How Low Will Utilities Rates Go?

Power companies, consumer groups at odds over rate costs in California

More than 18 million utility customers across the state can expect smaller energy bills next year. The question is: how much smaller?

The California Public Utilities Commission (CPUC) is expected to decide by year's end how much to reduce rates for customers who get their electricity and natural gas from the state's four largest investor-owned utilities: Southern California Edison (SCE), Pacific Gas and Electric (PG&E), Southern California Gas Company (SoCalGas) and San Diego Gas & Electric (SDG&E).

The CPUC periodically reconsiders the return on equity that utilities can earn. Earlier this year, it required the utility companies to submit new proposed rates that would reflect post-recession market conditions. The return on equity indicates how much profit a company generates with the money shareholders invest. Because these utilities are regulated, the CPUC — rather than the market — determines their return on equity. How low should they go? The utilities have proposed returns on equity around 11 percent, which they say would result in small reductions — from 12 cents to $12 annually — in an average residential energy bill. AARP California and other consumer groups are seeking larger reductions. The Utility Reform Network (TURN), a consumer organization, is advocating for a 9.4 percent return on equity rate, which it says could save each residential customer about $50 annually. The Division of Ratepayer Advocates, the independent consumer advocate within the CPUC, has proposed returns on equity ranging from 8.5 percent to 8.75 percent, said Jerry Oh, a division regulatory analyst. David Pacheco, AARP California state president, said the association is seeking lower rates because "in today's economy, many California seniors living on fixed incomes are struggling financially and simply cannot afford to pay high utility bills."

California has higher returns on equity than most other states, said Mindy Spatt, TURN communications director. The rates for SCE and PG&E ranked among the highest in the nation in a 2010 survey by Public Utilities Fortnightly, an energy industry trade publication, she said.

SCE, PG&E and SDG&E have proposed slight reductions in their pre-recession return on equity rates from current levels. SoCalGas proposed a slight increase in its equity return rate, but other changes would lower customers' bills about a penny a month.

Utilities cite high-risk state

The utilities say they need their proposed rates to attract investors who may view California as a relatively high-risk state. They also say they need to attract more investors because they need more capital than other states to meet California's unique infrastructure needs.

Stephanie Donovan, a SDG&E spokeswoman, said it must meet the state's renewable energy and other "green" requirements, as well as prepare for California wildfires and earthquakes. Jonathan Marshall, a PG&E spokesman, said his utility must offer higher returns because PG&E has a low credit rating.

"It would be a false economy to drive down rates of return to where we can't raise the necessary capital to invest in safer and more reliable energy infrastructure," Marshall said.

The CPUC is receiving public comments on this issue, and its decision will help determine the energy bills for more than 18 million of the state's 22 million regulated electricity and natural gas customers. Of those, PG&E serves more than 6.1 million in northern and central California, and SDG&E serves 1.4 million in San Diego and southern Orange County. SoCalGas provides natural gas to 5.8 million customers, and SCE provides electricity to 4.9 million customers in central, coastal and southern California.

"Working together, we can help stop the escalating cost of these essential services," said Pacheco. "Please join us by calling, emailing or writing the CPUC."

Send comments to CPUC Public Advisor, 505 Van Ness Ave., Room 2103, San Francisco, CA 94102 or email public.advisor@cpuc.ca.gov.

Laura Mecoy is a freelance writer based in Los Angeles.

[Photo courtesy of Annie Tritt]