratings for Entergy and ITC's operating companies are as they appear below in

Table 2:6

6 S&P provides increasing risk and declining credit ratings for investment quality bonds ranging fromAAA toAA to A to BBB (with "+„ and "" as sub ratings or notches within these rating classes for relatively lower or

higher risk, respectively). Moody's provides comparable increasing risk and declining credit quality ratings ofAaa to As to A to Baa (with I. 2, and 3 as sub-ratings or notches within these rating classes for relatively lowerto higher risk, respectively). Fitch uses a rating scale similar to S &P. There are no current AAA/Aaa creditratings (often pronounced "triple A") for the debt of electric utilities. Bonds rated BBiBa ("double B") or lowerare sometimes called junk bonds. Bonds rated B/B, CCC/Caa, CC/Ca, and C/C are considered speculative;bonds rated below these speculative grades reflect insolvency. S&P. Moody's, and Fitch also provide corporatecredit ratings for the utility itself. separate from various ratings given to the utility's fixed income securities,reflecting increasing risk levels for mortgages, unsecured senior debentures. subordinated debt, preferred stock,etc.

rviay r, zut3Redacted Direct Testimony of Slade Cutter

0000038

PUC Docket 41223

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8910111213

Senior Secured Credit RatingsITC r)crating^oS S,&.p NloOdy's1TCTransmission A AlMETC A AlITC Midwest A Al

Enter&y C}p,,,eratic^^;Entergy Ark. A- A3Entergy La. A- A3Entergy Miss. A- BaalEntergy Tex. BBB+ Baa2Entergy Gulf States BBB+ A3Entergy New Orleans BBB+ Baa3

Table 2

rage zu or t,i

Q. Do the rating agencies provide analysis in addition to credit ratings?

A.Yes. The analyses the rating agencies and investment advisors such as Value Line are

relied upon heavily by many investors.

Q. What do they have to say about the Transaction?

A.In an announcement published on December 11, 2011, the day after the Applicants

announced the Transaction, Moody's, one of the two major rating agencies followed

by investors, had this to say:

1T1teJ transaction appears to be neutral to metrics, but inorder to mitigate the potential business risks, we believe that ETRwill need to manage the regulatory process care,frilly and plan foroperating a previously integrated transmission and distributionsystem with an unrelated partner, including storm responseProtocol.

iw,uy r, 4v1.3Redacted Direct Testimony of Slade Cutter

0000039

PUC Docket 41223rage ^t of

In its Global +''reclit portal, Rating's Direct publication of December 5, 2011,

2 1 S&P, the other major rating agency besides Moody's offered the following:

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Finally, Value Line, whose publication Investment Survey is also closely

same parameters considered by Standard & Poors and Moody's and runs from A++ to

C in nine steps.The upper limit of Value Line's financial-strength rating scale

indicates financial strength better than the "vast majority" of the 1700 companies

ValueLine follows, while the lower limit indicates companies with "very serious

financial problems."

7, X_ . -, .,,,...tiliLy I, ZrVaJ


0000040

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PUC Docket 41223 .,I. czrr, GL Vt L.)

Q. What is the significance of IM y's and S&P's ratings and remarks and Value

Line's financial strength assessment in relation to the Applicants' financial

conditions?

These remarks and ratings are consistent with my view that ETI has a capability of

financing transmission construction that is close to that of ITC. ITC has an advantage

in having slightly higher credit ratings, but Entergy has a stronger financial-strength

rating from Value Line and does not use double leverage, nor is it so dependent upon

FERC's favorable regulation.

IV. CONCLUSION

Q. What do you conclude from your analysis?

A. I conclude from my analysis in this proceeding that if the change in ownership

contemplated in this docket were to occur:

1. Assuming that no major change occurs in the market for electric-utility stacks,

Entergy stockholders would experience returns far beyond that which would be

required by investors to invest in Entergy;

2. Electricity transmission costs in Texas that are related to financial considerations

would increase significantly in proportion to the share they now represent in the

price of electricity they now represent;

3. The value of the transmission assets at which the transfer of ownership would be

completed is reasonable; and

4. ET['s financial condition is adequate for the transmission construction reasonably

expected to be required for the foreseeable future.

lviily !, LV 1 JRedacted Direct Testimony of Slade Cutter

0000041

PUC Docket 41223

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Based upon the above conclusions, I recommend that the Commission not approve the

Transaction described in the Application.

Q, Does this complete your testimony?

Yes.


