Senate Energy, Utilities and Communications Committee
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Senate Energy, Utilities and Communications Committee California State Senate
Follow its sittingsSpeaker 1
Yes. Okay. So let's without further ado, let's start with you, professor Vorstein. And go bears.
Speaker 4
Thank you. I'm sorry I couldn't be there in person and particularly now that I'm missing the hamantaschen. I was asked to do a sort of a primer to bring the committee up to speed on the basics of utility regulation in order to sort of lay the groundwork for the discussion of what can be done about the high rates. I'm gonna go through this fairly quickly, but I hope you will feel free to interrupt me. And, certainly, I'm happy to take questions afterwards and be part of the discussion.
There we go. So there are many different parts of the electric sector, and they have different levels of regulation. I'm gonna focus on the parts that are in California, the investor owned utilities since that's the subject we're talking about today. Generation of electricity has largely been deregulated for almost thirty years now. Most of the electricity is actually generated by companies that are not regulated.
The utilities and the other retail providers such as CCAs, buy their power from these, generators in markets that are really not subject to economic regulation. Transmission, the high voltage power lines are, for the most part, done by regulated utilities. The very largest transmission projects that can be segmented out as determined by the CAISO are put up for bid and are bid out competitively. Interestingly, I think in the it's less than a decade they've been doing this. All of the large projects that have been bid out, I think none or almost none of them have actually been done by the utilities.
Third parties have done those instead. But most transmission occurs at lower voltage, is pretty integrated with the local distribution systems, and is part of the regulated utility. Distribution lines, these are the lower voltage lines that run around neighborhoods and serve households and businesses. Those are completely regulated. The CPUC oversees the the expenses, determines the prudent expense, and makes sure that the utility is compensated for that.
And then the last function is what I refer to energy procurement and retailing. We rely on some company as a customer. We rely on some company, either the utility or some other organization to buy our power for us and to then charge us for the electricity component. So the bill that you get has electricity procurement component, is mostly driven by the payments to generators, a transmission component which is mostly regulated, and a distribution component which is nearly entirely regulated. And then there are other things on the bill such as payment for public purpose programs, subsidies for low income customers, subsidies for energy efficiency programs, and so forth.
What we do with investor owned utilities and is done pretty much everywhere in The United States is rightly called cost of service regulation. The regulator is trying to determine the appropriate cost of service and then compensate the utility for those activities. They face a couple of challenges. One is assuring efficient operation that the companies aren't just wasting resources, and the other is compensating the investor owned utilities costs appropriately, not more and not less. And that means figuring out what their costs are, which for the most part isn't that hard, but there's one a couple areas where it's more challenging.
Both of these challenges create both incentive issues. Obviously, a company that's being regulated on cost of service might not have an incentive to pay a lot of concern about to cost if they know they're gonna get the money back. And information issues. A regulator, by definition, is at a real disadvantage relative to the regulated firm in understanding what the actual costs are and what the actual operations are. I don't think it's too much of an exaggeration to say you can't really do regulation perfectly unless you have almost as many people as the regulated company overseeing them and watching what they're doing.
And the CPUC has nowhere near that. And so there is always going to be an information asymmetry and the utilities will not have an incentive to fully disclose all of the information whether it's beneficial to them or not. So let me first talk about efficient operations. First of all, obviously not wasting resources. People are being paid to work.
You wanna make sure they're actually working. Inputs that are being purchased, you wanna make sure they're actually getting used, and so forth. And there are always instances where waste occurs in organizations. The CPU the regular can't completely eliminate that just as no company can completely eliminate it, but they want to make sure that it is kept to a minimum. They also want to make sure that whatever the regulated entity is doing, that they do it with an efficient mix of inputs.
And this can be a big problem if they're compensating some inputs more than others. This such as if they're overcompensating capital investments, the utility is going to have an incentive to use more capital and less labor or fuel or other inputs. So they want to make sure, the regulator wants to make sure that the regulated entity is not just not throwing away or wasting resources, but actually carrying out their mandate in a way that uses an efficient mix of resources. And then thirdly, and this is often overlooked, though in California it's really become a clear issue, is delivering the optimal product quality. In this case, it includes power outages.
The optimal number of power outages is not zero because that would be so expensive. People would not be willing to pay for it. But on the other hand, you don't want a utility that's regularly unreliable. So the regulator has to work with the regulated, utility to determine what is the right level of reliability that that customers are willing to pay for. And that can be a real challenge.
And reliability is not the only. Certainly, of safety, areas of just sort of service, billing service, etcetera, are all areas where the utility could potentially skimp, and customers could be very upset about that. But on the other hand, getting the absolute best quality would be extremely expensive, and customers are also worried about the cost of their bills. And then the second challenge is appropriately compensating investor owned utilities, and I think this is an area where today's hearing is going to spend most of the time. For most costs this is straightforward.
Basically the utility brings receipts to the regulator and says, here are our costs, We'd like you to set rates such that we can recover our costs. The regulator does look at them and say, Were these costs prudently incurred? Were you wasting resources? But once they decide that there is a number that they are determining to be prudent expense, for the most part, they can just say, okay, we're going to compensate you for the expense. The exception is the cost of capital and particularly the cost of equity investment.
So the cost of capital is divided between capital raised through debt, usually by selling bonds, and capital raised through equity by selling stock in the company. Debt is pretty easy to price because there's a market that prices a debt instrument. And so the utility can say, in order to borrow another million dollars, we are going to have to pay the bond market tells us we're going to have to pay a certain interest rate, and the regulator usually can just rely on that. Equity is a much more difficult issue because the issue there is what sort of return are equity investors do equity investors need to expect in order to be willing to buy the stock of this company? And that's pretty speculative.
There are approaches that are used, including some fairly complex finance models comparing to other utilities. Of course, that's got a problem because other utilities' return on equity is driven by their regulators. But a lot of the rate hearings revolve around fights over what is the appropriate return on equity. I will say I have written about this. The two of our former graduate students from the Energy Institute wrote a really nice paper looking at allowed return on equity compared to the cost of capital in markets in general.
And they found that while from the nineteen eighties to the present, well, actually, study only went to 2020, the cost of capital in general declined much more than the allowed rate of return on on equity decline. So there is some evidence and you there that's not that doesn't settle the question, but there is certainly some evidence to be concerned that regulators have not kept up with changes in the cost of equity and have been overcompensating equity investment. I'll get in a moment to the issues that raises, but I think that that is an area that has raised a lot of concern. At the same time, I wanna give you some sort of, idea of orders of magnitude here. While the cost of equity and the cost of capital in general is a very significant cost, as a share of the revenue requirement of utilities, it's actually pretty small.
So right now, the three investor owned utilities combined have an annual revenue requirement, that is the total cost, the revenue they have to raise to cover their costs. Somewhere, I haven't checked it in the last year, but somewhere in the 60,000,000,000 to $70,000,000,000 per year. That actually rolls in all the cost of energy even procured through the CCAs. But that's sort of the big pot that determines our electricity bills. The cost of equity, the the rate of return on equity is based on the capital base, that is how much investment they have.
And if you change that cost of equity, it would lower the revenue requirement. I did a calculation that if you lowered the allowed return on equity by three percentage points, this by the way would be a huge decline. The CPUC recently did cut the return on equity, but I believe it was by 0.3 percentage points. But if you lowered it by three percentage points, that would lower the revenue requirement of the three utilities by about $1,000,000,000 a year. Not nothing, but a small share of the 60,000,000,000 to $70,000,000,000 revenue requirement.
So while it is important to recognize that I think we are overcompensating equity investment, and certainly there's a real possibility of that based on the work, that was done at the Energy Institute, I don't see this directly having a huge impact on on electricity bills. So I do want to before moving on from this point out, some people say, well, that we should just have government ownership of utilities, then you don't have a cost of capital that you have to cover, and that's just not true. IOUs have a cost of debt and a cost of equity. Municipal utilities also have to raise capital and they raise it through debt as do coops. Coops are not really an issue in most of what in most of California, but municipal utilities are, and they have a cost of debt cost of capital as well.
They don't have equity, but they do have debt, and they end up paying an interest rate whether they're borrowing it from a bank or borrowing it by floating bonds. IOUs have a higher cost of capital. Their cost of debt is somewhat higher and their cost of equity is substantially higher in order to attract investors, while that is a higher cost, it also comes with some protection for rate payers. Because if the utility has some sort of imprudent behavior failure that can be blamed on bad action, in the case of an IOU, the entity that takes the first hit is the shareholders. And we've seen this in bankruptcies where the shareholders are wiped out, debt holders maybe get some but not all of their money, and rate payers are less affected.
If it's a municipal utility or it's an all debt financed utility, even if it were a investor owned utility, they when if when you get that sort of shock to the cost shock, it would end up being either causing bankruptcy very quickly and or flowing through directly to customers. So that higher return on equity does come with more risk taking essentially by shareholders. Whether that is the appropriate level of additional level of return on equity, I think is an open question, and I certainly suspect that it has risen relative to the actual cost of equity. Okay. Let me talk about some of these incentive effects.
First of all, setting return on equity too high directly raises bills for ratepayers in the way I talked about. You're just paying a higher percentage return on that investment. But possibly more importantly, it incentivizes utilities to overinvest in capital. And I have heard stories indirectly from people at investor owned utilities that this is very well understood. And when they are getting a very high return on equity relative to the what investors actually need to invest, they have a strong incentive to do things in a capital intensive way.
So let me just give you one example, and I'm not I'm not on wildfire prevention, you could you can do, vegetation management, which doesn't go into the capital base. That's just trimming trees. And you could or you could do undergrounding. That is a long term investment that goes into the capital base. Now, without making judgment on what the right balance is, I don't know what the right balance is, I will say that if you're paying a utility a very high return on equity, they're going to be biased towards making investment or doing things in a way that is more capital intensive, as I mentioned earlier, a different mix of inputs.
And so this capital bias is potentially a significant cost. I don't know of any good measurement, and it would be very idiosyncratic to a utility based on what the particular needs of that utility are. Certainly, we've seen this discussion come up in dealing with wildfires and, discussion of using undergrounding versus using other sorts of, technologies to reduce, wildfire. It's not to say that the utilities are presenting the wrong solution, it's just to say that the regulator has to be at least very aware that the utility's incentives might not align with what the regulator is looking for. On the other hand, setting returns too low can lead to underinvestment.
If you told a utility, we're only going to allow you to earn a 5% rate of return when investors really aren't going to be interested in investing if they don't expect a 7% rate of return, then the utility's going to have a hard time raising capital. And that can potentially change the way they operate and can even undermine quality of service if they can't raise capital to upgrade facilities. So setting it so the regulator is always faced with this balance of trying to get the return on equity just right. I think that and I have never been a regulator directly, but talking to many of them, think there is a real concern about setting the return on equity too low and belief that well if it's a little bit too high, at least we're assuring that investors are going to be interested and the utility will have an interest in making the appropriate investments. So let me close by saying I've I've taught courses on this for twenty five years.
There is no silver bullet solution. There is sort of by among some people a religious belief in free market competition, and that's just not an option for distribution systems and much of the transmission grid. So this idea that we can somehow deregulate those systems and get more competition into those systems just isn't feasible. Even retail competition has had mixed results, particularly at the residential level in some states where they're for profit companies. There's a lot of concern about scams and just about customers not searching enough to get a decent deal.
But on transmission and distribution, which these days is the heart of a regulated utility, the competition really isn't an alternative except with the possible exception of some of these large transmission projects that can be bid out because they're not completely integrated into the utility. Government ownership is often raised as an alternative and that creates a different set of incentive concerns and certainly any of us who have dealt with government bureaucracy are would be concerned that that would not operate very efficiently. It's not, though I do wanna say, it's not like arguing for the government to make cars or produce shoes where there is an alternative where we think a competitive market is possible. The two options we really face are either a regulated private utility or a government utility or a co op, which is sort of like a government utility. It's just setting up a different nonprofit entity.
A third alternative I will or not alternative, but a third approach that I will close with is often raised, which is called performance based regulation. And some people who are just real advocates of performance based regulation will tell you, oh, that will just solve your problem. That's just not true. This is the idea that you set some benchmark for the utility, and if they exceed the benchmark, they get to keep some of the savings or the extra revenue from exceeding the benchmark. And if they fall short, then they have to take a hit.
There are a number of problems with this. First of all, there's just measurement and determining what are the right criteria. Then once you decide what the right criteria are and you're let's say you want a certain level of safety or a certain level or low level of blackout or rates, you have to actually do the measurement and figure out what the right benchmark is. And usually, you're benchmarking against other utilities, but that's a difficult process. But I think the most obvious or the most extreme problem with performance based regulation is credibility, is actually being able to follow through.
And I'll give you two examples that made this clear, both from pre 2000. In the eighties, when Diablo Canyon was considered early eighties when it was considered sort of a financial disaster and there was talk of closing it, the CPUC reached a deal with the p PG and E that they would actually put the onus on PG and E and say, we're gonna have you buy the power from that power plant at a rate we're gonna set. If you can run the plant well, you can make a lot of money, and if you don't, then you're gonna lose money. Turned out once they did that, PG and E massively increased the capacity factor, ran the plant really efficiently and was making a boatload of money. The CPUC turned around and said, Well, we're changing the deal.
We're not going to let you earn that much money. So on this, when the utility did really well, the regulator changed their mind. And then we saw during the California electricity crisis when the utilities were supposedly locked in to charging a certain retail rate for a few years, but when they when it looked like, and in one case, they did go bankrupt, the regulator had no choice but to turn around and say, okay, we're going to let you raise rates in order to cover your costs because we have to have the utility. So performance based regulation, obviously, we should be rewarding utilities that behave well efficient and penalizing utilities that don't. But the idea that we can just solve the cost control problem that way, I think, is overstating the case.
So I will stop there. I'm happy to take questions and to clarify anything that you would like to talk about.
Speaker 1
Thank you, Professor. Just a quick follow-up on that last point. Where's the most don't they do there's some sort of performance based review program up in Oregon or Washington. Is that right?
Speaker 4
I actually don't know the answer to that. I think that's right. I think Washington State has had a performance based regulation. But in some sense every state has performance based regulation. Some are more explicit than others.
The most well known comes from The UK, which in some ways pioneered this, which said rates should decline in real terms every year by a certain percentage. And if you can lower your costs more than that then you can keep the money, the utility. If you can't then you have to eat the difference. That has not been a rousing success. There's been a lot of reconsideration, special cases, etc.
But there are real advocates of it still who come out of The UK and I don't think it should be dismissed. I think it should be part of a regulator's toolbox, but I also think that we should be clear by itself it doesn't it's not a silver bullet.
Speaker 5
Yeah. Well, thank you, professor, for the information. But what I'm understanding from you, getting from you is various solutions and we throw it one way and the other, but the general public is looking for a solution for stabilizing rates or bringing them down, but I'm getting the impression that capping or putting a cap on these rates wouldn't work either. Is that
Speaker 4
what you're feeling? So putting a cap on rates is a form of performance based regulation. It would basically say this is the most you can charge. You are required to deliver service for that level. And if you do better than that, it's well, a cap is unclear whether you'd have to lower your rates, but if you do worse, you, the shareholders, have to eat the difference.
Certainly, if you set that cap low enough, the utility is just not gonna be able to meet it and will potentially go out of business. If you but even if you don't set it that low, the utility is gonna try to find ways to to meet the cap while changing other things that are not explicit in the cap. And if I can take just one minute, I will give you an example from a different industry. I worked at the Civil Aeronautics Board during airline deregulation, and we used to one of the activities was to assign routes to US carriers, international routes. And we had formulas that they could bid where we assigned routes based on how many flights per week and how many meals you got and how much leg room.
And the problem was, do you tell them the formula? And the concern was, yeah, if you do that, you might end up with 38 meals and two inches of leg room because that's how they maximize their profits. The same issue comes up here and that is that if you can't fully specify what you want the firm to do and it's very hard to specify everything when it comes to quality, then if you set a price ceiling they're going to have an incentive to meet the price ceiling but shave other areas of quality probably in order to do so. And so price ceiling, I think, has credibility issues and it also has these sorts of enforcement issues because there's so many facets of the regulation of the service that need to be considered. And this is a problem that's come up in England and in other areas where they've used performance based regulation and utilities have responded by changing the quality of service in other ways and or saying, well, there's this you know, we've run into a special problem that wasn't anticipated, so we should change the PBR agreement.
And that's what happened with Diablo Canyon in the eighties, and that's also what happened with the utilities in during the California electricity crisis.
Speaker 5
Yeah. And, of course, here in California, we do want service, but you're also saying if the service drops, we have complaints Did I lose from the constituents, especially when it comes to blackouts, that everyone's complaining. If there's gonna be one, tell me when and how long, and it's very difficult to even, know if that's gonna be possible. But that's reflective in pricing as well.
Speaker 2
on. He can't. I'm just checking the mute. I think they might have muted his Zoom accent.
Speaker 2
I saw a green thing go on the screen that says mute. I don't know what that meant.
Speaker 1
pop up. You've got a you've got a You know, we can always do this. I mean, I don't know how we we can start with president Reynolds and then have an open discussion with everybody. Yeah. Yeah?
Yeah. Okay. Why why don't we do that? Mhmm. Let which have you come up if that's okay.
And then, hopefully, professor will be able to stay, and we'll be able to hear each other and discuss together.
Speaker 1
Good good talk center. Okay. Thank you. Thank you. Yes.
Mister president designee, is that is that what's the official title?
Speaker 1
Okay. Alright. Alright. Well, we appreciate you being here, thank you for stepping up. You've obviously had a long career at the PUC in various capacities.
We'd love we look forward to your testimony.
Speaker 11
Thank you, Chair, members of the committee. It's wonderful to be here with you this morning. I appreciate, and as we've already been hearing this morning, the affordability concerns that customers are facing and that are very real given the state of our energy bills today. I also want to acknowledge that today's hearing is in part, the PUC's, annual report oversight hearing, so I will touch on a few, broader PUC matters before diving further into some of the financial oversight issues that are the subject of today's hearing.
Speaker 1
Should we just let the professor, can you hear us? Oh, okay. Bornstein? If you'll stick around. Oh, are are you speaking?
Okay. Alright. Nidius. Just let him know what we're doing.
Speaker 11
little bit of, PUC background points for context. The California Public Utilities Commission or California PUC, CPUC, is the economic regulator of investor owned utilities that operate within California. These utilities provide essential services to residents, including electricity and gas, water, telecommunications, transportation, and rail services. In the electricity sector, our jurisdiction covers about 75% of the load in California. The commission has been active in the last year.
In 2025, we had five forty two active proceedings and resolved two twenty nine of those proceedings. We remain focused on improving the critical customer outcomes outlined in our mission: affordable, safe and reliable utility service, all while meeting our ambitious climate goals. As we focus today on electric rates and bills, I want to emphasize that delivering on these outcomes is the center of our regulatory responsibility. And I have a few slides. Can we pull up the slide deck?
Speaker 1
Members, we also have physical copies if we're having technical difficulty. So all the members, you guys all have these packets. Yeah?
Speaker 11
So I'll start with a brief overview of what's driving electric rate and bill increases. California energy policy has a long history, and that history shapes rates today. In the electric sector, utilities largely rely on long term contracts for generation rather than owning generation assets directly. Further, in the system we have today, utilities are not the default provider of retail energy supply in many areas. We have over 40 providers of retail electricity, including investor owned utilities, community choice aggregators, and electric service providers.
