California Public Utilities Commission Approves Proposed Cost of Capital Decision

Source: 7/6/2023, Location: North America

San Jose Water return on equity set at 8.80%.
Water Cost of Capital Mechanism continued and increases return on equity to 9.31%.
Customers will benefit from a modest rate reduction.

The California Public Utilities Commission (CPUC) has adopted the proposed decision in the cost of capital proceeding for San Jose Water for the years 2022 through 2024.

The final decision established an 8.80% return on equity, a 5.46% cost of debt, and a capital structure of 54.55% equity and 45.45% debt resulting in an overall rate of return of 7.28%. San Jose Water was previously authorized for a return on equity of 8.90%, a 6.20% cost of debt, and a capital structure of 53.28% equity and 46.72% debt — resulting in an overall rate of return of 7.64%.

“We appreciate the commission’s thoroughness in the review of our application and its balanced outcome,” said San Jose Water Vice President of Regulatory Affairs and Customer Service John B. Tang. “We look forward to continuing to invest in our water system and delivering on our public health mission to customers and communities.”

Water Cost of Capital Mechanism
The CPUC also authorized continuation of the Water Cost of Capital Mechanism (WCCM). The WCCM provides for an adjustment in San Jose Water’s return on equity and cost of debt if the average Moody’s Aa utility bond index rate between Oct. 1, 2021, and Sept. 30, 2022, varies by more than 100 basis points when compared to the same period from the prior years. The index rate in that period increased 103 basis points, thereby reaching the WCCM threshold.

San Jose Water filed a Tier 2 Advice Letter to trigger the WCCM on June 30, 2023. On July 31, 2023, the company expects to file a Tier 1 Advice Letter to implement new rates. The new rates would be effective on the date of the filing and will reflect the WCCM-adjusted return on equity of 9.31%, a cost of debt of 5.26%, and an overall rate of return of 7.47%.

Customer Rate Reduction
Had the WCCM-adjusted rate of return of 7.47% been in effect on Jan. 1, 2023, it would have lowered the revenue requirement by $400,000. Therefore, customer rates will be reduced to reflect the applicable portion of the $400,000 prospectively as of July 31, 2023.

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