As our electric bills continue their skyward ascent, a question crackles like lightning over regulators’ heads:
How much profit should the big utilities be allowed to make?
The California Public Utilities Commission wrestled with that lightning on Thursday. In the end, commissioners gave the utilities less than they asked for, and less than they got the year before, but way more than what consumer advocates believe they should get.
Don’t expect to go to Rio with the wild savings, though. Even under the new profit rules you won’t see much relief in your monthly bill.
“What the CPUC giveth with one hand, they taketh away with the other,” said Mark Toney, executive director of the consumer advocacy group TURN, The Utility Reform Network.
The Investor-Owned Utilities — Southern California Edison, San Diego Gas & Electric, Pacific Gas & Electric, SoCal Gas — had requested “returns on equity” (which compensates shareholders for the risk of doing business) ranging from 11% to 11.75%, which “are unjustifiably higher than market conditions warrant,” argued a letter to the CPUC from dozens of consumer groups.
“Leading financial firms estimate long-term U.S. equity market returns at an average of 6.06% for the general market, which is considered riskier than utility investments….. California IOUs’ ROE is already above the national average, and their proposed increase would collectively extract an additional $917 million from California ratepayers with no corresponding improvement in service.”
An early draft decision shaved the ROE a wee bit, to the mid-high 9s. The utilities complained. The ROE was bumped up a smidge, settling lower than previous years, but still clocking in at about 10%, “the lowest amount that is reasonably sufficient to assure confidence in the financial soundness of the utility and to improve and maintain investment grade credit ratings and so balances the interests between shareholders and ratepayers,” the decision said.
And that, on a vote of 4-1, is what commissioners approved on Thursday, Dec.18. Darcie L. Houck cast the lone “no” vote, wanting more relief for customers.
Missing forest for trees
People pay a lot of attention to the ROE percentages the utilities can collect — ooo! they’re going down! — but that misses the forest for the trees, TURN’s Toney suggested.
“When you’re financing a home, you want to know, ‘What’s my monthly payment?’ ” he said. “The two things that impact that are — yes, the interest rate on your mortgage — but, much more importantly, the price of your house.”
In this analogy, the amount of money utilities borrow for capital projects equates to the price of the house.
“It’s the same thing with people’s monthly bills. They’re more impacted by how much is being financed,” Toney said. “I get frustrated because there’s so much media on the percentage, while utilities are allowed to bloat their capital costs. So the reduction in the percentage — don’t get me wrong, that’s a good thing — is going to be more than offset by how much is being financed.”
Important background: The big investor-owned utilities don’t make money selling electricity itself. That’s pretty much a pass-through cost. Rather, the CPUC allows them to profit from their infrastructure investments — the aforementioned percentages — which critics say creates a perverse incentive for the utility to spend way more than is necessary.
Hardening the grid against wildfires has been a major focus of infrastructure spending and a major driver of rate hikes. To finance these improvements, the utilities must attract lenders and investors (by offering them a path to make money from interest on loans, dividends or rising stock value). “Indeed, in some cases, around 25% of customer payments cover utility profits, taxes on profit and interest” said a recent Little Hoover Commission report.
After listening to members of the public asking them to cut utility profits, the commissioners said they’re legally required to strike a balance between ensuring that utilities have enough money to keep the lights on, and that consumers can pay their bills. This decision does those things, the majority said.
Commissioners stressed that the shareholders’ return on equity — the most contentious part of this “cost of capital” proceeding — is not guaranteed, but a cap. They also said it reflects increased costs of borrowing in a state known for catastrophic wildfires.
The utilities were circumspect.
“SCE projects a rate decrease in January 2026, regardless of the outcome of this Cost of Capital decision,” Edison spokeswoman Gabriela Ornelas said. While the revised decision “modestly” increased the authorized ROE, “we think the reduction from current ROEs doesn’t reflect the unique risk environment facing California IOUs and their investors.”
Meanwhile, consumer groups fumed.
“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, CALPIRG Education Fund’s state director, in a statement.
“While the commission wisely turned down the utilities’ audacious proposals for unjustifiably high returns, the approved rates will still ensure excessive profits for utility shareholders. As long as CPUC allows such lofty rates of return, it incentivizes power companies to overspend, increasing energy bills for everyone. That’s not how a regulated market should work and it needs to change.”
