4. Long-Term Debt and Preferred Stock Costs
Long-term debt and preferred stock costs are based on actual, or embedded, costs. Future interest rates must be anticipated to reflect projected changes in a utility's cost caused by the issuance and retirement of long-term debt and preferred stock during the year. This is because the ROE is established on a forecast basis each year.
We recognize that actual interest rates do vary and that our task is to determine "reasonable" debt cost rather than actual cost based on an arbitrary selection of a past figure.6 In this regard, we conclude that the latest available interest rate forecast should be used to determine embedded debt cost in ROE proceedings. Consistent with this conclusion, the assigned Commissioner's Scoping Memo and Ruling allowed the utilities to update their long-term debt and preferred stock costs based on Global Insight's September 2007 forecasted interest rates for 2008. That update was submitted on September 27, 2007 as Late-Filed Exhibits 64, 65 and 66 by SCE, SDG&E and PG&E, respectively.
4.1. SCE
SCE projected its test year 2008 long-term debt cost to be 6.20% based on a simple average of its projected year-end 2007 and year-end 2008 long-term debt forecasts. That 2008 forecast provides for the issuance of $700 million in new long-term debt. Based on its late-filed exhibit that updated the impact of the most recently forecasted interest rates, SCE increased its forecasted long-term debt cost to 6.22% from 6.20%. This revised rate is five basis points higher than the 6.17% long-term debt cost authorized in its test year 2006 ROE proceeding.7
SCE used that same method to calculate a preferred stock cost of 5.98%. Its forecast provided for the issuance of $135 million of preferred stock in 2008. Based on its late-filed exhibit that updated the impact of the most recent forecasted interest rates, SCE increased its forecast to 6.01% from 5.98%. This revised rate is eight basis points lower than the 6.09% preferred stock cost SCE was authorized in its test year 2006 ROE proceeding.
4.2. SDG&E
SDG&E projected its test year 2008 long-term debt cost to be 5.55% based on a simple average of its projected year-end 2007 and year-end 2008 long-term debt forecasts. That 2008 forecast provides for the issuance of $430 million in new long-term debt. Based on its late-filed exhibit that updated the impact of the most recently forecasted interest rates, SDG&E increased its forecast to 5.62% from 5.55%. This revised rate is 13 basis points lower than the 5.75% long-term debt cost authorized in its test year 2006 ROE proceeding. This forecasted debt cost is slightly lower than SDG&E's currently authorized debt cost mainly due to SDG&E issuing $500 million of new and $161 million of refunding first mortgage bonds, which have lower interest rates, since the last cost of capital proceeding in 2005.
SDG&E used that same method to calculate a preferred stock cost of 6.70%. Its forecast provided for a $125 million issuance of preferred stock in test year 2008. This cost is also impacted by a required 550,000 share redemption. Based on its late-filed exhibit that updated the impact of the most recently forecasted interest rates, SDG&E increased its forecast to 7.25% from 6.70%. This revised rate is 42 basis points higher than the 6.83% preferred stock costs authorized in test year 2006 ROE proceeding. The forecasted preferred stock cost is higher than SDG&E's currently authorized preferred stock cost mainly because SDG&E plans to issue $75 million and $125 million of preferred stock in 2007 and 2008, respectively.
4.3. PG&E
PG&E projected a long-term debt cost of 6.05%, an increase of 3 basis points from its currently authorized 6.02% rate. This increase in cost results from the net impact of PG&E issuing approximately $1 billion of new fixed-rate debt in 2008 at an average interest rate of 6.05%. PG&E updated its long-term debt costs to reflect the most recent forecast of interest rates. That update did not result in any change in its long-term debt cost.
PG&E projected a preferred stock cost of 5.68%, a 19 basis point reduction from its currently authorized rate of 5.87%. PG&E does not project any new issuances or redemptions of preferred stock in 2008. Hence, the updated forecast of interest rates did not impact its test year preferred stock cost.
4.4. Discussion
There is no opposition to the utilities proposed long-term debt and preferred stock costs for the test year 2008. We have reviewed these undisputed costs which have been updated to reflect the most recent forecasted interest rates and find that the following long-term debt and preferred stock costs for the utilities are consistent with the law, in the public interest and should be adopted.
Rates |
SCE |
SDG&E |
PG&E |
Long-Term Debt |
6.22% |
5.62% |
6.05% |
Preferred Stock |
6.01 |
7.25 |
5.68 |
Having determined the appropriate long-term debt and preferred stock costs, we address the appropriate ROE.
6 38 CPUC2d 233 at 242 and 243 (1990).
7 Although cost of capital proceedings are held annually, the test year 2007 cost of capital proceeding was waived pursuant to D.06-08-026.
