ML19347D274

Prepared Testimony of Dt Gardner Re Study of Cost of Capital & Rate of Return for Southern CA Edison Co

ML19347D274
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Site:	San Onofre
Issue date:	03/18/1980
From:	Gardner D CALIFORNIA, STATE OF
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Text

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Application No. 59351 Exhibit No. 53

! Witness D. Gardner

.' Cc =issioner

. L. Grimes Ad=. Law Judge J. lialey CALIFORNIA PUBLIC UTILITIES COMMISSION Revenue Require =ents Division Rate of Return Unit STUDY OF THE

~ COST OF CAPITAL AND l

RATE OF RETURN FOR l

SOUTHERN CALIFORNIA EDISON COMPAhT O

Application Nc. 59351 i

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! ~ San Francisco, California-March 18, 1960

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MEMCRANDUM This report was prepared by the staff cf the Financial Analysis 3 ranch of the Cc= mission's Revenue Requirements Division in connection with Southern California Edison Cc=pany's request to increase rates for

, electric service as set forth in Application No. 59351.

I Dana T. Gardner, Research Analyst II, was responsible for the i

j -preparation of this report, under the general supervisien of a Terry R. Mcwrey, Financial Examiner IV, and James D. Pretti, Principal

, Financial Examiner.

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TABLE INDEX fs Table No. Title t .

1- Prime Rate - Disecunt Rate.

2 Yields on Public Utility Bends - I;evly-Issued vs. Distributed.

3 Trends in Interest Rates.

i k Nc=inal Interest Rates - Major California U+111 ties,1969 - 1978.

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5 Southern California Edison Company - Effective Interest Rate on Debt, December 31, 1980, 1981 and 1982.

6 Times Long-Term Debt Interest Earned - Edison and Selected Utility Groups, 1974 - 1978.

-7 Southern California Edison Ccx::pany- Effective Dividend Rute on Preferrim Stoa, u.ce=ber 31, 1980, 1981, 1982.

8' Southern California Edison Company- Cc==on Stock Book Value,

. Dividends and Earnires, 1970 - 1979 9 Earniras Rate on Average Cctson Equity - Edison and Selected Utility Groups,' 1974 - 1978.

10- Earnin6s Rate on AveraSe Total Capital - Edison and Selected

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Utility Groups, 197h - 1978.

11 Comparison - Dividend Payout Ratios - Edison and Selectei

. Utility Groups, 1974 - 1978.

12- Southern California Edison Cc=pany - Capital Structure, 19e9 - 1976.

13 Average Oceton Equity Ratio - -

Edison and Selected Utility Groups, 197h - 1978.

Ik- Southern California Edison Company - Financing, 196 9 - 1978.

15 Net Operating Inecce - Edison and Selected Utility Groups,

. 1974 1978. ,

l16 Operating Revenues - Edison and Selected Utility Groups, 197h - 1978.

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17; Cperating Expenses - Edison and Selected Utility Groups, 1974 - 1978.~

.18. Ope.7 ting Ratics - Edison and Selected Utility Groups,197h - 1978.

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TASLE I rE (Continued)

Table Nc. Title 19- Average Net Plant Investment - Edison and Selected Utility Groups, 1974 - 1978.

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.20~ Ratio-Cperatir4 Revenues to Average Net Plant Investment Edison and Selected Utility Groups, 1974 - 1978.

21 Ratio - Eet Operatire Inec=e to Average Net Plant Invest ent -

Edison and Selected Utility Groups, 1974 - 1978.

22 Deter =itation of Rates of Return Requ ed to Recover I: bedded Costs of Debt and Preferred Stock at varicus Assumed Rates of Return on Co==en Equity - Average Year 1981 and 1982 4 23 Recoc= ended Rate of Return.

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- Appendix List of Companies Used in Study.

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QUALIFICATIONS A!:D PREPARED TESTDONY OF DANA T, GAFRTER Q.1 Please state your name and business address.

A.1 My rame is D; sa T. Gardner and my business address is h55 Golden Gate Avenue, San Francisco, California 94102.

Q.2 By whom are you employed and in what capacity?

A.2 I am employed by the California Public Utilities Coc: mission in the Revenue Requirements Division, Rate of Return Section as a Research Analyst.

q.3 Please briefly describe your educational background and verk experience.

A.3 I graduated from Sonoma State University in 1975 with.a Bachelor of Arts degree in Economics. I subsequently earned a Master's degree in Iconocies at San Francisco State University.

I have been employed by the Commission for approximately 2h years

> reiei> : 4 i= =i=== c===1 1==-i===it=* a O a=ri== **1ca *1 1

• investigations as well as general rate proceedings. I was orig %mily assigned to the Finance and Accounts Division's Economic Analysis Unit. This unit served as the Division's special projects group and was responsible for

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l-evaluating the financial impact of public utility construction programs.

I joined the Rate of Return Section in February 1979 I have previous 2y prepared cost of capital studies and recommended rates of return in l

testimony before this Commission.

l Q.k What are your responsibilities in this proceedingt

.A.h lI am responsible for preparing a study of the cost of capital for I

Southern Califemia Edison Company .(Idison) and recommending a reasonable rate of retum for the utility for' test year 1981.

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Q.5 What are your reec=endaticas in this proceeding?

A.5 I am reec::cending that Edison be authorized a retum en ec=nen equity of 13 60% for the test year 1981. I as also recc=ending that Idisen be granted a step rate increase in 1982 to recogni:e financial attrition so that the utility will have a reasonable opportunity to earn an equiva-lent retum in that year. In my opinion, a 13.605 return ut ec=en equity is fair and reasonable to both Edison and its approximately eight million customers. This recce=endation equates to a rate of retum en rate base of 10.38% in 1981 and 10 50% in 1982 Q.6 Ecw does your recomnendation compare with Edison's requested rate of return?

- A.6 The hollowing table compares Edison's estimated capital structure, capital costs and requested rate of return with the results of my study.

The major differences between my recom*9M rate of return and l

Edison's are due to (a) the recommended retum on commen stock equity, and (b) my use of average-year imbedded costs rather than enkf-year capital I

! costs.

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Line:  : Capitalization :  : Weignted :

_No.: Co=conent  : Ratios  : Cos* *

"ost  :

(A) (3) (C)

Edison's Recuested Rates of Return 1 Year-End 1981 2 Long-Tem Debt L7.007, 8.034 3 77f.

, 3 Preferred Stock 13 00 7.80 1.01 h Comr.on Ecuity h0.00 15.00 6.00 l

l 5 Total 100.009 10.7e%

6 Year-End 1982 l

7 Long-Te m Debt k7.00 8.30 3 90 8 Preferred Stock 13 00 7 90 1.03 9 Cocnon Equity h0.00 15.00 6.00 10 Total 100.00% 10 9/,a Staff's Recoamended Rates of Return i

11 Average-Year 1081 l

12 Long-Tem Debt k7.00 8.29 3.90 13 Preferred Stock 13 00 7 98 1.0L l 14 Common Equity 40.00 13.60 5.hh 1 15 Total 100.00N 10 38%

f3 d 16 Average-Year 1082 17 Long-Tem Debt 47 00 8.51 4.00 18 Preferred Stock 13 00 8.12 1.06

19 Comon Equity ho.00 13.60 5.kh

20. Total 100.00% 10 5C$

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, Q.7 M:y did you base your recc=endation en average-year capital costs?

I s t I A.7 Prior to the Cc=ission's policy of setting rates so that majer utilities could go at least two years without general rate relief, the staff's rate of return re:0=endaticus were based on capital costs esticated for Dece=ber 31 of the test year. Year-end ratios were used in recognition -

of the fact that rate vould re=ain in effect for a period of tice extending beyond the test year. A year-end basis is not appropriate when specific allevances for financial attrition are included in the recc=endation.

Step rates, if based on year-end embedded ecsts, would in effect allow rate relief in excess of the utility's actual capital costs during the period that rates were in effect. yer this reason, I based ry reco=endation on the average cost of capital fer 1981 and for 1982. The recognition of financial attrition and average costs should provide Edison with a reasonable opportunity to earn the authorized return on co=cn equity in both years.

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\_)) Q.8 M:y are you recc=ending a step increase in Edison's rate of return for 1982, the year fellowing the test year?

A.8 If I.were to recommend one rate of return to cover both years, Edison would have no opportunity to earn the re:0= mended return on co=en equity in 1982 because of financial attrition. The current Co=missien policy for energy c0=panies of setting one return based on year-end capital costs causes utility earnings to fluctuate, rising in years of general rate relief and falling, eften markedly, after the. test year. A cere stable earnings pattern, which would result fro: the use of step rates, veuld have a positive effect on the financial ec= unity's attitude toward investment in Edison

.and the yields, required on the ec=pany's new debt issues.

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.1/ ')ecision I(o. 89711, 3outhern Califernia Edisen ::c=pany, 'ece=ber 1,1978.

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Step rates are also desirable frc= the point of view of the ratepayer.

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.(d Under the year-end cethod, the rate of return is based on costs which are screwhat higher than the interest and dividends the utility vill actually pay in the test year. The co= par:y is overcompensated fer the cost of senior securities in years of general rate relief and undercompensated in following years. Under a step rate policy, using average capital costs, consumers' electric rates vould more accurately reflect the utility's true capital costs.

