Virginia State Corporation Commission eFiling CASE Document Cover Sheet Case Number (if already assigned) PUE-2013-00011 Case Name (if known) Document Type OTHR Document Description Summary Expert Testimony and Report - Short Version . Total Number of Pages 74 Submission ID 6810 eFiling Date Stamp 4/30/2013 4 :44 :26PM IMA W PA w COMMONWEALTH OF VIRGINIA, ex rel. STATE CORPORATION COMMISSION CASE NO. PUE-2013-00011 Ex Parte: In the matter of investigating the toll Rates of Toll Road Investors Partnership 11, L.P ., Under § 56-542 D of the Code of Virginia JOINT EXPERT REPORT OF MR. ROBERT G. VAN HOECKE AND DR. A41CHAEL J. WEBB April 30, 2013 I-A W REPORT CONTENT 1. Introduction ...... . .. ..... . . . ...... . . .. .... .. . ..... . . . ...... . . ...... . . . . . ..... . . . ...... . . ...... . . ...... . . . ........ . . . ..... . . . ....... . . 2 H. Purpose and Overview ...... . . ...... . . . ..... . . . ...... . . ...... . . . ..... . . . ...... . . .... ... . . ..... . . . ...... . . ........ . . . ..... . . . ... 3 M. Appropriate Toll Standards Under §56-542 of the Virginia Code . . ..... . . . ...... . . ... ... .. . . . ..... . ... 4 A. B. C. Relationship of Tolls and User Benefits . . . ..... . . . ....... . ...... . . . ..... .. . ........ ........ . . ...... . . . . 13 Tolls Must Not Materially Discourage Use of the Roadway .. . . . ...... . . ........ . ....... . . .. 16 Tolls Must Provide Operator No More Than a Reasonable Return . . . ...... . . . ..... . . . ... 19 1. Reasonable Return Must be Determined Based on Costs .... .. ........ . . . ..... . . . . 19 Allowed Components of Return . . . ..... .. . ....... . ...... . . . .. ... .. . ...... . . ...... .. . . ...... . . . . 21 2. 3. Return of Investment (Depreciation) . . . . ...... . . ...... . . . ..... . . . ...... . . ...... .. . . ..... . . ... 22 4. Reasonable Return Must be Based on Prudent Investment . . . ........ . ....... . . .. 31 IV. Preliminary Assessment of TRIP 11's Compliance with Relevant Criteria ... .. ...... . . . ..... . . . . 31 V. Conclusion and Recommendation .. .. . ...... . . ...... . . . ....... . . . ...... . . ...... . . . ..... . ........ . . ...... .. . ..... . . . ... 39 I PA W I. INTRODUCTION 1. We are Mr. Robert G. Van Hoecke and Dr . NEchael J . Webb . Mr. Van Hoecke is a Principal with the firm of Regulatory Economics Group, LLC-a firm specializing in economic and financial consulting to regulated entities . Dr. Webb is a Director with the same firm. Our business address is 2325 Dulles Comer Boulevard, Suite 470, Hemdon, Virginia 20171-4675. 2. Mr. Van Hoecke has twenty-nine years of experience working for and providing consulting services to regulated entities and has testified before state and federal agencies, state and federal courts, and before domestic and international arbitral tribunals. A detailed listing of Mr. Van Hoecke's qualifications is provided at Exhibit No. I - Dr. Webb has sixteen years of experience providing consulting services to regulated entities. He has filed testimony before state and federal agencies. In addition, Dr. Webb holds a PhD in economics from George Mason University, and has taught courses in Law and Economics, the Economics of Regulation, and the Economics of Energy to both graduate and undergraduate students. Attached as Exhibit No. 2 is Dr. Webb's curriculum vitae. 3. Upon learning of the investigation' initiated by the State Corporation Commission ("Commission") into the rate structure and rate level charged by Toll Road Investors Partnership II, L.P. ("TRIP 11") in response to Delegate David I. Ramadan's complaint, we met with Delegate Ramadan and offered to prepare an expert report based on our Order Initiating Investigation, Docket No. PUE-2013-00011 (January 30, 2013). 2 I" W combined experience and expertise in regulatory matters . We are not being compensated for our time analyzing these issues or preparing this report. 2 H. PURPOSE AND OVERVIEW 4. The Commission's authority to regulate TRIP 11's operation of the Dulles Greenway was promulgated in the Virginia Highway Corporation Act of 1988 ("Act") and is codified in §56-535 through §56-552 of the Virginia Code ("Code") . In its Order Initiating Investigation of the rate structure and rate level charged by TRIP 11, the Commission cites the statutory requirements of §56-542 D of the Code, which sets forth three requirements the Commission will apply in this investigation. Specifically, the Commission must ensure that tolls are set at a level : (1) "Which is reasonable to the user in relation to the benefit obtained"; (2) "which will not materially discourage use of the roadway by the public"; and (3) "which will provide the operator no more than a reasonable return as determined by the Commission ." 3 Having determined that an investigation was warranted, the Commission requested submissions to "address and define with specificity the standards that the Commission should apply for each of these three requirements ." 5. The purpose of our report is to present relevant standards we believe the Commission should consider when carrying out its investigation. At this juncture our analyses have been limited to certain publicly available documents, however using this information we will explain why, in our opinion, TRIP 11's current rate level and rate structure are inconsistent with the statutory mandates defined above. We anticipate In addition, neither of us resides nor works in Loudoun County . Case No. PUE-2013-0001 1 . Order Initiating Investigation . Page 3 3 ~A W through TREP 11's concurrent filing and the discovery process that more detailed information will be forthcoming. For this reason we respectfully reserve the option to supplement our submission and to respond to TRIP 11's anticipated evidence as relevant .4 information becomes available in this proceeding 6. In Section 1H below, we will address standards the Commission should consider which will ensure that TREP H's tolls and toll structure meet the mandates established by the Act. In Section IV we will provide comments on how these proposed standards should be applied and to the extent information is available provide an illustration of their application. M. APPROPRIATE TOLL STANDARDS UNDER §56-542 OF THE VIRGINIA CODE 7. Pursuant to the Act the Commission has the power to regulate TRIP H as a public service corporation.5 The tolls charged by the TRIP H in performing its "public duties" are governed within a broad framework characterized by three explicit factors. Specifically, "the Commission, upon application, complaint or its own initiative, and after investigation, may order substituted for any toll being charged by the operator a toll which is set at a level: which is reasonable to the user in relation to the benefit obtained and ii. which will not materially discourage use of the roadway by the public and To the extent it is appropriate we may submit a reply report on July 9, 2013 in accordance with the current procedural schedule. §56-542 B 4 1-b W iii. which will provide the operator no more than a reasonable return as determined by the Commission ."6 8. In evaluating the appropriate regulatory standards that the Commission should consider when evaluating TRIP 11's toll levels and structure it is important to consider how these three independent statutory requirements work together to establish a comprehensive means of regulatory oversight. The statutory requirement that "[the toll] will provide the operator no more than a reasonable return as determined by the Commission"7 call for an examination of the operator's cost of providing the regulated service when evaluating the tolls. Moreover, other statutory provisions in §56-542 clearly establish cost-based requirements to ensure : (1) that the operator's costs are not improper or excessive;8 (2) that any contractual relationship with a closely associated or affiliated entity are no less favorable than the operator than it could obtain in an arm's length transaction;9 (3) rates shall be neither applied or collected in a discriminatory fashion; 10 (4) that the price paid in connection with any ownership change does not contribute to an increase in cost or tolls;" and (5) the use of any proceeds or funding obtained by the operator from bond indentures or credit agreements are limited to certain purposes-generally to build and maintain the physical plant or refinance any debt previously incurred for this limited purpose. 6 §56-542 D 7 Emphasis added. 8 §56-542 C 9 §56-542 C 10 11 12 12 §56-542 B §56-542 E §56-542 G 5 These types of requirements, which in I-A W general address cost reasonableness and prudency, are commonly imposed on public service or infrastructure entities subject to economic regulation . This cost-based approach to regulation is typically referred to as cost of service or rate of return regulation .' 3 9. The cost of service approach to economic regulation is well established and has been applied by regulatory agencies at the state and federal level for many decades. It is based on the principle that the regulated entity is granted an opportunity to recover it's reasonable and prudently incurred cost of providing the service, which would include a reasonable return on its prudently made investment associated with the assets used to provide the regulated service. 14 As Dr. Bonbright observed in Principals ofPublic Utility Rates: one standard of reasonable rates can fairly be said to outrank all others in importance attached to it by experts and by public opinions alike--the standard of cost of service, often qualified by the stipulation that the relevant cost is necessary cost or cost reasonably or prudently incurred . 15 10. An extensive body of economic literature and case law has developed to guide regulatory agencies in established cost-based standards for setting rates that limit the returns to a reasonable level . This guidance, which we find relevant for interpreting the provisions of §56-542 D, is summarized as follows. First, the regulated entity should be given the opportunity to recover prudently incurred operating expenses and investment . To the extent the entity incurs imprudent costs, or makes imprudent decisions which 13 14 is For purposes of this report we will refer to this as cost of service regulation. We address the details of the appropriate cost of service standard below and evaluate TRIP 11's current rates under this standard using publicly available information . Bonbright, James C. Principles ofPublic Utility Rates New York: Columbia University Press, 1961 . p.67 (emphasis in original) Also see, Alfred E. Kahn, "The Economics of Regulation : Principles and Institutions" . The MIT Press : Cambridge, Massachusetts . (1988) Volume 1, Chapter 2. 6 P W result in additional costs, these should not be included in the rates, nor should they be reflected in the return. Second, the entity is only given an opportunity to earn a reasonable return on investment, commensurate with other investments of similar risk observed in the marketplace . 16 When determining reasonable return on investment (both debt and equity), the Commission should identify the rate of return that similar entities of comparable risk must offer both equity and debt investors in order to efficiently attract 17 the capital required to build the regulated assets . The Commission should then apply the resulting weighted average cost of capital ("WACC") against the prudent level of rate base (generally based on the depreciated level of investment used to provide the regulated service) in order to detennine the maximum level of debt and equity return which is reasonable. Regulated entities are not guaranteed a return nor are they guaranteed that they will even recover their operating costs and make a profit . 18 Consequently, as a general matter, regulatory agencies and the courts prohibit regulated entities from engaging in retroactive ratemaking-taking costs which are properly incurred but not 16 17 Is Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591 (1944) There is a zone of reasonableness where the level of projected return can be neither excessive nor confiscatory. Provided the debt is arm's-length and has been provided by a non-affiliated party, most regulatory bodies will accept a rebuttable presumption that the actual embedded cost of debt is reasonable, absent a determination that the capital structure is not prudent or representative of the market or risks. In addition, to the extend another entity, such as a parent guarantees to provide recourse for the debt, most regulatory authorities look through the regulated entity to that guarantor when determining the weighted average cost of capital . Market Street Ry. v. Railroad Commn., 324 U.S . 548 (1945) 1-4 W recovered in one period and seeking to adjust rates in future periods to retroactively recover those costs.' 9 11 . Apart from being deemed improper by the courts, retroactive ratemaking causes several problems when setting reasonable rates and evaluating the proper level of return commensurate with the operator's risk. First, it can cause different generations of users to bear different levels of cost responsibility for the same asset or regulated service (i.e., intergenerational inequity). Absent special circumstances this is inappropriate, just as it would be inappropriate to unduly discriminate . In addition, setting current maximum rates on the basis of costs which supported rates in prior periods effectively provides to the regulated entity an opportunity to recover the same cost more than once. This provides a form return surety, thereby reducing the operator's risk. If the reduced risk is not properly reflected in the allowed rate of return-which is applied to the rate basethis can result in excessive rates or returns . 12. In addition to the traditional cost of service requirements, which are essentially captured in the requirement that "[the toll] will provide the operator no more than a reasonable return" the Act does not limit the regulatory oversight of the tolls to a traditional cost of service review, but went further to establish two additional independent statutory requirements . These additional requirements work in concert with the limitations of return to create a more comprehensive regulatory structure. These two companion provisions require that tolls must be : (1) "reasonable to the user in relation to the benefit obtained"; and (2) "not materially discourage use of the roadway by the 19 The courts have held that retroactive ratemaking is prohibited in determining cost of service rates that provide no more than a reasonable return . See, Public Service Company ofNew Hampshire v. FERC, 600 F.2d. 944 (D.C. Cir . 1970) 'A P& W public" . As we explain below, the overarching statutory framework created by these three criteria was designed to maximize the public benefit derived from the roadway. 