A portion of each payment goes directly in the pockets of shareholders. Called a “return on equity,” the amount is meant to compensate investor-owned utilities for the risk of doing business. It pays back shareholders for their investment in the companies and helps utilities maintain a higher credit rating to attract better loan rates for future projects.

Each state’s utility regulator, including the California Public Utilities Commission, is responsible for determining these often double digit rates of return, which is a key part of utilities’ profits. Studies found that the shareholder rates regularly outpace a common economic benchmark, costing customers across the country as much as $7 billion annually. CalMatters examined these rates since 2020 and found they amount to hundreds of millions of dollars annually from California customers.

Approved rates of return in the state are hovering around 10%, more than double the rate for the benchmark, 10-year U.S. treasury bonds. Utilities can earn less than that if they do not meet performance targets, but California’s three major investor-owned utilities still earned hundreds of millions of dollars from return on equity in 2023. Critics call that excessive and say utilities are exaggerating the risks they face.

“Across all the utilities, we seem to be providing some rather generous rates,“ said David Rode, a Carnegie Mellon University professor who studies decision making in finance and utilities. “It’s easy to look at a single utility and go, ‘well this rate makes sense for this utility’ and miss the broader implications(but)… It’s kind of like missing the forest for the trees.”

Customers across the state are facing steep power bills from the state’s three main investor-owned power companies. Californians pay among the highest electricity rates in the country, the largest portions of which come from new hikes for wildfire mitigation and rooftop solar programs. PG&E bills in particular have risen several times in the last year alone, and ratepayers will see another increase after regulators voted to keep the Diablo Canyon nuclear power plant open to address concerns over energy reliability during the shift to renewable sources.  

Gov. Gavin Newsom announced an executive order last fall to address high energy bills by asking the utilities commission to scrutinize wildfire mitigation costs and underperforming energy programs. The state Legislative Analyst’s Office released a report this month examining the state’s climate policies and residential electricity rates, which it found were increased by efforts to curb wildfires and global warming, among other factors. 

Southern California Edison’s 2024 approved shareholder return rate was the highest among its Golden State peers at 10.75%, followed by PG&E at 10.7%, and San Diego Gas & Electric at 10.65%.

The utility commission’s preliminary decisions for return on equity rates this year, which have not been finalized, are all just above 10%. That’s comparable to the industry average, also about 10%. 

Each company’s financial performance throughout the year determines whether they will achieve their full shareholder rate of return or even above it. But even a fraction of their approved shareholder rates represents millions of dollars from ratepayers. In 2023, for example. Southern California Edison collected $91 million out of a possible $198 million for shareholders (approved for 10.05%), PG&E collected more than $111 million out of a potential $125 million (approved for 10%), and San Diego Gas & Electric collected $41.9 million out of a possible $42 million (approved for 9.95%).

“A competitive return on equity is important to ensure that PG&E can continue to attract the level of investment needed to meet the energy needs of our hometowns,” PG&E spokesperson Mike Gazda said. “The state regulator determines that return on equity through an open, transparent and public process.”

Gazda said the “vast majority” of PG&E’s profits, to which the return on equity contributes, is reinvested into the utility. The company, he said, has cut expenses to customers through federal loans and grants, as well as “new technologies, improved processes, and renegotiated contracts.” He did not directly answer a question about whether lower shareholder returns would be part of the company’s future plans but said PG&E will work on bill affordability with regulators and policymakers.

The shareholder rates as approved by the utility commission have outpaced those for the 10-year treasury bonds, which are often used as a benchmark by researchers because they track inflation and are considered riskless. Riskier businesses tend to earn returns above this, experts said. But Rode’s study and others found that utilities’ shareholder return rates are going up nationally, while the risk the industry faces doesn’t match that increase.

Treasury bond yields are part of the model the California Public Utilities Commission uses when setting these shareholder rates.

“Without capital market funding, necessary grid work would have to be funded immediately in part through the rates customers pay, and this would significantly raise those rates,” Jeff Monford, spokesperson for Southern California Edison, said. “Providing our investors with a competitive (return on equity) is crucial to the success of this model.”

CalMatters looked at California’s three main investor-owned utilities’ shareholder return rates and the average 10-year treasury bond yields from 2006 through November, including the utilities’ actual returns during that period through 2023, the most recent data available.

The average rates for such treasury bonds didn’t break 5% from 2006 through November. Only within the last year have any of California’s three major investor-owned utilities dipped below double digits. California’s gap between the shareholder and treasury rates has closed slightly since 2006, with shareholder rates for the three companies declining between less than 2 percentage points each. Treasury bond rates largely held steady during that period, with 10-year notes going from a yield of 4.53 percent to 4.18 percent.

Despite this dip, the dollar amount the state’s power companies are authorized to collect for shareholders has increased nearly every year as their customer bases grow and utilities add more costs that can be charged to customers.