0000042

June, 1988- Instructor, Collegiate Test PrepNovember, 1988:

December, 1987- Administrator,June, 1988: Central Texas Biotechnology Consortium

November, 1983- Project Manager,June, 1986: General Western Corporation

March, 1983- Project Manager,November, 1983: Loughborough Engineering

July, 1982- Investor, Self-employedMarch, 1983:

February, 1982- Engineering Manager,July, 1982: Hussmann Insulated Panel

May, 1981-February, 1982:

Pricing Manager,Network Steel Corporation

May, 1976- Pricing Supervisor,May, 1981: Mesco Metal Buildings Corporation

September, 1973- Estimator,May, 1976: Mesco Metal Buildings Corporation

EDUCATION

Master of Business Administration,University of Texas at San Antonio, 1987

Bachelor of Arts in Economics,University of Texas at Arlington, 1973

0000043

Utility Docket++44iG

Filed Subject Area

Tri-County Elec. Co-op 8437 11/88 Financial Integrity

Sam Rayburn G&T Elec. Co-op 8595 1/89 Rate of Return

Lamar County Elec. Co-op 8717 4/89 Rate of Return

Industry Telephone Co. 8987 9/89 Sale of Stock

Southwestern Elec. Ser. Co. 9040 12/89 Cost of Capital

Panola-Harrison Elec. Co-op 9214 4/9(} Rate of Return

Sam Rayburn G&T Elec. Co-op 9447& 3/90 Financial IntegrityRate of Return

Pedernales Elec. Co-op 9456 3/90 Eco. Incentive Rate

Houston Lighting & Pwr Co. 9850 2/91 Cost of Capital

Brazos Elec. Pwr. Co-op 10059 2/91 Notice of Intent

North Texas Tel. Co. 10223 4/91 Tariff

Texas-New Mexico Pwr. Co. 10200 4/91 Cost of Capital

Houston Lighting & Pwr Co. 10473 9/91 Notice of IntentBrazos Elec. Pwr. Co-op 10883 1/92 Certificate of

Conven. & Necessity

Brazos Elec. Pwr. Co-op 10921 10/92 Avoided Cost

Houston Lighting & Pwr Co. 11000 3/92 Certificate ofConven. & Necessity

Texas Utilities Co. 11735 8/93 Rate Moderation

East Texas Electric Co-op 12456 7/94 Certificate ofConven. & Necessity

Texas Utilities Co. 12852 11/94 Cost of capital

Masters Financial Services 15810 5/96 Financial Integrity

City Public ServiceBoard of San Antonio

15613 9/96 Transmission CostRate of Return

0000044

PUC Docket 41223ATTACHMENT SC-3

PAGE 2 OF 2

City of Austin 15645 9/96 Transmission CostRate of Return

Hino Electric Power Company 20314 11/99 Certificate ofConven. & Necessity

Reliant Energy HL&P 22355 12/00 UnbundlingCost of Service

Cap Rock Electric 24577 5/02 Certificate ofConven. & Necessity

Denton Municipal Electric 26672 2/03 Transmission CostRate of Return

AEP Texas Central Company 28840 2/04 Rate of ReturnSouthwestern Public Service Company 32766 1107 Rate of ReturnEntergy Gulf States 33687 5/07 Transition to CompetitionEntergy Gulf States 34800 1/08 Rate of Return, Nuclear

DecommissioningPNM Resources 35460 6/08 MergerPUC Staff 35665 10/08 Selection of Competitive

Renewable Energy ZoneTransmission Providers

Oncor Electric Delivery 35717 10/()8 Rate of Retetrn.Texas-New Mexico Pwr. Co. 36025 6/09 Rate of ReturnSouthwestern Electric Power Co. 37364 2/15/10 Rate of ReturnEntergy Texas Electric Power Company 37482 1/29/10 Power Cost Recovery FactorEntergy Gulf States 37744 6/16/10 Rate of Return, Nuclear

DecommissioningCenterPoint Energy 38339 9/10 Rate of ReturnTexas-New Mexico Pwr. Co. 38480 11/10 Rate of ReturnEl Paso Electric Company 38361 7/16/10 Fuel ReconciliationEntergy Texas 39896 4/12 Rate of ReturnSouthwestern Electric Power Co. 40443 11/12 Rate of RettunEntergy Texas 41223 5/13 Sale of Assets

0000045

SOAH DOCKET NO. 473-I3-2879PUC DOCKET NO. 41223

APPLICATION OF ENTE GY TEXAS, §INC., ITC HOLDINGS CORP., MID §SOUTH TRANSCO LLC, §TRANSMISSION COMPANY TEXAS, §LLC, AND ITC MIDSOUTH LLC FOR §APPROVAL OF CHANGE OF §OWNERSHIP AND CONTROL OF §TRANSMISSION BUSINESS, §TRANSFER OF CERTIFICATION §RIGHTS, CERTAIN COST-RECOVERY §APPROVALS, AND RELATED RELIEF §

BEFORE THE STATE OFFICE

OF

ACfM[NiSTRATIVE HEARINGS

SUPPLEMENTAL DIRECT TESTIMONY OF

SLADE CUTTER



MAY 8, 2013

0000046

Public Utility Commission oflexasDocket No. 41223

Transmission Retail Revenue Requirement Effect

ITCWitness 8readv"s Version

1 ITC After- Tax Return on Equity2 ITC Equity Component of Capital Structure3 ITC Pre Tax Cost of Debt4 ITC Debt Component of Capital Structure5 ITC Federal Tax Rate6 ITC Pre-Tax Weighted- Average Cost of Capital7

