SAN DIEGO (KSWB) — A newly released audit into state oversight of rate increases at San Diego Gas & Electric and three other investor-owned utility companies in California is raising questions about regulators’ approval process for changes to customers’ bills.
The audit, which examined practices by the California Public Utilities Commission (CPUC) and Public Advocates Office (Cal Advocates) for approving proposed rate changes, found gaps in their monitoring of utility costs that could be opening up customers to unnecessary rate increases.
Residents of the Golden State pay some of the highest utility rates in the country, with rates for utilities like gas and electricity having jumped to unprecedented levels in recent years.
According to the audit, electricity rates statewide rose between 16% to 23% — depending on the provider — from January 2022 and January 2023. Meanwhile, residential natural gas rates increased between 27% to 162% during that same time frame.
While energy rates have been increasing statewide, customers at SDG&E, one of the companies included in the scope of the audit, currently have the highest electricity rate of the large investor-owned utilities in California, with nearly 25% reporting being more than a month behind on their bills as of March.
Pacific Gas & Electric, Southern California Gas and Southern California Edison were also included in the probe of the state regulator’s oversight over proposed rate increases.
The rise in energy rates at these utilities goes hand-in-hand with an increase in operating costs for the companies. According to the report, all four have seen an increase in these expenses from about 5% to 37% in recent years.
Several factors have contributed to this increase including: a decrease in electricity sales due to increases in solar power systems; greater wildfire mitigation and emergency-related costs; and market forces, such as an uptick in demand for energy due to unusually cold temperatures.
Given that utilities recover these costs through rates, there are multiple ways that companies and the state regulators determine when and how to increase rates for customers.
The primary way this is done is through a long and involved process to establish utility rates called a general rate case proceeding.
As part of these proceedings, which occur every four years, companies outline the revenue they believe they will need to recover anticipated operating expenses in addition to a return on their investment in building energy-related infrastructure. The forecast is then used to determine a rate increase for customers.
In between these general rate case proceedings, utility companies can adjust rates based on unforeseen costs incurred – whether it’s due to a catastrophic event like a wildfire that impaired service or changes in the cost of purchasing energy.
The CPUC is responsible for approving proposals submitted by utility companies with both of these proceedings, while Cal Advocates representatives serve as a voice for ratepayers.
Both of these entities’ goal is to ensure that all rate increases are necessary and appropriate, both during the general rate case proceedings and during mid-cycle negotiations.
Nonetheless, the audit found multiple issues relating to a lack of safeguards to ensure these things, among them being an inability by state regulators to determine whether a utility company’s projected costs are not being overstated, leading to undue changes.
The audit pointed to SDG&E as an example of what this could look like, citing how the company saw more profit on infrastructure investments than the rate set by state regulators as part of general rate case proceedings in nine of the last 10 years.
According to the report, this difference between the authorized rate of return based on projections and the actual rate of return was as high as 1.5% in one year, representing as much as $29 million more in profit than allowed depending on how SDG&E found ways to manage their operating costs.
Companies like SDG&E are entitled by law to earn a reasonable return on investment put towards infrastructure improvements, while seeking ways to efficiently manage their operating costs to retain as savings.
However, they’re only allowed to earn around a certain percentage on these investments, which is determined in the quadrennial negotiations.
Consistent surpassing of the rate of return, like seen at SDG&E, could signal a flaw in the state’s normal process of approving budgets for companies, the audit says – one that incentivizes overestimating a utility’s operating costs to retain the difference between what they actually spent and their projected figures as profit.
According to the report, the state regulators do not have the ability to figure out whether or not this is not the case for utility companies that do exceed their allowed profit on building infrastructure, in part because there is no mechanism to identify areas in which companies like SDG&E achieved cost savings.
“Reviewing how much the utility earned compared to the authorized rate of return and identifying where the utility was able to gain efficiencies should be a critical first step in ensuring that the utility’s projected costs were appropriate,” California State Auditor Grant Parks said in the report.
“ … we are concerned that the CPUC is not providing sufficient safeguards to protect customers,” the report continued. “Without fully understanding exactly how utilities are gaining cost-related efficiencies and earning profits, the CPUC cannot be certain that the revenue requirement it authorizes and the resulting rates are fair and reasonable.”
This “reasonableness” for utility costs should also be monitored by looking at a type of account called a balancing account, according to the report. These accounts are used to track variable costs that may be difficult to predict, like procuring electricity or wildfire mitigation efforts.
More than 300 accounts are maintained between the four energy utilities examined by the audit, tracking more than $16.8 billion in balances.
The CPUC and Cal Advocates review a selection of balancing accounts to ensure that utilities are complying with the terms they agreed to when the regulators authorized their budgets, subsequently allowing them to confirm that rates for customers are appropriate.
According to the audit, however, only about 35 to 42 electricity balancing accounts for three of the companies were looked at by Cal Advocates during the 2019-20 and 2021-22 fiscal years. That is estimated to be about 6% to 33% of each company’s total number of accounts.
There is also no process for state regulators to check that utilities actually finish projects that the CPUC agrees to raise rates for to get the cost of it recovered, auditors said. This is part of a type of mid-cycle rate adjustment for unanticipated costs, such as those incurred after a natural disaster.
“… if neither the CPUC nor Cal Advocates strengthens its efforts to verify whether the utility has completed the work in question … they risk allowing the utility to inappropriately recover costs from its customers,” the report read.
The state auditors’ office added that the CPUC should look for ways to strengthen efforts to ensure that utility customers are fully informed of the reasons why their rates might be increasing.
The auditor set a Feb. 2024 deadline for the two agencies to establish a way to implement elements of the auditor’s recommendations, including instituting a process of publishing actual rate-of-return numbers and ensuring that projects undertaken by utilities are completed.
The CPUC and Cal Advocates agreed with most of the auditor’s recommendations in their responses to the report, committing to make changes. However, the CPUC disagreed with two of the suggestions in a letter dated Aug. 9.
They said that they cannot implement the recommendation that the commission reviews completed projects if staff or an administrative judge are required to unilaterally review outside reports to verify a utilities’ work. As an alternative to another suggestion, they also said that they would craft a communication strategy to promote rate increase transparency.
In an emailed statement to FOX5SanDiego.com, SDG&E said that it was appreciative of the state auditor’s efforts to bring more transparency to the process of establishing energy rates in California, adding that the report emphasizes “many of the critical trends that are driving rate increases for all utilities in the state.”
“Energy affordability is a critical issue as utilities like SDG&E implement state clean energy policies, and we remain focused on delivering best-in-class reliability, customer service and wildfire safety to our customers,” the statement continued.