California Public Utilities Commission adopts cost of capital proposed decision

The California Public Utilities Commission has approved the proposed decision issued in the cost of capital application for California Water Service and three other utilities from July 2023 through the end of 2024. The decision originally established a 9.05% return on equity and 4.23% cost of debt for Cal Water, with a capital structure of 53.40% common equity and 46.60% long-term debt, and an authorized rate of return of 6.80%, effective July 31, 2023. However, the decision affirms and retains the Water Cost of Capital Mechanism, which automatically adjusts the rate of return when the Moody’s Utilities Bond Index fluctuates between cost of capital applications. Because the Index changed in 2022, triggering the WCCM, Cal Water intends to file for and-if approved-implement new rates based on an authorized 9.57% return on equity, with a 4.23% cost of debt and an authorized rate of return of 7.08%. Cal Water’s previous return on equity was 9.20%, with a cost of debt of 5.51% and authorized rate of return of 7.48% for the period of January 2018 to July 30, 2023. The 40 basis-point reduction from Cal Water’s current rate of return of 7.48% is expected to decrease annual operating revenue by approximately $7M, or less than 1%. This estimate may be impacted once the 2021 General Rate Case is finalized. It is the net impact of an approximately $11M decrease driven by the utility’s lower cost of debt, partially offset by an approximately $4M increase for the return on equity.