Why Californians Will Pay $340 More for Electricity Next Year [View all]

[Celerity]

The state public utility commission is poised to approve a rate of return that critics say overcharges customers by $4.4 billion per year.



Four investor-owned electric and gas utilities serving roughly 24 million commercial and residential customers across California are crossing their fingers in anticipation of a California Public Utilities Commission (CPUC) cost of capital proceeding today. The state’s five unelected commissioners will approve or reject a proposal that would allow the Pacific Gas & Electric Company, Southern California Gas Company, Southern California Edison, and San Diego Gas & Electric to charge customers what the American Economic Liberties Project (AELP) and eight other organizations described as “an unjust and unreasonable return” in a letter to regulators this week.

While the proposal does include modest reductions to each of the utilities’ return on equity, or ROE, for the next three years, some argue it continues to provide utilities with a risk-free return (aka expected profits above the cost of providing power) that far outpaces their real borrowing costs. The proposed reduction “would still result in an overcharge of $4.4 billion, or roughly $340 per year for each household served by the four California investor-owned utilities,” said Mark Ellis, AELP’s senior fellow for utilities and a former engineer for SoCal Edison.

Mildly rejecting investor-owned utilities’ requested rate of return has been pitched as something of a victory for ratepayer advocates, and a disappointment for the utilities. But this framing ignores the realities of what risk-free profits mean for corporate bottom lines and consumers of electricity in a state that has the second-highest electricity rates in the nation. And it’s a harbinger of fights around the country, where public utility commissions have largely failed to rein in massive profits from corporate utilities and their shareholders. On Tuesday, the CPUC revised its proposed decision even further in the direction of the utility companies, narrowing the rate reduction from 0.35 percent to 0.3 percent. The common return on equity will be set at 9.78 percent; utilities were seeking between 11 and 11.75 percent.

But the Public Advocates Office, the CPUC’s consumer-based entity, called for an ROE of 9.25 percent. The AELP-led letter estimated a reasonable ROE at 6.1 to 6.2 percent. These small changes can make a big difference. A study published by the University of California, Berkeley, Energy Institute at Haas earlier this year found that even the smallest change to a utility’s ROE can have significant cost implications for ratepayers. For instance, a 0.1 percentage point increase on the revenue a utility is allowed to earn corresponds with tens of millions of dollars or more in added revenues. Based on the average U.S. electric utility rate base in 2019, the authors found that a 0.1 percentage point change would result in a revenue differential of $114 million.

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