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-Step rates are consistent with the Cc= mission's stated policy of setting rates "so that major utilities can reasonably go at least two years without general rate relief."  ::n Decision No. 89711, dated Decenber 12, 1978, the Commission recognized that the year-end approach would not enable a utility to earn the autherized return en equity in the year following the test period and therefore authorized a somewhat higher

p return than it otherwise_vould have. The Cc==ission stated, "If ve were V.

to consider a test year earlier than 1931 for Idison's next general rate o/

proceeding we would authorize a lover return en equity." ' Ste; rates vould eliminate the need to grant an artificially high return in the test

. year in crder to insure adequate earnings in the subsequent years, s.9 'dhat do you mean by.the term financial attritien?

I A.9 Financial attrition can be defined as the increase in'a utility's weighted

cost' of long-ter: debt and preferred stech due to the issuance er retire ent of senicr ' securities. The interest and dividend rates on Idisen's outstanding 1[~DecisionNo.89711,Dece=ber 12, .1978, ' 3outhern California Edisen Company,

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senior securities cre telev the yields currently required by the =arket.

Consequently, Idison's weighted cost of capital win rise with every increnent of new financing planned for the near future. Failure to recognize these increased costs vould result, all other factors renaining constant, in Idison's return on co=non equity falling belev any level found fair and reasonable in this proceeding.

Q.10 Eave step rates for financial attrition been authorized for other utilities?

A.10 Step rates for operational attrition have been authorized fer water companies t

!, for several years primarily as a means to offset the effects of inflation and reduce the frequ'ency of general rate applications. Recent Come:ission i .

, decisions for water titilities have 'inclu'd'ed allowances for financial attriticn is recognition of increasing capital costs. 'Ihe Coca:issien staff first recoemended attrition allowances for a major energy utility in Pacific Gas and Electric Company's most recent general rate application (Decision

\ No. 91107, dated December 19,1979). Although step rates were not adopted, the concurring opinion of Connission President 3ryson urged the staff to "give this alternative rate-making procedure serious attentien in the future." President Bryson listed three benefits of step rates:

"First, under such step rates, the utility custoners vould pay for inflationary cost increases as they occur, not before the fact. Second, step rates vould contribute to stabilizing annual earnings, which would likely create a :nore faversble reception in the financial community for its stock and tend offerings. In contrast, fluctuating es.rnings are almost inevitable under the present approach, appearing sharply higher in the first year after a rate decision in contrast to the previous as well as the following year. This fluctuation 1/ Decision No. 91024, November 20, 1979, Southern California' Water Coc:pany; Decision No. 90425, July 3,1979, California Water Service.

2j Decision 'To. 91107, Pacific Gas and Electric Conpany, concurring epini.on of f3 Commissioner John I. 3ryson, page 4.

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likely causes debt and equity offerings to become more expensive. l Finany, in terms of an incentive for improved perfomance by the utility, a step rate adjustment would give the company a reasonable basis for ceasuring operating perfomance. Under our adjustment granted today, any operating improvement in 1981 win probably go undetected in 1981 earnings because it win be submerged by inflationary cost increases."g Q.n Does your rate of return recoc:mendation consider an allowance for operational attrition?

t A. n No, it does not. Operational attrition and the proper methodology for implementing step rates is the subject of Exhibit No. .

Q.12 How did you develop your rate of retum recommendation?

I A.12 The reccmmended rate of return results from an estimation of the costs of the three major components of capital: long-tem debt, preferred stock and common stock equity. Determination of the costs of the first two components is relatively straightforward, although some assumptions must be made regarding interest and dividend rates in the future. The determination p of a fair and reasonable return on connen equity is based largely on V

informed judgment.

Q.13 How did you develop Edison's imbedded cost of long-term debt for the het period?

A.13 Edison's weighted cost of debt was estimated by combining the utility's most recent recorded debt costs with rates assumed on proposed firancing. Table 5 shows this development through December 31, 1982. The company has planned debt issuances totaling $400 millinn in 1980, $300 millinn in 1981 and $300 millinn in 1982. After reviewing current interest rate trends, I have concluded j that the 1980 and 1981 debt financings, not already negotiated, will carry coupons greater than the 9 75% rate assumed by Edison. I have assumed that the company's proposed 1980 Series NN win bear a rate of 13.00%; the 1981 Series 00 win yield 10.00%; and the 1982 Series PP will reflect Edison's original estimation of 9 75%. - The company's most recent issue, dated October n,1979, has an effective interest rate of 12.06%.

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Edison's proposed finaneirg and required bond reti e:ents vill cause

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V the entedded ccat of long-ter= debt to increase frc: 7.L$ at year-end 1979 to 8.63% at the end of 1982. The e: bedded costs used to determine the rate of return and financial attrition rece::endations are based on averages cf year-end annual charges and year-end net proceeds.

- Q.14 How did you deter =ine Edison's preferred stock dividend rate?

A.14 The ce=pany proposes to offer three series cf preferred stoch before the end of 19*2. 875 million is scheduled for issuance in 19E0, another $75 =1111on in 1991 and 050 =1111cn in 1982. have a:sured that these series will carry dividend rate's cf 12.75%, 9 75% and 9 55, respectively, which are consistent with the interest' rater i app 2ded to Edison's new debt finaneirgs. As with the cost of lorg-ter= debt, the overall rate of return recccrendatiens are based en the average cest of preferred stock outstanding.

) Q.15. How have you determined that a 13.6". return on ec:=cn stock equity is fair and reasonable?

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' A.15 Fy recc==endation is' based en an analysis of the many facters, both taraible and intangible, which affect the ecst of equity capital to Edison. Se:e of the quantitative infor=ation that I

• reviewed are presented in the tables and corresponding explanations attached to this re;crt. I will discuss sc e of the qualitative considerations in the re=ainder cf my direct testi= cry.

The return on equity recor:mendation is by necessity a :atter of inferred fadgment. There is no precise =sthe=stical formula which can predict with a::y accuracy the' cost of equity capital in the future. 2 vas_ guided in =y 4:

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analysis by standards established by U.S. Suprene Cort decisiens and i

prior decisions cf this Cennission.3'; "hese standards can be s==ariced as follows:

1. "he return to the equity nciders should be ec=ensrate with the retens on investnents in other enterprises having sinilar rishs.

2. The return should be sufficient to enable the utility to attract capital at reasonable rates and to casure confidence in the utility's financial integrity.

3 The return should balance the interests cf both the investers and custoners of the utility.

-Q.16 Do you agree with Edison's projected capital struct =e fer the test year!

A.16 Ye's. Edison based its rate of reten request en a target capital structre of L5: debt,13% preferred stock and h0% cc=nen equity fer bcth 10 01 and 1962.

The cenpany's financing plans and future earnings should enable the achieve-ment of these goals.

e The co=cn equity ratic is one neasure cf the risk of investnent in a

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L particula cc.pany. In general, the lever the ratio, that is the greater the leverage, the greater is the risk. Table 12 shows that Eiison's equity ratio has'been increasing in the past few years. *his fact ecupied with the conpacy's stated seal cf achieving a LO% ratio will have a favorable i..: pact

'on-the investnent ec_mrsity and shculd enhance the utility's financial flexibility.

g FPC vs. Hope Natural Gas (1943) 320 U.S. 591,603. r Bluefield Water Works and Improvement Company vs. West Virginia Public Service Commission (1923) U.S. 677,692-93.

_  : Decision No. 74917, Pacific Telephone and Telegraph Company (1968) 69 CFJC 53, 67 68.- *

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Q.17 What is the company's current bond rating?

A.17. Edison's first mortgage bonds and preferred stock are rated AA by Standard and Poor's and Aa by Moody's Rating Service. Moody's describes Aa bonds as "high quality by all standards." "Together with the Aaa group they co= prise what are generally knoc as high grade bonds." They are rated lower than the best bonds because margins of protection may be scaller or long-tern risks appear somewhat larger than in Asa securities.

Q,18 ~ Fow does Edison's resource plan affect investor's perception of risk?

A.18 , After the accident at Three Mile Island the investent cocu=uJ,ty reassessed its position toward nuclear enerEy. This was evidenced by the drop of approximately 6% in stock prices for utilities engaged in

. nuclear energy. Edison is currently constructing four nuclear units, San Onofre 2 and 3 e_.i Palos Verdes 1 and 2. Such a ::mjor invest =ent 0: in nuclear energy will increase the risk perceived by investors and the

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. yields required on Diison's new security issues. In my opinion, the

. yield differentials will not be substantial as the financial coe= unity still believes .that the majority of nuclear plants now under construction will be-licensed and become operational.'

Q.19 Does' the Energy' Cost Adjustment' Clause (ECAC) reduce the -risk to a utility's common equity. holders? -

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M Moody's Public, Utility Manual,i1979, p;'viii.

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, yx O i 19 r - :* >"r>== er zc^c i == 11= = 111*r te ===> i= * :1=e1r fashicn, increases in the cost or energy. Under current practices Edison may file once everyfour months for an adjustment to the ECAC balancing account; the company does not have to file a general rate application to recover the increased costs. The expedited hearing process and the assurance of compensation for energy expenses reduces tbs .isk to Biison's equity holders. 4 Q.20 Does the co==1ssion's treatment of Edison's investment tax credit reduce the company's. risk when compared to other u+A14+4as?

