`UNITED STATES OF AMERICA
`BEFORE THE
`FEDERAL ENERGY REGULATORY COMMISSION
`
`
`
`
`
`Pacific Gas and Electric Company ) Docket No. ER16-2320-002
`
`
`
`
`
`
`REPLY BRIEF OF THE COMMISSION TRIAL STAFF
`
`
`
`
`
`
`
`
`
`
`
`
` Edith A. Gilmore
` Commission Staff Counsel
`
`
`
`
`
`
`
`
`Washington, D.C.
`April 17, 2018
`
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`
`TABLE OF CONTENTS
`
`INTRODUCTION ............................................................................................................... 1
`ARGUMENT ....................................................................................................................... 2
`I. Rate of Return on Equity (ROE) .............................................................................. 2
`a. Whether PG&E’s proposed ROE is just and reasonable .............................. 2
`b. Whether anomalous market conditions exist and, if so,
`whether these conditions affect the placement of the
`authorized ROE within the range of reasonable returns ............................... 9
`II. Cost of Long-Term Debt ........................................................................................ 10
`a. Whether PG&E’s proposed cost of debt is just and reasonable .................. 10
`b. Whether PG&E’s proposal to use net proceeds to calculate its
`long-term debt costs is appropriate ............................................................. 11
`c. Whether PG&E has appropriately forecasted its split of 10-
`year and 30-year bond issuances to estimate the cost of
`PG&E’s long-term debt ............................................................................... 13
`
`d. Whether PG&E has appropriately forecasted interest rate
`estimates included in its calculated cost of long-term debt ......................... 13
`
`III. Capital Structure ..................................................................................................... 14
`a. Whether PG&E’s proposed capital structure and resulting rate
`of return are just and reasonable ................................................................. 14
`b. Whether PG&E has included San Bruno-related costs in the
`equity ratio of its proposed capital structure ............................................... 15
`IV. Depreciation ........................................................................................................... 16
`a. Whether PG&E’s proposed depreciation rates are just and
`reasonable .................................................................................................... 16
`b. Whether the average service lives and dispersion patterns (i.e.
`Iowa Curves) proposed by PG&E are reasonable ....................................... 17
`
`c. Whether PG&E’s proposed net salvage and cost of removal
`ratios are appropriate ................................................................................... 27
`d. Whether PG&E’s proposed accounting for accumulated
`depreciation is appropriate .......................................................................... 34
`
`e. Whether PG&E has appropriately reflected the composite
`depreciation rate for land rights .................................................................. 34
`
`V. Capital Additions .................................................................................................... 34
`
`
`
`
`
`
`
`ii
`
`a. Whether PG&E’s capital additions forecast is just and
`reasonable .................................................................................................... 34
`b. Whether PG&E has included any imprudent capital costs in
`the TO18 Transmission Revenue Requirement ........................................... 36
`c. CPUC PROPOSED ADDITIONAL SUB-ISSUE: Other
`capital additions issues, including, without limitation, whether
`PG&E’s procedures related to capital additions, such as
`planning and prioritization, recordkeeping, cost estimating,
`and project cost containment are appropriate .............................................. 36
`VI. Common, General and Intangible (CGI) Plant........................................................ 37
`a. Whether PG&E’s methodology for allocating CGI plant costs
`is appropriate ............................................................................................... 37
`VII. Operation and Maintenance (O&M) Expenses ....................................................... 40
`a. Whether PG&E’s O&M expense forecast is just and
`reasonable .................................................................................................... 40
`VIII. Administrative and General (A&G) Expenses ........................................................ 42
`a. Whether PG&E’s A&G expense forecast is just and
`reasonable .................................................................................................... 42
`b. Whether it is appropriate to include all or part of certain
`enterprise-wide department expenses, such as Short Term
`Incentive Pay, Enterprise Records and Information
`Management, Enterprise Corrective Action Program, Edison
`Electric Institute membership dues, and Pension expenses in
`PG&E’s TO18 revenue requirement ........................................................... 44
`IX. Materials and Supplies (M&S) Escalation Rate...................................................... 44
`a. Whether PG&E’s proposed escalation factors used in
`developing forecasts of M&S expense in its O&M and A&G
