Senate Standing Committee on Energy, Utilities and Communications

All right, why don't we go ahead and call this hearing of the Senate Committee on Energy, Utilities, and Communications to order. Fantastic. Nice to see you, Senator. Welcome to our good Senators here. Pleased to be the new Chair of this committee. We also have a couple new Members of the Committee who will be visiting with us today because of the subject matter, Senators Reyes and Richardson.

We're going to be discussing lots of weighty issues through the course of the next couple of months, certainly today, as we confront all of these difficult questions about how we transition to cleaner grid while also struggling with and challenging shibboleths with regards to affordability and reliability and resiliency.

This hearing is also going to serve as the annual update of the California Public Utilities Commission and the Public Advocates Office with a focus on affordability by revisiting some of the regulation of our investor owned utilities. And we've established some fantastic people who will be speaking with us today.

We know of course that electricity is such an essential service for both our residents and also our businesses and industries. We know that it really holds the promise of a scaled clean future, clean energy future for the state that we hope to also encourage others to adopt. We also know that there's lots of challenges that we have.

My district just faced an enormous catastrophe last year with the terrible wildfires that we saw sweeping through Los Angeles. We know there's an interplay between affordability and liability with regards to our utilities and wildfire challenges.

We also want to build, of course, on a lot of the work that's been happening in this committee over the last couple of years. Senator Becker's bill, SB 254, which tackled a major recent driver of costs on electricity bills, which was the IOU's wildfire mitigation costs.

One of the provisions of the bill said that these costs are now going to be subject to a cost efficiency consideration. So that, you know, the PUC is going to be really ensuring that we're getting our best bang for buck with regards to ratepayer funds.

We also specified the IOUs would be prohibited from earning a profit on aggregate $6 billion of wildfire mitigation. You know, at the same time, of course, we're also asking ratepayers to step up and, you know, fund more of the Wildfire Fund. So there's a lot of cross subsidy going on here.

The other major piece of news that people need to focus on is the fact that SB 254 had a requirement for the California Earthquake Authority to come out with this big study. That's going to be coming out soon. It's all about looking at the liabilities and losses related to catastrophic events, including IOU ignited fires. Which of course, almost certainly very highly likely to cause the Eaton Fire.

We're not going to be focusing on that study today, but I think it's an important backdrop and I'm sure there will be questions, you know, relating to that study. And we know that it will help to inform a lot of the legislative discussions that are going to be taking place this year.

So anyhow, I'm really excited about the wonderful panel that we have. Some really sharp folks. We got a lot of interest amongst the Members, too. A number of you have been reaching out to me. We're all looking at ways to try to make the system work better. We know that people are getting increasingly squeezed.

There are massive affordability challenges. We also need to make sure that our utilities are able to function. We also want to make sure that we're putting consumers' needs at the top of our list. So let's start with Professor Severin Borenstein, who's here joining us remotely, and he's... Is that all set, guys?

Okay, so he's going to be talking a little bit about giving us a bit of an overview for the foundations of electric utility regulation. And he'll start the conversation. We're then going to hear from the President of the brand new... I'm not, I guess, President elect, I suppose. I don't think he officially starts his job until Monday.

Designee. Right? Yeah, President Reynolds. And then, of course, Public Advocate's Office will be presenting. And then we've got several great panelists from different perspectives about how we ought to be approaching these questions. So I'm really looking forward to this morning.

I want to thank Nidia and our wonderful staff who worked really hard to pull this together. And also want to wish everybody happy Purim. We've got hamantash in here over there. So celebrating the great victory over Haman. So, yes. Okay. So without further ado, let's start with you, Professor Borenstein. And go Bears.

Thank you. I'm sorry I couldn't be there in person. And particularly now that I'm missing the hamantaschen. I was asked to do a sort of a primer to bring the committee up to speed on the basics of utility regulation in order to sort of lay the groundwork for the discussion of what can be done about the high rates.

I'm going to go through this fairly quickly, but I hope you will feel free to interrupt me. And certainly I'm happy to take questions afterwards and be part of the discussion. There we go.

So there are many different parts of the electric sector, and they have different levels of regulation. I'm going to focus on the parts in California, the investor owned utilities, since that's the subject we're talking about today. Generation of electricity has largely been deregulated for almost 30 years now.

Most of the electricity is actually generated by companies that are not regulated. The utilities and the other retail providers such as CCAs buy their power from these generators in markets that are really not subject to economic regulation.

Transmission, the high voltage power lines are for the most part done by regulated utilities. The very largest transmission projects that can be segmented out as determined by the CAISO are put up for bid and are bid out competitively. Interestingly, I think in the, it's less than a decade they've been doing this.

All of the large projects that have been bid out, I think none or almost none of them have actually been done by the utilities. Third parties have done those instead. But most transmission occurs at lower voltage, is pretty integrated with the local distribution systems, and is part of the regulated utility.

Distribution lines. These are the lower voltage lines that run around neighborhoods and serve households and businesses. Those are completely regulated. The CPUC oversees the expenses, determines the prudent expense, and makes sure that the utility is compensated for that.

And then the last function is what I refer to energy procurement and retailing. We rely on some company. As a customer, we rely on some company, either the utility or some other organization, to buy our power for us and to then charge us for the electricity component.

So the bill has, that you get has electricity procurement component, which is mostly driven by the payments to generators, a transmission component, which is mostly regulated, and a distribution component, which is nearly entirely regulated.

And then there are other things on the bill, such as payment for public purpose programs, subsidies for low income customers, subsidies for energy efficiency programs, and so forth. What we do with investor owned utilities and is done pretty much everywhere in the United States is rightly called cost of service regulation.

The regulator is trying to determine the appropriate cost of service and then compensate the utility for those activities. They face a couple of challenges. One is assuring efficient operation, that the companies aren't just wasting resources. And the other is compensating the investor owned utilities costs appropriately, not more and not less.

And that means figuring out what their costs are, which for the most part isn't that hard. But there's one, a couple areas where it's more challenging. Both of these challenges create both incentive issues. Obviously, company that's being regulated on cost of service might not have an incentive to pay a lot of concern to cost if they know they're going to get the money back.

And information issues. A regulator by definition is at a real disadvantage relative to the regulated firm in understanding what the actual costs are and what the actual operations are.

I don't think it's too much of an exaggeration to say you can't really do regulation perfectly unless you have almost as many people as the regulated company overseeing them and watching what they're doing. And the CPUC is nowhere near that.

And so there is always going to be an information asymmetry and the utilities will not have an incentive to fully disclose all of the information, whether it's beneficial to them or not. So let me first talk about efficient operations. First of all, obviously not wasting resources. People are being paid to work.

You want to make sure they're actually working. Inputs that are being purchased, you want to make sure they're actually getting used, and so forth. And there are always instances where waste occurs in organizations. The CP, the regulator can't completely eliminate that, just as no company can completely eliminate it. But they want to make sure that it is kept to a minimum.

They also want to make sure that whatever the regulated entity is doing, that they do it with an efficient mix of inputs. And this can be a big problem if they're compensating some inputs more than others. Such as if they're overcompensating capital investments, the utility is going to have an incentive to use more capital and less labor or fuel or other inputs.

So they want to make sure, the regulator wants to make sure that the regulated entity is not just not throwing away or wasting resources, but actually carrying out their mandate in a way that uses an efficient mix of resources.

And then thirdly, and this is often overlooked, though in California, it's really become a clear issue, is delivering the optimal product quality. In this case, it includes power outages. The optimal number of power outages is not zero because that would be so expensive. People would not be willing to pay for it.

But on the other hand, you don't want a utility that's regularly unreliable. So the regulator has to work with the regulated utility to determine what is the right level of reliability that customers are willing to pay for. And that can be a real challenge. And reliability is not the only.

