The Duck Curve NEM 3 and YOU - Part 5
- Jeff Jorgenson
- 3 days ago
- 7 min read
We’ve looked at how the Duck Curve affects our energy costs on the home front now let’s take a look at the utilities and see how their ecosystem affects our bills.
The American power grid is sometimes called “the world’s largest machine”. With its more than 500,000 miles of high-voltage transmission lines, 5 million miles of distribution lines, and thousands of power plants it is a complex and mysterious amalgamation of competing and complementary resources.
Or is it? Surely if the U.S. Energy Information Administration can write an article called simply Electricity explained then perhaps its not too convoluted. The building blocks seem straightforward:
As you can see there is a lot of infrastructure that has been put in place to deliver electricity to our homes and businesses.
So here’s the “secret” from Laura Feinstein and Eric de Place of Sightline Institute: Playing Monopoly; or, How Utilities Make Money
“Utilities’ profit doesn’t come from the natural gas or water or electricity they provide to customers. That’s right, utilities do not earn profits on the products they sell—gas, water, and power are provided “at cost” to consumers—but rather from the investment in the assets (the pipes, substations, transmission lines, etc.) that are used to provide the service. In short, the more infrastructure that a utility builds, the higher the profits it can generate.
Asset value is at the root of the utility profit margin because a utility only earns a return on its investment in physical assets. And utilities own heaps of assets, not by accident. In fact, utilities are motivated to build more infrastructure because every year they recoup the cost of their investment in those assets plus an additional percentage of those costs (that’s the rate of return on equity) which is their profit.
Today, utilities are primarily incentivized to build new infrastructure—more pipes and wires—rather than boost efficiency, make repairs, or invest in operations. And, utilities may see third-party-owned climate-friendly energy systems like solar panels and batteries as a threat to their business model.”
Celso A. Morelos from Electric Utilities Café defines the “Revenue Requirement: This is calculated by accounting for all infrastructure costs [generation, transmission, equipment], operating costs and expenses [salaries, etc.], and Assets. The total amount is then multiplied by a predetermined rate of return”
It breaks down to this: Total Revenue Requirement = Rate Base × Allowed Rate of Return + Expenses
J.C. Kibbey of the Natural Resources Defense Council explains in Utility Accountability: How Do Utilities Make Money? “Utilities can collect their spending on operating expenses from you and me, on our bills. In practice, they almost always cover their costs, but they don’t get anything extra beyond what they spent. So, if a utility spends $100 on operating expenses, it collects $100 back, spread out across all the bills people pay to that utility. They don’t profit.
But with capital expenses—that is, physical infrastructure, like poles and wires—utilities can collect the money they invested plus an additional percentage they keep as profit. So, if a utility spends $100 on capital expenses, they might collect $110 on our bills, with $100 paying for the wires and poles and $10 going towards profits.
The problem is that utilities are incentivized to spend money on more physical infrastructure, whether or not it best supports a clean and affordable grid. They have little incentive to enable clean energy, for instance, or to keep bills low for people who have low incomes.
Here’s a hypothetical example that highlights the issue: several large new apartment buildings have been built in a neighborhood, so the area is now using more electricity than the local electric grid is able to provide. There are two ways to address this: one is a $50 million project that brings more power into the neighborhood by building new high-tension wires and new substations; the other is a $10 million project to reduce demand by implementing energy efficiency measures and installing batteries. For this example, let’s say the utility has a return on equity of 10%, meaning that they make a 10% profit on whatever they spend on capital expenses.
If the utility chooses to build the $10 million project, it would make $1 million in profit, and meet their public charge of providing “least-cost” service. But if it chooses the $50 million project, it will make $5 million in profit. They haven’t provided the “least-cost” solution, but they’ve made more money. Their shareholders will probably like this better, but it will also leave customers paying more than they should.”
So what is this mysterious Allowed Rate of Return (ROR)?
The CPUC explains the ROR is typically calculated as a weighted average of the utility’s capital structure. It balances the costs of debt (interest payments on bonds), preferred stock, and common equity (dividends for investors).
However as Mark Ellis (Mark led the strategy function at Sempra Energy (parent of San Diego Gas &Electric and Southern California Gas) for fifteen years.) points out in I was a California energy strategist. Here’s how the state lets PG&E give you a raw deal “consider what investors are willing to pay for utility stocks. If regulated returns matched utilities’ actual market-based cost of capital, their stock market values would match the amounts they’ve actually invested in infrastructure. But that’s not what we see. Instead, utility stocks are worth more than twice what utilities have invested — meaning each dollar utilities invest increases their stock market value by $2. The market awards this extra value only because the government lets utilities charge customers more than they should. This special 2-for-1 deal encourages utilities to spend as much as possible, which is a big reason why electricity rates in California keep going up.”
