The California Public Utilities Commission (CPUC) determines a water utility’s Rate of Return (ROR) in Cost of Capital (CoC) proceedings. ROR represents the weighted average cost of debt, preferred equity, and common stock that a utility uses to finance capital investments. The cost of debt is determined by the weighted average interest rate on long-term debt. In contrast, the cost of common stock is reflected in the Return on Equity (ROE) – the financial return to shareholders expressed as a percentage.
The CPUC sets the authorized ROE at a level sufficient to attract necessary investment while also ensuring customer rates are just and reasonable. In practice, the Commission determines the authorized ROE level in proceedings by examining financial models and estimating market returns on investments for other companies with similar risk levels. The Public Advocates Office intervenes in the proceedings to ensure water utilities are not granted higher ROEs that would increase shareholders’ profit and raise customer bills more than necessary.
CPUC typically determines a COC for class-A investor-owned water utilities within two distinct proceedings:
- COC for large class-A water utilities: California Water Service Company, California American Water Company, San Jose Water Company, and Golden State Water Company
- COC for small class-A water utilities: Liberty Utilities, Suburban Water Systems, San Grabriel Valley Water Company, and Great Oaks Water Company
Below you can find a schedule and links to testimony.