Certainly areas of safety, areas of just sort of service, billing service, etc. are all areas where the utility could potentially skimp. And customers could be very upset about that. But on the other hand, getting the absolute best quality would be extremely expensive. And customers are also worried about the cost of their bills.

And then the second challenge is appropriately compensating investor owned utilities. And I think this is an area where today's hearing is going to spend most of the time. For most costs, this is straightforward. Basically, the utility brings receipts to the regulator and says, here are our costs we'd like to make sure. We'd like you to set rates such that we can recover our costs.

The regulator does look at them and say, were these costs prudently incurred? Were you wasting resources? But once they decide that there is a number that they are determining to be prudent expense, for the most part, they can just say, okay, we're going to compensate you for the expense. The exception is the cost of capital, and particularly the cost of equity investment.

So the cost of capital is divided between capital raised through debt, usually by selling bonds, and capital raised through equity by selling stock in the company. Debt is pretty easy to price because there's a market that prices a debt instrument.

And so the utility can say, in order to borrow another million dollars, we are going to have to pay. The bond market tells us we're going to have to pay a certain interest rate. And the regulator usually can just rely on that.

Equity is a much more difficult issue because the issue there is what sort of return are equity investors, do equity investors need to expect in order to be willing to buy the stock of this company? And that's pretty speculative. There are approaches that are used, including some fairly complex finance models comparing to other utilities.

Of course that's got a problem because other utilities return on equity is driven by their regulators. But a lot of the rate hearings revolve around fights over what is the appropriate return on equity. I will say I have written about this.

Two of our former graduate students from the Energy Institute wrote a really nice paper looking at allowed return on equity compared to the cost of capital in markets in general. And they found that while from the 1980s to the present, actually the study only went to 2020, the cost of capital in general declined much more than the allowed rate of return on equity declined.

So there is some evidence, and that doesn't settle the question, but there is certainly some evidence to be concerned that regulators have not kept up with changes in the cost of equity and have been overcompensating equity investment.

I'll get in a moment to the issues that raises, but I think that that is an area that has raised a lot of concern. At the same time, I want to give you some sort of idea of orders of magnitude here.

While the cost of equity and the cost of capital in general is a very significant cost, as a share of the revenue requirement of utilities, it's actually pretty small. So right now the three investor owned utilities combined have an annual revenue requirement, that is the total cost, the revenue they have to raise to cover their cost.

Somewhere... I haven't checked it in the last year, but somewhere in the 60 to 70 billion dollars per year. That actually rolls in all the cost of energy, even procured through the CCAs. But that's sort of the big pot that determines our electricity bills.

The cost of equity, the rate of return on equity is based on the capital base, that is how much investment they have. And if you change that cost of equity, it would lower the revenue requirement. I did a calculation that if you lowered the allowed return on equity by 3 percentage points... This by the way would be a huge decline.

The CPUC recently did cut the return on equity, but I believe it was by 0.3 percentage points. But if you lowered it by 3 percentage points, that would lower the revenue requirement of the three utilities by about a billion dollars a year. Not nothing, but a small share of the 60 to 70 billion dollars revenue requirement.

So while it is important to recognize that I think we are overcompensating equity investment, and certainly there's a real possibility of that based on the work that was done at the Energy Institute, I don't see this directly having a huge impact on electricity bills.

So I do want to, before moving on from this point out, some people say, well, we should just have government ownership of utilities. Then you don't have a cost of capital that you have to cover. And that's just not true. IOUs have a cost of debt and a cost of equity.

Municipal utilities also have to raise capital and they raise it through debt, as do co-ops. Co-ops are not really an issue in most of what California, in most of California. But municipal utilities are, and they have a cost of capital as well. They don't have equity, but they do have debt.

And they end up paying an interest rate, whether they're borrowing it from a bank or borrowing it by floating bonds. IOUs have a higher cost of capital. Their cost of debt is somewhat higher, and the cost of equity is substantially higher in order to attract investors.

While that is a higher cost, it also comes with some protection for ratepayers. Because if the utility has some sort of imprudent behavior failure that can be blamed on bad action, in the case of an IOU, the entity that takes the first hit is the shareholders. And we've seen this in bankruptcies where the shareholders are wiped out.

Debt holders maybe get some but not all of their money, and ratepayers are less affected. If it's a municipal utility or it's an all debt financed utility, even if it were investor owned utility, when you get that sort of shock to the cost shock, it would end up being either causing bankruptcy very quickly and or flowing through directly to customers.

So that higher return on equity does come with more risk taking essentially by shareholders. Whether that is the appropriate level of additional level of return on equity I think is an open question. And I certainly suspect that it has risen relative to the actual cost of equity. Okay, let me talk about some of these incentive effects.

First of all, setting return on equity too high directly raises bills for ratepayers in the way I talked about. You're just paying a higher percentage return on that investment. But possibly more importantly, it incentivizes utilities to over invest in capital. And I have heard stories indirectly from people at investor owned utilities that this is very well understood.

And when they are getting a very high return on equity relative to what investors actually need to invest, they have a strong incentive to do things in a capital intensive way. So let me just give you one example. And I'm not, I'm not going...

On wildfire prevention. You could, you can do vegetation management, which doesn't go into the capital base. That's just trimming trees, and you could, or you could do undergrounding. That is a long term investment that goes into the capital base. Now, without making judgment on what the right balance is. I don't know what the right balance is.

I will say that if you're paying a utility a very high return on equity, they're going to be biased towards making investment or doing things in a way that is more capital intensive. As I mentioned earlier, a different mix of inputs. And so this capital bias is potentially a significant cost.

I don't know of any good measurement, and it would be very idiosyncratic to a utility based on what the particular needs of that utility are. Certainly we've seen this discussion come up in dealing with wildfires and discussion of using undergrounding versus using other sorts of technologies to reduce wildfire.

It's not to say that the utilities are presenting the wrong solution. It's just to say that the regulator has to be at least very aware that utilities incentives might not align with what the regulator is looking for. On the other hand, setting returns too low can lead to underinvestment.

If you told a utility, we're only going to allow you to earn a 5% rate of return when investors really aren't going to be interested in investing if they don't expect a 7% rate of return, then the utility is going to have a hard time raising capital.

And that can potentially change the way they operate and can even undermine quality of service if they can't raise capital to upgrade facilities. So the regulator is always faced with this balance of trying to get the return on equity just right.

I think that, and I have never been a regulator directly. But talking to many of them, I think there is a real concern about setting the return on equity too low and belief that, well, if it's a little bit too high, at least we're assuring that investors are going to be interested and the utility will have an interest in making the appropriate investments.

So let me close by saying I've taught courses on this for 25 years. There is no silver bullet solution. There is sort of by, among some people, a religious belief in free market competition. And that's just not an option for distribution systems and much of the transmission grid.

So this idea that we can somehow deregulate those systems and get more competition into those systems just isn't feasible. Even retail competition has had mixed results, particularly at the residential level. In some states where they're for profit companies, there's a lot of concern about scams and just about customers not searching enough to get a decent deal.

But on transmission and distribution, which these days is the heart of a regulated utility, the competition really isn't an alternative. With the possible exception of some of these large transmission projects that can be bid out because they're not completely integrated into the utility.

Government ownership is often raised as an alternative, and that creates a different set of incentive concerns. And certainly any of us who have dealt with government bureaucracy would be concerned that that would not operate very efficiently. It's not, though I do want to say, it's not like arguing for the government to make cars or produce shoes.

Where there is an alternative, where we think a competitive market is possible. The two options we really face are either a regulated private utility or a government utility or a co-op, which is sort of like a government utility. It's just setting up a different nonprofit entity. A third alternative I will... Or not alternative.

But a third approach that I will close with is often raised, which is called performance based regulation. And some people who are just real advocates of performance based regulation will tell you, oh, that will just solve your problem. That's just not true.

