What is Cost of Capital (CoC)?

A utility’s Rate of Return (ROR), or Cost of Capital (CoC), is the weighted average cost of debt, preferred equity, and common stock a utility has issued to finance its utility capital investments.  Cost of debt is determined by weighted average interest rates on long-term debt issuances while the cost of common stock is expressed as the Return on Equity (ROE).  ROE represents the financial return to shareholders that invest in common stock and is expressed as a percentage.  The Commission attempts to set the authorized ROE at a level that is adequate to enable the utility to attract investors to finance the replacement and expansion of its facilities so it can fulfill its public utility service obligation.  In practice, the authorized ROE level is determined in Commission proceedings by examining various financial models and estimating market returns on investments for other companies with similar levels of risk.  

R.87-11-012 established an annual CoC proceeding separate from General Rate Cases (GRCs) for the major California utilities beginning January 1, 1990.  CoC is typically determined by the Commission for the major utilities in a single consolidated proceeding. In 2008, Decision (D).08-05-035 established a multi-year Cost of Capital Mechanism (CCM) for PG&E, SCE, SDG&E and SoCalGas (the Utilities) which enabled CoC applications to be filed by the Utilities every three years, instead of annually.  The CCM provides a mechanism to automatically adjust a utility’s CoC if a certain threshold based on utility bond index rate changes is met in each year that the utility is not required to file a CoC application. 

The Utilities received a thorough review in 2012 in Decision (D.)12-12-034.  In 2015, 2016 and 2017, the utilities requested and were granted extension waivers from filing CoC applications. In 2017, the Utilities filed a joint petition to modify D.12-12-034 requesting to reduce the adopted ROE, update the cost of debt, and delay the next full Cost of Capital proceeding until 2019.  Consistent with the resulting D.17-07-005, the Utilities filed test year 2020 cost of capital applications on April 22, 2019.  These applications resulted in D.19-12-056 which set the Utilities’ cost of capital for 2020-2022.  Most recently, the Utilities filed unexpected off-cycle 2022 CoC applications, as well as the scheduled 2023 CoC applications. D.22-11-018 resolved the 2022 off-cycle applications, while D.22-12-031 adopted the cost of capital for the Test Year 2023 three-year cycle.

Cost of service regulation does not guarantee utilities will earn an authorized ROR.  A utility's actual or recorded ROR may be higher or lower than what the Commission has authorized, depending on how the utility manages its costs.  If the utility's actual costs end up lower than the costs included in the authorized revenue requirement, then the utility’s recorded ROR could be higher than its authorized ROR.  If utility actual costs are higher than the authorized amount, then the actual ROR may be lower than the authorized ROR.  This provides an incentive for utilities to efficiently manage their operating costs.

For current and historical CoC data, click here.

The Commission also establishes authorized Cost of Capital levels for small, multi-jurisdictional utilities.