Existing law vests the Public Utilities Commission with regulatory authority over public utilities, including electrical corporations and gas corporations. Existing law authorizes the commission to fix the rates and charges for every public utility and requires that those rates and charges be just and reasonable. Existing law, with certain exceptions, prohibits a public utility from changing any rate, except upon a showing before the commission and a finding by the commission that the new rate is justified. With certain exceptions, whenever an electrical corporation or gas corporation files an application to change any rate for the services or commodities furnished by it, existing law requires the corporation to furnish to its affected customers a notice of its application to the commission for approval of the new rate.

This bill would require an electrical corporations or gas corporations application requesting authorization for or recovery of capital expenditures to include, if the commission determines these estimates are required, its best estimate of the applications impact on its annual revenue requirement for each year that the capital expenditures described in the application are expected to remain in the applications rate base if the application is approved or conditionally approved and the net present value of those impacts. The bill would require the commission to determine in a scoping ruling or other ruling whether an application from an electrical corporation or gas corporation requesting authorization for or recovery of capital expenditures requires these estimates. The bill would further require the commission to require the electrical corporation or gas corporation to provide supporting workpapers and calculations for these estimates.

Under existing law, a violation of the Public Utilities Act or any order, decision, rule, direction, demand, or requirement of the commission is a crime.

Because the above-described requirements would be a part of the act, and because a violation of a commission action implementing the above-described requirements would be a crime, the bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Existing law vests the Public Utilities Commission with regulatory authority over public utilities, including electrical corporations and gas corporations. Existing law authorizes the commission to fix the rates and charges for every public utility and requires that those rates and charges be just and reasonable. Existing law, with certain exceptions, prohibits a public utility from changing any rate, except upon a showing before the commission and a finding by the commission that the new rate is justified. With certain exceptions, whenever an electrical corporation or gas corporation files an application to change any rate for the services or commodities furnished by it, existing law requires the corporation to furnish to its affected customers a notice of its application to the commission for approval of the new rate.

This bill would require an electrical corporations or gas corporations application requesting authorization for or recovery of capital expenditures to include, if the commission determines these estimates are required, its best estimate of the applications impact on its annual revenue requirement for each year that the capital expenditures described in the application are expected to remain in the applications rate base if the application is approved or conditionally approved and the net present value of those impacts. The bill would require the commission to determine in a scoping ruling or other ruling whether an application from an electrical corporation or gas corporation requesting authorization for or recovery of capital expenditures requires these estimates. The bill would further require the commission to require the electrical corporation or gas corporation to provide supporting workpapers and calculations for these estimates.

Under existing law, a violation of the Public Utilities Act or any order, decision, rule, direction, demand, or requirement of the commission is a crime.

Because the above-described requirements would be a part of the act, and because a violation of a commission action implementing the above-described requirements would be a crime, the bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Existing law vests the Public Utilities Commission with regulatory authority over public utilities, including electrical corporations and gas corporations. Existing law authorizes the commission to fix the rates and charges for every public utility and requires that those rates and charges be just and reasonable. Existing law, with certain exceptions, prohibits a public utility from changing any rate, except upon a showing before the commission and a finding by the commission that the new rate is justified. With certain exceptions, whenever an electrical corporation or gas corporation files an application to change any rate for the services or commodities furnished by it, existing law requires that the corporation furnish its customers notice of its application to the commission for approval of the new rate.

This bill would require an electrical corporations or gas corporations application requesting authorization for or recovery of capital expenditures to include include, if the commission determines these estimates are required, its best estimate of the applications impact on its annual revenue requirement for each year that the capital expenditures described in the application are expected to remain in the applications rate base if the application is approved or conditionally approved and to include the net present value of those impacts. The bill would require the commission to determine in a scoping ruling or other ruling whether an application from an electrical corporation or gas corporation requesting authorization for or recovery of capital expenditures requires these estimates. The bill would further require the commission to require the electrical corporation or gas corporation to provide supporting workpapers and calculations for the estimates.

Under existing law, a violation of the Public Utilities Act or any order, decision, rule, direction, demand, or requirement of the commission is a crime.

Because the above-described requirements would be a part of the act, and because a violation of a commission action implementing the above-described requirements would be a crime, the bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Existing law vests the Public Utilities Commission with regulatory authority over public utilities. utilities, including electrical corporations and gas corporations. Existing law authorizes the commission to fix the rates and charges for every public utility and requires that those rates and charges be just and reasonable. Existing law, with certain exceptions, prohibits a public utility from changing any rate, except upon a showing before the commission and a finding by the commission that the new rate is justified. With certain exceptions, whenever any electrical, gas, heat, telephone, water, or sewer system an electrical corporation or gas corporation files an application to change any rate for the services or commodities furnished by it, existing law requires that the corporation furnish its customers notice of its application to the commission for approval of the new rate.

This bill would require a public utilitys an electrical corporations or gas corporations application requesting authorization for or recovery of capital expenditures to include its best estimate of the applications impact on its annual revenue requirement for each year that the capital expenditures described in the application are expected to remain in the applications rate base if the application is approved or conditionally approved and to include the net present value of those impacts. The bill would further require the commission to require the public utility electrical corporation or gas corporation to provide supporting workpapers and calculations for the estimates.

Under existing law, a violation of the Public Utilities Act or any order, decision, rule, direction, demand, or requirement of the commission is a crime.

Because the above-described requirements would be a part of the act, and because a violation of a commission action implementing the above-described requirements would be a crime, the bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Existing law vests the Public Utilities Commission with regulatory authority over public utilities. Existing law authorizes the commission to fix the rates and charges for every public utility and requires that those rates and charges be just and reasonable. Existing law, with certain exceptions, prohibits a public utility from changing any rate, except upon a showing before the commission and a finding by the commission that the new rate is justified. With certain exceptions, whenever any electrical, gas, heat, telephone, water, or sewer system corporation files an application to change any rate for the services or commodities furnished by it, existing law requires that the corporation furnish its customers notice of its application to the commission for approval of the new rate.