13. It is appropriate for the Commission to request input regarding "standards that the Commission should apply for each of these three requirements" and to take this opportunity to re-evaluate its past regulation of the Dulles Greenway. In recent years, several community leaders and many local residents have raised numerous concerns that the Dulles Greenway tolls are excessive and that its toll structure is not sensitive to the distances users travel on the roadway .20 Despite public assurances from TRIP Il's financial officer in 1999 that the Dulles Greenway was "on very solid financial ground ( . . . ) [w]e have had positive cash flow for some time, and with the [recent debt] closing we now have a debt structure which matches our revenue stream" it is clear now that the course that TRIP 11 envisaged has taken a wrong turn. 21 It is clear conditions have changed which support a reconsideration of the prior standards used by the Commission . 14. At the time of the prior assurances in 1999, the average toll was $1 .25, average daily traffic had recently climbed to around 34, 00022_-due in part to toll reductions a few 1999.23 Annual revenues years earlier which caused traffic to double between 1996 and were just over $15 million and cash operating expenses before financing (i.e., total 20 21 22 23 In addition to Delegate Ramadan's complaint filed in this case, see e.g., Representative Frank Wolf s letter to Loudon Elected Officials at Exhibit No.3, and Leesburg Today news article regarding Representative Wolf s backing of Loudon Board of Supervisors formal request for distance-based tolling at Exhibit No. 4. See a newsletter from tollroadnews.com in May 1999, attached hereto as Exhibit No. 5. Direct Testimony of Ashley Yelds on behalf of TRIP 11 in Case No. PUE-2006-0008 1 . See page 55 of the Maunsell report in Exhibit No. 6 attached hereto . Direct Testimony of E. Thomas Sines on behalf of TRIP 11 in Case No. PUE-200600081 . See Exhibit No. 7 attached hereto at page 6. 9 1~0 W operating expenses less depreciation and interest expense) was about $8.5 million resulting in positive cash flow from operations of $6 .6 million. The roughly $500 million in debt, although much higher than the cost of the toll road property, had an average interest rate of 7%, a AAA rating and was set to be repaid by 2036. 15. Since that time conditions have changed. Ownership of TRIP 11 was transferred to Macquarie Infrastructure Groups ("MIG") in 2005 . Significant toll increases over the last six years have pushed the maximum two-axle toll from $2.70 in 2006 to $4. 10 currently- $4.90 during rush hour . Prior to the rate increases, average daily traffic climbed to 61,185 in 2005. Most recent first quarter 2013 traffic statistics show the daily traffic has averaged at 44,02 1 . 24 Revenues have increased almost five fold to $72.4 million. Cash operating expenses before financing have increased more than 70 percent to $14.7 million. Yet due to the significant rate and corresponding revenue increases the cash flow from operations (before depreciation and debt service) has increased almost nine-fold to $57.7 million.25 Long-term debt has ballooned, reaching $958 million with an extended term of 2056-prompting a recent downgraded by Fitch to BB+. 21 TRIP 11 requested and received a twenty-year extension on its toll road concession now through 2056 . 16 . Table I presents the change in TRIP 11's positive cash flow from operations which it described as "very solid ground" in 1999 as compared to a more recent period . 24 25 26 See Exhibit No. 6 at page 5 and page 56 of the Maunsell report contained therein, Exhibit No. 8 at page 3 . Compare TRIP 11's 2005 and 2012 financial statements attached hereto as Exhibit No. 9 and Exhibit No. 10. See Exhibit No. I I 10 1-b W Table I Toll Road Investors Partnership 111, L.P. Cash Flow from Operations ($ millions) Total Revenue 1999 15.1 2012 72.4 Total 1999 to 2012 681 .3 Cash Operating Expenses 1\ Revenue in Excess of Operafing Cost 8.5 6.6 14.7 57.7 213 .7 467.6 Source : Exhibit No . 12 1 1 Excludes Depreciation and Interest Expense 17. The table above excludes cost associated with return-both the return of capital (depreciation) and return on capital (debt and equity) which are related to the assets used to provide the regulated service. In other words, the $467.6 million in cash flow from operations represents the funds that have been collected over the past fourteen years that were available to be applied to return . 27 As of the end of 2012, TRIP U's gross project investment was approximately $435 million . The depreciation expense reported by TRIP U during this period was $138 million. Consequently, even if one first assigns the positive cash flow to the return of investment, $329.6 million in revenues were available to be applied to costs associated with the return on investment (debt and equity) during this period . However, since 2004 TRIP 11 has increased long-term debt by $442.8 million, from $515 .7 million in 2004 to $958.5 million in 2012 . During the same period gross project investment only increased approximately $85.7 million, from $349.4 million in 2004 to $435.1 million in 2012 . This leaves almost $700 million dollars of 27 Assuming the Commission finds that all of the cash operating costs were prudent during this period . II ~-D V-3 cash flow and proceeds from incremental debt that was not used to fund the construction of physical plant or refinancing debt previously incurred for this purpose . 18 . ,J) A TRUP H has incurred significant levels of debt, more than three times the net book value of the assets . TRIP H reports a current interest expense in excess of $64 million, more than four times the annual operating costs and approximately twenty percent of the current net value of the assets used to provide the regulated service. Notwithstanding that the Commission extended its concession an additional twenty years to 2056. The level of debt and debt service is not reasonable and is resulting in high tolls which appear to be diverting traffic, causing significant congestion on other roads in the area and undermining a primary purpose for granting the concession in the first place-to reduce the need to expend public funds to increase the road capacity along this route. The graphic below demonstrates that approximately 80 percent of the toll which users pay to drive on the Dulles Greenway relate to the operator's debt. 28 IPMM WM WO t-MM SAM am 28 Accessed from the Dulles Greenway's website on April 26, 2013 12 0~ 19. It is appropriate for the Commission to reevaluate the standards that it will apply when setting tolls. The Commission has the authority to reconsider decisions it has made more than a decade ago, especially if current evidence suggests that those decisions are no longer consistent with its statutory requirements established in the Act, or are not well reasoned today given the current evidence . Conditions may change over an extended time and ultimately the Commission should establish standards that meet the requirements of the Act and are well reasoned based on the facts and circumstances of the current proceeding. Therefore we support the recent Commission order requesting submissions for standards that should be applied when setting tolls pursuant to the Act. A. 20. Relationship of Tolls and User Benefits Delegate David Ramadan, Representative Frank Wolf and others have previously requested that the Dulles Greenway tolls be adjusted to reflect travel distance. We believe that the Commission should give strong consideration to imposing a standard that requires tolls be established on a distance-basis, absent clear and convincing evidence that an alternate structure is more efficient and results in greater public benefit . 21 . Cost-based rates are generally established in the first instance based on the principal of cost causation. In other words, costs that are caused by a particular class of traffic or are associated with travel over a specific portion of a regulated entity's assets should be assigned to those movements, or classes of traffic, for cost recovery purposes. A motorist traveling westbound for only the short distance between the main toll plaza to Route 606, less than 2 miles, derives little benefit from the remaining 12 miles of roadway to Route 7 in Leesburg . Yet under the current toll structure these users are 13 1-b W likely regain traffic which TRIP II has diverted over the recent years due to high tolls, albeit at a lower toll . The incremental traffic generates minimal incremental cost for TRIP 11 and therefore additional traffic generated by the lower tolls should be profitable for TRIP 11 on an incremental basis . Moreover, in the not too distant future the Silver Line Metro extension is projected to be operation in eastern Loudoun County. The absence of distance based tolls on the Dulles Greenway could lead to greater traffic congestion on alternate routes . 26. We anticipate that TRIP H may argue that shorter distance movements might create congestion on the toll way. Currently the TRIP 11 has congestion based tolls which the Commission approved in a prior proceeding . As we noted above, a significant level of traffic has been diverted since the congestion-based toll structure was approved, the average daily traffic count is down from 61,185 in 2005 to approximately 44,021 in first quarter 2013 . It is highly likely that under the current traffic conditions, TRIP II cannot support the need for a congestion surcharge . The Commission should require TRIP 11 to provide a detailed traffic study to justify if congestion-based tolls are still warranted. If after distance-based tolls are established significant congestion occurs on the Dulles Greenway, TRIP 11 should be allowed to submit an application seeking congestion or peak pricing, but only on those segments and during times when significant congestion existing . B. 27. Tolls Must Not Materially Discourage Use ofthe Roadway It is notable that in addition to the other criteria, the legislation provides that the toll charged by the operator must not to "materially discourage use of the roadway by the public" . This requirement is firmly based on the concept of maximizing the public 16 ~A W benefit derived from the toll road and preventing an exercise of market power . If this criteria was not in place, operator might exercise market-power by increasing rates above a reasonable level a divert traffic and attempt to increase profits with less traffic . 32 28. In fact, TRIP 11's presentations to investors demonstrate that this is exactly the experience on the Dulles Greenway since 2008. Rates have increased and traffic has been diverted to other routes, thereby increasing congestion on these roads . 33 However, TRIP U's revenues have increased every year. 29. This has contributed to the need for the Commonwealth's Department of Transportation ("VDOT") to construct expanded capacity on bypass routes at public expense.34 It is notable that this outlay in part duplicates capacity which already exists on the Dulles Greenway . Notwithstanding VDOT's efforts to expand these alternate routes, during the times when TRIP H charges congestion-based pricing these, alternate routes face significant congestion . Despite the reduced traffic count on the Dulles Greenway, TRIP H continued to increase its revenue, indicating that it may be charging rates which reflect an exercise of market power. A century of economic theory and regulatory precedent suggest that rates reflecting an exercise of market power imply an unreasonably high return. 30. Public service companies, like the Dulles Greenway, represent what economists call a "Natural Monopoly". Specifically, Natural Monopoly is characterized by a firm 32 33 34 Decreasing quantity and increasing price represents the textbook example by which a firm with market-power exercises this market-power . See Exhibit No. 20. See page 35 of Exhibit No. 21 noting capacity upgrades on alternative routes . 17 I-A W having substantial fixed costs and low variable costs. Once constructed, the Natural Monopoly's low variable cost may provide it a significant market advantage over firms wanting to enter the market. It is important to recognize, however, that having market power and being a monopoly are not equivalent. A firm with only one or two competitors, especially if those competitors are capacity constrained, may possess a substantial degree of market power and have the ability to charge prices and set quantities (i.e. traffic on the road, as discussed above) at levels that do not produce optimal social benefit. For these reasons, absent sufficient market forces to prevent the exercise of market power, Natural Monopolies which provide a public service are often subject to economic regulation, typically based on its cost of service 35 31 . There are several reasons to believe that the Dulles Greenway does possess market power. In certain investor presentations TRIP 11 indicates that they may have market power. 36 Operator claims that congestion on alternate routes is increasing every year and they as "well positioned to take advantage" of the increased congestion in the future. 32. One justification for requiring that tolls must not materially discourage use of the roadway by the public is to maximize the public benefit from the road . Any mechanism which allows the operator to take costs used to justify prior maximum rates and include those costs tojustify future higher tolls may undermine this statutory requirement . This 35 36 If a firm with these characteristics were required to charge prices equal to marginal cost it would become insolvent . As a result investors would not invest in this firm and society would be worse off. However, the cost of service methodology described below balances the interests of the users and the investors . See Exhibit No. 20 at page marked "Exhibit 5" 18 ~a W is because it removes any financial incentive for the operator to maintain reasonable tolls that do not divert traffic or otherwise suffer the potential loss. In essence it provides greater surety that the operator will recover its return despite actions it might take which diverts traffic . C Tolls Must Provide Operator No More Than a Reasonable Return I. 33 . Reasonable Return Must be Determined Based on Costs The Commission is not required to determine that the Dulles Greenway is a public utility before it can impose a traditional cost of service (rate of return) regulatory framework in setting its rates. First, the Act specifically envisions that the Commission will limit the investor returns generated by the Dulles Greenway to a reasonable level . Second, certificated public service corporations, such as TRIP II, are in effect granted the opportunity to pursue business within the constructs of their enabling legislation and governing code . As stated in §56-542 D, the operator is subject to a ceiling rate of return set forth by the Commission ; it is provided "no more than a reasonable return" . Contrary to positions that TRIP Il has articulated in the past the fact that it is not a franchised monopoly, or lacked eminent domain authority when constructing the roadway, or operates the roadway under a time limited concession does not provide any justification for departure for traditional cost of service regulation, nor does it change the statutory obligations of the Commission established in the Act. Other inftastructure-based companies face similar challenges and are yet regulated on a cost of service approach . Clearly each of these limitations were known when the Act was passed 37 and yet they still 37 The lack of eminent domain and limited concession period were actually established in the Act. See §56-54 1, Eminent Domain; and §56-55 1, Termination of certificate; dedication of assets. 