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In 2019, Consolidated Water Power Company (CWP), an electric utility in Wisconsin, submitted an initial application to the Public Service Commission of Wisconsin (PSCW) to change its rates based on a cost of service, which included an increase of the return on equity (ROE) for the rate base from the level of 6% from the prior rate case. Verso Corporation, the parent of CWP, intervened in the case, as did several large industrial CWP customers.

Verso Corporation retained NERA Managing Director Kurt G. Strunk and Senior Consultant Dr. Albert Bremser to provide expert testimony on financial matters at stake in the CWP rate case. Specifically, Verso was concerned that the rate of return afforded to CWP was insufficient to meet the standards established by the Supreme Court in Hope and Bluefield.  

Mr. Strunk performed a cost-of-capital study and recommended a rate of return on equity for CWP of 10%, reflecting the risk of investment in the electric utility business and the particular risks of CWP, which include serving a highly concentrated industrial customer base. The cost-of-capital study incorporated an analysis of CWP’s financial structure, taking into consideration imputed debt attributable to Power Purchase Agreements. Mr. Strunk found that CWP’s effective capital structure consisted of approximately 40% debt and 60% equity.

Dr. Bremser’s expert testimony presented a comparative analysis of CWP’s financial metrics and those of other Wisconsin utilities in order to assess whether CWP’s allowed return provided reasonable opportunities to attract capital. Dr. Bremser found that CWP’s rate of return was too low and consequently CWP was at a disadvantage to attract investment capital compared to other PSCW-regulated investor-owned electric utilities. Dr. Bremser also opined on the reasonableness of CWP’s dividend policy.

CWP’s financial structure and fair return were contested and subject to expert debate during the proceeding. CWP sponsored an 8% return on equity using a 100% equity capital structure, as did the Staff of the PSCW. The CWP industrial customers that intervened recommended a 6% return on equity using a 100% equity capital structure.   

Mr. Strunk and Dr. Bremser attended the Commission’s online, telephonic hearing on 28 October 2020 to address any questions posed in cross examination.  

In January 2021, the PSCW issued a Final Decision establishing rates for CWP to become effective in 2021. The Commission adopted the return on equity of 10% recommended by Mr. Strunk, grounded in his cost-of-capital study and further bolstered by Dr. Bremser’s comparative analysis. In addition, the PSCW held that a reasonable capital structure for CWP for ratemaking is 60% equity and 40% debt, which is the effective capital structure identified by Mr. Strunk and the one that guided his 10% ROE recommendation.