High Energy Costs: Delving into the World of Utility Company Profits
Navigating the labyrinth of charges on a monthly power bill can be daunting for consumers. Yet, hidden within these bills lies a surprising cost that often goes unnoticed—an allocation of funds that directly benefits shareholders. Known as a “return on equity,” this compensation aims to reward investor-owned utilities for the inherent risks associated with their operations. By providing shareholders with returns on their investments, these companies secure higher credit ratings, enabling them to access more favorable loan rates for future endeavors.
State utility regulators, such as the California Public Utilities Commission, play a pivotal role in determining these rates of return, a significant component of utilities’ profits. Studies have revealed that these shareholder rates consistently exceed a common economic benchmark, resulting in an annual cost of up to $7 billion for customers nationwide. An in-depth analysis by CalMatters has shed light on these rates since 2020, showcasing how California customers are contributing hundreds of millions of dollars annually to these profits.
In California, approved rates of return hover around 10%, surpassing the rate for the benchmark 10-year U.S. treasury bonds. While utilities may earn less if they fail to meet performance targets, the state’s major investor-owned utilities still reaped substantial returns on equity in 2023. Critics argue that these profits are excessive, accusing utilities of inflating the risks they face in their operations.
David Rode, a finance and utilities decision-making expert at Carnegie Mellon University, raised concerns about the generosity of these rates, emphasizing the broader implications of the situation. He likened the issue to “missing the forest for the trees,” highlighting the systemic impact of these seemingly isolated decisions.
Rising Power Bills: The Burden on California Consumers
Across the state, consumers are grappling with escalating power bills from California’s three main investor-owned power companies. Californians contend with some of the highest electricity rates in the nation, predominantly driven by recent hikes for wildfire mitigation and rooftop solar programs. Notably, Pacific Gas & Electric (PG&E) bills have experienced multiple increases in the past year alone, with another uptick on the horizon following regulatory decisions to keep the Diablo Canyon nuclear power plant operational.
In response to public concerns over high energy bills, Governor Gavin Newsom issued an executive order last fall, urging the utilities commission to scrutinize wildfire mitigation costs and underperforming energy programs. The State Legislative Analyst’s Office also released a report examining the impact of climate policies and wildfire prevention efforts on residential electricity rates.
Southern California Edison led the pack in 2024 with an approved shareholder return rate of 10.75%, followed closely by PG&E at 10.7% and San Diego Gas & Electric at 10.65%. While the utility commission’s preliminary decisions hover just above 10%, mirroring the industry average, the financial performance of these companies throughout the year determines whether they achieve their full shareholder rate of return.
Despite assertions by PG&E spokesperson Mike Gazda that the majority of profits are reinvested into the utility, questions linger about the necessity of such high shareholder returns. Gazda emphasized the importance of maintaining a competitive return on equity to attract investment but remained vague about the company’s future plans regarding shareholder returns.
The Discrepancy in Shareholder Rates: A Closer Look at the Numbers
The shareholder rates set by the utility commission in California have consistently outpaced those for 10-year treasury bonds, a key benchmark for evaluating returns. Jeff Monford, spokesperson for Southern California Edison, underscored the significance of providing investors with competitive returns to sustain the utility’s operations. However, researchers have noted a concerning trend of escalating shareholder rates nationwide, despite the industry’s perceived risks remaining relatively stable.
CalMatters’ analysis of California’s major investor-owned utilities’ shareholder return rates revealed a gradual convergence with treasury bond yields since 2006. While the average rates for treasury bonds remained below 5% during this period, the authorized collections for shareholders increased annually, reflecting the expanding customer base and growing operational costs for power companies.
Experts have highlighted the psychological factors at play in setting shareholder rates, with regulators often hesitant to approve rates below 10%. Janice Beecher, a utility economics specialist at Michigan State University, emphasized that businesses like utilities are not meant to be entirely risk-free, advocating for a balanced approach that considers both shareholder profits and consumer affordability.
As stakeholders continue to debate the appropriateness of these shareholder rates, Californians remain burdened by rising power bills, exacerbated by ongoing concerns about wildfire mitigation costs. While the quest for fair returns on equity persists, the intersection of economic interests and consumer welfare remains a delicate balancing act in the realm of utility operations.