IX. Alternate Decision
This alternate was issued for comments. We have reviewed the comments
filed and made appropriate changes throughout the text.
1. The Commission in 1994 embarked on a process to restructure the electric services industry in California.
2. The California State Legislature established the framework for restructuring the California electric service industry in AB 1890.
3. The Commission adopted a comprehensive PBR for Edison in D.96-09-092, including a cost of capital trigger mechanism.
4. The major electric utilities, Southern California Edison Company, Pacific Gas and Electric Company, and San Diego Gas & Electric Company have undergone fundamental changes in their operations as a result of restructuring.
5. The process of restructuring is ongoing and will continue to change the way in which utility operations subject to the Commission's jurisdiction are regulated.
6. The operations of the utility distribution companies are subject to regulation by the Commission.
7. The returns on the generation function of the former integrated utility are set by either market forces or by Commission decisions and legislative provisions.
8. The transmission function of the former integrated utility is regulated by the Federal Energy Regulatory Commission.
9. The remaining operations of the UDC consist of more than distribution operations.
10. The UDC is not a pure distribution company and will not become a pure distribution company for the foreseeable future.
11. The Commission should consider the risks associated with remaining functions of the UDC when it determines a reasonable return on equity.
12. In D.97-08-056, the Commission ordered the major electric utilities to file applications in this proceeding to consider unbundling cost of capital.
13. The evidence in this case shows that the UDC is neither more risky nor less risky than the former integrated utility.
14. There is no basis for imposing a distribution risk discount or unbundling adjustment on UDC operations; nor is there basis for adding a risk premium adjustment.
15. Gas distribution utilities are similar to electric utility distribution operations.
16. The Commission has historically authorized nearly the same returns for gas and electric utility operations.
17. In prior cost of capital decisions, the Commission did not rely exclusively on model results to determine the authorized return on equity.
18. The financial models employed in our cost of capital proceedings should not be determinative and must be tempered with a great deal of judgment. The DCF model, RP model, and CAPM model cannot be relied upon exclusively to develop a particular ROE, but may be helpful in developing a range of reasonable values. They are useful in establishing a range of required returns to consider in selecting the authorized return and in evaluating trends of investor expectations.
19. SDG&E's changes in revenue requirements resulting from this decision should be allocated to electric rates by class and spread in a manner consistent with the revenue allocation and rate design principles adopted in D.96-06-033 and D.97-08-056. The allocation and rate design principles applicable for gas rates are to be done in a manner consistent with the revenue allocation and rate design principles adopted in D.97-04-082 and as approved in Resolution E-3510.
20. For electric utilities the divestiture of generation and the FERC's regulation of transmission have not altered traditional methods of determining return on equity.
21. The reasonable return on equity, capital structure, cost of capital, and rate of return for the distribution electric utility operations of PG&E, SDG&E, and Edison are :
PG&E
Cap Structure |
Cost |
Wgt Cost | |
Debt |
46.20% |
7.09% |
3.28% |
Pref |
5.80% |
6.55% |
0.38% |
Equity |
48.00% |
10.60% |
5.09% |
Total |
100.00% |
8.75% |
SDG&E
Cap Structure |
Cost |
Wgt Cost | |
Debt |
45.25% |
6.87% |
3.11% |
Pref |
5.75% |
7.76% |
0.45% |
Equity |
49.00% |
10.60% |
5.19% |
Total |
100.00% |
8.75% | |
| |||
Cap Structure |
Cost |
Wgt Cost | |
Debt |
47.00% |
7.64% |
3.59% |
Pref |
5.00% |
6.62% |
0.33% |
Equity |
48.00% |
11.60% |
5.57% |
Total |
100.00% |
9.49% | |
22. The reasonable return on equity, capital structure, cost of capital, and rate of return for the gas distribution operations of PG&E and SDG&E are the same as for their electric distribution operations.
23. The return on equity for the unbundled electric distribution operations of PG&E and, SDG&E is the same as for their bundled electric operations.
1. Edison's 1996 PBR decision does not preclude its rate of return from being determined in this proceeding.
2. Because no adjustment is made as a result of unbundling, we will not disturb the operation of Edison's cost of capital trigger mechanism.
3. PG&E's cost of capital should go into effect as of January 1, 1999.
4. SDG&E's cost of capital should go into effect 30 days after the effective date of this order or as part of a consolidated revenue change with A.99-02-029, depending on the timing of the end of the rate freeze.
IT IS ORDERED that:
1. The cost of capital for 1999 of Pacific Gas and Electric Company (PG&E), San Diego Gas & Electric Company (SDG&E), and Southern California Edison Company (Edison) are set forth in the Findings of Fact and Conclusions of Law of this decision, and are approved.
