California's Token Utility Reform: When Symbolic Gestures Replace Meaningful Change

The Regulatory Landscape

California’s Public Utilities Commission (CPUC) has proposed what appears on the surface to be a significant regulatory shift—reducing the authorized “return on equity” for the state’s three largest investor-owned utilities: Pacific Gas & Electric (PG&E), Southern California Edison, and San Diego Gas & Electric. The proposed reduction of 0.35% would bring shareholder returns to just under 10%, marking the first time in at least two decades that PG&E and Edison would see returns dip below double digits. This decision comes against the backdrop of California consumers facing the second-highest electricity rates in the nation, trailing only Hawaii, with numerous factors including wildfire mitigation costs driving up bills.

The Complex Economics of Utility Regulation

The return on equity represents the profit margin utilities are allowed to earn on their investments, essentially compensating shareholders for the risk of doing business. These rates are set by state regulators and currently hover around 10% nationally. Under the proposed changes, PG&E’s rate would decrease to 9.93% (from 10.28%), Edison to 9.98% (from 10.33%), and San Diego Gas & Electric to 9.88% (from 10.23%). These percentages might seem minor, but they represent millions of dollars when applied to the utilities’ massive rate bases—the total value of assets upon which they can earn returns.

Utilities argue that these reductions threaten their ability to attract necessary investment for critical infrastructure projects. Spokespersons for all three companies—Jeff Monford of Edison, Jennifer Robison of PG&E, and Anthony Wagner of SDG&E—have expressed concerns that the decision fails to account for California’s unique risks and could hamper investments in grid reliability, wildfire mitigation, and clean energy transition. They maintain that maintaining attractive returns is essential for securing financing and maintaining credit ratings.

The Historical Context and Current Reality

California’s utility landscape has been shaped by decades of complex regulatory decisions, wildfire catastrophes, and increasing pressure to transition to clean energy. PG&E in particular has faced intense public scrutiny and legal challenges following devastating wildfires linked to its equipment. The costs associated with these disasters—both in terms of prevention and liability—have been largely passed through to consumers through rate increases approved by the very commission now proposing modest reductions in shareholder returns.

What makes this situation particularly galling is the fundamental mismatch between risk and reward. As experts and consumer advocates note, the utility industry is typically considered low-risk, yet shareholder returns far exceed those of virtually risk-free investments like U.S. Treasury bonds. According to academic research, this discrepancy costs utility ratepayers across the country as much as $7 billion annually—a massive wealth transfer from ordinary citizens to corporate shareholders.

A Deeper Analysis: The Illusion of Reform

While any reduction in authorized profit margins might appear progressive, this decision represents precisely the kind of incrementalism that perpetuates systemic injustice. Reducing returns by 0.35% is like applying a band-aid to a hemorrhage—it looks like action while doing little to address the underlying problem. The fact that this reduction brings returns to “just under 10%” reveals how accustomed we’ve become to accepting excessive corporate profits as normal.

Consider the comparison to U.S. Treasury bonds, considered the benchmark for risk-free investments, which yield about half of what utilities are permitted to earn. This disparity cannot be justified by any reasonable assessment of actual business risk. Utilities operate as regulated monopolies with guaranteed customer bases and rate recovery mechanisms—they are among the least risky investments imaginable. The continued authorization of nearly double-digit returns represents a fundamental failure of regulatory oversight and a betrayal of the public trust.

The Human Cost of Excessive Profits

Behind these percentage points and financial analyses are real people making impossible choices between keeping the lights on and putting food on the table. California’s electricity rates aren’t just statistics—they represent seniors choosing between medication and electricity, families sacrificing other necessities to pay power bills, and small businesses struggling to remain competitive. When we allow utilities to earn excessive returns, we’re essentially taxing the most vulnerable members of our society to enrich shareholders who face minimal actual risk.

The utilities’ argument that they need high returns to attract investment rings hollow when examined critically. These are not startups operating in competitive markets; they are government-sanctioned monopolies providing essential services. The notion that investors would flee from guaranteed returns in a stable market defies both logic and historical evidence. What we’re witnessing is not market economics but regulatory capture—where the regulated entities have excessive influence over their regulators.

The Missed Opportunity for Real Reform

Most disturbingly, the CPUC has ignored a potentially transformative approach suggested by Mark Ellis, former chief economist at Sempra (SDG&E’s parent company). Ellis correctly notes that the commission could achieve better outcomes by adjusting the debt-equity balance rather than simply tweaking return percentages. This approach could maintain credit ratings while significantly reducing the burden on ratepayers, but the commission left this crucial lever untouched in its proposed decision.

This failure to explore more comprehensive solutions demonstrates either a lack of creativity or a lack of courage—or perhaps both. True leadership would involve challenging the entrenched assumptions that have governed utility regulation for decades. It would mean prioritizing ratepayer interests over shareholder returns and recognizing that essential services should not be profit centers for excessive wealth extraction.

The Path Forward: Principles Over Profits

As defenders of democratic principles and economic justice, we must demand more than symbolic gestures. Regulatory bodies like the CPUC have a fundamental responsibility to protect consumers from monopoly pricing and ensure that essential services remain affordable. This requires courage to challenge powerful corporate interests and creativity to develop solutions that serve the public good rather than private profit.

The current proposal, while directionally correct, falls woefully short of meaningful reform. We need bold action that fundamentally rethinks how we regulate utilities—action that prioritizes affordability, reliability, and sustainability over shareholder returns. This might include more aggressive reductions in authorized profits, innovative approaches to capital structure, and greater transparency in how rates are determined.

Ultimately, this isn’t just about electricity rates—it’s about what kind of society we want to build. Do we want a system that treats essential services as opportunities for wealth extraction, or one that ensures all citizens have access to affordable, reliable power? The choice before us reflects larger questions about economic justice, corporate power, and the proper role of regulation in a democratic society. We must choose wisely, and we must choose courageously.