CPUC Allows Higher Rates of Return for Utilities

By Published On: December 16, 2005

Despite differences over whether utilities’ rates of return on investments were too high, the California Public Utilities Commission voted to allow returns on equity of between 10.7 percent and 11.6 percent for 2006. Two commissioners questioned the levels of return on investments. Commissioner Geoffrey Brown said it seems that utilities are engaging in rate-of-return “creep.” “At the end of the day, we want a return that encourages investment,” said commissioner John Bohn. He questioned the mechanisms for figuring out what rates of return to grant utilities. He said it was time to take another look at the models “introduced 20 years ago.” Although the models appear to be objective, that “can be illusory,” Bohn said, because they are only as good as their inputs. Commission president Mike Peevey responded that the rates of return are not that high given that the Federal Reserve Bank has been increasing interest rates. “I don’t think we’re in any way being exorbitant here,” he said. The rates of return for 2006 are as follows: ? Southern California Edison was granted its 11.6 percent return on equity request, resulting in an 8.77 percent return on rate base. Its long-term debt is authorized at 43 percent of its capital structure, common equity at 48 percent, and preferred stock at 9 percent. ? Pacific Gas & Electric’s authorized return on equity is 11.35 percent, resulting in an 8.79 percent return on base rate. Long-term debt is authorized at 46 percent of its capital structure, common equity at 52 percent, and preferred stock at 2 percent. ? San Diego Gas & Electric’s approved rate of return on equity is 10.7 percent, resulting in an 8.23 percent return on rate base. Long-term debt is authorized at 45.25 percent of its capital structure, common equity at 49 percent, and preferred stock at 5.75 percent. “Our adopted return on equity should be sufficient to provide a margin of safety for payment of interest and preferred dividends, to pay a reasonable common dividend, and to allow for some money to be kept in the business as retained earnings,” stated the decision.

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