This bill would require a public utilitys application requesting authorization for or recovery of capital expenditures to include its best estimate of the applications impact on its annual revenue requirement for each year that the capital expenditures described in the application are expected to remain in the applications rate base if the application is approved or conditionally approved and to include the net present value of those impacts. The bill would further require the commission to require the public utility to provide supporting workpapers and calculations for the estimates.

Under existing law, a violation of the Public Utilities Act or any order, decision, rule, direction, demand, or requirement of the commission is a crime.

Because the above-described requirements would be a part of the act, and because a violation of a commission action implementing the above-described requirements would be a crime, the bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 2847

Author:(Addis)

As Amended Ver:July 3, 2024

Majority vote

SUMMARY

Requires electrical and gas corporations to provide their best estimation of the impact of proposed expenditures on the utility's authorized revenue for each year of the life of a capital asset, if the California Public Utilities Commission (CPUC) determines it is necessary to provide such an estimate.

Senate Amendments

Make the utility estimates required only upon a CPUC determination.

COMMENTS

The utility business model encourages investment in physical infrastructure, as these capital assets earn a profit for utility shareholders. This model helps encourage utility investment in expensive projects that otherwise may be deemed too risky by financial investors. In the context of growing demand for electricity, as is expected in California as more housing and transportation electrify, this model can encourage utilities to expand and upgrade the infrastructure needed to meet that demand. However, as noted by the author, this model can also motivate utilities to propose higher cost projects in order to maximize their return.

Capital projects depreciate. They are paid off over many years, often over decades. Throughout that time, the costs are passed along to ratepayers. The durability of these capital costs, the author notes, makes the request for capital expenses deserving of enhanced scrutiny, as decisions made today could impact ratepayers for years. This measure seeks enhanced scrutiny for electrical or gas corporation capital projects by requiring the utilities provide estimations of a requested asset's impact to the revenue requirement for every year that asset will remain in the rate base, alongside a calculation of the net present value of the asset's impact to the revenue requirement.

Achievement of the state's clean energy goals will require utilities to make considerable investments in energy infrastructure, such as electricity transmission lines and upgrades to the electricity distribution system that enable distributed energy resources like solar panels and on-site batteries. It is important the utilities are confident they can recover the costs of these investments from ratepayers. At the same time, it is important the CPUC – and ratepayers – have a clear understanding of the rate implications of the utilities' proposed expenditures.

According to the Author

According to the author, "As energy rates increase across the state, it's important to ensure that every cost included in ratepayers' bills is just and reasonable. This is especially true for capital costs, which will have a long-term impact on rates. The CPUC needs a clear and accurate view of the long-term financial impact of a project to assess whether the cost of the project is reasonable to pass along to ratepayers. [This bill] will provide that transparency."

Arguments in Support

The Utility Reform Network (TURN) raises the state's skyrocketing rates in recent years as justifying the increased transparency brought forward under this measure. They note, "At a time with sky-high rates, every dollar matters when assessing whether a new program or project should be added to customer bills." They note the current process at the CPUC puts the burden on advocates to request information, allowing "for utility delay and objections."

Arguments in Opposition

San Diego Gas & Electric and Southern California Gas Company oppose this bill, noting "it is impossible to know what a utility's revenue requirement will be for the next 50 years." Further, they note the data required under this measure are not needed, and that ratemaking is complex. They state, "[This bill] would just add more work to this process, without adding any value."

FISCAL COMMENTS

According to the Senate Committee on Appropriations, the cost of implementing this bill is not significant and resulted in the bill not receiving a fiscal committee hearing pursuant to Senate Rule 28.8.

VOTES:

ASM UTILITIES AND ENERGY: 13-2-1

YES: Petrie-Norris, Bauer-Kahan, Calderon, Connolly, Friedman, Holden, Reyes, Santiago, Schiavo, Ting, Wallis, Wood, Zbur

NO: Jim Patterson, Joe Patterson

ABS, ABST OR NV: Chen

ASM APPROPRIATIONS: 11-3-1

YES: Wicks, Arambula, Bryan, Calderon, Wendy Carrillo, Mike Fong, Grayson, Haney, Hart, Pellerin, Villapudua

NO: Sanchez, Dixon, Ta

ABS, ABST OR NV: Jim Patterson

ASSEMBLY FLOOR: 52-11-17

YES: Addis, Aguiar-Curry, Bains, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Bryan, Calderon, Wendy Carrillo, Connolly, Essayli, Mike Fong, Friedman, Garcia, Gipson, Grayson, Haney, Hart, Holden, Irwin, Jackson, Jones-Sawyer, Kalra, Lee, Low, Lowenthal, Maienschein, McCarty, McKinnor, Muratsuchi, Ortega, Papan, Pellerin, Petrie-Norris, Quirk-Silva, Rendon, Reyes, Santiago, Schiavo, Soria, Ting, Villapudua, Wallis, Ward, Weber, Wicks, Wilson, Wood, Zbur, Robert Rivas

NO: Davies, Dixon, Flora, Vince Fong, Hoover, Lackey, Jim Patterson, Joe Patterson, Sanchez, Ta, Waldron

ABS, ABST OR NV: Alanis, Alvarez, Arambula, Juan Carrillo, Cervantes, Chen, Megan Dahle, Gabriel, Gallagher, Mathis, Stephanie Nguyen, Pacheco, Ramos, Luz Rivas, Rodriguez, Blanca Rubio, Valencia

SENATE FLOOR: 32-8-0

YES: Allen, Archuleta, Ashby, Atkins, Becker, Blakespear, Bradford, Caballero, Cortese, Dodd, Durazo, Eggman, Glazer, Gonzalez, Hurtado, Laird, Limón, McGuire, Menjivar, Min, Newman, Padilla, Portantino, Roth, Rubio, Skinner, Smallwood-Cuevas, Stern, Umberg, Wahab, Wiener, Wilk

NO: Alvarado-Gil, Dahle, Grove, Jones, Nguyen, Niello, Ochoa Bogh, Seyarto

UPDATED

VERSION: July 3, 2024

CONSULTANT: Laura Shybut / U. & E. / (916) 319-2083 FN: 0004262

 THIRD READING  

Bill No: AB 2847

Author: Addis (D), et al.

