Southern California Edison Company ) Docket No. ER ANSWER OF SOUTHERN CALIFORNIA EDISON COMPANY TO PROTEST TO COMPLIANCE FILING

Transcription

1 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Southern California Edison Company ) Docket No. ER ANSWER OF SOUTHERN CALIFORNIA EDISON COMPANY TO PROTEST TO COMPLIANCE FILING Southern California Edison Company ( SCE ) submits this answer to the protest of M-S-R Public Power Agency ( M-S-R ) to SCE s September 2, 2011 compliance filing ( Compliance Filing ) in the above-captioned docket. M-S-R admits that SCE s filing complies with the Commission s August 2, 2011 order, 1 and does not oppose its acceptance. 2 SCE s compliance filing should be accepted. Rule 213(a)(2) of the Commission s regulations normally prohibits responses to protest. However, the Commission has made it clear that it will waive this rule and allow responses when they ensure a complete and accurate record in the case. 3 The Commission also will waive application of this rule when an answer will assist the 1 Southern California Edison Co., 136 FERC 61,074 at P 8 n.1, P M-S-R Protest at P 9. 3 See, e.g., Delmarva Power & Light Co., 93 FERC 61,098 at 61,259 (2000) (allowing answers to a protest in order to insure a complete and accurate record ); N. Natural Gas Co., 91 FERC 61,212 at 61,767 n.10 (2000) (allowing an answer to a protest to achieve a complete and accurate record ); Southern California Edison Co., 136 FERC 61,074 at P 26 (2011).

2 Commission in addressing the issues raised by a protest. 4 SCE s Answer achieves both of these goals. I. SCE S SEPTEMBER 2, 2011 FILING COMPLIES WITH THE COMMISSION S AUGUST 2, 2011 ORDER In the compliance phase of a proceeding, the only issue that may be raised is whether the company has complied with the Commission s directive. 5 Plainly, SCE has done so. SCE submitted its compliance filing in compliance with the Commission s August 2, 2011 order in this proceeding. That order directed SCE to revise the Base rate of return on equity ( ROE ) in its formula rate to reflect the use of the median, which, as the Commission noted in its order, SCE s analysis showed was 9.93 percent. 6 On September 2, 2011, SCE submitted a filing to the Commission revising the Base ROE in its formula rate to 9.93 percent. Thus, SCE did exactly what the Commission directed it to do. M-S-R admits in its protest that SCE s filing is technically in compliance with the Commission s August 2, 2011 order. 7 In addition, MSR makes no arguments that SCE s filing is not in compliance, technically or otherwise, with the Commission s order. 4 See, e.g., Carolina Power & Light Co., 93 FERC 61,032 at 61,068 (2000) (allowing an answer to protests where the answer would assist in the Commission s understanding and resolution of the issues raised ); Int l Transmission Co., 92 FERC 61,276 at 61, (2000) (accepting an answer to protests where the answer assists in the Commission s understanding and resolution of the issues in this proceeding ). 5 Ameren Services, Inc., 119 FERC 61,098 at PP (2007). 6 Southern California Edison Co., 136 FERC 61,074 at P 8 n.1, P M-S-R Protest at P

3 To the contrary, M-S-R admits that the purpose of its filing is to highlight its continuing concerns with SCE s ROE, not whether SCE has complied with the Commission s order. 8 M-S-R's generalized ROE concerns are irrelevant to the issue before the Commission in this compliance sub-docket. SCE s filing is plainly in compliance with the Commission s August 2, 2011 order, and no party contends otherwise. As such, the compliance filing should be accepted. II. M-S-R S ARGUMENT IS AN UNTIMELY REQUEST FOR REHEARING OF THE COMMISSION S AUGUST 2, 2011 ORDER In addition to being presented in the wrong forum, M-S-R s argument is an untimely request for rehearing of the Commission s August 2, 2011 order. That order summarily resolved the issue of what Base ROE SCE would be permitted to use. Specifically, the Commission stated that SCE s ROE analysis resulted in a median of 9.93 percent, and directed SCE to use the median, rather than the midpoint, as its Base ROE. SCE disagreed with that ruling, so it sought rehearing, which the Commission denied by order issued October 5, If M-S-R disagreed with that ruling, it should have sought rehearing as well. Instead, M-S-R is challenging the 9.93 percent Base ROE through its September 22, 2011 protest. But M-S-R does not in fact protest SCE s filing. Instead, M-S-R s protest is a late-filed request for rehearing of the Commission s determination that SCE s Base ROE should be established at 9.93 percent, the median. 8 Id. 9 Southern California Edison Co., 137 FERC 61,016 (2011)

