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Developing cost of capital expert testimony for joint action agency


“MCR’s cost of capital testimony was content-rich, succinct, and effective.”

—VP of Transmission, joint action agency


Background

A joint action agency formed a Transco in order to own transmission assets it had acquired from its members. As part of establishing the company, the Transco faced a number of contentious issues in its associated Section 205 FERC rate filing to establish its transmission formula rate. The Transco engaged MCR to provide expert testimony on one of the most critical issues in the filing: determining the appropriate level of cost of capital.

Solution

MCR first discussed the key issues related to the Transco’s cost of capital with client personnel and their outside counsel. MCR then conducted an analysis of debt service coverage ratios of joint action agencies, G&Ts and municipals typically required by credit rating agencies consistent with obtaining the Transco’s desired “A” credit rating. MCR subsequently drafted testimony that considered the completed analysis, other related financial issues in the case, FERC precedent, the Transco’s goals and MCR’s previous client experience. This testimony supported use of the requested margin requirement percentage (a form of return), using the cash flow formula rate template. MCR reviewed and discussed its draft testimony with client personnel and their outside counsel, and submitted the testimony as part of the Section 205 filing.

Results

Despite substantial intervention by neighboring IOUs, FERC agreed with the arguments of MCR’s testimony and approved the Transco’s filing and requested margin ratio. FERC cited MCR’s analysis related to required debt service coverage ratios, FERC precedent and issues unique to the case. Based on these highly favorable results, the Transco now has a FERC-accepted formula rate.