Amended: 7/3/24 in Senate

Vote: 21

SENATE ENERGY, U. & C. COMMITTEE: 15-3, 7/2/24

AYES: Bradford, Ashby, Becker, Caballero, Dodd, Durazo, Eggman, Gonzalez, Limón, Min, Newman, Rubio, Skinner, Stern, Wilk

NOES: Dahle, Grove, Seyarto

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

ASSEMBLY FLOOR: 52-11, 5/20/24 - See last page for vote

SUBJECT: Electrical and gas corporations: capital expenditures: request for authorization or recovery

SOURCE: The Utility Reform Network

DIGEST:

This bill requires electrical and gas corporations in their request for capital expenditures to provide their best estimation of the impact of the proposed expenditures on the utility’s authorized revenue for each year of the life of the capital asset.

ANALYSIS:

Existing law:

1. Establishes and vests the California Public Utilities Commission (CPUC) with regulatory authority over public utilities, including electrical corporations and gas corporations.  (Article XII of the California Constitution)
2. Authorizes the CPUC to fix the rates and charges for every public utility and requires that those rates and charges be just and reasonable. (Public Utilities Code §451)
3. Prohibits, with certain exceptions, a public utility from changing any rate, except upon a showing before the CPUC and a finding by the CPUC that the new rate is justified. Requires, with certain exceptions, whenever an electrical corporation or gas corporation files an application to change any rate for the services or commodities furnished by it, that the corporation furnish its customers notice of its application to the CPUC for approval of the new rate. (Public Utilities Code §454 )
4. Authorizes the CPUC to require a public utility to correct any rates, practices, equipment or behavior that is unjust, unreasonable, unsafe, improper, inadequate, or insufficient. (Public Utilities Code §761)

This bill:

1. Requires an electrical corporation’s or gas corporation’s application requesting authorization for or recovery of capital expenditures to include, if the CPUC determines these estimates are required, its best estimate of the application’s impact on its annual revenue requirement for each year that the capital expenditures described in the application are expected to remain in the application’s rate base, if the application is approved or conditionally approved, and to include the net present value of those impacts.
2. Requires the CPUC to determine in a scoping ruling or other ruling whether an application from an electrical corporation or gas corporation requesting authorization for or recovery of capital expenditures requires these estimates.
3. Requires the CPUC to require the electrical corporation or gas corporation to provide supporting workpapers and calculations for the estimates.

Background

1. Regulated utility business model. The regulated utility business model encourages investment in physical infrastructure, as these capital assets earn a profit for utility shareholders. This model helps encourage utility investment in expensive projects that otherwise may be deemed too risky by financial investors. In the context of growing demand for electricity, as is expected in California as more housing and transportation electrify, the regulated utility model can encourage utilities to expand and upgrade the infrastructure needed to meet that demand. However, as noted by the author, this model can also motivate utilities to propose higher cost projects in order to maximize their return to shareholders.
2. Clean energy goals spur need for utility infrastructure investment. Achievement of the state's clean energy goals will require utilities to make considerable investments in energy infrastructure, such as electricity transmission lines and upgrades to the electricity distribution system that enable distributed energy resources like solar panels and battery energy storage. It is important the utilities are confident they can recover the costs of these investments from ratepayers. At the same time, it is important the CPUC – and ratepayers – have a clear understanding of the rate implications of the utilities' proposed expenditures. More recently, wildfire mitigation has necessitated capital investments to underground facilities, replace or sectionalize distribution lines, and other measures.
3. Accounting for costs. Depreciation is an accounting practice that allows utility customers to pay for investments over the asset’s lifetime. Depreciation is the financial recovery over time of a capital investment. The net present value (NPV) calculation is the difference between cash-in and cash-out over time for a given investment. It is often used to determine whether an investment will be profitable in the future. It calculates the value of an investment over a given time period, recognizing that project efficiencies, loans, payouts from insurance, taxes, and other factors will evolve over the lifetime (usually 30+ years) of the asset, and may show an investment that looks wasteful or inefficient in the short-term actually proving profitable in the long-term. Caution must be exercised in reviewing NPVs, however, as the calculation is dependent on estimates for future year cash flows. In other words, the calculation is only as good as its inputs.

Comments

1. Impacts to ratepayers of capital projects. Utility capital projects are paid off over many years, often over decades. Throughout that time, the costs are passed along to ratepayers. The durability of these capital costs, the author notes, makes the request for capital expenses deserving of enhanced scrutiny, as decisions made today could impact ratepayers for years. This bill seeks enhanced scrutiny for electrical or gas corporation capital projects by requiring utilities to provide estimations of a requested asset's impact to the revenue requirement for every year that asset will remain in the rate base, alongside a calculation of the NPV of the asset's impact to the revenue requirement.

