14. DRA's Base Return on Equity Recommendation

DRA's Discounted Cash Flow and Capital Asset Pricing Model analyses' results for the two proxy groups are below:

	Discounted Cash Flow	Capital Asset Pricing Model
Water Proxy Group	9.81%	8.13%
Gas Proxy Group	9.61%	7.65%

Given the results for the two proxy groups, DRA concludes that the appropriate equity cost rate for the two proxy groups is between the 7.65% to 9.81% range. This wide range reflects, according to DRA, the uncertainty and volatility in today's capital markets. Due to the lower level of risk, the equity cost rates for the Gas Proxy Group are lower than those for the Water Proxy Group. In recognition of this uncertainty and volatility, DRA asserts that an equity cost in the upper end of the range is appropriate. Thus, DRA recommends an equity cost of 9.75% as its benchmark return on equity for all Applicants.

DRA argues its 9.75% recommendation is consistent with the authorized returns on equity for water companies because the average authorized return as reported by AUS Utilities Reports is 10.08%. (Exhibit DRA-1, Panel A of Attachment JRW-12.) Additionally, yield spreads and rates have declined and therefore show further why DRA's 9.75% recommendation is reasonable.

DRA also notes that 9.9% is the most recent authorized average return on equity reported by the National Association of Water Companies in its recent Financial and Operating Data Report.⁴⁷ (Exhibit DRA-1, Panel B of Attachment JRW-12.)

⁴⁷ The National Association of Water Companies provides authorized returns on equity for a broader group of small water companies.