3. Summary of the Settlement Agreement Agreements with Individual Companies
The Parties assume that all four Class A water companies face identical costs of equity, and agree that this cost is 9.99 percent. This number is a compromise between the Applicants' proposed costs of equity which range from 11.25 percent to 11.50 percent and DRA's proposed costs of equity which range from 8.75 percent to 9.00 percent for individual companies. Since we approve the same cost of equity for all four companies, the differences in the overall rates of return among the companies reflect two other factors: capital structure and embedded cost of debt. We discuss the derivation of an overall rate of return for each individual company below.
California Water Services Company
In Application (A.) 11-05-001, direct testimony, and rebuttal testimony, California Water Service Company (Cal Water or CWS) sought Commission approval of the following:
· Capitalization of 46.10 percent long-tem debt and 53.90 percent equity;1 a cost of debt of 6.24 percent (modified from 6.16 percent);2
· A return on equity of 11.25 percent;3
· A rate of return of 8.86 percent (as modified);4
· Discontinuation of the Temporary Interest Rate Balancing Accounts (TIRBA),5 and TIRBA balance of $1,149,9196 (modified from an estimated $658,000)7 to be returned to ratepayers over twelve months; and
· Continuation of the Water Cost of Capital Mechanism (WCCM), with a base year of 2012.8
DRA does not oppose Cal Water's proposal to discontinue the TIRBA. DRA accepts Cal Water's calculation of the TIRBA balance as $1,141,919, and Cal Water agrees to amortize that balance over twelve months via a customer surcredit. DRA does not oppose continuation of the WCCM.
Cal Water and DRA agree that the settlement terms in Table I and Table II will provide ratepayers with reasonable rates sufficient to maintain the financial soundness and stability of Cal Water.
San Jose Water Company
In A.11-05-002, direct testimony, and rebuttal testimony, San Jose Water Company (San Jose or SJW) sought Commission approval of the following:
· Capitalization of 48.83 percent long-term debt and
51.17 percent common equity for the year 2012, and
48.48 percent long-term debt and 51.52 percent common equity for years 2013 and 2014;9· A cost of debt of 6.68 percent;10
· A return on common equity of 11.50 percent11 for years 2012-2014;
· An overall rate of return of 9.14 percent for 2012 and 9.17 percent for 2013 and 2014;12 and
· Continuation of the WCCM, with a base year of 2012.13
DRA's testimony advocated the following recommendations with respect to San Jose's application:
· Capitalization of 50 percent long-term debt and 50 percent equity for 2012-2014;14
· A cost of debt of 6.68 percent;
· A return on equity of 8.75 percent for 2012-2014;15and
· Continuation of the WCCM, but with a deadband zone of plus or minus 100 basis points and a benchmark period of October 2010 through September 2011.16
San Jose accepts DRA's offer of a capital structure comprising 48.65 percent/51.35 percent as the average of the debt and equity ratios San Jose proposed for year 2012 and later years. DRA accepts San Jose's cost of debt of 6.68 percent, which reflects San Jose's actual cost of borrowing (including transactional costs). The Parties agree on a return on equity of 9.99 percent for each Applicant as part of the comprehensive settlement. For San Jose, this results in a rate of return of 8.38 percent, to which San Jose and DRA agree.
San Jose and DRA agree to a continuation of the WCCM for San Jose on the same terms applicable to the other three Applicants. For San Jose, this requires a reduction of the deadband zone from one of plus or minus 200 basis points to one of plus or minus 100 basis points. The Parties agree that the benchmark period is the calendar year 2012. San Jose and DRA agree that the above settlement terms will provide ratepayers with reasonable rates sufficient to maintain San Jose's financial soundness and stability.
1 Cal Water's original capitalization request was based on its actual estimated capital structure. Cal Water proposed to correct its application to reflect a debt-to-equity capitalization of 47 percent/53 percent. CWS Exhibit 1 (CWS Corrected Application) at 2.
2 CWS Exhibit 13 (CWS/Kropelnicki Rebuttal) at 4-9.
3 CWS Exhibit 1 (CWS Corrected Application) at 2.
4 The 8.86 percent rate of return is based upon Cal Water's actual estimated debt-equity capital structure of 46.10 percent/53.90 percent and Cal Water's actual cost of debt (with transaction costs) of 6.24 percent.
5 CWS Exhibit 7 (CWS/Kropelnicki Direct) at 31 (lines 8-9).
6 CWS Exhibit 14 (CWS/Smegal Rebuttal) at 20 (lines 3-6).
7 CWS Exhibit 7 (CWS/Kropelnicki Direct) at 31 (lines 11-16).
8 Ibid. at 30 (lines 10-12).
9 A.11-05-002 at 7; SJW Exhibit 1 (SJW/Lynch) at 6 and Schedule 3.
10 A.11-05-002 at 7; SJW Exhibit 1 (SJW/Lynch) at 6 and Schedule 4.
11 A.11-05-002 at 7; SJW Exhibit 2 (SJW/Ahern) at 2-3, 62; SJW Exhibit 3 (SJW/Ahern) at Schedule PMA-1.
12 A.11-05-002 at 7; SJW Exhibit 2 (SJW/Ahern) at 2-3, 62.
13 A.11-05-002 at 1-2, 12.
14 DRA Exhibit 1 (DRA/Woolridge) at 55 (lines 14-15).
15 Id. at 49 (lines 23-24).
16 DRA Exhibit 3 (DRA/Kotyrlo) at 6 (lines 2-8).
