Is it time to cut electric company profits to ease consumer bills?

Should state regulators shrink your electric company’s profits? And would that really lower our appalling, outrageous, abominable electric bills?

Consumer advocates have been pushing this idea for years, and the California Public Utility Commission went so far as to make wee tiny downward adjustments in December. But Assemblymember Cottie Petrie-Norris, D-Irvine — and most everyone we know who actually uses the outlets in their homes — thinks that probably did not go quite far enough.

To that end, Petrie-Norris has introduced a bill that would poke the CPUC a bit harder in the ribs.

Assembly Bill 2463 would force regulators to re-evaluate how much money it allows electric and gas companies to pay their shareholders in exchange for shouldering the risk of funding infrastructure investments.

Vital background here: The big investor-owned utilities don’t make money selling electricity. That’s pretty much a pass-through cost. Rather, the CPUC allows them a return on their infrastructure investments — “return on equity” in finance-speak — which critics say creates a perverse incentive to spend way more than necessary.

(The more expensive — say, burying power lines rather than insulating the overhead lines — the more money the utility gets!)

Electric rates have doubled in California over the past decade, far outpacing inflation. They’re about twice the national average; only Hawaii is worse. And some 15 cents of every dollar on our electric bills pays utility profits and taxes.

“Utility profits are soaring while many California families are struggling to make ends meet and pay their bills,” Petrie-Norris said (Edison has reported income of $1.6 billion; SDG&E, $891 million; PG&E, $2.4 billion). “We need to scrutinize those numbers and make sure that utility returns are fair and reasonable.”

AB 2463 is simple: It requires the CPUC to conduct a robust, independent analysis to determine the true risk utility shareholders face, and balance risk with the proper reward.

“I was shocked to learn that, in its current process, the CPUC doesn’t conduct an independent, objective analysis of what they think is the right answer for utility return on equity,” Petrie-Norris said.

“Every year, we get proposals to cut the ROE. They’re never based on data or facts, but on feelings. We need to do the math to get this right.”

Consumer groups are inclined to agree.

“We think it’s a great bill,” said Mark Toney, executive director of the consumer advocacy group TURN, The Utility Reform Network.

“It’s asking for the CPUC to take a step back and look at the methodology. Should all capital costs be treated the same? Or should, say, wildfire-related capital costs receive a lower return on equity because of the circumstances — safety related, a lot of it due to past neglect …?

“The bottom line is, we think it’s of great value for the CPUC to take up that ax and say, ‘Are there other, fairer ways for figuring out what the cost of capital is?’ ”

The utilities? So far, expressing empathy.

“Southern California Edison is committed to addressing affordability for our customers,” said spokesman Jeff Monford. “We’ve taken significant actions to reduce our operational costs and keep rates as affordable and stable as possible. We look forward to working with the legislature on solutions to address affordability without jeopardizing the investments we need to maintain a safe, reliable and clean electric system.”

Ratepayer bill of rights

Last year, the investor-owned utilities asked CPUC for returns on equity ranging from 11% to 11.75%.

Consumer groups balked, saying those numbers were “unjustifiably higher than market conditions warrant.” Leading financial firms estimated long-term returns at some 6% for the general market — which is considered riskier than utility investments, the consumer groups argued — and they urged regulators to drop ROE that low. Other consumer groups were more generous, urging the CPUC to set the return at 8% or 9%.

In the end, the CPUC gave the utilities less than they asked for, but more than consumer groups thought they should have: 10.03% for Southern California Edison (down from 10.33% the prior year); 9.93% for SDG&E; 9.98% for PG&E; and 9.78% for SoCalGas.

Petrie-Norris’ bill aims to have the CPUC start the process to “conduct a systemwide review of the methodologies used to determine the cost of capital and authorized return on equity for each electrical corporation and gas corporation,” the Legislative Analyst’s bill summary says.

That would start with a baseline “capital-market risk framework” analysis (translation: a study to identify, assess, monitor and mitigate financial risks arising from capital investments, financing activities and market fluctuations), and then use that analysis to decide how much is reasonable for the investor-owned utilities to collect.

“The bill would require the commission to develop and adopt a strategy for adjusting authorized returns on equity for each electrical corporation and gas corporation, based on specified load growth or sales volume thresholds,” the summary said.

“The bill would require the commission to conduct a comprehensive review of the cost of capital adjustment mechanism applicable to each electrical corporation and gas corporation, evaluate the authorized return on equity applicable to each electrical corporation’s infrastructure that serves transmission-level customers, and to evaluate alternative, incentive-based return models that link a portion of shareholder earnings to performance outcomes.”

Once the baseline is established, anything above it must “be supported by express findings, based on substantial evidence, demonstrating that the electrical corporation or gas corporation faces materially greater risk than that reflected in the framework.”

The bill is slated for a hearing next month before the Assembly Committee on Utilities and Energy which, incidentally, Petrie-Norris chairs. That often, but not always, suggests a smooth maiden voyage. It will likely be helped by the bill’s language, which reads a bit like a Ratepayer Bill of Rights (insert imaginary exclamation points at the end of each sentence if you’re so inclined):

“Electrical corporations and gas corporations are entitled to a reasonable opportunity to earn a fair return on their invested capital, but ratepayers should not bear costs that exceed the level necessary to attract capital under prevailing market conditions,” it says.

“The cost of capital adjustment mechanism was designed to reflect changing capital market conditions but has not consistently produced downward adjustments when market conditions would support those reductions.

“Ratepayers should not pay full equity returns on infrastructure investments for which their utility did not provide initial capital or bear comparable financial risk.

“Aligning shareholder earnings with performance outcomes can better protect ratepayers while preserving safe and reliable utility service and can improve delivery of outcomes such as timely interconnections, cost containment and risk mitigation.”

No specific haircuts for utility ROEs. No numbers thrown out willy-nilly.

“The utilities argue that higher ROEs are warranted and necessary to attract capital,” Petrie-Norris said. “The ratepayer advocates argue that they’re wildly excessive. What I want to know is: Who’s right?

“We need to have an evidence-based, data-driven process to determine what’s the right answer,” she said. “AB 2463 creates that framework to protect ratepayers while also ensuring that the utilities are able to attract capital to deliver safe, reliable service.”