This is the idea that you set some benchmark for the utility, and if they exceed the benchmark, they get to keep some of the savings or the extra revenue from exceeding the benchmark. And if they fall short, then they have to take a hit. There are a number of problems with this.

First of all, there's just measurement and determining what are the right criteria. Then once you decide what the right criteria are. And you're, let's say you want a certain level of safety or a certain level or low level of blackout or rates, you have to actually do the measurement and figure out what the right benchmark is.

And usually you're benchmarking against other utilities, but that's a difficult process. But I think the most obvious or the most extreme problem with performance based regulation is credibility, is actually being able to follow through. And I'll give you two examples that made this clear, both from pre-2000.

In the 80s when Diablo Canyon was considered, early 80s when it was considered sort of a financial disaster and there was talk of closing it, the CPUC reached a deal with the PG&E that they would actually put the onus on PG&E and say, we're going to have you buy the power from that power plant at a rate we're going to set. If you can run the plant well, you can make a lot of money.

And if you don't, then you're going to lose money. Turned out once they did that PG&E massively increased the capacity factor, ran the plant really efficiently, and was making a boatload of money. The CPUC turned around and said, well, we're changing the deal. We're not going to let you earn that much money. So on this, when the utility did really well, the regulator changed their mind.

And then we saw during the California Electricity crisis when the utilities were supposedly locked in to charging a certain retail rate for a few years, but when it looked like in one case they did go bankrupt, the regulator had no choice but to turn around and say, okay, we're going to let you raise rates in order to cover your costs because we have to have the utility.

So performance based regulation, obviously we should be rewarding utilities that behave well and are efficient and penalizing utilities that don't. But the idea that we can just solve the cost control problem that way I think is overstating the case. So I will stop there. I'm happy to take questions and to clarify anything that you would like to talk about.

Thank you, Professor. Just a quick follow up on that last point. Where's the most... Don't they do, there's some sort of performance based review program up in Oregon or Washington, is that right?

I actually don't know the answer to that. I think that's right. I think Washington State has had a performance based regulation, but in some sense every state has performance based regulation. Some are more explicit than others. The most well known comes from the UK, which in some ways pioneered this.

Which said rates should decline in real terms every year by a certain percentage. And if you can lower your costs more than that, then you can keep the money, you the utility. If you can't, then you have to eat the difference. That has not been a rousing success. There's been a lot of reconsideration, special cases, etc.

But there are real advocates of it still who come out of the UK. And I don't think it should be dismissed. I think it should be part of a regulator's toolbox. But I also think that we should be clear by itself it doesn't... It's not a silver bullet.

Okay. All right. Senator Archuleta.

Well, thank you, professor, for the information. But what I'm understanding from you, getting from you, is various solutions. And we throw it one way or the other. But the general public is looking for a solution for stabilizing rates or bringing them down. But I'm getting the impression that capping or putting a cap on these rates wouldn't work either. Is that what you're feeling?

So putting a cap on rates is a form of performance based regulation. It would basically say this is the most you can charge. You are required to deliver service for that level. And if you do better than that, well, a cap is unclear whether you'd have to lower your rates.

But if you do worse, you, the shareholders have to eat the difference. Certainly if you set that cap low enough, the utility is just not going to be able to meet it and will potentially go out of business. But even if you don't set it that low, the utility is going to try to find ways to meet the cap while changing other things that are not explicit in the cap. And if I can take just one minute, I will give you an example from a different industry.

I worked at the Civil Aeronautics Board during airline deregulation. And we used to, we had one of the activities was to sign routes to US carriers, international routes. And we had formulas that they could bid where we assigned routes based on how many flights per week and how many meals you got and how much leg room.

And the problem was, do you tell them the formula? And the concern was, yeah, if you do that, you might end up with 38 meals and 2 inches of legroom because that's how they maximize their profits.

The same issue comes up here. And that is that if you can't fully specify what you want the firm to do, and it's very hard to specify everything when it comes to quality. Then if you set a price ceiling, they're going to have an incentive to meet the price ceiling, but shave other areas of quality probably in order to do so.

And so price ceiling I think has credibility issues and it also has these sorts of enforcement issues because there's so many facets of the regulation of the service that need to be considered. And this is a problem that's come up in England and in other areas where they've used performance based regulation.

And utilities have responded by changing the quality of service in other ways and... Or saying, well, there's a, you know, we've run into a special problem that wasn't anticipated, so we should change the PBR agreement. And that's what happened with Diablo Canyon in the 80s and that's also what happened with the utilities during the California electricity crisis.

And of course here in California, we do want service. But you're also saying if the service drops, we have complaints from the constituents, especially when it comes to blackouts, that everyone's complaining. If there's going to be one, tell me when and how long. And it's very difficult to even know if that's going to be possible. But that's reflective in pricing as well.

Senator, he can't hear you.

I think they might have muted his Zoom access.

Are we back? Check with Severin.

Are you able to hear us, Severin? Professor?

I think we lost him.

I saw a green thing go on the screen that says mute. I don't know what that meant.

What's that little thing in the corner there? See that up there?

The offshore wind. It's getting cut off.

He enjoys it the though. He's just like living in this wonderful muted land.

Professor, can you hear us? No.

I saw a weird little green window pop up.

You got it?

You know, we can always do is. I mean, I don't know how we can start with President Reynolds and then have an open discussion with everybody. Yeah, yeah. Okay. Why don't we do that? But we'll have you come up if that's okay.

And then hopefully professor will be able to stay and we'll be able to hear each other and discuss together. That was a good talk. Good talk, Senator. Okay, thank you. Thank you, Mr. President. Designee. What's the official title?

I think that's perfect. Thank you.

All right. All right. Well, we appreciate you being here. Thank you for stepping up. You obviously had a long career at the PC in various capacities. We look forward to your testimony.

Thank you. Chair, Members of the Committee, it's wonderful to be here with you this morning. I appreciate, and as we've already been hearing this morning, the affordability concerns that customers are facing and that are very real given the state of our energy bills today.

I also want to acknowledge that today's hearing is in part the PUC's annual report oversight hearing. So I will touch on a few broader PUC matters before diving further into some of the financial oversight issues that are the subject of today's hearing.

Should we just let the Professor. Can you hear us? Professor Bornstein, are you speaking? Okay. All right. Nidia's. Just let him know what we're doing. Okay.

All right. So it's helpful to start with a little bit of PUC background points for context. The California Public Utilities Commission, or California PUC. CPUC is the economic regulator of investor owned utilities that operate within California. These utilities provide essential services to residents, including electricity and gas, water, telecommunications, transportation and rail services.

In the electricity sector, our jurisdiction covers about 75% of the load in California. The Commission has been active in the last year. In 2025, we had 542 active proceedings and resolved 229 of those proceedings. We remain focused on improving the critical customer outcomes outlined in our mission.

Affordable, safe and reliable utility service, all while meeting our ambitious climate goals. As we focus today on electric rates and bills, I want to emphasize that delivering on these outcomes is the center of our regulatory responsibility. And I have a few slides. Can we pull up the slide deck.

Members? We also have physical copies if we're having technical difficulty. All the Members. You guys all have these packets yet? Yes. Okay. There you go. Fantastic.

So I'll start with a brief overview of what's driving electric rate and Bill increases. California energy policy has a long history. Net history shapes rates today in the electric sector. Utilities largely rely on long term contracts for generation rather than owning generation assets directly.

Further in the system we have today, utilities are not the default provider of retail energy supply in many areas. We have over 40 providers of retail electricity including investor owned utilities, community choice aggregators and electric service providers.

We also have a large ecosystem of largely unregulated developers who build most of the power plants that supply our electricity sector which has benefits. It supports economic development and competition. But most system costs ultimately flow to customers through rates and bills.

We have visibility into the books, the accounting, the costs and expenses and investments of only part of this ecosystem. Only the utilities are fully regulated through public processes.

