ALJ/MFG/sid Date of Issuance 12/21/2007

Decision 07-12-049 December 20, 2007

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Application of Southern California Edison Company (U338E) for Authorized Cost of Capital for Utility Operations for 2008.

Application 07-05-003
(Filed May 8, 2007)

And Related Matters.

Application 07-05-007
Application 07-05-008

Peter Van Mieghem and Shirley A. Woo, Attorneys at Law, for Pacific Gas and Electric Company; Laura Genao and Frank J. Cooley, Attorneys at Law, for Southern California Edison Company; Sempra Energy, by Carlos F. Pena, Attorney at Law, and Kim F. Hassan, Attorney at Law, for San Diego Gas & Electric Company; applicants.

Norman J. Furuta, Attorney at Law, for Federal Executive Agencies; Aglet Consumer Alliance, by James Weil, and The Utility Reform Network, by Hayley Goodson, Attorney at Law, and Michael Shames, Attorney at Law, by Consumer Alliance, and Utility Consumers' Action Network, jointly for Aglet Consumer Alliance, The Utility Reform Network, and Utility Consumers' Action Network; interested parties.

Jonathan Bromson, Attorney at Law, for the Division of Ratepayer Advocates.

TABLE OF CONTENTS

Title Page

OPINION ON TEST YEAR 2008 COST OF CAPITAL FOR THE MAJOR ENERGY UTILITIES 2 2

1. Summary 2 2

2. Jurisdiction and Background 3 3

3. Capital Structure 4 4

4. Long-Term Debt and Preferred Stock Costs 5 5

5. Return on Common Equity 9 9

5.1. Financial Models 10 10

5.1.1. Proxy Groups 10 10

5.1.1.1. Screens 10 10

5.1.1.2. Discussion 12 12

5.1.2. CAPM 15 15

5.1.3. Risk-Free Rate 16 16

5.1.4. Risk Premium 16 16

5.1.5. Discussion 17 17

5.2. DCF 19 19

5.2.1. Dividend Yield 20 20

5.2.2. Expected Growth Rate 20 20

5.2.3. Discussion 21 21

5.2.4. Historical Risk Premium (HRP) 21 21

5.2.4.1. Risk-Free Long-Term Treasury & Bond Yields 21 21

5.2.4.2. Risk Premium 22 22

5.2.4.3. Discussion 22 22

5.2.5. Fama French 24 24

5.2.6. Summary 27 27

5.3. Additional Risk Factors 28 28

5.3.1. Financial Risk 28 28

5.3.2. Business Risk 29 29

5.3.3. Regulatory Risk 31 31

5.3.4. Summary 33 33

5.4. SCE's Return on Equity 34 34

5.5. SDG&E's Return on Equity 36 36

5.5.1. San Onofre Nuclear Generation Station 37 37

5.5.2. Equity Rebalancing Mechanism 39 39

5.5.3. Summary 41 41

5.6. PG&E's Return on Equity 43 43

5.6.1. Pension ROE 44 44

5.6.2. Summary 45 45

6. Implementation 47 47

7. Rule 13.1 Violation 47 47

8. Procedural Matters 48 48

9. Comments on Proposed Decision 49 49

10. Assignment of Proceeding 49 49

Findings of Fact 50 50

Conclusions of Law 53 53

ORDER.. 56 56

APPENDIX A - Credit Ratios Including Debt Equivalence Test Year 2008

OPINION ON TEST YEAR 2008 COST OF CAPITAL
FOR THE MAJOR ENERGY UTILITIES

1. Summary

This decision establishes the 2008 ratemaking return on common equity (ROE) for Southern California Edison Company (SCE), San Diego Gas & Electric Company (SDG&E) and Pacific Gas and Electric Company (PG&E). The test year 2008 ROE for SCE is 11.50%, which results in a corresponding 8.75% return on rate base (ROR). This ROR is 2 basis points¹ lower than its currently authorized 8.77% ROR and results in a revenue requirement reduction of approximately $9.6 million.² The test year 2008 ROE for SDG&E is 11.10%, which results in a corresponding 8.40% ROR. This ROR is 17 basis points higher than its currently authorized 8.23% ROR and results in a revenue requirement increase of approximately $9.6 million.³ The test year 2008 ROE for PG&E is 11.35% which results in a corresponding 8.79% ROR. This ROR is the same ROR that PG&E is currently authorized; as such there is no change in its revenue requirement.

¹ One basis point equals 0.01%.

² Late-Filed Exhibit 64 shows that a 10 basis point change in SCE's authorized ROE equates to a $9.3 million revenue requirement change.

³ Late-Filed Exhibit 65 shows that a 10 basis point change in SDG&E's authorized ROE equates to a $2.5 million revenue requirement change. Hence, $2.5 million divided by 10 basis points equals a .25 million revenue requirement change for each one basis point. Therefore, a 17 basis point change in the ROE equates to a $4.3 million (17 basis points times $.25 million) change in revenue requirement. SDG&E subsequently clarified in a December 17, 2007 ex parte communication that its revenue requirement change should be $9.6 million, not the $4.3 million derived from its late-filed Exhibit 65. This update reflects the impact of changes in SDG&E's debt and preferred stock costs not reflected in its late-filed exhibit.