XV. Rate Base

With traditional cost of service ratemaking utility shareholders are expected to provide sufficient investment capital to finance the plant and facilities necessary to provide safe and reliable service to ratepayers. In exchange, shareholders are provided an opportunity to earn a reasonable rate of return on their equity investment and recover the interest costs of long-term debt. Absent the creation of any other sharing or reward devices, this return on equity is why investors own stock. The details become more complex; but the premise is constant: if the shareholders provide the financing necessary for the provision of service, they are entitled to the inclusion of a return on investment in retail rates. The Commission must decide what investments are reasonable and necessary for SoCalGas and SDG&E to provide safe and reliable service in the test year.

To derive Test Year 2004 estimates it is necessary to adjust from the recorded Base Year, 2001, for known or forecast events in 2002, 2003 and the test year itself, 2004. As they are discussed below, the issues are generally focused on Test Year 2004 expenditures, but the final Test Year 2004 rate base includes the past years' activities as a part of the new foundation for the test year rate base. Unless specifically otherwise adopted, the adopted Test Year 2004 estimates include the related requests or adjustments for these earlier years' additions. The accumulation of all depreciation over the life of the assets is from the total of all reasonable capital expenditures. Depreciation (discussed in more detail later) is the recovery of capital investment represented in rate base over the assets' useful lives.

The ratemaking risk to the ratepayers is that SoCalGas and SDG&E may not perform the work at the adopted levels, which would otherwise entitle the companies to the recovery of the depreciation and return built into retail rates as a result of adopting a test year forecast. As with all capital items, there is a normal forecast error - applicants may actually spend more or less than the adopted forecast. This decision endeavors to include in rates the effects of the most plausible actions in the test year and the Commission expects SoCalGas and SDG&E to perform in good faith the work necessary to provide safe and reliable service. The ratemaking risk to SoCalGas and SDG&E is that to meet this service obligation they must actually spend more than adopted forecast. The effects of these risks to both ratepayers and the utilities are prospectively corrected in subsequent rate adjustments where actual capitalized costs are accurately reflected.