2017 Cost of Capital Application
On April 3, 2017, Cal Water filed Application (A.) 17-04-006 with the California Public Utilities Commission (CPUC) to increase rates to establish its authorized Cost of Capital (CoC) for the period of Jan. 1, 2018 through Dec. 31, 2020. For 2018-2020, Cal Water’s application requests an increase in the rate of return of 8.31% from the current rate of 7.94%. Overall, the proposed changes to the cost of capital would increase Cal Water’s currently authorized revenues statewide by $9,296,200 (1.43%). Rates would increase beginning January 1, 2018.
On March 22, 2018, the CPUC adopted a decision in the cost of capital proceeding for Cal Water and three other water utilities for the years 2018-2020, establishing for Cal Water a 9.20% return on equity and a 5.51% cost of debt, with a capital structure of 46.60% long-term debt and 53.40% common equity, and an authorized return on rate base of 7.48%, compared with Cal Water’s prior return on equity of 9.43%, cost of debt of 6.24%, and authorized return on rate base of 7.94%. The adopted capital structure did not change.
The adopted returns on debt and equity will reduce Cal Water’s 2018 adopted revenue by approximately $6 million, of which $4.5 million is estimated to be driven by our lower cost of debt (which is a pass-through cost) and $1.5 million is estimated to be a reduction of return on equity for stockholders. The Commission also authorized continuation of the Water Cost of Capital Mechanism (WCCM), which provides for an adjustment in the return on equity if the cost of long-term debt as defined by an index of utility debt rates varies from the most recent index by 100 basis points or more in 2019 and 2020.
What is Cost of Capital?
All utilities, whether public or private, must obtain funding to finance the cost of infrastructure improvements and repay debt. This ensures funds are available to make infrastructure improvements, so water mains, wells, pumps, tanks, treatment systems, and other parts of the water system continue to provide a safe, reliable water supply. Cal Water proposes a financing structure in its CoC application that includes the amount of return needed to attract investors and secure long-term debt (loans and financial obligations longer than one year). As the agency regulating Cal Water, the CPUC is tasked with ensuring the CoC is reasonable.