4 Requests for rehearing of that ruling were due on September 2, M-S-R s late-filed request for rehearing cannot be entertained. The Federal Power Act ( FPA ) requires parties aggrieved by a Commission order to seek rehearing of an order within thirty days after the issuance of such order. 10 This statutory requirement may not be waived by the Commission or the courts. 11 In Mississippi Delta Energy Agency, the Commission rejected a request for rehearing of its order accepting a compliance filing over a protest. The Commission stated: Under Section 313(a) of the FPA, a request for rehearing must be filed within 30 days after issuance of a final order in a proceeding. The Commission and federal courts have firmly established that the 30-day time period is jurisdictional and cannot be waived. Thus, we have routinely dismissed filings that are, in essence, untimely requests for rehearing. We will do the same here. 12 The Commission explained that: In the June 11 Order, we clearly ordered Entergy to refund transmission credits and provide interest on those credits between July 4, 2004 and October 4, Entergy s Refund Report merely complied with this directive, and provided interest to MDEA during the timeframe established by the Commission. Had MDEA wanted to challenge the Commission s decision regarding interest, it should have filed U.S.C. 825l(a) (2000 and Supp. 2005). 11 See, e.g., Cities of Campbell and Thayer v. FERC, 770 F.2d 1180, 1183 (D.C. Cir. 1985) (holding that the thirty-day time requirement of this statue is as much a part of the jurisdictional threshold as the mandate to file for a rehearing ) (citations omitted); ISO New England Inc., 121 FERC 61,125 at 61,553 (2007) (denying as untimely a request for rehearing filed more than thirty days after the relevant order [b]ecause the 30-day rehearing deadline is statutory [and thus,] cannot be extended ) FERC 61,277 at P 9 (2008) (citations omitted)

5 a request for rehearing of the June 11 Order, which would have been due on or before July 11, Neither MDEA s protest of the Refund Report nor its current request for rehearing of the Order on Refund Report meets this deadline. Accordingly, we will reject MDEA s request for rehearing as untimely. 13 Similarly, in Midwest Independent Transmission System Operator, Inc., the Commission denied a request for clarification filed more than thirty days after the relevant order because it found that the request was: in essence, an untimely request for rehearing. The courts have repeatedly recognized that the time period within which a party may file an application for rehearing of a Commission order is statutorily established at 30 days by section 313(a) of the Federal Power Act and that the Commission has no discretion to extend that deadline. Accordingly, the Commission has long held that it lacks the authority to consider requests for rehearing filed more than 30 days after issuance of a Commission order. 14 Likewise, in this case, the Commission should dismiss M-S-R s protest as an untimely request for rehearing. III. M-S-R S ARGUMENTS REGARDING SCE S BASE ROE ARE WITHOUT MERIT In addition to being in the wrong forum and constituting an untimely request for rehearing, M-S-R s arguments regarding SCE s Base ROE are without merit. As M-S-R notes, M-S-R made these same arguments in its intervention papers filed on June 24, SCE responded to those arguments in its July 11, 2011 answer to M-S-R s June 13 Id. at P 10 (citation omitted) (emphasis added) FERC 61,202 at P 6 (2007) (citations omitted)