A.20 Yes. For ratemking purposes Edison flows through the k% portion of the invest =ent tax credit, however; the co=pany elected to normlize (ratably flow through) the additional $ allowed by the Tax Reduction Act of 1975. The difference between the amount of ITC generated and that currently flowed through is realized by the company as increased cash flow. As a result, the risk to Edison's stockholders is lower than the risk associated with a co=pany which flows through the entire investment tax credit.

Q.21 How did you determine that a return on equity of 13.6% would be commensurate with returns -on investments of similar risk?

A.21 -In order to determine a recoenendation for Edison that would provide a teturn comparable to that rcceived on si=ilar risk invest =ents, I compared Edison's earnings performance and financial data with statistics of other public utility companies. I selected three groups of utilities for cocparative purposes. ' The first group is co= posed of the fifteen largest electric utilities (exclusive of Edison) which ::aintafrned a double-A bond rating with both Moody's and Standard and Poor's. The second

. group contain the fifteen largest electric utilities in the Ur.ited States

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(~T (exclusive of Edison) regardless of bond rating. The third group is V

the Dow Jones' selection of fifteen utility stocks, of vnich Edison is a part. Data related to each of these three groups and Edison are shown in the tables attached to this report. It should be noted that the figures in the tables are based on recorded infor:stion and do not consider ratemaking adjustments. Some of the companies could possibly have experienced earnings above or below a reasonable norm during the period. In addition, differences do exist between various con:pardes with respect to types of generating plants, custo er =ix, types of service provided, regulatory climte, and local. operating envircnnents.

Dcepite these differences it is my opinion that these utilities present a valid sampling of comparetive companies because they are large regidated public utilities and have business and financial risks similar to those

e of Edison.

Q.22. How did you consider the interests of consu=ers in your reco==endation?

A.22. W recommendation strikes a balance between the two primary interests of consumers: the short-term concern of obtaining the lowest possible

' rates and the long-run interest of mintaining good electric service. In that regard, I chose a return on. equity that I believe fairly compensates the investor, allowing Edison to continue to attract capital at reasonable rates,but does not overly compensate the equity holders co= pared to si=ilar investments. . My recommendation c.? a rate of return based on average capital costs and step rates provMes additional protection to crsurers by more accurately reflecting the utility's actual capital costs.

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X Q.23 What other factors did you consider in arriving at your reco=nendations?

O A.23 Some of the additienal factors which I considered are as follows:

a. Be fact that Biison is engaged in a business which is affected with the public interest, is subject to regulation, and must provide electric service at reasonable rates.

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b. The Commission's Regulatory Iag Plan and stated policy that rates be set so that a utility can reasonably go at least two years without generil. rate relief.

c. Be essentia11ty of Diison's product to the public.

d. Siison's capital requirements and financial historf* .

e. Econo =ic conditions - the effects, of continued inflatica and increases in interest rates i

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f. Inte.. rest coverage requirements.

Q.2E. Di you have any further comments?

A.24. Yes. It is my cpinion that a return on ecmmon eqd.ty of 13.60% is

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fair. and reasonable to both the investors and customers of Edison. A return O at this level would provide for moderate increases in retained earrJngs, allow the company to obtain future financing at reasonable rates, and provide after-tax interest coverages of 2.66 times in 1981 and 2.63 times in 1982. My reconsnendation based on average costs and step rates for financial attrition

-protects the ratepayer by reflecting interest and dividend costs as they are estimated to occur.

It is my recomendation that Southern California Edison Company be c granted a return on ecmon equtty of 13.60%. The correspending rates of return, applicable to the rate base determined in this proceeding, are 10 38%

in1981and1050%in1982.

Q.25. Does this conclude your testimony?-

A.25. Yes it does.

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This study contains 23 tables developed in the course of detere.ining a reasonable rate of return for Southern California Edison Ccepany. Some of the tables present statistics emparing Edison's financial performance with that of 15 A4- rated electric and combination utilities, the 15 largest utilities and the Dow Jones's 15 utility stocks over the past five years.

Others present trends in interest rates and ten-year summaries of Edison's capitalization, book value, earnings and sources of financing.

Table No.1 presents the fluctuations in the bank prime interest rate and federal discount rate frca July 1976 to January 1980. The prime rate, the rate charged by the nation's largest commercial lenders to their most preferred customers, began a steady upward climb in 1977. By Septe=ber

. (D 6M. In October 1979, the prime rate increased sharply from 13t% to 15% after the Federal Reserve Board announced a major change in monetary policy. The earlier record high of 12% was established in July 1974 The discount rate, that rate charged by the Federal Reserve on loans to member banks, has shown a similar upward trend, reaching the current level of 12% in October 1979 Table No. 2 compares yields on newly-issued public utility bonds with yields on seasoned issues, grouped by Moody's Rating Service, Aaa to Baa, for the period April 1977 through December 1979 This table shows that the yields in all categories generally followed the same trends as short-term rates, gradually increasing through September 1979, with sharply higher rates l- recorded for the remainder of 1979 I

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O Table No. 3 shows interest rate trends in bonds and preferred stocks and interest rate variations for price ccur=ercial paper and govert=ent bills on an average annual basis for the years 1974 throgh 1978. Monthly fluctuations are shown for all categories from July 1977 through November 1979.

The trends. are generally consistent with the patterns exhibited in Tables Nos. 1 and 2.

Table No. 4 is a ten-year stame/ of nominal interest rates developed for Edison and seven other large California utilities. Increases registered over the years reflect (a) periodic sales of new bonds at rates exceeding the average cost of debt outstanding, (b) refunding of low-coupon bonds at =aturity, and (c) bond retirements in accordance with sinking fund requirements. The increase in Edison's nominal interest rate was well below the average of the other utilities for the ten-year peried. Over the last five years, Edison

(~h v' has experienced a rate of increase ccx: parable to the other utilities.

Table No. 5 presents the staff's development of Edison's effective interest rates on long term debt as of December 31, 1980, 1981, and 1982.

Two long-term debt issuances are scheduled for 1980, Series LL, negotiated in August 1979, will carry an interest rate of 9-5/8% and the staff has assumed Series FDi will bear a cougon rate of 13 00%. The interest rates of I

l 10.00% on the planne; 1981 issue and 9 75% on the 1982 offering are also staff l

es+1 mates. The ecmpany's most recent bond issue, Series MM, dated October 11,

! -1979,.has an effective rate of 12.06%.

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r O Table No. 6 presents Edison's after-tax interest coverage for the period 1974 to 1978, ccupared with the other groups of selected cccpanies.

Edison's average interest coverage of 2.49x exceeds the coverages experienced by the selected groups. Only five utilities recorded average interest coverages greater than that experienced by Edison over the five-year period.

Table No. 7 shows the staff's estimate of the effegtive dividend rates for the company's preferred stock as of December 31, 1980, 1981, and 1982. The dividend rates on the planned stock issues were estimated to be 25 basis points below the interest rates on long-term debt, a yield spread which the staff considers rea.sonable. The balance of preferred stock has been reduced each year for conversion of the Convertible Series 5.20% to ccanon stock. The Original Preferred Stock with a par value of $4 million has been excluded from the development of the cost of preferred because of its feature of participation with the cecmon steck in the receipt of dividends.

Table No. 8 sinwrizes data related to Edison's ccumon stock book value, dividends and ewWs for the years 1,/O through 1979 During the period, book value increased approximately $1.2 billion. Earnings available for ccxmcon totaled approximately $1.6 billion of which $900 million was paid out s in dividends. Book value per share increased annually and the annual dividend rate per share has shown a steady increase from $1.50 in 1970 to $2.72 in 1979 Table No. 9 compares Edison's earnings rates on average connon equity with those of similar utilities for the period 197h through 1978. Edison's perfomance was continually below average for those years. The trend over this period, however, 'has exceeded the earnings trends for the selected cct:panies,

,y L) . . ..

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O Table No.10 shows a trend fer Edisen's garnings V-en total espital M""1ar to that exhibited in Table No. 9. Although the  ;

. company's earnings during the five years incroved at a faster rate than those of the ec=parative groups, Edison's eamings rate en average total capital re=ained belov everage for the entire pericd.

Table No. 11 cc= pares Edison's dividend payout ratio with those of the other selected ec=panies. Applicant's conservative

- payout ratic has citigated to a certain extent the a= cunt of external funds needed to meet eccstruction expenditures. Since 1976 the payout ratio has shown an increasing trend which is eccsistent a

vith the ce=pany's ple: to gradually bring the ratio in line with the industry average. Higher payout ratics should have a positive affect on the market price of the ec=pany's ce==cn stock which is currently p selling belov book value.

O Table No. 12 contains a s m ry of Edison's capital structure

- for the years 1969 through 1973. Since 1975 the co=pany has placed greater emphasis on equity financing reducing the debt ratio frc=

5155% to h7 9h% in 1978. Edisen based its rate of return request en target capital ratics' of 47% debt,135 preferred and h0% ce==en

- stock equity. Staff cencluded that, given the conpany's 'uture

_ financing plans, these ratios could be attained in the test period.