At the Puc, we do have oversight regarding the reliability and clean energy compliance of community choice aggregators and electric service providers, though we do not regulate their rates because we have decoupled energy rates. In California, utilities provide electricity supply as a straight pass through to customers with no profit.

Utility earnings come from investments when they put up capital for projects, a capped rate of return is allowed but not guaranteed. It is collected on an amortized portion of investment costs. The benefits to utility investors come from dividends if any are paid, and from stock value if it increases.

What we call the revenue requirement, as you've heard this morning, is the authorized cost of operating and investing in the electrical system each year. This is the amount that is divided up among customers through the per unit cost of electricity. It includes costs like operations and maintenance and long live capital assets that are recovered over time.

Wildfire costs have been a major driver of rate increases since 2019. Between 2019 and 2024, the utilities collected approximately $27 billion for wildfire mitigation and approximately $14 billion for wildfire insurance premiums and catastrophic events. About $40 billion total in authorized wildfire related costs.

These costs are significant and the PUC continues to scrutinize and where justified, reduce or disallow cost recovery requests. At the same time, California is facing worsening wildfire conditions and the inverse condemnation liability regime creates unique financial exposure for utility caused wildfire damages.

It is also noteworthy that the combined revenue requirement shown for 2025 is lower than 2024, primarily because PGE's revenue requirement is lower due to the removal from rates in 2024 of a large wildfire related revenue requirement and a generation cost adjustment.

This reflects how some wildfire cost recovery is time limited costs are tracked, reviewed and then amortized over defined periods so some amounts will roll off of rates even as other approved costs enter rates. So now I'm going to talk a bit about reliability and resource progress.

So so as you can see from this slide, we've had a recently adopted preferred System plan in the integrated resource planning proceeding that's on a path to meet the state's greenhouse gas targets by 2045.

The PUC's Integrated Resource Planning process ensures that California's electric sector meets its greenhouse gas reduction goals while maintaining reliability at the lowest possible costs. Recently we approved a comprehensive integrated resources plan to reduce statewide annual GHG emissions from the electric sector to 25 million metric tons by 2035.

This represents the most aggressive of the range identified by the California Air Resources Board and this plan will achieve a nearly 60% reduction compared to 2020 levels. The decision plans for the construction of more than 56 gigawatts of new clean energy resources by 2035 using the planning process.

Our modeling indicates that by 2040 natural gas usage will decrease by about 80% compared to the modeled 2026 usage. Remember that utilities, for the most part are not the generators of electricity. Retail sellers of electricity use long term contracts with private generators to cover the electricity needs of their customers.

The cost of this energy and the guarantee of capacity obtained on behalf of customer are obtained on behalf of of customers in advance through competitive solicitations.

Nearly 40 load serving entities, including community choice aggregators as well as the utilities use a competitive solicitation process to contract for clean resources to meet the statewide scoping plan targets at the lowest cost for consumers. We continued this year to achieve milestones for clean energy.

Our integrated resources planning process implemented by the Energy Division led to over 7,000 megawatts of new clean energy projects coming onto California's electric grid, including over 4,000 megawatts of new battery storage projects. This is something to be proud of.

It's an all time record and it was reached using these competitive processes, all carried out by the retail providers on behalf of their customers so that the lowest cost projects were selected to meet our energy needs in 2024.

We also reached and then surpassed the milestone of 10,000 megawatts of installed battery storage capacity and have now reached over 17,000, up from just 770 megawatts in 2019. While we've been making lots of progress on resource development, wildfire mitigation spending has grown significantly and we are applying increased scrutiny as programs mature.

The General rate case remains the Commission's primary mechanism for reviewing utility investment plans, operating costs and financial assumptions before they enter rates. We've opened proceedings to evaluate improvements to the California Climate Credit to better target relief and enhance affordability going to the next slide.

Going to talk a little bit about the return on equity, the cost of capital and accountability. Now, as the state's economic regulator, our responsibility is to strike a careful balance. Utilities must be able to access capital at a reasonable cost. Customers must also be protected from excessive returns.

Return on equity and cost of capital are among the most important tools that we have to achieve that balance. Authorized returns are not automatic and they're not guaranteed. They're based on market evidence and they're revisited when conditions change. So the markets. This is why this matters. Utilities operate in capital markets.

They compete for investment capital just like other firms. If returns are set too low, credit metrics deteriorate, borrowing costs rise and infrastructure investment becomes more expensive. If returns are set too high, customers overpay and confidence in the regulatory framework erodes. Our role is to set returns that reflect actual market conditions, no more and no less.

So how do we set the return on equity and the cost of capital? These determinations occur in formal litigated proceedings. They rely on expert testimony, financial modeling, market data inputs, capital structure analysis and a public record with evidentiary review.

We revisit these numbers as interest rates and market conditions change and the Commission has adjusted authorized returns when the record supported doing so. There are already accountability measures in place. Authorized returns are not automatic and they're not guaranteed. Utilities earn their return only if they manage costs within approved budgets, operate prudently and meet regulatory requirements.

If utility spending is imprudent, we impose disallowances, reduce recovery and we require refunds where appropriate. This is a framework designed to maintain reliability and financial stability while protecting customers. Many proceedings have been initiated in response to statute. I'm going to the next slide. Legislative direction shapes the scope and priorities for the Commission's work.

Timelines are driven by evidentiary and procedural requirements. Outcomes are based on record development and analysis. Affordability is addressed through front end scrutiny of spending, post spend accountability and legislative direction that strengthens our oversight. Most utility spending is reviewed before it enters rates. In the General rate case, utilities proposed multi year forward looking budgets.

Spending is tested and challenged, forecasts are scrutinized and reductions are made. Where costs are unsupported, utilities will only recover what is approved by the Commission. Wildfire mitigation is essential, but costs are not unchecked. For wildfire cost recovery, we typically review wildfire spending for reasonableness, evaluate compliance with approved wildfire mitigation plans and disallow costs if they're imprudent.

Recent statutory changes, including SB254, strengthen the alignment between mitigation planning and the General rate case process. And this alignment will reduce delay between when spending happens and when financial scrutiny happens. Turning to transmission costs and our advocacy at FERC as an agency, transmission rates are largely regulated by the Federal Government, the Federal Energy Regulatory Commission, or Ferc.

The PUC actively litigates at FERC to challenge excessive transmission return on equity, to reduce formula rate impacts on customers, and to protect California customers in the delivery of transmission service. This is a direct affordability effort where we are fighting for customers to pay lower transmission costs.

In addition to existing regulatory tools, the Legislature has provided significant direction in recent years to strengthen cost oversight and financial accountability. SB254 strengthened financial integration for wildfire planning. As I mentioned, AB 1207 directed reforms to improve the targeting of the California Climate Credit. We've also opened proceedings to implement these statutes.

So all that said, in closing, affordability is not addressed through a single lever. It requires disciplined rate case review, reasonableness, oversight, federal advocacy, and implementation of your legislative direction, all working together within the regulatory framework. Thank you. And I look forward to your questions. Thank you.

All right, there he is. Okay, great. All right, you know what? So thank you, professor, for being back. Thank you, President Reynolds. Why don't we just make it an open discussion with these two panelists? There's a lot of interplay, of course, as we went into the details of the rainmaking process.

So let's let Senator Archuleta continue with his questioning of Professor Borenstein. And then, of course, if you've got additional comments to the question or if you want to direct your questions to the President, you're welcome as well. Senator Archuleta, now he's gone.

You still there, Professor? Okay, great. Oh, there you are. Well, professor, thank you for sticking with us. And I left you off with a question about caps and how that would be difficult. But also we mentioned about the General public wanting service.

And I think everyone would like to know if there's going to be a shutdown, when and how long, which is something that's very difficult.