6 24, 2011 intervention, and no purpose would be served in repeating that response here. For the Commission s convenience, the portion of SCE s July 11, 2011 answer that addresses cost of capital issues is attached. IV. CONCLUSION M-S-R has offered no reason why SCE s compliance filing should not be accepted, nor does it or any other party oppose its acceptance. SCE s compliance filing complies with the Commission s August 2, 2011 order and should be accepted. Respectfully submitted, /s/ Gary A. Morgans Gary A. Morgans Steptoe & Johnson LLP 1330 Connecticut Avenue, NW Washington, DC Anna Valdberg Southern California Edison Company 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California Attorneys for Southern California Edison Company October 7,

7 CERTIFICATE OF SERVICE I hereby certify that I have this day served the foregoing document upon each person designated on the official service list compiled by the Secretary in this proceeding. Dated at Washington, D.C. this 7 th day of October, /s/ Gary A. Morgans Gary A. Morgans Steptoe & Johnson LLP 1330 Connecticut Avenue, N.W. Washington, DC (202) Attorney for Southern California Edison Company

8 ATTACHMENT

9 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Southern California Edison Company ) Docket No. ER MOTION FOR LEAVE TO RESPOND AND RESPONSE OF SOUTHERN CALIFORNIA EDISON COMPANY Anna J. Valdberg Erin Moore Gary Chen Southern California Edison Company 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, CA Gary A. Morgans Steptoe & Johnson LLP 1330 Connecticut Avenue, NW Washington, DC Attorneys for Southern California Edison Company July 11, 2011

10 orders. 133 Because rehearing orders can be issued in conjunction with a stay should the Commission choose to do so, 134 final resolution must mean following a final Commission order that is no longer subject to rehearing. 135 SCE submits that the language is appropriate as drafted. VIII. SCE S PROPOSED COST OF CAPITAL IS JUST AND REASONABLE SCE submitted the testimony of Dr. Paul T. Hunt in support of its requested return on equity ( ROE ). To perform his analysis, Dr. Hunt assembled a comparable group that was screened using the factors that the Commission employed in determining SCE s ROE in its April 15, 2010 Order in SCE's 2008 CWIP proceeding. 136 He developed a range of reasonableness of 7.72 percent to percent based on this comparable group. Dr. Hunt recommended that the Commission use the midpoint (12.02 percent) rather than the median (9.93 percent) of the range of reasonableness in order to determine where to set SCE s base ROE within that range, and showed that SCE s proposed base ROE does not exceed the midpoint of the range of reasonableness for the comparable group. He also showed that the requested base ROE, in combination with the 133 Six Cities Protest at U.S.C. 825l(c) (2006); see also Philadelphia Elec. Power Co. v. FPC, 156 F.2d 648, 649 (1946). 135 See 16 U.S.C. 825l(a) (2006). 136 S. Cal. Edison Co., 131 FERC 61,020 ( April 15th Order ). 55

11 incentives previously approved by the Commission, does not exceed the top end of the zone of reasonableness. 137 A. Midpoint vs. Median The intervenors contend that Dr. Hunt s use of the midpoint of the range of reasonableness is contrary to the April 15 th Order and that the Commission should summarily reject SCE s use of the midpoint. 138 The intervenors objections to SCE s use of the midpoint, however, do not warrant summary resolution of this issue in this docket, as the intervenors request. SCE recognizes that the Commission followed this approach in Potomac-Appalachian Transmission Highline, L.L.C., 133 FERC 61,152 at P 65 (2010). However, just as [t]he question of which companies should be included in a proxy group is properly resolved based on the facts and circumstances of each case, 139 the resolution of the midpoint vs. median issue here depends upon the record developed in this case. In this case, Dr. Hunt has provided extensive testimony based on the facts present in this case that support the use of the midpoint: 137 Exh. SCE-300 at See, e.g., Six Cities Protest at 9. The April 15th Order governed the outcome of Docket Nos. ER and ER10-160, per the Commission s order in S. Cal. Edison Co., 129 FERC 61,304 (2009), but is not controlling here, as Six Cities allege. It is one Commission decision among many on the midpoint vs. median issue, and its applicability depends upon the facts presented. 139 Atlantic Path 15, 133 FERC 61,153 at P 14 (2010). 56