We also have a large ecosystem of largely unregulated developers who build most of the power plants that supply our electricity sector, which has benefits, it supports economic development and competition, but most system costs ultimately flow to customers through rates and bills. We have visibility into the books, the accounting, the costs and expenses and investments of only part of this ecosystem. Only the utilities are fully regulated through public processes of the PUC. We do have oversight regarding the reliability and clean energy compliance of community choice aggregators and electric service providers, though we do not regulate their rates. Because we have decoupled energy rates in California, utilities provide electricity supply as a straight pass through to customers with no profit.
Utility earnings come from investments. When they put up capital for projects, a capped rate of return is allowed, but not guaranteed. It is collected on an amortized portion of investment costs. The benefits to utility investors come from dividends, if any are paid, and from stock value, increases. What we call the revenue requirement, as you've heard this morning, is the authorized cost of operating and investing in the electrical system each year.
This is the amount that is divided up among customers through the per unit cost of electricity. It includes costs like operations and maintenance and long lived capital assets that are recovered over time. Wildfire costs have been a major driver of rate increases since 2019. Between 2019 and 2024, the utilities collected approximately $27,000,000,000 for wildfire mitigation and approximately $14,000,000,000 for wildfire insurance premiums and catastrophic events, about $40,000,000,000 total in authorized wildfire related costs. These costs are significant, and the PUC continues to scrutinize and, where justified, reduce or disallow cost recovery requests.
At the same time, California is facing worsening wildfire conditions, and the inverse condemnation liability regime creates unique financial exposure for utility caused wildfire damages. It is also noteworthy that the combined revenue requirement shown for 2025 is lower than 2024, primarily because PG and E's revenue requirement is lower due to the removal from rates in 2024 of a large wildfire related revenue requirement and a generation cost adjustment. This reflects how some wildfire cost recovery is time limited. Costs are tracked, reviewed, and then amortized over defined periods. So some amounts will roll off of rates even as other approved costs enter rates.
So now I'm going talk a bit about reliability and resource progress. So as you can see from this slide, we've had a recently adopted preferred system plan in the integrated resource planning proceeding that's on a path to meet the state's greenhouse gas targets by 2045. The PUC's integrated resource planning process ensures that California's electric sector meets its greenhouse gas reduction goals while maintaining reliability at the lowest possible costs. Recently, we approved a comprehensive integrated resources plan to reduce statewide annual GHG emissions from the electric sector to 25,000,000 metric tons by 2035. This represents the most aggressive of the range identified by the California Air Resources Board, and this plan will achieve a nearly 60% reduction compared to 2020 levels.
The decision plans for the construction of more than 56 gigawatts of new clean energy resources by 2035. Using the planning process, our modeling indicates that by 2040, natural gas usage will decrease by about 80% compared to the modeled 2026 usage. Remember that utilities, for the most part, are not the generators of electricity. Retail sellers of electricity use long term contracts with private generators to cover the electricity needs of their customers. The costs of this energy and the guarantee of capacity obtained on behalf of customers are obtained on behalf of customers in advance through competitive solicitations.
Nearly 40 load serving entities, including community choice aggregators as well as the utilities, use a competitive solicitation process to contract for clean resources to meet the statewide scoping plan targets at the lowest cost for consumers. We continued this year to achieve milestones for clean energy. Our integrated resources planning process implemented by the Energy Division led to over 7,000 megawatts of new clean energy projects coming onto California's electric grid, including over 4,000 megawatts of new battery storage projects. This is something to be proud of. It's an all time record, and it was reached using these competitive processes, all carried out by the retail providers on behalf of their customers so that the lowest cost projects were selected to meet our energy needs.
In 2024, we also reached and then surpassed the milestone of 10,000 megawatts of installed battery storage capacity and have now reached over 17,000, up from just seven seventy megawatts in 2019. While we've been making lots of progress on resource development, wildfire mitigation spending has grown significantly, and we are applying increased scrutiny as programs mature. The general rate case remains the Commission's primary mechanism for reviewing utility investment plans, operating costs and financial assumptions before they enter rates. We've opened proceedings to evaluate improvements to the California Climate Credit to better target relief and enhance affordability. I'm gonna talk a little bit about the return on equity, the cost of capital, and accountability now.
As the state's economic regulator, our responsibility is to strike a careful balance. Utilities must be able to access capital at a reasonable cost. Customers must also be protected from excessive returns. Return on equity and cost of capital are among the most important tools that we have to achieve that balance. Authorized returns are not automatic and they're not guaranteed.
They're based on market evidence and they're revisited when conditions change. So the markets. This is why this matters. Utilities operate in capital markets. They compete for investment capital just like other firms.
If returns are set too low, credit metrics deteriorate, borrowing costs rise, and infrastructure investment becomes more expensive. If returns are set too high, customers overpay, and confidence in the regulatory framework erodes. Our role is to set returns that reflect actual market conditions, no more and no less. So how do we set the return on equity and the cost of capital? These determinations occur in formal litigated proceedings.
They rely on expert testimony, financial modeling, market data inputs, capital structure analysis, and a public record with evidentiary review. We revisit these numbers as interest rates and market conditions change, and the Commission has adjusted authorized returns when the record supported doing so. There are already accountability measures in place. Authorized returns are not automatic and they're not guaranteed. Utilities earn their return only if they manage costs within approved budgets, operate prudently, and meet regulatory requirements.
If utility spending is imprudent, we impose disallowances, reduce recovery, and we require refunds where appropriate. This is a framework designed to maintain reliability and financial stability while protecting customers. Many proceedings have been initiated in response to statute. I'm going to the next slide. Legislative direction shapes the scope and priorities for the Commission's work.
Timelines are driven by evidentiary and procedural requirements. Outcomes are based on record development and analysis. Affordability is addressed through front end scrutiny of spending, post spend accountability, and legislative direction that strengthens our oversight. Most utility spending is reviewed before it enters rates. In the general rate case, utilities propose multi year forward looking budgets.
Spending is tested and challenged, forecasts are scrutinized, and reductions are made where costs are unsupported. Utilities will only recover what is approved by the Commission. Wildfire mitigation is essential, but costs are not unchecked. For wildfire cost recovery, we typically review wildfire spending for reasonableness, evaluate compliance with approved wildfire mitigation plans, and disallow costs if they're imprudent. Recent statutory changes, including SB two fifty four, strengthen the alignment between mitigation planning and the general rate case process, and this alignment will reduce delay between when spending happens and when financial scrutiny happens.
Turning to transmission costs and our advocacy at FERC as an agency, transmission rates are largely regulated by the federal government, the Federal Energy Regulatory Commission, or FERC. The PUC actively litigates at FERC to challenge excessive transmission return on equity, to reduce formula rate impacts on customers, and to protect California customers in the delivery of transmission service. This is a direct affordability effort where we are fighting for customers to pay lower transmission costs. In addition to existing regulatory tools, the legislature has provided significant direction in recent years to strengthen cost oversight and financial accountability. SB two fifty four strengthened financial integration for wildfire planning, as I mentioned.
AB twelve oh seven directed reforms to improve the targeting of the California Climate Credit. We've also opened proceedings to implement these statutes. So all of that said, in closing, affordability is not addressed through a single lever. That requires disciplined rate case review, reasonableness oversight, federal advocacy, and implementation of your legislative direction, all working together within the regulatory framework. Thank you, and I look forward to your questions.
Speaker 1
All right, there he is. Okay, great. All right. You know what? So thank you, Professor Ferminbach.
Thank you, President Reynolds. Don't we just make it an open discussion with these two panelists? There's a lot of interplay, of course, as we went into the details of the rate making process. So let's let Senator Archuleta continue with his questioning of Professor Bornstein. Then, of course, if you've got additional comments to the question or if you wanna direct your questions to the president, you're welcome as well.
Speaker 5
Well, professor, thank you for sticking with us. And we've I left you off with a question about caps and how that would be difficult, but also we we mentioned about the general public wanting service and, I think everyone would like to know, if there's gonna be a shutdown, when and how long, which is something that's very difficult, but that's a that's a main factor I think in a lot of families lives when, you know, the groceries are in the refrigerator and they're gonna shut down. Neighborhoods are warning running up and down asking each other if they heard anything, if it was an accident, on and on. But, it's all predicated on cost is what you're telling me. Service is predicated on cost.
And if we want good service, we may have to raise the rates a little bit. Is that what you're telling me?
Speaker 4
Well, the costs are gonna be higher if for better service. I would say it doesn't necessarily have to be collected through rates. And in fact, I have written extensively on some of the problems we're facing now by collecting these costs through rates, including suggesting the income graduated fixed charge, which, did get adopted though at a very low level, so it's having a pretty small impact. Some of these costs, I would argue more appropriately belong on the state budget. And I know that's not a popular thing to say in Sacramento, but there's a lot of public policy that the state has committed to and then stuck it into rates, whether it's renewable power, for low income customers, energy efficiency programs, all of which I think are public policy decisions that more appropriately belong in the state budget.
If they were in the state budget that would bring rates down substantially. That's a big number, particularly if you think that responding to climate change in terms of managing wildfires is a state emergency responsibility similar to flood control and seawalls and so forth. Likewise, low income subsidies which we do for food and for medical care through the state and federal budget, when it comes to energy are paid for through raising rates. So I think it is possible to lower rates and still cover the necessary costs for a good service. Obviously, the state budget is not an endless well either, but I think that we have really tilted towards paying for a lot of cost through the electric bills.
Speaker 1
I can't agree with you enough, professor. Know you've made this point before, but we're trying to encourage people to move toward electricity and then we're increasing the cost of buying electricity through some of this wonderful pro social programming that, quite frankly, should be housed, I think, in the Greenhouse Gas Reduction Fund or elsewhere. That's what that fund was set up to do, and yet it's now been rated for all sorts of other uses at very high cost. Anyhow, I I I appreciate you bringing it up, I I think it's something we really need to spend some time on this year. We we punted some of the key cap and invest discussions from last year.
I think it's a good thing for us to focus on this year as we as we look at all of the implications of the issues that are being raised today in today's hearing. Sorry, Senator.
Speaker 4
Yes. And if I can just add that it's not just the fact that we're discouraging electrification, it's also an incredibly regressive tax. Our research shows that it is much more regressive than the sales tax and about as regressive or slightly more regressive than a gas tax. So we are choosing to pay for these programs through about the most regressive tax we could come up with.
Speaker 5
Absolutely. And to the president, you're the oversight. That's why I see you. But in in that, I I think your resiliency I'm I'm talking about 2040 and our climate goals. Are we gonna be able to meet that when we talk about resiliency and innovation?
And and to the chair, I might bring up hydrogen that we've got to increase hydrogen in our portfolio, in our investments, in our future a little bit more, to provide the service and affordability and to be consistent with what we're trying to do with the cost of regulating fire preventions and answering those calls. But I also think that are you over regulating and don't allow these utilities to innovate and do what they need to do?
Speaker 11
Thank you, senator. Speaking And I'm done. First to the the first part of your question, we are absolutely planning for delivering reliability and resilience as we look towards our our climate goals for 2045. Our process, our integrated resource planning process, is really set up to make sure that we can deliver reliability, that we meet our GHG targets, and that we do so at the lowest possible cost. So that is really kind of the driving factor behind how we plan for the infrastructure of the future.
We want the the resources that are going to be best able to deliver, on exactly that, on a reliable system, a safe system, one that meets our climate goals and does so at lowest cost to customers. That's That's the driving principle behind how we procure. As to whether or not we are over regulating the utilities, I think it's always fair for us to question ourselves about whether or not we have the right regulatory structure in place for utilities to make smart investments. Because ultimately, as a regulator, I think that's what we're looking for. We want the utilities to make the best decisions possible using customer dollars, which we are here to safeguard.
We want them to be making choices that are going to drive better outcomes for customers. And I think we've seen examples of utilities in California innovating with customer dollars to deliver better service. One example I would point to is investment in advanced weather stations. The utilities in California have deployed weather stations on the grid that give us really granular information about wind speed, about humidity, about temperature, and really help the utilities better understand the nature of risk on the system that facilitates smarter decisions about investment on the grid. And that large scale deployment of weather stations is a California innovation one that our regulatory environment has been able to facilitate.
Speaker 7
Well, thank you for being here, and congratulations. I guess a couple things, and
Speaker 7
over to my colleagues. Might have a little follow-up. But on February, you mentioned how it aligns wildfire oversight with your cost targets and such. That's great news. There was a piece in the bill where we set up it requires investor owned utilities to securitize $6,000,000,000 in future wildfire risk mitigation capital expenditures.
So using securitized debt rather than equity for that, for which you'll have to issue financing orders for. So does the CPC have all the necessary resources to ensure utilities are able to quickly set up this financing mechanism, which is expected to save ratepayers hundreds of millions per year.
Speaker 11
Yes. Thank you for having that provision. We really appreciate the legislative direction there to reduce costs for customers by reducing the ultimately, the return that utilities will have on that infrastructure. We are looking to rapidly implement that legislation, and we will always make sure that we are requesting resources through the finance process to make sure that we can comply with adjustments to the legislative environment and implement legislative directives. We are looking forward to implementing that and saving customers money.
Speaker 7
Awesome. Another point, been looking for ways is we've really already talked about this morning about making the grid safer, cleaner, more reliable, while also lowering bills. That's what we're all looking for. Several commissioners have noted that one way to lower rates is supporting load growth, so that we're dividing the fixed cost of the grid over a larger amount of kilowatts delivered. Some of us, we've been calling it beneficial load growth.
But it's beneficial if we support more load without spending a lot of money to expand the grid to handle the extra load. And if we do that, it lets us lower rates. So just how is the PC supporting both sides of this opportunity? What are you doing to help enable low growth from big future sources of growth like EV charging, electrification, even data centers? And as part of that, what are you doing to make sure the benefits outweigh the costs, such as expanding our use of load flexibility during peak times, for example, so we can handle a lot of load growth by increasing utilization of the grid assets we've already paid for.
Speaker 11
I'll point first to our implementation of SB410, which was really driven by some of the delays interconnecting that new load was facing around California. And so now we've we have been implementing that bill and approving, utility investments in infrastructure that's going to support faster interconnections. That's certainly one avenue we've taken. We also have been working and have developed now an interim rule 30, what we call rule 30, which is an interconnection rule for new large load customers like data centers. And the essential provision of the interim rule is that those customers can come to the utility with money upfront to invest in the infrastructure necessary to serve them.
They don't, at this point, have a guarantee that that money will be repaid to them. So they're essentially fronting the cost of that infrastructure, which unlocks the utility decision to connect those customers as quickly as is reasonably possible, gets more load on the system, and spreads out the fixed costs, as you mentioned. So it's another tool that we've been using to accelerate interconnection of new load and support spreading those fixed costs around. And we share the vision of more demand flexibility, ultimately helping to support a more efficient grid. We want to make the best use of the grid that we have and the grid that we're building for the future.
We have a number of active programs that move demand around one way or another. We could even point to time of use rates as an example of how we are looking to optimize demand to reduce peaks. Is more work that we can do in this area, I'm looking forward to our continued efforts to ultimately meet the load flexibility goals and deliver the most efficient grid for customers while expanding the pool of customers so that we can spread out the fixed costs.
Speaker 7
Yeah. Great. Thank you. And I think leading legislature look forward to partnering with you on that. And I think we'll have some ideas around that.
Also try to
Speaker 7
Because you sort of hear the fact some people say, we used to have a grid utilization closer to maybe 65% and maybe now we're closer to, say, 45%. So I think we want to figure out, working with you, ways that we can make better use of not better use, but make efficient use of all the assets we've already paid for. I look forward to working with you on that. Had a question about something that came up to me relatively recently, I don't claim to know a ton about it. I just wanted to ask you about stranded assets in the gas system.
The combined revenue requirements for gas utilities has increased 72% over the past decade, and new capital investments in the gas system now surpass $4,000,000,000 per year, from what I've been told. The utilities are assuming these assets will be used and useful over a long horizon, often well over fifty years, even though the state needs to significantly reduce our gas use, as you just said, by 2045. So where this is a looming fiscal potential, a bit of a time bomb here, PCN has been holding a proceeding on the future of the gas system that's supposed to be figuring out what to do about this. Can you give us any update on that?
Speaker 11
We do have an active proceeding. I can definitely follow-up with you on the current status of that proceeding and what we can expect as the next steps. I can certainly say that it is a challenge that we're well aware of and thinking about as we move towards electrification, as we hope to be successful in electrifying as much of our economy as possible, we do run the risk of the other energy system that we have considerably invested in a state, the gas system, serving fewer customers. And we don't want to be in a position that a shrinking number of customers pays a large and, what is still growing, share of fixed costs and ultimately that energy service becoming more and more unaffordable, a month more and more unaffordable over time. So it's definitely a concern that we are very attuned to and recognize the importance of making smart investments to support the safety of the gas system because we do have aging infrastructure on the gas side that does need maintenance, does need repair, does need replacement, and looking for opportunities to evaluate electrification as an alternative option where appropriate.
But we, of course, still have lots of customers who are dependent on the gas system for a range of services. We don't just use it for electric generation, which we are over time going to reduce our reliance on, but we also use it for home heating and cooking and particularly in existing buildings. There will be a number of customers who rely on that system for quite some time to come.
Speaker 7
Yeah, thank you. And we did have the min bill, the SB121 that was to do some pilots. Have you Any problem? Haven't really heard a lot about progress on pilots since then.
Speaker 11
I am happy to follow-up with you. I don't have information handy. I'm not sure if
Speaker 7
Okay. Senator Stern found it. Hearing that, yeah, there may be some maps and such.
Speaker 7
may have a follow-up. Have a couple more, but let me give my other colleagues some opportunities. Thank you.
Speaker 6
Thank you, Mr. Chair. Professor Bornstein, when you mentioned that there were policies that were brought forth by the legislature that are put on our ratepayers, through utility bills, that shouldn't actually be there, that should be subject to a different type of account, whether it's the general fund or other policy locations where those policies should be funded and not on the ratepayers. Were you talking about the balancing accounts? There's roughly 300 balancing accounts in the IOU system, or were you referring to something different?
Speaker 4
No. Balancing accounts can be used for a variety of costs, and some of them, I think, probably do belong on electric bills and some don't. I was talking more generally on the different programs that we are financing through electric bills and particularly through per kilowatt hour charges and that many of them are not actually typical utility costs, they are more likely to be or they are costs that are either imposed by the legislature through a public policy decision such as a program to help low income customers or are a result of what I would argue is a state emergency that we're paying for other effects through the state budget. Flood control is very much a problem with climate change and it is paid for through the state budget. Wildfire control other than which has massively increased as the climate has as things have gotten hotter and drier has been a big problem that CAL FIRE is facing, but if that tree is next to a power line instead our electric bills.
So we are loading more and more costs onto our electric bills that I think are public policy priorities. And I understand why. It's, you know, certainly easier than and the state budget is always controversial and always difficult, and so it's easier to say, well that let's just pay for that through, that's an electric cost. But I think what we've done as a result is ratcheted up the price of electricity, which disproportionately is paid for by low income people, and we have discouraged people to use electricity when it is efficient to do so. And I'll just give you one example.
PG and E charges me right now about 40¢ a kilowatt hour, during peak times even more than that. The actual incremental cost of supplying me another kilowatt hour is somewhere in the 10 to 15¢ range. The difference is paying for all of the fixed costs of the system, the climate change impacts, the public policies and so forth. But when I go to look at should I put in a heat pump or should I get an electric vehicle, I'm facing some pretty steep costs that are not really reflecting the additional cost of providing me that electricity.
Speaker 6
Thank you for that, sir. Thank you. Back to you, mister president. I do have a couple of questions regarding affordability challenges, and I think it's our job to scrutinize, if not at minimum, into the fact that increases, particularly streaming from the legislative mandates that go into the policies and the bills that our constituents pay. I was looking at a 2022 auditor's report, the state auditor's report.
