From: Robert Berman [mailto:bermaneconomics@gmail.com]

Sent: Monday, November 14, 2011 11:18 PM

To: Bob Smith

Cc: 'Robert Berman'; 'Roy, Robin'; 'Corkran, Jerry L' ; 'BolducChristopher'; 'Anderson Richard'; 'Ballo

Timothy'; 'Beck Scott R.'; 'Caskey John. F'; 'Cym balsky John'; adelaski@standardsasap.org; 'Tom';

'FernstromGary'; 'Gaytan Carlos'; 'GreesonRobert'; bruce.r.hirsch@bge.com; 'H odgeGerald R.'; 'Hyland

Michael J.'; 'Millure David'; 'Nadel Steven'; 'Patterson Wesley F.'; 'Petersen Eric'; 'Polinski Raymond';

artrosenfeld@gmail.com; 'RosenstockSteven J.'; 'Si mmons Charles E.'; 'Cohen Dan'; 'Coulter Greg';

'Creevy Jim'; ahofmann@publicpower.org; 'Kumar Puesh'; 'Mauer Joanna'; 'Aaron Meyers';

jrossetti@mlgw.org; 'Ryan Paul'; 'Schoen Jerry W.'; 'Waltner, Meg'; Brian Coffey; 'Coughlin Katie';

brenda.edwards@ee.doe.gov; jeremiah.freeman@e e.doe.gov; Caitlin Johnson; Zhimei Luo;

emily.marchetti@ee.doe.gov; Michael Rivest; 'Rosenquis t Gregory'; 'Drexler Charles R.'; 'PhilHopkinson';

James.Lass@cleco.com; 'Sampat MaheshP.'; DYoung@energy-solution.com;

chad.kennedy@us.schneider-electric.com; eduardor obles@eaton.com; vijay.tendulkar@onyxpower.com;

'Kenneth Winder'; thomas.patzner@us.schneider-elect ric.com; carlosgsiqueiros@eaton.com; 'Raba Jim';

'Parker Richard'; 'Saint, Robert D.'

Subject: Re: Cost of Capital to Electric Utilities



### The discounts rates used are real , not nominal. The purpose is to avoid just the sort of problem

that you raise -- trying to address inflation in the anlaysis. We avoid that by also doing the

analysis in constant (re al dollars). Market rates, (except fo r TIPS) whether debt or equity, are

nominal (current dollar yields, no t constant dollar yields -- i.e ., they contain an expectation of

inflation). In order to use this information in the analysis, it must comport with the constant

dollar / real rates we are using. In the case of interest rates or equity returns, the customary

approach is to subtract the embedded rate of inflation -- typically assumed to be the CPI. A

commonly accepted approach to evaluating the infla tion that the "market believes will occur" is

the difference between the TIPS and yield on conventional Treasuries of the same term.

As an economist, my interest is maximizing benefits to society as a whole. I try not to think in

terms of an "opposition." True efficiency gains are "win-win". Elimination of waste / losses

results in a larger pie for everyone , so long as the real cost of e liminating the losses is less than

the losses. This is the reason for focusing on th e LCC and why economists tend to favor a result

that minimizes the LCC. How those efficiency gains are shared among producers and consumers

is a separate question. Since the additional invest ment cost associated with the transformer is

also born by the same electricity consumer to whom the benefit of the reduced generation and

fuel cost accrues, the ultimate cost to the pr oducer remains the return earned on the incremental

investment versus the typically higher return that would be earned in a non-regulated

opportunity.

Hope that helps.



### Regards,

Robert A. Berman, Principal

Berman Economics

www.BermanEconomics.com

1915 Grand Court

### Vienna, VA 22182

703

‐ 281

‐ 0490

703

‐ 655

‐ 8398 (cell)

BermanEconomics@gmail.com

On Nov 14, 2011, at 8:36 PM, Bob Smith wrote:

Robert:

I didn’t say anything about how interest rates are derived; all I said was don’t integrate CPI into the

assumed discount rate

. I stick by my statement that Banks don’t care about Inflation and CPI, they care

about the differential between the cost of money and the revenue from loans. Discount rates deal with

monetary returns for competing investments.