But that's a main factor, I think, in a lot of families lives when, you know, the groceries are in the refrigerator and they're going to shut down, neighborhoods are running up and down, asking each other if they heard anything. It was an accident, on and on. But it's all predicated on cost is what you're telling me.

Service is predicated on cost. And if we want good service, we may have to raise the rates a little bit. Is that what you're telling me, well,

the costs are going to be higher for better service. I would say it doesn't necessarily have to be collected through rates. And in fact, I have written extensively on some of the problems we're facing now by collecting these costs through rates, including suggesting the income graduated fixed charge, which did get adopted though at a very low level.

So it's having a pretty small impact. Some of these costs, I would argue more appropriately belong on the state budget.

And I know that's not a popular thing to say you in Sacramento, but there's a lot of public policy that the state has committed to and then stuck it into rates, whether it's renewable power, subsidies for low income customers, energy efficiency programs, all of which I think are public policy decisions that more appropriately belong in the state budget.

If they were in the state budget, that would bring rates down substantially. That's a big number, particularly if you think that responding to climate change in terms of managing wildfires is a state emergency responsibility, similar to flood control and seawalls and so forth.

Likewise, low income subsidies, which we do for food and for medical care through the state and federal budget when it comes to energy are paid for through raising rates. So I think it is possible to lower rates and still cover the necessary cost for good service. Obviously the state budget is not endless. Well either.

But I think that we have really tilted towards paying for a lot of cost through the electric bills.

I can't agree with you enough, Professor. I mean, I know you've made this point before, but we're trying to encourage people to move toward electricity and then we're increasing the cost of buying electricity through some of this wonderful pro social programming that quite frankly should be housed, I think, in the greenhouse gas reduction Fund or elsewhere.

That's what that Fund was set up to do and yet it's now been rated for all sorts of other uses at very high cost. So anyhow, I appreciate you bringing it up and I think it's something we really need to spend some time on this year.

We punted some of the key cap and invest discussions from last year. I think it's a good thing for us to focus on this year as we look at all of the implications of the issues that are being raised today in today's hearing. But sorry, Senator.

Yes, and if I can just add that it's not just the fact that we're discouraging electrification, it's also an incredibly regressive tax. Our research shows that it is much more regressive than the sales tax and about as regressive or slightly more regressive than a gas tax.

So we are choosing to pay for these programs through about the most regressive tax we could come up with. Absolutely.

And to the President, you're the oversight, that's how I see you. But in that I think your resiliency, I'm talking about 2040 and our climate goals. Are we going to be able to meet that when we talk about resiliency and innovation?

And to the chair I might bring up hydrogen that we've got to increase hydrogen in our portfolio in our investments in our future a little bit more to provide the service and affordability and to be consistent with what we're trying to do with the cost of regulating our fire prevention and answering those calls.

But I also think that are you over regulating and don't allow these utilities to innovate and do what they need to do.

Thank you. Senator, speaking first to the first part of your question. We are absolutely planning for delivering reliability and resilience at.

As we look towards our climate goals for 2045, our process, our integrated resource planning process is really set up to make sure that we can deliver reliability, that we meet our GHG targets and that we do so at the lowest possible cost.

So that is really kind of the driving factor behind how we plan for the infrastructure of the future. We want the resources that are going to be best able to deliver on exactly that, on a reliable system, a safe system, one that meets our climate goals and does so at lowest cost to customers.

That's, that's the driving principle behind how we procure. As to whether or not we are, we are overregulating the utilities, I think it's, it's always fair for us to question ourselves about whether or not we have the right regulatory structure in place for utilities to make smart investments.

Because ultimately as a regulator, I think that's what we, what we're doing looking for. We want the utilities to make the best decisions possible using customer dollars, which we are, we are here to safeguard. We want them to be making choices that are going to drive better outcomes for customers.

And I think we've seen examples of utilities in California innovating with customer dollars to deliver better service. One example I would point to is investment in advanced weather stations.

The utilities in California have deployed deployed weather stations on the grid that give us really granular information about wind speed, about humidity, about temperature and really help the utilities better understand the nature of risk on the system.

That facilitates smarter decisions about investment on the grid that large Scale deployment of weather stations is a California innovation and one that our regulatory environment has been able to facilitate.

Well, thank you for being here and congratulations. I guess a couple things and then I'll turn over to my colleagues. Might have a little follow up, but on 254. Thank you. You mentioned how it aligns wildfire oversight with your cost targets and such. That's great news.

There was a piece of in the Bill where we set up requires investor utilities to securitize $6 billion in future wildfire risk mitigation capital expenditures. So using securitized debt rather than equity for that, which you'll have to issue financing orders for.

So does the CPC have all the necessary resources to ensure utilities are able to quickly set up this financing mechanism which is expected to save ratepayers hundreds of millions per year?

Yes. Thank you for highlighting that provision. And we really appreciate the legislative direction there to reduce costs for customers by reducing ultimately the return that utilities will have on that infrastructure.

We are looking to rapidly implement that legislation and we will always make sure that we are requesting resources through the finance process to make sure that we can complete comply with adjustments to the legislative environment and implement legislative directives. We are looking forward to implementing that and saving customers money.

Awesome. Another point, we've been looking for ways, as we've really already talked about this morning, about making the grid safer, cleaner, more reliable while also lowering bills. Right. That's what we're all looking for.

And several commissioners have noted that, you know, one of the best ways to or one way to lower rates is supporting load growth so that we're dividing the fixed cost of the grid over a larger amount of Kilowatts delivered. And you know, some of us, we've been calling it kind of beneficial load growth. Right.

But it's beneficial if we support more load without spending a lot of money to expand the grid to handle the extra load. And if we do that, it lets us lower rates. So just, you know, how is the PC supporting both sides of this opportunity?

You know, what are you doing to help enable load growth from big future sources of growth like EV charging, electrification, even data centers?

And as part of that, what are you doing to make sure the benefits outweigh the costs, such as expanding our use of load flexibility during peak times, for example, so we can handle a lot of load growth by increasing utilization of the grid assets we've already paid for?

I'll point first to our implementation of SB410, which was really driven by some of the Delays in interconnecting that new load was facing around California. And so now we have been implementing that Bill and approving utility investments in infrastructure that's going to support faster interconnection. So that's certainly one avenue we've taken.

We also have been working and have developed now a interim Rule 30, what we call Rule 30, which is an interconnection rule for new large load customers like data centers.

And the essential provision of the interim rule is that those customers can come to the utility with money up front to invest in the infrastructure necessary to serve them. They don't at this point have a guarantee that that money will be repaid to them.

So they're essentially fronting the cost of that infrastructure, which unlocks the utility decision to connect those customers as quickly as is reasonably possible, gets more load on the system and spreads out the fixed costs. As you mentioned, that's another tool that we've been using to accelerate interconnection of new load and support spreading those fixed costs around.

And we share the vision of more demand flexibility, ultimately helping to. Helping to support a more efficient grid. We want to make the best use of the grid that we have and the grid that we're building for the future. We have a number of active programs that move demand around one way or another.

We could even point to time of use rates as an example of how we are looking to optimize demand to reduce peaks.

There's more work that we can do in this area and I'm looking forward to our continued efforts to ultimately meet the load flexibility goals and deliver the most efficient grid for customers while expanding the pool of customers so that we can spread out the fixed costs.

Yeah, great, thank you. And I think the leading Legislature, you know, look forward to partnering with you on that, and I think we'll have some ideas around that.

And also, you know, try to get better data too, because you sort of hear the fact, you know, some people say, you know, we used to have a grid utilization closer to maybe 65%, and maybe now we're closer to, to say 45%. Right.

So I think we want to figure out, working with you, ways that we can make better use of not better use, but make efficient use of all the assets we've already paid for. So look forward to working with you on that. I had a question about something that kind of came up to me relatively recently.

