IX. Assignment of Proceeding
Michael R. Peevey is the Assigned Commissioner and Michael J. Galvin is the assigned Administrative Law Judge (ALJ) in this proceeding.
1. Applicants are public utilities subject to the jurisdiction of this Commission.
2. SCE seeks to increase its test year 2006 ROE to 11.80% from 11.40%.
3. PG&E seeks to increase its test year 2006 ROE to 11.50% from 11.22%.
4. SDG&E seeks to increase its test year 2006 ROE to 12.00% from 10.38%.
5. SDG&E also seeks to change its capital structure by increasing its common equity ratio 200 basis points and reducing its long-term debt ratio 200 basis points.
6. PG&E and SCE, and SDG&E's applications were consolidated pursuant to Rule 55.
7. PG&E and SCE seek no material change in their authorized capital structures.
8. Debt equivalence is a term used by credit analysts for treating long-term non-debt obligations, such as PPAs and leases, as if they were debt in assessing an entity's credit rating.
9. Debt equivalence has been reflected in the utilities' credit rating since at least 1990.
10. SDG&E has investment grade credit ratings of A from S&P and A2 from Moody's.
11. SDG&E has received a stable outlook from S&P and Moody's and is not on credit watch by either of the rating agencies.
12. We recognized that actual interest rates do vary and that our task is to determine reasonable debt costs rather than actual cost based on an arbitrary selection of a past figure.
13. In September, 2005, PG&E, SCE, and SDG&E submitted late-filed Exhibits 48, 49, and 50, respectively, to reflect the most recent forecasted interest rates.
14. There is no dispute on the cost of PG&E, SCE, or SDG&E's long-term debt or preferred stock.
15. The legal standard for setting the fair ROE has been established by the United States Supreme Court in the Bluefield and Hope cases.
16. An ROE is set at a level of return commensurate with market returns on investments having corresponding risks, and adequate to enable a utility to attract investors to finance the replacement and expansion of a utility's facilities to fulfill its public utility obligation.
17. PG&E has an investment grade rating of BBB from S&P and Baa1 from Moody's.
18. SCE has an investment grade rating of BBB+ from S&P and a Baa1 from Moody's.
19. Quantitative financial models are commonly used as a starting point to estimate a fair ROE.
20. Although the quantitative financial models are objective, the results are dependent on subjective inputs.
21. It is the application of informed judgment, not the precision of quantitative financial models, which is the key to selecting a specific ROE.
22. The individual parties' use of quantitative financial models resulted in a broad test year 2006 ROE average range from 8.70% to 11.95% for PG&E, 8.70% to 14.00% for SCE, and 8.70% to 11.60% for SDG&E.
23. Two important components of the Hope and Bluefield decisions are that the utilities have the ability to attract capital to raise money for the proper discharge of their public utility duties and to maintain creditworthiness.
24. Our consistent practice has been to moderate changes in ROE relative to changes in interest rates in order to increase the stability of ROE over time.
25. The September 2005 Aa utility bond interest rate forecast for test year 2006 is 6.19%, a 71 basis point reduction in interest rate from the April 2005 forecast of 6.90% used by the utilities, a 25 basis point reduction from the June 2005 forecast used by ORA and FEA, and a 19 basis increase from the July 2005 forecast used by ATU.
26. Official notice is taken of the changes that have occurred in the short-term Federal Funds rate from the January 1, 2005 to the October 6, 2005 submittal date.
27. The Federal Funds short-term rate has increased a consistent 25 basis points at each of the six Federal Reserve Board's Open Market Committee meetings held this year up to the submittal date from 2.25% to 3.75%.
1. The consolidation of these applications does not mean that a uniform ROE should be applied to each of the utilities.
2. The capital structures proposed by PG&E and SCE should be adopted because they are balanced, attainable, and intended to maintain an investment grade rating and attract capital.
3. SDG&E's debt equivalence argument does not justify a change in its authorized capital structure.
4. The impact of SDG&E's debt equivalence should be considered along with its other risks in arriving at a fair and reasonable ROE.
5. The long-term debt and preferred stock costs being proposed by the utilities are consistent with the law, in the public interest, and should be adopted.
6. The latest available interest rate forecast should be used to determine embedded long-term debt and preferred stock costs in ROE proceedings.
7. The inconsistent direction of long-term interest rates and consistent quarter percent increases in the short-term rates demonstrate that the utilities are facing increased interest risk.
8. Interest risks being experienced by the utilities warrant the ROEs being adopted in this proceeding at the upward end of an ROE range found just and reasonable.
