1. Summary
This decision establishes the base year 2010 ratemaking cost of capital and return on common equity for Great Oaks Water Company (Great Oaks). This is the first proceeding for this company where the sole subject is cost of capital, separated from a general rate case, pursuant to Decision (D.) 07-05-062, the most recent rate case plan for the Class A water utilities. The rate case plan established that cost of capital would be addressed for these companies in a consolidated proceeding rather than the past practice of treating cost of capital as one other cost item in the general rate cases.
In this decision, we adopt a return on equity of 10.20% along with an imputed capital structure to include ratepayer-beneficial long term debt, and then derive a weighted cost of capital. We take note of the financial markets' dislocation and therefore consider whether there are any extenuating circumstances of sufficient importance to warrant a departure from our normal procedures. The authorized return reflects the risk reductions inherent in all of the outstanding balancing accounts or memorandum accounts available to the company. Based on our consideration of all circumstances, we adopt a return on equity of 10.20% which is based on the testimony made by the sole active intervenor, the Division of Ratepayer Advocates; discounts the request by the applicant; and considers Great Oaks' individual risk profile, which includes relative size of operations and capital ratios. We adopt the following company-specific ratios and equity return:
Great Oaks Water Company Adopted 2010 Cost of Capital | |||
Long Term Debt |
30% |
7.50% |
2.25% |
Preferred Stock |
3% |
6.00% |
0.18% |
Equity |
67% |
10.20% |
6.83% |
Total |
9.26% | ||
Second, this decision adopts a Cost of Capital Adjustment Mechanism which uses an interest rate index and a Moody's bond rating to adjust the return on equity and update the cost of capital for the two years 2011 and 2012 before the next cost of capital proceeding for a base year of 2013. This is the same mechanism adopted in D.09-07-051 for the three large multi-district Class A water companies and in D.10-10-036 for the smaller Class A companies (excluding Great Oaks). Consistent with D.10-10-036, we adjust the trigger mechanism otherwise used in D.09-07-051 to avoid an unintended reduction in return which may result from a high cost base year for the bond index which captures the unusual recent market instabilities.
Finally, this decision orders Great Oaks to engage an independent Certified Public Accountant (CPA), with utility client experience, to perform a full and complete audit of the company beginning with all transactions as of January 1, 2009. Great Oaks shall continue to have annual audits unless this order is subsequently rescinded by a future Commission decision. Great Oaks must file for preapproval of its proposed selection of a CPA, and may recover the reasonable costs of these audits in a new CPA Audit Cost Memorandum Account.
The specific cost impacts of this decision are not quantified and depend upon any other changes to revenue requirement scheduled to be effective on January 1, 2010 in A.09-09-001. This proceeding is closed.