Check with your colleague, Paul Krugman; I think he’ll say the same thing. If you don’t like Krugman,

then let’s turn to physics and talk about savings in barrels of oil or tons of coal, please.

At this point in time we need understanding, clarity, and confidence in each other’s statements.

Don’t you believe that we can pull off successfully this Negotiated Rule Making effort that we’re trying

to arrange? Let’s throw out some clarifying, empathetic, and complementary comments that support

the “opposition” so we can move ahead.

I am betting we can get our rule making recommendations done.

Regards,

Bob Smith, PE

Product Manager

Federal Pacific

601 Old Airport Road

Bristol, VA 24201

TEL: (276) 645-8836

FAX: (276) 645-8956

CELL: (276) 591-6143

Email: bsmith@federalpacific.com

The information contained in this message and any attachments is intended only for the use of the individual or

entity to which it is addressed, and may contain informa tion that is privileged, confidential and exempt from

disclosure under applicable la w. If you have received this message in error, you are prohibited from copying,distributing, or using the information. Please contact the sender immediately by return e-mail and completely delete

the original message from your system.

From: Robert Berman [ mailto:bermaneconomics@gmail.com ]

Sent: Monday, November 14, 2011 8:05 PM

To: Bob Smith

Cc: Roy, Robin; Corkran, Jerry L; BolducChristopher; Anderson Richard; Ballo Timothy; Beck Scott R.;

Caskey John. F; Cymbalsky John; < adelaski@standardsasap.org >; Tom; FernstromGary; Gaytan Carlos;

GreesonRobert; < bruce.r.hirsch@bge.com >; HodgeGerald R.; Hyland Michael J.; Millure David; Nadel

Steven; Patterson Wesley F.; Petersen Eric; Polinski Raymond; < artrosenfeld@gmail.com >;

RosenstockSteven J.; Simmons Charles E.; Cohen Dan; Coulter Greg; Creevy Jim;

< ahofmann@publicpower.org >; Kumar Puesh; Mauer Joanna; Aaron Meyers; < jrossetti@mlgw.org >;

Ryan Paul; Schoen Jerry W.; Waltner, Meg; < brian.coffey@navigant.com >; Coughlin Katie;

< brenda.edwards@ee.doe.gov >; < jeremiah.freeman@ee.doe.gov >; JohnsonCaitlin;

< zhimei.luo@navigant.com >; < emily.marchetti@ee.doe.gov >; < mrivest@navigant.com >; Rosenquist

Gregory; Drexler Charles R.; PhilHopkinson; < James.Lass@cleco.com >; Sampat MaheshP.;

< DYoung@energy-solution.com >; < chad.kennedy@us.schneider-electric.com >;

< eduardorobles@eaton.com >; < vijay.tendulkar@onyxpower.com >; Kenneth Winder;

< thomas.patzner@us.schneider-electric.com >; < carlosgsiqueiros@eaton.com >; Raba Jim; Parker

Richard; Robert Berman; Saint, Robert D.

Subject: Re: Cost of Capital to Electric Utilities



### Sorry Bob, I must respectfully disagree. Consider that TIPS yields are lower than conventional

Treasury securities -- the differen ce being what the market expects inflation to be. Inflation is

very much a factor in interests rates and equity yields. Banks must indeed consider inflation as

well as everyone else in the market. Banks don't get to pick the interest rate anymore than you or

your members do. Both need to take the rate se rved up by the market, and the market does very

much consider inflation.

Regards,

Robert A. Berman, Principal

Berman Economics

1915 Grand Court

Vienna, VA 22182

703.281.0490

703.655.8398 (cell)

Berman.Economics@gmail.com

### www.BermanEconomics.com

Sent from my iPhone

On Nov 14, 2011, at 7:41 PM, "Bob Smith" < bsmith@federalpacific.com > wrote:

Fellow Negotiated Rule Making Members:

We seem to be adding unnecessary confusion to our analyses.

Banks don’t care about Inflation or CPI. Banks measure their success on the cost to borrow money

versus the interest rate they can charge on loans of this money.