The proponents of this bill note that typically, a request for authorization of a utility project in a general rate case only includes the list price of the asset and the impact on the revenue requirement during the rate case period (usually 3 or 4 years). It does not typically include significant rate impacts in later years. Instead, uncovering the long-term impact requires one or more rounds of discovery, taking up resources that could be more effectively used elsewhere. However, The Utility Reform Network (TURN) cites instances where this type of long-term information has been provided demonstrated the importance of these data points.

1. Example of NPV use in utility application. Specifically, they note that in a 2014 San Diego Gas & Electric (SDG&E) application for a vehicle-grid integration pilot, SDG&E provided the annual revenue requirement associated with the project through 2037 as part of the prepared direct testimony of their representative in the proceeding. The numbers show that not only do the annual costs of the program jumps from $1 million in the first year to $10 million in the fourth year, but that ratepayers will pay $200 million over the life of the project despite its initial $55 million price tag. TURN expresses concerns that this level of information is generally the exception. This bill attempts to require this level of analysis for future capital projects.

Related/Prior Legislation

AB 2666 (Boerner, 2024) would require the CPUC to review the actual past costs an electrical or gas corporation records following each general rate case test year, and adjust the authorized revenue requirement in the subsequent general rate case, as appropriate. The bill is pending in the Senate Committee on Appropriations.

AB 2054 (Bauer-Kahan, 2024) among its provisions, would authorize the CPUC to allocate between ratepayers and shareholders any costs recorded in a balancing account above an authorized forecast. The bill is the Senate Committee on Appropriations.

AB 2847 (Addis, 2024) would require electric and gas IOUs to provide in their request for capital expenditures their best estimation, alongside supporting documents, of the impact of the proposed expenditures on the utility’s authorized revenue for each year of the life of the capital asset, as well as the asset’s net present value. The bill is pending on the Senate Floor.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

SUPPORT: (Verified 8/5/24)

The Utility Reform Network (source)

California Environmental Voters

California Public Interest Research Group

FAIR California

Peninsula Clean Energy

OPPOSITION: (Verified 8/5/24)

San Diego Gas and Electric Company
Southern California Edison

Southern California Gas Company
Southwest California Legislative Council
Tri-County Chamber Alliance

ARGUMENTS IN SUPPORT: The Utility Reform Network (TURN), the sponsor of this bill, states:

At a time with sky-high rates, every dollar matters when assessing whether a new program or project should be added to customer bills. This simple transparency measure provides the Commission and the public essential information about not just the up-front costs, but the added burden on customer bills for the life of the asset.

ARGUMENTS IN OPPOSITION: San Diego Gas & Electric states:

Utility capital expenditures are approved through the GRC. Because there is no limit on the “capital expenditures” anticipated by AB 2847, does this legislation intend to upend the current GRC process? The GRC process includes multiple methods to review the costs, benefits, business needs, and cost-benefit analysis of capital investments. To the extent that AB 2847 applies to a subset of undergrounding capital investments proposed pursuant to PUC Section 8388.5, the Commission has already developed a framework by which utilities should address the benefits and costs of undergrounding capital expenditures. AB 2847 could bifurcate and unravel the California Public Utilities Commission’s (CPUC) existing utility ratemaking process with no additional value add. The CPUC has extensive ongoing processes and analyses of electric rate affordability. AB 2847’s data is not needed. The process of how utilities enter costs into rates is very complex. AB 2847 would just add more work to this process, without adding any value.

ASSEMBLY FLOOR: 52-11, 5/20/24

AYES: Addis, Aguiar-Curry, Bains, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Bryan, Calderon, Wendy Carrillo, Connolly, Essayli, Mike Fong, Friedman, Garcia, Gipson, Grayson, Haney, Hart, Holden, Irwin, Jackson, Jones-Sawyer, Kalra, Lee, Low, Lowenthal, Maienschein, McCarty, McKinnor, Muratsuchi, Ortega, Papan, Pellerin, Petrie-Norris, Quirk-Silva, Rendon, Reyes, Santiago, Schiavo, Soria, Ting, Villapudua, Wallis, Ward, Weber, Wicks, Wilson, Wood, Zbur, Robert Rivas

NOES: Davies, Dixon, Flora, Vince Fong, Hoover, Lackey, Jim Patterson, Joe Patterson, Sanchez, Ta, Waldron

NO VOTE RECORDED: Alanis, Alvarez, Arambula, Juan Carrillo, Cervantes, Chen, Megan Dahle, Gabriel, Gallagher, Mathis, Stephanie Nguyen, Pacheco, Ramos, Luz Rivas, Rodriguez, Blanca Rubio, Valencia

Prepared by: Nidia Bautista / E., U. & C. / (916) 651-4107

8/7/24 15:18:40

**** END ****

SENATE COMMITTEE ON ENERGY, UTILITIES AND COMMUNICATIONS

Senator Steven Bradford, Chair

2023 - 2024 Regular

Bill No: AB 2847 Hearing Date: 7/2/2024

SUBJECT: Electrical and gas corporations: capital expenditures: request for authorization or recovery

DIGEST: This bill requires electrical and gas corporations in their request for capital expenditures to provide their best estimation, alongside supporting documents, of the impact of the proposed expenditures on the utility’s authorized revenue for each year of the life of the capital asset, as well as the asset’s net present value (NPV).