`expenses are appropriate .............................................................................. 44
`X. Allocators ............................................................................................................... 44
`a. Whether PG&E has appropriately calculated its line-of-
`business and network transmission labor allocators ................................... 44
`XI. Sales Forecast ......................................................................................................... 46
`a. Whether PG&E’s proposed gross load forecast results in just
`and reasonable rates ..................................................................................... 46
`b. Whether PG&E’s proposed forecast of Helms pumping load
`results in just and reasonable rates .............................................................. 50
`
`
`
`
`
`
`
`iii
`
`XII. Other ..................................................................................................................... 53
`a. Whether PG&E should be allowed to include certain non-
`capital items in rate base, including: ........................................................... 53
`i. Habitat Conservation Plan (HCP) .................................................... 53
`ii. Alviso (environmental) credit ........................................................... 55
`iii. Working cash .................................................................................... 56
`iv. Other receivables .............................................................................. 58
`b. Whether PG&E should be required to include certain items in
`rate base, including: ..................................................................................... 60
`i. Unfunded reserves ............................................................................ 60
`ii. ADIT associated with abandoned projects in its rate
`base when PG&E includes those abandoned projects in
`its rate base ....................................................................................... 61
`c. Whether PG&E has included any items as prepaid expenses in
`rate base that should not be included as prepaid expenses in
`rate base ....................................................................................................... 61
`d. Whether PG&E has used a reasonable methodology to
`functionalize and allocate prepaid expenses determined to be
`appropriately included in rate base to Network Transmission
`customers ..................................................................................................... 62
`e. Whether PG&E’s forecast of Non-Tariffed New Products and
`Services (NP&S) expenses and revenue is just and reasonable .................. 63
`f. How PG&E’s self-acknowledged errors in its filing should be
`corrected ...................................................................................................... 66
`g. What adjustments to PG&E’s franchise fee expense are
`appropriate to reflect the impact of any authorized
`adjustments to PG&E’s cost of service ........................................................ 67
`h. Whether there are any other costs that are improperly included
`by PG&E in its TO18 Transmission Revenue Requirement ....................... 67
`CONCLUSION ................................................................................................................. 68
`
`Appendix of Acronyms…………………………………………………………………..69
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`
`iv
`
`TABLE OF AUTHORITIES
`Court Cases
`
`Bluefield Water Works and Improvement Co. v. Pub. Serv. Comm’n of W. Va.,
` 262 U.S. 679, (1923) ..................................................................................................... 2
`
`Federal Power Comm’n v. Hope Natural Gas Co.,
`U.S. 591 (1944) ................................................................................................................... 2
`
`Administrative Proceedings
`
`Association of Business Advocating Tariff Equity, et al.
` v. Midcontinent Independent System Operator,
` 156 FERC ¶ 61,234 (2016) ........................................................................................ 4, 7
`
`Boston Edison Co., Opinion No. 299,
` 42 FERC ¶ 61,374 (1988) ............................................................................................ 48
`
`Consumers Energy Co., Opinion No. 429,
` 85 FERC ¶ 61,100 (1998) .............................................................................................. 6
`
`Delmarva Power and Light Co., Opinion No. 185,
` 24 FERC ¶ 61,199 (1983) ............................................................................................ 49
`
`Ind. and Mich. Mun. Disrib. Ass’n v. Ind. Mich. Power Co.,
` 59 FERC ¶ 61,260 (1992) ............................................................................................ 48
`
`Kern River Gas Transmission Co., Opinion No. 486-B,
` 126 FERC ¶ 61,034 (2009) ............................................................................................ 6
`
`Kern River Gas Transmission Co., Opinion No. 486,
` 117 FERC ¶ 61,077 (2006) .......................................................................................... 37
`
`Martha Coakley, Mass. Attorney General, et al. v. Bangor Hydro-Electric Co., et al.,
` Opinion No. 531, 147 FERC ¶ 61,234 (2014), order on paper hearing,
` Opinion No. 531-A, 149 FERC ¶ 61,032 (2014), order on reh’g,
` Opinion No. 531-B, 150 FERC ¶ 61,165 (2015), vacated and remanded sub nom.