12 Dr. Hunt excludes unreasonable DCF results from the range of reasonableness, which is 7.72% to 16.32%. 140 This is a narrower range than that at issue in PATH. Under the facts of this case, SCE s approach negates the Commission s concerns about excessively high or low ROE estimates driving the midpoint. Dr. Hunt demonstrates that when the distribution of ROE estimates is skewed, the midpoint estimate provides a more reliable representation of the range of data, when compared with the median. 141 He shows that in this case the distribution is positively skewed, in contrast to the group in Northwest Pipeline (relied upon by the April 15th Order, 131 FERC 61,020 at P 87). Dr. Hunt demonstrates that the use of the median in this case discriminates against SCE as compared to other RTO members that seek an ROE as part of an RTO-wide filing. 142 He shows that this results in an ROE reduction of 209 basis points in this case as compared to the ROE that the Commission would award to SCE as part of an RTO filing. Dr. Hunt also provides other record evidence that supports use of the midpoint. He demonstrates that [o]ne of the most fundamental features of any DCF analysis is to develop a range of reasonable returns within which the ROE for the individual utility or utilities under consideration will be set, 143 and that the use of the median completely ignores the range of reasonable returns. 144 He provides a table 140 Exh. SCE-300 at Id. at Id. at Id. at Id. 57

13 showing how the use of the median results in the same ROE for very different ranges of data. This evidence supports the use of the midpoint, whereas the intervenors have provided no evidence in support of their positions. The intervenors arguments, moreover, do not justify the use of the median. Several parties cite the Commission s April 15 th Order as controlling precedent on the issue, but as noted above this is a matter for case by case resolution, and the evidence here justifies the use of the midpoint. SCE has sought rehearing of the April 15th Order with respect to the midpoint vs. median issue, so the issue is far from settled with respect to SCE. 145 The Six Cities also asserts that the use of the median in the April 15 th Order is consistent with a line of Commission cases applying the policy of basing ROE levels on the median, as opposed to the midpoint, of proxy group results for more than a decade, both in the electric and gas context. 146 This statement is untrue, because while the Commission has used the median in gas cases for more than a decade, it has not done so in electric cases. This is significant, because the Commission has recognized the differences between the gas and electric industries in its ROE policies. 147 Many, if not most, electric cases during the past decade have used the midpoint, not the median, for 145 SCE recognizes that a petition for rehearing does not operate as a stay of the order from which rehearing is sought. As discussed in the text, however, the facts here, in SCE s view, justify the use of the midpoint. 146 Six Cities Protest at See S. Cal. Edison Co., Opinion No. 445, 92 FERC 61,070 at 61, (2000); Sys. Energy Res., Inc., Opinion No. 446, 92 FERC 61,119 at 61, (2000), reh g denied, 96 FERC 61,165 (2001). 58

14 setting the ROE. 148 The Commission noted these cases in its April 15th Order, but distinguished them on the ground that the midpoint vs. median issue was not specifically raised by the parties or addressed by the Commission. 149 However, the fact that the use of the midpoint was so well established that in the cited cases neither the parties nor the Commission even paused to comment on its use is not a basis for distinguishing the cases. On the contrary, the long-used presumption unchallenged and unquestioned by any of the parties or the Commission in these cases that the midpoint is the correct methodology for calculating ROE only adds force to the strength of the precedent in favor of this methodology. Under these circumstances, SCE believes that the use of the midpoint in this proceeding is just and reasonable. At a minimum, the intervenors have not demonstrated that the issue should be summarily decided in their favor. B. The ROE Should Not Be Adjusted Due to SCE s Use of Formula Rates The CPUC and M-S-R argue that SCE s replacement of its stated rates with formula rates reduces SCE s risks, which should be reflected in its ROE. 150 The CPUC argues that SCE should be required to compile a proxy group composed of utilities 148 See, e.g., Norwalk Power, 120 FERC 61,048 (2007); Bridgeport Energy, LLC, 112 FERC 61,077 (2005); Milford Power Co., LLC, 110 FERC 61,299, reh g denied on other grounds, 112 FERC 61,154 (2005); ISO New England, Inc., 108 FERC 61,272 (2004); Allegheny Power, 103 FERC 63,001 (2003), aff d, Opinion No. 469, 106 FERC 61,241 (2004) (subsequent history omitted); N. Ind. Pub. Serv. Co., 101 FERC 61,394 (2002); Consumers Energy Co., Opinion No. 456, 98 FERC 61,333 (2002); S. Cal. Edison Co., 92 FERC 61,070 (2000); Sys. Energy Res., Inc., Opinion No. 446, 92 FERC 61, April 15th Order at P CPUC Request at 12-14; M-S-R Motion at