Back then, there were over 300 of these streaming accounts with a total of $16,800,000,000 in accumulative balances. Where does that money go? Do you follow the money? Is that money being used for what it was designated for? Do you have oversight over that?
And I'll stop there, and then I have a few more questions.
Speaker 11
Yes, absolutely. And thank you for the question, Senator. These types of accounts, both memo accounts and balancing accounts, they are a slightly different regulatory structure than our general rate cases. So for general rate cases, we're looking ahead at what we think the utility is going to need for the next few years. With these types of accounts, we're actually we have preauthorized the utility to track certain categories of costs in these accounts.
And so they accumulate these balances, and they ultimately come to us with requests to recover those costs. And we will scrutinize those costs after the fact. We'll have proceedings where we look into the books and evaluate what the utility did, make determinations about whether or not those costs are reasonable. Where we find utility action unreasonable, we'll disallow a portion of the costs. And then after the fact, they're allowed to enter into rates to recover those costs over a defined period of time.
Speaker 6
So but it's my understanding that they're recovering these dollars, like roughly when the auditors report that $16,800,000,000 with a B, was already paid for by rate fares, and they have this money in these accounts. And you said you audit them after the fact, after they use those dollars?
Speaker 11
Yeah. The general approach for these accounts is that they don't enter into rates until the utility has come in to request review and approval. On occasion, we do approve interim rate recovery for these costs because the the accounts are accumulating interest over time while they're not in rates. And then once they're in rates, they, ultimately will be collected from customers. But the utility is only allowed to recover what we approve as reasonable costs from that amount.
So the if the utility's got a billion dollars on a balancing account and we only authorize recovery of $700,000,000, customers will only pay for that $700,000,000 of recovery. And we'll have a process involving taking in evidence of the utility's conduct, and interveners may argue that certain actions of the utility mean that we shouldn't approve all the costs. And in fact, we do disallow a significant portion of the costs in these types of accounts.
Speaker 6
Thank you. How many of these balancing accounts exist today in the state investor owned utilities?
Speaker 11
I wouldn't want to hazard a guess that would be wrong, but I can certainly say that there has been a substantial growth in the number of these accounts, and it's definitely something that is worth us thinking about as a regulator, how often we approve these accounts. The idea behind this category of accounts is to allow for the utilities to track certain kinds of particularly unexpected costs that are hard to forecast in the future. And I definitely think it's important for us to be attentive to whether or not we've got the right sets of costs and the right structures for recovery.
Speaker 6
I appreciate that because ratepayers, actually, the money that was set aside in 2022, and I've heard that it's almost 60% more than that now today, 2022 is 16,800,000,000. So that's a significant amount of money going to our utility bills for our constituents that I want to make sure there's some kind of accountability in where, you know, where's that money going and how many of those accounts exist now that the ratepayers are paying for that have zero or minimal impact on the delivery of quality of service or utilities themselves.
Speaker 11
I really appreciate that. Should mention that many of these types of accounts are tracking wildfire mitigation costs. So there are valuable services that are performed for this money that customers will ultimately pay for, but I certainly appreciate the concern about the volume of money in those accounts.
Speaker 6
And then we I was going to ask you about the total balancing in those accounts now because the last report we have is 2022, but you're going get back to me on that. And then how many CPUC personnel are assigned to this area to make sure that this money is tracked?
Speaker 11
I think I will similarly need to get back to you on that, but structurally, the recovery of these accounts comes through advice letter filings, which are reviewed by the relevant industry division staff. So for our energy companies, our energy division staff typically review these advice letters as they come in. Some of these advice letters are of a category that gets filed in an application. So we will have a judge assigned in addition to our energy division staff and broader support from support staff.
Speaker 6
subject is that how many balancing accounts and you may not know, you'll have to get back to me that has directly impacted the IOU due to legislative mandates? Like, are some of them I mean, out of the 300, several of them, over 50%, were because of legislative mandates that require these accounts to be created and the ratepayers to be charged because of policy that's passed out of this building. So do you have an updated one since 2002? Just curious.
Speaker 6
Okay. And then just a situation going on in my district yesterday. I was actually with Commissioner Hoch, and we were in Keene, California, where most famous for, the loop Tohachapi Loop railway system, La Paz, and the Cesar Chavez Memorial, and Cesar Chavez National Park. So, Union Pacific got into the water business in that particular area. And I don't know, the history goes back very, very far.
But in the mid 1990s, there was a piece of legislation passed that allowed them to have stackable containers on the rail cars. So they dug up the pipeline for the delivered water to the Keane area from Tehachapi so that they could have the capacity go through the tunnels. And they took out the entire pipeline. They were ordered by the CPUC, I believe about ten years ago, to start bringing in water, have a sustainable solution. And they started trucking in water.
It was supposed to be a two year solution. It is still currently being trucked in today, ten years later. Have gone before the PUC they, meaning Union Pacific, have gone before the CPUC, requesting a rate increase of over 1000%. So people that are paying these retirement communities, this place where it's at, where mostly retired railroad people live, where La Paz is, where the Cesar Chavez facility is I toured that yesterday Let's say their rates right now are $1,400 a month. Their rate's gonna go to almost $6,000 a month for water.
And then a u individual household, their rates are, like, $300 a month. They're expecting it to go to almost $2,000 a month for water. Dollars 2,000 a month for water. The water board has put forth a little over a million dollars to do well testing and create a sustainable solution. And the request before the CPUC is to vacate what Union Pacific is doing just so we can get the information from the water board.
Because why would we invest that money and still not have a sustainable solution? And now, Union Pacific and I'm paraphrasing all this very quickly. Union Pacific is saying, we want out. We're not doing the water issue anymore. And they're asking you to let them out.
What are you going to do?
Speaker 11
I certainly can't speak to what the resolution of the proceeding will be given that we have an active litigation, but I can certainly say that we recognize at the PUC the importance of water service to Californians. Indeed, we have a human right to water in California. And I can also certainly indicate that the request of a water utility, in this case, Union Pacific Railroad, does not mean that they're going to be granted that request. They can't change rates without commission approval, and I certainly appreciate the importance of affordable, reliable and safe water service, much the same as energy service.
Speaker 6
I appreciate that you made the comment, and I appreciate your last statement, but that it's a human right to have water. But is it a human right at $3,000 a month? That's the question, I guess, that CPUC is facing. It's been over twenty years on the main water line that has not been available. And it was so detrimental that people wouldn't even mop their floors because there was so much debris.
The floor would be dirtier using the water prior to the water hauling. So you guys did make a mandate that they had to haul at least potable water. It had to be clean water. And they're getting it from Dehachapi and it's being delivered every day. People still run out of water.
And that two year solution is now, like I said, ten years later. And because there is a national park there the Cesar Chavez National Park is there a communication with federal partners to see if there's some type of solution that can be worked on? So I have that question, if you want to answer. And then I just have the final one. Have, Mr.
Chair, thank you for your leniency on this, because it's very important to my district. And the National Park gets 45,000 visitors every year. So they are not going to be able to pay that increase, like I said, almost to $6,000 a month. So obviously, the federal partner question. And then also, I'll let you start with that one.
Speaker 11
Sorry. I am aware of the coordination with the Water Board on this. I am not aware of coordination with federal partners on this, and I'll follow-up to see if there is any.
Speaker 6
Okay. And on the Water Board situation, why would we allow I agencies should talk I think all agencies should communicate together, especially if we oversee a particular area of interest. The Water Board, like I said, issued a $1100000.0.1200000.0 dollars sustainable plan to do well testing. They believe there's some property that is a different arm of the La Paz, or Cesar Chavez, organization that has properties where there could be wells that could service that area. And they're starting to do well testing, but then the motion before you is to abandon that whole project, basically, and not provide water or increase it by 1000%.
You're taking that very seriously.
Speaker 11
Absolutely. We take it very seriously. We recognize the importance of communities throughout the state, including the community in Kane, having access to affordable, safe, reliable water, and certainly appreciate that finding a long term sustainable solution for this community is ultimately in the best interests of the community and in the best interests of the state.
Speaker 6
Okay. And I appreciate that. And I know that for years, you know, the community, the CPUC, and other regulators were like, you can't get out of it. You bought yourself into the water district. You're, what, a $54,000,000,000 company.
You're going to deliver water to this community. And now they're kind of like, well, all right, we're going to let you out, basically, in theory, but there has to be a sustainable solution. So I guess my concern is, with the ruling that came down late last night, where the administrative law judge sided with Union Pacific on moving forward as is, that's a huge concern. Because what happens to the resources that were allocated? And it may not be something that you'd be able to answer.
It may be a question for the Water Board, but what happens to those resources that were allocated from the Water Board to find a sustainable solution to get Union Pacific out of the situation that they find themselves in and still provide quality water and affordable water in this community for both the public entities, the federal park. The La Paz is different. It's a commercial part of that area, which is part of the Cesar Chavez Memorial. So I just want to make sure that I brought this to your attention, that you guys are actively looking for an affordable way to deliver water to that entire community up there.
Speaker 1
Thank you, Senator. Important line of questioning. This has come to my attention as well. We're very concerned about this. Let me turn to Senator Richardson.
Speaker 14
Thank you, Mr. Chairman. If I might, I'm going to start my comments by thank you for calling this kind of what I would call a level setting hearing for some of the new members here, which I am. So, I appreciate kind of how we've started with this space and I'm sure we'll build upon it. So, congratulations.
And I must say, you have the best stacks here of any committee. Got to
Speaker 14
Doctor. So, I'm also going to look forward to serving on this committee. With that, I have a few questions. First of all, Professor Borenstein, is that a real picture, a background? Does that exist of
Speaker 4
It's in the Yes. That that is the North Sea, and it was taken by a friend of mine who was on a cruise in the North Sea, and she texted me. She was there, and I said, Oh, take a picture of the wind turbines. And she happened to actually just be going by the wind turbines. Well,
Speaker 14
I realize we all come with different experiences and ideas, but that's a little scary to me. If that picture is supposed to be more inviting of what we hope our environment will look like, I don't know if that's what we're hoping for, as I've been under a few of those turbines myself, and it just seems a little interesting. But with that said, let me go into my questions, which are primarily for the CPUC. Number one, I wanted to know, in your slides, you said that you anticipated an over 80% reduction in natural gas. And you've heard a couple questions here about that.
What do you attribute that statement to? What facts do you have to anticipate that we're actually going to reduce 88%? Because I find that would be a lawful goal in my mind.
Speaker 11
So I do want to clarify that we're I'm talking specifically about natural gas used for electric generation, so use of natural gas plants to provide electric power. And that's based on our modeling of the future energy system that we are planning for through the integrated resources planning process in partnership with the California Energy Commission, which develops a demand forecast, which we take in and we model the lowest cost portfolio to deliver on our climate goals reliably based on that demand forecast. We then pass our portfolio, which includes location specific information about where we expect resources to be developed, to the California Independent System Operator, or CAISO, and they use that portfolio to plan for transmission development that is ultimately going to facilitate the construction of new electric generation resources to build out new clean energy resources that are going to help us reduce our usage of gas plants. And I do want to clarify that as a reduced usage of gas plants, it doesn't necessarily mean that gas plants are coming off of the system. They're still potentially available as capacity resources.
They're there to provide reliability but don't need to run as much.
Speaker 14
Okay. I've only been in the Senate now for a little over a year, but I would caution those types of comments and recommendations. We're going through that very issue regarding energy as it relates to fuel. And I think by making those assumptions, they're actually quite dangerous because people take those assumptions as and then next thing you know, everyone's, oh, we're not going to utilize gas. And I just find that to be extremely, extremely dangerous.
And so I would caution on that slide a little more clarification of specifically where are you referring to, a potential reduction of 88% of gas. My second question, getting to anticipating the load, has there been an analysis on whether there are significant resources for the upcoming needs, such as at ports, with vehicles, with data centers, and so on. Has the CPUC produced any reports of what you anticipate the needs to be? How do you anticipate fulfilling those? How long will it take, does such a report exist?
Speaker 11
Yes. I would say the main venue for that is actually the Energy Commission's demand forecast, which we take into account as we develop that portfolio. So the CEC is evaluating what demand is going to look like in the state, and they are taking into account potential data center growth and the demand that comes from that, as well as looking at our transportation electrification future and what kind of demand that will generate. So we take into account those forecasts as we plan the portfolio to deliver reliable energy based on our forecast uses of energy in the future. And this is a process that we, as joint agencies, regularly run so we can account for changes over time in what we're actually seeing on the ground and whether or not the time associated with demand growth is going to be a little bit different than we expect in one given year, we will be able to adjust that in the next year.
Speaker 11
Their demand forecast, which I believe is a component of their integrated energy policy report.
Speaker 14
Okay. Mr. Chairman, if you could direct me and my staff to where we would find that. And there might be some other people who would be interested as well. It's interesting you referenced the Energy Commission because when I asked that question to members of that commission during a presentation of data centers, I was told the answer is no.
So it's interesting your comment. That being said, is there a group you mentioned that, something you alluded to, the two of you talk, the CEC and the CPUC. Is there a group, and are there discussions taking place about the upcoming needs, what are the strategies and the legislation and so on? And more specifically, let me say, is there a holistic approach? Out of the CEC last year, with energy came that we needed a more holistic approach with the air districts and local entities and so on, that as they're forming these policies, is someone holistically is there a group looking at these decisions and seeing are they making sense and so on?
And so I'm going to ask that same question related with the Are the two of you working together to look at holistically, of all these things we're talking about wanting to do, hoping to do, is there a group, and are there discussions to evaluate holistically and make recommendations to us as a legislature of things we should consider instead of kind of the piecemeal that appears to happen?
Speaker 11
Yeah, I think so we are working with the Energy Commission, and I would add with the Air Resources Board. We are agencies who are going to jointly report on SP100 progress, and that I think will be a nice overview of our current state of progress on moving to our energy future as well as some of the challenges ahead of us and how we will need to make some changes in order to meet that future. And we work very closely, as I mentioned, with the CEC and with CAISO, and we also are taking into account the Air Resources Board's scoping plan as we develop the IRP, the Integrated Resources Portfolio, that ultimately helps us plan the fiscal infrastructure that's going to support that energy future. So it is really intended to be a holistic view of what the energy system needs in order to meet the clean energy goals of the state, do so reliably, and do so while delivering customers as affordable energy as possible.
Speaker 14
So if you would kindly provide that information to the committee so that those of us who are newer to the committee could come up to speed. Who ultimately makes the decision? If air district has a scoping plan and says, Hey, we want to eliminate whatever let's say, for example, at a port, who ultimately makes that decision? Are we ready? Do we have sufficient resources to do this?
Are you just relying upon the air districts to move forward with their plans? Or does the CPUC or CEC have any authority, to your knowledge, to help direct a more holistic approach?
Speaker 11
So we tend to plan on a broader system level. So we're taking in the Air Resources Board's statewide scoping plan for emissions and building out the grid that's going to support the energy resources we expect to deliver that reliable future. Ultimately, the investment decisions about which particular type of generation is built in which particular place is made through competitive bidding. So all of the load serving entities we oversee, whether it's the investor owned utilities, the community choice aggregators, or the electric service providers that serve direct access customers, they issue bids for energy resources, and they will enter into long term contracts with developers to build power plants in very specific places in order to meet both their compliance needs and serve customers with the energy that will be necessary. So it's a little bit of a messy diagram, but it is a process that we all have had some experience working through together, and everybody has a degree of predictability in terms of how we're going to plan the grid to connect resources and what all of these load serving entities are going to need to buy in order to serve their customers' needs and the developers understand that they need to win bids, they need to deliver competitive energy resources that are going to meet our climate and reliability goals.
Speaker 14
Let me give you a more specific example. Let's say, for example, the port. The Port of Los Angeles knows it needs to build a 200 MW station to do offshore. Right? Offshore, off powering.
And then there are also scenarios where you can put hoods over those exhaust areas to collect it versus actually, you know, plugging in? Who ultimately would make the decision if the city of L. A. Comes to you and says, Hey, we need to build a 200 megawatt station, and then developers, other people are saying, Oh, well, we have these other opportunities. Are you relying upon the air district or the ports to ultimately make the decision, the holistic decision of what's right?
Do we have sufficient amount of power for the state? Or are you all involved?
Speaker 11
Okay. I think conceptually how this would work is that the port, as a customer, is going to tell their electric service provider, whoever is their retail provider, DWP. They tell DWP we need 200 megawatts of power. DWP is going to evaluate whether or not there is existing capacity on the circuit for that customer. And if there's not enough capacity on that circuit for that customer's new needs, DWP will engage in a study to evaluate whether or not what the upgrades will look like on the grid to support that customer.
I will note that we don't regulate DWP as a service provider. As a municipal provider, they're not under our general jurisdiction. But conceptually, same thing would work for a customer who is served by the investor owned utilities.
Speaker 14
So back to my question that I'm asking. Once DWP reviews this, at any point does the CPUC or the CEC look at this and go, okay, they're looking to do a 200 megawatt station. How is this going to impact our overall needs and our resources? At what point are you all looking at some of these local decisions and determining whether those decisions are in fact consistent with your statewide policies of what you're trying to do?
Speaker 11
For GWP, we at the PUC do not. They're not under our jurisdiction, so we don't take responsibility for how they go about serving their customers. For the utilities that we oversee, we do review their procurement and make sure that they are meeting our reliability goals, that they're meeting our climate goals, and we also allow the costs to be recovered on bill for their procurement.
Speaker 14
Okay. All right. And my last question is, I believe in your statement on page two, you said what's driving, the utility cost increases. And as I understood you to say, you stated pretty clearly that a lot of that is fire related wildfire spending. Is there anything else that you would attribute the more significant increases to our utility costs?
Speaker 11
Yes. So absolutely, wildfire is a key cost driver. A recent estimate indicated that about 27%, if I'm remembering correctly, of PG and E's revenue requirement is associated with wildfire related costs. So it's a key driver for the cost increases that we're seeing in the state. There are lower numbers for Edison and for SDG and E, but still very substantial.
We issued a report in response to the governor's executive order about energy affordability that highlights different components of the electric bill and indicates essentially what is driving the cost of energy service in California today. And in addition to wildfire, I would highlight, as we did in that report, the cost shift that comes from legacy NEM1 and NEM2 customers who are not paying as much into the fixed costs of the grid, as well as from net billing tariff customers because our rate design has most of our fixed costs recovered through a volumetric power charge. When a customer has rooftop solar and pays for fewer retail electrons, they're escaping the costs of the fixed costs of the grid, even though they are continuing to rely on the grid for reliability services and for energy at times that they're not producing.
Speaker 14
Thank you. If you could provide that report to the committee that they could share with us, that'd be helpful. And I look forward to speaking with you again, particularly on that last comment that you made of how lower income residents are oftentimes, unfortunately, bearing the burden of some of the energy costs. Thank you, and congratulations. I understand.
Speaker 10
Thank you, Mr. Chair. First of all, congratulations on on your promotion. I I you were looking forward to this hearing and every one of these hearings coming up.
Speaker 10
I'm happy to be back on this committee. As as you know, I've been on utilities and energy in my eight years that I was in the assembly. It's good to be back, on this. Utility services, know, are essential for our daily living, and for society to function. We recognize that, and we recognize the importance of them.
We, as a legislature, fortunately, unfortunately, have to find ways to join with you to make sure that we find ways to reduce what our ratepayers are paying. When we have town hall meetings, when we have interaction with our residents, that's one of the top complaints to us. And it's something we have to address. And it's something, unfortunately, that we've been trying to address for years and years. So, we have to find whatever we've been doing, we can't expect a different result if we continue to do the same thing.