8 ETI After Tax Return on Equity

9 ETI Equity Component of Capital Structure1{} £TI Pre Tax Cost of Debt11 ETI Debt Component of Capital Structure12 ETI Federal Tax Rate13 ETI Pre-Tax Weighted -Average Cost of Capital14

15 Difference in Pre-Tax WACC16

17 Projected Ending Rate Base J$MM)18 Projected Average Rate Base19

20 Difference in Total Revenue Requirement JRR) ($NtM)21 Difference in Retail RR Due to Change in Pre-Tax WACC ($MM)22 Retail Portion of Total RR23

24 Discount Rate25

26 Net Present Value of Difference in Retail RR

Attachment SC-1

Page 1 of 2

20^1 2014 2Q16 2017 2U112.38% 12.38% 12,38% 12.38% 12,38%60.00% 60,00% 60.00% 60.00% 60.00%4.05'% 4.31% 4.45% 4.53% 4.59%

40.00% 40.00% 40.00% 40.00% 40.00%35.0[]% 35.00% 35.00% 35.00`35 35.00%13.05% 13.15% 13.21% 13.24% 13.26%

1013% 10.13'& 10.13% 10.13% 10.13%48.80% 49.00% 48.90% 48.90% 48.90%6 73% 6.79% 6.83% 6.85% 6.86%

51.20% 51.00% 51.10% 51.10% 51.20%35.00% 35.00% 35.00% 35.00% 35.00%11.05% 11.10% 11.11% 11.12% 11.13%

2.00% 2.05% 2,10% 2.12% 2.14%

S 532.60 $ 603.80 $ 824.70 $ 973.20 $ 1,048.90 $ 1,123.40$ 568.20 $ 714.25 $ 898.95 $ 1,011.05 $ 1,086.15

$ 11.34 $ 14.66 $ 18.85 $ 21.42 $ 23.21$ 9.85 $ 12.72 $ 16.36 $ 18.59 $ 20.15

8.68% 8.68% 8.68% 8.68% 8,68%

8.00%

$60.39

0000047

Public Utility Commission of Texa^Docket No. 41223

Transmission Retail Revenue Requirement Effect

Staff Witness tutter°s Version

1 ITC After Tax Return on Equity2 ITC Equity Component of Capital Structure3 ITC Pre-Tax Cost of Debt4 ITC Debt Component of Capital Structure5 ITC Federal Tax Rate

6 ITC Pre-Tax Weighted, Average Cost of Capital7

8 ET! After-Tax Return on Equity

9 Eli Equity Component of Capital Structure

10 ETI Pre-Tax Cost of Debt

11 ETI Debt Component of Capital Structure12 ETI Federal Tax Rate

13 ETI Pre-Tax Weighted -Average Cost of Capital

14

15 Difference in Pre-Tax WACC

16

17 Projected Ending Rate Base J$MM)

18 Projected Average Rate Base

19

20 Difference in Total Revenue Requirement (RR) ($MM)21 Difference in Retail RR Due to Change in Pre-Tax WACC ($MM)

22 Retail Portion of Total RR

2324 Discount Rate

2526 Net Present Value of Difference in Retail RR

27 Due to Change in Pre-Tax WACC (5MM)

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Attachment SC-1

Page 2 of 2

2{t13 zt}14 2015 2016 2017 201412.38% 12.38% 12.38% 12.38% 12.38%60.00% 60,00% 60.00% 60.00% 60.00%4.05% 4.31% 4.4596 4.53% 4.59%

40.00% 40,00% 40.00% 40.00% 40.00%35.00% 35.005b 35.00'3b 35.00% 35.00%13,05'% 13.15% 13.21Rb 13.24% 13.26%

10.13% 10.13% 20.13% 10.13% 10.13%48.80% 49.00% 48.90'% 48.906A 48.90%5.58% 5.58% 5.58% 558% 5.589b

51.24`3t•, 51.00% 51.10% 51.1096 51.10%35.00% 35,00% 35.00% 35.00% 35.00%1046% 10.48% 10.4796 10.47% 10.47%

2,59% 2.67g6 2.74% 2.77% 2.79%

$ 53160 $ 603.80 $ 824.70 $ 973.20 S 1,048.90 S 1,123.40$ 568.257 $ 714.25 $ 898.95 S 1,011.05 $ 1,086.15

$ 14,69 $ 19.07 5 24.59 $ 27.98 S 30.32$ 12,75 S 16.55 $ 21.34 $ 24.29 5 26.32

816896 8.68% 8.68% 8.68% 8,68%

8.00%

$78,7

0000048

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0000049

control number 41850 item number: 207

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