Ouch.
There are ways to re-align the incentives:
In The US doesn’t need to generate as much new electricity as you think, Mike Specian, utilities manager with the nonprofit American Council for an Energy-Efficient Economy, or ACEEE, “Our incentives aren’t properly lined up,” said Specian. State legislators and regulators can address this, he said, by implementing energy-efficiency resource standards or performance-based regulation. “Decoupling,” which separates a company’s revenue from the amount of electricity it sells, is another tactic that many states are adopting.”
Joe Daniel, who runs the carbon-free electricity team at the nonprofit Rocky Mountain Institute (RMI), has also been watching a model known as “fuel cost sharing,” which allows utilities and ratepayers to share any savings or added costs rather than passing them on entirely to customers. “It’s a policy that seems to make logical sense,” he said. A handful of states across the political spectrum have adopted the approach, and of the people he’s spoken with or heard from, Daniel said “every consumer advocate, every state public commissioner, likes it.”
The Edison Electric Institute, which represents all of the country’s investor-owned electric companies, told Grist that regardless of regulation, utilities are making progress in these areas. “EEI’s member companies operate robust energy-efficiency programs that save enough electricity each year to power nearly 30 million U.S. homes,” the organization said in a statement. “Electric companies continue to work closely with customers who are interested in demand response, energy efficiency, and other load-flexibility programs that can reduce their energy use and costs.”
The think tank RMI has also produced a guide that introduces the basics of performance-
based regulation (PBR) for electric utilities. It contains numerous ideas to better align utilities incentives with the public good.
So how did our CUPC do this last go round?
Diana DiGangi at Utility Dive reports: “PG&E’s ROE is now 9.98%, down from 10.28%, San Diego Gas & Electric’s is now 9.93%, down from 10.23%, Southern California Gas is down to 9.78% from 10.08%, and Southern California Edison’s is now 10.03%, down from 10.33%. California has some of the highest rates in the country, second only to Hawaii.”
Utility Dive also published the Sierra Club’s response: “We presented clear evidence showing that utilities are inflating their cost-of-capital estimates and that authorized returns should be significantly lower to reflect actual market conditions,” said Julia Dowell, senior organizer at Sierra Club. “The Commission ignored that record, split the difference, and moved on.” Adding “that returns on equity of “~6% would balance consumer and utility needs” while saving “$440 per household compared to the utilities’ proposals.”
George Avalos of Silicon Valley countered with PG&E Chief Executive Officer Patricia Poppe “Bottom line, electric bills have gone down four times since 2024. That’s the equivalent of a reduction of $20 a month for electric bills.” Also noting Loretta Lynch’s, a former PUC commissioner response, “PG&E continues to post record profits year after year after year because the PUC continues to fail to rein in their profligate and unnecessary spending, all designed to boost their profits and pick Californians’ pockets,” said Loretta Lynch, a former PUC commissioner.
While Melody Petersen of the LA Times pointed out “Edison’s electric rates have risen by more than 40% in the last three years, according to a November analysis by the commission’s Public Advocates Office. More than 830,000 Edison customers are behind in paying their electric bills, the office said, each owing a balance of $835 on average.
In a January report, state legislative analyst Gabriel Petek detailed how electric rates at Edison and the state’s two other biggest investor-owned electric utilities were 50% higher than those charged by public utilities such as the Los Angeles Department of Water and Power. The public utilities don’t have investors or charge customers extra for profit.”
We’ll give Utility Dive’s Robert Walton the last word on this topic: Customers, don’t expect electric bill relief in 2026: ‘The cake is baked.’
He quotes Jay Griffin, a former utility regulator and executive chair for the Regulatory Assistance Project regarding utility business model reform “isn’t just an abstract policy debate, it’s a practical necessity. By rewarding capital investment over outcomes, the model encourages utilities to ‘spend money to make money,’ while discouraging non-capital solutions like demand management and distributed energy resources. This model creates risk for customers and investors alike.”
While the CPUC may feel good about it’s reduction of 0.3% Mark Wolfe, executive director of the National Energy Assistance Directors Association points out, “They’re freezing rates at the highest they’ve ever been.” Low-income customers are “continually falling behind,” and utilities “spend considerable resources trying to collect. I don’t think it works, especially as electricity gets more and more expensive, going up faster than incomes.”
So if our costs are going to keep rising then installing solar with storage needs to be considered. As I promised in part 1, we’ve created a tool that helps you figure out if the investment is worth it for you:
Next we’re going to learn about the different types of power plants and their very diverse functions…then finally we’ll be able to report on the whole reason for this series - The Duck Curve and Curtailing!