19 ~A W imposed a duty on the Commission to evaluate the reasonableness and prudency of TRIP H's costs in order to limit the return to a reasonable level as one of three guiding ratemaking principals . 34. Consequently cost of service ratemaking provides a reasonable way to apply the regulatory and economic concept underlying the provisions in the Act in evaluating the TREP II's tolls. In this regard, TRIP H should be allowed the opportunity to recover its prudently incurred cost of service, including a reasonable return on its depreciated investment relative to the current period of operation. It should not be guaranteed a return or cost recovery, nor should it be allowed to reflect any debt or financing costs in its cost of service which was not directly related to construction or expanding of physical assets used in providing the regulated toll road service. 38 35. In the following section we provide a broad overview of the cost of service standard the Commission should apply when examining the reasonableness of TRIP II's tolls and rate structure. In the subsequent section, we also present an illustrative calculation of TREP 11's cost of service under this approach based on publicly available information. 39 36. The Commission should evaluate the reasonableness of the Dulles Greenway rates using a depreciated original cost ("DOC") cost of service methodology . This approach is 38 39 See §56-542 G Given the lack of certain cost and traffic information in the public record we are not able to verify the appropriateness or prudency of certain costs for inclusion in the operator's cost of service . Therefore we believe that the attached computation likely overstates the costs that should be included in setting tolls. To the extent we are able to obtain additional information we reserve the right to update these calculations in order to provide the Commission with a more complete record upon which to make its decision . 20 4 I-a W widely accepted by most state regulatory agencies that oversee the economic regulation of public service corporations in the United States . In general, a DOC cost of service is comprised of four main elements ; (1) prudently incurred operating expenses; (2) an allowed return of the asset base ; (3) a reasonable allowed return on the deprecated value of the existing asset base ;40 and (4) a provision of income taxes. 37 . To the extent a Commission is setting forward looking rates, as opposed to reviewing past cost recovery, they should examine actual costs over a recent twelve month period ("base period") and adjust these costs to remove any imprudent costs. In addition, any non-recurring cost incurred during the historical period may need to be removed or amortized to the extent the Commission determines that is appropriate. In addition, because the rates are being set for a future period, the Commission should consider if there are any "known and measureable" changes anticipated in the cost or traffic in the near term, e.g., over the next nine months. If so, appropriate adjustments should be made in order to determine a rate that will provide the operator with an opportunity to recover its projected cost of service . 2. 38 . Allowed Components of Return The reasonable return noted under §56-542 D is to be "determined by the Commission ." In a regulatory environment the notion of "return" is comprised of two components. First, a regulated entity may charge rates that include a return of capital, which is represented by depreciation expense reflected over the useful life of the asset. Second, a regulated entity may charge rates that include return on capital. The return on capital is calculated by determining a reasonable capital structure (i.e. debt and equity 40 This is commonly referred to as "rate base". 21 0) a PA W ratio). Once this is determined the allowed return on investment is determined by applying a weighted average cost of capital ("WACC") to the net rate base. The WACC is determined by multiplying a reasonable cost of debt by the debt percentage and a reasonable cost of equity by the equity percentage . 39. The net rate base represents the depreciated cost of the assets used to provide the regulated service. Under cost of service the interest expense from the operator's income statement is replaced with an allowed debt and equity return on investment when determining the reasonable level of costs . Standards for determining a reasonable rate of return should be guided by the principle that firms and even projects within firms must compete for capital . Within the regulatory context, this means that a reasonable rate of return will provide the regulated firm with a return on capital equivalent to the return it would have earned on projects of similar risk . 41 Return of Investment (Depreciation) 40. Depreciation represents the return of the cost incurred in the construction of physical assets used in regulated service. The depreciation expense represents the opportunity for the regulated entity to recover this return based on the allocation of this cost to specific periods in which the assets are used. Regulators typically require depreciation of regulatory assets to be performed on a straight-line basis over their useful lives. However, to the extent the regulated entity can demonstrate that an alternate form of depreciation is more appropriate, or that a significant difference exists between the economic life and physical life of an asset, they may seek approval to adjust the method of depreciation . If the projected economic or physical lives of the assets materially 41 Federal Power Commission v . Hope Natural Gas Co., 320 U.S . 591 (1944) 22 change while in regulated service, regulators should require the regulated entity to perform a depreciation study and seek approval to prospectively adjust the depreciation factors based on the new information . 41 . TRIP 11's depreciation expense used to establish tolls should only reflect prudent investment associated with assets that provide regulated service to the users. To the extent TRIP H has invested in capital that is not providing regulated service or has made imprudent investment in capital, even if it is providing regulated service, any depreciation cost above the level of prudent investment reasonably required to provide the regulated service should be excluded from the tolls. 42. TRIP 11's depreciation expense should be computed on a straight-line basis using the lesser of the physical life of the asset or its economic life. The maximum economic life for TRIP H must consider the number of years remaining in its concession period . Based on TRIP U's current net investment of approximately $270 million and its current depreciation expense of $9.65 million per year, the existing assets are projected to be fully depreciated in approximately 28 years (i.e., 2040), which is well before the end of the new concession period . 43. The Commission has recently extended TRIP H's concession period through 2056 . As such any current assets which will continue to provide service beyond the original concession termination date may need to have their depreciation factors adjusted to reflect the extension of their economic life. a. Reasonable Return on Capital Funded by Debt 23 W W 44. The interest expense found in TRIP H income statement is not appropriate for cost of service purposes. As the shown graphic above demonstrates approximately 80 percent of the tolls users pay is related to the operator's debt . The amount of existing debt is more than three times TRIP H's net assets, resulting in excessive interest expense. Under a cost of service standard the Commission computes a reasonable debt return based on the debt costs and the percentage of rate base that is reasonably funded by debt . 45 . Excessive interest expense should not be included in the toll rates charged to users pursuant to §56-542 C, which states : [Tlhe Commission shall review the [annual] report and other such materials as it deems necessary for the purpose of determining improper or excessive costs, and shall exclude from the operator's costs any amounts which it finds are improper or excessive . 46. In addition, §56-542 E indicates that if there is a change in ownership, as occurred when MIG acquired TRIP II in 2005, [T)he Commission, in any subsequent proceeding to set the level of a toll charged by the operator, shall ensure that the price paid in connection with the change in ownership or control, and any costs and other factors attributable to or resulting from the change in ownership or control, if they would contribute to an increase in the level of the toll, are excluded from the Commission's determination of the operator's reasonable return, in order to ensure that a change in ownership or control does not increase the level of the toll above the level that would otherwise had been required under subsection D or subdivision 1 3 if the change in ownership or control had not occurred . 47. The dramatic increase in debt since 2004 has lead to an increase in the interest expense TRIP Il asserts should be considered when setting tolls. TRIP 11's interest expense was just over $33 million in 1999 . This increased to $43.9 million in 2004 prior to MIG's acquisition. In 201 1 and 2012, TRIP 11 reported interest expenses of $66.2 24 W million and $64.8 million, respectively . The Commission should investigate the extent to which this change in control may have resulted in the increase in costs TRIP 11 is reporting . 48. In addition, the Commission should investigate any evidence that might indicate if TRIP 11 has an affiliated or closely associated relationship with any debt holder . The legislation explicitly states that; during the course of its annual review of the operator's costs Commission shall; Included in [the course of the annual review] shall be consideration of contractual relationships between the operator and individuals or entities that are closely associated or affiliated with the operator to assure that the terms of such contractual relationships are no less favorable or unfavorable to the operator than what it could obtain in an arm's length transaction . §56-542 C Absent a cost of service standard, allowing debt beyond that needed to build or expand capital assets opens the door for TRIP 11 to circumvent regulatory oversight by over levering the assets and potentially paying their affiliate an unreasonable rate of interest. 49. The cost of service requirement to set the debt return based on the portion of rate base funded by debt is consistent with §56-542 G which would limit any debt service included in tolls to that debt which funded capital ; The proceeds and funding provided to the operator from any future bond indenture or similar credit agreement must be used for the purpose of refinancing existing debt, acquiring, designing, permitting, building, constructing, improving, equipping, modifying, maintaining, reconstructing, restoring, rehabilitating, or renewing the roadway property, and for the purpose of paying reasonable arm's-length fees, development costs, and expenses incurred by the operator or a related individual or entity in executing such financial transaction, unless otherwise authorized by the Commission . 25 W IA W If TREP H is able to include in its rates amounts of debt that was not used to build toll road assets, or refinancing at a lower rate existing debt previously issued to build toll road assets~ TRIP 11 has unlimited ability to increase rates by simply securing more debt. This ability is only capped by the coverage ratios imposed by third parties-a result that reflects bond holders' perceived risk that such abuse may lead to loss on their notes. In other words, the ability to include in its rates unlimited amounts of debt would effectively allow TREP 11 to set tolls that would be otherwise unreasonable, thereby evading regulation . A cost of service standard avoids this problem. 50. A new regulatory provision effective January 2013 through January 2020 which instructs the Commission under certain conditions to increase the inflation index applied to existing tolls if the future tolls are not sufficient to permit the operator to maintain coverage ratio set forth in the rate covenant provisions of its bond indenture or similar credit agreement.42 First, the extent to which this provision applies should be limited by the other existing provisions of the Act. The Commission should only adjust tolls under this provision to the extent required to meet reasonable debt ratios related to debt proceeds that were actually used to construct the assets used to provide the regulated service. In addition, the Commission must also determine that: the level of debt, and its covenants, are prudent; that any increase in the debt or coverage requirements are not the result of the prior change in ownership or control ; and any debt held by related parties reflect terms that are no less favorable than those that could be obtained from unrelated parties . Absent these standards, or toll set strictly on a cost of service basis, TRIP 11 has 42 §56-542 1 (3) 26 11-A the potential to unreasonably increase or maintain excessive tolls by issuing excessive and imprudent debt or by agreeing to overly restrictive coverage ratios . 51 . Under a cost of service approach the level of debt return permitted in setting maximum rates is based on the size of the net rate base, the percentage of the rate base funded by debt, and the reasonable level of debt cost required to attract sufficient debt investors to provide a level of funds consistent with the debt portion of the rate base . In this regard, cost of service does not include interest expense that is reflected on the operator's income statement, but instead reflects a reasonable cost of debt for the portion of the rate base presumed to be funded by debt. 52. TRIP 11's debt is more than three time net investment . Consequently, its interest expense appears excessive given the level of investment in assets used to provide the regulated service. In addition, its balance sheet suggests that the operation is funded entirely by debt. There is no indication that MIG contributed any equity to TRIP H during the 2005 acquisition. On the contrary there appear to have been approximately $90 million in debt proceeds distributed as a return of capital in 2005 . If a regulator determines that the actual capital structure of an entity is not reasonable or is not consistent with market-driven capital structures of similar enterprises it will often impute a capital structure and cost of debt which it believes is reasonable for purposes of computing a cost of service. 