| Independently Powered Energy News

Editor’s Note : This is the second of a new Current series explaining the fundamentals of impenetrable energy terms. With it, we hope to pull back the curtain on terms of art used in California utility regulation that often come with considerable price tags for consumers.

Investor–owned utilities use their general rate cases to cover big expenses and capital costs, at a profit. They also use something called memorandum accounts.

These two are by no means the only mechanisms allowing recovery in rates of utility costs, which are supposed to be just reasonable. (Other mechanisms include balancing accounts not covered here. Unlike memorandum accounts, balancing accounts record private utility spending of amounts authorized for rate recovery.)

Utility general rate cases are massive applications submitted to state regulators, covering three- to five-year periods, that seek permission to charge ratepayers billions of dollars for operations and maintenance, among other things. These utilities are strange animals because they are large corporations that must seek permission for their income. That’s because they are regulated monopolies and the regulatory paradigm seeks to add competitive pressure. The requested annual revenue in these filings are based on utility forecasts of expenses and capital costs.

The main way that California utilities make money is from regulators allowing them to charge ratepayers a double-digit percent profit on their capital expenditures, from plants to poles and wires. “The Commission is mandated by statute to ensure that utilities are able to attract capital by offering an adequate or fair rate of return to investors,” a Nov. 2017 CPUC guide to utility general rate cases states.

Utility general rate case applications generally seek considerably more revenue than what regulators approve.

Southern California Edison, for example, asked for $4.7 billion in capital expenditures for 2018. The California Public Utilities Commission approved $3.98 billion in Edison’s 2018-20 rate case last year. Regulators okayed cost recovery “where appropriate,” including making adjustments “where the utility made a mistake,” Commissioner Cliff Rechtschaffen said last May.

Memorandum Accounts : These utility accounts track unexpected costs that generally can’t be projected in utility rate cases. Recovery is not preauthorized, nor is it automatic.

Utilities, for example, are allowed to recover costs related to wildfires, wind and snowstorms, and other emerging risks through memorandum accounts. Those may include company spending to comply with new safety rules and requirements and making the system more resistant.

Use of these accounts has grown, including because of being expanded by wildfire recovery legislation, SB 901.

This wider use concerns ratepayer advocates because these accounts are less scrutinized than general rate cases. Memorandum accounts now deal with “large amounts of spending that have never been reviewed,” Marcel Hawiger, The Utility Reform Network attorney, said.

Utilities also muddy the waters when they spread costs out over various proceedings. It makes tracking and catching possible overlap more difficult.

Take Pacific Gas & Electric’s application, discussed last week, seeking interim recovery from ratepayers of $900 million of its $1.67 billion in costs starting this August and running to the end of 2021.

These costs are included in PG&E’s 2019 Wildfire Mitigation Plan. That plan was approved by the California Public Utilities Commission last May, but not the cost recovery. While some of the wildfire mitigation costs are rolled into the utility’s general rate case, others are diverted to memorandum accounts. According to PG&E, the costs in the accounts are ones that are “incremental.” They include tree trimming, vegetation management and public shut off costs “not sought elsewhere.”

Figuring out just where all these related costs begin and end is no easy feat. A reasonableness review of the interim amount from the memorandum accounts is to be conducted down the road.

The utility warns that without this interim rate recovery, it would have to wait at least two years to see the money. Getting it earlier improves its sorry credit rating and relieves pressure from Wall Street. But whether these costs are just and reasonable are unknown.

PG&E estimates it would add $5.70 to average monthly residential bills for 17 months.

PG&E said it will file a reasonableness application in a few months. It added that if some of the costs are not deemed just, customers will see refunds.

But possible refunds are questionable given the CPUC’s staff heavy workload.

“It is very difficult for the Commission to review utility spending after the fact,” Hawiger added. When spending reviews are upfront, expenses and capital spending are compared to similar work, creating an incentive for efficient utility spending.

The request to add $900 million of “incremental” costs into rates includes memorandum accounts created by SB 901. The weighty legislation promotes speedy recovery of utility spending on wildfire safety but was rushed through the legislature.

That has created some chaos. When and where costs paid out of PG&E and other utility memo accounts post SB 901 will get reviewed by the Commission is not known.

— Elizabeth McCarthy

If there are regulatory terms you are would like us to explain in plain English, please email us at editorial@cacurrent.com . Earlier, we addressed the basics of the Power Charge Indifference Amount.