4. Disputed Issue: Need for General Rate Case
The only dispute between Alco and DRA is whether Alco should be required to file a GRC application. The positions of DRA and Alco are summarized below.
4.1. DRA
Alco intends to place into rate base the new plant and equipment financed by the requested debt and equity and to recover the associated revenue requirement in advice letter filings known as rate-base offsets.4 DRA recommends that the Commission order Alco to file a GRC application, as Class A water utilities are required to do, in lieu of rate base offsets.
DRA states that Resolutions W-4577 and W-4645 established an authorized rate of return of 9.86%. However, as shown in Table 2 below, DRA argues that Alco's authorized rate of return in 2009 should be reduced to 8.46% based on (1) Alco's embedded cost of debt and equity, and (2) the projected cost of debt and equity requested in this proceeding.
Table 2 | ||||
Amount |
Capital Ratios |
Cost Factors |
Weighted Cost Factors | |
2007 "A" Bond |
$8,030,000 |
45.42% |
7.85% |
3.57% |
A.07-10-012 Debt |
5,915,000 |
33.46% |
8.50% |
2.84% |
Preferred Stock |
2,000,000 |
11.31% |
8.50% |
0.96% |
Common Equity |
1,732,971 |
9.80% |
11.06% |
1.08% |
Total |
$17,677,971 |
100.00% |
8.46% | |
Sources: Application 07-10-012, Attach. J; Alco Exhibit 1, Attach. A and B. | ||||
DRA argues that the Commission needs to adjust Alco's rates so it does not earn a rate of return in 2009 that is 1.4% above its projected cost of capital (9.86% vs. 8.46%). A rate base offset is not the proper vehicle for adjusting Alco's rates, according to DRA, because it is limited to plant additions; it does not adjust rates to reflect changes to capital structure, cost of capital, or reductions to plant for accumulated depreciation.5 DRA submits that the best means for adjusting Alco's rates to reflect all of these items is a GRC.
4.2. Alco
Alco contends that DRA's proposed GRC proceeding is outside the scope of this proceeding, which is limited to Alco's request to issue new debt and equity. Alco states that because it is a Class B water utility, it is not required to file a GRC, but may file rate-base offsets or GRCs as it deems necessary. Alco plans to file rate-base offsets to recover all the expenses related to the new plant that is financed by the debt and equity requested in the instant proceeding.
Alco believes a GRC is unnecessary because the Commission recently reviewed and approved the bulk of Alco's capital program in Resolution W-4577. The only major project not yet authorized is the proposed AMR system in the amount of $700,000. Moreover, if Alco is required to file a GRC application, Alco intends to seek a rate increase to recover all of its rising costs, not just the cost of the rate base additions. Alco asserts that the likely result is that ratepayers will probably see a larger rate increase with a GRC compared to a rate-base offset.
Alco also contends that DRA's proposed GRC is premised on a flawed calculation of Alco's cost of capital. First, while DRA used the stated interest rate of 7.85% on existing debt, Alco asserts this ignores bond issuance costs of $587,735 which represent an additional interest rate of 0.56%. Therefore, Alco submits that the actual interest rate is 8.41%. Second, DRA assumed the $6 million of long-term debt requested in the current proceeding will have an interest rate of 8.5%. Because the new debt will have issuance costs, Alco believes it is likely the new debt will have an interest rate of 9% (8.5% + 0.5% issuance costs). Finally, DRA assumed a return on equity (ROE) of 11.06%. However, California Water Service (CWS) filed an Application on May 1, 2008, requesting an ROE of 12.57%. Alco believes its ROE should be at least 200 basis points higher than CWS, or 14.57%.
As shown in the Table 3 below, Alco calculates that its cost of capital will be 9.22% in 2009, which is higher than the 8.45% calculated by DRA:
Table 3 | ||||
Capital Amount |
% of Capital Structure |
Cost |
Weighted Cost | |
2007 "A" Bond |
$8,030,000 |
45.42% |
8.41% |
3.82% |
2008 Bond |
5,915,000 |
33.46% |
9.0% |
3.01% |
Preferred Stock |
2,000,000 |
11.31% |
8.5% |
0.96% |
Common Stock |
1,732,971 |
9.80% |
14.57% |
1.43% |
Total |
$17,677,971 |
100.0% |
9.22% | |
Alco believes that its estimated cost of capital for of 9.22% for 2009 is close enough to its authorized rate of return of 9.86% so as to obviate the need for a GRC proceeding.
4 The purpose of most of the debt and equity requested by Alco in this proceeding is to (i) refinance plant and equipment that is already included in rate base, and (ii) pay for debt and equity issuance costs.
5 Commission Water Standard Practice U-27-W, Para. 9 (definition of "rate base offset").