Table No.13 cc= pares Edison's. average co __cn equity ratic for the past five years with the averages of the selected ec=panies.

Edison's equity ratios have been oc= parable to these of the ether double'A-rated utilities. The Dev Jones stocks' recorded slightly s,

m i

_f J -

}

hi;;her averages; the fifteen largest electries recorded slightly 10 er

'Q '

averages. The equity ratics for Edisen in this table differ frc=

those presented in Table No.12 which shev capital structures based on yea m nd data.

Table No. Ih is a general s"-"r/ of the npany's long-te: ::

financing from 1969 to 1978. Total financing over the ten years aucunted to approximately $3 9 biliicn of which $1.4 bW on was generated internally. The allevance for funds used during eenstruction, Ar"JDC, has grevn censiderably since 1973 I= 1973 this non-cash inec=e ite=

vas greater than the co=pany's net in:c=e after dividend pay =ents.

Table No.15 shows that for the five year period 197h-1973 Edisc='s net operating inec=e grew at a sicver rate than those rates experienced by the co=parative ec=panies.

/N- Table No. 16 shows that Edison's operating revenues have

+

v) grown at a rate ec= parable with those of the selected groups. The revenue trend has surpassed the grevth rate in the co=pany's average net plant invest =ent as shown in Table No. 19 Table No.-17 reveals that the rate of increase in Edison's operating expenses has been approximately the sa=e as the trends for the Dov Jones utility steeks and the' natien's fifteen largest electric ec panies. The AA-rated electric and co=binatien utilities experienced greater increases in operating expenses than did Edisen.

' Table No.13 brings together Tables Nes.16 and 17 by presenting

- ratios of operating expenses to operating revenues. All groups have X ;

i. -5

shown an increasing ratio over the past five years, indicating that expenses have been increasing at a faster rate than revenues.

Table No. 19 shows the average net plant investnent of Edison and the selected utility groups. Net plant invest =ent consists of gross utility plant, less depreciation and a=orti::ation reserves, advances for construction and deferred incone taxes. Edison's average net plant invest =ent increased by 40% over the period conpared to inerenents ranging frc= 30% to h7% for the other groups.

Edison experienced the same average growth rate se the AA-rated utility group.

Table "o. 20 compares ratios of operating revenues to average net plant investment for Edison and the other utility

. groups. Applicant's growth rate over the period was comparable te that experienced by the fifteen largest electric companies, but lagged behind the trends of the other two groups.

Table No. 21 presents the re'.io of net operating ineone shown in Table No. 15 co average net plant investnent which was presented in Table No. 19 Edison's total retum over the five-year period averaSed 7 12%, the_same as that recorded for the fifteen

~

largest' electric utilities. The Dov Jones' group and the AA-rated group both experienced .esmings on utility investnent greater than that recorded for Edison. The eamings statistics in this table are less than the ea mings rates on total-capital shown in Table No. 10-which include earnings derived from other inecce, pri=arily AFUDC.

n

).

j

_f.

- -~ -. . . .. -- - - .-

t Table No. 22 co= bines assu=ed earnings rates on co==0n 4

equity ranging fro 13.00% to 14 50% vith the embedded cost of Edison's debt and preferred stock to produce various rates of return. The resulting rates of return for the test year 1981 range between

}

10.14% and 10 74%.

Table No. 23 contains staff's rate of return reco=mendatiens i

of 10.38% in 1981 and 10 50% in 1982 which result from the conclusion that 13.60% is a fair and reasonable return for the common-equity E holders of Edison.'

I' 4

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i

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t: --  : -- . .,. , ; ., _ . . .;_-__. ._ . . . . . . . , _ . _ , . , . . . . . . . . . _ , _ , , , , . . . , . . . _ , , ,

TABLE NO. 1 SouTm:T CALIFORNI ' EDISON CCMPANY h- Prime Rate - Discount Rate

:  :  : Discount  :

Year : Month  : Prime Rate - Rate  :

(a) (b) (c) 1976 July 7-1/4  % 5-1,  %

August 7 September October 6-3/4 November 6-1/2 5-1/4 December 6-1/2-6-1/4 1977 January 6-1/4 February March April May 6-1/2-6-3/4 i

June ,

[>-3/4 July ~

August 6-3/4 - 7 September 7-1/4 5-3/4

. October 7-1/2-7-3/4 6 November December 1978 January 7-3/4-8 6-1/2

p. February

-~ March April May 8-1/A-8-1/2 7 June 8-3/4-9 July 7-1/4-7-3/L i August 7-3/4-8 September 9-1/4 1/2 3/4 8-1/2 Octoeer y-3/4-10-10-1/4 9-1/2

, November 10-1/2 3/4' 11-1/2 i December- 11-1/2 3/4 1979 January 11-3/4 February l

March

• April May l

June 11-3/4-11-1/2 July ~111/2 3/4 e-1/2-10 August _. 11-3/4 12-1/4 10-10-1/2 September October 12-1/4./2-14-1/2-15-12-3/4 13-1 -A 2A- 5-1/2 10 11 - 12 November 15-1/4 1/2 3/4 12 Deeember 15-1/2-15-1/4 1980 January 15-1/4

[%).

') SOURCE: Irving Trust Con:pany Weekly Interest Rates Listings.

,, -. .~.r. . . . . .

O O O TABLE NO. 2 .

. BDirrHERN CASTERNIA EDISON COMPANY '

Yields on Public Utiuty 3onds - Newly-Issued vs. Distributed-

, s .: Aaa Securities  : Aa Securities  : A Securities  ; Baa Securities  :

, t .

Newly-Issued  : Distributed: Newly-Issued : Distributed: Newly-Issued : Distributed: Newly-Issued : Di stributed:

Month iMillions : Yield: Yield  : Millions : Yield: Yield : Millions : Yield: Yield  : Millions : . Yield: Yield  :

12[/, (a) (b) (c) (d) . (a) (f) (g) (h) (il (j) (k I 1

. April ~ .$275.

100; 8.17% 8.21% $ 330 8.44% ' 8.51% $ 110 8.67% 8.91% $ 40 8.85%)~9.17%)

May- 8.15 8.22 - -

8.49 $0 8.68 8 71 205 8 94 9 13 June '500 8.05 8.12 260 8.19 8.37 130 8.34 8 58 162 8.78 9.02 July . - -

8.10 242 5 8.29 .8.32 75 8.60 8 51 245 8.25 8.97 August - - 8.13 75 8.17 8.36 - -

8.49 65 8.59 8.91 September 315 8.04- 8.07 365 8.24 8.32 75 8.60 8 51 245 8.25 8.97 I Octobee - - 8.18 85 8.25 8.44 330 8 52 8.61 325 8.98 9.01 November 400 8.27 8.23 280 8.40 8.48 137 8.56 8.64 26 9.15, 9.06 December - -

8.34 180 8 57 8 55 110 8.64 8.64 115 9.08 9 08 1978 January - -

8.52 315 8.97 8 76 125 8.90 8.92 150 9.35 9.'27 February - - .

8.57 35 8.80 8 79 30 8.90 8.97 100 9.45 9.29 M:rch 225 8.72 8.57 45 8.75 8 79 255 9.02 8.98 138 9.53 9.37 8.69 9.04 8.86 9.08 9.09 9 42 April - -

175 365 25 9.54 May - -

8.83 145 9.01 9 02 170 9 35 9 22 220 9.69 9.70 June 250 8.90 8.92 275 9 41 9.19 195 9 42 9.40 70 10.00 9 78 July 10 9.10 9.02 300 9.57- 9.26 375 9 53 9.51 200 9.88 9 73

- August 450 8.75 8.86 300 8.86 9.11 60 8.90 9 32 - -

9.53 September 150 8.625 8.84 245 8.95 9.09 205 9.04 9.28 - -

9.47

-October 525 9.12 9.04 275- 9 55 9.28 15 9.50 9 46 235 9 75 9.69 November 100 9.16 9 19 400 9 54 9 46 20 9.625 9.68 - -

9.99

! December 150 .9.27 9.34 110 9.31 9.56 to 9.32 9 70 - -

10.08 i 1222. ,

January 150 9 37 9.48 30 9.85 9 70 50 9.95 9 90 60 10.15 10.29 i February 425 9 59 9 51 - - -

9 74 400 9 95 9 84 100 10 50 10.27 March 450 9.65 9.61 100 9.87 9 89 - -

10.04 40 10.47 10.53 i April- 200 9.58 9.61 - -

9 92 375 10.27 10.10 255 10 70 10.56 May - -

9 71 25 -9.82 10.19 300 10.34 10.30 75 10.65 10 70 June 50 9 37 9.48 275 10.01 9 95 500 9.90 10.14 - -

10 56 July - -

9 42 120 9.73 9 72 -

9 98 - -

10.48 August 300 9 53 9 46- 100 9.67 9 75 40 9.88 10.14 - -

10.50 se tember 275 10.00 9.69 - -

9.94 85 10.36 10.36 205 10.99 10.78 OcEober 345 -10.73 10 38 200 11.85 10.85 720 12.04 11.40 - -

11.89 November 500 10.93 10.99 125 12.00 11 57 545 12.49 11.89 105 13.08 12.48 December - -

10.96 290 11 54 11.47 25 12.25 11.79 75 12.45 12.51

! SOURCE: Moody's Bond Survey.

