California Capitol

The passage of AB 1054 has allowed PG&E to lower its requested return on equity for 2020. 

Pacific Gas & Electric reduced its requested return-on-equity rate for 2020, following the passage of AB 1054, wildfire legislation that passed earlier this year.

In an Aug. 1 filing to the California Public Utilities Commission, PG&E proposed lowering its request to 12 percent rather than the 16 percent it had asked for. The utility cited AB 1054 and the financial protection it provides to California utilities. PG&E currently has a 10.25-percent return on equity.

PG&E’s original 2020 cost-of-capital application, filed with the CPUC in April, would have pushed up PG&E’s revenue requirement by $1.2 billion, leading to a monthly $8 increase in the typical electric customer’s bill (see CEM No. 1536 [9]).

AB 1054, which Gov. Gavin Newsom signed in July, provides for the creation of a wildfire fund that would help cover utility liability stemming from wildfire damages. It also for the first time provides for regulated collection of wildfire costs directly from ratepayers, reversing the state’s previous practice.

“PG&E concludes that for the foreseeable future, and for the duration of the wildfire fund, its financial risk in connection with future wildfires is likely to be substantially reduced relative to when it filed its cost of capital application in April 2019,” the utility said in the filing.

California utilities file cost-of-capital applications with the CPUC every three years, to determine the return on capital investments they can recover through rates. In April, all three investor-owned utilities requested steep increases in their return-on-equity rates for 2020, citing increased wildfire liability and jittery investors. Southern California Edison proposed a 16.6-percent ROE, while San Diego Gas & Electric requested a rate of 14.3 percent for 2020.

In its August filing, PG&E representatives said the 16-percent ROE proposal was based on the assumption that utility shareholders could face an “unlimited risk” of liability from wildfires caused by its equipment. The passage of AB 1054, however, has changed these calculations, since the new wildfire fund will allow utilities the liquidity to settle wildfire claims. PG&E estimates that the fund, along with its insurance coverage, will cap its future wildfire liabilities at $2.7 billion on a rolling three-year basis.

PG&E’s revised ROE proposal came on the same day that multiple parties protested the utilities’ original 2020 cost-of-capital applications. Environmental Defense Fund voiced several concerns with the applications, contending that none of the utilities had adequately demonstrated why they required an increased ROE and pushing back against the notion that California’s regulatory atmosphere is dampening PG&E’s financial prospects. According to EDF, the utilities painted a dire picture of the financial risk they face based on “generalized statements” from credit-rating agency representatives, without any supporting data.

“The utilities appear to have confused events created by their own actions with changes in external risk factors such as the liability and regulatory settings. Their inability to acknowledge their own culpability in this situation is troubling,” the group said.

Michael Gorman, a utility regulation consultant who provided testimony on behalf of The Utility Reform Network, the Energy Producers and Users Coalition and Indicated Shippers, criticized the wildfire premium built by utilities into their ROE requests, saying the ROE’s objective is not to protect the interests of utility investors. Gorman also noted that the utilities had not included a wildfire ROE premium in previous cost-of-capital applications, although those too factored into wildfire damage claims.

The CPUC intends to issue a proposed decision in the cost-of-capital proceeding in November.

Kavya Balaraman covers the California Public Utilities Commission and PG&E Corp. for California Energy Markets. She has reported on climate policy and science in Washington, D.C. and graduated from Columbia University's Graduate of Journalism.