Making sense of the alphabet soup of charges on a monthly power bill is challenge enough. But there鈥檚 a surprising cost baked into customers鈥� bills that doesn鈥檛 have its own line item.
A portion of each payment goes directly in the pockets of shareholders. Called a 鈥渞eturn on equity,鈥� the amount is meant to compensate investor-owned utilities for the risk of doing business. It pays back shareholders for their investment in the companies and helps utilities maintain a higher credit rating to attract better loan rates for future projects.
Each state鈥檚 utility regulator, including the California Public Utilities Commission, is responsible for determining these often double digit rates of return, which is a key part of utilities鈥� profits. Studies found that the shareholder rates regularly outpace a common economic benchmark, costing customers across the country . CalMatters examined these rates since 2020 and found they amount to hundreds of millions of dollars annually from California customers.
Approved rates of return in the state are hovering around 10%, more than double the rate for the benchmark, 10-year U.S. treasury bonds. Utilities can earn less than that if they do not meet performance targets, but California鈥檚 three major investor-owned utilities still earned hundreds of millions of dollars from return on equity in 2023. Critics call that excessive and say utilities are exaggerating the risks they face.
鈥淎cross all the utilities, we seem to be providing some rather generous rates,鈥� said David Rode, a Carnegie Mellon University professor who studies decision making in finance and utilities. 鈥淚t鈥檚 easy to look at a single utility and go, 鈥榳ell this rate makes sense for this utility鈥� and miss the broader implications(but)鈥� It鈥檚 kind of like missing the forest for the trees.鈥�
Customers across the state are facing steep power bills from the state鈥檚 three main investor-owned power companies. Californians pay among t, the largest portions of which come from and rooftop solar programs. PG&E bills in particular have risen in the last year alone, and ratepayers will see another increase after regulators voted to open to address concerns over energy reliability during the shift to renewable sources.
Gov. Gavin Newsom announced an executive order last fall to by asking the utilities commission to scrutinize wildfire mitigation costs and underperforming energy programs. The state Legislative Analyst鈥檚 Office this month examining the state鈥檚 climate policies and residential electricity rates, which it found were increased by efforts to curb wildfires and global warming, among other factors.
Southern California Edison鈥檚 2024 approved shareholder return rate was the highest among its Golden State peers at 10.75%, followed by PG&E at 10.7%, and San Diego Gas & Electric at 10.65%.
The utility commission鈥檚 preliminary decisions for return on equity rates this year, which have not been finalized, are all just above 10%. That鈥檚 comparable to the industry average, also about 10%.
Each company鈥檚 financial performance throughout the year determines whether they will achieve their full shareholder rate of return or even above it. But even a fraction of their approved shareholder rates represents millions of dollars from ratepayers. In 2023, for example. Southern California Edison collected $91 million out of a possible $198 million for shareholders (approved for 10.05%), PG&E collected more than $111 million out of a potential $125 million (approved for 10%), and San Diego Gas & Electric collected $41.9 million out of a possible $42 million (approved for 9.95%).
鈥淎 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,鈥� PG&E spokesperson Mike Gazda said. 鈥淭he state regulator determines that return on equity through an open, transparent and public process.鈥�
Gazda said the 鈥渧ast majority鈥� of PG&E鈥檚 profits, to which the return on equity contributes, is reinvested into the utility. The company, he said, has cut expenses to customers through federal loans and grants, as well as 鈥渘ew technologies, improved processes, and renegotiated contracts.鈥� He did not directly answer a question about whether lower shareholder returns would be part of the company鈥檚 future plans but said PG&E will work on bill affordability with regulators and policymakers.
The shareholder rates as approved by the utility commission have outpaced those for the 10-year treasury bonds, which are often used as a benchmark by researchers because they track inflation and are considered riskless. Riskier businesses tend to earn returns above this, experts said. But Rode鈥檚 study and others found that utilities鈥� shareholder return rates are going up nationally, while the risk the industry faces doesn鈥檛 match that increase.
Treasury bond yields are part of the model the California Public Utilities Commission uses when setting these shareholder rates.
鈥淲ithout capital market funding, necessary grid work would have to be funded immediately in part through the rates customers pay, and this would significantly raise those rates,鈥� Jeff Monford, spokesperson for Southern California Edison, said. 鈥淧roviding our investors with a competitive (return on equity) is crucial to the success of this model.鈥�
CalMatters looked at California鈥檚 three main investor-owned utilities鈥� shareholder return rates and the average 10-year treasury bond yields from 2006 through November, including the utilities鈥� actual returns during that period through 2023, the most recent data available.
The average rates for such treasury bonds didn鈥檛 break 5% from 2006 through November. Only within the last year have any of California鈥檚 three major investor-owned utilities dipped below double digits. California鈥檚 gap between the shareholder and treasury rates has closed slightly since 2006, with shareholder rates for the three companies declining between less than 2 percentage points each. Treasury bond rates largely , with 10-year notes going from a yield of 4.53 percent to 4.18 percent.
Despite this dip, the dollar amount the state鈥檚 power companies are authorized to collect for shareholders has increased nearly every year as their customer bases grow and utilities add more costs that can be charged to customers.
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 鈥� 10 can feel like a substantial round number, and moving below that may feel like a large move.
And the companies regularly ask for more. Had regulators landed at PG&E鈥檚 request for 2023 鈥� one percentage point above what was approved 鈥� the company would have been allowed to collect $12.5 million more. Southern California Edison requested the equivalent of about $9.4 million above what was later approved, and San Diego Gas & Electric requested the equivalent of $2.5 million more than what was later approved.
鈥淭he business is not meant to be risk free. If it鈥檚 risk free, give them treasury returns and go home early.鈥�Janice Beecher, political science professor focused on utility economics, Michigan State University
Cal Advocates, the body responsible for advocating for ratepayers before the commission, often pushes back against these, requesting lower shareholder rates.
鈥淲e generally think they鈥檝e been set a bit too high,鈥� Michael Campbell, assistant deputy director of energy at Cal Advocates, said. 鈥淭he utilities鈥� arguments of just how risky it is to be a utility in California and their ability to recover their costs from ratepayers is overstated.鈥�
Rising costs are of particular concern for Californians, whose bills, especially under PG&E, have risen steadily because of wildfire response. attempted to cushion some of that blow on ratepayers, prohibiting utilities from collecting for shareholders a return on the first $5 billion they collectively spend on wildfire safety measures.
鈥淭he business is not meant to be risk free,鈥� said Janice Beecher, political science professor at Michigan State University who specializes in utility economics. 鈥淚f it鈥檚 risk free, give them treasury returns and go home early.鈥