Q) V w -

TABLE NO. 3 SOUTIERN CALIFORNIA EDISON COMPANY Trends in Interest Rates

Bond Yields  :  :  : U.S.  : U.S. :

: U.S. State  :  :  ; Preferred: Prime  : Government: Government:

: Government: and :  :  : Public : Stock : Commercial : 3 Months 23-5 Years :

.- :Long-Tenn : Local : Industrials : Rails : Utilities: Yield : Paper  : Bills : Issues :

(a) (b) (c) (d) (e) (f) (g) (h) (i)

-1974 Average 6.99% 6.19% 8 78% 8.98% 9.22% 8.23% 9.87% 7 84% 7 81%

1975 Average 6.98 7.05 9 25' 9 39 9.88 8 38 6.33 5.80 7 55 1976 Average 6.78 6.64 8.84 8.85 9.17 7 97 5 35 4.98 6.94 1977 Average 7 06 5.68 8.28 8.13 8.58 7.60 5.60 5 27 6.85 1978 Average 7.89 6.03 8 90 8.64 9 22 8.25 7 99 7 19 8.30 1977 July 6.97 5.63 8.18 8.02 8 48 7 51 5 41 5 19 6.67 August 7.00 5.62 8.21 8.05 8.47 7 55 5.84 5 49 6.90 September 6.94 5.51 8.19 8.03 8 43 7.58 6.17 5.81 6.92 October 7 08. 5.64 8.27 8.07 .8.56 7.60 6.55 6.16 7 23 November 7 14 5 49 8.36 8.10 8.61 7.67 6.59 6.10 7 28 December 7 23 5 57 8.42 8.10 8.65 7 85 6.64 6.07 7 40 1978 January 7 50 5 71 8.60 8.20 8.87 7 93 6.79 6.44 7 71 February 7 60 5 62 8.65 8.32 8.90 7 99 6.80 6.45 7 76 March 7.63 5.61 8.66 8.41 8.93 8.07 6.80 6.29 7 76 April 7 74 5.80 0.72 8.49 9.05 8.06 6.86 6.29 7.90 May 7 87 6.03 8.84 8.60 9 19 8.11 7 11 6.41 8.10 June 7 94 6.22 8.92 8.68 9 33 8 31 7.63 6.73 8.31 July. 8.09 6.28 9.05 8 70 9.38 8.42 7 91 7 01 8 54 August 7.87 6.12 8.95 8 72 9.21 8.26 7 90 7 08 8.31 September 7.82 6.09 8.90 8.68 9 17 8.24 8.44 7.85 8.38 October 8.07 6.13 9.03 8 74 9 37 8.29 9.03 7 99 8.61 November 8.16 6.19 9.21 9.01 9 58 8 43 10.23 8.64 8.97 December 8.36 6.51 9 31 9.15 9.67 8.84 10 43 9.08 9 23 1979 January 8.43 6.47 9.44 9.21 9.85 8 79 10.32 9.35 9.36 February 8.43 6.31 9.42 9.22 9.84 8 77 10.01 9.32 9.16 March 8.45 6.33 9 50 9 30 10.02 8.77 9.96 9 48 9.25 April 8.44 6.29 9.57 9.38 10.05 8.29 10.39 9.46 9.32

( May 8.55 6.25 9.69 9.48 10.23 8.82 9.98 9.61 9.30 June 8.32 6.13 9.57 9.44 10.04 8.87 9 71 9.06 8.89

! July 8.35 6.13 9.47 9.45 9.90 8.93 9.82 9.24 8.88 l August 8.42 6.20 9 52 9 48 9.97 9.02 10.39 9 52 9.08 September 8.68 6.52 9.66 9.50 10.19 9.16 11.60 10.26 6 ON0br h*.h h*.

SOURCES: Federal Reserve Bulletins.

kk*.bb lb*. kk*.h *'/!d

. kh*.b kk*. k.

Moody's Bond Survey.

^

t

- TABLE NO. 4

, SOUTHERN CALIFORNIA EDISON COMPANY

~

Nominal Interest Rates Major California Utilities 1969 - 1978 6

:  :  : Increase : Increase :

' Conpany  : 1969 : 1970 : 1971 : 1972 : 1973 : 1974 : 1975 : 1976 : 1977 : 1978 : 69 - 78 : 73 - 78 :

(a) (b) (c) (d) (e), (f) (g) (h) (i) (j) (k) (1)

Picific Gas and Electric 17 46% 4.9.3% 5 25% 5 44% 5.60% 6.03% 6.61% 6.70% 7 18% 7 23% 62% 29%

San Diego Gas & Electric- 4.60 5 30 5 32 5 94 6.65 7.13 7 15 7.23 7.65 8.20 78 23

. General Telephone 5 76 5 81 6.00 6.15 6.24 6.20 6.15 6.39 6.67 28 8 5 21 Pacific Telephone 4 75 5 39 5 92 5 95 6.10 6 59 6.64 6.68 6.79 7 36 55 21 Pacific Ltg. - Utility System 4 48 4 80 5 40 5.61 5 86 5.96- 6.16 6.43 6.43 7.47 67 27 California Water Service' 4.19 4 79 5 07 5 07 5 30 5 55 7 05 7 74 7 87 7 71 84 45 Southern California Water 4 59 4.95 5.04 5 04 5 36 5 33 5 43 6 57 6.55 6.73 47 26 Southern California Edison 4 75 5.06 5.i0 5 29 5 41 6.00 6.14 6.34 6.46 6.72 41 24 Nominal rato developed by dividing. interest charges for the year by the average of beginning and end-of-year long-tem debt and short-term debt for capital purposes.

s

I TABLE NO. 5 SOUTHEPR CALIFORNIA EDISON COMPANY Effective Interest Rate on Long-Tert:1 Debt Estimated as of December 31, 1980, 1981 and 1982 l

: Par  : Net ' : Annual : Effective:

Description  : Value  : Proceeds  : Charge : Rate  :

(a) (b) (c) (d)

Outstanding, December 31, 1979 $2,782,652 $2,757,185 $20L,000 7.Lo%

1980 Planned Bond Issues Series LL - 9.625 50,000 49,500 4,889 9.88 Series,UN - 13 00% 350,C00 350,000 45,500 13 00 Maturing Debt Cal. Elect. 2.875% Series (6,000 5,890) (176) 2.99 Debentures (74,902 ( 6,057) (2,264) 2.98 Prond.ssory Note (3.639 3.530) (272) 7.70 Outstanding, December 31, 1980 3,098,111 3,071,208 251,677 8.19 1981 Planned Bond Issue Series 00-10.00% 300,000 300,000 30,000 10.00

'hm), Maturing Debt Series G (40,000 (39,157 (1,484 3.79 Series EE (100,000 (98,477 (9,217 9 36 Promissory Note (3.561 (3.45L (266 7 70 Outstand.Lg, December 31, 1981 3,254,550 3,230,120 270,710 8 38 1982 Planned Bond Issue Serie'sPP~-975% 300,000 300,000 29,250 3 79 Maturing Debt Series H 37,500 (37,101) (1,610).L.34 Series I 40,000 (39,789) (1,909) 4.80 Series J 40,000 (L0,016) (1,9E9) 4.87 Promissory Note (3.522) (3.L16) (263) 7 70 Outstanding, December 31, 1982 $3.433.528 $3.409.798 $29L.220 8.63%

-Dollars in Thousands.

1/ Rate negotiated in August 1979.

. o --

_ _ _ ~.

TABLE 6

() SOUTHERN C AL IFORN I A EDIS ON COMPANY

.................................................. 1 l

TIMES L ONG- TERM DEO T IN TE PE ST E ARN E0*

TREND AND 5-YEAR AVEPAGES 1974 - 1978 I I S0. CALIF. I 15 A A-R A TED 1 15 LA RGEST t DOW JONE S I i YEAR I EDISDN I E LEC T R IC & COMB. I ELECTRIC i 15 1 i i C OM PA N Y I UTILITIES I U T IL IT IES I UT ILIT Y STOCKS I 1974 2.54 2.39 2.19 2.23 1975 2.42 2.34 2.17 2.20 i

1976 2.57 2.48 2.26 2 .4 0-1977 2.56 2.51 2.35 2.47 1978 2.38 2.43 2.28 2.46 5-YR AV E R A GE 2.49 2.43 2 25 2 35 I ND E X-19 74 100 100 100 100 1975 95 98 99 99

'1976 101 104 103 108

. 1977 101 105 107 111 1978 94 102 104 110 5-Y R AVERA GE- 98 102 103 105

• AFTER INCOME T4XES l

S OURC E S: 5-YEAR STUDIES. RA TE OF RE TURN UNIT.

MOOD Y' S PUBLIC UTILITY HANUAL.

A NNUAL REPGRTS TO-STOCKHOLDERS.

ANNUAL REPORTS TO CALIFORNIA PUB LIC UTILI TIE S C OMMI SSI ON .