53 . In Section IV below we apply a cost of service to TRIP II's 2012 financial results and we impute a capital structure which is 50% debt and equity. In doing so we have accepted for the sake of the presentation the actual debt cost associated with TRIP Il's 27 I-A W existing long-term debt, roughly 6.36 percent, although we note the Commission may want to consider if TRIP 11's leveraging effects the level of this cost. This assumption regarding the capital structure actually increases the overall weighted average cost of capital we apply in our calculation for two reasons . First, the cost of equity is estimated to be higher than the cost of debt. Second, we provide TRIP II an allowed income tax allowance on the equity return based on the maximum statutory federal and state tax rates. b. 54. Reasonable Return on Capital Funded by Equity In the past the Commission has allowed TRIP II to set its current maximum tolls based in part on its allowed return . It also appears that in its prior examinations the Commission has considered past earnings when evaluating the current maximum rates under a mechanism known as the Reinvested Earnings Account ("REA"). It appears that the operator has asserted that it should be allowed to not only carry-forward costs that were used to justify prior rates, but is also allowed to compound additional return in the form of "interest" when computing the past unrecovered allowed return . The REA approach in combination with an unreasonably high allowed return on equity results in excessive levels of proposed allowed equity returns . 43 As we discussed above, allowing a regulated entity to use the same cost to justify maximum rates and return in two different periods is considered retroactive ratemaking and has been prohibited by regulatory agencies and ruled improper by the Courts . It is inconsistent with the basic tenets of costbased regulation and may create certain intergenerational equity concerns that future tolls 43 See the revised REA exhibit attached to the testimony of Mr. McKean, submitted on behalf of TREP 11 in Case No. PLJE-2006-0008 1, attached hereto as Exhibit No. 22. 28 P W might violate the non-discrimination provision of the Act. We do not believe this approach is reasonable and have concerns that it will result in excessive tolls. 55 . In the initial rate proceeding the Commission allowed TREP 11 to set tolls based on surprisingly high 30 percent return on equ ity.44 At no point in our extensive regulatory backgrounds, have either of us heard of a regulatory body granting an allowed return on equity this high . As a point of reference, comparable allowed returns for natural gas and oil pipelines, two regulated infrastructure industries that face much greater risk than TRIP H, will generally average betwetri nine and thirteen percent depending on market conditions . Moreover, the allowed returns in these industries are not guaranteed . The operator is not allowed to carry-forward return that the regulatory agency determines is allowed and permitted to be recovered in one period into a subsequent period . 56. TRIP H's original investment in the Dulles Greenway appears to have been funded with approximately I I% equity-$40 million in equity and $3 10 million in debt . By the end of 2005, TRIP H asserts that it net equity investment was roughly $55 million. At the same time its balance sheet indicates that the partner's equity was a negative $333 .5 million. Despite the relative low percentage of project investment funded with equity, TREP II claims that in 2005 it has $1 .18 billion in retained equity which must be considered when evaluating the reasonableness of its requested toll increase. 45 This is in 44 45 As a point of reference, this level of return is roughly equivalent to the average annual return Microsoft has earned since 1987. Given that the Dulles Greenway is a regulated enterprise and does not involve innovative technology, it is difficult to reconcile the notion of a reasonable return with allowing TREP Il to earn a 30% return per annurn . See Exhibit No. 22. 29 addition to the interest expense TRIP 11 computes on roughly $855 .6 million of long-term debt. 57. This approach allows TREP 11 to claim a REA and interest expense associated with long-term debt which is more than three times the net project investment. We believe such an approach fails to provide any meaningful oversight to ensure that the tolls are reasonable and that return is not excessive . 58. TRIP H has had an opportunity for seventeen years to recover any return that it may reasonably been entitled to during its early operation. In addition, the Commission has recently extended the TRIP 11's concession until 2056, in essence granting the operator a remaining concession period which was longer than the original concession term . There does not appear to have been any substantial investment in the project investment or improvement in the quality of service that would support the need for an extended period to recover the actual investment . This action appears to provide TRIP H additional assurances and opportunities to recover its return and potentially imposes more imprudent costs on the users. The combination of high allowed returns in prior decisions, potential retroactive ratemaking through the use of the REA concept, inclusion of interest expenses from debt not used to fund project investment and the extended concession period are all inconsistent with the requirement that the tolls and return be limited to a reasonable level. Conditions have changed and the Commission should establish new standards addressing those changes in order to meet the requirements of the Act. 59. Under a cost of service approach an operator is allowed an opportunity to earn a reasonable equity return based on the size of the net rate base, the percentage of the rate 30 base funded by equity, and the reasonable level of equity cost . The last factor is based on comparable investments of similar risk so the entity is able to attract sufficient equity investors to provide a level of funds consistent with the equity portion of the rate base . 60. As we noted above, the existing TRIP 11 capital structure appears to contain too much debt therefore for cost of service purposes we have assumed a market-based capital structure of 50% equity . We have also assumed that an appropriate equity rate of return should be not greater that the equity returns currently being earned by publicly traded hazardous liquid pipelines . These companies provide a common carrier infrastructure service and face much greater risks than TPJP 11.46 4. 61 . Reasonable Return Must be Based on Prudent Investment The proper interpretation of "reasonable return" should be based only on prudent investment . In addition, the requirement of §56-542 C that the operator's cost must not be improper or excessive would suggest that any cost caused by debt issuance and affiliate relationships must also be found reasonable before it could be included in the tolls . IV. PRELIAHNARY ASSESSMENT OF TRIEP U'S COMPLIANCE WITH RELEVANT CRITERIA 62. In the following section we present an illustrative calculation of a cost of service for the Dulles Greenway under the DOC cost of service approach based on publicly available information. For purposes of this illustration we are using information reported in TRIP U's 2012 financial reports. As we noted above, these costs should be adjusted to 46 These proxy companies are listed in Exhibit No. 23 at page 3 31 1-h W remove any imprudent or non-recurring costs. In addition, the impact of any known and measurable changes in costs should also be considered in setting a forward looking rate . We anticipate TRIP II will identify any ftiture changes in costs in its direct case. 63 . For proposes of our analysis we using the actual cash operating expenses that TRIP H reported in its 2012 income statement (i.e., this excludes depreciation and interest expense-debt return, which is addressed below) . 64. The next step is to estimate the net value of the assets used to provide regulated service. We generally refer to this as rate base . The rate base can consists of several elements: (1) Property in Service; (2) Allowance for Funds Used during Construction ("AFUDC"); (3) Accumulated Depreciation ; (4) Amortization of AFUDC ; (5) Working Capital ; (6) Accumulated Deferred Income Taxes ("ADIT"). 65 . Property in Service is a key component of the DOC rate base . It represents the actual gross cost to construct or acquire the capital facilities (i .e., the physical long-lived fixed assets) used to provide the regulated service. Most state regulatory bodies require that the property in service be based on the original cost to construct the assets . Operators are generally not allowed to write-up the cost of assets acquired from others which were already in regulated service. As such, the change in ownership of regulated assets between two parties would not lead to an increase in cost or rates as the result of the acquisition price the buyer paid for the assets . Virginia Code §56-542 E indicates that the Commission : [S]hall ensure that : the price paid in connection with the change in ownership or control, and any costs and other factors attributable to or resulting from the change in ownership or control, if they would contribute to an increase in the 32 I-A W level of the toll, are excluded from the Commission's determination of the operator's reasonable return, in order to ensure that a change in ownership or control does not increase the level of the toll . . . 66. In preparing the 2012 cost of service for TRIP H attached hereto as Exhibit No. 23, we estimated a gross project investment of approximately $435 million of project investment based on Note 3 to the TRIP Il's 2012 financials .47 In addition we add to the project investment the gross amount of fixed assets, approximately $1 .6 million, associated certain furniture, fixtures, office equipment and vehicles on the assumption all of these are used to provide regulated service and should be included in the rate base. 67. We were not able to verify at this point if this figure includes any write-up of the assets due to the 2005 change of control. To the extent they do, the write-up should be removed . 48 In addition, we assume that the assets listed on the financial statements represent facilities that only provide regulated service. If this is not the case, then an adjustment would need to be made to remove any assets not used in providing the regulated service on the Dulles Greenway . 68. The notes to the financial statements indicate that the project investment costs reflect all direct and indirect costs related to the acquisition, development and construction of the project. Because the project investment cost includes all direct and indirect costs related to the acquisition, development and construction of the project, we have assumed any cost of capital incurred during the construction of the roadway was capitalized in the project investment figures discussed above and therefore we have not attempted to break out any AFUDC . 47 48 See Exhibit No. 10 Pursuant to §56-542 E 33 4 .0 A PA W 69. The accumulated depreciation for the project investment as of year-end 2012 is reported to be approximately $165 million" and $1 .3 million for fixed assets.50 Since the cost of capital during construction is capitalized in the project investment, we assume that the amortizations of these amounts are reflected in the accumulated depreciation balances that the operator has provided . 70. A regulated entity is typically allowed to include certain items relating to working capital in its rate base ; primarily prepayments and certain inventory costs related to operations. The year-end 2012 balance sheet provided in the financial records submitted to the Commission indicates that the operator incurred approximately $542 thousand in prepaid expenses related to operations . We include this amount in the cost of service calculation. We have not included any prepaid bond insurance or deferred bond issue cost. These reflect costs associated with long-term debts which are amortized to interest expense over the term of the financing agreements . These costs represent the cost of debt financing and not working capital associated with operating the toll road . 71 . Generally regulated entities are required to compute any tax timing differences that are created between applying an accelerated tax depreciation factor as compared to a straight-line book depreciation factor. This timing difference, the accumulated deferred income tax ("ADIT") is typically determined by applying the maximum statutory state and federal income tax to the depreciation timing difference generates by applying the accelerated tax and straight-line book depreciation factors . Under a cost of service approach the operator is required to recognize the value of any tax timing difference as an 49 50 See Exhibit No. I O at note 3 See Balance Sheets at Exhibit No. 10 34 A W offset (i .e., reduction) to the net value of the rate base . TRIP 11 is a pass-through entity and as such these timing differences accrue to the benefit of its owners. Even in a period when TRIP 11 reports a net tax loss to the individual investor, these tax deductions can still serve to further reduce the investors' tax obligation . We advocate that when dealing with pass-through entities the appropriate method for determining ADIT is to consider the potential tax obligation of the investor (i.e., determine a weighted average tax rate for computing ADIT based on the income assignment to each investor and that investor's expected maximum statutory tax rate) .51 Because TRIP 11 is a pass through entity its financials do not provide an ADIT balance or enough information to compute such a balance. Consequently, we have not reduced the rate base in the attached schedule to account for any ADIT and therefore believe our rate base is over-stated by this amount. 72. We computed the 2012 end of year rate base by taking the gross project investment and fixed assets less the associated accumulated depreciation plus working capital. If additional information becomes available we would also propose to reduce this balance by the accumulated deferred income tax balance. As presented in Exhibit No. 23 we estimate based on publicly available data that TRIP 11's rate base is no greater than $273.8 million. 73 . Once we have determine the appropriate rate base, the allowed return on rate base can be computed by identif~ing a reasonable after-tax cost of equity and debt and computing an allowed weighted average cost of capital ("WACC") as follows : 51 This is consistent with our position that part of the operator's cost of service should reflect a tax allowance. Since TRIP 11 is a pass-through entity, and does not directly pay any taxes itself, we would compute the tax allowance abased on the maximum allowed after-tax equity return and the weighted average tax rate for TRIP 11's investors, the parties that ultimately face the tax obligation . 35 A ~A W a (After-tax Cost of Equity x % of Rate Base funded by Equity) + (Cost of Debt x % of Rate Base funded by Debt) 74. The WACC is applied to the rate base to determine the maximum allowed overall return - both debt and equity which the Commission will use to determine the maximum tolls . In determining the WACC it is important that the cost of debt and after-tax cost of equity represent the risks inherent in the operation of the regulated entity . 75 . The debt cost used in the WACC must represent a reasonable cost of debt associated with debt used to construct the assets in the rate base . For purposes of our calculations we have accepted TRIP U's embedded cost of debt of 6.34% for the current debt instruments. 