We have to be more creative in what we do. Finding ratepayer protections will ensure that the rates are affordable, especially for low income households, as was mentioned by my colleague. The economic support that you need and the investors that you need to cover costs, we recognize that they have to make some level of profit for them to make that investment. There is some discussion about the risk involved in case of a bankruptcy. I'm unaware of any of our IOUs going into bankruptcy.
And so although that's talked about as if it's a current high risk, I I I don't see how that is. In 2026, the level of profit, if our records are correct, the return on equity for California IOUs was approximately 10%. Is that accurate?
Speaker 11
Yes. We our most recently approved cost of capital decision reduced the return on equity for the large and restaurant utilities by 30 basis points or 0.3%, and they are all right around 10%. Some are slightly below, some are slightly above.
Speaker 10
Well, we know that we have to do those assessments. It's critical to determine what should be included. As Doctor our first speaker talked about
Speaker 10
Borenstein, Professor Borenstein, about what should be included in capital or otherwise. And I'll have some questions in just a moment. But we have to find a balance to try to figure out what to do with this. I do want to thank the staff from CPUC and the Public Advocates Office for preparing the reports that we were able to review, and I thank you for that. I'd like to move to the Little Hoover Commission and their recommendations.
I'm sure you have received this and have had an opportunity to review it. There are some that were of greater interest to me. One was to integrate the cost related proceedings, the wildfire cost of capital, and we had that discussion with Professor Bornstein, to integrate those into the GRC and streamline filings. What do you what would be your response to that?
Speaker 11
I would say that we still have some work to do on integrating more costs into the general rate case and streamlining filings. We continue to have a number of memo and balancing accounts, as discussed earlier this morning, that are recovered through different means, through either advice letter filings that go to our staff or through applications that are separately recovered from our general rate cases. We have certain costs including, for example, costs for expedited undergrounding that will be reviewed separately from the general rate case, and that's under statutory direction in SB eight eighty four. It is definitely the case that I think looking at the longer arc of the history of regulating utilities, once upon a time, we used to review almost all costs in a general rate case, and there were not very many additional filings. Today, we are in a position that we have many more separate filings and separate recovery mechanisms in addition to the general rate case, which does make it more difficult in any given general rate case to have a holistic view of what the impacts are going to be on customers.
We have to actually take into account many different venues for cost recovery. There are some values that are provided by some of these venues, and so I don't want to say that it's categorically something that we should not do. But it is definitely important that we try to get costs that make sense to be in the general rate case into that rate case where we can forecast them and have an overall view of what the impacts on customers will be, there's and more work to do on that front.
Speaker 10
You mentioned SB 84, and I'm sure there's other legislation that has been introduced that makes it more difficult to streamline. I would like, at some point, I would imagine it's already been done, to know which pieces of legislation that we have passed have caused additional work for the PUC that should be revisited. We're all well intentioned when we introduce our legislation, and when our colleagues vote on it in both houses and get signed by the governor, that it's something that we expect to be done. But that doesn't mean the the the legislation is infallible. It's something that absolutely can be revisited, and I I would welcome you to, revisit some of those pieces of legislation that have caused additional additional load that perhaps can be rewritten in such a way to make it easier.
One of the I think the biggest complaint that we have heard in all my years here is the amount of time it takes for the PUC to get reports out, to get decisions out. And that, it's something that has to be addressed. Can't be for lack of staff because we've continued in our budget to provide more and more staffing and the cost continues to increase, which is another one of the recommendations from the Little Hoover Commission is to do an analysis of staff and staff, the work that is done by the staff and the cost of that. The other was to direct the state auditor to evaluate, here it is, the staffing levels and expertise. What would be your response to that?
Speaker 11
I will need to follow-up with you on I I believe we have we've probably got specific, responses to audit findings. I think broadly speaking, there are areas where it's more and less challenging to hire staff to perform work. We've had a lot of successes, and we've indeed been able to reduce our vacancy rate through a number of efforts by our agency administration. That said, we definitely need regulatory process to keep up with the changing nature of the systems we oversee and the new tools that are available for all of the world to use to make work more efficient. And so I think there 's definitely opportunity for us to continue making sure we've got the right skills.
And I'm happy to follow-up on the response to that audit.
Speaker 10
I would appreciate that. In fact, I would like and I'm not going to go through all of the Little Hoover Commission. I find that when they do their reports after a number of workshops and study groups, that their reports are very informative and provide lots of good information for us as legislators. So I would like to follow-up with you specifically on that particular report. And if I may, Mr.
Chair, with Professor Bornstein, My last question is, in your presentation on cost and incentive impacts of setting and impacts of setting allowed return on equity, You talked about you had to incentivize utilities to over invest if the equity is too high, that it incentivizes utilities to over invest in capital. And you talked about, and this was discussed here, like the wildfire clearing. Well, in our budget, we've had specific funding for wildfire clearing from various sections. And if that's an additional expense, it somehow is coming out of CPUC that is of concern. But you also talked about the undergrounding and that that is capital, and there is an incentive then to overinvest in the undergrounding.
Could you talk a little bit more about that, please?
Speaker 4
Well, if you tell any regulated entity that when you spend a dollar on any expense, regardless of what it is, we're gonna reimburse you a dollar 5. They are gonna try to spend a lot of money on that. And that's what happens if the true cost to the utility is, say, 7% and you give them a 9% rate of return, they are going to try to do things in a way that's very capital intensive. Undergrounding, even though it involves a lot of labor, the terms can be confusing, it's a long term investment, so it goes into the capital account and becomes part of the rate base. And as a result, if you give them a very high rate of return, they will be inclined to spend a lot of money on undergrounding.
Speaker 10
We also know the undergrounding is more expensive. It also provides for greater protection from fires that would start from our utilities. So, do you balance that?
Speaker 4
Well, I'm not the right person to answer that question. I haven't done that study. My colleague Meredith Valle has done extensive work on that, and she would be a great person to consult on that question.
Speaker 11
And if I may add on, I will say that it is, I think, the responsibility of the regulator to make sure that the utilities are making smart decisions about how to invest to reduce wildfire risk. And as I mentioned earlier, we now have so much more granular data about the nature of the risks on the electric grid and the weather conditions confirmed in different parts of the grid, it is enabling us to engage in more rigorous evaluation of what benefits are delivered by different mitigation choices that the utilities could make. So we will evaluate undergrounding as an option to solve risk on particular circuits. We will also evaluate covered conductor or continuing vegetation management and use of PSPS to make sure that the utilities are making smart decisions about which solutions to choose for which portions of the grid.
Speaker 10
And just as a follow-up, Mr. Chair, when you do the undergrounding, yes, it is a big investment, but it becomes part of your equity. So because that is your equity, is there then is does it the equity of the rate payers also so they get a rate of return themselves?
Speaker 10
It seems like a simple question. Seems like But it's their equity. They're paying for it, so at some point they should get a rate of return.
Speaker 11
Very much appreciate the point. It is the case that in the regulatory structure, the utility dollars that are invested are entitled to a return, a return on the debt and return on the equity used to finance the asset, and ultimately customers pay for that.
Speaker 10
Thank you. I know I have so many more questions, but it'll be for another day.
Speaker 1
Alright. Senator Stern, I know before you jump off, professor, because professor Bornstein needs to go, I know, but Senator Stern had a question. And we really appreciate your flexibility. I I know you've got something going on in your place.
Speaker 2
It's it's interesting to be able to call my former professor and then just get to haul him back to a committee, which is a nice privilege to get to have for a moment. I don't know if it was a hauling, though. Don't know if that actually counts. But, I appreciate you coming back. Just first out, I did want to say congratulations, though, to President Reynolds.
It's exciting to have you before this committee, and think this is really exciting new era for the PUC as well. And, as you can see on this committee, especially now that it's our very first hearing from our new chair here, the the intellectual firepower is high. The the the knowledge of individual idiosyncrasies as professor Bornstein put it is very high. So, I think this is a really good breaking of the seal for you to get to realize just the depth and knowledge and detail that that we're gonna ask of you and I I have a very good feeling you're up for it. Just as a lead in though to to to your To my couple questions for you.
I did wanna go to Professor Borenstein to ask the things that I don't wanna hit you with on maybe your first day on the job here. But, think maybe that that got President Picker in a little hot water the first time he testified before this committee, I don't know, I got old, nine years ago or so. But, that's why I'm gonna go to you, professor. Just in terms of the general promise we make to rate payers around their rates. And where risk fits into that.
And just there's there's some fundamentals to how we offer electric service in this state that does inherently at least shift, if not vary, if not cost shift risk. So, I did want to ask you about that at the outset. Just as you're trying to sort of find a equitable framework. The fact that in, you know, when you have to, when you live right next door to a power plant, your your cents per kilowatt hour rate is the exact same as if you live, you know, a 100 miles away across 18 canyons in the middle of a high fire severity zone at the end of a tiny dirt road where you're the only house left. And, that power still has to reach your house at the same exact rate that it does for the person living next door to the power plant.
Speaker 2
There are, you know, we Thoughts on that one? Is that something that we just have to accept that, okay, here's the promise and how we've made our rates in this state and that we're going to have to accommodate that risk some other way?
Speaker 4
Well, I would call that a cross subsidy, not a risk, but and we have sort of committed to that cross subsidy that we're going to charge a uniform rate regardless of what the actual cost of serving different areas are. It's not a complete commitment because of course if you live in Alameda or Palo Alto or one of the places with the Muni, they're not cross subsidizing the high cost areas. And of course some places such as San Francisco would like to not be cross subsidizing the high cost areas by leaving the utility. And so I think that's a public policy decision that really should be made at the state level. What is our commitment to subsidizing areas that are higher cost or that become higher cost because of changes such as climate change?
We aren't really confronting that. We're just rolling it all in right now.
Speaker 2
And, look, I'm speaking as as someone who represents fire zones and places that complain about PSPS constantly. Including my own parents. So, I'm putting myself at risk with my constituents and yeah, even my folks just by saying that, you know, it's it's sometimes it just irks me that that we're sort of solving for a puzzle that we don't sort of recognize the cost shifts that happen at the outset. Get into these other cost arguments, that fundamental one of underlying risk isn't there. But to your I did want to see, just in teeing up maybe President Reynolds, this notion of the idiosyncrasies.
Or President Reynolds, you start to get into it yourself circuit by circuit. Right? Thinking about costs in that way and implementing Senator Becker's two fifty four with that new cost profile. So it's not just an OEIS world and it's sort of a blind approach to capital investment and wildfire, but something that is like you, I think you used the word smart, President Reynolds. But, you used the word idiosyncratic a little bit, Severin, and it wasn't just about wildfire, right?
It was about overall scrutinizing in that ROE. Those sort of those detailed decisions that have to get made for each utility. And whether those, are there objective ways we can go about that process of the idiosyncratic IOU by IOU. Doesn't have to be circuit by circuit, but investment by investment, that sort of analysis. Does the ROE process and frankly the whole GRC need outside objective standards?
Can they be inside objective standards? No objective standards at all, perhaps? And there it is inherently eye of the beholder.
Speaker 4
Well, I'm probably not the best person to answer that. I've never been deep in a GRC. There certainly are real problems with information asymmetry with the utility knowing a lot more than the regulator does about what things cost and what the alternative ways of doing things are and so forth. I will
Speaker 4
I I will say and I will once again make myself unpopular in Sacramento. Undermining the CPUC budget, paying CPUC employees badly, having them have poor work conditions and therefore high turnover is really a recipe for not getting good outcomes. I would like to see a more well supported CPUC that can keep people for a long time and sorry, this is and can professionalize their operations. We'll make that With that, I'm sorry.
Speaker 2
We'll make that your t up. I was a more generous t up than I expected. I thought he was gonna make your life more difficult, President Reynolds, but he's actually made it easier. He's you didn't have to submit a BCP at all. So congratulations.
Yeah.
Speaker 2
But thank you, Severin, professor. But so on that note, I'm not asking you to make sort of a budget projection. I know Senator Becker and Senator Richardson has sort of probed around that issue. So much about what resources you need or that's a separate process, probably separate hearing. But just in terms of how workflow goes, you know.
You've been in this agency. You understand it. I was only there for a second. I was in the bowels of the ALJ division during law school. Right?
So, felt the vibe a bit. I will say that a lot of brave public servants in there. A lot of people who go deep and have a ton of expertise. I also know though that looking through your work plan for 20 I think you've got 53 items on your docket, at least what was publicly in here, give or take. From trains, to water, gas, right, Uber and electric, you know, clean miles standards, and then a big chunk of energy in gas and electric.
And then you've got these giant GRC proceedings with huge consequence, and then those underlying cost of capital determinations that drive that. At any given time, the most at the commission, the most number of commissioners who would even be on a case is two. Right? If you have one on the primary and then they'll come in. But at any given time, three fifths of the commission is just not even able to put its head on that.
How are you thinking about prioritization or ways to get whatever firepower you've got attuned to these affordability challenges? And how to I mean, to me, yeah, how to get more out of energy division too. Right? And how to how to really build up the analytical firepower there to, yeah, not be in what seems to me a reactive posture. I mean, would you dispute that, that the way a GRC filing comes to you, you don't put something out.
You have to wait to receive the application. Is that correct?
Speaker 11
So we do wait to receive the application, although it's more involved in a process that is actually adapted somewhat in recent years. So we used to just receive the general rate case when it came in, and we would evaluate that spending request for the next few years. We have now reformed that process. So a full year before the utilities file their general rate case, they file with us their risk assessment mitigation phase, where they essentially tell us their key risks, and ultimately the goal is to map their spending plan in the general rate case to those key risks. So, I would argue that that reform has actually
Speaker 2
got to that. Think Ramp has been successful in that regard. And, I guess it's like, what's two point zero of that look like? And, what more, I mean, think you're gonna hear it from both sides of the aisle here, just a scrutiny of that ROE decision just because we are we are out of step, say, with the rest of the country. Right?
We're we're given a higher return than most other states in the country and everyone wants to know why. Do you think that part of the reason why is because of wildfire risk?
Speaker 11
I would certainly say that wildfire risk is a key financial risk that we are taking into account as we decide to set the return on equity. There's no question about it, and given the liability regime in California, we need our return on equity to be attuned to the state of financial risks that confront the utilities. We are, nonetheless, trying to move the return on equity to the lowest possible amount that is going to compensate investors in a way that's going to attract enough investment to invest in the system.
Speaker 2
Lowest possible amount under current circumstances, but I guess my hypothetical to you is if the risk profile did shift in wildfire, and we were successful at targeting investments and did in ways that were meaningful not just to us as legislators but to the markets, to insurers. Would that I mean, is there a scenario Does that then lead to more space for the commission to actually reduce what the ROE would be? If there if and and can you get to that quantified sort of delta of what a really solid wildfire mitigation plan looks like? And then, what that that sort of, the nexus would be, I guess, to can you get there?
Speaker 11
I'm not sure I can give you a specific quantified amount, but I can absolutely say that we would take into account any changes that the legislature makes in the liability regime as we are evaluating through an evidence based process involving financial experts what that means for the nature of risks confronted by California utilities that may be different than risks faced by other utilities around the country.
Speaker 2
But you can't You said going Maybe going forward if changes were made. But under the current regimes, like under the the ten fifty four reform we sent you last year, under the new, you know, additional funds, 6,000,000,000 more. We've got it now, the cost framework on top. We've got some other elements around Yeah, different parts of Just sort of tightening things up there. Are we already sort of committed now to what we've just authorized?
Or are there ways on an ongoing basis to look at what that recently, those recently three authorized rates were and to say, actually, you know, we projected that out for x number of years. I forget what the cycle is. Three, four?
Speaker 11
We have we actually have an opportunity for some adjustment up and down. We have a cost of capital adjustment mechanism that can move the cost of capital over time. I would say that more broadly speaking, I think the legislature has been very supportive of trying to invite trying to provide an investable environment for California utilities, and we do take that into account as we go through the process of setting the return on equity for the California utilities.
Speaker 2
We get I I certainly get that. And I I'm very sensitive to what credit rating agencies think of our, you know, our IOUs value out there. I mean, I think that's a real thing. And I think there's you can't just do magic and expect the risk to go down. But, if we're actually doing the work and the risk actually is coming down.
And, you know, that's sort of I mean, that may be a prelude to what we'll hopefully hear from the earthquake authority as well. And, we appreciate your participation incidentally in that process over there. I think that's been a really healthy thing to get the PUC and the Department of Insurance talking. Because if we can do work here that is actually recognized by the markets, then in theory there should be a concurrent kind of tightening that's possible without having disruptions in say credit rated ratings and with the appetite for equities and things like that. I don't wanna overdo it here.
I think I got to all of them for now. I guess, maybe we touched on the wildfire piece. Are there other utility costs in California that you think are really different than the others that justify having us give their shareholders more in this state than say, Wall Street gets in, you know, other states across this country. I know that's sort of a common thing we hear is, why are we given a higher rate than than these other states? Other things besides wildfire you think that justify that?
Speaker 11
Wildfire is the key driver for sure. I would also recognize as, you know, I think think consistent with with the question you asked Professor Borenstein, universal service is in many ways the most fundamental cross subsidy policy that we've engaged in both as a state and really around the country. We've made the commitment to have universal service. And our state is a very big state, and it's a state with challenging terrain, and there are areas that confront a different set of risks in a small number of customers that utilities still need to make investments to support, and that definitely changes changes the nature of delivering utility service in California versus, say, a state like a state that has a a more dense population and, as a result, a smaller utility system serving those customers?
Speaker 2
Well, let me just commend you. That is a much better way to answer that question, more diplomatic than President Picker did. So, A for diplomacy, we'll get the unvarnished version of you going forward in the weeks and months ahead, we hope, here as a committee. This is tough stuff. We don't plan to take it easy here.
And, but I will say, you've got a difficult job ahead of you, so we're counting on you. Thank you. I yield back, Mr. Chair.
Speaker 1
Right. As we discussed, it costs so much more and there's so much higher risk associated with servicing certain places. Senator Press.
Speaker 15
Thank you. One, it's a pleasure to meet you, John. I understand it's your first day on the job. I have a couple of questions, but because this came up naturally because of my colleague, Senator Reyes, I actually want to start off with something else. You all were talking a little bit earlier about undergrounding, undergrounding as fire mitigation and strategies we could use to try to reduce some of the costs related to undergrounding and discussing that as a future issue to address.
I'm the senator that represents Altadena. I represent all of the San Gabriel Mountains. And I can tell you this is something that we need to address right now. I have constituents that are receiving $20,000 and $40,000 bills in the mail because of SoCal Edison's new undergrounded system. And while they wanted to see those risks be mitigated after experiencing a devastating fire that took out entire blocks of neighborhoods, they now need to contend with paying for this while they are actively rebuilding their homes.
Now, my understanding, as I have talked with stakeholders and investigated this issue because I now have constituents who are coming to me asking me how we are going to work on addressing this cost for them because this is now going to be a barrier for them going through the rebuild process, is that SoCal Edison has submitted a letter to you all to explore some of those cost saving strategies. So I want to know, what can we do right now in order to reduce some of those costs for current fire survivors, not in the future?
Speaker 11
you for the question. And I can only begin to begin to understand what it must be like for someone to have lost their home, lost everything, and then be confronted by a bill like that from the utility. So I fully appreciate what people must be going through who are experiencing that. I will say that I am absolutely committed to working with you and pushing the utilities to find solutions that are going to help your constituents. I definitely recognize the importance of making sure that when we have wildfire recovery, we're not putting families in a situation that should be unacceptable.