-v I

o

~

TABI3 NO. 7 SOUTHERN CALIFORNIA EDISON COMPAhT Effective Dividend Rate on Preferred and Preference Stoc Estimated as of December 31,1980,1981 and 1982

: Par  : Net  : Annual : Effective:

Descriotion  : Value : Proceeds : Charce : Rate  :

(a) (b) (c) (d)

(Dollars in Thousands)

Outstanding, December 31, 1979 $812,150 $805,063 $59,579 740%

1980 Planned Stock Issue 12.75% Series 75,000 75,000 9,563 12 75 Conversions Convertible Series 5.20% (12.000) (11.712) (624) 5.33 Outstanding, December 31, 1980 875,150 868,351 68,518 7.89 1981 Planned Stock Issue 9.75% Series 75,000 75,000 7,3 13 9 75 Conversions Convertible Series 5.20% (12,000) (11.712) (62L) 5.33

("]

v 75,207 8.07 Outstanding, December 31, 1981 938,150 931,639 1982 Planned Stock Issue 9 50% Series 50,000 50,000 4,750 9 50 Conversions Convertible Seiies 5.20% (4.895) (L.778) (255) 5.33 Outstanding, December 31, 1982 $983.255 $976.861 579.702 8.16%

- J/ Excludes 5% original Participating Preferred Stock having an aggregate par value of $4 m47%n.

J

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h .

TABIE No. 8 30tmERN CALIFORNIA EDISON COMPANY -

Coninon Stock Book Value, Dividenda, Eamings 1970 - 1979:

's ~

Net Earnings: Dividends: .  : Dividends:-  :  : s.  :  :

: ..: . Atter . : ~ Paid

• Earnings To:-to Dock : Dividends Shares

• Book Value Earnings: Annual  :

' :Book Value' Preferred on Book Value s Value . : Payout Outstanding :Per Share : Per  : Dividend Rate

Year : December 312 Dividends : Equity : Percent : Percent : Ratio ' December 31 : December 31: Sharo : Per Share :

-(a) (b) (c) (d) (e) (t) (g) (h) (i) (j) 1970 .$1,012,651 $110,870 $ 61,433 1095%- 6.07% 55 41% 40,963 $24 72- $2 71 $1.50 1971 1,151,922 105,752 65,475 9.18 5.68 61 91- 43,965 26.20 2 41 1 56 197,2 1,193,195 109,995 68,535 9 22 5 75 62.35 43,965 27 14 2.50 1 56 1973 1,251,412 116,809 68,585 9.33 5.48 58.72 43,965 28.46 2.66 1 56

-1974- 1,366,774 124,287 75,527 9 09 5 53 60 77 47,965 28.50 2.59 1.68 1975 1,421,760 137,176 80,581 9.65 5.67 58 74 47,965 29.64 2.86 1.68 1976 1,643,588- 185,047 83,350 11.26 5 07 45 04 53,609 30.66 3.45 1,68 1977 1,780,439 206,712 112,294' 11.61 6 31 54.32 55,126- 32 30 3.75 2.24

'1978 .2,052,056 202,225 133,280 9.85 6.49 65 91 63,017 32.56 3.21 2.48 1979 2,237,133 292,481 167,662 13.07 7 49 57 32 65,375 34.22 4.47 2 72 Columns (a), (b), (c) and (g) are expressed in thousands.

Column (a) consists of year-end par value of outstanding common stock and original preferred stock,

plus premium on _ capital stock and retained earnings.

. Column (c) consists of dividends paid on original preferred and common stock.

SOURCES: Annual Reports to Stockholders.

G.O. 65-A Reports to CPUC.

TABLE 9 SOUTHERN CALIFOR*lIA E0ISON COMPANY EARNINGS RA TE ON AVERAGE COMMON ECUITY TREhD AN0 5-YEAR AVERAGES 1974 - 1978 1 . I 50. CALIF. I 15 AA-RATE 0 1 15 LARGEST I 00W JONE S I i YEAR I EDISON I ELECTRIC & C GMB. I ELEC TPIC i 15 l-l l COMPANY I UTILITIES I UT IL I T IES 1 UTILITY ST OCK S I 1974 9.46: 11.53: 11.08 11.38 1975 0.01 11.58 11.26 11.20 1976 12.05 12.22 11.59 12 25 1977 12.05 12.23 12.09 12.30 1973 10.52 11.54 11.04 11.73

_ (~g ' 5-YR AVER AG E 10.76 11.82 11.41 11 77 L,/

I ND E X-19 74 100 100 100 100 1975 10. 100 102 98 1976 127 106 105 106 1977 127 106 109 los 1978~ 111 100 100 10 3 5-YK AVER AGE 114. 103 103 103 S O UR CE S : 5-YEAR STUDIES , R ATE GF RETURN UNIT.

MOOD Y' S~ P UBLIC UTILITY MA N UA L.

A YlUA L ' RE 008 TS TO S TOCKMGLOERS.

AhNUAL REPORTS TO CALIFORNIA P UB LIC UTILI TIE S C 0wMI SSION.

(q S

,1

~

l l

table 10 0- SOUTHERN C ALIFCRNI A EDI SDN C O M P A*v Y EARNINGS RA TE ON A VERAGE TOTAL C API T 4L TREhD A40 5-YE AP A VER A GES 1974 - 1978 I I S0. CALIF. I 15 A A- R A TED 1 15 LA RGE S T I 00W JONE S I I YEAR I EDISCN I ELECTRIC & C GH9. I ELECTRIC i 15 I I .I C OM PA N Y I UT ILI TIE S I U T IL IT IES I UTILITY ST OCK S I 1974 7.10% 8 20: 8.40 % 3.40%

1975 7.47 8.33 8.58 8.43 1976 9 61 8.71 9.81 9.00 1977- d.7e 8.93 9.21 9.29 1978 8.47 8.86 8.99 9.22 5-Y R AV ER A GE 3.09 6.61 8.80 8.87

.-I ND E x-19 7 4 100 100 100 100 197S. 105 102 102 100 1976 121 106 105 107 1977- 124 109 110 11 1

~

1979 119 108 107 110

~5-YR AVERAGE' 114 105 105 10 6 53URCES: 5-YEAP STUDIES ,. R ATE OF RETU RN UNIT.

~ M000 Y' S PUBLIC UTILIT Y N A NUA L.

A NNUAL REPOR TS TO STOCxn0LDE RS.

A NNU AL RE P0F.TS T0 .C ALIF ORNI A PUBLIC UTILI TIE S C OMMI SSION.

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T A B LE 11 O SC UTH ERN CALIFOR9IA E0IS ON COMP ANY DIVIDEND PA YOUT SATIO TREN0 AND 5-YE AR AVERAGES 1974 - 1976 I I S0. CALIF. I 15 AA-RATE 0 1 15 LARGEST I 00W J0NES I i YEAR I CDISDN I ELECTRIC & C OMB. I ELEC TRIC i 13 I I I C OM PA N Y I UT ILI TI ES I UT IL IT IES I UT ILIT Y STOCKS I 1974 60.52: 71.55: 72.92: 64.03:

~

1975 58.50 71.89 73.48 66.11 i

1975 44.60 69.86 70.54 61.00 1977 54.12 69.71 70.39 62.91 1978 65.72 74.11 77.92 67.46 5 -Y F. AV ER A GE 56.73 71.42 73 05 64.30 I ND E X -19 7 4 100 100 100 100 1975 97 100 101 103

^

1976 74 98 97 95 1977- 39 97 97 98 1976 109 104 107 105 5-YR AVERAGE' 94^ 100 100 100 SOURCES:~5-YEAR STUDIES, 9A TE Cr RE TURN UNIT.

MOOD Y'S #UBLIC UTILITY FANUAL.

A NNUAL 'PE PCR TS TO STOCKh0LCERS.

A NNU AL REPORTS TO C ALIFORNI A ' AUB LIC UTILI TIE S C OMMI SSIGN.

E fs

.kg

-' == * ,a-ee ep e "w r'e

g o Io TABLE No.12 SOUTfG!RN CALIFORKIA I!DISON COMPANY -

Capital Stnicture 1969 - 1978

: 3f Preferred and  : 2/  : 8

Year  : DebtN -  : Preference Stock '  : Common Hauit F  : Total Capital (a) .(b) (c) (d) (e) (f) (g) (h)

(Dollars in thousands) 1969 $1,505,827 55,19% $258,753 9 48%

• 963,829 35 33% $2,728,409 100.00%

1970 1,560,265 53.22 358,753- 12.24 1,012,651 34 54 2,931,669 100.00 1971 1,667,733 52.47 358,753 11.29 1,151,922 36.24 3,178,408 100.00 1972 ~1,792,733. 52.42 433,753 12.69 1,193,195 34 89 3,419,681 100.00 19 73 1,819,133 So.En 508,753 14.22 1,251,412 34.96 3,579,278 100.00 1974 1,949,099 50.30 558,753 14 42 1,366,774 35.28 3,874,626 100.00 1975 2,160,740 51 55 608,753 14 53 1,421,760 33 92 4,191,253 100.00 1976 2,182,934- 49.22 608,753 33.72 1,643,588 3706 4,435,275 100.00 1977 2,482,250 49 90 711,172 14.30 1,780,439 35,80 4,973,861 100.00 1978 2,531,371 47 94 696,650 13.19 2,052,056 38.87 5,280,077 100.00 lo Year. Average $1,965,206 50.92% $510,285 13.22% $1,363,763 35.86% 3,859,254 100.00

1[ Includes Short-Terin Debt.

l 2] Includes original Preferred Stock.

