California regulators cut profits on electric bills, upsetting utilities

from Malena CaroloCalMatters

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Regulators on Thursday approved a slight reduction to the profits that shareholders can receive of the three major investor-owned utilities in California.

The decision reduced the returns of the three major investor-owned energy companies by 0.3%, bringing shareholder returns for Pacific Gas & Electric to just under double digits for the first time in at least two decades. A a solution proposed last month would have imposed a slightly larger profit cut of 0.35%.

All utilities claimed returns of over 10%. The decision is unlikely to significantly affect customer bills, which remain the second highest in the nation after Hawaii.

Darcie Houck was the lone no vote on the California Public Utilities Commission, saying the decision did not properly consider the cost to ratepayers.

“Every economic indicator tells us that we live in a time of extreme uncertainty for working Californians,” she said. “I don’t think the decision threads the needle enough to account for the full impact on the client’s interest.”

Utilities say the high potential rate of return to shareholders is important to securing the necessary financing for infrastructure projects, which are typically paid for upfront by investors and bonds and later repaid by ratepayers after regulators approve the spending. This return is considered compensation for the risk of doing business.

Returns are not specifically listed on customer bills, instead they are included in the price customers pay.

The ruling pegs 2026 potential shareholder returns for PG&E at 9.98%, Edison at 10.03% and San Diego Gas & Electric at 9.93%. These returns are not guaranteed and may be affected by the utility’s financial performance during the year, decreasing if the utility has cost overruns. Historically, only San Diego Gas & Electric achieves its full return to shareholders, while PG&E and Edison typically fall short of the full amount.

The three utilities’ approved returns have hovered around 10% for decades, which is also the national average return to utility shareholders, often exceeding that. Scholars and ratepayer advocates have argued for years that this is a problem because the higher rate of return is meant to offset risk, but utilities have historically been a low-risk industry. Their rates are set by regulators and their income is largely predictable and effectively guaranteed by ratepayers who will continue to need services like electricity. The 10-year U.S. Treasury bond, which is considered the basis of a risk-free investment, is about half the approved interest rate for utilities. Utilities regularly reject that point, saying wildfires in particular have made their industry riskier.

Utilities have criticized the proposed rate cut for shareholders, saying it would worsen already high bills for ratepayers. The California Public Defender’s Office, which advocates for toll payers before the commission, rejected that, saying the claim was “completely without merit.”

“The evidentiary record shows that (the utilities’) claims to increase their respective (returns) are based on flawed methods and would inevitably result in unreasonably high customer rates,” it said in a December response to the utility’s comments.

Energy companies said the decision is not an accurate reflection of the risks their industry faces in the state.

“We believe the reduction from current ROEs does not reflect the unique risk environment facing California IOUs and their investors,” said David Eisenhower, an Edison spokesman.

Similarly, PG&E was “disappointed that the final decision does not recognize the current increased risks to help attract needed investment for California’s power systems,” said Mike Gazda, a PG&E spokesman. “We will continue to work with regulators and state leaders to ensure adequate financing needs and reasonable long-term rates for customers so we can continue to stabilize our energy prices and fund critical energy system improvements for customers.”

Shareholder earnings are a percentage of the utility’s “rate base”—the total value of its assets from which it can earn a return. This includes things like power plants. While returns to a given utility’s approved shareholders vary, the rate bases for California’s three utilities are steadily increasing. Each utility’s rate base is billions of dollars, earning hundreds of millions for shareholders even if a utility does not achieve its full return to shareholders.

In 2023, for example, Edison had an interest basis of $29.7 billion and was allowed to earn $198 million for shareholders that year. If its approved return had been one percentage point lower, it would still have been allowed to earn $178 million for shareholders. Although it was far less than that that year, it still brought shareholders $91 million from ratepayers.

In Houck’s dissent, she noted that base rates for utilities, including Edison’s natural gas division, are expected to rise by about 10% each year, with combined allowed potential returns approaching $1 billion more by 2025. Her analysis of that includes Edison’s natural gas division, SoCalGas.

Houck recommended that regulators revisit the issue annually instead of every three years.
California ratepayers are facing an electricity bill affordability crisis due to factors such as recovery and hardening after forest fire. Shareholder earnings, which impact the bills, have also risen in recent years due to rising utility price bases.

This article was originally published on CalMatters and is republished under Creative Commons Attribution-NonCommercial-No Derivatives license.