5. Assignment of Proceeding
John A. Bohn is the assigned Commissioner and Douglas M. Long is the assigned ALJ in this proceeding.
1. The record on the Water Cost of Capital Mechanism is composed of the joint motion for the adoption of the settlement and the settlement agreement.
2. There is a full and complete record for the financial markets dislocation that is composed of testimony, work papers, examination of witnesses, as well as full and complete opening and reply briefs.
Settlement
3. The parties to the settlement adopted in this decision had a sound and thorough understanding of the issue, and all of the underlying assumptions and data and could therefore make informed decisions in the settlement process.
4. The adopted settlement is among competent and well-prepared parties who were able to make informed choices in the settlement process.
5. The Water Cost of Capital Mechanism is consistent with the energy utility mechanism adopted in D.08-05-035.
6. We interpret the settlement as an agreement among the settling parties to propose a similar Water Cost of Capital Mechanism in subsequent cost of capital proceedings and that the settlement binds the parties but not the Commission in the future.
7. The settlement is silent on the source of interest rate forecasts to be used by the adjustment mechanism.
Financial Markets Dislocation
8. The impacts of the financial market dislocation on the applicants have on the whole been less severe than the impacts on the stock market as a whole.
9. There is no persuasive evidence that applicants cannot obtain commercial paper financing.
10. There is no persuasive evidence that the commercial paper rates are above the costs of long-term debt or equity.
Settlement
1. Applicants alone bear the burden of proof to show that the proposed Water Cost of Capital Mechanism is reasonable.
2. The Water Cost of Capital Mechanism settlement is reasonable because it fairly balances intervenor and shareholder interests and provides a reasonable adjustment to the return on equity.
3. The Water Cost of Capital Mechanism uses a measurement adjusted to the water utilities and is therefore reasonably distinguished from the energy utility mechanism adopted in D.08-05-035.
4. The settlement is reasonable in light of the whole record.
5. The settlement, which we interpret to contain an agreement among the settling parties to propose a similar Water Cost of Capital Mechanism in subsequent cost of capital proceedings, is consistent with the law, and does not contravene or compromise any statutory provision or Commission decision.
6. The settlement is in the public interest.
7. Adoption of the settlement has no precedential status for other jurisdictional utilities or for subsequent applications by the applicants.
Financial Markets Dislocation
8. No action is required to address the financial market dislocation at this time.
Procedural
9. This order should be effective immediately.
10. This proceeding should be closed.
IT IS ORDERED that:
1. The settlement agreement (Attachment A) for California Water Service Company, California American Water Company, and Golden State Water Company with the Division of Ratepayer Advocates to implement the Water Cost of Capital Mechanism is adopted for calendar years 2010 and 2011. Within 14 days of the effective date of this decision, each company shall file a Tier 2 Advice Letter to include the mechanism in each company's preliminary statement, substantially as follows:
The Water Cost of Capital Mechanism provides an automatic adjustment, up or down, to [utility's] adopted return on equity for 2009 (and thus, its overall rate of return on rate base for 2009) for calendar years 2010 and 2011 only if there is a positive or negative difference of more than 100 basis points between the then current 12-month October 1 through September 30 average Moody's utility bond rates and a benchmark. For 2010, [utility's] initial benchmark is equal to the average interest rate of Moody's Aa utility bonds if it has an AA or A credit-rating or higher, or Moody's Baa utility bonds if [utility] has a BBB+ credit rating or lower for the period October 1, 2007 to September 30, 2008. The subsequent October 1 through September 30 average shall be based on the foregoing parameters. If the 100 basis point "deadband" is exceeded, [utility's] return on equity will be adjusted by one-half of the difference between the benchmark and the October 1 to September 30 average. In any year where the 12-month October through September average of Moody's utility bond rates triggers an automatic return on equity adjustment, that average becomes the new benchmark.
If the 100 basis point "deadband" is exceeded, [utility] will file a Tier 2 advice letter by October 15 that updates return on equity and related rate adjustments to become effective on January 1 of the following year. The advice letter would also update long-term debt and preferred stock costs to reflect actual August month-end embedded costs in that year and forecasted interest rates for variable long-term debt and new long-term debt and preferred stock scheduled to be issued. However, [utility's] capital structure, as adopted for base year 2009, shall not be adjusted. Workpapers outlining the calculations relating to the change in return on equity, long-term debt costs, preferred stock costs and resulting changes in rates to become effective on the following January 1 are required to accompany the advice letter.
2. California Water Service Company, California American Water Company, and Golden State Water Company shall meet and confer with the Division of Ratepayer Advocates on or before September 1, 2009, to agree upon a uniform source for interest rate forecasts.
3. Application (A.) 08-05-002, A.08-05-003, and A.08-05-004 are closed.
This order is effective today.
Dated July 30, 2009, at San Francisco, California.
MICHAEL R. PEEVEY
President
DIAN M. GRUENEICH
JOHN A. BOHN
RACHELLE B. CHONG
TIMOTHY ALAN SIMON
Commissioners
************** PARTIES ************** APPENDIX A ************ SERVICE LIST ***********
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David P. Stephenson |
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Paul T. Hunt |
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(End of Attachment B)