SOURCES: Annual Reports to Stockholders G.9. 65--A Reports to CPUC.

TABLE 13 SO UTH ERN C ALIFORN I A E015 0N C OMPAH y A VE 9 AGE COMMCN E QUI TY R t. T I C TREhD AND 5-YEAR AVERAGES 1974 - 1978 I I S0. CALIF. I 15 AA-RATED 1 15 LARGEST I 00W JONE S I i YEAR I EDISON I ELECTRIC & C OMB. I ELECTRIC I 15 I I I C OM PA N Y I UT ILI TI ES I UTILITIES 1 UTILITY STOCKS I 1974 '35.04% 34.59% 33.07% 35.13%

1975 34.47 34.21 32.36 34.85 1976 35.44 35 14 33.43 36 27 1977 36.31 36.21 35.12 38.10 1978 37.30 36.96 36.30 39.23 r~ 5-YR AVE 9 AGE y') 35.71 35.42 34 06 36.72 I t" 'X -19 7 4 100 100- 100 100 1975 98 99 93 99 1976 101 102 101 10 3 1977 106 105 106 108 1978 106 107 110 11 2 5-YR AV EP'AG E 102 102 103 10 5

'SOURC E S: . 5-YE AR STUDI ES , P A TE OF RETUO N U NI T.

. MOOD Y' S PUBLIC UTILITf M A tJ U A L.

A NNUAL RF. P O R T S TO S TOC KH OLD E 9 5. .

ANNUAL REPCRTS TO CALITGRNIA P Ud LIC UTILI TIE S C OMMI SSION.

N

. f~f K.

TABLE No. 14 .

' SOUTHERN CALIFORNIA EDISON COMPANY Financing 1969 - 1978

:  :  : Internal Financhig  :  :  : Internal :

External Financing  : Net Incomes  :  : 'tFinancing:

Iong-Tem . : Preferred: Conrnon : After :  : Depreci- :  : Total  : as %  :

Year  : -Debt  : Stock  : Stock  : Total-  : Dividends: AFUDC  : ation  : Total  : Financing : of Tbtal :

1969 $ 175,000 $ -

• 53,340 $ 228,340 $ 38,328 * (17,471)

• 79,856 $ 100,713 $ 329,053 30.61%

1970 100,438 100,000 - 200,438 49,437 (17,007) 86,239 n8,669 119,107 37.19 1971 107,553 - 98,UO 205,683 40,277 (15,859) 94,398 n 8,816 324,499 36.61 1972 125,000 75,000 - 200,000 41,410 (7,152) 104,434 U 8,692 338,692 40.95 1973 4,558 75,000 - 79,558 48,224 (N,190) 109,878 147,912 227,4's 65.02 1974 222,486 50,000 67,200 339,686 48,760 (16,163) n6,189 148,786 488,472 30 46 1975 161,641_ 50,000 - 2n ,641 56,595 (26,773) 120,410 150,232 3 61,873 41.52 1976 126,263 - 123,951 250,214 101,697 (47,610) 124,802 178,889 429,103 41.69 1977 200,000 102,419 43,323 345,742 94,418 (60,238) 140,520 174,700 520,442 33.57 1978 200,000i (14,522) 203,364 388.842 68,945 (78,421) 157.203 147.727 536.569 27.53 lo Year Totals $1,422,939 $437,897 $589,308 $2,450,144 $588,091 $(296,884) $1,U3,929 $1,425,U6 $3,875,200 36.70%

i P3rcent of Total Financing ' 3 6.72% n.30% 15.20% 63.2 2% 15.18% (7.66)% 29.26% 36.7e% 100.00%

Dollars in Thousands.

SOURCE: Annual Reports to Stockholders.

1 6

TABLE 15 SOUTHERN C ALIFORN I A EDISON C OMPANY NET OPERA TING I NC OME TRE AD AND 5-YE AR A VERA GES 1974 -

1978 I I 50. CALIF. I 15 AA-RATED 1 15 LA RGEST I 00W JONE S I i YEAR I EDISON I ELEC TRIC & COMB. I ELECTRIC i 15 I I I COMPANY I UTILI TIES I UT IL IT IES I UT ILIT Y ST OCKS 1 1974 252,710 117,655 109,21* 196,632 1975 266,606 132,846 129,631 223,105 1976 -

307 140 152,142 145,727 250,228 1977 330,722 163,463 167,312 263,912 1978 324,601 175,727 173,571 275,250 5-YR AVE 9 AGE 296,355 148,406 145,051 241,825 0

INDEx-1974 100 100 100 100 1975 105 113 119 113 1976 122 129 133 127 1977 131 139 153 -

134

1978 128 149 159 140

~

5-YR AVERAGE 117 126 133 123 1

f DOLLA RS IN TH OUSA ND S l

500RCES: Y E AR STUDIES, RA TE OF RE TURN UNIT.

H000 Y' S PUB LIC UTILITY NA N UAL.

A hMUA L RE PO R TS TO STOCKHOLDE RS.

thNUAL~ REPORTS TO C ALIFORNI A ~ PUB LIC UTILI TIE S C OMMI SSI ON.

sm x_-)

=s -- - - - - , -c, -. e-

T A B L E 16

\

(~/

s- SOUTHERN C ALIFCRNI A EDI S0N COMPA4Y OPE RA TING RE VE N UE S TREhD ANO 5-YE AR A VERA GES 1974 - 1978 I I 50. CALIF. I 15 AA-RATE 0 1 15 LA RGES T I 00W JUNE S I i YEAR I EDISON i ELECTRIC & COMB. I ELECTRIC i 15 I I 1 C OMPA N Y I UTILITIES I UT IL I T IES I UT ILIT Y STOCKS I 1974 1,350,959 639,607 575,637 1,129 982 1975 1,647,134 762,686 667,697 1,325,880 i .

1976 1,846,540 686,107 779,6*6 1,533,107 1977 2,064,914 1,059,120 911,159 1,790 809 1978 2,328,798 1,186,053 1,029,316 1,970,933 5 -Y R AV ER A GE 1,349,669 906,715 796,691 1,550,142 I fl0 E X-19 7 4 100 100 100 100 1975 121 119 119 117 1976 136 139 135 136 1977 152 166 158 158 1978 171 185 179 17e 5-YR AVER 4GE 136 142 133 137 i-DOLLA RS IN THOU SA ND S-S OURCES :' 5-Y E AR STUDIES, RA TE OF RE Tuen ' UNI T.

MGOD Y' S PUBLIC UTILITY MANUAL.

A NNUA L. RE POR TS~ TG STOC KHOLDE RS.

A NNU AL~.RE POR TS TG C ALIF ORNI A _ PUB LIC UTILI TIE S C OMMI SSI Oh.

O a

TABLE 17 SOUTHERh C ALIFORNI A EDISON C OMPAN Y l

OPERATING EXPENSES l TREND AND 5-YE AR A VE RA GES 1974 - 1978 i 1 50. CALIF. I 15 A A-R A TED 1 15 LA RGEST I 00W JONES I 1 YEAR I E0! SON I ELECTRIC & C OMB. I ELECTPIC i 15 1 1 -

I C OM PA N Y I UTILITIES 1 UT IL I T IES I UT ILIT Y STOCKS I 1974 1,108,249 521,752 466,423 934,350 1975 1,380,528 629,839 558,265 1,102,775 1976 1,539,400 733,965 633,916 1,282,878 1977 1,734,192 895,657 743,846 1,526,897 1978 2,004,197 1,010,325 655,745 1,695,683 gg 5-YR AVER AGE 1,55 3,313 758,308 651,639 1,308,316

_U

.INDEx-1974 100 100 100 100 1975 125 121 120 118 1976 139 141 136 137 1977 156 172 159 164 1978 181 194 183 182 5-YR. AVERAGE 140 145 140 140

- 0 0LLA RS IN THOUS A NO S S J UR C ES : S-Y E A R- STUDIES,- R A TE OF RE TURN UNI T.

MOOD Y' S PUBLIC UTILIT Y MANUAL.

A NhUAL RE POR TS TO STOC FHOLDE RS.

A NNUAL' REPORTS TO C ALIFORh!A P UB LIC UTILI TIE S C OMMI SSIGN +

u ).

t r

e -

v - u -

d TABLE 18 p- SOUTHEPh CALIFORNIA EDIS ON COMPANY OPERA TING RATICS TR EN D AtiD 5-YE A R A VE RA GE S 1974 -

1978 I I S0. CALIF. I 15 AA-RATE 0 1 15 LARGEST I 00W JONES I I YEA 9 I EDISON I ELECTRIC & C OMS. I ELEC TRIC i 15 I I i C OM PA N Y I UTILITIES l UT IL IT IES I UT ILIT Y ST OCK S t 1974 81.43% 80.84% 80.23% 82.19%

1975 83.31 81.51 80 54 83.02 3

1976 83.37 d2.13 80.77 53.6 3 1977 8 3.98 83.69 8 1. 11 85.15 1973 86.06' 64.85 82.85 85 .9 9

~5-YR AV E P. A GE 83.73 e2.60 81 10 84.00

.O I ND E X-19 7 4 100 100 100 100 1975 103 101 100 10 1 1976 102 102 101 102 1977 103 104 101 104 1978 106 105 103 10 5 5-YR AVER AGE 103 102 101 102 SOURCE S:- 5-YE AR STUDIES, R ATE CF RETU RN UNI T.

