You've heard talk lately about the convergence of electricity and natural gas. That idea has grown as commodity markets have matured for gas and emerged for bulk power.
Energy utilities in California will be permitted to set charges at a level high enough to earn an 11.6-percent return on equity (ROE) for 1996. Pacific Gas and Electric Co. was also awarded a separate 50-basis-point risk premium (12.01 percent) for the 70/30 debt/equity ratio associated with its natural gas pipeline expansion project.
The award reduces the ROE for all of the state's utilities except Sierra Pacific Power Co., which operated under an ROE allowance of 11.3 percent last year. Both Southwest Gas Corp. and PacifiCorp were exempted by prior order from this year's annual cost-of-capital investigation. While approving the ROE award contained in a settlement agreement in the case, the California Public Utilities Commission (CPUC) rejected a separate proposal to hold the ROE allowance to an even 10 percent to drive the utilities' market-to-book ratio to one.
The CPUC also found that the "incremental approach" of its annual ROE proceedings already provided an additional premium of between 0 and 20 basis points to compensate utility investors for risks associated with restructuring of the electric industry. The CPUC cited the "extended discussion" of the risk issue in its prior order on cost of capital for energy utilities (see Re Sierra Pacific Power Co., 158 PUR4th 217 (1994)). Re Pacific Gas & Electric Co., Applications 95-05-016 et al., Decision 95-11-062, Nov. 21, 1995 (Cal.P.U.C.).
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