Speaker 15
just also want to say I appreciate you sharing that, and I would love to figure out a way that we can get on regular communication because my experience last year I began in the legislature last year is the CPUC has been less than responsive. And it has been very difficult to get responses to a crisis that's going on in my district. And so I want to make sure that we have a open line of communication with one another. When my constituents feel like the decisions that the CPUC is making are happening in a black box, those things make me concerned. When they feel like the CPUC is being less than transparent, those things make me concerned.
So my duty is to represent them when I'm up in this space. And a lot of the issues we're talking about today, we're discussing them as if they are far off issues that we're going to have to address in the future. They are happening right now. And I want to make sure that we're keeping that top of mind as we're having this discussion. Another question I had that I want to bring up and let me recognize again, I understand that it's your first day, and so this might not be something that you're familiar with, but I want to share it with you.
Back in November 17, my office submitted a letter to the CPUC related to the request for the return on equity that the investor owned utilities had submitted to you all. And my office had requested that there be an independent ROE analysis done. We are very concerned about the number that was represented by the IOUs. We wanted to see an independent analysis be done into what that number actually should be. We were concerned that the number that was being suggested by Pacific Gas and Electric, or PG and E, SoCal Edison, as well as San Diego Gas and Electric was unjustifiably higher than market conditions warranted, that there was flawed methodology that was used, that was citing outdated financial data.
And so, you all did not do that independent analysis, but you did ultimately end up reducing overall the ROE that was anticipated. And so I would like to understand why an independent analysis was not performed as my office requested, along with other stakeholders, as well as individuals and constituents from my district who also expressed support for doing this independent analysis.
Speaker 11
I'll start by thanking you for reaching out as we were going through that cost of capital proceeding. And what I can say is that we do go through cost of capital proceedings evaluating multiple different positions about what the return on equity should be. And ultimately, we have stakeholders in addition to the utilities organizations like our Public Advocates Office that's housed within the PUC, as well as organizations like Churn and many others who are participating in that proceeding and submitting their own analyses of what they think the return on equity should be. And so our process does allow for for taking in evidence and different perspectives and different analyses about what the utility ROE should be. Ultimately, in that case, not only did we not accept the increase in the return on equity requested by the utilities, but we actually decreased the return on equity.
Speaker 15
And I understand the Little Hoover Commission recommendations also include having the state treasurer's office provide an independent analysis for cost of capital proceedings moving forward. Is that correct?
Speaker 11
I do seem to remember that's correct. Have not looked at the report recently, but yes.
Speaker 15
You know, I think it's important not just, you know, for us, right, and for myself making this request, but really for members of the public to see us do these types of independent analysis, to make sure that we're very clearly justifying when we're providing an ROE. And ROE is basically determining what the profits will be for these companies. And I think for many individuals and constituents across the state of California, there are frustrations that there have been huge profits that we've seen for IOUs. And yet, especially in a community that's been hit by a fire, it feels as though those same companies are not taking on the risk and the liability and mitigating the risk of these fires. And they're not doing their due diligence as a company.
And that's been, I think, incredibly frustrating for folks. So moving forward, I would like to see us make ensure that there is an independent analysis being done whenever there is a return on equity up for consideration. Is that something that you all can commit to doing?
Speaker 11
We can definitely commit to making sure that we're using the evidence based process that is taking into account multiple different analyses, including analyses that are not coming from the utilities, which is the process as it's outlined. And we, you know, ultimately need to be able to test the analyses of different organizations who put forward their proposals and that can involve cross examination and the involvement of the experts in the process. And so that's really vital to us. We need to make sure that there's a chance for all of our stakeholders to confront the evidence that's presented about what the ROE should be, and that's absolutely what we will do.
Speaker 15
Okay. The final thing I'll ask, and I just want to bring it back to this conversation around this undergrounding issue and the cost, particularly that my constituents are seeing right now. Have you seen this letter from SoCal Edison making this request around some of the cost savings measures? And are these discussions that the CPUC is actively having on how we can reduce costs that are being placed, specifically on to Altadena residents that are going through the rebuild process?
Speaker 11
I have seen this letter. Let me follow-up with you on the current actions, and let's make sure that we can find a good path forward for your constituents.
Speaker 15
Okay. Yeah. I want to sit down and discuss this as soon as possible. This is a really critical issue for all of them. Thank you.
Speaker 2
Yeah. If you don't mind, Mr. Chair, just I wanted to follow-up on Senator Perez's point. You said you wanted to you could commit to an sort of evidence based the evidence based approach you're currently undertaking. But what I'm also hearing from you tell me if I'm hearing this accurately there would be no objection to receiving an independent analysis, say, from the state treasurer's office or another state entity.
Is that correct? No objection to receiving that through the evidentiary process?
Speaker 11
We could certainly receive it through the evidentiary process, but ultimately our evidentiary process also needs a chance to test the underlying assumptions, the analyses, and the judgments. There needs to be potential cross examination of witnesses who put forth that analysis. Yeah. And that's all part of the due process that we need to provide to all of our parties.
Speaker 2
No, we would we wanted to I mean, that's that quasi judicial process that you have there in that litigation sort of internal litigation based approach. But I guess what I'm saying is if you're just in that standard without data, forget treasury or your analysis, you know, you're just guessing about the model they've given you. So, mean, my question's more about do you have the data necessary and is the data itself available to empower trusted other entities with sensitive information that would require, probably, some kind of, maybe not compulsion, but some, I mean, different type of information flow than we're currently getting in these proceedings. So, do you need additional statutory authorization to require that data be sort of transmitted in that way so that such an analysis could occur? Or can it can the current process handle that?
Speaker 11
So I think the current process actually can handle it. We actually have quite broad data gathering powers. We still have to provide due process to everyone that appears before us, so they've got to have a chance to cross examine and confront evidence. But the underlying and broad data gathering statutes that we have as an agency both enable us as an agency to take in lots of different data and perspectives. It also enables entities who are litigating before us to obtain detailed data from each other, and we can and do issue protective orders to protect that data where there are confidentiality issues associated with disclosure of that information.
But we very much make use of detailed data and analyses put forth by parties other than the utilities in determining what the right return on equity is for the utilities.
Speaker 2
But just in, you know, when you're evaluating things like have you over invested capital in this particular area and you're going after sort of underlying assumptions about timing of upgrades to that particular circuit or substation. I mean, are things that no outside entity is going have unless you gather it and provide it in a meaningful way. So, how do you are you doing that now and people aren't just aren't accessing it?
Speaker 11
I would actually say that it is happening now. So, I point to, for example, the last PG and E general rate case where I was the assigned commissioner, we did have parties get very disaggregated data about different circuits and circuit segments that the utility intended to harden in different ways, whether that was undergrounding or using a covered connector or not hardening and using other mitigation methods. And parties leveraged that data to develop their own set of recommendations and potentially different ways of mitigating risk on those circuits. We were able to take into account the analyses from the utility on the one hand, analyses from other parties on the other hand, and ultimately come up with a solution that we thought was the best set of risk mitigations for the utility to fund and be able to move forward with that will provide customers the best risk reduction for the amount of money they were investing.
Speaker 2
And we know the part of the compromise there was that you didn't just say you get it all at once, but you're going to this is something we're going to be continuously reviewing over time, right? So, it's sort of it doesn't just all go out the door. If they're not all approved, they're going to kind of go back through the cycles again. I guess I'm just trying to get from you, do you agree with Professor Borenstein that there is a sort of there is some asymmetry here between either the data you have or, well, he was sort of alluding to just the personnel fire, firepower that maybe you lack. Is there some Are you saying, do you think there's no asymmetry?
Or there is still some asymmetry?
Speaker 11
I think it's fair to say that there is still some asymmetry. Obviously, the utilities have much larger workforces and separate and apart from the resources they bring to bear on our rate case proceedings, they have entire operational staff who are going about the everyday work of figuring out what the nature of the system is and what the nature of different potential projects are that they should propose and evaluate. We are not sitting with every utility employee, so we're not going to have necessarily the same volume of data and the same day to day data that they have. But the fundamental data gathering statutes that we've been empowered with do give us the ability to go very deep into utilities records. And the parties who litigate before us do, in fact, do so.
So we are able to get very granular data about what the utilities are planning, what the potential benefits are, and use that to analyze what is right to fund is
Speaker 2
I guess I'm getting also at the financial side of things though. Not just like what they're going to fund or what their plans are, but also from a financial perspective. You know, what the mark how the markets are actually analyzing it. I mean, do we have that do we analytical function, too, to understand the sort of yeah, the Wall Street side of things when they look
Speaker 11
at risk? It's a fair point. We certainly are again, we're not in the meetings with the folks
Speaker 11
private equity. Bankers that the utilities are meeting with. But at the same time, we do have people on staff who do have real financial expertise and can help us dig into some of the key metrics. And our the parties who appear before us do hire experts who can also help test some of the assumptions that the utilities are putting forth as the justification that they would propose for their return on equity. And, you know, the result that we came to actually reducing from the current return on equity instead of the increase that the utilities had requested, I think is reflective of a process that can take in expertise that's not just utility expertise and come to a decision that strikes a balance of providing an investable environment and allows utilities to attract the capital necessary to do work, but also protects customers from excessive requests.
Speaker 1
Can build off of this line of questioning just to, ask this? We hear such different reports about whether utilities are a risky investment. I guess I always struggle with this whenever there are threats of some of the line of questioning that we have that if you pursue this, that there's there's so much risk associated with these investments. But it's hard for me to to to really believe that when you see how the p you know, the PUC virtually guarantees that they would, you know, recover their costs as long as they, you know, behave reasonably. You know, you you you decouple returns from sales, you know, even if sales are so low, you know, they're they're still gonna be earning profits.
And, you know, all the they get this use of memo and balancing accounts shifts the risk of overspending to ratepayers. So I mean I mean, is it with all that in mind, I you know, shouldn't investing in the utilities actually be less risky, especially since then the state comes in and helps out significantly on the liability side when there's a problem? Isn't it kinda less risky rather than more risky given all of these other factors? I think about other businesses that would love to have these kinds of protections guaranteed to them from government agencies.
Speaker 11
I think it's a very fair question. What I would point to is that there are utilities around the country who also have a regulated environment that provides a degree of stability and protection could look to. And so as investors are looking at California utilities, they're evaluating California utilities and their risk profile versus alternative investments, including utilities around the country that might form a similar risk component of their broader investment profile. And so I think the while we've done a lot to support the predictability, stability and the financial protection that makes for an investable environment, the nature of the wildfire risk in California does differentiate us from every other state in the country, And that is a real risk that we are confronting and is a component of how we have to evaluate the investability of the utilities.
Speaker 11
I think it is the critical differentiating factor between California and most other jurisdictions around the country.
Speaker 7
Well, thank you. I know we're mindful we have two other panels that are looking forward to. Just a couple of quick points. We appreciate a lot of testimony today. And certainly, I'm working on legislation, working on legislation with TURN about trying to take some of those costs off of the ratepayers that Severin Bornstein talked about, and a few other points that brought up today.
Two things. One, a general interest and one, just a specific point I need to make. One, just a general interest, the utility bill. I want to hear the next few panels on this as well. But how do we make the bill more simple?
You mentioned, particularly, the climate credit. We want people to get that. I appreciate that. But I always feel, as a member of this committee, when I have trouble understanding the it's an issue. So I don't know have any general thoughts on that.
It might be a future topic. Just one specific point I wanted to raise because there was some testimony last week in the Assembly Energy Utilities Committee about the forecast timeline. And I passed a bill eight eighty seven requiring fifteen year forecasts because that was important for sufficient lead time for transmission planning. And in that hearing over the assembly, there's some comments from your predecessors, the CEO of CAISO, that seemed to highlight the CPUC's view that ten year resource portfolio was more important than the fifteen year. That's very concerning because we know these transmission investments, number one, we want more instant generation and we know that these transmission investments take a lot of time.
So there's a little concern to hear that. Why would we be when we pass the law, say we should have these longer planning horizons, why would we be using a shorter timeframe?
Speaker 11
So I think thank you for the question. As I heard testimony in that hearing, I think while the integrated resources plan does typically have a ten year time horizon, we also do forecast out further. And I believe that CAISO indicated that they are now adjusting to a fifteen year baseline for their transmission planning process. So we are in a world where the development of transmission is looking at that longer time horizon that's able to provide more certainty for developers about when and where the transmission will be available for them to connect to.
Speaker 7
Okay. That sounds good. I won't believe it right now, but I'd love to keep following up with your office on that, because it's an important point. But thank
Speaker 1
Well, we've subjected you to a lot. You know, and I'm I'm right. I can you know, I do have four or five more things I wanna talk to about, but I but I I we really do need to move on with the with the I I appreciate the time we've had yesterday. I appreciate you coming in to meet and all of the follow-up that I know you're going to be doing now given the many questions you've gotten from the members. But to underscore Senator Stern's point, there's so much interest and focus on your portfolio here in the Senate.
We're obviously all anxious for you to be successful, but the stakes are so incredibly high. I know you know that, and appreciate your candid, forthright engagement with this committee today and look forward to many more of these productive discussions. Senator Archuleta? Yeah.
Speaker 5
Mister president, didn't that sound good, mister president? Wear it well. I think you will. I wanna thank you for coming. And, you know, as my colleagues have said, we've gotta gotta fill you out a little bit and, but let you know we're behind you.
At the same time, let you know we're all concerned about the cost, the availability, the future of hydrogen in conjunction with need to expand our portfolios across the state. There's just so much on your plate, no doubt. But, stay in touch. Here to help and serve our constituents, as you know, and and I think all of us are trying to bring the cost down because it's across the state of California. Under your umbrella, that will be your success to be able to bring that down, maintain the service, and open doors for innovation.
So with that, I wish you all the luck. Look forward to meeting you again. Thank you.
Speaker 1
Thank you, mister president. Alright. Let's hear let me okay. So thank you. Thank you so much.
We're gonna now bring up Linda Sarizawa, who's the director of public advocates office at the PUC. And I do I just wanna take a point of personal privilege to welcome some the the fantastic Loyola Marymount University professor Fernando Guerra, who's here. Say hello. And then his wonderful students who are here visiting Sacramento to learn about the legislative process. And we appreciate you being here very much.
Speaker 1
They're in the thick of it now. So just for you who've just arrived, we've been intensely discussing the energy system, the way that we calculate rate of return, how we figure out the rates that people pay, what are the equities of these issues. And now we have Linda whose job it is to be a public advocate looking out for the public when it comes to these rate review processes that come before the Public Utilities Commission. So it's very connected to a lot of the central questions of affordability that our constituents and fellow Californians are facing. And we're just so glad to have the students here.
So, further ado, let's now hear from you, Sarazawa.
Speaker 9
Okay. Good morning, Chair Allen and members of the committee. My name is Linda Cerezoa, and I'm the Director of the Public Advocates Office. Our office was established to advocate on behalf of ratepayers for affordable, safe, and reliable service across energy, communications, and water, while advancing the state's climate goals. Sorry.
Let me see if I can work this. Does the do I use this? There's only three buttons. It shouldn't be that difficult. Okay.
All right. So, we are part of the PUC, we are independent in some fundamental ways. We set our own priorities, develop our own policy positions, and manage our own budget and resources. We participate in PUC proceedings and must follow the same rules as all other parties, including how and when we speak to PUC decision makers. As part of my remarks today, I'll begin with highlighting our work in 2025, which is discussed in more detail in our annual report.
Last year alone, we participated in 160 proceedings at the PUC. And I'm going to provide some examples of that work. So, in energy, we recommended nearly a $1,000,000,000 reduction in Southern California Edison's general rate case request. The general rate case, or GRC, is a process in which a PUC sets a three to four year budget for utilities operating and capital expenditures. Our analysis contributed to the PUC's decision to reduce the company's requested increase by 57%.
With respect to data centers, we are advocating for guardrails to ensure large load customers bear appropriate infrastructure costs and that speculative or stranded costs are not unfairly shifted onto existing ratepayers. In communications, we negotiated major affordability and infrastructure commitments in the Verizon Frontier merger to deliver real benefits for customers, including Verizon agreeing to provide tens of thousands of new fiber connections in underserved areas, provide low cost broadband options, expand rural wireless coverage, and make significant network investment backed by financial guarantees. We also defended universal service protections when a move to end the carrier of last resort obligations could have put over 29,000,000 Californians at risk for losing guaranteed access to phone service. Recently, we issued a joint proposal with AT and T to advance fiber deployment and customer protections, which could represent one of the largest fiber build outs in The United States, while ensuring customers across California are not left without reliable voice service. In water, we successfully advocated against automatic surcharges and unjustified costs that were presented in Golden State Water's general reducing the company's request by $132,000,000 And in the rural community of Keene, I know there was a good discussion this morning with Senator Grove.
The water company, serving 30 households and a handful of small businesses, proposes to either abandon service or proposes rate increases that could push some monthly bills above $1,500 which is, again, a more than 1,000 percent increase. We are focused on ensuring these customers continue to receive affordable and reliable water service while a viable long term solution can be implemented. In fact, one of our deputy directors is today in the town of Keene, participating in the public hearing and also meeting with community leaders. Now, I'd like
Speaker 9
discuss the most pressing issue facing ratepayers today: continuing electricity affordability concerns. I'd like to speak to where electricity rates are today, the costs that lie ahead, and a framework for how to assess any proposals intended to address affordability concerns. As part of that framework, I will discuss a component in utility ratemaking that works in conjunction with the return on equity, called rate base. So, over the past decade, electricity rates across California have increased between 75 to over 100%, depending on the utility. At the beginning of this year, we saw modest decreases in the rates of two of the three largest electric utilities.
And I truly hope that these recent decreases are sustained. But they may very well be rate fluctuations, not a downward trend. When we hear that rates are going down, it's important to understand what that actually means. A change in rates does not necessarily mean that underlying costs are going down. More specifically, when we put aside today's rates and examine the costs that the utilities have already incurred, the picture becomes clearer.
So, as an example, I'm going to focus on one of the primary cost drivers, wildfire related spending, and break down these costs into three buckets. Across the major utilities, billions of dollars in wildfire related costs are already reflected in customers' rates and bills. This is the first bucket. The second bucket represents costs that the utilities have requested for recovery and are pending before the PUC. These costs are not yet in rates and bills.
The third bucket consists of costs that the utilities have incurred but they have not yet sought approval to include in rates. And at the beginning of this year, over $2,000,000,000 is sitting in this bucket. Buckets two and three represent future upward pressure on rates, And the utilities largely control when they bring them forward for recovery. So I want to emphasize the data that I'm showing you here is just for wildfire related spending, which is why we need to keep track of all the buckets across all the major cost drivers. We need to do that in order to truly answer the question, are recent rate decreases going to continue?
What actually determines rate and bill trends is whether the underlying costs of the system are rising or falling. Concrete, durable solutions that bend the cost curve down over the long term will determine sustained rate and bill relief. This is why oops, sorry. Okay. This is why, when a proposal is offered to address affordability, there is an initial line of inquiry or set of questions that should be considered.
First, what is being addressed or solved by the proposal? Does it reduce rates on a sustained basis for all ratepayers? Does it require ratepayer funding that is commensurate with quantifiable ratepayer benefits? If so, when do those benefits show up? In the term?
Or are they backloaded? And how are risks assessed? This initial set of questions is especially important as ideas gain traction from structural overhauls to establishing new programs. Some may hold promise but may take over a decade to implement. That's why our focus is on a set of four policy levers, of which all must be pushed, because they provide a mix of near term and long term relief.
