3 ways to fix California’s utility spending problem — if lawmakers act

California lawmakers are once again contending with how to curb the state’s high energy costs as they hurtle toward the end of this year’s legislative session on Aug. 31. So what’s on the table for utility rate reform in the final stretch?

Enter Senate Bill 905, a complicated package of proposals that are likely to face intense opposition from utilities, which tend to reflexively resist rules that could crimp their profits. But California voters are demanding reform, according to state Senator Josh Becker, the Democrat who wrote the bill.

Californians rank cost of living as a top concern, and most blame the state’s three big utilities for rising electricity rates that are now roughly twice the U.S. average. And when it comes to California’s climate strategy, ​“it’s going to be really hard to convince people to install heat pumps and switch to EVs, or get a factory to switch to electricity rather than natural gas, if the price of electricity is too high,” he said. 

Becker was speaking at a July 14 webinar hosted by the University of California at Berkeley’s Center for Law, Energy, and Environment (CLEE) to promote its latest research on the causes of the state’s electricity cost crisis. As that report highlights, there are no easy fixes.

Climate change and wildfire risks are forcing Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric to invest more in their aging and strained power grids. The California Public Utilities Commission, which regulates those utilities, is loath to rein in spending that expands the grid, brings more clean energy online, and reduces the risk of wildfires. 

But the sheer amount of spending planned by utilities threatens to overwhelm the ability of their customers to pay for it. PG&E is seeking state regulator permission to spend $73 billion through 2030, and Southern California Edison has told investors it plans to spend from $38 billion to $41 billion through 2030.

SB 905 seeks to tackle utility spending in three key ways:

• Limit utilities’ return on equity (i.e., their guaranteed rate of profitability) on investments that help them reduce their risks. 
• Shift costs away from customers and into utility or state-backed debt.
• Create ​“performance-based” regulatory structures that reward utilities for improving how they serve customers and climate goals, not just for building new infrastructure.

“Lowering electricity rates is a hard problem with no silver bullet,” Becker said. ​“But if we get this right, we can start a virtuous cycle.”

Curbing utilities’ return on equity

California lawmakers have been trying for years to pass utility reforms. In 2024, most of their efforts failed. But last year, Senate Bill 254, also sponsored by Becker, managed to make it through the legislative gauntlet.

SB 905 represents an important, if somewhat incremental, next step on those efforts, said Matthew Freedman, senior staff attorney at The Utility Reform Network (TURN), one of the state’s most vocal utility ratepayer advocacy groups and a sponsor of the bill. Among the bill’s provisions, a ​“lower return on equity is a pretty big one,” he said.

Utilities earn guaranteed rates of profit on capital investments, which puts upward pressure on customer rates. Anything that can reduce that rate of ​“return on equity,” or ROE, could help limit those increases, he said. A number of states are targeting utilities’ ROE to combat rising rates — and utilities are, not surprisingly, fighting back against the idea.

In a nod to the challenging politics, SB 905 proposes assigning a lower ROE only to key categories of utility spending, Freedman said. The biggest category is the tens of billions of dollars utilities are investing in burying and hardening power lines to eliminate the risk of sparking wildfires. SB 905 would also limit ROE for utility capital costs in ​“balancing” and ​“memorandum” accounts over which regulators have waived their typical authority for a ​“reasonableness review” to examine and claw back spending, usually for costs that can’t be predicted in advance of ratemaking proceedings.

Both these types of spending help reduce risk for utilities, which can lower the cost of financing as they go out to Wall Street to raise investment and procure debt, Becker said during the July webinar. That means utilities get ​“other benefits besides the pure financial return” from those investments, he said — and that justifies reducing how much they get to charge customers to recover those costs.

Borrowing to lower customers’ costs

SB 905 also seeks to curb costs by forcing utilities to borrow money themselves, or rely on state-issued loans, to pay for some of their costs, Freedman said.

