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Calif. utilities face rising fire, energy transition risks with no profit boost

As California's investor-owned utilities move into the next decade of an accelerated energy transition and heightened wildfire risks, their regulated profit margins will remain unchanged after the California Public Utilities Commission on Dec. 19 approved a proposed decision that rejected requested increases.

"This proposed decision reaches a fair and just outcome," PUC President Marybel Batjer said ahead of the commission's unanimous vote on 2020 ratemaking cost of capital.

The decision authorized a 10.25% return on equity for Pacific Gas and Electric Co., or PG&E, the state's largest utility.

"We recognize that any increase to customer bills can be challenging, and PG&E is committed to keeping costs as low as possible while meeting our responsibilities to safely serve our customers," a utility spokesperson said a Dec. 20 email.

PG&E plans to pump $28 billion into new gas pipelines, power lines, power generation and other infrastructure over the next four years. While the approved return is lower than requested, the decision "allows PG&E to offset the upfront, immediate costs of these long-term projects for our customers," the spokesperson said.

The utility initially asked for a 16% equity return to account for greater wildfire risks, a request it later lowered to 12% after California Gov. Gavin Newsom in July signed emergency legislation that set up a $21 billion insurance fund to cover costs from future fires.

PG&E seeks to emerge from Chapter 11 bankruptcy protection together with its parent company, PG&E Corp., by next June, related to excessive wildfire liabilities linked to its power lines. As part of its review of PG&E's plan of reorganization, the commission will decide whether or not to require the utility to file a new cost of capital application.

'No remaining significant unmitigated risks'

Regulators granted Southern California Edison Co., or SCE, a 10.30% return on equity. Like PG&E, the Edison International utility subsidiary had requested a higher return prior to the passage of the wildfire law, Assembly Bill 1054.

"AB 1054 has substantially mitigated wildfire liability exposure as well as liquidity concerns," according to the commission's decision. "With the adoption of [the law] there are no remaining significant unmitigated risks that warrant investor compensation through a higher [return on equity]."

In an emailed statement, SCE welcomed the PUC's "timely action," but added that higher wildfire, energy transition and regulatory risks "differentiate us from utilities in other states."

Commissioners approved equity returns for Sempra Energy's electric utility San Diego Gas & Electric Co. and natural gas affiliate Southern California Gas Co. at 10.20% and 10.05%, respectively.

While regulators opted to leave returns at prior levels, some groups active in the proceeding, including the commission's Public Advocates Office, sought to slash utility profit margins. But regulators determined that lower levels could threaten investor confidence.

The utilities' 10.05% to 10.30% equity returns compare favorably with average returns for U.S. utilities, according to the PUC. The decision cited average authorized equity returns of 9.6% for U.S. electric utilities and 9.59% for U.S. gas utilities.