Although they agreed to review next year the methodology used in calculating authorized profit levels for the energy utilities they oversee, California’s five regulators Thursday unanimously agreed to increase returns-on-equity (ROE) for the three major electric or combination utilities. The action drew a lot of commentary from the five members of the California Public Utilities Commission, which reviews the utilities’ so-called “cost-of-capital” annually at the end of each calendar year.

Pacific Gas and Electric Co. was bumped up to 11.35% for its ROE, resulting in an 8.79% return on rate base (ROR), including increasing the utility’s revenue requirements slightly by $11.8 million ($9.8 million in electricity and $2 million in its natural gas operations).

Southern California Edison, with the lowest credit rating, but the highest current market value for its stock, received a ROE increase to 11.6%, giving it an 8.77% ROR.

Sempra Energy’s San Diego Gas and Electric Co. was given a boost to 10.7% ROE, and an 8.23% ROR, keeping the ROR on the same level it was last year.

CPUC President Michael Peevey said the three utilities’ capital cost requests were handled together for “administrative ease,” but it should never be assumed it means the regulators will arrive at a common number for each company. In all cases, which is typical, the utilities sought increases bigger than what they received, he said. (PG&E’s utility sought to go from 11.22% to 11.5%; Edison wanted to go from 11.4% to 11.8% for its ROE, and SDG&E sought 12% from 10.38%.)

While supporting the upgrades, Commissioner John Bohn said he had some concerns about the “process,” noting that the use of what he called “sophisticated-looking” financial models gives the “appearance of objectivity” that might not really exist. “The models are only as good as the information that goes into them.” Bohn wants the CPUC to “do a better job” of determining how models will be used in the future.

Commissioner Geoffrey Brown concurred with his colleagues and urged that the CPUC in the future make the ROE-setting process “more civil.” Brown said in the past there has been a tendency to look at the cost-of-capital proceeding as “some sort of arms race among utilities.” He thinks there seems to be “ROE-creep” each year.

Peevey, a former president and board member in the 1980s and early 90s at Southern California Edison, reminded his colleagues that ROEs have varied from different periods, noting that Edison’s ROE was 11.6% two years ago, was reduced to 11.4% last year, and is now going back to 11.6%. “There has not been just a race to the top,” said Peevey, adding that when he was first working at Edison in the 1980s with inflation nationally being very high, the utility’s ROE was more than 16%.

“I don’t think in any way that we are being exorbitant at all.”

©Copyright 2005Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.