So I don't claim to know a ton about it, but just want to ask you about stranded assets in the gas system. The combined revenue requirements for gas utilities has increased 72% over the past decade. And new capital investments in the gas System now surpass $4 billion per year from what I've been told.

And utilities are assuming these assets will be used and useful over long horizon, often well over 50 years, even though the state needs to significantly reduce our gas use, as you just said, by 2045. So where this is kind of a looming fiscal, you know, potential bit of a time bomb here.

What you know, PCN has been holding preceding on the future of the gas system that's supposed to be figuring out what to do about this. You know. Can you give us any update on that?

We do have an active proceeding. I can definitely follow up with you on the current status of that proceeding and what we can expect as the next.

I can certainly say that it is a challenge that we're well aware of and thinking about as we move towards electrification as we hope to be successful in electrifying as much of our economy as possible.

We do run the risk of the other energy system that we have considerably invested in as a state, the gas system serving fewer customers.

And we don't want to be in a position that a shrinking number of customers customers pays a large and what is still growing share of fixed costs and ultimately that energy service becoming more and more unaffordable, more and more unaffordable over time.

So it's definitely a concern that we are, we are very attuned to and recognize the importance of making smart investments to support the safety of the gas system because we do have aging infrastructure on the gas side that does need maintenance, does need repair, does need replacement and looking for opportunities to evaluate electrification as an alternative option where appropriate.

But we of course still have lots of customers who are dependent on the gas system for a range of services. We don't just use it for electric generation, which we are over time going to reduce our reliance on, but we also use it for, for home heating and cooking and particularly in existing buildings.

There will be a number of customers who rely on that system for quite some time to come.

Yeah, thank you. And we did have the Min Bill, the SB 1221 that was to do some pilots. Have you any? I haven't really heard a lot about progress on pilots since then.

I am happy to follow up with you. I don't have information handy. I'm not sure if they just.

And a cost.

Thank you for the question. And I can only begin to begin to understand what it must be like for someone to have lost their home, lost everything, and then be confronted by a Bill like that from the utility. So I fully appreciate what people must be going through who are experiencing that.

I will say that I am absolutely committed to working with you and pushing the utilities to find solutions that are going to help your constituents. I definitely recognize the importance of making sure that when we have wildfire recovery, we're not putting families in a situation that should be unacceptable.

Okay. And I just also want to say I appreciate you sharing that and I would love to figure out a way that we can get on regular communication.

Because my experience last year, I began in the Legislature last year, is the CPUC has been less than responsive and it has been very difficult to get responses to a crisis that's going on in my district. And so I want to make sure that we have a open line of communication with one another.

When my constituents feel like, you know, the decisions that the CPUC is making are happening in a black box, you know, those things make me concerned. When they feel like the CPUC is being less than transparent, those things make me concerned. So, you know, my duty is to represent them when I'm up in this space.

And a lot of the issues we're talking about today, we're discussing them as if they are far off issues that we're going to have to address in the future. They are happening right now. And I want to make sure that we're keeping that top of the mind as we're having this discussion.

You know, another question I had that I want to bring up and let me recognize again, I understand that it's your first day and so this might not be something that you're familiar with, but I want to share it with you.

Back in November 17, my office submitted a letter to the CPUC related to the request for the return on equity that the investor owned utilities had submitted to you all. And my office had requested that there be an independent ROE analysis done. We are very concerned about the number that was represented by the IOUS.

We wanted to see an independent analysis be done into what that number actually should be.

We were concerned that the number that was being suggested by Pacific Gas and electric or PG&E, so Cal Edison as well, San Diego Gas and Electric, was unjustifiably higher than market conditions warranted, that there is flawed methodology that was used and that was citing outdated financial data.

And so you all did not do that independent analysis, but you did ultimately end up reducing overall the ROE that was anticipated.

And so I would like to understand why an independent analysis was not performed as my office requested, along with other stakeholders as well as individuals and constituents from my district who also expressed support for doing this independent analysis.

I'll start by thanking you for reaching out as we were going through that cost of capital proceeding. And what I can say is that we do go through cost of capital proceedings evaluating multiple different positions about what the return on equity should be.

And ultimately we have stakeholders in addition to the utilities, organizations like our public Advocates Office that's housed within the PUC, as well as organizations like Churn and many others who are participating in that proceeding and submitting their own analyses of what they think the return on equity should be.

And so our process does allow for taking in evidence and different perspectives and different analyses about what the utility ROE should be ultimately. In that case, not only did we not accept the increase in the return on equity requested by the utilities, but we actually decreased the return on equity.

And I understand the Little Hoover Commission recommendations also include having the state treasurer's office provide an independent analysis for cost of capital proceedings moving forward. Is that correct?

I do seem to remember that's correct. I have not looked at the report recently, but yes,

you know, I think it's important not just, you know, for us. Right. And for myself making this request, but really for Members of the public to see us do these types of independent analysis, you know, to make sure that we're very clearly justifying when we're providing an ROE.

An ROE is basically determining what the profits will be for these companies.

And I think for many individuals and constituents across the state of California, there are frustrations that there have been huge profits that we've seen for IOUs, and yet, especially in a community that's been hit by a fire, it feels as though those same companies are not taking on the risk and the liability and mitigating the risk of these fires.

And like they're not doing their due diligence as a company. And that's been, I think, incredibly frustrating for folks. So moving forward, I would like to see us ensure that there is an independent analysis being done whenever there is a return on equity up for consideration. Is that something that you all can commit to doing?

We can definitely commit to making sure that we're using the evidence based process that is taking into account multiple different analyses, including analyses that are not coming from the utilities, which is the process as it's outlined. And we ultimately need to be able to test the analyses of different organizations who put forward their proposals.

And that can involve cross examination and the involvement of the experts in the process. And so that's really vital to us. We need to make sure that there's a chance for all of our stakeholders to confront the evidence that's presented about what the ROE should be and that that's absolutely what we will do.

The final thing I'll ask, and I just want to bring it back, you know, to this conversation around this undergrounding issue and the cost, particularly that my constituents are saying right now, you know, have you seen this letter from SoCal Edison making this request around some of the cost savings measures?

And are these discussions that the CPUC is actively having on how we can reduce costs that are being placed specifically onto Altadena residents that are going through the rebuild process?

I have seen this letter. Let me follow up with you on the current actions and let's make sure that we can, we can find a good path forward for your constituents.

Okay. Yeah, I want to sit down and discuss this as soon as possible. This is a really critical issue for all of them. Thank you.

Thank you.

To follow up on the, on the, the Little Hoover recommendation.

Yeah. If you don't mind, Mr. Chair, just. I wanted to follow up on Senator Perez's point. You said you wanted to, you could commit to sort of evidence based, the evidence based approach you're currently undertaking. But what I'm also hearing from you tell me if I'm hearing this accurately.

There would be no objection to receiving an independent analysis, say, from the State Treasurer's office or another State. State entity, Is that correct? No objection to receiving that through the evidentiary process?

We could certainly receive it through the evidentiary process. But ultimately our evidentiary process also needs a chance to test the underlying assumptions, the analyses and the judgments. So there needs to be potential cross examination of witnesses who put forth that analysis.

And that's all part of the due process that we need to provide to all of our parties?

No, we want it to be. I mean, that's that quasi judicial process that you have there in that litigation, sort of internal litigation based approach. But I guess what I'm saying is if you're just in that standard, but without data, forget treasury or your analysis, you know, you're just, you're just guessing about the model they've given you.

So I mean, my question's more about do you have the data necessary and is the data itself available to empower trusted other entities with sensitive information that would require some kind of, maybe not compulsion, but some, I mean, a different type of information flow than we're currently getting in these proceedings.

So do you need additional statutory authorization to require that data be sort of transmitted in that way so that such an analysis could occur or can the current process handle that?

