JUICE: Noblesse Oblige

By Published On: November 13, 2014

President Ronald Reagan promoted the concept of “trickle down” economics. If the population were allowed tax breaks they, in turn, would display noblesse oblige without having to pay so much in taxes, according to the theory. Also, people would work longer hours because they’d get to keep more of their pay. Paychecks would be invested in the banking industry, which would loan out more money in an economic Mobius loop. Although Reagan aimed tax breaks at everyone, it mostly amounted to tax breaks for those more well off. While history fluffs up the former president, it doesn’t reflect well on “trickle down.” It doesn’t seem to be working for investor-owned utilities and this state either. California’s regulated utilities have their own forms of accumulating wealth for shareholders. Those trickle up strategies include: • Tax breaks; • Higher rates; and/or • Rates of return on the nearly $15 billion/year that they are investing in infrastructure. For equity investments, the California Public Utilities Commission allows utilities a return of around 10 percent. Of regulated utilities, San Diego Gas & Electric and SoCal Gas alone reported $13 million more in profits in the third quarter of this year than at the same time last year. Southern California Edison and Pacific Gas & Electric Securities & Exchange Commission filings also show increased profits. But there is no trickle down. The profits are kept close to the vest as the utility world is being forced to change because of external pressures, mainly the growth of distributed energy and technologies giving consumers more say in the amount, type and timing of their energy use. Monopoly utilities react to threats by focusing on maximizing profit and minimizing spending. Think of their actions pre- and post-2000-01 energy crisis. Now they face uncertainty for the future of centralized power and monopolies. Edison is in major cost-cutting mode—workers and services. It announced in April that it is cutting jobs among its 14,000-person workforce. According to sources, that’s going beyond the number related to decommissioning its San Onofre Nuclear Generating Station. Despite the profits, the company’s apparently laying off people at headquarters and cutting contractors. In its latest iteration of the general rate case—the triennial proceeding at the commission that sets utility revenues—Edison is proposing only a “modest” increase, according to the Office of Ratepayer Advocates. Advocates are proposing a decrease. PG&E won an increase of $453 million in its general rate case Aug. 14, 2014. Still, there are utility layoffs. PG&E publicly retired three department heads Sept. 15, 2014, after revelations of illicit communications with the California Public Utilities Commission. At issue was PG&E’s choice of judge on its gas transmission and storage case in which it seeks a $555 million increase for 2015. While some utility budgets are apparently being cut inside, suffice it to say that policymakers on the outside are not going to make the financial lives of any regulated energy utility difficult. Since PG&E’s bankruptcy in April 2001, and Edison’s threat to follow in PG&E’s wake, the commission has treated profits like an allowance to keep the financial community off its collective back. Despite proposed settlements—like the pending refunds to Edison ratepayers over 2012 San Onofre costs in which shareholders would only receive 5 percent of any insurance claims, or PG&E’s potential $1 million in fines to shareholders over improper communications with the commission, and a $1.4 billion pending penalty over gas safety—shareholders are relatively immune to losses. But the squeeze can’t continue to be only at one end—ratepayers. And, perhaps, taxpayers. In a case before the commission, economic analyst Bill Marcus, principal with JBS Energy, claims that both Edison and PG&E “are playing games with taxes—particularly Edison, but PG&E to a lesser extent—flowing through to shareholders taxes that otherwise would have been normalized (so ratepayers would have gotten the money over the life of the assets).” The financial stability of California’s regulated utilities has come a long way from the scary financial threats following state deregulation. They are all on terra firma. Regulated utilities are guaranteed revenue unlike unregulated generators or other non-utility providers, thus regulators have a duty to keep profits in line and commensurate with the current economy. An imbalance is inefficient and increases resentment. Shareholders are necessary to provide capital, but there is such a large disparity between their compensation and ratepayers’burden. For example, PG&E Corp.’s earnings/share the latest quarter soared to $1.73, compared to last year’s third quarter of $.36/share. Edison shareholders also reaped more, by about 5.5 percent—up to $1.54/share in this year’s third quarter compared to earnings a year ago of $1.46/share. Ratepayers pay quite handsomely for those shareholder loans. In addition to higher rates, consider the disparity between the commission-approved utility rates of return on their investments, compared to the interest rates of consumer savings bank accounts or Treasury bills, which are below 1 percent. Allowing increased utility profit at ratepayers’ expense with no commensurate benefit, including a current lack of choice, is not good for the public, it’s not good for the state and ultimately won’t be good for the utility industry.

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