15 operating under formula rates, and that its allegedly reduced risk should be taken into account in deciding where to place SCE within the zone of reasonableness. M-S-R argues that SCE s ROE should be placed at the lowest end of the zone of reasonableness due to its use of a formula rate. 151 No matter. The Commission s policies for determining the selection of a proxy group, and where to place the ROE within the zone of reasonableness, have not depended on whether or not the filing utility used a formula rate. For example, in Virginia Electric and Power Co., 123 FERC 61,098 (2008), which involved the determination of an ROE for a company switching from a stated rate to a formula rate, the Commission did not make the adjustments that the CPUC and M-S-R urge. This policy is consistent with the underlying risks involved. While a formula rate relieves a utility from the burden of having to file annual rate cases, it also puts the utility at risk for reduced revenues when its costs decline. In this situation, it loses the opportunity to earn higher returns to offset the risks associated with regulatory disallowances. Further, to the extent formula rates reduce risk, this would be reflected in the utility s bond rating, which is taken into account when selecting the proxy group. The CPUC s and M-S-R s adjustments should be rejected. 151 M-S-R Motion at

16 C. The Intervenors Other Arguments Regarding SCE s Proposed ROE Are Erroneous and Should Be Rejected The Protesting Parties present a series of arguments regarding other issues related to SCE s proposed ROE. These arguments are erroneous and should be rejected as well. 1. Response to CPUC CPUC argues that because SDG&E s formula rate contains a lower ROE than SCE s proposed ROE, that SCE s proposed ROE is too high. 152 This argument is without merit. The ROE set forth in SDG&E s formula rate was agreed to as part of a settlement. SDG&E s settlement covered a variety of issues regarding SDG&E s formula rate, not just ROE. In addition, the fact that a settlement provision works for SDG&E does not mean that it works for SCE, because the characteristics and risks of the two systems are quite different. Finally, the CPUC itself has consistently authorized lower ROEs for SDG&E than for SCE, indicating that the CPUC itself views SCE as a higher risk entity Response to M-S-R M-S-R points out an apparent inconsistency between the period of Dr. Hunt s DCF analysis, October 2010 through March 2011, and the time period of 152 CPUC Request at The current CPUC-authorized ROEs for SCE and SDG&E are 11.50% and 11.10%, respectively. (CPUC Decision No , Ordering Paragraphs 1 and 2; these authorized ROEs have continued through 2011.) In the recent past, the difference between the two ROEs has been greater. For example, in 2006 and 2007, the CPUC-authorized ROEs for SCE and SDG&E were 11.60% and 10.70%, respectively. (CPUC Decision No , Ordering Paragraphs 2 and 3, as corrected by CPUC Decision No ). 61

