high-electricity-bills-excessive-embedded-profits-causing-concerns

High Electricity Bills: Excessive Embedded Profits Causing Concerns

Understanding the intricate details of charges listed on a monthly electricity bill is challenging enough. However, hidden within these bills is a surprising cost that customers often overlook—a portion of each payment goes directly into the pockets of shareholders. Referred to as “return on equity,” this amount aims to compensate investor-owned utility companies for the risks associated with conducting business. It rewards shareholders for their investment in these companies and helps utility firms maintain a higher credit rating to attract better interest rates for future projects.

State public utility regulators, including the California Public Utilities Commission, are tasked with determining these return rates, often in the double digits, which play a crucial role in the profits of utility companies. Studies have revealed that shareholder rates consistently exceed a common economic benchmark, costing customers across the nation up to $7 billion annually. CalMatters delved into these rates since 2020 and found that they amount to hundreds of millions of dollars yearly for California customers.

Approved return rates in the state hover around 10%, more than double the benchmark rate—the 10-year U.S. Treasury bonds. While utility companies may earn less if they fail to meet performance targets, the top three investor-owned utility companies in California still raked in hundreds of millions of dollars in return on equity in 2023. Critics argue that this is excessive and that utility companies are exaggerating the risks they face.

“In all utility companies, it seems that we are offering fairly generous rates,” remarked David Rode, a finance and public utilities decision-making expert at Carnegie Mellon University. “It’s easy to analyze a single utility company and say, ‘Well, this rate makes sense for this utility company’ and overlook the broader implications, but…it’s like not seeing the forest beyond the trees.”

Customers across the state are grappling with soaring electricity bills from California’s top three investor-owned electric companies. Californians pay some of the highest electricity rates in the country, largely stemming from new increases for wildfire mitigation and rooftop solar energy programs. PG&E’s bills, in particular, have spiked numerous times just in the past year, and taxpayers will see another hike after regulators voted to keep the Diablo Canyon nuclear power plant open to address energy reliability concerns during the transition to renewable sources.

Governor Gavin Newsom issued an executive order last fall to tackle high energy bills, and the state’s Legislative Analyst’s Office released a report this month examining the state’s climate policies and residential electricity rates, which found that they increased due to efforts to combat wildfires and global warming, among other factors.

### Rising Concerns and Public Outcry

The approved return rate for Southern California Edison in 2024 was the highest among its Golden State counterparts at 10.75%, followed by PG&E at 10.7% and San Diego Gas & Electric at 10.65%. Preliminary decisions by the public utilities commission on return rates this year, which are yet to be finalized, all hover just above 10%, aligning with the industry average.

The financial performance of each company throughout the year determines whether they will meet or surpass their total return rate for shareholders. Even a fraction of their approved rates for shareholders represents millions of taxpayer dollars. In 2023, for instance, Southern California Edison collected $91 million out of a possible $198 million for shareholders (approved at 10.05%), PG&E garnered over $111 million out of a potential $125 million (approved at 10%), and San Diego Gas & Electric received $41.9 million out of a possible $42 million (approved at 9.95%).

“It’s crucial to achieve a competitive return on equity to ensure that PG&E can continue to attract the necessary investment to meet the energy needs of our cities,” stated Mike Gazda, a PG&E spokesperson. “The state regulator determines that return on equity through an open, transparent, and public process.”

Gazda emphasized that the “vast majority” of that return is reinvested in PG&E. The company, he said, has reduced costs to customers through federal loans and grants, as well as “new technologies, improved processes, and renegotiated contracts.” He did not directly respond to a question about whether lower returns for shareholders would be part of the company’s future plans but stated that PG&E would collaborate with regulators and policymakers to address bill affordability.

The California Public Utilities Commission offices in the Edmund G. Pat Brown building in San Francisco on January 28, 2022. The CPUC approves return rates to shareholders billed directly to energy customers. Photo by Martin do Nascimento, CalMatters

The approved shareholder return rates by the public utilities commission have exceeded those of 10-year Treasury bonds, which researchers typically use as a benchmark because they track inflation and are considered risk-free. Riskier companies tend to earn higher returns than these bonds, experts noted. However, studies revealed that shareholder return rates for utility companies are increasing nationwide, while the industry’s risk does not align with this uptick.

The Treasury bond yields are part of the model used by the California Public Utilities Commission in setting these rates for shareholders.

“Without capital market financing, necessary network works would have to be immediately funded, in part through fees paid by customers, significantly raising those fees,” stated Jeff Monford, a Southern California Edison spokesperson. “Offering our investors a competitive return is crucial to the success of this model.”

CalMatters analyzed shareholder return rates for California’s top three investor-owned utility companies and the average 10-year Treasury bond yields from 2006 to November, including the actual returns of the utility companies during that period up to 2023, the most recent data available.