` Emera Maine v. FERC, 854 F.3d 9, 17 (D.C. Cir. 2017). .................................... passim
`
`Minnesota Power and Light Co., Opinion No. 20,
` 4 FERC ¶ 61,116 (1978), aff’d Opinion No. 20-A, 5 FERC ¶ 61,091 (1978) ............. 38
`
`
`
`
`
`
`
`
`v
`
`New England Power Co., Opinion No. 295,
` 42 FERC ¶ 61,016 (1988) ............................................................................................ 55
`
`Pacific Gas and Electric Co.,
` 156 FERC ¶ 61,238 (2016) ............................................................................................ 2
`
`Public Service Co. of Indiana, Opinion No. 783-A,
` 57 FPC 1173 (1977), affirmed, Public Service Co. of Indiana v. FERC,
` 575 F. 2d 1204 (7th Cir. 1978). ................................................................... 35, 41, 43, 49
`
`Southwestern Pub. Serv. Co., Opinion No. 339,
` 49 FERC ¶ 61,354 (1989) ............................................................................................ 48
`
`Sys. Energy Res., Inc., Opinion No. 446,
` 92 FERC ¶ 61,119 (2000); order on reh’g, Opinion No. 446-A,
` 96 FERC ¶ 61,165 (2001) ...................................................................................... 12, 13
`
`Statutes
`
`
`18 C.F.R. § 385.706(b)(iii) (2017) .............................................................................. 47, 63
`
`18 CFR Pt. 101 (2017) ....................................................................................................... 20
`
`Other
`
`Public Utility Depreciation Practices, published by the National Association of
`Regulatory Utility Commissioners in 1996……………………………………………. .19
`
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`
`
`UNITED STATES OF AMERICA
`BEFORE THE
`FEDERAL ENERGY REGULATORY COMMISSION
`
`
`
`Pacific Gas and Electric Company ) Docket No. ER16-2320-002
`
`
`
`REPLY BRIEF OF THE COMMISSION TRIAL STAFF
`
`To: The Honorable David H. Coffman
` Presiding Administrative Law Judge
`Pursuant to Rule 706 of the Commission’s Rules of Practice and Procedure,1 and
`the Presiding Judge’s procedural orders,2 the Commission Trial Staff (Trial Staff)
`submits its Reply Brief in the above-captioned proceeding.
`INTRODUCTION
`On March 15, 2018, Initial Briefs were filed by Pacific Gas and Electric Company
`(PG&E); the California Public Utilities Commission (CPUC); the Cities of Anaheim,
`Azusa, Banning, Colton, Pasadena, and Riverside, California (Six Cities); the California
`Department of Water Resources State Water Project (SWP); the Transmission Agency of
`
`1 18 C.F.R. § 385.706 (2017).
`2 “Order Establishing Procedural Schedule,” Docket No. ER16-2320-002 (March
`31, 2017); “Order Adopting Rules for the Conduct of the Hearing,” at P 59, Docket No.
`ER16-2320-002 (Dec. 4, 2017).
`
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`Docket No. ER16-2320-002 2
`Northern California (TANC); and Trial Staff.3 Trial Staff primarily responds to the
`arguments set forth by PG&E.
`The issues addressed in this case arise out of PG&E’s eighteenth Transmission
`Owner Tariff filing (TO18), proposing a wholesale base transmission revenue
`requirement (Wholesale Base TRR) of $1.705 billion and a retail base transmission
`revenue requirement (Retail Base TRR) of $1.718 billion. On September 30, 2016, the
`Commission accepted PG&E’s proposed rates, suspended them for five months (to
`become effective March 1, 2017, subject to refund) and set the matter for hearing and
`settlement procedures.
`4
`ARGUMENT
`
`I. Rate of Return on Equity (ROE)
`
`a. Whether PG&E’s proposed ROE is just and reasonable
`
`PG&E generally alleges that the intervenors and Trial Staff’s recommended base
`ROE is too low to satisfy the Hope and Bluefield standard.5 PG&E argues that: (1) the
`median value obtained by employing the DCF methodology to determine an appropriate
`
`3 On March 16, 2018, Trial Staff submitted an errata to its Initial Brief that was
`accepted by the Presiding Judge. “Order Granting Motion to Accept Corrected Initial
`Brief of Commission Trial Staff,” Docket No. ER16-2320-002 (March 23, 2018).
