State regulator recommends smaller profit rate for SDG&E

Investor-owned utilities in California — including San Diego Gas & Electric — will earn smaller rates of profit on their infrastructure projects next year under a proposed decision that will soon go before the five voting members of the California Public Utilities Commission.

In SDG&E’s case, what’s called the utility’s “return on equity” would drop from 10.23% in 2026 to 9.88% under the figures released late last week. .

It’s difficult to say what the lower rate would mean for the monthly bills that SDG&E customers pay, but the pending vote comes at a time when high utility rates have become a major concern across California and in the San Diego area in particular.

The commission, or CPUC, each year conducts what’s called a cost of capital proceeding that includes setting a return on equity, or ROE, that tries to find a balance so that utilities can attract investors to finance the replacement and expansion of their facilities while also fulfilling the power companies’ obligations to provide service to their customers.

The CPUC takes into account financial models and estimates of market returns on investments by other companies with similar levels of risk. Determining the percentage is a lengthy process that includes input from the state’s investor-owned utilities, consumer groups, environmental organizations and other parties.

Return on equity is important because utilities in California earn their money from infrastructure projects they undertake — things that include maintaining poles and wires, reducing the risk of wildfires in their respective service territories and carrying out various projects to help meet California’s climate goals, like building EV charging stations.

SDG&E officials sought a return on equity of 11.25% for 2026, almost 1% higher than last year, saying that if the return is too low, investors will instead choose lower-risk companies with similar returns. SDG&E added that a lower return increases the risk that its credit rating could fall, which would lead to higher costs for customers in the long run.

“We are disappointed that the proposed cost of capital decision does not fully reflect current market conditions or the unique risks California utilities face,” SDG&E spokesperson Anthony Wagner said in an email. “A decision that accurately reflects these realities is essential to enabling investments that reduce wildfire risk, strengthen reliability, replace aging infrastructure and advance California’s clean energy transition for the benefit of the communities we serve.”

The CPUC justified the 9.88% figure for SDG&E, saying in the 66-page proposed decision that it “balances the interests between shareholders and ratepayers” and represents “the lowest amount that is reasonably sufficient to assure confidence in the financial soundness of the utility and to improve and maintain investment grade credit ratings.”

Consumer and environmental groups want the commission to adopt a lower percentage.

“We do think (reducing the return from 10.23% to 9.88% is) a step in the right direction, but so much more needs to be done in terms of affordability,” said Mark Toney, executive director at The Utility Reform Network (TURN), the Oakland-based organization that frequently weighs in on CPUC matters.

TURN called for a return on equity of 9.5% for SDG&E.

But Toney emphasized that while the percentages that utilities earn are important, another crucial factor is the accumulated costs that power companies spend on expensive projects that get passed to ratepayers. And the CPUC has final approval on whether those projects get the green light.

“We’ve got to cut both to make sure that ratepayers actually see some savings,” he said, adding that the “commission needs to look hard at all of the rate-based requests that SDG&E is making.”

The Public Advocates Office, the independent consumer arm of the CPUC, called for a return on equity of 9.25%. The Utility Consumers’ Action Network (UCAN), based in San Diego wanted 8.87%, while the Wild Tree Foundation environmental group requested 8.3% and the Environmental Defense Fund lobbied for a return of  6.47% to 7.55%.

The Sierra Club and the Protect Our Communities Foundation asked the CPUC to adopt an even lower return — 6.15% for SDG&E.

“We want the commission to issue a rate of return that is based on evidence, makes sense and untangles all different ways that an interested stakeholder like the utilities can inflate their costings,” said Katie Ramsey, senior attorney for the Sierra Club. “We put forward evidence that around 6% was the right return on equity.”

While a reduced rate of return is a positive step, Ramsey likened the number in the CPUC’s proposed decision to “applauding crumbs.”

Mark Ellis testified in the proceeding on behalf of the Sierra Club and the Protect Our Communities Foundation, a San Diego environmental and consumer group. Ellis asserts the commission uses flawed modeling that gives too much deference to investor-owned utilities.

“It’s bad news” for ratepayers, Ellis said of the proposed decision. “I feel the commission did not do its job.” An independent consultant and senior fellow at the American Economic Liberties Project, Ellis is a former chief of corporate strategy and chief economist at Sempra, the parent company of SDG&E.

The Sierra Club estimates that a return on equity of about 6% could save customers of all investor-owned utilities in California $6.1 billion a year.

Parties involved in the proceeding, including SDG&E and the consumer/environmental groups, have until Dec. 4 to submit comments and make their respective arguments to raise or lower the percentages recommended in the proposed decision.

The commission’s vote is scheduled for Dec. 18.

In addition to SDG&E, the proposed decision would give all the investor-owned utilities in the state a haircut:

• for Pacific Gas & Electric, the return on equity drops from 10.28% this year to 9.93% in 2026
• for Southern California Edison, the percentage is reduced from 10.33% to 9.98%, and
• the return for Southern California Gas calls for a dip from 10.08% to 9.73%

High electricity bills have become a hot-button issue in California.

With the exception of Hawaii, the average retail price per kilowatt-hour in the Golden State was the highest in the country in 2024, according to the U.S. Energy Information Administration.

The Public Advocates Office recently posted a chart showing that rates have increased substantially since 2014, surpassing inflation by 121% for PG&E customers, 88% for SDG&E and 80% for Southern California Edison, as of Jan. 1 of this year.

SDG&E reported profits of $936 million in 2023 and $891 million in 2024, according to financial numbers filed with the U.S. Securities and Exchange Commission by Sempra.

The CPUC and its voting commissioners have repeatedly said that affordability is “a critical concern” that’s at the top of their minds when issuing rulings.

Administrative law judge Jonathan Lakey wrote the proposed decision, and CPUC President Alice Reynolds is the commissioner assigned to the proceeding.