PG&E wanted a fatter profit margin. Why California regulators turned them down
PG&E Corp. wanted the right to earn higher profit margins to compensate investors for wildfire risks. California regulators this week gave the troubled utility a resounding “no,” saying its margins are high enough already.
In a unanimous ruling Thursday, the Public Utilities Commission rejected PG&E’s request to increase its “return on equity,” one of the key measures of profitability, from 10.25 percent to 12 percent. The PUC also turned down similar requests by the state’s other major electric utilities, Southern California Edison and San Diego Gas & Electric.
PG&E and the other utilities argued that the risk of mega-disasters such as the 2018 Camp Fire meant they have to offer investors higher returns to attract capital. The massive wildfires of 2017 and 2018 sank the utilities’ credit ratings, making it harder for them to attract new capital, and drove PG&E into Chapter 11 bankruptcy.
The utilities initially sought huge increases in their profit margins — to 16 percent in PG&E’s case. They whittled those requests down considerably after the Legislature enacted AB 1054, which creates a $21 billion insurance pool to help utilities pay for damages from future wildfires caused by their equipment.
Half of the pool comes from ratepayer dollars, and the utilities can use the money to pay liability claims if the PUC finds that they operated their equipment “prudently.” If the state finds they behaved recklessly, they can still borrow from the pool but will have to pay it back.
The utilities said AB 1054 helps cushion them financially but doesn’t go far enough.
PG&E lawyer Shirley Woo, in a written filing with the PUC, said the insurance pool “leaves residual risk for potential wildfire liability with the liability.” Utilities also are afraid the fund will be depleted quickly. “The risk of shortfall is possible even in the early years. That uncertainty creates risk for investors,” Woo wrote.
The commission disagreed, noting that the current margins are still higher than the average for U.S. electric utilities: 9.6 percent.
Setting the utilities’ profit margins is one component in the rate-making process at the PUC, and even if the commission had gone along with the utilities’ proposals, rates wouldn’t have gone up right away. But approval by the PUC would have set the table for future rate hikes.
PG&E has a request pending since late 2018 to raise rates $10.57 a month for gas and electric customers, with half the money earmarked for safety improvements. On Friday the company announced it reached a compromise agreement with consumer organizations, including the two customer advocacy units of the PUC, on a $5.69-month increase. The settlement still needs the OK of the commission.
This story was originally published December 20, 2019 at 10:54 AM with the headline "PG&E wanted a fatter profit margin. Why California regulators turned them down."