ANALYSIS:

Existing law:

1. Establishes and vests the California Public Utilities Commission (CPUC) with regulatory authority over public utilities, including electrical corporations and gas corporations.  (Article XII of the California Constitution)
2. Authorizes the CPUC to fix the rates and charges for every public utility and requires that those rates and charges be just and reasonable. (Public Utilities Code §451)
3. Prohibits, with certain exceptions, a public utility from changing any rate, except upon a showing before the CPUC and a finding by the CPUC that the new rate is justified. Requires, with certain exceptions, whenever an electrical corporation or gas corporation files an application to change any rate for the services or commodities furnished by it, that the corporation furnish its customers notice of its application to the CPUC for approval of the new rate. (Public Utilities Code §454 )
4. Authorizes the CPUC to require a public utility to correct any rates, practices, equipment or behavior that is unjust, unreasonable, unsafe, improper, inadequate, or insufficient. (Public Utilities Code §761)

This bill:

1. Requires an electrical corporation’s or gas corporation’s application requesting authorization for or recovery of capital expenditures to include its best estimate of the application’s impact on its annual revenue requirement for each year that the capital expenditures described in the application are expected to remain in the application’s rate base, if the application is approved or conditionally approved, and to include the net present value of those impacts.
2. Requires the CPUC to require the electrical corporation or gas corporation to provide supporting workpapers and calculations for the estimates.

Background

Regulated utility business model. The regulated utility business model encourages investment in physical infrastructure, as these capital assets earn a profit for utility shareholders. This model helps encourage utility investment in expensive projects that otherwise may be deemed too risky by financial investors. In the context of growing demand for electricity, as is expected in California as more housing and transportation electrify, this model can encourage utilities to expand and upgrade the infrastructure needed to meet that demand. However, as noted by the author, this model can also motivate utilities to propose higher cost projects in order to maximize their return.

Clean energy goals spur need for utility infrastructure investment. Achievement of the state's clean energy goals will require utilities to make considerable investments in energy infrastructure, such as electricity transmission lines and upgrades to the electricity distribution system that enable distributed energy resources like solar panels and on-site batteries. It is important the utilities are confident they can recover the costs of these investments from ratepayers. At the same time, it is important the CPUC – and ratepayers – have a clear understanding of the rate implications of the utilities' proposed expenditures. More recently, wildfire mitigation has necessitated capital investments to underground facilities, replace or sectionalize distribution lines, and other measures.

Depreciation. Depreciation is an accounting practice that allows utility customers to pay for investments over the asset’s lifetime. Depreciation is the financial recovery over time of a capital investment.

Net present value (NPV). The NPV calculation of cash-in, cash-out over time for a given investment. It is often used to determine whether an investment will be profitable in the future. It calculates the value of an investment over a given time period, recognizing that project efficiencies, loans, payouts from insurance, taxes, and other factors will evolve over the lifetime (usually 30+ years) of the asset, and may show an investment that looks wasteful or inefficient in the short-term actually proving profitable in the long-term. Caution must be exercised in reviewing NPVs, however, as the calculation is dependent on estimates for future year cash flows. In other words, the calculation is only as good as its inputs.

Comments

Impacts to ratepayers of capital projects. Utility capital projects are paid off over many years, often over decades. Throughout that time, the costs are passed along to ratepayers. The durability of these capital costs, the author notes, makes the request for capital expenses deserving of enhanced scrutiny, as decisions made today could impact ratepayers for years. This bill seeks enhanced scrutiny for electrical or gas corporation capital projects by requiring the utilities provide estimations of a requested asset's impact to the revenue requirement for every year that asset will remain in the rate base, alongside a calculation of the net present value of the asset's impact to the revenue requirement.

The proponents of this bill note that typically, a request for authorization of a utility project in a general rate case only includes the list price of the asset and the impact on the revenue requirement during the rate case period. It does not typically include significant rate impacts in later years. Instead, uncovering the long-term impact requires one or more rounds of discovery, taking up resources that could be more effectively used elsewhere. However, TURN cites instances where this type of long-term information has been provided have demonstrated the importance of these data points.

Example of NPV use in utility application. Specifically, they note that in a 2014 San Diego Gas & Electric (SDG&E) application for a vehicle-grid integration pilot, SDG&E provided the annual revenue requirement associated with the project through 2037 as part of the prepared direct testimony of their representative in the proceeding. The numbers show that not only do the annual costs of the program jumps from $1 million in the first year to $10 million in the fourth year, but that ratepayers will pay $200 million over the life of the project despite its initial $55 million price tag. TURN expresses concerns that this level of information is generally the exception. This bill attempts to require this level of analysis for future capital projects.

Amendments needed. While the added information required by this bill would help provide greater understanding of the impacts of capital projects on utility rates over a longer period of time, it needs to be balanced with the realities that these calculations are dependent on the inputs, as such they are helpful estimations. In this regard, it may be useful for the CPUC to determine where such calculations would be helpful to assess the costs on rates. Therefore, the author and committee may wish to amend this bill to afford the CPUC the discretion to make such determinations.

Prior/Related Legislation

AB 2666 (Boerner, 2024) requires the CPUC to review the actual past costs an electrical or gas corporation records following each general rate case test year, and adjust the authorized revenue requirement in the subsequent general rate case, as appropriate. The bill is pending in this committee.

AB 2054 (Bauer-Kahan, 2024) among its provisions, authorizes the CPUC to allocate between ratepayers and shareholders any costs recorded in a balancing account above an authorized forecast. The bill is pending in committee.

AB 2847 (Addis, 2024) requires electric and gas IOUs to provide in their request for capital expenditures their best estimation, alongside supporting documents, of the impact of the proposed expenditures on the utility’s authorized revenue for each year of the life of the capital asset, as well as the asset’s net present value. The bill is pending in committee.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

SUPPORT:

The Utility Reform Network, Sponsor

FAIR California

Peninsula Clean Energy

OPPOSITION:

San Diego Gas and Electric Company
Southern California Gas Company
Southwest California Legislative Council
Tri-County Chamber Alliance

ARGUMENTS IN SUPPORT: The Utility Reform Network (TURN), the sponsor of the bill, states:

At a time with sky-high rates, every dollar matters when assessing whether a new program or project should be added to customer bills. This simple transparency measure provides the Commission and the public essential information about not just the up-front costs, but the added burden on customer bills for the life of the asset.

