20. Comments on Proposed Decision
The proposed decision of the ALJ in this matter was mailed to the parties in accordance with Pub. Util. Code § 311 and comments were allowed under Rule 14.3 of the Commission's Rules of Practice and Procedure (Rules). Timely comments and replies were filed by all parties. To the extent parties reargued their previous position, we accord the comments no weight. Changes have otherwise been made to reflect reasonable corrections or clarifications. Some specific comments are addressed below. DRA in its comments supported the proposed return on equity but raised questions concerning the proper capital structures and the cost of new debt. Corrections and clarifications have been made to address these concerns.
Suburban proposes that the cost of capital adjustment mechanism's deadband should be symmetrical and the deadband should be widened to
250 basis points before the return adjusts upwards or downwards, citing the smaller size, and therefore access to the financial markets, of the applicants compared to the large multi-district companies in A. 08-05-002 et al. (We note San Jose would fit the size range of those other companies.) We have modified the mechanism to be symmetrical because we are adopting the mechanism to stabilize the cost of capital from unanticipated or unintended decreases and we also intend to adjust the return should economic conditions require a higher return. Park/Apple also comment that the deadband for the cost of capital adjustment mechanism may still result in unintended reductions and therefore proposes either a larger deadband (as did Suburban) or the use of a benchmark that does not rely on the problematic 2008-09 time period. San Gabriel proposes that the Deadband should remain at 100 points but that the benchmark should change to the 12-months ending September 30, 2010 and that this would avoid the effects of the earlier market dislocations. We agree and this change was made to the base period. Corrections and changes have been made to reflect these concerns with the proposed decision.
The proposed decision is revised to grant Valencia's late-filed motion63 to adopt a 2011 and 2012 capital structure that recognizes a new $12 million, 12-year long term loan at a low cost of only 4.62%. DRA supports this specific adjustment in its Reply Comments (at 6).
San Gabriel chose not to establish a 2010 Cost of Capital Memorandum Account authorized by D. 09-12-019 and therefore it need not make any rate adjustments before the effective date of this decision, and appropriate changes have been made in this decision.
Applicants argue that the proposed decision failed to recognize and adjust the return on equity for a perceived risk that the companies borrow debt at higher interest rates than the proxy group of companies. (See Park/Apple Comments at 11.) In fact, the proposed decision fully addresses and compensates for this perceived risk by deferring extensively to the companies proposed capital structures and adopting the applicants' embedded and forecast cost of debt. Thus, if Park/Apple or others historically borrowed at higher rates those rates are embedded in their cost of capital, and, despite DRA's objections, we adopted the applicants' rate forecasts for new debt. We believe that using the actual cost of debt offsets any other risk related to size.
63 Filed June 16, 2010, to set aside submission and consider new information. No party otherwise . . . timely commented on the motion.
