2. Background

Decision (D.) 09-05-019 established the base year 2009 ratemaking return on common equity for California Water Service Company (California Water), California American and Golden State Water Company (Golden State). This was the first proceeding for these three companies where the sole subject was cost of capital, separated from a general rate case, pursuant to D.07-05-062, the most recent rate case plan for the class A water utilities. In response to the highly unusual problems in the 2008 financial markets, we adopted on our own motion a temporary interest rate balancing account for each company. The temporary interest rate balancing account was authorized to record any difference between the forecast incremental cost of debt included in the adopted cost of capital and the actual cost of new long term debt.

The forecast cost of debt for base year 2009 included estimated costs of debt for any debt the companies expected to issue between the time the applications were filed in May 2008 and the anticipated start of the 2009 base year. The purpose of the balancing account is to reduce the interest rate risk to both the applicants and ratepayers during the life of the adopted cost of capital.

The temporary interest rate balancing account shall record the difference in interest expense between the actual interest cost for long-term debt for debt issued after January 1, 2009, and the interest cost included in the adopted cost of capital for debt issues in 2009 or later. This account shall include interest costs from the effective date of this decision forward and remain in effect until the next cost of capital proceeding for each company, in an appropriate venue, to end the balancing account. Any recovery shall be subject to a standard reasonableness review of the interest costs actually incurred. (D.09-05-019 at 42.)

The decision included the following findings of fact:

9. The Commission should create the temporary interest rate balancing account to record the difference in interest expense between the actual interest cost for long-term debt for debt issued after January 1, 2009, and the interest cost included in the adopted cost of capital for debt issues in 2009 or later subject to a standard reasonableness review.

10. The temporary interest rate balancing account should be effective from the date of this decision and include interest costs from the effective date forward.

California American made no comment addressing the temporary interest rate balancing account in the body of its filed opening or reply comments on the proposed decision; nor did California Water or Golden State. The California Water Association described the temporary interest rate balancing account as "acceptable," but that it should not be "institutionalized." (California Water Association Opening Comments at 9.)