CCPUC Annual Meeting Commission Policy and Wall Street

1. CCPUC Annual MeetingCommission Policy and Wall Street Bill Nusbaum Managing Attorney TURN October 5, 2009

2. Extremely challenging environment • Investment needs are large with many new requirements, especially in energy • Energy efficiency; aggressive renewables requirements; smart grid; carbon reduction • Brattle Group Nov. 2008 report estimates overall industry capital investment requirements through 2030 at approximately $1.5 to $2 Trillion, with the western region ranging between $89 and $189 Billion1 • In telecom – fiber investments, especially for video; 4G wireless networks; “broadband for all” • USTelecom estimates that carriers are investing $60 Billion a year2

3. Extremely challenging environment • Recession is reducing demand • Financial crisis resulting in tight credit and higher cost of credit • Only 30% of the energy industry companies have a rating of A or better – average rating for IOUs is in Baa range3 • In many states, regulators are continuing to allow lower energy company returns and rates than requested • Edison Electric Institute: the average ROE in 2008 rate cases was 10.34%4

4. Key messages being sent to CPUC • Need for “clear and supportive” regulation • Stable revenues, earnings and cash flows • “Utilities and regulators must keep financial community trust to attract capital at lowest cost to customers.”5 • “Adequate” ROE is critical to attract capital • In telecom, constant refrain is: any regulation has a chilling effect on investment with spill-over impacts on infrastructure, job creation, valuation and stock price

5. CPUC response – minimize risk for energy utilities • Higher than average ROEs for investor owned utilities6 • PG&E 11.35% • SDG&E 11.1% • SCE 11.5% • Earnings predictability • Decoupling • Shareholder incentives for EE • Balancing accounts • Procurement cost protection – AB 57 (P.U. Code §454.5) • No subsequent prudency review for large capital investments so long as the utility does not exceed the forecast amount

6. CPUC response in telecom -deregulate • The assumption of “vibrant” competition has led to almost total deregulation • Tremendous resistance to any “new” rules that might “deter network investment” • Example: copper retirements rules

7. Ratepayer concerns • Is the CPUC too generous? • PG&E, Edison and Sempra have all been rated investment grade with comments from rating agencies such as “reasonable/balanced regulatory environment” (Fitch); “solid regulatory paradigm” (S&P) • Sanford Bernstein analyst Hugh Wynne has called Southern California Edison "perhaps the fastest-growing, most favorably regulated electric utility in the United States.”7 • Is there an over-reliance on credit ratings? • “The Street” doesn’t always get it right. How much weight should the CPUC give to investors’ perspectives?

8. Ratepayer concerns • Are ROEs too high? Has the balance of risk been shifted too far to ratepayers? • Are all the investments necessary and provide tangible benefits to consumers? • Will telecom deregulation actually benefit consumers? • Who benefits from broadband infrastructure investment and where?

9. Sources • The Brattle Group “Transforming America’s Power Industry: The Investment Challenge 2010 – 1030, November 2008 • USTelcom ex parte presentation to the FCC re National Broadband Plan, GN Docket 09-51, September 3, 2009 • Edison Electric Institute, “2008 Financial Review, Annual Report of the U.S. Shareholder-Owned Electric Utility Industry” • Moody’s Investors Service, Florida Municipal Electric Association-Florida Municipal Power Agency Annual Conference –“The Financial Outlook for Public Power Utilities”, July 16, 2009, Dan Aschenbach • Robert Boada, VP & Treasurer, Southern CA Edison presentation to NARUC July 21, 2009 • D.07-12-049 • Barron’s “Boring Beauties With Powerhouse Yields” Sept. 14, 2009