`4 Pacific Gas and Electric Co., 156 FERC ¶ 61,238 (2016).
`5 PG&E Initial Br. at 3-5 (citing Federal Power Comm’n v. Hope Natural Gas
`Co., 320 U.S. 591, 603 (1944) (Hope); Bluefield Water Works and Improvement Co. v.
`Pub. Serv. Comm’n of W. Va., 262 U.S. 679, 692-93 (1923) (Bluefield) (collectively,
`Hope and Bluefield)).
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`Docket No. ER16-2320-002 3
`base ROE will not conform to the Commission’s findings in Opinion Nos. 531 and 551;6
`(2) the proxy group used by the intervenors and Trial Staff is too small and should
`include Avangrid;7 (3) alternative benchmarks show that use of the median would not
`produce a just and reasonable result for PG&E;8 (4) PG&E’s ROE should not go below
`CPUC-approved ROEs;9 (5) the intevenors and Trial Staff ignore transmission risk;10 and
`(6) the intervenors and Trial Staff fail to consider model risk or the use of a model other
`than the DCF methodology.11 Each of these assertions and criticisms of Trial Staff’s
`recommended base ROE are unfounded. As discussed below, Trial Staff’s application of
`the two-step DCF methodology is appropriate and consistent with Commission
`precedent.
`First, contrary to PG&E’s contention, the results obtained by the intervenors and
`Trial Staff do not fall far below the level that investors would expect and require under
`Hope and Bluefield. PG&E argues that the Commission found in Opinion No. 531
`12 that
`the midpoint of the DCF (9.39 percent) was too low to satisfy Hope and Bluefield, and
`
`6 PG&E Initial Br. at 3-5.
`7 Id. at 5-6, 9-10.
`8 Id. at 7.
`9 Id. at 9.
`10 Id. at 8-9.
`11 Id. at 10-12.
`12 Martha Coakley, Mass. Attorney General, et al. v. Bangor Hydro-Electric Co.,
`et al., Opinion No. 531, 147 FERC ¶ 61,234 (2014), order on paper hearing, Opinion
`No. 531-A, 149 FERC ¶ 61,032 (2014), order on reh’g, Opinion No. 531-B, 150 FERC ¶
`61,165 (2015), vacated and remanded sub nom. Emera Maine v. FERC, 854 F.3d 9, 17
`(D.C. Cir. 2017).
`
`
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`Docket No. ER16-2320-002 4
`that, later, the Commission similarly found in Opinion No. 55113 that the DCF midpoint
`of 9.29 percent did not meet the Hope and Bluefield standard. PG&E relies upon the
`Commission decision in that case to consider alternative benchmarks as well as ROE’s
`approved by state commissions to determine whether an upward adjustment to the central
`tendency of the DCF results was necessary. Thus, PG&E suggests that the intervenors
`and Trial Staff disregarded the Commission’s guidance in Opinion Nos. 531 and 555 and
`used only the median result in recommending base ROEs for PG&E that are far below
`the levels rejected by the Commission in those opinions. This is an incorrect
`interpretation of those opinions.
`Importantly, Commission precedent continues to support the use of its two-step
`DCF methodology to evaluate whether PG&E’s proposed ROE is just and reasonable.
`Under the Hope and Bluefield standard, the rate of return allowed for a public utility
`should be sufficient to: (1) maintain the financial integrity of the enterprise; (2) enable
`the company to attract new capital; and (3) provide a return to the common equity owner
`that is commensurate with returns on investments in other enterprises of corresponding
`risk. Trial Staff witness Green explains how the Commission’s DCF methodology was
`designed to meet the Hope and Bluefield standard.
`14 Further, as explained in Trial Staff’s
`Initial Brief (at 13-21), he properly applied each and every element of the adopted
`methodology. Accordingly, the application of the Commission’s DCF method
`
`13 Association of Business Advocating Tariff Equity, et al. v. Midcontinent
`Independent System Operator, 156 FERC ¶ 61,234 (2016) (Opinion No. 551).
`14 Ex. S-0006 at 10:8-13; 13:18-14:12; 15:1-25.
`
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`Docket No. ER16-2320-002 5
`demonstrates that PG&E’s proposed ROE is not just and reasonable and exceeds the level
`required to satisfy this standard.