The math is fairly simple, he said. Borrowing money to pay for costs via a process known as securitization allows utilities to reduce the amount of money going into the ​“rate base” of capital investments on which they earn a guaranteed return. Utilities must collect money from customers over time to pay back those loans, but up-front impacts on customer rates are lower.

Tapping into state-backed bonds for utility projects that benefit the state at large — say, building transmission lines to allow more clean energy to be constructed and connected to the grid — could reduce costs even further, since governments can borrow more cheaply than utilities.

Last year’s SB 254 required the state’s big three utilities to securitize the first $6 billion in their ongoing grid wildfire-safety investments and created a state ​“transmission accelerator” to provide public funding for new transmission projects.

SB 905 would ​“require the PUC and the utilities to continue evaluating ways like that to lower financing costs,” Becker said, with an end-of-2028 deadline to report to the legislature on findings and recommendations.

It will take time for savings from this shift to borrowing to show up, said Sam Uden, co-founder and managing director of Net-Zero California, a Sacramento-based environmental policy group. He cited the example of the transmission accelerator, whose initial funding awaits final state budget negotiations. 

“Then the goal would be for the accelerator to fire up next year, and launch public financing,” he said. ​“This is a multiyear transition.”

Rewarding utilities for solving problems, not just building stuff

Curbing the return on investment and requiring utilities to borrow more both target the ​“capex bias” of regulatory structures that reward utilities with guaranteed profits on the capital expenditures. But what if utilities could be financially rewarded more directly for doing a better job on the things their customers and regulators really care about?

For decades, utility regulators and lawmakers have attempted to structure performance-based regulations to accomplish this. Some noteworthy examples include a long-running implementation at Hawaiian Electric and an abortive effort from Connecticut’s former head utility regulator that led to a bitter fight with utilities and her eventual departure from the agency.

SB 905 would set a Jan. 1, 2028, deadline for the California Public Utilities Commission to launch an effort to establish clear performance metrics for tasks such as making the grid more reliable, reducing greenhouse gas emissions, and speeding up the process of connecting new customers and renewable sources. ​“This will make clear what our expectations are for good performance, and hold utilities accountable for delivering safe, reliable, clean, and affordable power,” Becker said.

To be clear, SB 905 doesn’t authorize the commission to offer any financial incentives for meeting or exceeding whatever metrics it comes up with, Freedman said — at least, not yet. ​“We’re worried about a performance-based regulatory approach that the utilities can game and earn excessive profits from,” he said, as happened with Illinois utility ComEd over the 2010s.

“Let’s see how it goes for a few years. If we like it, the legislature can change the law and attach some incentives around that,” he added.

One big performance metric that SB 905 would establish, and which Virginia and other states have already implemented, is ​“grid utilization,” or squeezing more of the power grids that utilities already have. That’s a good way to drive down utility costs, which are based on ​“dividing the total costs of running the grid by the total amount of energy delivered to customers,” Becker said.

“We need to control the numerator of that equation — the costs. But if we can increase the denominator of the energy sold, then rates will go down,” he said. 

California has plenty of load growth coming, whether from data centers, EV charging, or heat pumps and air conditioners for homes and buildings, Becker noted. The right combination of cost controls along with that can ​“make EVs look cheaper to drive, and make heat pumps look more cost-effective versus gas furnaces,” he said. 

Right now, SB 905 is in the state Assembly appropriations committee, where it could undergo a number of amendments that won’t become known to its author until it is released for further consideration via a process known as ​“suspense.” Similar last-minute amendments gutted key provisions from another of Becker’s bills last year — before it was vetoed by Gov. Gavin Newsom.

Meanwhile, a late-breaking push by Newsom to reform California’s wildfire liability system — one of the state’s key drivers of utility costs — is likely to add more pressure on lawmakers trying to negotiate on a plethora of energy and climate issues, ranging from what to do about data centers to how to manage budget pressures tied to the state’s carbon cap-and-invest program.

Will SB 905 make it into law? ​“You know, utilities are fighting it fiercely,” Becker said. ​“But as we learned from last year, big things come down to the final wire, and I hope we’re going to get it through.”