ARGUMENTS IN OPPOSITION: San Diego Gas & Electric states:

Utility capital expenditures are approved through the GRC. Because there is no limit on the “capital expenditures” anticipated by AB 2847, does this legislation intend to upend the current GRC process? The GRC process includes multiple methods to review the costs, benefits, business needs, and cost-benefit analysis of capital investments. To the extent that AB 2847 applies to a subset of undergrounding capital investments proposed pursuant to PUC Section 8388.5, the Commission has already developed a framework by which utilities should address the benefits and costs of undergrounding capital expenditures. AB 2847 could bifurcate and unravel the California Public Utilities Commission’s (CPUC) existing utility ratemaking process with no additional value add. The CPUC has extensive ongoing processes and analyses of electric rate affordability. AB 2847’s data is not needed. The process of how utilities enter costs into rates is very complex. AB 2847 would just add more work to this process, without adding any value.

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 2847

Author:(Addis)

As Amended Ver:March 21, 2024

Majority vote

SUMMARY

Requires electrical and gas corporations in their request for recovery of capital expenditures to provide their best estimation, alongside supporting documents, of the impact of the proposed expenditures on the utility's authorized revenue for each year of the life of the capital asset, as well as the asset's net present value (NPV).

Major Provisions

COMMENTS

The utility business model encourages investment in physical infrastructure, as these capital assets earn a profit for utility shareholders. This model helps encourage utility investment in expensive projects that otherwise may be deemed too risky by financial investors. In the context of growing demand for electricity, as is expected in California as more housing and transportation electrify, this model can encourage utilities to expand and upgrade the infrastructure needed to meet that demand. However, as noted by the author, this model can also motivate utilities to propose higher cost projects in order to maximize their return.

Capital projects depreciate. They are paid off over many years, often over decades. Throughout that time, the costs are passed along to ratepayers. The durability of these capital costs, the author notes, makes the request for capital expenses deserving of enhanced scrutiny, as decisions made today could impact ratepayers for years. This measure seeks enhanced scrutiny for electrical or gas corporation capital projects by requiring the utilities provide estimations of a requested asset's impact to the revenue requirement for every year that asset will remain in the rate base, alongside a calculation of the net present value of the asset's impact to the revenue requirement.

Achievement of the state's clean energy goals will require utilities to make considerable investments in energy infrastructure, such as electricity transmission lines and upgrades to the electricity distribution system that enable distributed energy resources like solar panels and on-site batteries. It is important the utilities are confident they can recover the costs of these investments from ratepayers. At the same time, it is important the California Public Utilities Commission (CPUC) – and ratepayers – have a clear understanding of the rate implications of the utilities' proposed expenditures.

According to the Author

According to the author, "As energy rates increase across the state, it's important to ensure that every cost included in ratepayers' bills is just and reasonable. This is especially true for capital costs, which will have a long-term impact on rates. The CPUC needs a clear and accurate view of the long-term financial impact of a project to assess whether the cost of the project is reasonable to pass along to ratepayers. [This bill] will provide that transparency."

Arguments in Support

The Utility Reform Network (TURN) raises the state's skyrocketing rates in recent years as justifying the increased transparency brought forward under this measure. They note, "At a time with sky-high rates, every dollar matters when assessing whether a new program or project should be added to customer bills. This simple transparency measure provides the Commission and the public essential information about not just the up-front costs, but the added burden on customer bills for the life of the asset." They note the current process at the CPUC puts the burden on advocates to request information, allowing "for utility delay and objections" and undermining TURN's ability to scrutinize spending.

Arguments in Opposition

San Diego Gas & Electric and Southern California Gas Company contend "it is impossible to know what a utility's revenue requirement will be for the next 50 years." Further, the utilities assert that the CPUC has extensive ongoing processes and analyses of electric rate affordability. They note the data required under this measure are not needed, and that ratemaking is complex. They state, "[This bill] would just add more work to this process, without adding any value."

FISCAL COMMENTS

According to the Assembly Committee on Appropriations, the cost of this measure are minor, if any.

VOTES

ASM UTILITIES AND ENERGY: 13-2-1

YES: Petrie-Norris, Bauer-Kahan, Calderon, Connolly, Friedman, Holden, Reyes, Santiago, Schiavo, Ting, Wallis, Wood, Zbur

NO: Jim Patterson, Joe Patterson

ABS, ABST OR NV: Chen

ASM APPROPRIATIONS: 11-3-1

YES: Wicks, Arambula, Bryan, Calderon, Wendy Carrillo, Mike Fong, Grayson, Haney, Hart, Pellerin, Villapudua

NO: Sanchez, Dixon, Ta

ABS, ABST OR NV: Jim Patterson

UPDATED

VERSION: March 21, 2024

CONSULTANT: Laura Shybut / U. & E. / (916) 319-2083 FN: 0002834

Date of Hearing: May 1, 2024

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Buffy Wicks, Chair

ABPCA Bill Id:AB 2847

Author:(Addis) – As Amended Ver:March 21, 2024

Urgency: No State Mandated Local Program: Yes Reimbursable: No

SUMMARY:

This bill requires an application for authorization of recovery of capital expenditures by an electrical or gas investor-owned utility (IOU) to the California Public Utilities Commission (CPUC) include the IOU’s best estimate of certain costs.

Specifically, this bill requires such an application to include both of the following:

1. The application’s effect on the IOU’s annual revenue requirement for each year that the capital expenditures described in the application are expected to remain in the application’s rate base.
2. The net present value of the application’s impact on the IOU’s annual revenue requirement.

