At the end of August, California State Auditor Grant Parks released his agency’s audit of the California Public Utilities Commission (CPUC) and the California Public Advocates Office (Cal Advocates). The audit looked at the agencies’ review and participation in the rate requests from California’s three largest electric utilities and natural gas company — Pacific Gas & Electric, San Diego Gas & Electric (SDG&E), Southern California Edison (SCE) and Southern California Gas Company.

The review assessed how CPUC and Cal Advocates conducted and participated in the hearings for increases of electric and natural gas rates.

While the audit found no criminal nor scathing behavior, the conclusions clearly show that both CPUC and Cal Advocates could do more to ensure the public understood the reasons for rate increases, as well as ensuring that the utilities were making the expenditures for which their rate increases were approved.

In his letter to the governor and Legislature, Parks wrote, “CPUC and Cal Advocates need to strengthen their monitoring of utilities’ costs, and the CPUC needs to provide greater transparency when authorizing rate changes.”

Parks is concerned with electric rates California users are paying. Not only did he acknowledge, “Californians currently pay some of the highest utility rates in the country,” he argued that the two state agencies could do more to oversee utility expenditures and rate requests.

Electric rates have climbed significantly the past seven years due to the utilities’ soaring costs. The auditor noted that SCE’s costs grew 15% between 2017 and 2020 and then another 37% between 2020 and 2023.

While the utilities are legislatively authorized monopolies, the increase in costs and subsequent rate of growth is not simply monopoly manipulation. Several important trends have and are still occurring that have a significant effect on these companies and can be seen throughout the Hill communities.

Over the past two decades, the frequency and extent of wildfires has grown by 60%, from 347,000 incidents in 2007 to more than 554,000 last year. While the acreage burned was about 311,000 in 2022, it was greater than 2.5 million acres in 2019 and 2020. Six of the seven largest fires in state history have all occurred since 2020 and only six of the 20 largest fires occurred before 2010.

Expenses to repair fire damage and to mitigate future fire damage have grown considerably for the state’s largest utilities. The CPUC reported that SCE’s wildfire-related costs have grown from nearly $290 million in 2019 to more than $1.7 billion in 2021, representing about 12% of its total annual revenue requirement.

Another trend affecting utility costs is creating an unexpected consequence to electricity rates. Utilities are encouraging greater private use of solar electricity. First, these customers are using less electricity, which results in a loss of revenue. Secondly, the utilities also compensate these customers for any solar-generated power fed into the grid.

While more solar power is good and reduces demand on the utilities’ produced power, it has little effect on fixed costs. The utilities must still maintain distribution lines and other infrastructure features, such administrative staff.

While the CPUC has approved including the new and growing costs in the revenue requirements for the utilities, it has an incentive to manage and reduce expected costs in order to improve its net income.

This is the principal focus of the audit report. Parks and his staff are recommending that CPUC and Cal Advocates do a better job reviewing rate requests and expense claims.

“In a 1996 decision, the CPUC observed that an investor owned utility may retain as profits the savings it generates from reducing operating costs below projections in the general rate case proceeding,” the auditor noted; then stated, “utilities may have an incentive to generate profits by overestimating their operating costs and then characterizing the difference between their estimates and their actual costs as cost savings.”

From 2006 through 2022, SCE’s actual rate of return has been higher than its authorized rate of return six times, but not once in the past six years. In the past three years, the actual rate of return has been between 3.28 to 3.77 points below the authorized return. However, SDG&E’s actual rate of return has exceeded its authorized return 14 times in the same period.

The auditor points out that the CPUC’s collection of cost data varies and does not always verify projected costs. Consequently, neither the CPUC nor Cal Advocates can ensure that a utility has actually completed the work whose costs have been approved.

However, the auditor identified CPUC’s Office of Energy Infrastructure Safety as an important source and potential collaborator to review and to ascertain specific expenses. “Energy Safety Office is required by law to approve or deny utilities’ wildfire mitigation plans, and it oversees utilities’ compliance with wildfire mitigation requirements.”

Not only could this office’s reports be used during a rate hearing, but the auditor suggested that more evidence, such as photographs, may be required to confirm the completion of work for which costs are claimed.

Reinforcing the value of conducting such audits or reviews, the report noted that in 2023, the CPUC did audit SCE’s cost recovery application for wildfire mitigation and vegetation management costs for 2021.

“The audit found, among other things, that SCE had overstated operations and maintenance expenses for fire risk mitigation, overstated its requested revenue requirement, and sought to recover unsubstantiated capital related revenue requirements,” and this report concluded, “Such findings can underscore the importance of scrutinizing cost recovery applications closely.”

The audit report basically found that CPUC and Cal Advocates “… lack processes to ensure that utilities’ projected costs are not overstated … [and] … lack a process to identify areas in which the utilities achieved cost savings.” Both weaknesses could be mitigated if the CPUC and Cal Advocates also strengthened their efforts to verify that the utilities actually completed the work for which rate increases were approved.

The CPUC response did not reject the auditor’s findings and suggestions; however, CPUC was not willing to wholeheartedly accept them either.

The CPUC did agree to ensure that utilities clearly explain their actual rates of return and where projected costs exceeded actual costs. CPUC noted that this information is available, but it would implement a process to highlight it. This will help administrative law judges to further analyze this result.

However, because of its quasi-judicial responsibilities, it cannot require reports from other agency divisions to be considered in a rate proceeding. But it will encourage staff to be more aware of other agency reports.

This elicited a response from the state auditor: “We are perplexed by CPUC’s response. … The CPUC has broad authority to develop rules that govern how utilities apply for cost recovery and to compel utilities to provide any information necessary to justify those costs. … Different divisions within the CPUC and other state agencies publish reports that may demonstrate whether a utility has completed the work for which it is requesting to recover costs. Thus, we stand by our recommendation.”

But overall, the auditor believes the CPUC can do much more to help the public understand electric and natural gas rate decisions. However, the CPUC agreed and disagreed.

Primarily, the CPUC argues that it is the utilities’ responsibility to keep the public informed since they are publicly owned. The CPUC should not engage directly with the utilities’ customers.

And again, the auditor objected: “The CPUC mischaracterizes our recommendation. Our recommendation does not suggest that the CPUC should communicate directly with utility customers. …. Our recommendation specifically states that the CPUC should determine the exact approach for communicating energy rate increases to utility customers, … the CPUC is the public agency responsible for regulating utilities to ensure that customers have safe, reliable utility services at reasonable rates. Thus, it is critical that the CPUC establish and implement a communication strategy that clearly explains to customers why their rates are increasing.”

The full state audit report, “Electricity and Natural Gas Rates,” August 2023, can be found at https://www.auditor.ca.gov/reports/2022-115/index.html.