17 Dr. Hunt s bond yield data, April 2010 through September Actually, Dr. Hunt s bond yield data are for the same period, as can be seen in page 13 of Exhibit SCE-301, as the six-month historical period averages of 5.47 percent for A bonds and 5.94 percent for Baa bonds are the averages over the October 2010 through March 2011 period. M-S-R s claims that Dr. Hunt incorrectly screened his proxy group are baseless. 155 Regarding the number of analysts covering Cleco Corporation, Dr. Hunt s data show that at the end of March 2011, six analysts were following Cleco Corporation. Dr. Hunt based his count on the number of analysts providing earnings estimates for the current year since it is the best measure of the total number of analysts who follow the company. M-S-R s claim that Avista Corporation should be included in Dr. Hunt s proxy group 156 is incorrect, as Avista s credit rating was not raised to BBB until March 2, It is not reasonable to include Avista Corporation in the proxy group when it possessed a qualifying credit rating for less than one-sixth of the historical period. M-S-R complains that Dr. Hunt s market-to-book analysis is invalid 157 because Dr. Hunt used Edison International s market-to-book ratio as a proxy for SCE s. However, Dr. Hunt needed to do this because SCE s common stock is not publicly traded and no SCE market-to-book ratio is available. M-S-R also argues that there is circularity because the market-to-book ratio and retention ratio depend on regulatory decisions. There may be merit to this argument, 154 M-S-R Motion at Id. at Id. 157 Id. at

18 in which case the Commission should consider the same analysis conducted on SCE s proxy group, which does not present the circularity concerns suggested by M-S-R. The market-to-book analysis ROE estimates, using the proxy group s market-to-book ratio and retention ratio, are percent, corresponding to the median estimate of 9.93 percent, 158 and percent, corresponding to the midpoint estimate of percent. 159 Regarding M-S-R s preliminary independent DCF analysis, the Commission should note that M-S-R s analysis shows a midpoint ROE estimate of percent, which supports SCE s ROE recommendation in this docket. 160 However, M-S-R provides no details about the analysis other than a one page summary attached to its pleading. Thus, there is insufficient detail to determine whether there are errors in M-S-R s analysis. For example, as noted above, Avista Corporation should be excluded from M-S-R s analysis, since it was rated BBB for less than one-third of the historical time period that M-S-R used. 3. Response to SWC Many of SWC s comments about ROE have been addressed above, so SCE does not repeat its responses here. However, SWC s claim that SCE should have excluded Exelon Corporation from its proxy group is incorrect, 161 as SCE s historical DCF period spanned October 2010 through March 2011, and the Exelon-First Energy 158 Exh. SCE-301 at 3: Exh. SCE-301 at 2: M-S-R Motion, Appendix A. 161 SWC Motion at

19 merger was not announced until late April 2011, which is outside of SCE s historical period. 4. Response to SWP SWP notes that SCE has based its ROE on the midpoint in the event the Commission or a court reverses its earlier determination on this issue, but argues that SCE s disregard of Commission precedent does not withstand scrutiny. 162 At the same time, SWP acknowledges that unless SCE files its rates in this manner, it would irretrievably lose revenues if the Commission or a court reverses the Commission s earlier determination. SWP is free to take a contrary position on the merits, but SCE is entitled as a matter of law to structure its filing in this manner, and to ultimately use the midpoint in its rates in this proceeding if the Commission s earlier determination is reversed, and the Commission therefore determines (or is required) to use the midpoint in this case. SWP argues that even the median DCF estimate is too high and that the Commission should revise it downward because of the economic downturn. 163 SWP s argument is at odds with the economic facts, as the U.S. economy has been growing since June If anything, the Commission should reverse SWP s argument and grant an 162 SWP Motion at Id. at The official arbiter of when recessions begin and end is the Business Cycle Dating Committee of the National Bureau of Economic Research. In September 2010, the Committee determined that the economy had reached a trough in June 2009 and that a recovery began in that month. See In addition, one can consult data produced by the Bureau of Economic Analysis, U. S. Department of Commerce. Its June 24, 2011 news release (Continued...) 64

