Utilities Set for Slightly Lower Investment Returns

By Published On: November 30, 2012

Utility interest rates on their investments are set to decline next year--not by much, but by more than sought. If the California Public Utilities Commission approves a proposed decision next month, utilities’ return on the equity portion of their investments would decline as follows: -Pacific Gas & Electric 10.4 percent, down from the current 11.35 percent; -San Diego Gas & Electric 10.3 percent, down from 11.1 percent; -SoCal Gas 10.1 percent, down from 10.82; and, -Southern California Edison 10.4 percent, down from 11.5 percent. The commission has “been approached by Wall Street” about regulatory reliability, said commissioner Tim Simon Nov. 29. The average return on equity for electric utilities across the nation is 10.36 percent. For gas utilities it’s 9.75 percent, according to the proposed decision. The reduction is expected to translate to savings of $2.20/month in Edison territory for utility ratepayers, down to as little as 16 cents/month for SoCal Gas. “Utilities are concerned that a lower return on equity could potentially harm their credit profile and increase their cost of capital during a time when they need to spend substantial amounts on capital investment projects,” notes the proposed decision. “We’ve been approached by Wall Street,” said commission member Tim Simon Nov. 29. Still, the decision found those concerns, “without merit.” PG&E and Edison have the lowest credit ratings of the bunch, at BBB from Standard & Poor’s. SoCal Gas and SDG&E’s ratings are A, according to the commission. Utilities also argued for a higher rate of return because investors shy away from them due to “regulatory lag.” “No party presented any evidence to substantiate that regulatory lag does not exist in other states” nor that the risk is anything new or different in California, the decision states. About half of what utilities are allowed to invest is from equity. Debt and common stock have slightly lower rates of return.

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