Despite complaints from customers about rising electric bills, the California Public Utilities Commission voted 4 to 1 on Thursday to keep profits at Southern California Edison and the state’s other big investor-owned utilities at a level that consumer groups say has long been inflated.
The commission vote will slightly decrease the profit margins of Edison and three other big utilities beginning next year. Edison’s rate will fall to 10.03% from 10.3%.
Customers will see little impact in their bills from the decision. Because the utilities are continuing to spend more on wires and other infrastructure — capital costs that they earn profit on — that portion of customer bills is expected to continue to rise.
The vote angered consumer groups that had detailed in filings and hearings at the commission how the utilities’ return on equity — which sets the profit rate that the companies’ shareholders receive — had long been too high.
Among those testifying on behalf of consumers was Mark Ellis, the former chief economist for Sempra, the parent company of San Diego Gas & Electric and Southern California Gas. Ellis estimated that the companies’ profit margin should be closer to 6%.
He argued in a filing that the California commission had for years authorized the utilities to earn an excessive return on equity, resulting in an “unnecessary and unearned wealth transfer” from customers to the companies.
Cutting the return on equity to a little more than 6% would give Edison, Pacific Gas & Electric, SDG&E and SoCalGas a fair return, Ellis said, while saving their customers $6.1 billion a year.
The four commissioners who voted to keep the return on equity at about 10% — the percentage varies slightly for each company — said they believed they had found a balance between the 11% or higher rate that the four utilities had requested and the affordability concerns of utility customers.
Alice Reynolds, the commission’s president, said before the vote that she believed the decision “accurately reflects the evidence.”
Commissioner Darcie Houck disagreed and voted against the proposal. In her remarks, she detailed how California ratepayers were struggling to pay their bills.
“We have a duty to consider the consumer interest in determining what is a just and reasonable rate,” she said.
Consumer groups criticized the commission’s vote.
“For too long, utility companies have been extracting unreasonable profits from Californians just trying to heat or cool their homes or keep the lights on,” said Jenn Engstrom at CALPIRG. “As long as CPUC allows such lofty rates of return, it incentivizes power companies to overspend, increasing energy bills for everyone.”
California now has the nation’s second-highest electric rates after Hawaii.
Edison’s electric rates have risen by more than 40% in the last three years, according to a November analysis by the commission’s Public Advocates Office. More than 830,000 Edison customers are behind in paying their electric bills, the office said, each owing a balance of $835 on average.
The commission’s vote Thursday was in response to a March request from Edison and the three other big for-profit utilities. The companies pointed to the January wildfires in Los Angeles County, saying they needed to provide their shareholders with more profit to get them to continue to invest in their stock because of the threat of utility-caused fires in California.
In its filing, Edison asked for a return on equity of 11.75%, saying that it faced “elevated business risks,” including “the risk of extreme wildfires.”
The company told the commission that its stock had declined after the Jan. 7 Eaton fire and it needed the higher return on equity to attract investors to provide it with money for “wildfire mitigation and supporting California’s clean energy transition.”
Edison is facing hundreds of lawsuits filed by victims of the fire, which killed 19 people and destroyed thousands of homes in Altadena. The company has said the fire may have been sparked by its 100-year-old transmission line in Eaton Canyon, which it kept in place even though it hadn’t served customers since 1971.
Return on equity is crucial for utilities because it determines how much they and their shareholders earn each year on the electric lines, substations, pipelines and the rest of the system they build to serve customers.
Under the state’s system for setting electric rates, investors provide part of the money needed to build the infrastructure and then earn an annual return on that investment over the assets’ life, which can be 30 or 40 years.
In a January report, state legislative analyst Gabriel Petek detailed how electric rates at Edison and the state’s two other biggest investor-owned electric utilities were 50% higher than those charged by public utilities such as the Los Angeles Department of Water and Power. The public utilities don’t have investors or charge customers extra for profit.
Before the vote, dozens of utility customers from across the state wrote to the commission’s five members, who were appointed by Gov. Gavin Newsom, asking them to lower the utilities’ return on equity.
“A profit margin of 10% on infrastructure improvements is far too high and will only continue to increase the cost of living in California,” wrote James Ward, a Rancho Santa Margarita resident. “I just wish I could get a guaranteed profit margin of 10% on my investments.”