20 ROE that is higher than the current DCF estimate, because as the economy continues to expand, capital will become more scarce and investors will demand higher returns than at present. D. The Formula Rate Calculation of the Cost of Debt Is Just and Reasonable M-S-R complains that it cannot locate any testimony that explains SCE s calculation of long-term debt in Schedule Dr. Hunt explains the calculations in Schedule 5 on pages 3-9 of his Direct Testimony. M-S-R references a Commission order from 2001, arguing that it requires the use of the gross proceeds of debt in determining capital structure. 166 Exhibit SCE- 302, however, provides a clear example that demonstrates why the use of gross proceeds will cause SCE to underrecover its capital costs. SCE s situation is similar to a homeowner who takes on a mortgage to buy a house and finances points and other mortgage costs from the amount borrowed. The mortgage balance the homeowner owes includes the cost of the points; however, the funds the homeowner has to invest in his home is the total mortgage balance minus these costs. Similarly, the utility only receives the net proceeds (the bond s face value less financing costs) to invest in rate base. Thus, rate base is based on net proceeds, and it would be inconsistent to base the cost of capital on the Gross Domestic Product ( GDP ) shows that real GDP has grown for the last seven quarters. See Table 1 in SWP Motion at M-S-R Motion at

21 on gross proceeds. As SCE s exhibit has shown, this inconsistency will lead to a result that unfairly penalizes investors. According to standard utility ratemaking, the costs associated with debt and preferred equity issuance cannot be expensed, but only amortized over time. 167 Because of this, only the net proceeds method employed by SCE will correctly estimate SCE s cost of debt, preferred equity, and capital structure. It is instructive to review the precursor to the Commission order cited by M-S-R. M-S-R cited Opinion No. 446-A, which was an order denying rehearing. The original opinion was Opinion No In this opinion, the Commission rationalized use of the gross proceeds because [the gross proceeds] reflects the company s total obligation with respect to long-term debt. 169 However, the gross proceeds are the obligation of the company when debt issues mature. At the maturity of a bond issue, the expenses and other costs of debt issuance are fully amortized so that the net proceeds calculation for that particular issue will equal the gross proceeds of the issue. The fact that costs of debt issuance are amortized over time is based on the fact that the bond represents a deferred obligation. By failing to recognize that bond and preferred equity issues permit the company to defer payments, the opinion cited by M-S-R fails to recognize an important point that explains why the gross proceeds method is not accurate. 167 This regulatory treatment presumes, in effect, that these costs are financed. If the costs cannot be expensed and recovered in rates in the year they are incurred, they must be paid for with borrowed funds. 168 Sys. Energy Res., Inc., 92 FERC 61,119 (2000). 169 Id. at 61,

22 The other issue raised by M-S-R concerns SCE s exclusion of debt issued to finance fuel inventories; this issue is also raised by Six Cities. 170 Both argue that debt of the company, regardless of purpose, must be counted because it is fungible. However, this is not true. Dr. Hunt s testimony clearly states that the proceeds of the Series 2009B bonds cannot be used to finance operating expenses or capital additions. 171 Were SCE to use the proceeds for these purposes, SCE would be in violation of the CPUC order authorizing SCE to issue the bonds. Thus, the bonds are not fungible and the arguments of M-S-R and Six Cities have no merit. On a related point, Six Cities argument that the fuel inventory financing would change the size of a subsequent SCE bond issuance to finance other utility needs 172 is completely wrong because the fuel inventory financing can only be used for a specific purpose. 173 For these reasons, the Commission should ignore intervenors objections to SCE s debt cost, preferred equity cost, and capital structure calculations. IX. THE NUMEROUS COMPLAINTS ABOUT SCE S FORMULA RATE CALCULATIONS HAVE NO MERIT A. Support for Costs Included in Formula Rate Six Cities and M-S-R argue that SCE has not fully supported the costs included in the formula or that the formula should be revised. For example, Six Cities 170 M-S-R Motion at 75; Six Cities Protest at Exhibit SCE-300 at 5:2-5 & n Six Cities Protest at Moreover, SCE s last four issuances of first mortgage bonds for general corporate purposes have all been $500 million, including one that that was issued at the same time as the fuel inventory financing. 67