`Moreover, Opinion No. 531 adopted the two-step DCF methodology for use in
`setting the ROE for electric utilities.15 Although that opinion was subsequently vacated,
`the vacatur did not address the two-step methodology, nor did the parties in the current
`proceeding reject the use of the two-step DCF methodology. In addition, the placement
`above the central tendency in that case was based on a finding of the presence of
`anomalous capital market conditions. As discussed below and in Trial Staff’s Initial
`Brief (at 45-59), the record in this proceeding does not support such a finding during the
`relevant study period and, thus, there is no need to review alternative benchmarks. The
`Commission has historically found that for single entities, such as PG&E, the best
`measure of central tendency is the median. The Opinion No. 531 series of orders does
`not alter that determination.
`Second, Trial Staff witness Green properly determined the proxy group that should
`be used in this proceeding. Contrary to PG&E’s assertions, it is not too small and
`Avangrid should not be included. PG&E contends that using a limited group of
`companies increases the potential for error in the reliability of a DCF analysis and, for
`that reason, PG&E witness McKenzie recommended a refinement of the proxy group
`criteria to allow companies that meet either the Moody’s or the S&P credit rating criteria
`to be included in the proxy group. As explained in Trial Staff’s Initial Brief (at 24), this
`
`15 Opinion No. 531 at P 31.
`
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`Docket No. ER16-2320-002 6
`is inconsistent with Commission precedent. Opinion No. 531 requires proxy group
`companies to meet both the Moody’s and the S&P credit rating.16 The test is whether the
`credit rating of the proxy group company under either Moody’s or S&P is one notch
`above or below the credit rating of PG&E. If so, the company should be eliminated from
`the proxy group.
`Moreover, as a whole, Mr. Green’s proxy group is sufficiently large to eliminate
`or significantly reduce measurement error, thereby producing a rate of return on equity
`estimate for PG&E that is representative of its true cost. Trial Staff explained in its
`Initial Brief that the Commission has accepted proxy groups with as few as three
`companies, and has also stated that “a proxy group should consist of at least four, and
`preferably at least five members, if representative members can be found.”17 Mr. Green’s
`proxy group of eight companies is twice that size, so it is clearly large enough to
`eliminate or severely reduce measurement error.
`In addition, Avangrid should not be included in the proxy group because it simply
`fails the Commission’s credit rating screening criteria. As mentioned above, it must meet
`both Moody’s and S&P’s credit ratings bands. Avangrid was rated Baa1 during the data
`
`16 Opinion No. 531 at P 107.
`17 See Trial Staff Initial Br. at 19-20 (quoting Kern River Gas Transmission Co.,
`Opinion No. 486-B, 126 FERC ¶ 61,034, at P 104 (2009) (Kern River). See also
`Consumers Energy Co., Opinion No. 429, 85 FERC ¶ 61,100, at 61,361 (1998)
`(Commission adopted proxy group of four companies, rejecting arguments that a proxy
`group of four companies was too small).
`
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`Docket No. ER16-2320-002 7
`period in the record. Because PG&E was rated A2 during this period, Avangrid falls
`outside of the notch band for PG&E of A1 to A3.18
`Third, PG&E’s reliance on its alternative benchmarks as support for its position
`that applying the median of the results of the DCF methodology would not produce a just
`and reasonable ROE for PG&E is unfounded. As explained in Trial Staff’s Initial Brief
`(at 33-45), PG&E’s alternative ROE benchmarks are flawed and unreliable. In Opinion
`Nos. 531 and 551, the Commission emphasized that it was not departing from relying on
`the DCF methodology but was only looking to other record evidence to inform the
`placement of the ROE within the zone of reasonableness provided by the DCF
`methodology due to its finding of anomalous capital market conditions. 19 Thus, only if
`anomalous conditions exist would it be necessary to review state-allowed ROEs and other
`alternative methods as a tool for corroborating the placement of the ROE. As discussed
`below, Trial Staff does not agree that anomalous market conditions existed during the
`relevant six-month DCF data period.
