3. Capital Structure
Capital structure consists of long-term debt, preferred stock, and common equity.5 Because the level of financial risk that the utilities face is determined in part by the proportion of their debt to permanent capital, or leverage, we must ensure that the utilities' adopted equity ratios are sufficient to maintain reasonable credit ratings and to attract capital.
3.1. SCE
SCE seeks a test year 2008 ratemaking capital structure of 43.00% long-term debt, 9.00% preferred stock, and 48.00% common equity. This is the same capital structure that it is currently authorized.
3.2. SDG&E
SDG&E seeks a test year 2008 ratemaking capital structure consisting of 45.25% long-term debt, 5.75% preferred stock, and 49.00% common equity. This is the same capital structure that it is currently authorized.
3.3. PG&E
PG&E seeks a test year 2008 ratemaking capital structure of 46.00% long-term debt, 2.00% preferred stock, and 52.00% common equity. This is the same capital structure that it is currently authorized.
3.4. Discussion
There is no opposition to the utilities' proposed capital structures. However, Aglet Consumer Alliance, The Utility Reform Network and Utility Consumers' Alliance jointly (ATU) recommend that PG&E's 52% equity ratio be reviewed for the calendar year following the year PG&E attains an A level credit rating. ATU's recommendation pertains to a subsequent test year and should appropriately be addressed in the next phase of this proceeding which will address cost of capital mechanisms and other changes that may alter the utilities' annual cost of capital applications.
The capital structures proposed by SCE, SDG&E and PG&E are balanced, attainable and are intended to maintain an investment grade rating and to attract capital. For these reasons, we find that the undisputed proposed capital structures of SCE, SDG&E and PG&E are fair, consistent with law, in the public interest and should be adopted. The adopted capital structures are detailed in the following tabulation:
CAPITAL RATIO |
SCE |
SDG&E |
PG&E |
Long-Term Debt |
43.00% |
45.25% |
46.00% |
Preferred Stock |
9.00 |
5.75 |
2.00 |
Common Equity |
48.00 |
49.00 |
52.00 |
Total |
100.00% |
100.00% |
100.00% |
The next step in determining a fair ROE is to establish reasonable long-term debt and preferred stock costs.
5 Debt due within one year, short-term debt, is excluded.