9. A test year 2006 ROE range from 10.61% to 11.63% is just and reasonable for PG&E.
10. A test year 2006 ROE of 11.35% is just and reasonable for PG&E.
11. A test year ROE range from 10.86% to 11.82% is just and reasonable for SCE.
12. A test year 2006 ROE of 11.60% is just and reasonable for SCE.
13. A test year ROE range from 10.25% to 10.78% is just and reasonable for SDG&E.
14. A test year 2006 ROE of 10.70% is just and reasonable for SDG&E.
15. The utilities ROE applications should be granted to the extent provided for in the following order.
IT IS ORDERED that:
1. Pacific Gas and Electric Company's (PG&E) cost of capital for its test year 2006 electric and gas operations is as follows:
Capital Ratio |
Cost Factor |
Weighted Cost | |
Long-Term Debt |
46.00% |
6.02% |
2.77% |
Preferred Stock |
2.00 |
5.87 |
0.12 |
Common Stock |
52.00 |
11.35 |
5.90 |
Total |
100.00% |
8.79% |
2. Southern California Edison Company's (SCE) cost of capital for test year 2005 is as follows:
Capital Ratio |
Cost Factor |
Weighted Cost | |
Long-Term Debt |
43.00% |
6.17% |
2.65% |
Preferred Stock |
9.00 |
6.09 |
0.55 |
Common Stock |
48.00 |
11.60 |
5.57 |
Total |
100.00% |
8.77% |
3. San Diego Gas & Electric Company's (SDG&E) cost of capital for its test year 2006 electric and gas operations is as follows:
Capital Ratio |
Cost Factor |
Weighted Cost | |
Long-Term Debt |
45.25% |
5.75% |
2.60% |
Preferred Stock |
5.75 |
6.83 |
0.39 |
Common Stock |
49.00 |
10.70 |
5.24 |
Total |
100.00% |
8.23% |
4. SDG&E shall calibrate its Market Indexed Capital Adjustment Mechanism to conform to this decision. Although its next full ROE review is not due until 2010 for test year 2011, SDG&E may file such an application in 2006 for test year 2007.
5. PG&E, SCE and SDG&E shall implement the revenue requirement changes authorized by this decision as set forth in the body of this order. If the Energy Division Director suspends any tariffs in those filings, such tariffs shall become effective upon the date the Energy Division Director confirms that the tariffs are in compliance.
6. Applications (A.) 05-05-006, A.05-05-011, and A.05-05-012 are closed.
This order is effective today.
Dated December 15, 2005, at San Francisco, California.
MICHAEL R. PEEVEY
President
GEOFFREY F. BROWN
SUSAN P. KENNEDY
DIAN M. GRUENEICH
JOHN A. BOHN
Commissioners
APPENDIX A
SAN DIEGO GAS & ELECTRIC COMPANY
DEBT EQUIVALENCE IMPACT ON S&P GUIDELINES
TEST YEAR 2006
CASH FLOW |
DEBT/ CAPITAL |
CASH FLOW/ DEBT | |
S&P Rating Ranges A Rating Range BBB Rating Range |
4.50 - 3.80 x 3.80 - 2.80x |
42%-50% 50% - 60% |
30% - 22% 22% - 15% |
NO Debt Equivalence Current 49% Equity Current 10.38% ROE |
5.78 x |
53.6% |
29.2% |
Debt Equivalence Current 49% Equity Current 10.38% ROE |
3.95 x |
60.3% |
21.5% |
Debt Equivalence Current 49% Equity Requested 12% ROE |
4.12 x |
59.9% |
22.7% |
Debt Equivalence Requested 51% Equity Requested 12% ROE |
4.22 x |
58.7% |
23.4% |
Note: Bold Numbers are outside S&P Business Position 5 guidelines for an A credit rating but within the guidelines for a BBB credit rating.
(END OF APPENDIX A)
APPENDIX B
CREDIT RATIOS INCLUDING DEBT EQUIVALENCE
TEST YEAR 2006
CASH FLOW TIMES (x) INTEREST COVERAGE |
DEBT/ CAPITAL |
CASH FLOW/ DEBT | |
S&P Rating Ranges A Range BBB Range |
5.2 - 4.2 x 4.2 - 3.0 x |
40%-48% 48% - 58% |
35% - 28% 28% - 18% |
|
|||
PG&E |
|||
@ Requested 11.50% ROE |
4.7 x |
52.3% |
21.8% |
@ ATU's Recommended 10.40% ROE |
4.6 x |
52.3% |
21.2% |
SCE |
|||
@ Current 11.40% ROE |
4.0 x |
51.5% |
20.2% |
@ ATU Recommended 10.40% ROE |
3.9 x |
51.5% |
20.2% |
Note: Bold Numbers are outside S&P Business Position 6 guidelines for an A credit rating but within the guidelines for a BBB credit rating.
(END OF APPENDIX B)
