Small Class A Water Utilities Cost of Capital 

Background 

For the years 2013 to 2015, three of California’s small investor owned water utilities – Park/Apple Valley, Suburban and San Gabriel Valley Water (SGVW) - requested the CPUC to authorize increases to their return-on-equity (ROE) to over 11%. Great Oaks Water Company has requested to maintain its ROE of 10.20%.  The ROE determines the amount of profit that the utilities have the opportunity to earn on their utility investments.   

See Summary of utility requests. 

On November 28, 2012, ORA entered into to a Settlement with Park Water/Apple Valley Ranchos, Suburban Water, San Gabriel Water and Great Oaks to lower their Return on Equity (ROE) from 10.20% to 9.79%.  The 0.41% reduction in the ROE will result in rate reductions for ratepayers served by these utilities. 

 

 

 

Utility 

Utility Request     ROE      

Adopted ROE 

Adopted ROR* 

Annual Revenue Requirement Increase/(Decrease) 

Park Water /
Apple Valley Ranchos 
  

11.95% 

9.79% 

9.70% 

 $               (446,607) 

Suburban Water    

11.25%  

9.79% 

8.49% 

 $               (405,924) 

San Gabriel Water    

11.60%  

9.79% 

8.61% 

 $            (3,678,173) 

Great Oaks Water    

10.20%  

9.79% 

9.10% 

 $                 (30,110) 

         

* Rate of Return includes the cost of utility long-term debt and preferred stock. 

 

On May 23, 2013, the CPUC issued a Decision adopting the Settlement. 

 

ORA Position 

ORA supported the CPUC-adopted settlement because it results in lower equity returns than requested by the small water utilities, and will reduce revenue requirement for the various utilities from $30,000 to over $3.6 million annually. The CPUC-adopted settlement because it results in lower equity returns than requested by the small water utilities, and will reduce revenue requirement for the various utilities from $30,000 to over $3.6 million annually. ORA’s analyses found that:  

  • Capital cost (debt and equity) are at historically low levels. 
  • Bond yields, dividend and earnings growth rates, and risk profiles demonstrate that the required returns on water utility stocks have declined over the past three years. 
  • The capital structures for each of the utilities should be adjusted to be more in line with the capital structure of publicly traded water utilities.  
  • There are numerous regulatory mechanisms in California, such as balancing and memorandum accounts, that protect water utilities from a wide variety of risks. 

See ORA table for basis of ORA’s recommendations. 

See ORA’s August 27, 2012 Testimony.

»See ORA Report on California Regulatory Environment for Class A Water Utilities. 

 

Current Proceeding Status 

See the proceeding docket.

 

Other Resources

See Cost of Capital page for larger water companies