X. Capital Structure

Capital structure is comprised of long-term debt, preferred stock, and common equity.⁶ Because the level of financial risk that Sierra faces is determined by the proportion of its debt to permanent capital, or its leverage, the concern is to ensure that the adopted equity ratio is sufficient to maintain reasonable credit ratings and to attract capital.

All common stock is issued at the holding company level. For the purpose of rate making, a percentage of Sierra's capital is allocated to each of its three distinct utility businesses or divisions based upon each division's contribution to rate base. These utility divisions are electric, gas and water. After a percentage of capital is allocated to each division, specific amounts of debt, preferred stock and common equity are then assigned to each division. First, a specific amount of debt is assigned to the Water Division. After the debt portion of capital is assigned, preferred stock and common equity are then added in the appropriate proportions to fill out the total capital allocation for the Water Division.

Next, a specific amount of debt is allocated to the Gas Division. After the debt portion of capital is assigned, preferred stock and common equity are then added in the appropriate proportions to fill out the total capital allocation for the Gas Division. Because the individual capital assignments to each utility Division adds up to the total company, the residual amounts of debt, preferred stock, and common equity are allocated to the Electric Division.

Sierra finances its capital requirements with the goal of obtaining the lowest cost of capital at the Company level while maintaining a "A" bond rating, regardless of how that capital is subsequently allocated or assigned to each utility business.

Sierra's allocation of its total company capital to its Electric Division results in a capital structure composed of 47.56% debt, 7.67% preferred stock, and 44.77% common equity. Although Sierra's holding company is seeking federal regulatory approval for a merger with Portland General Electric Company and intends to sell its water operations, Sierra does not anticipate any change in its capital structure. This undisputed capital structure is the same capital structure being proposed by ORA. No other party addressed the reasonableness of Sierra's capital structure.

We conclude that, Sierra's 2001 capital structure consisting of 47.56% long-term debt, 7.67% preferred stock, and 44.77% equity is consistent with the law, in the public interest and should be adopted. The next step in determining a fair ROE is to establish reasonable long-term debt and preferred stock costs.