- MOOD Y' S PueLIC UTILITY MAhUAL.

A NNUAL RE PO R TS TO S TOC K H OLD E RS .

A NNU AL RE POR Tt TO CAu !FORN I A PUBLIC UT ILIT IE S COMMISSION.

[j.

w./

7-TABLE 19 SOUTHE P.h C A LIF ORflI A EDI SDN C OMPAN Y AVERAGE NE T PLA NT I NVE S TMEN T THEND AND 5-YE AR A VE RAGES 1974 -

1978 I i 50. CALIF . I 15 AA-PATED i 15 LARGEST I 00W JONE S I I YEA 9 I EDISON i ELECTRIC & COME. I E LEC TRIC i 15 I I I COMPANY I UTILITIES I UTILITIES i UTILI T Y STOCK S I 1974 3,507,594 1,755,la7 1,707,456 2,821,190 1975 3,805,130 1,906,951 1,905,137 3,002,946 1976 4,132,323 2,060,044 2,085,347 3,175,634 1977 4,507,242 2,239,966 2,278,200 3,393,939 1978 4,921,948 2,451,186 2,511,643 3,658,422 gS 5-YR AV ER A G E 4,174.d47 2,082,659 2,097,557 3,210,426 O

I t10 EX-19 7 4 100 100 100 100 1975 108 109 112 106 1976 116 117 122 11 3 1977 128 128 133 12 0 1978 140 140 147 130 5-YR AVER AGE 119 119 123 11 4 DOLLA RS IN ' n 0 0 S A *10 5 53URCES:- 5-f E AR STUDIES, RA TE OF PE T URN UNIT.

M000 Y,3 PUBLIC UTILITY PA N UA L.

A N'iUA L RE P O R TS 70 'S IGC XHDLDE RS.

A NNUAL RE P OP T S TO C ALIF 0PNI A PUBLIC UTILI TIE S C OMMI SSI ON . .

y.

I TL8LE 20 l O' SOUTHERN C ALIF ORNI A EDISDN COMPAuY I

RA TIO: OPE FA TING RE VE N UE S TO AV ER t GE NP I TREND AND 5-YE AR A VERAGES i

1974 - 1978 l l $0. CALIF. I 15 A A-R A TED 1 15 LA RGE ST I DOW JONE S i I YEAR I EDISON I E LEC T P IC & C OMB. I ELECTPIC i 15 I i 1 C OM PA N Y l UTILITIES. I UT IL I T IE S I UT ILIT Y ST OCK S I 1974 38.80% 36.84% 34.13% 43.92%

1975 43.29 39.93 36.32 48.28 1976 44.69 43 16 37.97 53.9 0 1977 45 81 47.41 40.94 60.87 1978 47.31 49.76 42 26 63.72 5-YR AV ER A GE 43.98 43.42 38.32 54 14 O-I ND E X-19 7 4 100 100 100 100 1975 112 108 106 110 1976 115 117 111 123 1977 118

• 129 120 139 1978 122 135 124 145

. 5-YR AVERAGE: 113 116 112 123 l

S OUR C E S: 5 -Y E A R STUDIES, RA TE 0F -RE TURN UNI T.

~

M000 Ys S PUBLIC UTILIT Y. HA NUAL.

L A NNUAL RE PORTS. TO STCC KHOLDE RS.

L ' ANNUAL: REPCRTS 70 ' CALIFORNIA P UB LIC UTILI TIE S C OMMI SSI ON .

o w

1

TABLE 21 O SOUTHERN C AL IFORN I A E0ISON C OMPANY RA TIO: OF NET OPR. INCOME TO AVER AGE NPI '

TRENO AND 5-YE AR A VERAGE S 1974 - 1973 I I S0. CALIF. I 15 A A-R A TE0 1 15 LA RGE S T I 00W JONE S I 1 YEAR I EDISON I E LEC TRIC & C OMB. I ELEC TPIC i 15 1 ,

1 I C OM PA N Y I UT ILI TI ES I UT IL IT IES 1 UT ILIT Y STOCKS I 1974 7.20% 6.98% 6.65 % 7.64%

1975 7.01 7 26 6.96 7.95 1976 7.43 7.60 7.19 8.39 1977 7.34 7.59 7.61 S.39 1978 6.59 7.40 7.16 S.11 7.12 5-YR AVERAGE 7.12 7.37 8.10 INDEx-1974 100 100 100 100 1975 97 106 105 104 1976 103 109 , 108 110 1977 102 109 114 110 1978 92 106 108 106 5-YR AVERAGE 99 106 107 106 SOURCES: 5-YE A R STLOIES. RA TE OF RE TURN UNI T.

H000 f 'S PUBLIC OTILIT Y MANUAL.

ANNU AL REPORTS ' TO STOCKHOLDERS.

ANNUAL RE POR TS T O C A LIF CRNI A- PUB LIC UT ILI TIE S - C OMMI SSI ON.

!.xg h).

)

TABLE NO. 22 SOUTHERN CALIFORNIA EDISON COMPANY Rates of Return Required to Recover Imbedded Costs or Debt and ,

Preferred Stock at Various Assumed Earnings Rates on Common Equity Average Years 1981 and 1982

:  :  : Asstaned Earnings Rates on Common Equity  :

: Capital : Cost  : 13.005 : 13.25% : 13 50% : 13.75% : 14.00% : 14.25% : 14.50% :

Weighted Cost Totals  :

,  : 1981  : Ratios : Factor (a) (b) (c) (d) (e) (f) (c)

Long-Tem Debt 4700% 8.29% 3 90% 3.90% 3.90% 3 90% 3 90% 3.90% 3.90%

Preferred Stock 13 00 7 98 1.04 1.04 1.04 1.04 1.04 1.04 1.04 common Equity 40.00 - 5.20 5.30 5.40 5.50 5.60 5.70 5.00 i

Total 100.00% 10.14% 10.24% 10.34% 10.44% 10.54% 10.64% 10.74% 1 1982 Long-Tem Debt 47 00% 8 51% 4.00 4.00 4.00 4.00 4.00 4.00 4.00 itererred Stock- 13 00 8.12 1.06 1.06 1.06 1.06 1.06 1.06 1.06 Common Equity 40.00 - 5.20 5.30 5.40 5.50 5.60 5 70 5 00 Total 100.00% 10.26% 10.36% 10.46% 10.56% 10.66% 10.76% 10.06%

[

J/ Average year cost factors. Year end cost factors are developed in Tables Nos. 5 and 7 I

l I

O TABLE NO. 23 SOUTHERN CALIF 01UTIA EDISori COMPANY Recommended Rate of Return Average Year 1981

: Capital : Cost Weighted :

Components  : Ratios-  : Factors : Cost  :

1 (a) (b) (c)

Long-Tem Debt 4700% 8.29% 390%

Preferred Stock 13 00 7 98 1.04 Common Eq21ty 40.00 13.60 5.44 Total g g Averare Year 1982 O Long-Tem Debt 47 00% 8.51% 4.00%

Preferred Stock 13 00 8.12 1.06 Common Equity 40-00

. 13.60 5.44 Total 100.00s 10.50%

l

{

i

/ .

u

, s APPENDIX SOUTHERN CALIFORNIA EDISON COMPANY List of Companies Used in Study AA-Rated Electric and Largest E3ectric Combination Utilities (15) Utilities (15)

Baltimore Gas & Electric Company Boston Edison Company Cincinnati Gas & Electric Company Carolina Power & Light Con:pany Cleveland Eectric Eluminating Company Cleveland Ilectric Elu=inating Company Comonwealth Edison Company Commonwealth Edison Company Gulf States Utilities Company Detroit Edison Company Houston Industries, Inc. Duke Power Company Illinois Power Company Duquesne Light Company Northern Indiana Public Service Company Florida Power Corporation Northern States Power Company Florida Power & Light Company -

Oklahoma Gas & Electric Company Houston Industries, Inc.

Pacific Gas & Electric Company Ohio Edison Company Public Service Company of Colorado Oklahoma Gas & Electric Company 1

Public Service Company of Indiana, Inc. Pennsylvania Power & Light Company Public Service Eectric & Gas Company Potomac Electric Power Company Wisconsin Electric Power Company Public Service Co. of Indiana, Inc.

Dow Jones Utility Stocks (15)

American Electric Power Company Cleveland Electric Illuminating Company Columbia Gas System, Inc.

Comonwealth Edison Company Consolidated Edison Company of New York, Inc.

Consolidated Natural Gas Company Detroit Edison Company

' Houston Industries, Inc.

Niagra Mohawk Power Corporation Pacific Gas & Electric Company Panh=Mle Eastern Pipeline Company Peoples Gas Company Philadelphia Eectric Company Public Service Electric & Gas Company j . Southern California Edison Company

. - .. . - -