Utilities New Rates of Return

By Published On: June 6, 2008

The California Public Utilities Commission last week pulled utilities’ rates of return on investments out of their traditional annual income review. On May 29, regulators voted to put utilities’ return on investment under an automatic adjustment mechanism. Now, utilities get a set return from ratepayers–one that fluctuates when the bond market moves more than 1 percent, according to Moody’s ratings service. For returns on investments based on equity, utilities are allowed a high rate of return, which is paid by ratepayers. In addition to what regulators allow–about an 11 percent return on investment–ratepayers also pay taxes on top of those same utility profits. So, the bottom line in returns for that part of utility investments is about 20 percent, according to the CPUC. Utilities’ net income on equity is set at about 11 percent. But regulators limit that return on investment to about half of utilities’ borrowing. The rest is debt. That debt is flowed through ratepayers, so utility shareholders don’t profit from the debt portion, according to the CPUC. Planned utility investments, based on information from the commission and utilities, are as follows: -Southern California Edison–$19.9 billion over five years. Equity rate of return 11.8 percent. -Pacific Gas & Electric–$13 billion over three years. Equity rate of return 11.35 percent. -Sempra–$11 billion over five years. Sempra’s two utilities, San Diego Gas & Electric and SoCal Gas, are being allotted 61 percent of that. A Sempra spokesperson said the investment amounts are roughly two-thirds for SDG&E and one-third for SoCal Gas. Assuming roughly half of those investments are treated as equity investments–$22 billion–it would cost ratepayers over $4 billion in returns, and about $2.4 billion in shareholder profit.

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