ALJ/MFG/sid Mailed 12/20/2004

Decision 04-12-047 December 16, 2004

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Application of Southern California Edison Company (U 338-E) for Authorized Capital Structure, Rate of Return on Common Equity, Embedded Cost of Debt and Preferred Stock, and Overall Rate of Return for Utility Operations for 2005.	Application 04-05-021 (Filed May 10, 2004)
Application of Pacific Gas and Electric Company for Authority to True-up its Cost of Capital for 2004 and to Establish its Authorized Cost of Capital for 2005. (U 39 M)	Application 04-05-023 (Filed May 12, 2004)

William Harn, Attorney at Law, for Southern California Edison

Company; and Shirley Woo, Attorney at Law, and Darcy
Morrison, for Pacific Gas and Electric Company, applicants.

James Weil, for Aglet Consumer Alliance; Robert Finkelstein,
Attorney at Law, for The Utility Reform Network;
Norman J. Furuta, Attorney at Law, for the Department of the Navy; Jeffrey M. Parrott and James Ozenne, Attorneys at Law, for San Diego Gas & Electric Company; Alcantar & Kahl, LLP, by Rod Aoki and Donald Brookhyser, Attorneys at Law, for Cogeneration Association of California; and Davis Wright Tremaine LLP, by Steven F. Greenwald and Jeffrey P. Gray, Attorneys at Law, for Calpine Corporation, interested parties.

Laura J. Tudisco, Attorney at Law, for the Office of Ratepayer Advocates.

OPINION ON TEST YEAR 2005 RETURN ON EQUITY AND
ON PACIFIC GAS AND ELECTRIC COMPANY'S TRUE UP YEAR 2004

TABLE OF CONTENTS

Title Page

OPINION ON TEST YEAR 2005 RETURN ON EQUITY AND

ON PACIFIC GAS AND ELECTRIC COMPANY'S TRUE UP YEAR 2004 3

I. Summary 3

II. Jurisdiction and Background 4

III. Debt Equivalence 5

A. Utilities Proposed Solution 8

1. Debt Equivalence Impact 8

2. Annual ROE Proceeding 11

3. S&P's Debt Equivalence Formula 14

4. Debt Equivalence Policy 15

IV. Capital Structure 15

A. SCE 16

B. PG&E 16

C. Discussion 17

V. Long-Term Debt and Preferred Stock Costs 18

A. SCE 18

B. PG&E 19

C. Discussion 22

VI. Return on Common Equity 24

A. SCE's Return on Equity 25

1. SCE and ORA's Position 25

2. Aglet-TURN's Position 28

3. Discussion 31

B. PG&E's Return on Equity 36

1. PG&E's Position 36

2. Aglet-TURN's Position 38

3. ORA's Position 38

4. Discussion 39

VII. Implementation 43

VIII. Comments on Proposed Decision 43

IX. Assignment of Proceeding and Procedural Matters 44

Findings of Fact 44

Conclusions of Law 48

ORDER 50

APPENDIX A - Test Year 2005 Credit Ratios

APPENDIX B - SCE's Results of Financial Models

APPENDIX C - PG&E's Results of Financial Models

I.

OPINION ON TEST YEAR 2005 RETURN ON EQUITY AND

ON PACIFIC GAS AND ELECTRIC COMPANY'S TRUE UP YEAR 2004