DRA Finds Edison’s Cost of Capital Request is Out of Line with Today’s Market and Unfair to Customers

SAN FRANCISCO, August 7, 2012 – The Division of Ratepayer Advocates (DRA), the independent consumer advocate within the California Public Utilities Commission (CPUC), on Monday presented evidence in the CPUC’s proceeding on Cost of Capital, finding that Southern California Edison’s (Edison) request for an 11.10% Return on Equity far exceeds both the company’s revenue needs and market standards.

DRA recommends that the appropriate Return on Equity (“ROE,” or the revenue that shareholders can expect to earn on their investment) should be 8.75%, which would result in a $211 million annual savings to Edison’s customers. [See Cost of Capital Comparison Chart]

In April 2012, Edison submitted its request to the CPUC to reduce its ROE from 11.5% to 11.10%.  The CPUC’s Cost of Capital proceeding will determine the ROE that Edison can earn, ultimately impacting its Rate of Return.  However, DRA’s analysis finds that Edison’s requested ROE is too high by today’s market conditions, given that interest rates are currently at low levels and cost of capital rates have significantly declined since the CPUC’s last Cost of Capital proceeding in 2007.

DRA’s conclusions are based on three financial models used to compute ROE, using current interest rates, risk premium, and reasonable growth forecasts.  Even a nationwide market analysis comparing Edison’s request to thirty four electric utilities demonstrates that Edison’s ROE request of 11.10% far exceeds the median ROE of 9.9% of the thirty four comparable investor owned utilities.

“While DRA does not object to Edison’s proposed capital structure or forecasted cost of long-term debt, it is unwarranted for Edison to charge its customers a Rate of Return for its investors that is out of line with the current market conditions,” said Joe Como, DRA’s acting director.  “Edison should be passing those hundreds of millions of dollars in savings onto its customers.”

The CPUC has consolidated the Cost of Capital proceeding across the state’s four largest investor owned utilities.  The CPUC will hold evidentiary hearings in the Cost of Capital case in September 2012, and it is expected to issue its final decision by the end of the year.


For more information please visit DRA’s Cost of Capital webpage.