Monopolies and profits
“How much profit a monopoly should earn is both an economic and a moral question,” mused the Sierra Club in pre-meeting missives. “When it comes to growing our energy capacity and affordably, the best answer under our current energy system is that utilities should receive enough get enough to get the job done — but right now they are asking for a lot more.”
Nationally, returns on equity for regulated utilities have ranged from 9.39% to 9.72% over the past decade, PUC documents say.
Consumer groups seethe over the “excessive profits” that investor-owned utilities are allowed to collect, even as bills rise. Edison reported income of $1.6 billion last year; SDG&E, $891 million; PG&E, $2.4 billion.
Executive compensation is nothing to sneeze at. Last year, PG&E’s head, Patricia Poppe, made $15.8 million; SCE’s, Steven Powell, made $4 million; and SDG&E’s Caroline Winn made, well, it’s hard to say exactly, as she’s a smaller cog in the SEMPRA wheel (SEMPRA’s CEO made more than $20 million) and the names of lower-paid execs are blacked out in official filings. It might be safe to assume she’s the highest-paid one of those, at about $3.3 million.
“While California households struggle to pay bills, the CPUC’s decision on this year’s Cost of Capital proceeding gives utilities a return on equity between 9.78% and 10.03% — a tiny reduction of just .30% from already too high 2025 levels,” the Sierra Club said in a statement after the vote.
“This cut is not nearly enough of a decrease to help ratepayers during California’s affordability crisis. Evidence presented by Sierra Club and The Protect Our Communities Foundation proves that returns on equity of 6% would balance consumer and utility needs, saving California customers $6.1 billion each year, or $440 per household, compared to the utilities’ proposals.”
But the commission ignored that record, split the difference, and moved on, said Julia Dowell, Senior Organizer at Sierra Club. “While this reduction is better than nothing, in the middle of an affordability crisis, Californians deserve more than a performative gesture — they deserve leadership. The commission failed to provide it today.”
Pressure
The CPUC has been under intense pressure to get consumer electric bills under control. Rates have doubled over the past decade, far outpacing inflation. And the rates in California are about twice the national average.
Annual rate increases between 2020 and 2025 have averaged 13.3% for PG&E, 12.3% for Edison, and 9.1% for SDG&E, the Sierra Club noted.
“Other states are taking decisive action to scrutinize utility profits,” said the letter from dozens of consumer groups. “The Connecticut Public Utilities Regulatory Authority has denied gas company rate increases and required millions in customer refunds. The Illinois Commerce Commission cut utilities’ proposed rate increases and return on equity, saving customers hundreds of millions of dollars. The California Public Utilities Commission should join this movement by more thoroughly scrutinizing the utilities’ proposals and prioritizing ratepayer interests.”
California’s commitment to clean energy and a host of other policies means there’s not a whole lot that will shrink bills, the experts have said. But there are things we can do to stop them from spiking more, and shrinking utility profits — more than they’ve been shrunk — is one of them.
Utility profits have stayed high and steady nationwide for the past 40 years, even as the actual cost of capital has gone down, a recent Little Hoover Commission report said. But regulators often approve profit levels exceeding what’s truly needed to attract investment. Scaling back those profits could help reduce bills, and the State Treasurer’s Office should be tapped to ensure thorough examination and fairer determinations of utility profit levels.
Public, rather than private, financing of big infrastructure projects could also help enormously, experts have said.
“The perverse structure of the utility funding system effectively rewards the utilities for being inefficient. The fact that rates are so much lower in public and municipal utilities is abundant evidence of this. As long as the legislature and administration fail to address this built-in bias the CPUC will continue to bow to utility pressure and electricity will become less affordable,” said Jose Torre-Bueno, executive director of the Center for Community Energy, in a statement.
The PowersThatBe will surely paint this as a major win for consumers. But, meh.
“Revising the decision in favor of utility shareholders is more than just buckling under pressure from the major utilities,” TURN’s Toney said. “It is part of a disturbing pattern of Commissioners disregarding proposals to address the affordability crisis issued by their own judges and staff, based upon evidence presented by all parties in ratemaking cases.
“This is a clear sign that the legislature needs to take more action to address the affordability crisis, because the CPUC has failed to do so.”
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