I have highlighted these last year at this very hearing, but I think they deserve highlighting again. So, the first policy lever is to reduce the cost of the utility's day to day operations and capital expenditures. This is most effectively done by returning to the PUC's general rate case process, which, until recently, was a primary forum in which to set the utility's budget for a three to four year period. Returning to this process allows for budget discipline, prioritization of utility spending, and helps to avoid multiple changes to rates in a year. Since 2019, just for wildfire related costs alone, the three large utilities have filed 17 separate applications, and over half of them have been for over $1,000,000,000 each.
By now, the utilities should be able to properly plan their wildfire mitigation activities and forecast the associated costs. The utilities have also filed separate requests for a wide array of other programs and projects, including customer connections and billing and metering system upgrades. The vast majority of the utilities' estimated operating and capital infrastructure costs should be presented in their general rate case, with few exceptions for truly unforeseeable costs. I'll go quickly through the next policy levers. The second policy lever is to pursue lower cost financing of capital investments.
This will provide significant savings realized over a long period of time. The third policy lever is to reform or phase out ratepayer funding for programs that cost more than the benefits they provide. This will result in near term relief. And the fourth lever is to modernize rate structures so that costs are allocated equitably across all customers. And this will help ensure that no narrow set of customers is unduly benefiting at the cost to others.
Recent legislation has been enacted, including bills authored by this very committee, which have provided meaningful steps on several of these fronts. These efforts matter and they contribute to the solution. So now I'm going to move into the last part of my remarks. So, cost discipline must apply not only to day to day operating expenses but also to capital investments. I'd like to speak more specifically to capital infrastructure costs and a rate making component called rate base.
Now, I know a lot of focus has been paid to return on equity. Rate base is the other side of the equation in terms of utility profit. Rate base works in conjunction with ROE in terms of increasing a utility's profit. It's a regulatory term that essentially represents the value of a utility's infrastructure assets on which the utility earns a profit or ROE. Ratepayers pay the cost of those assets over time, as well as the ROE that the utility is authorized to earn.
Because the profit included in customers' rates and bills is directly proportional to rate base, utilities have a financial incentive to propose more capital spending than might be absolutely necessary. Ugh. There we go. The electric utilities' rate base has almost doubled in the last decade as they invest in welfare mitigation, reliability upgrades, and infrastructure to support electrification. Sustained increases in rate base places upward pressure on customers' rates and bills.
And as I noted earlier, the utilities have been allowed to request increases outside of the GRC process, making it extremely difficult to review their capital projects holistically. Utilities have a natural inclination to maximize profit, so it is important to ensure that capital projects are really needed and prioritized, that costs are forecasted as accurately as possible, and that risks are not unfairly shouldered by ratepayers. This is essential to improving long term affordability. In closing, the challenge is not simply to focus on today's rates but to manage the costs that determine the underlying cost drivers that determine where rates and bills are ultimately headed. This is how our office is focusing our advocacy in 2026 and beyond to help ensure that California's energy policy goals are met in a disciplined, accountable, and affordable manner.
Thank you.
Speaker 1
Thank you. Thank you, Madam Director. So just for me to better understand the way things operate, have your office recommended lower ROEs than what the CPC has approved?
Speaker 9
Yes. Okay. But we the PUC's decisions most recently have hewed very close to where our litigation position.
Speaker 1
Got you. Okay. All right. And what do you have a sort of philosophy as to as to a formula that should be used to determine the ROE?
Speaker 9
And I think that Professor Borenstein and President Reynolds have spoken to this, there are lots of different inputs to be used in terms of determining a fair, reasonable ROE. Do you approach it? We look at very complex studies that analyze the ROE of similar utilities. It is a it gives us a range to look at. We look also, especially more recently, at the utilities reduced risk and specifically on wildfire mitigation.
Because as their risk goes down, you know, honestly, so should certain mechanisms like memorandum accounts and balancing accounts and ROE. That risk is cost and that cost has been shifted to ratepayers Oh, over yeah. And so, we are pushing back, trying to make sure that it shifts back to an appropriate balance.
Speaker 1
You know, with that I mean, so do you see the wildfire fund having reduced upward pressure on rates? Or do you think it's simply shifting risk?
Speaker 9
I believe that the wildfire fund has reduced risk significantly. You know, we have investors coming through several times a year. I think they meet with members as well. They meet with the utility.
Speaker 9
Yeah. And I think that they're very focused on the Wildfire Fund and the continuation of the Wildfire Fund and that's for a reason, because it helps reduce financial risk. And, you know, there is a there was a need and, right now, continuing need for that fund. We understand that. But that should be reflected the lower risk should be reflected in other parts of the utilities business.
Speaker 1
Do you how how this by the way, this is the students wanna know. I I I got a note from the students about how how your best understanding of how the system predicts fire risk. What the process by which you go through understanding what this year, next year, the next decade's fire risk is going to be so that as you try to incorporate that into your approach to these rate questions?
Speaker 9
That's a great question. And honestly, thanks to the legislature, we have a very good, robust process. We actually have a new agency established, the Office of Energy Infrastructure, that is responsible for looking at wildfire risk and how specifically to mitigate that risk across many different kinds of measures. The utilities are responsible for assessing their risk. And I should say safety risk in general.
Wildfire risk is certainly a big chunk of that, but there's other kinds of risks as well. So, the utilities are responsible for assessing their risks. They do that actually President Reynolds mentioned this earlier they do that before they submit their general rate case application. Commission takes a look at their methodologies. And, by the way, as part of that process, which, again, the legislature last year has now made sure that the risk assessment that occurs is also aligned with the Office of Energy Infrastructure Safety's wildfire risk assessment.
So, all that is now beginning to work in coordination across agencies. Looks at the risks that the utilities identify, looks at modern technology, advancing technology. And California's on the forefront of this, by the way. Advancing technology from undergrounding, covered conductor, weather stations, PSPS, etcetera. Looks at all these different measures that have been developed to determine from our point of view, determine the lowest cost, the cheapest, fastest way to mitigate risk.
So, that has been the focus, I would say, of the legislature, the governor's office, and the state agencies involved in looking at lowering wildfire risk.
Speaker 1
Yeah. By the way, beyond I mean, the things you mentioned were things that are so directly related to traditional IOU investments, but there's a lot of other new technological development happening on the firefighting side, on the building hardening side, even on software that's trying to change behavior with regards to risk reduction in communities that I think the more we can be marrying these efforts across sectors, and that's part of what this earthquake authority report is looking at, think the better. So there's a real opportunity for a virtuous cycle here with regards to risk reduction. Can I follow-up a bit also on your thoughts on this discussion we had about the little Hoover Commission's recommendations? And the suggestion that they had about trying to task the treasurer's office with providing some independent analysis of the cost of capital proceedings.
Do you currently incorporate or consider the treasurer's expertise in capital markets? And do you have a perspective on considerations for such an approach as we're trying to think about some additional firepower from outside of the PUC to help this process along?
Speaker 9
Yes. I think it's a good idea, frankly. And we our office more and more you know, we're listening to the utilities quarterly meetings with shareholders. We find it very instructive to hear what they're saying to their shareholders, to see if it lines up with what they're saying to everybody else. I think it's a big input.
I would say that the makeup the shareholder makeup of some of the utilities has changed greatly over the last ten to fifteen years. So, think it's important and I think there's much more interest
Speaker 9
How so? I think that the type of investors for some of the utilities have the attributes have changed.
Speaker 9
I would say that there are a lot more investors looking at utilities as not just let's say, used to be widows and orphans a long time ago. I think that's changed.
Speaker 1
I'll follow-up with you more on that. Is your sense with the wildfire fund that there's an appropriate sort of level of risk that the shareholders are taking on under the current policy with regards to the Wildfire Fund?
Speaker 9
I am very glad to see that with the continuation fund that there is skin in the game for shareholders, let's put it that way. I think that was a we supported the continuation of the fund and that was a key component.
Speaker 1
Okay. I'd love to get a just to and I know Senator Ratchel has some questions. I'd like want to get who controls the PAO's budget allocation? Is the CP and what's the CPUC's
Speaker 9
We are by statute, 309.5 of the Public Utilities Code, our budget is set independently of the commissions.
Speaker 1
And do you feel as though you've got a good level of resources for staffing and for an independent evaluation of requests for GRCs and some of the other proceedings?
Speaker 9
I do, actually. We do come before the legislature with budget change proposals. We try to make sure that they are in line with the workload, of course. But we try to run lean and mean because if we're looking at the utilities operating costs, we should definitely be looking at our own and running as lean as possible. And I believe we are.
Speaker 5
Thank you, madam director, for being here with us today. And I can't begin to say thank you enough for your voice and your organization that's standing up for the ratepayers and it's so important. But are your hands tied to a degree because some of the things that we heard today and and the necessity it seems like that the utilities have to have this level of profit. This level that if the profit margin isn't there, then we have to subsidize it. If there if there's a wildfire, there's issues, then we have to subsidize it some way, somehow.
And but on the backs of the rate payers, is that what we're we heard earlier today and that what you discovered? Because, reducing the cost, is what every family is looking for and they're looking for this session that we do something about that. But how do we convince them to make these adjustments if they're all mathematical and they're all based on rates and based on profits and so on? How do we get them to move off that dime? And I mean dime.
Speaker 9
Well, honestly, I think discussions like today help a lot. Because I think that it sheds a light on what the regulatory framework is, how it functions, how it's supposed to work. And raising good questions about, Well, then what is going on? I think, first of all, it's transparency. And then it's accountability.
Exerting discipline. And so, I think the more that that happens, the more that the utilities will be called to account. And that is extremely important in the regulatory framework.
Speaker 5
So, your system in the future might be for public outcry, for public involvement, for city councils across the state to hear more from you and organizations like you to go ahead and transmit that information to the the new president we just heard. But we've got to do something so they understand that we're sick and tired of it, as they say. We've got to see some action and some source of game plan that we are going to see a reduction over the future.
Speaker 9
Yes. And I would also add to that that you need a credible source of information sources of information that can take the data, analyze it, present options, and make recommendations. And that's what our office tries to do every day. We also need an understanding of rate making, which is complicated, but in some ways, it's not. So, a basic understanding of rate making within the PUC, within our office, and, you know, frankly, other key stakeholders that are participating in the process.
Speaker 5
And getting the general public to understand about equity versus cost versus profitability. So they understand that it is a business that we need. And if we can't help them, they can't help us, We've gotta find that happy medium, I guess. And, you know, the the rate base increases pertaining to profitability is is important, but at the same time, every household in California is suffering right now and they need some adjustment. So I, again, thank you and and please stay with us, be involved, and let us be part of your outcry as well.
Speaker 7
Thank you. Thanks for your report, and thank you for being here and everything you said. I'll just ask one quick question. Just one note, just in general, I think that we didn't discuss in the last panel too, is just that's been a focus of the legislature, think, the last few years is also just streamlining a lot of the clean energy projects, for example, because that adds a lot to cost when we have just excessive timelines and to get things done. I just wanted to note that in general.
It's one thing we've and I think we'll hopefully return to that again this year, we're trying to do permanent streamlining and make things faster. One of the challenges I know the advocates face, I think possibly your office too, is information asymmetry when there's hundreds of paces of dense technical information you have to parse through in a limited time frame. Is there anything the legislature could do to help advocates have better access to data and information you need to be more effective at spotting opportunities for efficiencies and push back potentially on costs?
Speaker 9
I really appreciate that question because it is a daily battle for us to sift through sometimes thousands of pages of utility data. Hundreds and hundreds of accounts, depending on the size of the utility. And trying to follow, you know, what did the utility spend on and then figuring out was it reasonable. But first, we have to figure out, you know, what accounts to look at. The challenge is making sure that we can look at all the accounts, all the accounts that the utility has.
All the accounts are regulatory accounts. They're all utility accounts. Let me give you an example. It's it actually is an example from a water utility. A recent general rate case actually, it's been several general rate cases where this comes up where the water utility is looking for recovery for costs associated with giving very luxurious jewelry to their staff, ratepayer funded jewelry, expensive sporting events, etcetera.
This comes up in the general rate case. And our staff uncovered it. And we keep uncovering it. And it keeps coming back. And sometimes the utilities will go, Oops.
Oh, yeah. That shouldn't be there. And they'll take it out. So, they'll adjust the request. But we want to follow-up and make sure they really did adjust, that ratepayers truly are not paying for it in their bills.
And the way to get at that is to see those accounts. All the accounts. So, it's a real story. Very true.
Speaker 14
Thank you, Mr. Chairman. I just have a few quick questions. First of all, I have one from a colleague who is out of town and unable to be here. The person asked: Can you speak to what tools the Public Advocates Office has in its disposal to ensure ratepayer money is used appropriately?
And how does the PAO review utility accounts? Which is what was just asked here.
Speaker 9
Thank you. Again, I will emphasize the point that our discovery rights, our ability to look at all of the utilities' accounts, where they book their costs, is fundamental to our work. And we should have the ability to look at all the accounts. And do you not? We have some utilities that are fighting us at every step of the way.
Speaker 14
Okay. And other than discovery, do you have any other tools at your disposal to ensure ratepayers' money is being used appropriately? We do. We have
Speaker 9
and I don't mean this to sound trite. I actually genuinely mean this. We have incredibly talented staff. They are passionate about their work. They understand the mission given to us by the legislature to advocate on behalf of ratepayers.
Day one, when they start with us, we make sure they understand their mission and what we're advocating for. That is our number one tool. And then, once we have our resources, then getting out the information that the utilities have. So, I would say those two tools working in tandem are what we need. We are also trying to keep up with advanced technology, GIS mapping, geographical spatial analysis, basically.
Using that kind of tool in terms of assessing the utilities' wildfire mitigation plans and whether they're targeting the riskiest areas in the state. That is advanced technology. And we're especially with our most newly hired employees, they're coming in the door from college, having taken some of those classes. It's been a big boost to our analysis. So, staying ahead of the curve and being on top of what technologies are out there that make our analysis more streamlined, easier, etcetera.
Those are important tools for us.
Speaker 14
Okay. Thank you. Real quickly, on your page three, it stated that you in 2025 highlights, you advocated for guardrails to protect against data center cost shifts. I don't expect you to give us that full report today, but could you please provide to the committee what you did and what you found and what your recommendations are? I am quite concerned, which is why I asked the question earlier.
Who's really planning and looking at how much you know, electricity we're actually going to need? Do we have it? How much is it going to cost? How soon are we going to get it? And everything that I'm hearing about these data centers are that the costs potentially go to the ratepayer and can be quite extensive.
So any information I'm a new member on the committee. So any information you have on the guardrails that you've put in place to help with the data center cost shifts, I'd be interested in reading. The second thing is on page six, number three. It says, key questions for evaluating ratepayer impacts. And I'm assuming these are questions that your department asks.
Does it require ratepayer funding that is commensurate with the quantifiable ratepayer benefits? If yes, when will those benefits be realized in the near term, over how many years, and in later years? So I'd be interested in learning more about that, how the actual ratepayer funding is related to the benefits that they're receiving. My next follow-up had to do with, on the next page, seven, number three, phase out ratepayer funding of programs that are not cost effective. So if you have provided this committee in the past any recommendations of those programs that should be phased out, if you would share them again with us, that would be great.
And then finally, it was briefly mentioned earlier this morning. For example, I'd like to learn a little bit more about the solar program, and how it was intended that people who got solar, they'd receive sufficient electricity for themselves, and would be putting more into the grid. But it appears that some of the more lower income areas are actually funding the power that individuals with the solar programs are receiving. So any information you might have on that, I'd be interested. Thank you very much.
I'm going to head out. I'm being called to a budget meeting as we speak. But I look forward to working with you going forward.
Speaker 5
You know, when I'm listening and again, thank you for being here, but I feel that you're the the cop on the beat and you're looking and seeing what's going on in the energy world and yet you're bringing the items to the table for us to see. But you don't have the power to do anything about it. We need you to participate with us so we can be your power through your information because of their issues and wrongdoings and and money is being thrown out like water, then we need to know about it. And so then we can act because we have the power to bring people to the table. Well, you may not, but I I see you're you have a vital role here and I think we need to elevate your status any way we can because we don't have the time and wherewithal, to be honest with you, to do the things that you're doing, but we certainly have the time and wherewithal to act upon the knowledge that you bring us.
So if there's punitive action that needs to be taken, then we need to know about it. So I I meant total support of what your agency is doing and look forward to seeing you, rise to the top so you can be part of our committee. Thank you, Mr. Chair.
Speaker 2
Thank you, Mr. Ozawa. I know we've spent a lot of time on ROE and a lot of time on wildfire risk. While I have you for just a second longer, shift over to the rate base part of it. And helping us understand what kind of savings potential there exists in this arena.
We know that aside from the wildfire risk, that the distribution grid upgrade cost, at least as anticipated, could be quite substantial in the decade ahead if you take into account building electrification, electric vehicles, and then just sort of general upgrades to substations and circuits and distribution, grid transmission systems, integration of DERs. People are talking about more demand flexibility. All that kind of work that's going to have to happen on that distribution grid. We know that there are lots of people involved in these GRC cases sort of weighing in. That's sort of the picture we've got.
But there's scores of other cases underway, just looking through the work plan. I think I named 53. That's across boundaries. But even just within energy, think you're in the mid-30s. My understanding is that often you, at PO, are sometimes the only one even in one of these proceedings as a counterparty to the applicant.
Is that the case?
Speaker 2
Do you have any concern about the lack of interaction, say, between cases that are affecting the rate base and the GRC process? That in other words, they run-in sort of this disaggregating manner. Is that something you see as a sort of pattern that I don't know, concerning?
Speaker 9
It's extremely concerning. Especially when if you go back to the chart that I showed you about the increasing rate base. The more that the utilities are allowed to request increases to propose capital infrastructure projects outside of the general rate case, it makes it much more challenging for the commission and for key parties that want to look at that, need to look at the information and look at it, all these projects, capital investment projects, try to prioritize them, try to get the utility to prioritize their capital infrastructure projects. You can't do that if the proposals are in different proceedings before the Right.
Speaker 2
40 different silos, each with its own sense of urgency, no stacking in terms of priority.
Speaker 2
Beyond even just a staff resources issue, it's even just the actual prioritization of the spending itself.
Speaker 9
Right. Right. I would like to come at this from a different angle, as well. We are because electrification is a very important focus for our office. We are trying to get at future costs.
We issued a study last year. And in that study, we looked at the distribution system across three utilities to see where there could be future growth on their physical system that didn't require upgrades. And overall, how much was it going to cost to get to electrification that is being planned for, for 2040? For the future? And other, let me be clear, other stakeholders are doing this, too.
And we are, we think that's great. The more, the better. Because the more we can do this, our state can kind of hone in on how much it's going to cost us to electrify. How much it's going to cost in terms of system upgrades, resources, etcetera. We need to get at that number.
And the more we do it, I think the better the data will be. So, it's okay if we're providing bookend. We're just trying to get to refine our methodologies. And we try to reach out to key stakeholders to vet our study, to make sure, you know, if they have a different way of coming at it, we want to hear that. Those efforts are important, as well.
Because if you get it wrong, it's going to increase rate base. We could have utilities investing in things that aren't necessary, aren't sequenced well. And the same thing with transitioning away from natural gas to electrification. We've got to do that in a very measured way, not to mention the fact that we're dealing with material that explodes. There's safety issues.
But, you know, it's a different system that's pressurized, right? So, we have to be very careful about how we make that transition. And SB twelve twenty one, which requires the commission to conduct pilot programs for that transition to help determine how best it should happen. We are participating in that proceeding. We think it's going to be very helpful.
Very helpful. So, there's a number of ways to get at that. But all that goes towards making sure we can try to reduce rate base as much as possible.