52 The Commission should determine if TRIP 11's cost of debt would be less if it had not issued debt more than three times its net book value. Macquarie Infrastructure Groups' presentation to its investors indicates that other toll roads in its portfolio may have a lower cost of debt. 53 76. Based on our review, it appears that the initial investment in the Dulles Greenway was funded with only $40 million in equity and $310 million in debt. By 2004, the year prior to MIG's acquisition, the net book value for the project investment was approximately $258 .5 million, total assets of roughly $384 million, long-term debt was approximately $515 .7 million and investor equity was negative, ($202.9) million . 54 In 52 53 54 See Exhibit No. 23 at page 2 See Exhibit No. 21 at slide 29 Financial statements for these periods are not publicly available. A review may be needed to determine the extent and sources of any equity partner distributions or contributions that may have occurred during this period. 36 1-a W September 2005, MIG acquired 100% interest in the TRIP H, reportedly agreeing to pay $617.5 million, an amount value that is greater than the total asset value.55 MIG assumed the existing debt and issued additional debt to bring the total long-term debt at year-end to more than $855 million . 56 There is no indication on the 2005 cash flow statement that any investors made an additional equity contribution as part of the acquisition . On the contrary, during 2005 TRIP H received proceeds from debt in excess of $390 million and despite reflecting a net income loss in excess of $41 million on the income statement and only generating $22 .4 million in positive operating cash flow, TRIP 11 distributed almost $90 million as return of partner capital .57 Consequently, it seems highly likely that the proceeds for the 2005 bonds were used to fund capital distributions to the investors . In addition, certain partners were paid $11 million out of the loan proceeds relating to work they performed in connection with extending the Certificate of Authority and issuing the 2005 Senior Bonds . 58 77 . Due to the significant leveraging the balance sheet reflects negative equity and it appears that TRIP H's capital structure is 100% debt.59 In certain situations when a regulator deten-nines that the capital structure is imprudent and does not reflect reasonable conditions, it can impute a capital structure for purposes of determining a reasonable level of return . We believe that is appropriate in this instance. 55 56 57 58 59 Exhibit No. 24 Exhibit No. 9 at note 7 See Exhibit No. 10 This is reflected as an expense on the income statement and contributes to the net loss that year. Exhibit No. 10 at note 9 Base on our review of Macquarie's report to investors it appears that TREP Il's debt is not guaranteed by, or has recourse back to, its parent company . See Exhibit No. 21 at slide 9. 37 1-4 W 78. Based on the average market dfiven capital structures and rates of return observed for publicly traded oil pipeline companies, we have estimated that a reasonable capital structure is approximately 50/50 debt/equity and a reasonable return on the imputed equity is currently 10 .97% '0 79. Based on these assumption the WACC of 8 .65% is derived by taking the 50% debt capital structure times TRIP 11's 6.34% cost of debt and summing it with the product of the imputed 50% equity capital structure and the estimate market-driven after-tax return on equity of 10.97%. 80. Multiplying the WACC against the $270.9 million rate base results in an allowed after-tax return of $23 .4 million. 81 . We estimated a tax allowance required on the equity portion of the return assuming that the investors all pay the maximum statutory tax rates of 35% federal and 5 .75% for Virginia state income taxes. The results in an effective tax rate of 38.7% and a tax allowance on the imputed equity return of $9 .4 million. 82. The following table aggregating the individual elements for the cost of service together to determine the maximum revenue requirement that should be allowed when computing tolls for TREP 11. 60 We believe that these companies actually face greater operating risks that those encountered by TRIP 11 and therefore these proxy estimates most likely overstate the level of return TRIP II should receive . 38 )-A W 0 Ok A Table 2 Toll Road Investors Partnership H, L.P. Operating Expenses (Excl. Interest & Depreciation) Return of Capital (Depreciation) Return on Capital Tax Allowance Total Cost of Service ($000s) 14,652 9,652 23,443 9,396 57,142 Source : Exhibit No. 23, Page I 83 . This maximum revenue requirement should be allocated over the vehicle road miles traveled on the Dulles Greenway to determine distance-based tolls that are reasonable . We currently do not have detailed usage data for the Dulles Greenway to illustrate this calculation. We believe the Commission should require TRIP 11 to produce such information and that absent its production the Commission should impose distancebased tolls based on the length of the movements in proportion to the $4 . 10 toll for a 14 mile movement, or the maximum toll the Commission determines is reasonable- whichever is less . 84. Total revenues in 2012 were more than $72 million, which indicates that the rates are providing revenues in excess of the cost of service. This suggests that the current level of returns is not reasonable . V. CONCLUSION AND RECOMAMNDATION 85 . Per the Commission's request for submissions, the foregoing addresses and defines with specificity the standards we believe the Commission should apply to an investigation under §56-542 D of the Code of Virginia . 39 ~A W 86. The criteria that the toll "will provide the operator no more than a reasonable return" and "will not materially discourage the use of the roadway by the public" support a cost of service approach . We have explained the cost of service standard and provided an analysis of TREP H's financial results under the cost of service approach. Based on publically available information, the preliminary results demonstrate that the current level of return is not reasonable . In addition, the criterion that the toll should be "reasonable to the user in relation to the benefit obtained" supports the application of a distance-based rate design standard . 87. In summary, we conclude that the three concurrent criteria in §56-542 D are properly interpreted as cost of service regulation and distance-based rate design . Should in the course of this proceeding further relevant information become available, we respectfully reserve the option to supplement, modify or extend the content of this report . 40 A COMMONWEALTH OF VIRGINIA, ex reL STATE CORPORATION COMMISSION CASE NO. PUE-2013-00011 Ex Parte: In the matter of investigating the toll Rates of Toll Road Investors Partnership II, L.P., Under § 56-542 D of the Code of Virginia STATE OF VIRGINIA TOWN OF HERNDON Before me, a Notary Public in and for the aforesaid jurisdiction, personally appeared Robert G. Van Hoecke who, being by me first duly sworn, did depose and say that he is the individual who prepared with Michael J. Webb the Joint Report of Mr. Robert G. Van Hoecke and Dr. Michael J. Webb to be submitted to the above captioned docket, and that the facts stated therein are true to the best of his professional knowledge and belief . Robert G. Van Subscribed and sworn to me on thisac&day of 2013. §46tary Put4ic- I-A W COMMONWEALTH OF VIRGINIA, ex reL STATE CORPORATION COMMISSION CASE NO. PUE-2013-00011 Ex Parte: In the matter of investigating the toll Rates of Toll Road Investors Partnership H, L.P., Under § 56-542 D of the Code of Virginia STATE OF CALIFORNIA CITY OF SAN FRANCISCO Before me, a Notary Public in and for the aforesaid jurisdiction, personally appeared Michael J. Webb who, being by me first duly sworn, did depose and say that he is the individual who prepared with Robert G. Van Hoecke the Joint Report of Mr. Robert G . Van Hoecke and Dr. Michael J. Webb to be submitted to the above captioned docket, and that the facts stated therein are true to the best of his professional knowledge and belief. A%N~41F VeWM1 D,---I ,~~ael SAN FRANCISCO, CA Subscribed and sworn to me on this MARLYN ANO comm. 0 20OM9 NOTARY PUBW - GUgM SM FRANC= CoLan MyC0M-Wfe9Ahft21,2017 Le=LM day of A 2013 . Notary Public EXHIBIT NO. 1 I-A W ROBERT G. VAN HOECKE Regulatory Economics Group, LLC . Principal Mr. Van Hoecke has twenty-nine years of experience in the oil pipeline business . For over twelve years he held various positions with Williams Pipe Line Company (WPL), including Operations Supervisor, Health and Safety Supervisor, Strategic Planning and Tariffs Manager, and Tariff and Regulatory Affairs Manager . Since leaving WPL, Mr. Van Hoecke has provided consulting services to the industry, primarily relating to cost of service, market studies and business planning . Mr. Van Hoecke has provided expert testimony in numerous matters relating to pipeline tariffs, cost of service and business practices . Relevant Experience Pipeline Operation * Directed and Managed WPL's Phase II defense in a rate case before the U.S. Federal Energy Regulatory Commission (FERC) in Docket No. IS90-21-000 et al. # Managed and supervised preparation of monthly, annual and long-range forecasts of volumes, revenues and related variance comments. * Established and supervised system-wide health and safety programs for approximately 700 employees in 10 states . * Directed and supervised all day-to-day operational activities of pipeline terminals and pump stations for a three terminal complex transporting and delivering refined petroleum, fertilizer, asphalt and LPG . * Carried out various aspects of pipeline operations and administration at terminal, pump station and regional field office levels. Rates and Regulation For WPL, directed company's Phase II defense in a rate case before the FERC in Docket No. IS90-21-000 et al. Responsible for developing the course of defense and selecting appropriate expert witnesses to testify on the company's behalf. Supervised development of various stages of discovery, direct testimony, rebuttal testimony and case preparation. Served as chief company witness and performed short-run marginal cost analysis of integrated pipeline network containing more than 40,000 distinct routes . * Presented testimony in a FERC complaint proceeding to determine whether certain bookkeeping services provided by a common carrier pipeline were jurisdictional. * Expert testimony regarding the proper method for determining just and reasonable transportation charges for unregulated carbon dioxide pipelines in two separate class action disputes initiated by royalty interest owners in the Federal District Court of New Mexico and Colorado. Expert testimony regarding the proper method for determining just and reasonable cost-based transportation charges for regulated oil pipelines at the FERC. REGULATORY ECONOMICS GROUP, LLC P W * Expert testimony regarding rate reasonableness and revenue adequacy on behalf of an anhydrous ammonia pipeline at the STB. * Expert testimony regarding just and reasonable rates for the Trans Alaska Pipeline Settlement (TAPS) under various alternative cost of service methodologies at the Regulatory Commission of Alaska and the FERC. Expert testimony regarding the application of standards set forth in the 1992 Energy Policy Act (EPAct) for determining whether substantially changed economic circumstances have occurred for rates previously deemed to be just and reasonable under the EPAct. Prepared market evaluation, laid-in cost data, and testimony for market-based rate applications for several oil pipelines seeking market-based rates at the FERC. Prepared market evaluation and laid-in cost analysis to support oil industry mergers and acquisitions at the Federal Trade Commission . Economics and Finance * Assisted in the financial and regulatory evaluation of potential acquisition opportunities . Participated in the development of a historical cost trend analysis for the oil pipeline industry related to the oil pipeline tariff index . Provided expert testimony regarding the reasonableness of certain decisions made by a majority partner in a joint venture pipeline in a dissolution action initiated by a minority partner before the Federal District Court of Missouri. Commercial Analysis Market evaluations and determining appropriate competitive tariff structures to maximize a pipeline's profitability . Conducting competitive analysis of potential market encroachments and assisting pipeline clients in developing a series of strategic and tactical responses . Developing the data and testimony required for market-based rate applications at the FERC. Performing economic analysis of proposed business development projects to assist pipeline management in evaluating various business strategies . While with WPL, responsible for performing market evaluations and establishing competitive tariff rates and ancillary fees to maximize profitability. Worked closely with Marketing and Business Development groups to develop and implement market-based, negotiated rates with strategic shippers and joint pipeline carriers . ~~REGULATORY ECONOMICS R 1= .3GROURLLC C W PA W Testimony Apr . 18, 2012 Filed Answering Testimony on behalf of Enbridge Energy, L.P. at FERC relating to a Complaint against the carrier's apportionment procedures in Docket No. OR12-14-001 . Dec . 12, 2012 Filed Rebuttal Testimony on behalf of Enterprise TE Products Pipeline Company LLC presenting cost-of-service information in support of Enterprise TEPPCO's March 16, 2012 rate filing for Tariff Nos . 54.15.0 and 55 .11 .0 in Docket No. IS12-203-000 . Nov.20,2012 Rebuttal Expert Disclosure in Sunoco, Inc. (R&M) v. Enbridge Energy, L.P. and Enbridge Energy, L.P v. Shell Trading (US) Company and Shell Pipeline Company, LP in the Supreme Court of the State of New York County of New York. Index No. 601461-2009. Sep.11,2012 Deposition in Sunoco, Inc . (R&M) v. Enbridge Energy, L.P. and Enbridge Energy, L.P v. Shell Trading (US) Company and Shell Pipeline Company, LP in the Supreme Court of the State of New York County of New York. Index No. 601461-2009. Jul. 16, 2012 Filed Affidavit on behalf of Osage Pipe Line Company, LLC at FERC regarding grandfathered rates substantial change in Docket No. ORI 2-21 -000. Jul. 9, 2012 Filed Prepared Direct Testimony on behalf of Enterprise TE Products Pipeline Company LLC presenting cost-of-service information in support of Enterprise TEPPCO's March 16, 2012 rate filing for Tariff Nos . 54.15 .0 and 55 .11 .0 in Docket No. IS 12-203 -000. Jun .19,2012 Filed Affidavit at FERC in Docket No. IS12-362-000 on behalf of Plains Pipeline, L.P. supporting its response to an indexed rate filing protest . Jun .13,2012 Filed Affidavit on behalf of Black Lake Pipeline Company at the FERC in support of their new Rules and Regulations Tariff No. 79.1 .0 filed on May 26, 201 1 in Docket No. IS 11-3 99-000 . Apr . 