The bill directs the CPUC to require the IOU to provide supporting workpapers and calculations for the estimates above.

FISCAL EFFECT:

Minor additional costs to the CPUC, if any, to receive estimates from IOUs.

COMMENTS:

The CPUC regulates the rates charged by the state’s IOUs for each unit of electricity the IOUs sell to their customers. Traditionally, the rates charged by California’s electric IOUs have been higher than the average rates charged by electric utilities nationally; however, the average bill paid by a customer of a California electric IOU has been lower than the national average. Nonetheless, rates have increased considerably over the past decade. According the Public Advocate’s Office (PAO) at the CPUC, the rates for electricity charged by Pacific Gas and Electric (PG&E), Southern California Edison (SCE) and San Diego Gas and Electric (SDG&E) have increased over the past ten years by 127%, 91% and 72%, respectively. Similarly, many IOU customers have seen their electric utility bills increase, in some cases dramatically from month to month.

Electric bill increases are, in part, an effect of electric rate increases, which the PAO attributes, in part, to wildfire mitigation, transmission and distribution investments and rooftop solar incentives, though the PAO also notes higher bills often coincide with increased electricity use, such as greater reliance on air conditioning. In any case, the higher cost of electricity, and the jump in monthly electric bills, has led to concerns over affordability and the ability of the state to meet its climate goals through widespread electrification (electric vehicle adoption and installation of heat pumps, for example).

Generally speaking, an IOU regulated by the CPUC does not profit from the electricity or natural gas it sells to its customers. Rather, the CPUC authorizes the IOU to recover its legitimate cost of operations from its ratepayers, along with a rate of return on the IOU’s capital investments, such as investments in buildings, electrical wires and gas pipelines. This cost-recovery plan encourages the IOU to make costly long-term capital investments.

Achievement of the state’s clean energy goals will require the IOUs to make considerable investments in energy infrastructure, such as electricity transmission lines and upgrades to the electricity distribution system that enable distributed energy resources like solar panels and on-site batteries. It is important the IOUs are confident they can recover the costs of these investments from ratepayers. At the same time, it is important the CPUC—and ratepayers—have a clear understanding of the rate implications of the IOUs’ proposed expenditures. The author describes this bill as providing a “clear and accurate view of the long-term financial impact of a project to assess whether the cost of the project is reasonable to pass along to ratepayers.”

Similarly, the Utilities Reform Network (TURN) writes:

Utilities rate increase requests usually do not provide the Commission with the total revenue requirement increase over the life of the asset. When this data is provided, it highlights the impact of utility financing costs and profit on the total amount collected from ratepayers. For example, in Southern California Gas Company’s recent application for the Ventura Compressor Modernization Project (A.23-08-019), the “price tag” of the project is shown as $578 million dollars but the revenue requirement over the 50-year life of the project is $1.8 billion dollars. Given the value of this information, AB 2847 makes this a requirement of any utility spending request. Leaving disclosure subject to discovery allows for utility delay and objections and undermines the ability of the Commission and ratepayer advocates to scrutinize the spending.

In contrast, SCE and SDG&E contend “it is impossible to know what a utility’s revenue requirement will be for the next 50 years.” Further, the utilities assert:

The CPUC has extensive ongoing processes and analyses of electric rate affordability. AB 2847’s data is not needed. The process of how utilities enter costs into rates is very complex. AB 2847 would just add more work to this process, without adding any value.

Analysis Prepared by: Jay Dickenson / APPR. / (916) 319-2081

Date of Hearing: April 3, 2024

ASSEMBLY COMMITTEE ON UTILITIES AND ENERGY

Cottie Petrie-Norris, Chair

ABPCA Bill Id:AB 2847 (

Author:Addis) – As Amended Ver:March 21, 2024

SUBJECT: Electrical and gas corporations: capital expenditures: request for authorization or recovery

SUMMARY: Requires electrical and gas corporations in their request for capital expenditures to provide their best estimation, alongside supporting documents, of the impact of the proposed expenditures on the utility’s authorized revenue for each year of the life of the capital asset, as well as the asset’s net present value (NPV).

EXISTING LAW:

1. Establishes the CPUC has regulatory authority over public utilities, including electrical corporations. (California Constitution Article XII, §§ 3 and 4)
2. Authorizes the commission to fix the rates and charges for every public utility and requires that those rates and charges be just and reasonable. (Public Utilities Code § 451)
3. Prohibits a public utility from changing any rate, except upon a showing before the commission and a finding by the commission that the new rate is justified. (Public Utilities Code § 454)
4. Authorizes the CPUC to require a public utility to correct any rates, practices, equipment or behavior that is unjust, unreasonable, unsafe, improper, inadequate, or insufficient. (Public Utilities Code § 761)

FISCAL EFFECT: Unknown. This bill is keyed fiscal and will be referred to the Committee on Appropriations for its review

BACKGROUND:

Financial Literacy – The following terms are commonly used to describe and categorize monies – either collected or spent – by utilities.^[1]