Speaker 2
And are there I mean, there systematic impediment? I asked about that asymmetry to President Reynolds and he indicated, you know, there is some asymmetry between regulated entities and the regulators just in terms of how much you can keep track of. When you're all alone in one of these proceedings and you're doing what you can, I mean, how do you actually build in all those sort of capital intensive, rate based proceedings? How do you find sufficient analytical heft to be able to provide that holistic analysis? I mean, we missing where are we missing functionality there?
Is it having stronger energy division input? Is it something in the intervener process? Where does that extra help come from? Is it just beefing up what the PAO is capable of? Thoughts on that?
Speaker 9
Yeah. It goes back to that line of inquiry. Mean, I there's a whole host of other questions that follow that initial set of questions. But it goes along with that. So, we're raising those kinds of questions, but we have to make sure that we get the answers we need to do the proper analysis.
And that goes back to other questions that were raised today in terms of rediscovery rights. Being able to see the utility information, unvarnished. And holding them accountable for explaining their proposals.
Speaker 2
Do you lack is that a lack of statutory direction on that front? Or is that more of a pattern and practice of just how things are done?
Speaker 9
What would be helpful is legislative affirmation of our discovery rights, frankly. Explicit affirmation. Okay.
Speaker 1
I just want to take a moment because this also happens to be your annual PAO report on all things in addition to these rate related issues. Obviously, you remember the whole carry of last resort discussion. And I just wanted to ask a couple questions about the decision of GAO to file this joint proposal relating to these obligations. So as you know, there's just a lot there continues to be a lot of concern about the possibility of folks losing lifeline support for their telephone service. So I just I wanted to know if you had any comments you could just make about the extent to which the PAO's proposal ensures that households don't lose affordable home telephone service?
Speaker 9
Yes. Thank you for that question. So, the joint proposal is with AT and T. And I want to emphasize, it's not a settlement. It's a joint proposal, which means that we came together and agreed on a path forward.
Settlement implies compromise. We don't feel we compromised. In terms of what we didn't compromise on was a set of principles that we actually filed with the Commission in its carrier of last resort proceeding. And all the principles are geared towards making sure that customers are protected should a carrier be relieved of its obligation as a carrier of last resort. The joint proposal is in line with our principles.
It's also in line with our statutory mandate, I should add. So, the joint proposal is meant to be a supplement to the PUC's staff proposal on the carrier of last resort. It's not meant to replace it, not meant to improve it. It's meant to supplement it. And by supplement, I mean it provides an expedited path for the carrier to exit its COLA or its obligation, if it commits to certain things.
And I'm going to run down a list of what those commitments are. So, in order, again, to exit their COLA obligation, they must do it in exchange for first of all, they can only relinquish their obligation where there's at least one service provider that offers high quality wired service. Otherwise, not eligible. Can't exit. And in those areas, this means that customers will not be left without access to communication services.
By definition, it does not include areas where there's only one landline service provider that provides service over, you know, Plano telephone service. By definition, because there has to be at least one service provider in that area that provides high quality communication services.
Speaker 1
But isn't one of the problems that there's nothing in the proposal that ensures service for everybody?
Speaker 9
I'm going to keep going. Okay. So, also, there is a commitment that the carrier of last resort provide lifeline service. Now, we did not agree with AT and T on how long. Our position remains it should be in perpetuity.
So, was an agreement there. And we have made that clear to the Commission. The Commission needs to decide that. The other thing is that AT and T has agreed to, in the areas where they would like to be relieved of their obligation, they commit to significant build out of the fiber network, with a priority to low income and disadvantaged communities. And this buildup needs to be measurable and verifiable.
And is enforced by the PUC, by the way. So, it explicitly recognizes ongoing PUC authority. So, I want to also add that currently California is on the bottom half of fiber build out in the country. We uncovered this through a study that we published last year or early this year. This proposal, in terms of fiber buildout, would put us on the top half of most of the states in this country.
And practically, what that means is that more Californians will have access to telehealth, to online education, governmental services, etcetera. We think this is a huge advance in terms of public interest of the public interest, while protecting customers, making sure that they will continue to have access to reliable service.
Speaker 1
But the build out is the build out and the proposal is only in those areas where fiber already folks already have gigabit level service. Right?
Speaker 9
Well, it could be multiple service providers, only one among them needs to have one gig offerings. But the requirement is multiple service providers only and one needs to provide one gig service. So, what we're saying is that the carrier can be relieved of its obligation, could seek relief of its obligation, as long as there are other providers in that area.
Speaker 9
It's going to impact areas where there's already choice. And choice of high quality service.
Speaker 1
So, the question is just there are other communities that are not going to be
Speaker 9
That are not part of the joint proposal. They are not. So, rural communities don't tend to have that choice. They are not going to be eligible for the carrier will not be able to pursue this expedited path for a lot of rural communities, most rural communities. And by the way, some of these communities do not want they want to own and operate their own systems.
And what we have said, what we've recommended in the Commission's COLA proceeding, is that the Commission carve a path out for them to require the carrier of last resort to work with those communities to facilitate ownership and operation of their own systems. So, we steer clear of those communities and we want to make sure that they have discretion. Okay.
Speaker 1
I think, for several reasons, we're gonna wanna have a separate conversation about this because I know, you know, as you know, it continues to be an area of real concern. And I think I'm I think that the, well, there there are implications to there there are potential implications to the to to aspects of this proposal's approach that I I think we would just wanna make sure get addressed. And and I think we just it's gonna take us kinda going through some details with you. So I look forward to that. Alright.
Any final questions? We're already past It's almost 12:30. So, I just apologize. And we've got a wonderful new next panel coming along. So, I appreciate your work and thank you for your presentation.
And let's call up our stakeholder perspectives panel. So we've got Matthew Freeman from Tern, who's here. We've got Travis Ritchie from Berkeley Law Center for Law, Energy, and the Environment. And then Jose Torres from the Affordable Energy Campaign. So let's start with you.
Speaker 8
Thank you, Mr. Chairman, members of the committee. My name is Matt Friedman. I am a staff attorney with TURN, the Utility Reform Network. Happy to be here today.
Last year, TURN worked with the legislature on a package of electricity affordability measures that were designed to promote accountability and a lower cost for ratepayers. The primary measures involved alternative financing of investments in transmission and distribution through two mechanisms: first, public financing and ownership of new electric transmission and second, securitization of distribution investments, including spending on wildfire mitigation. Substituting lower cost debt financing for high cost utility shareholder equity can reduce ratepayer costs by between onethree and onetwo over the life of the asset. The IOUs, the investor owned utilities, are forecasting over $100,000,000,000 in new capital expenditures over just the next few years. And the California independent system operator has forecasted in its twenty year transmission plan that up to $60,000,000,000 of new capital investments are needed to connect resources to meet the state's decarbonization goals.
The legislature has made some progress on alternative financing in 2025, but far more remains to be done. SB two fifty four that members of this committee know well was slated to require the utilities to securitize $15,000,000,000 in wildfire mitigation capital expenditures, but last minute changes to the bill reduced this amount to $6,000,000,000 SB two fifty four also authorized incremental steps forward to support public financing of electric transmission projects through an accelerator program administered by GOBIZ, but this initiative represents a significantly scaled down version of the original concept that was included by bills authored by Senator Becker and Assembly Member Petrie Norris. Given the scale of future capital spending, the legislature should take additional steps to expand the use of alternative financing given the clear benefits for ratepayers. Our second proposal last year was to enhance PUC scrutiny of utility spending requests that would drive up rates beyond inflation and to consolidate review of such requests. This was included in SB two fifty four but removed from the final package due to intense opposition by the utilities themselves.
This was a missed opportunity, and I want to talk more about it. So we have five options today for promoting accountability and affordability in the current legislative session. First, using inflation as a benchmark for applying heightened scrutiny to cumulative utility spending requests. As has been discussed today, a primary driver of massive rate increases over the last five years has been increased utility spending. And to get a handle on rates, future spending has to be subject to greater scrutiny by the PUC.
Currently, the PUC considers utility spending proposals in a series of one off cases. There's no coordinated consideration of overall utility spending requests, and this is particularly true given the diminishing portion of utility spending that is included in the general rate case. The utilities take advantage of this, by the way, by constantly submitting separate cost recovery applications, each of which is considered in a vacuum. To address this structural flaw in the PUC process, the legislature should direct the PUC to routinely consider the cumulative impact of all spending requests. In particular, we call for the following requirements to be adopted.
Each utility should submit as part of its general rate case an inflation constrained spending scenario that reflects the utility's highest needs. And the PUC should only authorize expenditures in excessive inflation if the utility provides clear and convincing evidence that these additional expenditures are necessary to ensure the safe and reliable operation of the system. The PUC should apply heightened scrutiny to any utility requests beyond those presented in the general rate case that would increase spending beyond inflation. And this approach would require the utility to provide a greater showing of need for cumulative spending that exceeds inflation. But simply, the purpose of this is to separately identify the utility's needs from its wants to apply greater scrutiny to excessive spending proposals.
And it wouldn't prevent the utility the PUC from approving more spending. It simply imposes a higher burden on the utility and requires a consolidated review. Secondly, we proposed limiting the use and review of balancing accounts and memorandum accounts. This topic came up earlier today. The PUC has authorized the utilities to record increasing amounts of spending in balancing accounts and memorandum accounts.
Speaker 8
the balances of these accounts are placed into rates, they can cause huge spikes that exacerbate affordability challenges. This approach has replaced the traditional method of forecast rate making, where the amount of total expense and capital to be incurred over time is forecast in a general rate case. Under forecast rate making, the utility is forced to live with the annual revenues that are approved in the case. If the utility overspends, the excess can be assigned to shareholders. Balancing and memorandum accounts, though, essentially allow the utilities to run up large and unpredictable balances that are presented at a later date for recovery in rates, and many of these costs are subject to minimal review before they go into rates.
Ratepayers have to live within their household budgets. Utilities should have to do the same. The legislature should direct the PUC to limit the use of balancing in memorandum accounts and force the utilities to live within the budgets created in their general rate cases. Third, return on equity. A lot of conversation today.
We propose a lower return on equity for certain categories of capital investment. The PUC generally provides a single return on equity to each utility for all their capital investments that are subject to state jurisdiction. The legislature should consider directing the PUC to adjust the equity return provided for certain types of capital costs that are less risky for the utility or that lower other risks for utility shareholders. For example, capital costs that are included in a balancing account, capital costs exempted from a reasonableness review and capital costs relating to wildfire mitigation and or undergrounding. And I understand Mr.
Ritchie will talk about this in his statement. A lower return on equity is justified if the capital investment lowers the risk to shareholders, as is the case for wildfire mitigation and undergrounding projects. Fourth, linking ratepayer funded utility executive compensation to rate discipline and affordability. One way to help align the motivations of utility management with the interest of ratepayers is to link a portion of top employee compensation to affordability goals or limits on rate increases. Now the good news is there currently is a statutory prohibition so that ratepayers don't pay for the cost of executive compensation.
But the bad news is this prohibition only applies to officers of the utility, which is a very small group of top employees, around six, for example, at PG and E. The legislature could require the PUC to tie a portion of ratepayer funded compensation for a much larger group of top level utility employees and ensure that those utilities, those employees are motivated to pursue affordability and rate reduction goals and the success on those efforts is measured by the amount of compensation that they receive in rates. And then finally, encouraging utility employees and contractors to report wasteful overspending. When the PUC evaluates the reasonableness of utility spending proposals, it relies on critiques raised by non utility parties like TERN and the Public Advocates Office that participate in proceedings. The PUC rarely rejects or reduces a utility spending request in the absence of competing proposals raised by non utility parties.
TURN and the Public Advocates Office and other consumer parties do our best to identify excessive spending by the utilities. But there are many examples of unreasonable spending that we fail to catch. Who is in the best position to know when utilities are overspending or otherwise squandering ratepayer money? Their employees and the employees of their contractors. The legislature should consider methods of incentivizing these individuals to disclose information about wasteful spending to the Public Utilities Commission.
If any information obtained from an employee is used to reduce the amounts collected in rates, the employee should receive significant financial incentives and be protected against retribution. And this proposal could be combined with the PUC investigative unit concept that's going to be discussed by Mr. Ritchie. So here are some ideas for consideration. We've got more.
We look forward to working with this committee and members on a suite of affordability and accountability proposals this year. Thank you.
Speaker 5
Thank you, mister Friedman. Right to the point. Excessive spending. Give me some examples of what they're doing. The vacations, yachts, what what's going on?
Give me some example of excessive spending.
Speaker 8
So those are the easy ones, right? The sort of the gold plated appliance situation. I'm actually thinking about something that's much bigger than that, where the utilities, as has been discussed today, are structurally motivated to spend capital rather than expense because expense is a pass through. Capital goes into rate base. That's how they make their money.
So in many cases, the utilities are always pushing higher capital spending as opposed to using an expense program to achieve the same result. So in that situation, I think we could find that folks on the inside would have far better insights into what's happening. I'll give you one other example. In the implementation of the energization direction that was provided by the legislature in SB four ten, PG and E came in and asked for a huge amount of additional spending to be recovered in rates. And one of the things that we found is that PG contractors to do this work of energization.
The external contractors cost about three times as much as internal labor. Now you think on the one hand that the utility motivated to spend less. But on the other hand, all of these costs go into rate base. Rate base is how they earn profit. So there are conflicting incentives here.
So as much as I'd like to think that this kind of mechanism would find the gold plated watches that are being given, I think that some of this other stuff is actually much more significant. That's where having folks on the inside that would be motivated to tell the true story could yield huge dividends.
Speaker 5
So, obviously, you're against outsourcing because of the cost, two to three times what it would normally keep an employee within the system, even with benefits, a lot cheaper than outsourcing. Is that
Speaker 8
what I'm hearing? I don't think we have a general position on outsourcing, but in this situation, the numbers are what they are. This is what was shown in the case. And when we looked at it, it really caught our attention. And we asked for the PUC to take a hard look at PG and E's use of much more expensive contractors for this work.
And the PUC had very little interest in addressing this in its final decision.
Speaker 1
You're going to find that Mr. Ritchie's going to touch on some of these issues. So let's go to you.
Speaker 3
Thank you, Mr. Chair. Thank you, Mr. Chair, senators. Appreciate being here.
Travis Ritchie with the UC Berkeley Center for Law, Energy, and the Environment. I know we're short on time, so I'm just going to try to skip to some of our proposals. But before I do that, though, I wanted to provide some kind of two points to stress about these proposals that we're putting here today. The first is that these are a work in progress. I think the information that we submitted says working draft on the top, that's for a reason.
We're still taking feedback from folks. And the way we generated these was we held a convening in last December in 2025 with various experts to discuss these ideas. These ideas that I brought before you today are Klee's ideas. They're not from the group, but they were inspired by that discussion. So we were trying to hone in on some of the topics that were discussed and bring those here.
I'm trying to click forward here to bring you along. If folks could bring me to the proposal number one. It's just delayed. It might be just delayed. Well, we'll see if it starts clicking wildly then.
So the first of our proposals has to do with some of the topics that we've discussed in various forms today. And it combines a few things. And the top is wildfire really is where the cost driver is here. And so we were looking at how do you combine these ideas of rate based spending, capital spending, the returns on equity that are provided for capital spending, and particularly as it pertains to wildfire? This is a big piece of spending.
Of the $40,000,000,000 spent in the past five years, 60% of that has been on mitigation efforts. Efforts. So this isn't just paying victims funds. This is actually going out and doing the work, the tree trimming, trying to make our system safer. Now it's important to do those costs.
What we are seeing is that a lot of those costs have been operational. They've been the tree trimming stuff, the labor, the folks going out there and doing the hard work. We're starting to see that converting more towards capital expenditures, things like undergrounding, things like investing in the poles. This isn't necessarily a bad thing. Sometimes shifting from operational expenditures to capital expenditures can be the most efficient thing.
Sometimes it can be the safer thing to reduce ignitions. But what happens when you do that is what we've discussed here today of that's rate based spending. And when you do capital spending or rate based spending, you do get to earn that ROE, that return on equity that's associated with that. It's a financing cost. And so what we're proposing here today is rather than going after the return on equity of the entire system spending, let's look at the options of splitting the ROE.
Let's look at the options of saying for this particular class of spending, how can we reduce the return on equity just for capital expenditures that are in the wildfire mitigation plan? Now this is somewhat similar to the securitization that has been done before. Those were done in tranches. And this is kind of creating more of an ongoing structure where that's allowable of these assets in the wildfire CapEx. They just don't receive the same return as general utility spending.
Now why does that make sense? We think there's a few reasons for that. One, it reduces the profit motive on the climate crisis and on adapting to safety crisis and wildfire that we're facing here in California. That's important to a lot of constituents and to a lot of rate payers. Another piece, though, that we think is really important here is you hear when you talk about reducing ROE, you talk about you hear utilities say, well, will hit our credit ratings.
We're going to be riskier and we won't be able to raise capital as much. If you limit the reductions in ROE to wildfire CapEx projects, those projects in and of themselves should reduce a large aspect of risk that the utilities face. Wall Street isn't just worried about ROE. They are worried about that. But it's not just what they're worried about.
They're worried about the liability that's going to happen when a utility caused wildfire causes more damage. That's a big component of that. So spending in these project categories reduces that risk and it offsets the distaste of Wall Street for lowering ROE in other areas. It combats this idea, we've heard a little bit, of overinvesting in capital expenditures. That concept in utility practice is called gold plating.
If you're receiving a lower ROE for wildfire expenditures, I think it gives the public, it gives ratepayers more assurances that those capital costs truly are necessary for safety because the utility is not profiting as much as they can profit more if they went to a different bucket of spending. And then as we've discussed before, it's lower rates. Lower financing rates over a long period of time. It's like having a cheaper mortgage and that can be beneficial to ratepayers. Our second proposal is also been touched on today.
It's about the PUC capacity and the information asymmetry that we've talked about today. The general rate case is a behemoth proceeding and the Public Utility Commission is dealing with many other applications and many other proceedings. This is not unique to California. This is something that happens in public utility commissions across the country. The information asymmetry is just the nature of utility rate making.
And so we were looking for ideas of how can you kind of cut through some of this, how can you get to some of the ideas that we're looking at, and how can you build capacity of the PUC or other entities to dig into what is maybe missed in these other proceedings, missed in the rate case. That's not to say the rate case is not important. The rate case is vitally important. It's still going to be the most proceeding. We agree that more of the revenue requirement decisions should be put into the rate case.
But we also think that you can create a team to look at, dig into certain issues similar to how a grand jury would dig into issues. Look at the root cause analysis of what's going on, look at where the spending is happening, rely on resources, nontraditional resources like whistleblowers or other investigative reports, and come up with an informational report that doesn't have to go through the structures of the constraints of the quasi judicial process. Now the downside of this is it wouldn't have any effect in and of itself. You would still have to go through the quasi judicial process at some point. But it would be an information generating report, again, similar to like a grand jury report.
You develop the information, you present that to the regulator, and that you hope that that leads to behavior changes. So those are two my two policy proposals. I apologize the clicker was not working for that, but I'm happy to answer questions on that.
Speaker 1
Okay. Sure. Well, okay. If there are they quick ones? Because we've got Mr.
Torres too. We want to Oh, yeah. We can wait. Hear from him. Okay.
Let's hear from Jose Torres now, and then and then we'll be able to have a broader conversation with the whole panel. Are you available there?
Speaker 16
Alright. I'll get started. Thank you so much, chair and members and committee staff. I appreciate the invitation to speak today. Sorry I couldn't be there.
