Four investor-owned electric and gas utilities serving roughly 24 million commercial and residential customers across California are crossing their fingers in anticipation of a California Public Utilities Commission (CPUC) cost of capital proceeding today. The state’s five unelected commissioners will approve or reject a proposal that would allow the Pacific Gas & Electric Company, Southern California Gas Company, Southern California Edison, and San Diego Gas & Electric to charge customers what the American Economic Liberties Project (AELP) and eight other organizations described as “an unjust and unreasonable return” in a letter to regulators this week.
While the proposal does include modest reductions to each of the utilities’ return on equity, or ROE, for the next three years, some argue it continues to provide utilities with a risk-free return (aka expected profits above the cost of providing power) that far outpaces their real borrowing costs. The proposed reduction “would still result in an overcharge of $4.4 billion, or roughly $340 per year for each household served by the four California investor-owned utilities,” said Mark Ellis, AELP’s senior fellow for utilities and a former engineer for SoCal Edison.
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Mildly rejecting investor-owned utilities’ requested rate of return has been pitched as something of a victory for ratepayer advocates, and a disappointment for the utilities. But this framing ignores the realities of what risk-free profits mean for corporate bottom lines and consumers of electricity in a state that has the second-highest electricity rates in the nation. And it’s a harbinger of fights around the country, where public utility commissions have largely failed to rein in massive profits from corporate utilities and their shareholders.
On Tuesday, the CPUC revised its proposed decision even further in the direction of the utility companies, narrowing the rate reduction from 0.35 percent to 0.3 percent. The common return on equity will be set at 9.78 percent; utilities were seeking between 11 and 11.75 percent. But the Public Advocates Office, the CPUC’s consumer-based entity, called for an ROE of 9.25 percent. The AELP-led letter estimated a reasonable ROE at 6.1 to 6.2 percent.
These small changes can make a big difference. A study published by the University of California, Berkeley, Energy Institute at Haas earlier this year found that even the smallest change to a utility’s ROE can have significant cost implications for ratepayers. For instance, a 0.1 percentage point increase on the revenue a utility is allowed to earn corresponds with tens of millions of dollars or more in added revenues. Based on the average U.S. electric utility rate base in 2019, the authors found that a 0.1 percentage point change would result in a revenue differential of $114 million.
Tom Steyer, the billionaire former financial services executive who is a candidate for California governor, slammed the further narrowing of the ROE as a “sweetheart deal for corporate utilities.” He released a letter to the CPUC earlier this week, calling for a reduction in the ROE, better adherence to state-mandated hookups to the electric grid for solar and other renewables, and increased oversight on utilities to avoid expensive, “gold-plated” infrastructure upgrades that can be folded into the rate base without achieving efficiencies for ratepayers.
Utilities, which use opaque financial models of dubious merit to prove that their ROE needs are legitimate, claim that the rate of return must be set at a level competitive enough to attract investors, or else they will be unable to upgrade services and keep up with soaring electricity demand, including from data centers. For example, in a statement to the Prospect, PG&E said it was “disappointed that the updated proposed decision fails to acknowledge current elevated risks to help attract the needed investment for California’s energy systems.” SoCal Edison gave the Prospect almost precisely the same statement, stressing the competitive chase for investors and the need to attract investment.
But on a recent episode of Organized Money, the podcast co-hosted by Prospect executive editor David Dayen, Steyer framed utility ROE from a finance standpoint. A 9.78 percent return on the cost of borrowing, adjusted for inflation, is a real return of around 7 percent, without any risk. Steyer intimated that such guaranteed returns are fairly unprecedented in other business sectors.
Monopoly utilities are supposed to have their profits tightly regulated to protect ratepayers. Yet their stock prices are surging in ways that are totally unmoored from the expectation for a regulated monopoly. One estimate is that utility stocks are valued at around twice the investment in equipment.
“If it was a fair rate of return, you’d think [investor-owned utilities would] be trading at book value,” Steyer said. “So you know from the market itself that these are really high rates of return.”
In anticipation of the rate case decision, PG&E rose over 2.5 percent in trading Wednesday, while Edison International, parent company of SoCal Edison, also was up over 2 percent. (SoCal Gas and SDG&E are both part of the utility giant Sempra, which includes other operating companies.)
Brian Shearer, director of competition policy at the Vanderbilt Policy Accelerator, noted that an investor-owned utility “is considered sort of a hybrid between bonds and stocks. It’s not quite as safe as a bond, but it’s certainly not as risky as a typical stock, and that is for good reason,” he said. “The returns that regulators are approving should reflect that sort of hybrid status of being a very safe stock as opposed to a return that is just the average for every stock.”
The CPUC, by contrast, has said that their decisions on ROE “balances the interests between shareholders and ratepayers.” AELP disputes this, pointing to how the proposed decision outlines “the various methods for calculating ROE in cost of capital proceedings, but, in a baffling turn, then says that the [Commission] will not decide among them or find a reasonable model.”
THE IMPACT OF GUARANTEED RETURNS on California ratepayers is real. According to a recent Century Foundation and Protect Borrowers analysis, more than 238,000 California households are already behind on their utility bills, with ratepayers averaging an overdue balance of $1,120, and owing on average $3,633 in annual utility costs.
California’s electricity rates were rivaled only by Hawaii in 2024, according to the Energy Information Administration. As a public watchdog called the Little Hoover Commission has demonstrated, since 2014, electric rates have risen 121 percent for PG&E, 88 percent for SDG&E, and 80 percent for SoCal Edison, even as overall inflation rose only 36 percent.
Residential Electricity Rate Trends Compared to Inflation (2014–2025)
But the allowances for utilities to enjoy large risk-free returns is relatively standard. “I think the root problem is really that … the norm is to approve a 10 percent return on equity, and we’re seeing that across the country at the state regulator level and at the federal level,” Shearer said. This leniency from public utility commissions coincided with a neoliberal approach to capital in the 1970s, and electricity rates have inched up ever since, despite more efficient options for delivering power.
In California, governors appoint the five commissioners to the CPUC, who have staggered six-year terms. The terms of all five commissioners will come due during the next governor’s first term. Steyer, who has promised to “break up the utility monopolies” and reduce utility bills by up to 25 percent, would be in a position to put his stamp on the commission in a way that would constrain guaranteed profits.
That includes ensuring the CPUC uses its authority to limit expensive infrastructure projects embarked upon by utilities primarily as a moneymaking operation. “People think that the electric utility makes money by selling you electricity, but that’s not true,” Steyer said on the Organized Money podcast. “The electric utility makes money by getting investment accepted into the rate base with a guaranteed rate of return.”
The Little Hoover Commission has proposed removing utilities from the process of setting ROE rates, instead giving authority to make the initial ROE proposal to the state treasurer’s office. Another option proposed by advocates is an auction, where investors compete for the opportunity to fund utilities and the utilities choose the one with the lowest capital cost. This would eliminate the guesswork from public utility commissions, and is how most companies fund their operations.
In addition, publicly owned utilities have proposed lower rates than their corporate counterparts for years, lagging behind inflation while investor-owned utilities have soared past it. This has led many activists to seek public takeovers of corporate utilities as a price-reducing measure.
In a political climate where affordability is king, Steyer believes that the CPUC is squandering the opportunity to reduce guaranteed return for corporate utility companies. “Monopolies are in the business of charging the highest prices and providing the worst service,” he said on Organized Money. “And if you don’t like it, you can lump it because we’re a monopoly and there’s no place else to go. So when you look at a public utility commission, which is designed to control a monopoly, structurally that will not work.”