9, 2012 Filed Affidavit on behalf of Enterprise TE at the FERC in support of their March 16, 2012 cost-of-service rate filing in Docket No. IS 12-203-000. Aug. 9,2011 Filed Second Affidavit on behalf of SFPP at the FERC in response to complaint filed by ConocoPhillips Company and Chevron Products Company regarding grandfathered rates and substantial change in Docket Nos . ORII-13-000 and OR I 1- 16-000 . Jul. 5, 201 1 Filed Affidavit on behalf of SFPP, L .P. at the FERC in response to complaint filed by ConocoPhillips Company and Chevron Products Company regarding grandfathered rates and substantial change in Docket Nos . OR] 1- 13-000 and ORI 1- 16-000 . Feb.25,2011 Presented Oral Testimony and Cross Examination before an Arbitral Tribunal at the International Chamber of Commerce in relation to forecasted transportation REGULATORY ECONOMICS RE .2GROURUC PA W revenues, cost recovery mechanisms, and quantum meruit for historical losses incurred by international crude oil pipeline . (c. 15 898/VRO) Jan. 17, 2011 Submitted Third Expert Report in a matter of Arbitration at the International Chamber of Commerce presenting alternative forecasted transportation revenues under various scenarios relating to the operation of an international crude oil pipeline . (c. 15 898/VRO) Dec .22,2011 Submitted Second Expert Report in a matter of Arbitration at the International Chamber of Commerce presenting forecasted transportation revenues under various scenarios, cost recovery mechanisms, and quantum meruit for historical losses relating to the operation of an international crude oil pipeline. (c. 15 898NRO) Dec . 21, 2011 Submitted Joint Expert Statement in a matter of Arbitration at the International Chamber of Commerce regarding forecasted transportation revenues and quantum meruit for historical losses incurred by international crude oil pipeline. (c. 15 898NRO) Nov. 5, 2011 Submitted Expert Report in a matter of Arbitration at the International Chamber of Commerce presenting forecasted transportation revenues under various scenarios, cost recovery mechanisms and quantum meruit for historical losses relating to the operation of an international crude oil pipeline. (c. 15 898NRO) Nov. 2-3, 2010 Presented Oral Testimony and Cross Examination at the FERC on BP Pipelines (Alaska) Inc . in Docket Nos . IS09-348 et al. in support of BPPA's cost pooling mechanism which properly allocates costs among Trans Alaska Pipeline System Carriers based on usage. Oct. 4, 2010 Submitted Prepared Reply Testimony at the FERC on behalf of BP Pipelines (Alaska) Inc . in Docket No. 1509-348-000 . Jun.18,2010 Submitted Answering Testimony at the FERC on behalf of BP Pipelines (Alaska) Inc . in Docket Nos . IS-09-348 et al. responding to testimony presented by CPTAI regarding proper cost pooling mechanism . Apr . 16, 201 0 Submitted Direct Testimony at the FERC on behalf of BP Pipelines (Alaska) Inc. in Docket Nos . IS09-348 et al. in support of BPPA's cost pooling mechanism which properly allocates costs among Trans Alaska Pipeline System Carriers based on usage . Mar. 22, 2010 Filed Affidavit on behalf of TE Products Pipeline Company in Docket No. IS 10160-000 regarding the jurisdictional nature of terminals . Feb . 8, 2010 Submitted Rebuttal Testimony at the California Public Utility Commission on behalf of San Pablo Bay Pipeline LLC in support of the company's application for market based rates. Apr . 1, 2009 Filed Direct Testimony at the California Public Utility Commission on behalf of San Pablo Bay Pipeline LLC in support of the company's application for market based rates. REGULATORY ECONOMICS R1= .3GROUP,LLC ~A W May 2, 2008 Cross examination in BP West Coast Products et al. v. SFPP Docket No. OR035-001 at the FERC. Mar. 3, 3008 Filed supplemental Affidavit on behalf of Calnev Pipe Line LLC at the FERC in response to complaint filed by ExxonMobil Oil Corporation in Docket No. OR07-5-000. Feb .27,2008 Submitted Prepared Answering Testimony on behalf of SFPP, L.P. at the FERC in response to complaint filed by BP West Coast Products, LLC, ExxonMobil Oil Corporation, and ConocoPhillips Co. in Docket No. OR-03-5-001 Nov. 27, 2007 Filed Affidavit on behalf of Calnev Pipe Line LLC at the FERC in response to complaint filed by ExxonMobil Oil Corporation in Docket No. OR07-5-000. Jul. 20, 2007 Submitted Affidavit on behalf of the Petition for Declaratory Order of Enbridge Pipelines (Southern Lights) LLC at the FERC supporting an innovative rate structure for the new pipeline in Docket No. OR07-15 . Mar. 22, 2007 Submitted Expert Designee Report on behalf of Cortez Pipeline Company under the terms of the Arbitration Agreement established in C02 Committee, Inc v. Shell Oil Company , Shell C02 Company, Ltd., aka Kinder Morgan C02 Company, L .P., Shell Western E&P, Inc ., Mobil Producing Texas and New Mexico, Inc., and Cortez Pipeline Company . Nov. 28 30,2006 Presented Testimony on behalf of Trans Alaska Pipeline System Carriers at the FERC regarding an investigation of interstate transportation rates in Docket Nos . ISOS-82 and IS06-01 et a]. Aug. 11, 2006 Filed Prepared Rebuttal Testimony at the FERC on behalf of the Trans Alaska Pipeline System Carriers in an investigation of interstate transportation rates in Docket Nos . ISOS-82 and IS06-01 et al . Jun .29,2006 Presented Direct Oral Testimony and Cross Examination on behalf of Cortez Pipeline in Arbitration by Agreement involving C02 Committee, Inc. v. Shell Oil Company, Shell C02 Company, Ltd., aka. Kinder Morgan C02 Company, L.P., Shell Western E & P, Inc ., Mobil Producing Texas and New Mexico, INC., and Cortez Pipeline Company . May 30, 2006 Filed Expert Report on behalf of Cortez in Arbitration by Agreement involving C02 Committee, Inc . v. Shell Oil Company, Shell C02 Company, Ltd., aka Kinder Morgan C02 Company, L.P., Shell Western E & P, Inc ., Mobil Producing Texas and New Mexico, Inc., and Cortez Pipeline Company . May 26, 2006 Filed Prepared Answering Testimony at the FERC on behalf of the Trans Alaska Pipeline System carriers in an investigation of interstate transportation rates effective January 1, 2006 in Docket Nos . IS05-82 et al. and IS06-01 et al. Apr . 4, 2006 Filed Prepared Supplemental Direct Testimony at the FERC on behalf of the Trans Alaska Pipeline System Carriers in an investigation of interstate transportation rates effective January 1, 2006 in Docket No. IS06-01 et al. REGULATORY ECONOMICS Rr . .MGROUP,LLC I-& W Mar. 31, 2006 Filed Affidavit at the Surface Transportation Board (STB) on behalf of Valero, L.P. supporting its claim of materially changed circumstances which would permit the STB to vacate its prior rate prescription in Koch and thus restore ratemaking initiatives to Valero in Docket No. 42084 . Dec .7 .2005 Filed Prepared Direct Testimony at the FERC on behalf of the Trans Alaska Pipeline System Carriers in an investigation of interstate transportation rates effective January 1, 2005 in Docket No. ISOS-82 et al. Jul. 18, 2005 Filed Affidavit in support of Sunoco's answer to ConocoPhillips's protest of Sunoco's application for authority to charge market-based rates in Docket No. OR05-7-000 . Apr. 12, 2005 Filed Prepared Direct Testimony on behalf of Sunoco Pipelines L.P. supporting Sunoco's application for authority to charge market-based rates in Docket No. OR05-7-000 . Feb. 25 Mar . 2, 2005 Presented Oral Testimony and Cross Examination on behalf of SFPP in response to protest and complaint in Texaco Refining and Marketing et al . SFFP Docket Nos . OR96-2-000 et al. and IS98-1-000 . Jan . 28, 2005 Filed Prepared Rebuttal Testimony on behalf of SFPP in response to protest and complaint in Texaco Refining and marketing et al. SFFP LP Docket Nos . OR962-000 et al. and IS98-1-000 . Dec .10,2004 Filed Affidavit at the FERC in support of Petition for Declaratory Order filed by Enbridge Energy Company, Inc. regarding initial rates and determination of rate base for a proposed crude oil pipeline system between Chicago, U, and Cushing, OK. Docket No. OR05- 1 -000. Dec.10,2004 Filed Prepared Answering Testimony on behalf of SFPP in response to protest and complaint in Texaco Refining and Marketing, et aL v. SFPP, LP Docket Nos . OR96-2-000 et al. and IS98-1 -000. Oct. 14, 2004 Filed Affidavit at the STB on behalf of Kaneb Pipe Line Partners, L.P. rebutting certain statements and allegations contained in the verified statement of Complainant witnesses in Docket No. 42084 . Sep.13,2004 Filed Affidavit at the STB on behalf of Kaneb Pipe Line Partners, L.P. supporting its claim of materially changed circumstances which would permit the STB to vacate its prior rate prescription in Koch and thus restore ratemaking initiatives to Kaneb in Docket No. 42084 . Apr . 6, 2004 Filed Affidavit at the FERC discussing entitlement of third party shippers to reparations . Big West v. Frontier, Docket No. ORO 1-3. Apr . 5, 2004 Filed Affidavit at the FERC supporting the response of Frontier Pipeline Company to the request for rehearing of Big West Oil Company and Chevron Products Company . Docket Nos . ORO 1 -02-000 and ORO 1 -04-000 . ~~REGULATORY ECONOMICS R C .3 GROUP LLC 0 1-6 W Dec.11,2003 Presented Oral Testimony and Cross Examination on behalf of the Trans Alaska Pipeline System Carriers in the matter of Tariff Rates To Be Effective January 1, 2003 for the Intrastate Transportation of Petroleum over the Trans Alaska Pipeline System and the Investigation Into the 2001 and 2002 Tariff Rates for the Intrastate Transportation of Petroleum over the Trans Alaska Pipeline System before the Regulatory Commission of Alaska. P-034. Oct. 15, 2003 Submitted Rebuttal on behalf of the Trans Alaska Pipeline System Carriers in the matter of Tariff Rates To Be Effective January 1, 2003 for the Intrastate Transportation of Petroleum over the Trans Alaska Pipeline System and the Investigation Into the 2001 and 2002 Tariff Rates for the Intrastate Transportation of Petroleum over the Trans Alaska Pipeline System before the Regulatory Commission of Alaska. P-034. Sep.10,2003 Filed Affidavit at the FERC in support of Shell Pipeline Company LP's motion to compel discovery in Docket No. OR02-1 0. Aug . 29, 2003 Submitted Prepared Direct Testimony at the FERC on behalf of Shell Pipeline Company LP in support for its application for authority to charge market-based rates. Docket No. OR02-1 0. Jul. 24, 2003 Filed Affidavit at the FERC in support of Shell Pipeline Company LP's motion to extend the procedural schedule in Docket No. OR02-10 . Jun .10,2003 Submitted Prepared Answering and Rebuttal Testimony at the FERC supporting Platte FERC Tariff No. 1474 in Docket Nos . IS02-384-000 et al . Jun.3,2003 Submitted Prepared Direct Testimony on behalf of the Trans Alaska Pipeline System Carriers in the matter of Tariff Rates To Be Effective January 1, 2003 for the Intrastate Transportation of Petroleum over the Trans Alaska Pipeline System and the Investigation Into the 2001 and 2002 Tariff Rates for the Intrastate Transportation of Petroleum over the Trans Alaska Pipeline System before the Regulatory Commission of Alaska . P-034. Dec .20,2002 Submitted Prepared Direct Testimony at the FERC supporting Platte FERC Tariff No. 1474 in Docket No. IS02-384-0000 et al . Oct. 28, 2002 Submitted Reply Testimony at the FERC on behalf of Shell Pipeline Company in response to protest by Phillips Petroleum Co., Tosco Corporation, and ToscoPetro Corp. Docket No. OR02-1 0-000. Aug. 9, 2002 Submitted Testimony at the FERC in support of reparations calculations proposed by Frontier Pipeline Company in Docket Nos. ORO 1 -2-00 and ORO 1 -4000. Jul . 9, 2002 Submitted Testimony at the FERC on behalf of Shell Pipeline Company in support for its application for authority to charge market-based rates. Docket No. OR02-10-000 . Jan. I I 31,2002 Cross-examination in complaint of ARCO Products Company et al. v. SFPP, LP in Docket Nos. OR96-2-000, et al . before the FERC. R ~ ~ REGULATORY r .,3ECONOMICS GROUP, LLC Ak 1~& W Nov.2,2002 Filed Affidavit at the FERC supporting Plantation Pipe Line Company's Petition for Declaratory Order regarding initial rates for proposed new pipeline service from Bremen, Georgia to Chattanooga and Knoxville, Tennessee . Docket No. OR02-1 -000. Jul. 31, 2001 Filed Prepared Reply Testimony on behalf of SFPP at the FERC in response to complaint of ARCO Products Company et al. in Docket Nos. OR96-2-000, et al. May 15,2001 Filed Prepared Answering Testimony on behalf of SFPP in response to complaint of ARCO Products Company et al . in Docket Nos . OR96-2-000, et al. Apr. 23 26,2001 Presented Oral Testimony on behalf of Trans Alaska Pipeline System Carriers in the matter of the correct calculation and use of acceptable input data to calculate the 1997, 1998, 1999, and 2000 tariff rates for the intrastate Transportation of Petroleum over the Trans Alaska Pipeline System before the Regulatory Commission of Alaska P97-4 and P97-7 . Apr . 2, 2001 Filed Affidavit with the Superior Court of Arizona, Tax Court discussing Commission regulations regarding the concept of Original Cost in SFPP, L.P. v. Arizona Department ofRevenue No. TX 1999-00532 . Mar. 29, 2001 Filed Rebuttal Report on behalf of Cortez Pipeline Company in C02 Claims Coalition, et al., v. Shell Oil Company, et al. in the United States District Court for the State of Colorado CfV No. 96-Z-245 1 . Mar. 26, 2001 Filed Affidavit at the FERC supporting the response of Anschutz Ranch East Pipeline to the complaint made by Chevron Products Company . Docket No. OROI-05-000 . Mar. 20, 2001 Submitted Testimony at the FERC on behalf of West Shore Pipe Line Company in support for its application for authority to charge market-based rates. Docket No. OROI-06-000 . Mar . 14, 2001 Filed Affidavit at the FERC supporting the response of Frontier Pipeline Company to answer of complaint made by Chevron Products Company . Docket No . OROI-04-000 . Mar . 13, 2001 Filed Affidavit at the FERC supporting the response of Anschutz Ranch East Pipeline Inc . to the amended complaint made by Big West Oil Company . Docket No. ORO 1-03 -000 . Mar. 5, 2001 Filed Affidavit at the FERC supporting the response of Frontier Pipeline Company to answer a complaint made by Big West Oil Company . Docket No. ORO 1 -02-000 . Feb.26,2001 Filed Rebuttal Testimony on behalf of Trans Alaska Pipeline System Carriers in the matter of the correct calculation and use of acceptable input data to calculate the 1997, 1998, 1999 and 2000 tariff rates for the Intrastate Transportation of Petroleum over the Trans Alaska Pipeline System before the State of Alaska, Regulatory Commission of Alaska, P-97-4 . REGULATORY ECONOMICS Rr . .3GROUPLLC i-h W Feb. 6, 2001 Filed Affidavit at the FERC supporting the response of Anschutz Ranch East Pipeline Inc . to the complaint made by Big West Oil Company . Docket No. OR01-03-000 . Jan. 29, 2001 Filed Affidavit at the FERC supporting the response of Frontier Pipeline Company to the complaint made by Big West Oil Company. Docket No. ORO I 02-000 . Dec .20,2000 Prepared Direct Testimony, filed with the FERC, in support of Chase Transportation Company's application for authority to charge market-based rates in Docket No. OR01-1-000 . Nov. 14, 2000 Presented Oral Testimony on behalf of Kinder Morgan Energy Partners, L.P. before the State of Arizona, Board of Equalization regarding the proper valuation of SFPP's pipeline assets in the State of Arizona. Jul. 12, 2000 Filed Second Prepared Direct Testimony on behalf of Trans Alaska Pipeline System Carriers in the matter of the correct calculation and use of acceptable input data to calculate the 1997, 1998, 1999 and 2000 tariff rates for the Intrastate Transportation of Petrolewn over the Trans Alaska Pipeline System before the State of Alaska, Regulatory Commission of Alaska, P-97-4 . May 9, 2000 Submitted second report to the American Arbitration Association (AAA) regarding oil pipeline tariff regulations rebutting testimony of Marcum Midstream-Farstad, LLC in the arbitration between Marcum Midstream-Farstad, LLC el .al. v. Amoco Oil Company. Case No. 70 198 00294-99. May 5, 2000 Filed Affidavit at the FERC supporting the Response of ExxonMobil Pipeline Company to the Motion to Intervene of BP Exploration & Oil, Inc . in Opposition to ExxonMobil Pipeline Company's Petition for Declaratory Order and Petition for Discovery regarding initial transportation rates on the Hoover Offshore Oil Pipeline System (HOOPS) in Docket No.01100-2-000 . May 2, 2000 Submitted Testimony at the FERC on behalf of Equilon Pipeline Company, LLC in support of its cost-of-service filing in Docket No. ISOO-208-000 . Mar. 20, 2000 Submitted report to the AAA regarding oil pipeline tariff regulations in support of Amoco Oil, Company's position in the arbitration between Marcum Midstream-Farstad, LLC et al. v. Amoco Oil Company. Case No. 70 198 0029499 . Mar. 9, 2000 Filed Affidavit at the FERC supporting ExxonMobil Pipeline Company's Petition for Declaratory Order regarding initial transportation rates on the HOOPS in Docket No. OROO-2-000 . Feb.15,2000 Submitted Testimony at the FERC on behalf of Marathon Ashland Pipe Line LLC in support of its application for the authority to charge Market-Based Rates in Docket No. OROO- 1 -000. ~~PEGULATCIRY ECONOMICS ? 