I have a wife with the flu at home and a three year old, so I appreciate the virtual option. I'm Jose Torres, the executive director of the Affordable Energy Campaign. We are a new statewide effort that brings together dozens of consumer, climate, and environmental justice advocates working to make sure that Californians have the electric system that is clean, affordable, and accountable to the communities it serves. As you've already heard from my colleagues and many folks up here today, California is in an electricity affordability crisis. I'm gonna try to cover new things and reiterate important pieces.
And more importantly, political courage and for creative and structural reforms. Voters here nationally have made it clear that they expect meaningful change, meaning our climate targets depends on electrification, and electrification depends on affordable electricity rates. So this is just not an economic issue. It's a climate issue as well. The good news is with the right policy solutions put in place, we are confident we can lower bills while accelerating the clean energy transition.
Climate affordability are not at odds with one another. As we are seeing, natural gas prices can be very volatile, providing yet another economic reason to drive towards local clean energy. But in order to address our affordability crisis, we need to take on the largest cost drivers head on, which we consider wildfire mitigation liability and distribution grid investments, all of which are layered into a system of misaligned incentives that reward capital spending over cost discipline as you've heard. And if we are serious about affordability, we have to look at these incentives. We also must stop the deeply regressive practice of funding wildfire liabilities through utility bills and deliver deliver safe and reliable electricity at the lowest reasonable cost while preserving good union jobs.
But our regulatory model was built for a different era. And, you know, I wanna put a finer point on something that many folks, including doctor Borenstein said, under the current structure, the larger capital expenditure the larger the capital expenditure utility can get approved, the more profit it earns. This creates a structural incentive to prioritize the most capital intensive solutions. Meanwhile, lower cost distributed solutions like virtual power plants, non wire alternatives, and DERs are tasseling being disincentivized. As long as profit is tied primarily to capital spending rather than performance, rate pressure will continue, and fossil fuel use will continue.
Several of our member organizations are working on analysis and materials around this topic, which we're happy to share with the committee when they become available. And at the highest level, new incentives are needed to align utility performance with affordability, climate progress, and the public interest, and our campaign is ready to engage constructively for those changes. But we wanna be clear. While new incentives are needed, more utility profit is not. We need to focus on taking the profit that we have already authorized and structure incentives to make folks earn it rather than guaranteeing it to them regardless of performance.
Additionally, we all know wildfires are no longer rare events. They are systemic climate threats. Wildfire survivors must be supported and made whole in a timely manner. Policy challenge before us is how to finance recovery, long term safety in a way that protects affected communities while maintaining affordability for California statewide. As a campaign, we've been discussing a set of structural approaches to addressing wildfire issues, all of which were submitted in our s p two fifty four comments to the Earthquake authority.
They included the following. First, there should be no utility profits on wildfires. Wildfire mitigation is a public safety necessity, not a shareholder growth opportunity. Long lived safety investment should be evaluated for low cost public interest financing, clean public bonds, or via dedicated public fire safety financing authority rather than automatically earning full equity returns. Second, if the value of our liability risk is reduced to public backstops or other reforms, their authorized returns should reflect that lower risk producing direct savings for ratepayers.
Third, if public funds are used to stabilize a utility, the public should receive a commensurate benefit, including equity or public ownership structures that allow Californians to share in the upside, not just absorb downside risk, which I know the senator was asking about earlier in the in the hearing today. And finally, we know that structural reform will take time, but people are suffering today. So it is also essential that we prioritize meaningful immediate harm reduction measures. That means maintaining caps on disconnections so families are not plunged into crisis. It means strengthening a rear edge management and payment assistance program, including models that align bills with the ability of customers to pay.
It means strengthening protections during extreme heat events when losing power can become a matter of life and death, and it means adopting common sense reforms that ensure that new large lower loads, including data centers, do not shift additional costs onto ratepayers nor use fossil fuels to operate. We also urge the committee to take a serious look at meaningful reductions or at least inflation based caps on rate increases or even a temporary rate freeze as the state bills have planned for meaningful reductions. Californians cannot afford to wait years for long term structural fixes to reduce rates. Chairman members, thank you for your time, your attention to this issue, and your willingness to take on what is clearly one of the most pressing challenges facing California families. We look forward to working with you to deliver real life relief and lasting change, and I remain committed to working with you all to find solutions that truly work for all Californians.
Speaker 7
Becker. Well, want to thank you all for the suggestions. A lot of good stuff in here. I appreciate and we'll be working with, I think, a number of you to put some of these into print this year. So want appreciate the testimony.
Speaker 7
ROE sorry, had a couple of notes here. On the ROE part, I think that's quite an interesting suggestion. It's been really clear and it's come out mostly through this hearing that the largest cost increase over the last really fourteen, fifteen years from the day that I've seen, the cost of generation really hasn't gone up much. It's really been about the cost of inflation. It's really been really that last mire of the distribution grid.
And your data points that out in great detail. Not even a question so much but just an agreement that we really have to get hold of those wildfire costs. I think we started the process with two fifty four last year, but we need to continue to focus on that. And I think some of the suggestions that you've had, Mr. Friedman, will be helpful to us in that spirit as well, in terms of aligning the right incentives to make sure we get to the right outcome.
Just to kind of say I appreciate this panel. I'll be reviewing a lot of these recommendations and I think we've already been in conversations with a number of you of putting some of this to print. Thank you.
Speaker 5
Oh, okay. You had mentioned data centers. You know, we in California have got to be competitive with the rest of the nation when it comes to data centers because it's gonna be important for our future. But we all know that's gonna be extremely, difficult to deal with them at times because of the drain and the requirements for energy. What do you see on that?
Because, you know, we we're gonna need them for the future. At the same time, they're gonna be a really drain on the grid. How do we work that out? What do you see there?
Speaker 16
You know, that's a great question. And right now, we're working through that issue internally in the campaign. I'd say that, you know, net like you see nationally, there's definitely a perspective where a lot of folks are just questioning on a bipartisan basis. I'd say I see nationally just like data centers being next to them. Right?
And I think we're dealing with those questions as well internally. But, additionally, I think there's some folks that wanna set some parameters and some clarity about leveraging the load in a way that, you know, can make sure that they pay for their energy use and benefit rate payers. So I'd say in terms of, like, the work folks I'm working with, there's a mixed perspective. And I'd say locally folks probably don't want them near them. But, also folks understand to your point, like, the need to kinda provide some guidance and parameters to, you know, the question you posed.
Speaker 1
Just a quick question for Mr. Ritchie. So is there so can you kind of give us a sense of where when you're talking about relooking at the ROE, like a lower ROE, for example, where have you seen where it's been successful? Are there some kind of cautionary tales that we should be concerned about elsewhere in the country in that discussion? What some other stories from around the country that you think should inform our approach to this?
Speaker 3
Well, think thank you for that question. I think the first thing to think about is that allowing a utility to earn a fair rate of return on the capital that they deploy for public use is a requirement that's based in Supreme Court law. And it's been there for decades. It's how we do utility regulation. That actual number is, is the regulator has a lot more discretion on that.
The PUC has a lot more discretion on that. And there's a lot of fighting that goes on over that across the country in different states on where you actually set that. But there's a zone of reasonableness that courts have recognized are appropriate for this. And there's also a concept known as the end result. So what the regulator does, as long as the end result is considered to be reasonable, the courts will generally defer to it as long as there's an evidentiary basis for that.
So examples of splitting the ROE, we've seen it in the other direction. So we've seen where FERC has added incentives to ROE for transmission operators to build projects more quickly. And I was actually challenged by some of the ISOs or some of the states who said, well, we don't want our repairs to pay more for that. We have the ROE. You're doing something different.
You've got split ROE where you're providing an added incentive. And the courts have generally said, end result is that this is still within the zone of reasonableness and there's evidentiary basis for making this decision. So a split ROE here is appropriate. We think that if the commission was tasked to do this, there could be an evidentiary record developed to look at what is an appropriate lower ROE for this specific type of capital expenditure that actually does double duty. You're deploying these resources, but you're also buying down liability.
You're also creating projects that are making these the entire system less risky. And so that's why we think it's appropriate. This type of split ROE where you're lowering something, I have not seen an example of of splitting the ROE this way. Folks have looked at it. In Canada, they looked at it a little while ago, but I don't believe they actually implemented it.
But based on the foundational principles of how a utility regulation is done, we believe it is a sound way to go forward.
Speaker 8
If I may, Senator. Yes, sir. In the PUC cost of capital decisions where they review all of the modeling and recommendations of parties, they basically determine that there is a reasonable range in which their return on equity can land. So for example, in the most recent decision for Southern California Edison, the PUC said that the reasonable range was between 9.710.25%. And the PUC picked 10.03%.
So the PUC picks a number and they typically pick one that is above the midpoint for this range. They could pick the bottom of the range. They chose not to. They could pick the bottom of the range for other types of capital. So even the PUC itself has not set ROE at the lowest level that it believes
Speaker 1
is reasonable. And they're doing that because they're that's done because of their analysis of the market and alternative investment opportunities for utility investors?
Speaker 8
Well, they pick a range based on the showings of all the parties. Why they pick the number within the range they do is subject to the deliberative privilege of the five commissioners and the administrative law judge. There's really very little insight that they provide into why they land where they do within the range.
Speaker 8
that decision? I think it's an outcome oriented process by the commission. They get lobbied heavily by the utilities and by representatives of investment firms and rating agencies, all of which are looking for the highest possible ROE and are warning about catastrophic consequences if the number is set too low. I think that lobbying happens at the commission and in the governor's office. And I think that all of those factors play into the commission's determination as to where they want to land.
Speaker 1
Where do you think we should be putting our focus as we I mean, as we hear you know, people so deeply concerned about just getting squeezed on their rates? Where would you be spending most of your time?
Speaker 8
The number one driver is spending. So if you want to have an impact on future rates, reduce the amount of spending that's allowed. That's the top thing.
Speaker 1
So But a particular type of spending that you think we should be focusing on?
Speaker 8
I think it we need to require the utilities to prioritize. As I mentioned in my statement, there's no cumulative accounting for what's on the table. It's all a series of one off decisions. Utility comes in and wants this program. They want that program.
Everything is done in isolation. There needs to be order That's what the
Speaker 8
The general rate case only covers a fraction of the cost. You're right, it certainly is supposed to do that. But more and more of utility spending is now showing up outside of the general rate case. And the PUC is not doing Right.
Speaker 8
I mean, I'm personally litigating half a dozen or more individual proceedings right now, which are all one off requests by the utilities for spending initiatives. And if you go into one of those cases and say, PUC don't approve this because there's six other requests on the table, that argument really gets no traction today in front of the PUC. It simply doesn't get considered. And it needs to be. And that's part of what we're asking for.
So getting a handle on spending and requiring prioritization and forcing the utilities to live within overall budgets, I think that's step one to gaining some control and then doing alternative financing of capital where we can save a lot of money if we don't put cost on rate base but find other ways to finance. And then we get to return on equity. I think that's kind of the order of priority that I would identify.
Speaker 1
Yeah. I mean, when you go through the proposals, they're I mean, each of them have I mean, they all they all they all respond to various needs. Some of them are directly responsive to various legislative mandates. That's another kind of broader structural problem that we keep putting all these new requirements on that are all good things, but they're all contributing to cost pressures. So is it your sense that the commission does not they're are they required to look at these things individually and they're not looking at the big picture enough?
And so it's just too easy to keep approving things that drive up costs in ways that are ultimately deleterious for consumers? Is that kind of the general?
Speaker 8
I'm not sure they're required to do that, although I think requiring them to consider all of the spending requests collectively in statute would help. I just think there's no plan. It's more chaos than order when it comes to how spending is approved at the PUC. And the PUC is quite reactive. They sit and wait for utilities to come in and ask for money, And then they respond to each.
It's just the way the organization is wired and they need to change their wiring around this stuff given the crisis that we're facing.
Speaker 1
Okay. What are your thoughts on Mr. Rishi's concerns about just this kind of this paperwork approach from the utilities that just make it so difficult for need for more of an investigative unit to get to some of the dysfunction of the rate review process? I think it's a
Speaker 8
great idea. And I'd let him speak more about it. But I think the PUC needs to beef up its capacity to dig deep. The problem we have now is that when a proceeding is scoped out, a utility comes in and asks for spending to be included in rates, the PUC only reviews the evidence in front of it in making its decision. So if nobody shows up to contest the proposal, if there's no criticism that's raised, the PUC defaults to approving the utility request.
I'd say, you know, 90 times out of 100, they don't really take a pound of flesh out of the utilities unless someone points them in that direction. The PUC could be much more aggressive in on its own initiative going after excessive spending, but they wait for interveners to come in, like my group and the public advocates, and that's the only way that they're able to assess whether they're going to make changes to the utility proposal. So an investigative unit would really shift the lens on this and allow the commission to be much more aggressive in on its own initiative finding things that it does not want to approve. And right now, they're really lacking that. Okay.
Speaker 1
All right. Well, may I have had a chance to review your letter? It's an interesting proposal. Would that that would have to be something that would be independently created by the legislature or they could have you talked to the leadership there about these issues?
Speaker 3
We have not. As I said, we're this is still a work in progress. Where this type of investigative unit would live, we'd want to ensure that there's not redundancy with a lot there's a lot of work and a lot of great work that the PUC already does in the auditor's office, the enforcement office. The auditor is verifying a lot of costs that's there. The enforcement office is looking for, things like the gold watches that shouldn't be in there.
We think that this is a potential for a broader thing, like what Mr. Friedman said of how can we start to look at some of this information that would generally be subject to a prudency review, would generally be subject to reasonableness review in the course of a rate case, but maybe folks didn't get to it or maybe it's coming down the line and they want to take an extra look at it outside of the constraints of the quasi judiciary proceeding. Again, as I said, we're welcome to feedback on where to house this, how to house this. I think the PUC has a lot of inherent authority. I think they're a very muscular agency to go in and get the data that they need to get.
We saw that in the San Bruno incident that was related to safety. But this regulator has a lot of muscle and we think it can be flexed to the benefit of ratepayers. Hence, that's the genesis of this idea. Okay.
Speaker 5
I would just like to close this. Thank you both. You know, the fight is there, but with facts and data information in the agency that I can envision that would oversee and point out some of these issues would really benefit not just our constituents, the state, but the, agencies themselves. Sometimes it's, it's pretty good to have someone sitting here to audit and see what's going on. So I I like the path you're on, and I appreciate it.
Thank you for coming. Thank you.
Speaker 1
Alright. Thank you, guys. Public comment. Anyone wants to make some comments to the committee on the matters that we've been discussing? We're going to ask you to keep it brief.
Sorry. We're just so
Speaker 12
Understood. Yeah. Hunter Stern, on behalf of the California State Association of Electrical Workers and the Coalition of California Utility Employees. A whole lot of information. Appreciate the opportunity to listen and learn.
I'm going to specify two comments and one observation. The first comment specifically for the California Public Utilities Commission IRP, which was mentioned by the new president. That IRP was mentioned at 56 gigawatts as total procurement. What was not mentioned is 30 gigawatts of that is coming from out of state. That threatens the opportunity for over 400,000 Californians to earn a living building those projects here in the state.
Just as a sense of what 30 gigawatts is, on a day like today in March, 25 gigawatts or so is what the state needs to meet its energy need for the day, total. So we're talking about, on an average day, spring and fall, more capacity being utilized from out of state. And that's not what the intent is, and that's not what the value is to the economy of California. We want more of that procured from in state generation. It's better for us, and it's better for our members.
But it's also better for the state as a whole. The second comment around cost drivers. We totally recognize the need to lower bills. Our members' jobs working for the utilities depend on it, and we understand that. I will also recognize the excellent work of the POA PAO, rather in the CPUC.
And one thing that was not mentioned very well that they have worked on extensively, late twenty twenty four, all last year, is the cost of the net energy metering tariff structure. It was brought up by Professor Borenstein briefly. That's still a major cost driver on bills. And the last thing I will point out as an observation, utility workers, union labor was mentioned by many of the people who testified for Energy Today. We were not consulted by any of them.
Not that we had to be. But we certainly have a lot to say about how things are done. And we appreciate the opportunity to say so.
Speaker 13
Thank you. Good morning, Chair and community members. My name is Will Abrams. I am an organizing advocate for the Utility Wildfire Survivor Coalition. When we talk about affordability, there should be a clear understanding that the California crisis is largely of our own making as we have not aligned the financial incentives of the utilities with the interests of the public.
When victims of utility fires are not timely and fully paid restitution for their losses, these costs do not disappear. They shift into skyrocketing insurance premiums, housing instability, sluggish local business recovery, and housing debt, which makes affordability out of reach across California communities. Affordability will not improve until utility incentives are changed, where return on equity is tied to our public goals. Right now, we have an inverse and very much dysfunctional relationship between utility investor financial incentives and what is healthy for our California communities. We must no longer coddle our utilities.
They must earn their credit rating and investor returns through providing safe and reliable service. What residents now see is that our California utility incentive structures drives increased shareholder return when the utilities drive decreased payments, decreased payments to victims and increasing energy rates. This lopsided dynamic that undermines the affordability of all Californians is due to loopholes in legislation like AB ten fifty four and SB two fifty four. These loopholes must be closed this legislative session. Simply stated, we are rewarding the wrong outcomes.
Going forward, if we don't tie bottom line utility return on equity to our public need for affordable rates, full restitution for victims, safety and climate resilience, then we'll keep trading away the lives of our citizens here in California. Right now, Southern California Edison is running around to being fire survivors and trying to pay the least amount of money to the least amount of people. And PG and E is trying to walk away from their commitments to fire victims who are ten years in waiting and only getting pennies on the dollar for restitution. This is not only unjust. It is simply bad public policy that prioritizes corporate investor interests over the public interests.
What are we doing? Respectfully, we are placing band aids on gaping public wounds. The legislature looks for bonds. We set up for trusts and wildfire funds. And when that dries up, we set up SB two fifty four continuing funds, all with the primary purpose to support these investors that made bad Wall Street bets on these utilities.
Through legislation and ineffectual regulation, they are able to avoid the responsibilities and the court ordered obligations to victims and the public at large. There are alternatives, but it will take California legislature to stand up to powerful utility investor influences to get this done. We must align utility return on equity with a return on safety and a return on affordability.
Speaker 13
Thank you. I will. By tying these together with indices like CPI, we can see a better day. The Utility Wildfire Survivor Coalition and wildfire victims across California stand ready with detailed proposals and constructive SB two fifty four amendments to get this done this session. We invite committee members to work with us towards these shared goals.
Thank you very much.
Speaker 17
comment. Good afternoon. My name is Chloe Ames, and I'm a policy advisor with NextGen California. I will keep this pretty brief, as I know we're wrapping up. But we're here today to voice our general support for rate and infrastructure reforms that lower the cost of electricity while advancing a clean energy transition.
I think it was well established today that the costs of electricity are too high in California, with as much as 20% of customers unable to pay their bills. Therefore, we'd like to amplify some of the proposals mentioned on the last panel today, including, one, a lower rate of return on equity as low as 6% to 8%, in line with the market rate, which will support electricity affordability for Californians while still attracting market capital for utilities. Two, requiring lowest cost wildfire mitigation pathways to reduce strain on ratepayers due to excess capital spending while also increasing wildfire resilience. And this is a broader category, but three, we wanted to amplify the need for increased investments in distributed energy resources to reduce grid demand and strain, such as securing funding for the demand side grid support program. Thank you.
Speaker 1
Great. Thank you. Well, thank you, everybody. Thank you to our great staff. Thanks, everyone, for participating, all the thoughtful participation from our panelists and the public.
This is obviously going to be one of many deep dives into the tricky issues that we're all facing as we try to make sure we have a reliable, cleaner, more affordable system for everybody. So with that, I'm going to adjourn the hearing. Thank you, Nidia.
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