The discount factor that we assume in our present worth calculations is simply an algebraic term for

discounting future revenues and expenditures which have nothing to do with CPI. CPI is an indicator of

what a given quantity of tangible goods cost when referenced to some base period.

We could, if we wanted to, express our analysis in “easy

‐ to

‐ understand” terms that are meaningful such

as “barrels of oil” or “tons of coal” that are saved, as we move toward higher efficiencies

.

Regards,

Bob Smith, PE

Product Manager

Federal Pacific

601 Old Airport Road

Bristol, VA 24201

TEL: (276) 645-8836

FAX: (276) 645-8956

CELL: (276) 591-6143

Email: bsmith@federalpacific.com

The information contained in this message and any attachments is intended only for the use of the individual or

entity to which it is addressed, and may contain informa tion that is privileged, confidential and exempt from

disclosure under applicable la w. If you have received this message in error, you are prohibited from copying,

distributing, or using the information. Please contact the sender immediately by return e-mail and completely delete

the original message from your system.From: Roy, Robin [ mailto:rroy@nrdc.org ]

Sent: Friday, November 11, 2011 7:26 PM

To: Saint, Robert D.; Robert Berman

Cc: Corkran, Jerry L; Bolduc Christopher; Anderson Ri chard; Ballo Timothy; Beck Scott R.; Caskey John.

F; Cymbalsky John; adelaski@standardsasap.org ; Tom; Fernstrom Gary; Gaytan Carlos; Greeson

Robert; bruce.r.hirsch@bge.com ; Hodge Gerald R.; Hyland Michae l J.; Millure David; Nadel Steven;

Patterson Wesley F.; Petersen Eric; Polinski Raymond; artrosenfeld@gmail.com ; Rosenstock Steven J.;

Simmons Charles E.; Cohen Dan; Coulter Greg; Creevy Jim; ahofmann@publicpower.org ; Kumar Puesh;

Mauer Joanna; Aaron Meyers; jrossetti@mlgw.org ; Ryan Paul; Schoen Jerry

W.; bsmith@federalpacific.com ; Waltner, Meg; brian.coffey@navigant.com ; Coughlin

Katie; brenda.edwards@ee.doe.gov ; jeremiah.freeman@ee.doe.gov ; Johnson

Caitlin; zhimei.luo@navigant.com ; emily.marchetti@ee.doe.gov ; mrivest@navigant.com ; Rosenquist

Gregory; Drexler Charles R.; Phil Hopkinson; James.Lass@cleco.com ; Sampat Mahesh

P.; DYoung@energy-solution.com ; chad.kennedy@us.schneiderelectric.com ; eduardorobles@eaton.com ; vijay.tendulkar@onyxpower.com ; Kenneth

Winder; thomas.patzner@us.schneider-electric.com ; carlosgsiqueiros@eaton.com ; Raba Jim; Parker

Richard

Subject: RE: Cost of Capital to Electric Utilities

Thanks Bob,

Is the 6.22% rate of return real or nominal?

If it’s 6.22% nominal, then with cpi currently at ~3.9% the real rate is around 2.2%, which suggests 7% is

high.

Cheers, Robin

From: Saint, Robert D. [ mailto:robert.saint@nreca.coop ]

Sent: Friday, November 11, 2011 4:03 PM

To: Robert Berman

Cc: Corkran, Jerry L; Bolduc Christopher; Anderson Ri chard; Ballo Timothy; Beck Scott R.; Caskey John.

F; Cymbalsky John; adelaski@standardsasap.org Delaski; Tom; Fernstrom Gary; Gaytan Carlos; Greeson

Robert; bruce.r.hirsch@bge.com Hirsch R; Hodge Gerald R.; Hyland Michael J.; Millure David; Nadel

Steven; Patterson Wesley F.; Petersen Eric; Polinski Raymond; artrosenfeld@gmail.com Rosenfeld;

Rosenstock Steven J.; Roy, Robin; Simmons Charles E.; Cohen Dan; Coulter Greg; Creevy

Jim; ahofmann@publicpower.org Hofmann; Kumar Puesh; Mauer Joanna; Aaron

Meyers; jrossetti@mlgw.org Rossetti; Ryan Paul; Schoen Jerry W.; bsmith@federalpacific.com Smith;