`Fourth, PG&E’s reliance on CPUC-approved ROEs is misplaced. The fact that
`PG&E’s state-approved ROE for the portion of its business under the jurisdiction of the
`CPUC (10.4 percent for 2017) is not controlling and should not be considered by this
`Commission unless there is a finding of anomalous capital market conditions. In this
`case, there should be no such finding. However, even if the Commission were to find
`
`18 See also Trial Staff Initial Br. at 27.
`19 Opinion No. 531 at P 146; Opinion No. 531-B at PP 91, 103, 120; Opinion No.
`551 at P 137.
`
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`Docket No. ER16-2320-002 8
`anomalous capital market conditions in this proceeding, it would look to average state
`ROEs for all utilities during a specific time period, and not simply rely upon PG&E’s
`state-approved ROE.
`Fifth, PG&E’s contention that the intervenors and Trial Staff ignore transmission
`risk lacks merit. The record shows that the companies included in the proxy group have
`significant transmission, as well as unregulated business operations that are riskier than
`transmission or distribution and are automatically considered in the DCF results of those
`companies.20
`Lastly, PG&E’s assertion that the intervenors and Trial Staff fail to concede that
`model risk is any concern and its vaulted criticism of Trial Staff witness Green’s
`unwavering and consistent practice of applying the Commission’s DCF methodology
`“since at least the late 1990s”21 is off base. It bears repeating here that there are no
`anomalous market conditions and, thus, there is no need to consider alternative ROE
`analyses. Even so, as previously discussed, the Commission continues to require and has
`not departed from its use of the DCF methodology in establishing a reasonable ROE. 22
`Also, as pointed out by Six Cities’ witness Solomon on re-direct examination, the CAPM
`and Risk Premium models are more affected by anomalous markets that may undermine
`confidence in the model’s results. This is because interest rates and utility bond yields,
`which are identified by PG&E witness Quackenbush as being affected by anomalous
`
`20 See Ex. S-0009 at 385-392.
`21 PG&E Initial Br. at 12.
`22 Opinion No. 531 at P 146.
`
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`Docket No. ER16-2320-002 9
`market conditions, are a direct input into those models, whereas interest rates are not an
`input to the DCF model.23
`b. Whether anomalous market conditions exist and, if so, whether these
`conditions affect the placement of the authorized ROE within the range of
`reasonable returns
`
`PG&E contends that the market conditions that the Commission found to be
`anomalous in Opinion Nos. 531 and 551 continue to exist today.24 Trial Staff disagrees.
`PG&E’s reliance on Opinion Nos. 531 and 551 is misplaced. As fully explained in Trial
`Staff’s Initial Brief (at 45-59), anomalous market conditions do not currently exist, based
`on an additional two and one-half years of data and information that is now available and
`an analysis of economic and capital market conditions. Trial Staff witness Green
`explains how conditions differ today from the record presented in the Opinion No. 551
`proceeding. Despite anticipation that bond yields would rise shortly after the Federal
`Reserve phased out its bond buying program, in October of 2014, bond yields have not
`risen. Also, the ten-year Treasury bond yield has fluctuated between about 1.5 and 4
`percent since 2008, and since 2012, Moody’s public utility bond index has traded in a
`relatively tight range of roughly 3.9 percent to 4.5 percent. Therefore, sufficient time has
`passed, nearly ten years, that a relatively low interest rate environment, by historical
`standards, can no longer be considered anomalous and should instead be considered a
`
`23 Ex. PGE-0033 at 11:12-13.
`24 PG&E Initial Br. at 12-15.
`
`
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`Docket No. ER16-2320-002 10
`“new normal” going forward. Accordingly, there is no justification in this case to set
`ROE above the median of the zone of reasonableness.
`II. Cost of Long-Term Debt
`
`a. Whether PG&E’s proposed cost of debt is just and reasonable
`
`PG&E contends that it made a reasonable forecast of the anticipated cost of debt it
`would incur for debt issuances it expected to make during 2017 (Period II). PG&E
`claims that it developed the forecast in the spring of 2016, based on end-of-year data
`from 2015 (Period I), and then made its best estimate of expected costs of long-term debt
`that would be incurred during the remainder of 2016 and calendar year 2017.
`25 PG&E
`argues that the intervenors and Trial Staff’s criticisms of the forecast were based, in part,
`on information that only became available after PG&E filed its case in this proceeding
`and that, in doing so, ignores the Commission’s policy that forecasts should be based on
`whether they were “reasonable when made.”26 Trial Staff disagrees.
