A significant portion of Californians' electricity bills goes towards shareholder returns, a practice that critics argue is excessive. This article examines the return on equity model, which compensates investor-owned utilities for the risks they face, and its impact on customer costs. California's approved rates are significantly higher than industry benchmarks, raising questions about the true level of risk utilities face and the fairness of these charges.
Power lines in Sacramento on Sept. 20, 2022. Electric bills include fees for utilities’ return on equity, which critics say have grown excessive in California. is challenge enough. But there’s a surprising cost baked into customers’ bills that doesn’t have its own line item.
“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… It’s kind of like missing the forest for the trees.”
“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.”
Treasury bond yields are part of the model the California Public Utilities Commission uses when setting these shareholder rates. 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.
CALIFORNIA UTILITIES SHAREHOLDER RETURNS ELECTRICITY RATES COST OF LIVING UTILITY REGULATION
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