One contributing factor nationwide, studies found, is that regulators often hesitate to approve shareholder rates below 10% and rarely take into consideration the gap between what utility shareholders earn and the treasury bond rates. Psychology comes into play here – 10 can feel like a substantial round number, and moving below that may feel like a large move.

And the companies regularly ask for more. Had regulators landed at PG&E’s request for 2023 – one percentage point above what was approved – the company would have been allowed to collect $12.5 million more. Southern California Edison requested the equivalent of about $9.4 million above what was later approved, and San Diego Gas & Electric requested the equivalent of $2.5 million more than what was later approved.

Cal Advocates, the body responsible for advocating for ratepayers before the commission, often pushes back against these, requesting lower shareholder rates.

“We generally think they’ve been set a bit too high,” Michael Campbell, assistant deputy director of energy at Cal Advocates, said. “The utilities’ arguments of just how risky it is to be a utility in California and their ability to recover their costs from ratepayers is overstated.”

Rising costs are of particular concern for Californians, whose bills, especially under PG&E, have risen steadily because of wildfire response. A law passed in 2019 attempted to cushion some of that blow on ratepayers, prohibiting utilities from collecting for shareholders a return on the first $5 billion they collectively spend on wildfire safety measures. 

“The business is not meant to be risk free,” said Janice Beecher, political science professor at Michigan State University who specializes in utility economics. “If it’s risk free, give them treasury returns and go home early.”

The post One reason your power bill is high: Baked-in profits that critics call excessive appeared first on The Hemet & San Jacinto Chronicle.

Satyasai’s Pacific Gas and Electric bill jumped by about $100 compared to the same month last year. Like many of PG&E’s 5.5 million customers, she’s having to rescript her monthly budget around these rising costs. 

“Everyone is getting squeezed,” Satyasai said. 

Propelled in large part by PG&E, which hiked residential electricity rates by 20% for about 16 million Californians in January, the state high electricity prices are second only to Hawaii, which is always an expensive outlier because of the costs of shipping oil to the far-flung archipelago.

A pack of New England states have historically had some of the nation’s highest electricity prices (the federal government doesn’t track rates but rather calculates prices using customer counts, sales and revenue data) due to factors like a shortage in natural gas pipeline capacity plus the region’s reliance on costly fossil fuels to generate electricity. 

But California has joined them in the last ten years, leapfrogging with Rhode Island, Connecticut, Massachusetts and New Hampshire to periodically hold the title as the most expensive state for electricity usage in the lower 48. (Even though Californians pay a high amount for each unit of electricity, their total bills tend to be lower than other states in the Northeast and South due to the West Coast’s relatively temperate climate.)

East Coast residents are paying higher prices during cold winter months with Californians paying higher electricity prices for a brief period nearly every summer since 2014, likely when people must cool their homes during heatwaves. 

It is unusual for Californians to pay higher prices than the East Coast in the depth of winter. This year alone, typical Northern and Central California households (which use about 500 kilowatt-hours of electricity each month) will pay over $400 more annually on their PG&E bill.  

PG&E currently charges the most for electricity among California’s three investor-owned utilities with an average residential rate of $0.397 per kilowatt hour. The company’s residential electricity rates have risen more dramatically than the other utilities, jumping 128% over the last decade. 

San Diego Gas and Electric’s average residential electricity rate is $0.383 per kilowatt hour and Southern California Edison’s rate is $0.338. 

PG&E has vowed to keep future rate increases between 2% and 4% annually, and said January’s dramatic hike was partly due to the slow pace of state approvals that compressed two years of rate hikes into one. 

PG&E chief executive officer Patti Poppe last week told investors during a quarterly earnings call that the company is taking dramatic steps to increase efficiency and lower costs. In an interview with the Chronicle, Poppe said the focus on lowering operational costs is new for the company and one that she hopes will show up in lower bills in the future. 

“The work we’re doing is really necessary,” Poppe said. 

Robert McCullough, an Oregon-based energy consultant who has studied California’s utility markets, said California’s historically high electricity prices can in part be tied to complicated factors like the state’s deregulation of the energy industry in the 1990s. 

But McCullough blamed January’s sticker shock hitting PG&E customers this year on the company’s deferred maintenance of its aging electric grid.

The company attributes about 85% of January’s rate increase to covering the costs to modernize, upgrade and strengthen its aging electric and natural gas infrastructure at a time when climate change has made the state increasingly vulnerable to storms and wildfires. 

“Pacific Gas and Electric fell behind on its maintenance and even without global warming that would have been a big bill,” McCullough said. 

And PG&E’s rates are set to be eclipsed by San Diego Gas and Electric before the end of 2024. The San Diego utility has temporarily dropped rates to compensate customers after previously  charging too much, according to the Public Advocate’s Office of the California Public Utilities Commission. 

Californians’ utility bills could also be impacted by a controversial proposed monthly fixed charge of about $24. 

The post ‘Everyone is getting squeezed’: California electricity prices now second-highest in U.S. appeared first on The Hemet & San Jacinto Chronicle.