1= .3GROUP,LLC PA W Jun.16,1999 Submitted Testimony at the FERC on behalf of Amoco Pipeline Company in support of its cost-of-service filing in Docket No. IS99-268-000 . Apr. 30, 1999 Supplemental Testimony on behalf of Cortez Pipeline Company in C02 Claims Coalition, et al., v. Shell Oil Company, et al. in the United States District Court for the State of Colorado CIV No. 96-Z-245 1 . Feb. 19, 1999 Supplemental Testimony on behalf of Explorer Pipeline Company as part of its Motion for Summary Disposition in its Application for Market-Based Rates at the FERC, OR99-1 -000. Jan . 29, 1999 Oral Testimony and cross-examination in Conoco Pipeline Company, Inc . v. Transmontaigne Pipeline, Inc. in the United States District Court for the Western District of Missouri, Southwest Division, Case No. 97-5085-CV-SW-1 . Jan. 13, 1999 Deposition in C02 Claims Coalition, et al., v. Shell Oil Company, et al. in the United States District Court for the State of Colorado CIV NO. 96-Z-245 1 . Nov.23,1998 Prepared Testimony on behalf of Cortez Pipeline in C02 Claims Coalition, et al., v. Shell Oil Company, et al. in the United States District Court for the State of Colorado CIV NO. 96-Z-245 1 . Oct. 8, 1998 Submitted Testimony on behalf of Explorer Pipeline Company as part of its Application for Market-Based Rates at the FERC in Docket No.OR99-1-000 . Oct. 8, 1998 Prepared Direct Supplemental Testimony on behalf of the Trans Alaska Pipeline System Carriers in the Alaska Public Utilities Commission Docket No. P-97-4, the protest of the 1997 and 1999 Tariff Rates for the Intrastate Transportation of Petroleum over the Trans Alaska Pipeline System (revised Oct. 15, 1999). Sep .25,1998 Deposition in Conoco Pipeline Company, Inc . v. Transmontaigne Pipeline, Inc. in the United States District Court for the Western District of Missouri, Southwest Division, Case No. 97-5085-CV-SW-1 . Aug. 14, 1998 Testimony in Conoco Pipeline Company, Inc. v. Transmontaigne Pipeline, Inc . in the United States District Court for the Western District of Missouri, Southwest Division, Case No . 97-5085-CV-SW-1 . Mar. 2, 1998 Rebuttal Testimony in CF Industries, et al., v. Koch Pipeline Company, LP. at the STB, Docket No. 41685 . Dec .17,1997 Deposition in Doris Feerer, et al., v. AMOCO Production Company in the United States District Court for the State of New Mexico CrV NO. 95-00012-JC/WWD . Nov. 10, 1997 Direct Testimony in CF Industries v. Koch Pipeline Company, LP. at the STB in Docket No. 41685 . May 5, 1997 Doris Feerer, et al., v. AMOCO Production Company in the United States District Court for the State of New Mexico CIV NO. 95-00012-JCfWWD . REGULATORY ECONOMICS RM3 GROUP, LLC I-A w Dec. 1995 Cross-examination in Phase II of Williams Pipe Line Company, Docket No. IS90-21-000 et al ., before the FERC. Oct. 26, 1995 Rebuttal Testimony in Phase II of Williams Pipe Line Company, Docket No. IS90-21-000 et al., before the FERC. Jul . 21, 1995 Supplemental Direct Testimony in Phase 11 of Williams Pipe Line Company, Docket No. IS90-21 -000 et al., before the FERC. Jul . 1995 Deposition in Phase 11 of Williams Pipe Line Company, Docket No. IS90-21 -000 et al ., before the FERC. Jan . 23, 1995 Direct Testimony.' in Phase H of Williams Pipe Line Company, Docket Nos . IS90-2 1 -000 et al before the FERC. Jul. 30, 1993 Verified Statement in Kerr-McGee Refining Corporation and Texaco Refining and Marketing, Inc. v. Williams Pipe Line Company, Docket No. OR91-1-000, before the FERC. R ~ ~ REG U LATO RY .,3ECONOMICS r GROUP, LLC ~A W 0 Presentations Hot Topics in Oil Pipeline Ratemaking : Rate Design & Cost Allocation (September 2012). Association of Oil Pipelines, Annual Business Conference, Savannah, Georgia . * Regulatory Due Diligence: Mergers & Acquisition (September 2012). Association of Oil Pipelines, Annual Business Conference, Savannah, Georgia. * FERC Jurisdictional Jeopardy (September 2012). Association of Oil Pipelines, Annual Business Conference, Savannah, Georgia. * Grandfathered Rates - FERC's New Outlook (September 2011). Association of Oil Pipelines, Annual Business Conference, Denver, Colorado . * Jurisdictional Jeopardy (September 2011). Association of Oil Pipelines, Annual Business Conference, Denver, Colorado . * Jurisdictional Jeopardy (September 2010). Association of Oil Pipelines, Annual Business Conference, Atlanta, Georgia * Grandfathered Rates and Changed Circumstances (September 2010). Association of Oil Pipelines, Annual Business Conference, Atlanta, Georgia * Jurisdictional Jeopardy (September 2009). Association of Oil Pipelines, Annual Business Conference, San Diego, California * EP Act, Grandfathered Rates and Changed Circumstances (September 2009). Association of Oil Pipelines, Annual Business Conference, San Diego, California # Grandfathered Rates / Changed Circumstances (September 2008). Association of Oil Pipelines, Annual Business Conference, Austin, Texas. * FERC Jurisdictional or Not? (September 2008). Association of Oil Pipelines, Annual Business Conference, Austin, Texas. * Changes in North American Logistics and Regulatory Environment (September 2007). Association of Oil Pipelines, Annual Business Conference, Los Angeles, California. * FERC Jurisdictional or Not? (September 2007). Business Conference, Los Angeles, California . * Grandfathered Rates, Changed Circumstances (September 2007). Pipelines, Annual Business Conference, Loi Angeles, California. Association of Oil * FERC Jurisdictional and Non-Jurisdictional Services (May 2006). Pipelines, Annual Business Conference, Minneapolis, Minnesota. Association of Oil * FERC Jurisdictional and Non-Jurisdictional Services (May 2005). Pipelines, Annual Business Conference, New Orleans, Louisiana. Association of Oil Association of Oil Pipelines, Annual * FERC Form 6 (May 2004). Association of Oil Pipelines, Annual Business Conference, St. Petersburg, Florida. REGULATORY ECONOMICS R1= .3GROUR,LLC I-A W * FERC Jurisdictional and Non-Jurisdictional Services (May 2004). Association of Oil * FERC Jurisdictional and Non-Jurisdictional Services (May 2003). Pipelines, Annual Business Conference, Baltimore, Maryland . Association of Oil * FERC Form 6 - Page 700 (May 2002). Regulatory Workshop, St . Petersburg, Florida. * FERC Jurisdictional and Non-Jurisdictional Services (May 2002). Pipelines, Accounting and Regulatory Workshop, St . Petersburg, Florida. * Market-based Rates for Oil Pipelines (May 2001). Association of Oil Pipelines, Accounting and Finance Workshop, New Orleans, Louisiana. 4 Market-based Rates for Oil Pipelines (May 2000). Association of Oil Pipelines, Accounting and Finance Workshop, San Antonio, Texas. * Market-based Rates (May 1999). Workshop, San Antonio, Texas. * FERC Form 6 (May 1998). Association of Oil Pipelines, Accounting and Finance Workshop, Atlanta, Georgia. * FERC's Indexation of Oil Pipeline Rates (April 1998). American Petroleum Institute, Pipeline Conference, Houston, Texas. * Applying for Market-based Rates (May 1997). Association of Oil Pipelines, Accounting and Finance Workshop, Atlanta, Georgia. * Oil Pipeline Rate Regulation (March 1997). Executive Enterprises, Oil Pipeline Regulation, Houston, Texas. * Pipeline Economics (1992-1996). American Technology, Harris College, Houston, Texas. * Overview of Current Oil Pipeline Regulations (May 1996). Accounting and Finance Workshop, St . Louis, Missouri . * Oil Pipeline Rate Regulation (October 1995). Executive Enterprises, Alternative Ratemaking and Gas Price Methodologies, Houston, Texas. * Pipelines, Annual Business Conference, St . Petersburg, Florida. Association of Oil Pipelines, Accounting and Association of Oil Association of Oil Pipelines, Accounting and Finance Petroleum Institute, School of Pipeline Association Of Oil Pipelines, Challenges Facing Oil Pipelines (June 1995). Executive Enterprises, Oil Pipeline Ratemaking Strategies for the 90s, Houston, Texas. # Recent FERC Rulemakings (May 1995). Association of Oil Pipelines, Accounting and Finance Workshop, St . Louis, Missouri . * Quantifying Competition in the Quest for Market-Based Rates (May 1994). Association of Oil Pipelines, Accounting and Finance Workshop, Dallas, Texas. * The Future of Oil Pipeline Ratemaking (May 1993). Association of Oil Pipelines, Accounting and Finance Workshop, San Antonio, Texas. ~~REGULATORY ECONOMICS Z 1= .3GROUP,LLC ~A W C Prior Experience Klick, Kent & Allen, Inc. (1997 -1998) Senior Consultant Led client engagements regarding oil pipeline regulatory matters ; provided financial and economic consulting services to clients regarding strategic planning, market analysis, ratemaking and litigation support . Williams Pipe Line Company (1993 -1997) Manager, Tariffs and Regulatory Affairs Directed company's Phase 11 defense in rate case before the FERC (IS90-2 1 -000 et al.). Williams Pipe Line Company (1990-1993) Manager, Strategic Planning and Tariffs Supervised the preparation of monthly, annual and long-range forecasts of volumes, revenues and related variance comments . Williams Pipe Line Company (1987-1990) Supervisor, Health and Safety Responsible for establishing system-wide health and safety programs for approximately 700 employees in 10 states . Williams Pipe Line Company (1986-1987) Operations Supervisor Responsible for supervising all aspects of pipeline terminal and pump station operations for terminal complex handling refined petroleum, fertilizer, asphalt and LPG . Williams Pipe Line Company (1984-1986) Various Positions in Field Operations Responsible for various aspects of pipeline operation and administration at the terminal, station and regional field office level. Education Northwestern University Pipeline Economics and Management Program University of Kansas B.S. Business Administration REGULATORY ECONOMICS R1= .3GROUP,LLC I-& EXHIBIT NO. 2 PA W MICHAEL J. WEBB Regulatory Economics Group, LLC . Director Dr. Webb has over fifteen years of oil industry experience. Dr. Webb has extensive experience in all aspects of oil pipeline rate regulation at the Federal and State levels. He has participated in numerous projects involving the calculation of cost-based rates. He has also prepared several applications for authority to charge market-based rates on interstate oil pipelines . He has prepared whitepapers and met with FTC Staff to gain approval for mergers on behalf of oil companies . Dr. Webb holds a PhD in economics from George Mason University in Fairfax, Virginia and has published in the journal Public Choice . His academic interests include applied microeconornics, industrial origination, and auction theory. He has taught courses in Law and Economics, the Economics of Regulation, and the Economics of Energy at the graduate and undergraduate level . Testimony Apr. 29, 2013 Presented oral testimony at the California Public Utilities Commission on behalf of SFPP, LP discussing theoretical principles of cost allocation with regard to Application No. 09-05-014 . Dec .12,2012 Filed Rebuttal Testimony at the Federal Energy Regulatory Commission on behalf of Enterprise TE Products Pipeline Company LLC in Docket No. IS12203-000 on matters relating to rate design and cost-of-capital . Nov. 5, 2012 Filed Direct Testimony at the California Public Utilities Commission on behalf of SFPP, LP discussing theoretical principles of cost allocation with regard to Application No. 09-05-014 . Oct. 10, 2012 Filed Verified Statement at the Federal Energy Regulatory Commission on behalf of Buckeye Pipeline Company, L.P. in Docket No. OR12-28-000 regarding the justness and reasonableness of the pipeline's rates. Jul. 18, 2012 Filed Affidavit at the Federal Energy Regulatory Commission on behalf of Association of Oil Pipe Lines in Docket No. OR12-4-000 on issues related to assessing competition in the context of applications for market-based ratemaking authority . Jul. 16, 2012 Filed Reply Verified Statement at the Federal Energy Regulatory Commission on behalf of Buckeye Pipeline Company, L.P . in Docket No. IS 12-185-000 . Jul. 9, 2012 Filed Prepared Direct Testimony at the Federal Energy Regulatory Commission on behalf of Enterprise TE Products Pipeline Company LLC in Docket No. IS 1 2203-000 on matters relating to rate design and cost-of-capital . ~ REGULATORY ECONOMICS RE .3GROUP,LLC C ~A W 10 May 15, 2012 Filed Verified Statement at the Federal Energy Regulatory Commission on behalf of Buckeye Pipeline Company, L.P. in Docket No. IS12-185-000 addressing issues related to ratemaking in the context of the company's ratemaking; program. Apr. 18-20, 2012 Presented oral testimony and responded to questions of Commissioners at the Public Service Commission of the State the State of Wyoming on behalf of Belle Fourche Pipeline Company in Docket no. 50000-61 -PR- I I on issues related to cost-of-service and cost-of-capital . Feb. 1, 2012 Filed Supplement Direct Testimony at the Public Service Commission of the State of Wyoming on behalf of Belle Fourche Pipeline Company in Docket No. 50000-61 -PR- I I on issues related to cost-of-service and cost of capital. Jan . 10- 11, 2012 Presented oral testimony and cross examination at the FERC on behalf of Enbridge Pipelines (Southern Lights) LLC in Docket Nos . IS 10-399-000, et. al. on issues related to cost-of-service and rate design. Jan . 9, 2012 Filed Supplemental Direct Testimony at the Federal Energy Regulatory Commission on behalf of SFPP, LP in Docket No . IS 1 1-444-001 revising calculations to accord with Commission's new cost-of service ruling. Jan . 6, 2012 Filed Rebuttal Testimony before the State Corporation Commission of the State of Kansas on behalf of Mid-America Pipeline Company, LLC in Docket No. 12MDAP-068-RTS on issues related to cost-of-service and rate design . Dec . 