`PG&E filed its rebuttal testimony with some updates and, thus, clearly could have
`updated their cost of debt calculations at that time to conform with current and forecasted
`interest rates at that time. PG&E’s continued use of outdated forecasts at the time of the
`rebuttal testimony when updated information was available overstates the true costs and
`shows that the original forecasts were not reasonable when made. As explained in Trial
`Staff’s Initial Brief (at 60-61), Mr. Green calculated PG&E’s long-term debt cost net
`
`25 PG&E Initial Br. at 16-17.
`26 Id.
`
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`Docket No. ER16-2320-002 11
`proceeds data as of December 31, 2016,27 and then analyzed updated information that
`reflects new debt issuances that occurred from January 1, 2017 through May 25, 2017.
`He also included PG&E’s forecasts of upcoming debt issuances through December 31,
`2017. He also modified the coupon rates for the 10-year and 30-year bonds, which
`PG&E planned to issue in the fourth quarter of 2017 to be 3.30 percent and 4.00 percent,
`respectively, to reflect actual coupon rates observed for debt issuances which occurred
`most recently (in March 2017) for bonds of the same durations. Mr. Green’s use of the
`updated information shows that PG&E’s estimate of its long-term debt cost was not
`reasonable when made. Accordingly, Trial Staff’s recommended cost of long-term debt
`for Period II for PG&E of 4.95 percent should be adopted.
`b. Whether PG&E’s proposal to use net proceeds to calculate its long-term
`debt costs is appropriate
`
`PG&E recognizes that the Commission has opted in the past to use the gross
`proceeds of debt issuances to calculate its long-term debt costs. However, PG&E also
`explains how the use of gross proceeds is not explicitly required by the Commission’s
`regulations and that this method is fundamentally flawed.
`28 Trial Staff agrees that the use
`of net proceeds to calculate its recommended cost of long-term debt for PG&E is
`appropriate.29 TANC, on the other hand, contends that the use of gross proceeds from
`debt issuances is appropriate to calculate the debt component of capital structure, relying
`
`27 Ex. S-0006 at 70:3-5; Ex. S-0007 at 13.
`28 PG&E Initial Br. at 20-21.
`29 Trial Staff Initial Br. at 61-62 (citing Ex. S-0006 at 70:3-5, 140:10-142:8).
`
`
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`Docket No. ER16-2320-002 12
`on the Commission’s decision in System Energy Resources, Inc. (SERI).30 As discussed
`below, TANC’s reliance upon SERI is misplaced.
`At the outset, TANC appears to misunderstand the issue set forth in this section.
`The issue is whether PG&E’s proposal to use net proceeds to calculate its long-term debt
`costs is appropriate, not whether the use of such method is appropriate to calculate the
`debt component of its proposed capital structure. The rulings in SERI upon which TANC
`relies address the use of gross proceeds for long-term debt principal outstanding to
`calculate the debt component of the capital structure.31 Opinion No. 446 addressed the
`following two proposed changes: (1) a change to the “calculation of the cost rate of debt
`by switching from the yield-to-maturity method to the embedded cost method”; and (2) a
`change to the “calculation of the long-term debt ratio by switching from use of the gross
`proceeds of debt method (i.e., the total principal outstanding of long-term debt) to the net
`proceeds of debt method (i.e., gross proceeds less unamortized premium, discount,
`expenses, and losses).”
`32 The Commission approved SERI’s switch to the embedded cost
`method for determining the cost rate of long-term debt, but rejected the proposed switch
`to a net proceeds method for deriving the long-term debt ratio.
`
`30 TANC Initial Br. at 67-70 (citing Sys. Energy Res., Inc., Opinion No. 446, 92
`FERC ¶ 61,119 at 61,447-49 (Opinion No. 446) (2000); order on reh’g, Opinion No.
`446-A, 96 FERC ¶ 61,165 at 61,740-41 (Opinion No. 446-A) (2001) (SERI).
`31 TANC Initial Br. at 67-68 (citing Opinion No. 446 at 61,447-49; Opinion No.
`446-A at 61,740-41).
`32 Opi