11. Automatic Trigger Mechanism
Southwest and ORA agree on an automatic trigger mechanism (ATM),71 and the use of AA utility bonds yields in establishing the ATM benchmark bond, as a replacement to annual cost of capital filings. However parties disagree over how the ATM is applied to the capital structure. Southwest proposes that the ATM use the adopted capital structure, while ORA recommends use of the actual capital structure.
We have previously discussed our reasons for adopting a hypothetical capital structure, and the related ROE. The ATM provides protection for ratepayers when debt costs decline, and protection for shareholders when debt costs increase. Consistent with our adopted ATMs in other proceedings, we will adopt an ATM that applies to the adopted capital structure.
71 The ATM adjusts the rate of return upward and downward as a result of changes in utility bond rates. The adjustment in rate of return occurs when the average benchmark yield changes by more than 100 basis points. Parties propose that the interest rate measurement period is the six-month period of April to September of the same year, and when the ATM adjustment is triggered, the current authorized return on equity should be adjusted by 50% of the change in interest rates, and the debt and preferred stock costs be recalculated to reflect the actual September month-end embedded costs in that year. Southwest and ORA also agree that the "off-ramp," a provision that would nullify employing the ATM, occurs when the basis point change is equal or exceeds 260 basis points, and that a formal cost-of-capital case should occur every five years, regardless of whether or not an ATM off-ramp is reached.