2. PG&E's cost of capital should go into effect as of January 1, 1999.
3. If SDG&E's rate freeze ends on or before July 1, 1999, the revenue impacts of this order shall be consolidated with the rate changes resulting from Application (A.) 99-02-029. SDG&E shall file an advice letter consistent with the provisions of the decision in A.99-02-029 to reflect the revenue changes adopted here in. If SDG&E's rate freeze is expected to end after July 1, 1999, SDG&E shall file an advice letter within 5 days of the effective date of that determination, but no later than June 30, 1999, with tariffs consistent with this order. The advice
letter shall go into effect 30 days after it is filed, upon Energy Division determination of compliance.
4. Application (A.) 98-05-019, A. 98-05-021, and A. 98-05-024 are closed.
This order is effective today.
Dated June 10, 1999, at San Francisco, California.
RICHARD A. BILAS
President
HENRY M. DUQUE
LORETTA M. LYNCH
JOEL Z. HYATT
Commissioners
I dissent.
/s/ JOSIAH L. NEEPER
Commissioner
Table of Contents
Pages
OPINION 2
Summary 2
Introduction 4
I. Does Edison's Performance Based Ratemaking (PBR) Mechanism Preclude Consideration of Changes to its Rate of Return? 5
II. Standard of Review 7
III. Electric Distribution Utility Risk 9
A. PG&E 12
B. SDG&E 15
C. Edison 19
D. TURN 21
E. ORA 25
F. Czahar and Knecht (C and K) 28
G. FEA 29
H. Discussion 30
IV. Financial Modeling Issues 39
A. DCF 39
B. CAPM 42
C. ECAPM 45
D. ATWACC 46
E. Interest Rates 48
F. Commission Recorded Risk Premium 51
V. Rate of Return 53
A. ROE 54
B. Debt, Preferred Stock, and Rate of Return 60
VI. Gas Distribution Utility Return on Equity and Rate of Return 61
VII. Rate Base and Revenue Requirement 65
VIII. Implementation of Rates 66
A. PG&E 66
B. SDG&E 67
C. Edison 67
Findings of Fact 67
Conclusions of Law 71
ORDER 71
APPENDIX A
Appendix A
Robert C. Cagen
CALIF PUBLIC UTILITIES COMMISSION
505 VAN NESS AVE. RM 5124
SAN FRANCISCO, CA 94102-3214
SHIRLEY WOO
LAW DEPARTMENT
PACIFIC GAS & ELECTRIC COMPANY
PO BOX 7442
SAN FRANCISCO, CA 94120
MARK BACKUS
SIERRA PACIFIC POWER COMPANY
PO BOX 10100
RENO, NV 89520-0024
FRANK J. COOLEY
SOUTHERN CALIFORNIA EDISON CO
PO BOX 800
ROSEMEAD, CA 91770
RAY CZAHAR
5650 GRAVENSTEIN HWY - RTE 116 N
FORESTVILLE, CA 95436
NORMAN FURUTA
JENE G. DIERSING
CODE 09C
FEDERAL EXECUTIVE AGENCIES
900 COMMODORE DR.
SAN BRUNO, CA 94066-5006
M CATHERINE GEORGE
GOODIN MACBRIDE SQUERI SCHLOTZ & RITCHIE
505 SANSOME ST., STE 900
SAN FRANCISCO, CA 94111
LYNN HAUG
ELLISON & SCHNEIDER
2015 H STREET
SACRAMENTO, CA 95814
RAY JEULS
SOUTHERN CALIFORNIA WATER CO.
630 E. FOOTHILL BLVD.
SAN DIMAS, CA 91773
CAROLYN KEHREIN
ENERGY MANAGEMENT SERVICES MAIL STOP 9
1505 DUNLAP COURT
DIXON, CA 95620-4208
RON KNECHT
1465 MARLBAROUGH AVENUE
LOS ALTOS, CA 94024-5742
JOHN LEGLER
1040 ST. ANDREWS COURT
BOGART, GA 30622
JASON MIHOS
CALIFORNIA ENERGY MARKETS
9 ROSCOE STREET
SAN FRANCISCO, CA 94110-5921
JUDY PAU
EL PASO ENERGY CORPORATION
650 CALIFORNIA ST. FL 24
SAN FRANCISCO, CA 94108
REED V. SCHMIDT
BARTLE WELLS ASSOCIATION
1636 BUSH STREET
SAN FRANCISCO, CA 94109
PATRICIA A. SCHMIEGE
O'MELVENY & MYERS LLP
EMBARCADERO CENTER WEST
275 BATTERY ST. FL 26
SAN FRANCISCO, CA 94111
FRANK SPASARO
DSM TRANSITION MANAGER
SOUTHERN CALIFORNIA GAS COMPANY
555 W 5TH ST., ML-24G1
LOS ANGELES, CA 90071-2071
JAMES F. WALSH
SAN DIEGO GAS & ELECTRIC CO.
101 ASH STREET
SAN DIEGO, CA 92112-4150
JAMES WEIL
PO BOX 6640
SAN RAFAEL, CA 94903-0640
(END OF APPENDIX A)