So I think the current process actually can handle it. We actually have quite broad data gathering powers. We still have to provide due process to everyone that appears before us. So they've got to have a chance to cross examine and confront evidence.

But the underlying and broad data gathering statutes that we have as an agency both enable us as an agency to take in lots of different data and perspectives. It also enables entities who are litigating before us to obtain detailed data from each other.

And we can, we can and do issue protective orders to protect that data where there are confidentiality issues associated with disclosure of that information. But we very much make use of detailed data and analyses put forth by parties other than the utilities in determining what the right return on equity is for the utilities.

But just when you're evaluating things like have you over invested capital in this particular area and you're going after sort of underlying assumptions about timing of upgrades to that particular circuit or substation, I mean, these are things that no outside entity is going to have unless you gather it and provide it in a meaningful way.

So how do you. Are you doing that now? And people just aren't accessing it.

I would actually say that it is happening now.

So if I point to, for example, the last PG and E General Rate case where I was the assigned commissioner, we did have parties get very disaggregated data about different circuits and circuit segments that the utility intended to harden in different ways, whether that was undergrounding or using carbon connector or not hardening and using other mitigation methods and parties leverage that data to develop their own set of recommendations and potentially different ways of mitigating risk on those circuits.

We were able to take into account the analyses from the utility on the one hand, analyses from other parties on the other hand, and ultimately come at a solution, come up with a solution that we thought was the best set of risk mitigations for the utility to Fund and be able to move forward with that will provide customers the best risk reduction for the amount of money they were investing.

And we know part of the compromise there was that you didn't just say you get it all at once, but you're going to. This is something we're going to be continuously reviewing over time. Right. So it's Sort of it doesn't just all go out the door that they're not all approved.

They're going to kind of go back through the cycles again. I guess I'm just trying to get from you. Do you agree with Professor Borenstein that there is a sort of, there is some asymmetry here between either the data you have or what he was sort of alluding to, just the personnel fire firepower that maybe you lack.

Is there some. Are you saying, do you think there's no asymmetry or there is still some asymmetry?

I think it's fair to say that there is still some asymmetry.

Obviously the utilities have much larger workforces and separate and apart from the resources they bring to bear on our rate case proceedings, they have entire operational staff who are going about the everyday work of figuring out what the nature of the system is and what the nature of different potential projects are that they should propose and evaluate.

We are not sitting with every utility employee. So we're not going to have necessarily the same volume of data and the same day to day data that they have.

But the fundamental data gathering statutes that we've been empowered with do give us the ability to go very deep into the utilities records and the parties who litigate before us do in fact do so.

So we are able to get very granular data about what the utilities are planning, what the potential benefits are and use that to analyze what is right to Fund is.

I guess I'm, I'm getting also at the financial side of things though, not just like what they're going to Fund or what their plans are, but also from a financial perspective, you know, what the market, how the markets are actually analyzing it. I mean, do we have that analytical function too to understand the sort of.

Yeah, the Wall street side of things when they look at risk.

It's a fair point. We certainly are. Again, we're not in, we're not in the meetings with the folks, bankers that the utilities are meeting with. But at the same time we do have, we do have people on staff who do have real financial expertise and can help us dig into some of the key metrics.

And our, the parties who appear before us do hire experts who can also help test some of the assumptions that the utilities are putting forth as the justification that they would propose for their return on equity.

And you know, the result that we came to actually reducing from the current return on equity instead of the increase that the utilities had requested, I think is reflective of a process that can take in expertise that's not just utility expertise and come to a decision that strikes a balance of providing an investable environment and allows utilities to attract the capital necessary to do work, but also protects customers from excessive requests.

Can I build off of this line of questioning just to, you know, ask this, what is? What is? You know, we hear such different reports about whether, you know, whether utilities are a risky investment.

You know, you know, and I guess I always struggle with this whenever there are threats of, you know, some of the line of questioning that we have that, oh, if you pursue this, there's so much risk associated with these investments.

But it's hard for me to really believe that when you see how the PUC virtually guarantees that they recover their costs as long as they behave reasonably. Because you decouple returns from sales, even if sales are so low, they're still going to be earning profits.

And you know, this use of memo and balancing accounts shifts the risk of overspending to ratepayers. So I mean, is it with all that in mind, shouldn't investing in the utilities actually be less risky?

Especially since then the state comes in and helps out significantly on the liability side when there's a problem, isn't it kind of less risky rather than more risky given all of these other factors? I think about other businesses that love to have these kinds of protections guaranteed to them from government agencies, I think

it's a very fair question. And what I would point to is that there are utilities around the country who also have a regulated environment that provides a degree of stability and protection that investors could look to.

And so as investors are looking at California utilities, they're evaluating California utilities and their risk profile versus alternative investments, including utilities around the country that might form a similar risk component of their broader investment profile. And so I think the.

Well, we've, we've done a lot to support the predictability, stability and the financial protection that makes for an investable environment. The nature of the wildfire risk in California does differentiate us from every other state in the country.

And that is a real risk that we are confronting and is a component of how we have to evaluate the investability of the utilities.

So do you think that's become the main risk factor for investment?

I think it is a, it is the critical differentiating factor between California and most other jurisdictions around the country.

Okay, I know Senator Becker had a couple follow up questions.

Well, thank you. And we mindful. We have two other panels that I'm looking forward to. Just a couple quick points.

You know, we appreciate a lot of testimony today and you know, certainly I'm working on legislation, working on legislation with turn about trying to take some of those costs off of the ratepayers that, that Severin Bornstein talked about.

And a few other points that brought up today two things, one of General interest and one just kind of a specific point I need to make. One General interest, the utility Bill. And I want to hear the next two panels on this as well. But you know, how do we make the Bill more simple?

You mentioned specifically the climate credit. We want people to get that. Appreciate that. But I always feel as a Member of this Committee when I have trouble understanding the Bill, it's an issue. So I don't have any General thoughts on that. Might be a future topic.

Just one specific point I wanted to raise because there was some testimony last week in the Assembly Energy Utilities Committee about the forecast timeline and I passed a Bill 887 requiring 15 year forecasts because that was important for sufficient lead time for transmission planning.

And in that hearing over in the Assembly there's some comments from your predecessor as well, the CEO of CAISO that seem to highlight the CPUC's view that 10 year resource portfolio was more important than the 15 year.

And that's very concerning because we know these transmission investments, number one, we want more instinct generation and we know that these transmission investments take a lot of time. So there's a little concern to hear that why would we be, would we pass a law say we should have these longer planning horizons?

Why would we be using a shorter timeframe?

So I think. Thank you for the question. As I heard the testimony in that hearing, I think while the Integrated Resources plan does typically have a, a 10 year time horizon, we also do forecast out further and I believe the CAISO indicated that they are now adjusting to a 15 year baseline for their transmission planning process.

So we are, we are in a world where the development of transmission is looking at that longer time horizon that's able to provide more certainty for developers about when and where the transmission will be available for the them to connect to.

Okay, that sounds good. I won't believe it right now, but I'd like to, you know, keep following up with your office on that because it's an important point. But thank you for that comment. Thanks.

All right, well, we've subjected you to a lot, you know, and I am right. I can, you know, I just. Four or five more things I want to talk to you about but I, we really do need to move on with it. I appreciate the time we've had Yesterday.

I appreciate you coming in to meet and all of the follow up that I know you're going to be doing now, given the many questions you've gotten from the Members. But to underscore Senator Stern's point, there's so much interest and focus on your portfolio here in the Senate, and we're obviously all anxious for you to be successful,

but the stakes are so incredibly high. I know you know that, and we appreciate your candid, forthright engagement with this Committee today and look forward to many more of these productive discussions. Senator archlock.

Yeah. Mr. President. Doesn't that sound good, Mr. President? Wear it well. I think you will. I want to thank you for coming and, you know, as my colleagues have said, we've got to, we've got to feel you out a little bit, but let you know we're behind you.