Waltner, Meg; brian.coffey@navigant.com Coffey; Coughlin

Katie; brenda.edwards@ee.doe.gov Edwards; jeremiah.freeman@ee.doe.gov Freeman; Johnson

Caitlin; zhimei.luo@navigant.com Luo; emily.marchetti@ee.doe.gov ; mrivest@navigant.com Rivest;

Rosenquist Gregory; Drexler Charles R.; Phil Hopkinson; James.Lass@cleco.com Lass; Sampat Mahesh

P.; DYoung@energy-solution.com Young; chad.kennedy@us.schneiderelectric.com Kennedy; eduardorobles@eaton.com Robles; vijay.tendulkar@onyxpower.com Tendulkar;

Kenneth Winder; thomas.patzner@us.schneiderelectric.com Patzner; carlosgsiqueiros@eaton.com Siquieros; Raba Jim; Parker Richard

Subject: RE: Cost of Capital to Electric Utilities



### Robert—

### After much discussion within NRECA and consultation with a major supplemental lender for

distribution cooperatives, we have come up with median Rate of Return on Total Capitalization

of 6.22% for electric cooperatives. So, the 7% figure being used is well within the ball park.



# Bob Saint

Principal Distribution Engineer, Energy and Power Division

National Rural Electric Cooperative Association (NRECA)

4301 Wilson Blvd

Arlington, VA 22203

Phone: (703) 907-5863

Cell: (703) 283-5078

From: Robert Berman [ mailto:bermaneconomics@gmail.com ]

Sent: Monday, November 07, 2011 5:47 AM

To: Parker Richard

Cc: Robert Berman; Corkran, Jerry L; Bolduc Christop her; Anderson Richard; Ballo Timothy; Beck Scott

R.; Caskey John. F; Cymbalsky John; adelaski@standardsasap.org Delaski; Tom; Fernstrom Gary; Gaytan

Carlos; Greeson Robert; bruce.r.hirsch@bge.com Hirsch R; Hodge Gerald R.; Hyland Michael J.; Millure

David; Nadel Steven; Patterson Wesl ey F.; Petersen Eric; Polinski

Raymond; artrosenfeld@gmail.com Rosenfeld; Rosenstock Steven J.; Roy Robin; Saint, Robert D.;

Simmons Charles E.; Cohen Dan; Coulter Greg; Creevy Jim; ahofmann@publicpower.org Hofmann;

Kumar Puesh; Mauer Joanna; Aaron Meyers; jrossetti@mlgw.org Rossetti; Ryan Paul; Schoen Jerry

W.; bsmith@federalpacific.com Smith; Waltner Meg; brian.coffey@navigant.com Coffey; Coughlin

Katie; brenda.edwards@ee.doe.gov Edwards; jeremiah.freeman@ee.doe.gov Freeman; Johnson

Caitlin; zhimei.luo@navigant.com Luo; emily.marchetti@ee.doe.gov ; mrivest@navigant.com Rivest;

Rosenquist Gregory; Drexler Charles R.; Phil Hopkinson; James.Lass@cleco.com Lass; Sampat Mahesh

P.; DYoung@energy-solution.com Young; chad.kennedy@us.schneiderelectric.com Kennedy; eduardorobles@eaton.com Robles; vijay.tendulkar@onyxpower.com Tendulkar;

Kenneth Winder; thomas.patzner@us.schneiderelectric.com Patzner; carlosgsiqueiros@eaton.com Siquieros; Raba Jim

Subject: Cost of Capital to Electric Utilities



### Richard and All,

For those interested in the curren t cost of money to investor owne d electric utilities, the weighted

average cost of capital a ppears to be a little over 5%. This is composed of about 7% equity and

4% debt. See attached for full li st of sector costs. As noted in my earlier email to Ken, rural

electric coops and municipals typically borrow fr om RUS at rates pegged to long-term treasuries

-- currently about 3%. Links also included her for convenience.

http://www.rurdev.usda.gov/UEP_Rates.html

and http://www.rurdev.usda.gov/UEP_Loans_Grants.html

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