• Capital expenditures (CapEx) – longer-term costs, such as costs to build and maintain physical assets; i.e. power plants, overhead lines, and pipes. Utilities earn a return on their CapEx.
• Operational expenditures (OpEx) – recurring or short-term costs, such as labor, fuel, vegetation management, and taxes. Utilities do not earn a return on their OpEx. They may earn or lose money depending on how their projected OpEx lines up with their actual expenditures.
• Revenue Requirement – the total amount of revenue the utility would need to collect from ratepayers in order to provide a reasonable opportunity to earn a fair rate of return on its investment.
• Rate of Return – i.e. profit. Established under the regulatory compact, utilities are allowed the opportunity to earn (not guaranteed) an annual rate of return on their rate base.^[2] Legal precedent requires the rate be sufficient to allow the utility to attract investment under prudent management, given the level of risk that the utility business model faces.
• Rate base – total of all long-term investments made by the utility to serve customers, net depreciation, such as buildings, power plants, fleet vehicles, poles, wires, transformers, pipes, and even offices and their furniture – i.e. the physical belongings.^[3]
• Depreciation/Amortization – accounting practices that allow utility customers to pay for investments over the asset’s lifetime. Depreciation is the financial recovery over time of a capital investment; amortization is the recovery over time of an intangible investment; e.g., a regular payment to a city for a franchise agreement.
• Net present value (NPV) – calculation of cash-in, cash-out over time for a given investment. It is often used to determine whether an investment will be profitable in the future. It calculates the value of an investment over a given time period, recognizing that project efficiencies, loans, payouts from insurance, taxes, and other factors will evolve over the lifetime (usually 30+ years) of the asset, and may show an investment that looks wasteful or inefficient in the short-term actually proving profitable in the long-term. Caution must be exercised in reviewing NPVs, however, as the calculation is dependent on estimates for future year cash flows. In other words, the calculation is only as good as its inputs.

COMMENTS:

1. Author’s statement. According to the author, “As energy rates increase across the state, it’s important to ensure that every cost included in ratepayers’ bills is just and reasonable. This is especially true for capital costs, which will have a long-term impact on rates. The CPUC needs a clear and accurate view of the long-term financial impact of a project to assess whether the cost of the project is reasonable to pass along to ratepayers. AB 2847 will provide that transparency.”
2. Profit Drivers and Uncertain Calculations. The utility business model encourages investment in physical infrastructure, as these capital assets earn a profit for utility shareholders. This model helps encourage utility investment in expensive projects that otherwise may be deemed too risky by financial investors. In the context of growing demand for electricity, as is expected in California as more housing and transportation electrify, this model can encourage utilities to expand and upgrade the infrastructure needed to meet that demand. However, as noted by the author, this model can also motivate utilities to propose higher cost projects in order to maximize their return.

Capital projects depreciate. They are paid off over many years, often over decades. Throughout that time, the costs are passed along to ratepayers. The durability of these capital costs, the author notes, makes the request for capital expenses deserving of enhanced scrutiny, as decisions made today could impact ratepayers for years. This measure seeks enhanced scrutiny for electrical or gas corporation capital projects by requiring the utilities provide estimations of a requested asset’s impact to the revenue requirement for every year that asset will remain in the rate base, alongside a calculation of the net present value of the asset’s impact to the revenue requirement.

Writing in opposition, San Diego Gas & Electric (SDG&E) and the Southern California Gas Company (SoCalGas) note the evaluations called for under this bill are infeasible, given the uncertainty of how a utility’s revenue requirement may change over decades as well as the delay between receiving approval for an asset versus its in-service date. This uncertainty could skew the required calculations, leading to values with little basis in reality.

Despite the concern, SDG&E has provided such calculations for their projects. As part of their 2014 application^[4] for a vehicle-to-grid pilot, SDG&E provided annual revenue requirement impacts through 2037.^[5] Those projections demonstrated annual cost escalations from $1 million in the first year to $10 million by year four, and showed actual total project costs at approximately $194 million, despite the initial application showing “total capital and O&M costs” at $102 million.^[6] In a recent project update, SDG&E compared actual project costs versus costs forecasts at the beginning of the project. They found cost overruns of approximately $24 million as of December 2020.^[7] This would suggest that the goal behind this measure – greater transparency of how utility capital requests will impact future rates – is valuable, as actual project costs in this example have even exceeded those forecast by the more granular calculations. However, it also demonstrates SDG&E’s concern that findings from such exercises should be viewed cautiously, as the variables inherent to these calculations are assumptions that can often lead to informed, but inaccurate, conclusions.

Moreover, in focusing long-term rate impact calculations solely on capital expenses, this bill may result in utility applications that always give the impression that operational expenses are more favorable to ratepayers, as the associated ancillary costs (taxes, interest, profit, etc.) of OpEx are often less than CapEx. However, as has been shown with vegetation management for wildfire mitigation, operational expenses can also arise suddenly and persist over many years. While this bill rightly acknowledges these uncertainties by requiring electric and gas utilities’ “best estimate,” the CPUC and parties should be cautious in drawing rigid conclusions from the data provided.

REGISTERED SUPPORT / OPPOSITION:

Support

The Utility Reform Network (TURN)

Oppose

Sempra Energy and Its Affiliates: San Diego Gas & Electric Company and Southern California Gas Company

Analysis Prepared by: Laura Shybut / U. & E. / (916) 319-2083

1. Definitions heavily borrowed from Lazar’s Electricity Regulation in the US: A Guide, Second Edition, 2016. ↑

2. Two US Supreme Court decisions, Hope and Bluefield, established general principles around commissions setting rates of return. ↑

3. And some other items like deferred taxes, etc. ↑

4. A. 14-04-014 ↑

5. Appendix B, A.14-04-014, “Prepared Direct Testimony of Jonathan B. Atun, Chapter 4 on behalf of SDG&E Company,” April 11, 2014. https://www.sdge.com/sites/default/files/regulatory/Chapter_4_Atun_Testimony_VGI.pdf ↑

6. Pg. 5, Application of SDG&E for authority to implement a pilot program for electric VGI, A. 14-04-014, April 11, 2014. ↑

7. Table 9, pg. 24, SDG&E, Power Your Drive Research Report, April 2021; https://www.sdge.com/sites/default/files/regulatory/SDG%26E%20FINAL%20Power%20Your%20Drive%20Research%20Report%20April%202021.pdf ↑