13, 201 1 Filed Direct Testimony at the Federal Energy Regulatory Commission on behalf of SFPP, LP in Docket No. IS 1 1-444-001 regarding the proposed indexation of pipeline rates and the economic principles of the Commission's indexing methodology. Nov. 1, 2011 Filled Rebuttal Testimony at the Federal Regulatory Commission on behalf of Enbridge Pipelines (Southern Lights) LLC in Docket Nos. ISIO-399-000, et. al. on issues related to cost-of-service and rate design. Oct. 25, 2011 Filed Affidavit before the State Corporation Commission of the State of Kansas on behalf of Mid-America Pipeline Company, LLC in Docket No. 12-MDAP068-RTS in support of a Motion to Compel. Oct. 14, 2011 Filed Direct Testimony before the Public Service Commission of the State of Wyoming on behalf of Belle Fourche Pipeline Company in Docket No. 5000061-PR-1 I on issues related to cost-of-service and cost-of-capital. Aug. 19, 2011 Filed Direct Testimony before the State Corporation Commission of the State of Kansas on behalf of Mid-America Pipeline Company, LLC in Docket No. 12MDAP-068-RTS on issues related to cost-of-service and rate design. June 7, 2011 Filed Direct Testimony at the Federal Energy Regulatory Commission on behalf of Enbridge Pipelines (Southern Lights) LLC in Docket Nos . IS10-399-000, et. al. on issues related to cost-of-service and rate design. ~~REGULATORY ECONOMICS zr . .3G .OUP,LLC W Jul . 2, 20 10 Presented oral cross examination of behalf of SFPP, L .P. addressing issues associated with cost allocation and volume projections in Docket No. IS09-437 . May 14, 201 0 Filed Rebuttal Testimony on behalf of SFPP, L.P. addressing issues associated with cost allocation, and volume projections in Docket No. IS09-437 . MaylO-11,2010 Presented oral cross examination behalf of San Pablo Bay Pipeline, LLC at the California Public Utility Commission supporting its Application for market based rates in Docket No . A.08-09-024 . Apr . 15,2010 Provided direct testimony on behalf of Kuparuk Transportation Company on Cost of Service issues before the Regulatory Commission of Alaska. Feb . 23-24, 2010 Presented oral Testimony on behalf of SFPP, L.P. at the California Public Utilities Commission addressing issues associated with competition, sound regulatory policy and macro-economic conditions in Docket No. 09-05-014 . Feb . 8, 2010 Filed Rebuttal Testimony on behalf of San Pablo Bay Pipeline LLC in Docket No. A-08-09-024 addressing issues related to competitive analysis of San Pablo Bay's markets . Jan . 25, 2009 Filed Rebuttal Testimony on behalf of SFPP, L .P. at the California Public Utilities Commission addressing issues associated with competition, sound regulatory policy and macro-economic conditions in Docket No. A. 09-05-014 . Dec.29,2009 Filed Verified Statement on behalf of San Pablo Bay Pipeline, LLC, supporting Motion to Compel in Docket No. A 08-09-024. Dec.11,2009 Filed Direct Testimony on behalf of SFPP, L.P. addressing issues associated with cost-allocation, and volume projections in Docket No. IS09-437 . Sept . 21, 2009 Filed affidavit supporting SFPP's Petition for Rehearing in Docket No. IS09437 . Jun .26,2009 Presented Oral Sur-rebuttal testimony on behalf of SFPP, LP addressing issues associated with volume projections and economic conditions. Jun . 18-19, 2009 Presented Oral Testimony on behalf of SFPP, LP at the Federal Energy Regulatory Commission in Docket No. IS08-390-002 addressing issues discussed in prepared Direct and Rebuttal testimony . Mar. 27, 2009 Filed Rebuttal Testimony at the Federal Energy Regulatory Commission discussing cost-al location, depreciation, and the economic conditions associated with demand for refined petroleum products in SFPP's destination market . Jan . 13, 2009 Filed a Sworn Declaration on behalf of San Pablo Bay Pipeline, LLC supporting its Response to Tesoro's Motion for Summary Adjudication in Docket No. A.0809-024 . Dec . 2-4. 2008 Presented Oral Testimony on behalf of SFPP, LP at the Federal Energy Regulatory Commission addressing theoretical issues related to allocation of cost and the economic life of the pipeline . ~~REGULATORY ECONOMICS Z 1= .3GROUP,LLC PA W C Oct. 16, 2008 Filed Direct Testimony at the Federal Energy Regulatory Commission on behalf of SFPP, LP in Docket No . IS08-390-002 discussing theoretical principles of cost allocation . Sept . 30, 2008 Filed Direct Testimony at the California Public Utilities Commission on behalf of San Pablo Bay, Pipeline Company LLC supporting its market based rates in Docket No. A.08-09-024. This testimony examined the competition that San Pablo Bay faces in its origin and destination markets using conventional measures of market concentration and competition Sept. 9, 2008 Filed Answering Testimony at the Federal Energy Regulatory Commission on behalf of SFPP, LP in Docket No. OR03-5-000, discussing theoretical issues associated with cost-allocation and the economic life of the pipeline. Jul. 6, 2007 Filed Affidavit at the Federal Energy Regulatory Commission in support of a motion for rehearing of Frontier Pipeline Company in Docket No. ORO 1 -2-000 and OR014-000 discussing calculation of refunds owed by Frontier. ~~PEGULATORY ECONOMICS Rr . .3GROUP,LLC ~A W Relevant Experience Rate Regulation Issues * Led the project team in developing data and preparing cost-of-service calculation in cost-based rate cases. Assisted multiple witnesses in drafting testimony regarding FERC requirements for cost-based ratemaking . * Prepared cost-of-service filings, consistent with FERC regulations in 18 CFR § 346.2 on behalf of numerous oil pipelines . * Assisted counsel in preparing cross examination regarding cost-based ratemaking and regulatory theory. * Assisted multiple witnesses in drafting testimony presenting Stand-Alone Cost theory to the FERC. Antitrust Matters Prepared a whitepaper for the Federal Trade Commission analyzing the competitive impact of a pipeline acquisition in the Eastern Pennsylvania area. Developed a computer-based model to analyze the competitive impact of an oil pipeline acquisition in the mid-continent region. Prepared a detailed whitepaper explaining the theory behind the analysis and the results of the analysis. Met with FTC Staff to discuss the results of the analysis . Analyzed the competitive impact of a refinery acquisition in the northeastern United States . Constructed a computer-based simulation based on publicly available data and an analysis of how the acquisition would impact the market. Prepared multiple whitepapers reporting results of the analysis. Met with FTC Staff to discuss the results of the analysis. Market-Based Rate Filings Assisted in the preparation of an application for market-based ratemaking authority and associated exhibits consistent with 18 CFR § 348 on behalf of Sunoco Pipeline, LP's marketbased rate filing . Assisted in the preparation of expert testimony and exhibits filed in Shell Pipe Line Company LP in market-power case. Participated in the development of applications for market-based ratemaking authority on behalf of Chase Pipeline Company, Inc. West Shore Pipeline Company, Inc, and Marathon-Ashland Pipe Line LLC. Acquisition Due Diligence Participated in a project team analyzing the regulatory risk that a private equity fund faced if it acquired a controlling interest in liquids . Participated in a project team analyzing the regulatory risk that a pipeline company considering a conversion in ownership structure from a corporation to a master limited partnership could face if its rates were contested by its shippers . REGULATORY ECONOMICS REMIGROMLIC ~A W Involvement in Prior Regulatory Matters FERC Matters OR03-5-001 Complaint against the rates of SFPP's North Line and Oregon Line IS05-216-000 Protest against the rates of Mid-Amefica Pipeline. IS05-82-000, IS06-01-000 Protest and Complaint against TAPS CARRIERS rates. OR05-7-000 Sunoco Logistics Partners, L.C. Market Based Rate filing OR96-2-000, IS98-1-000 Protest and complaint against SFPP's Sepulveda pipeline system OR05-1-000 Petition for Declaratory Order Filed by Enbridge's Spearhead pipeline. ORO] -2-000 Calculating reparations owed by Frontier to Big West and Chevron OR02-10-000 Shell Pipe Line Company, LP application for market-based ratemaking authority. IS02-384-000 Protest and Complaint against Platte Pipe Line Company and Express Pipeline Company, LLC . OR96-2-000 Complaint against SFPP's rates ORO 1 -06-000 Application of West Shore Pipe Line Company for market-based ratemaking authority . OROI-03-000, OROI-05-000 Complaint against the rates of Anschutz Ranch East Pipeline Inc. OROI-02-000, OROI-04-000 Complaint against the rates of Frontier Pipeline Company . ORO I - 1 -000 Application of Chase Transportation Company for market-based ratemaking authority OROO- 1 -000 Application of Marathon-Ashland Pipe Line, LLC for market-based ratemaking authority . ~~REGULATORY ECONOMICS R C .3GROUPLLC $A w State Matters P-03-4 Protest and complaint at the Regulatory Commission of Alaska against the rates of the TAPS Carriers TO-0 1 147 Protest against Olympic Pipe Line Company, Inc's rate increase at the Washington Utilities and Telecommunications Commission . P97-4 and P97-7 Protest and complaint at the Regulatory Commission of Alaska against the rates of the TAPS Carriers. TX 1999-00532 Challenge to Arizona tax court's determination that SFPP's property should be valued at other than original cost. Other Entities Docket No. 42084 Analyzing the return of Valero's ammonia pipeline. Civ No. 96-Z-2451 Challenge to the rates charged by a C02 Pipeline in Federal District Court. Case No. 70 198 00294-99 Challenge to a pro-rationing policy of Amoco Oil Company filed before the American Arbitration Association . Publications and Presentations Presentation at EUCI regarding all aspects of ratemaking for the liquid pipeline industry, December 2012. "Market-Based Rates" Presented at the 2012 Annual Business Conference of the Association of Oil Pipe Lines "Regulatory Basics for Oil Pipelines" Presented at the 2012, 2011, 2010, and 2009 Annual Business Conference of the Association of Oil Pipe Lines "Ratemaking: Beyond the Basics" Presented at the 2011, 2010, 2009, and 2008 Annual Business Conference of the Association of Oil Pipe Lines "Pipeline Economics 101" Presented at the 201 1, and 2010 Annual Business Conference of the Association of Oil Pipe Lines REGULATORY ECONOMICS R1= .3GROUP,LLC PA W 0 * "New Developments in Pipeline Expansions: Executing the Deal" Presented at the 2011 Annual Business Conference of the Association of Oil Pipe Lines * "FERC 101" Presented at the 2008 Annual Business Conference of the Association of Oil Pipe Lines The Political Economy of the Israel Palestine Conflict: An Evolutionary Game Theory Approach : Doctoral Dissertation . Rowley, CK and M . J. Webb "Israel and Palestine : the slow road to peace or the fast track to mutual annihilation" Public Choice (July 2007) 132 : 7-26 . "The Antitrust Review of Oil Pipe Line Mergers at the FTC" Presented that the 2007 Annual Business Conference of the Association of Oil Pipe Lines. "FERC 101" Presented at the 2007 Annual Business Conference of the Association of Oil Pipe Lines. "Surviving a Rate Case" Presented at the 2006 Annual Business Conference of the Association of Oil Pipe Lines. Previous Relevant Employment Association of Oil Pipe Lines (1997-1998) Intern Prepared statistical analysis of pipe line failures from publicly available sources . Assisted Executive Director in employing economic theory to address industry concerns. Education George Mason Universiry PhD, Economics MA, Economics American University BA, (Magna Cum Laude) International Relations, Economics REGULATORY ECONOMICS R1= .3GROUP,LLC 1-6 w 40 A ob EXHIBIT NO. 12 130440264 Z58'6 919'6 COVO I 160'Ef 808'01 01 VVE Z5o'l 1 8Lt7'9E 6661 9ZI'SI E69'9 6ZI'6E OOOZ 660'ZZ 169'Z 1 C99'017 009"PZ IOOZ VL071 805'6 09L'91 9ZO'O 1 108'1 Z V88'01 K9'LZ ZOOZ MIS 91Z'ZI LIO'Vf COOZ Z JO I a~ud Z I *oM j!q!qxZI I t, o2rd E I It oged E I osuodxg isonjul uopiowdaCl 17 g E Z I wall -U-1 anu;)Ao-d jujojL suoijujado wog molq qseD asuadxg 2upiado qstD asuadxo isaialui ptm uoilmajdap Suiploxg \ I I!q!qxg 1!q!qxg aoinoS z *U11 - I T'i \1 it, o2ed IE I oM I!q!qx3 It ogud I E I , oM I!q!qx3 (Sooos) SJOISOAtil PU" 1101, suopoiado wojj Aiojq qsuD d--l III dtqsjouvmd 8E8'6 130440264 Z99'6 EOZ'99 Olf'15 T-lo-z 9lt7'Ll 9ZL'89 6Z8179 617L'Lg ZS9'171 OOV'ZL T1-oz ZJO Z ased ZI oN 1!q!qxa fZ9'01 LgL179 W'LJ7 IZZ'81 J79V59 u-10--z t7 g asuodxg isaialul E Z I woll -U-1 suoiliuodo woLg moij qsuo asuadxg guilujado qsro anuDA2-d tMOJL uoilrpaida(l asu2dxo Isojolui pue uoijutooldop guiploxg \1 61-tl '01'6,soNl!q!qxg 61-tl '01'6,soMl!q!qxg 068'0 1 gL6'Et, IZE'S 9ZZ'55 80t,'L gt,0'95 LECS 810'8S 9ES'01 L60'19 z 'Ul - I *Ull \1 61171 '01'6'SOMI!q!qx3 61-ti '01'6 *soMl!q!qxa LZ9'01 Lt,6'Z9 898'Zf Z68'El 09L'9t7 2oinoS FO-oz 8917'ZZ 68Z'6Z LSL'lg To-o-Z OLL'817 Z8E'Sl ESI'V9 Woo-Z 1760'LI7 LLO'L I 1 L l'fP,9 TOOK 8Z['ZJ7 M'Ll 996'65 WE 9tL'gt, 96L'S I lt,5'179 '60-o-Z (Sooos) suotiviado woij molq qseZ) -d--l III diqsjauved sjoisoAul pruo-S IlojL 130440264 en eq anUOAQ-d 1101 P0100110 :) tZ 130440264 g agud 10 1 -ON 1!q!qxg aOIA13S JO ISO:) JUJOJL EZ 61 81 91 El gl LI ~ajqd xujL 3jujS puu juiapaj pauiqwo:) -xuW al B'd Xul QIUIS ujnloH pamolIV jejol II ol 6 8 *-UlI L ZI fq!nbg uo wnio-d pmolIV jqoU jo isoo oiju-d,(4!nbg poindw] oijuH lqoU paindwl 9 g t, E Z lul!dL, :)jo ISO:) QSLIIDAV P3142!OtA 'LICIV juj!&Z) SuppoAk slassV paxil -jd2G poluinmooV IUOLLQSOALq l33fOJd -ido(I poluinwnooV SIoSSv POXIA I To-li z t oz 'I E joqwaoo(l SIOIS ;DAUI PRO-d 1101 uoilvinoleD ooimas jo isoo pur oseg ajvH . d--l III diqSlQLqJ8d asug almd IgOA jo pug JUOLUISOAUl 133f0id alux XLJL plapaj t, I [Z *U'l * Ll *U'l 6 *U'l c4!nbg uo wma-d p3molIV 33uL'mOIIV xLU 3wO3uI jaldillnW xLU 3wO3ul I1 Cul 8 *u-1) 1!q!qxg 1!q!qxg 5Z $ fZ-oZ,suj wnS C88'ZVO'ZL $ ZZ IZ OZ L '0 1 'o I 'o I 'o I 'o I 'ON I!q!qxg * ON 1!q! qxa ON 1!q!qxg 1!q!qxg 1!q!qxg 55756S 9 ol I -su-I tunS ZI 6 + (01 E a2ud IEZ Z oSud 'EZ t, 0-29d t, ogud 11 aftd t, o5rd 11 o2vd amemoliv XL"L 816'lt,['Lg luj!dL,:) uo tuma-d (uoijuioaid3Cj) lul!du :)jo turua-d (uoijupoidoCl V isonjul -loxg) s;)swdxg guilundo (11 *u'l aoiAjoS anUOAO-j ILIU13JUI SDJUJS Pal!Un (91 'Ul- 0/91 *U-1 51 Ui + [t, I *Ul * (g I 'Ul - 0] uopUxuLjo juatuliudaCl Liutgl'A 6t 'u'l El ul S o&.d'ol *oN 1!q!qxa g agtd 'o I *ON 1!q!qxg $ $ $ $ $ $ $ $ $ $ $ $ E69'56C6 Z60'ft,t,'EZ t,99'1 99'6 899'IS9't,l E69'96C6 %z,E9 %L*8E %gL,g %O*SE CZ6'898't,l ZWEVVEZ %99'8 %L6'01 %t,E*9 %05 %09 9EV996'OLZ zEg,zt,g QL [I loc, 1) WOVO'591) 60f'009'1 018,zsl,sft, E JO I Oft'd EZ *ON 1!q!qxg 130440264 %00*001 %09,9z %LZ*8 %t,E*9 %8v' 1 %Ltl*O %t,L'O %OV*E %gz*o jq5CI jo isoo %9011 1 %Z9*Lt, %9tI*E jqaG jujol jo JU0013d PONSIOM E JO Z O'Bud EZ *oM 1!q!qxg E09'189'600'1 OZVLL~'89Z coo' 18VE8 6ZO'L68'1 V I t,18'9LL'08t, LEZ'06'K jq5U onssi D90oz Sal-Jos, 990oz SaUas V90oz Sal-13s 96661 SOWS V6661 Sal-JOS LI 32Rd'01 'oMj!q!qxg :oo1noS %Lg'S %OL'S %VZ*9 %t'I'L %E I'L almd Isaialul iqa(] jo isoo polqgiaM -d--j IH diquaujiud SIOISOALq P1310-d IIOJL 6*1 L*817 1 *917 V88 17*17 Z*6Z 5'617 VE8 9* 18 g*ZS 6'E O*g 9,Z Z'Z Z*t, C'17 130440264 8031 061, 66'8 99*v 81*9 961, 917*L 6E*8 9,917 S'l 5 1*176 E* 117 1*817 C*88 CE8 9*LL L*817 Z'68 I,Z8 z*zg Z*6Z L*09 6*9Z 9*" % oPff %0-1 1 OH P121A I - .qslG . 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