At the same time, let you know we're all concerned about the cost, the availability, the future of hydrogen, in conjunction with the need to expand our portfolios across the state. There's just so much on your plate. No doubt, but stay in touch. We're here to help and serve our constituents, as you know.

And I think all of us are trying to bring the cost down, down, because it's across the state of California under your umbrella. That will be your success, to be able to bring that down, maintain the service and open doors for innovation. So with that, I wish you all the luck. Look forward to meeting you again.

Thank you.

Thank you all so much. Thank you, Mr. President. All right, let's hear. Let me. Okay, so thank you. Thank you so much. We're going to now bring up Linda Serizawa, who's the Director of the Public Advocates office at the PUC. And I just want to take a point of personal privilege to welcome some.

The fantastic Loyola Marymount University Professor Fernando Guerra, who's here. Say hello. And his wonderful students who are here visiting Sacramento to learn about the legislative process. And we appreciate you being here very much. They're in the thick of it. They're in the thick of it now.

So just for you who just arrived, we've been intensely discussing the energy system, the way that we calculate rate of return, how we figure out the rates that people pay, what are the equities of these issues.

And now we have Linda, whose job it is to be a public advocate, looking out for the public when it comes to these rate review processes that come before the Public Utilities Commission. So it's very connected to a lot of the central questions of affordability that our constituents, fellow Californians are facing. And we just.

So glad to have the students here. So let's. Without further ado, let's now hear from you. Ms. Serizawa.

Good morning. Can you hear me? Yes. Okay. Good morning, Chair Allen and Members of the Committee. My name is Linda Serizawa and I'm the Director of the Public Advocates Office. Our office was established to advocate on behalf of ratepayers for affordable, safe and reliable service across energy, communications and water while advancing the state's climate goals. Sorry. Let me see.

I can work this. Does the. Do I use this? There's only three buttons. It shouldn't be that difficult. Okay. All right. So, although we are part of the PUC, we are independent in some fundamental ways. We set our own priorities, develop our own policy positions and manage our own budget and resources.

We participate in PUC proceedings and must follow the same rules as all other parties, including how and when we speak to PUC decision makers. As part of my remarks today, I'll begin with highlighting our work in 2025, which is discussed in more detail in our annual report.

Last year alone, we participated in 160 proceedings at the PUC and I'm going to provide some examples of that work. So, in energy, we recommended nearly a $1 billion reduction in Southern California Edison's General rate case request.

The General rate case, or GRC, is a process in which a PUC sets a 33 to 4 year budget for utilities operating and capital expenditures. Our analysis contributed to the PUC's decision to reduce the company's requested increase by 57%.

With respect to data centers, we are advocating for guardrails to ensure large load customers bear appropriate infrastructure costs and that speculative or stranded costs are not unfairly shifted onto existing ratepayers.

In communications, we negotiated major affordability and infrastructure commitments and the Verizon Frontier merger to deliver real benefits for customers, including Verizon agreeing to provide tens of thousands of new fiber connections in underserved areas, provide low cost broadband options, expand rural wireless coverage, and make significant network investment backed by financial guarantees.

We also defended universal service protections when a move to end the carrier of last resort obligations could have put over 29 million Californians at risk for losing guaranteed access to phone service.

Recently, we issued a joint proposal with AT&T to advance fiber deployment and customer protections, which could represent one of the largest fiber buildouts in the United States.

While ensuring customers across California are not left without reliable voice service in water, we successfully advocated against automatic surcharges and unjustified costs that were presented in Golden State Water's General rate case, reducing the company's request by $132 million. And in the rural community of Keene. I know there was a good discussion morning with Senator Grove.

The water company serving 30 households and a handful of small businesses proposes to either abandon service or proposes rate increases that could push some monthly bills above $1,500, which is again a more than 1,000% increase.

We are focused on ensuring these customers continue to receive affordable and reliable water service service while a viable long term solution can be implemented. In fact, one of our deputy directors is today in the town of Keene participating in the public hearing and also meeting with community leaders.

Now I'd like to discuss the most pressing issue facing rapiers today, continuing electricity affordability concerns. I'd like to speak to where electricity rates are today, the costs that lie ahead, and a framework for how to assess any proposals intended to address affordability concerns.

As part of that framework, I will discuss a component in utility rate making that works in conjunction with the return on equity called rate base.

So over the past decade, electricity rates across California have increased between 75 to over 100%, depending on the utility. At the beginning of this year, we saw modest decreases in the rates of two of the three largest electric utilities. And I truly hope that these recent decreases are sustained.

But they may very well be rate fluctuations, not a downward trend. When we hear that rates are going down, it's important to understand what that actually means. A change in rates does not necessarily mean that underlying costs are going down.

More specifically, when we put aside today's rates and examine the costs that the utilities have already incurred, the picture becomes clearer. So as an example, I'm going to focus on one of the primary cost drivers, wildfire related spending, and break down these costs into three buckets. Across the major utilities.

Billions of dollars in wildfire related costs are already reflected in customers rates and bills. This is the first bucket. The second bucket represents costs that the utilities have requested for recovery and are pending before the PUC. These costs are not yet in rates and bills.

The third bucket consists of costs that the utilities have incurred, but they have not yet sought approval to include in rates. And at the beginning of this year, over $2 billion is sitting in this bucket. Buckets 2 and 3 represent future upward pressure on rates and the utilities largely control when they bring them forward for recovery.

So I want to emphasize the data that I'm showing you here is just for wildfire related spending, which is why we need to keep track of all the buckets across all the major cost drivers. We need to do that in order to truly answer the question, are recent rate decreases going to continue?

What actually determines rate and Bill trends is whether the underlying costs of the system are rising or falling. Concrete durable solutions that bend the cost curve down over the long term will determine sustained rate and Bill relief. This is why. Oops, sorry.

Okay.

This is why when a proposal is offered to address affordability, there is an initial line of inquiry or set of questions that should be considered. First, what is being addressed or solved by the proposal? Does it reduce rates on a sustained basis for all ratepayers? Does it require ratepayer funding that is commensurate with quantifiable ratepayer benefits?

If so, when do those benefits show up in the near term? Or are they backloaded? And how are risks assessed? This initial set of questions is especially important as ideas gain traction, from structural overhauls to establishing new programs. Some may hold promise, but may take over a decade to implement.

That's why our focus is on a set of four Policy levers of which all must be pushed because they provide a mix of near term and long term relief. I have highlighted these last year at this very hearing, but I think they deserve highlighting again.

So the first policy lever is to reduce the cost of the utility's day to day operations and capital expenditures. This is most effectively done by returning to the PUC's General rate case process which until recently was a primary forum in which to set the utilities budgets for a three to four year period.

Returning to this process allows for budget discipline, prioritization of utility spending and helps to avoid multiple changes to rates in a year. Since 2019, just for wildfire related costs alone, the three large utilities have filed 17 separate applications and over half of them have been for over a billion dollars each.

By now the utilities should be able to properly plan their welfare mitigation activities and forecast the associated costs. The utilities have also filed separate requests for a wide array of other programs and projects including customer connections and billing and metering system upgrades.

The vast majority of the utilities estimated operating and capital infrastructure costs should be presented in their General rate case with few exceptions for truly unforeseeable costs. I'll go quickly through the next policy levers. The second policy lever is to pursue lower cost financing of capital investments. This will provide significant savings realized over a long period of time.

The third policy lever is to reform or phase out ratepayer funding for programs that cost more than the benefits they provide. This will result in near term relief. And the fourth lever is to modernize rate structures so that costs are allocated equitably across all customers.

And this will help ensure that no narrow set of customers is unduly benefiting at the cost to others. Recent legislation has been enacted, including bills authored by this very Committee, which have provided meaningful steps on several of these fronts. These efforts matter and they contribute to the solution.

So now I'm going to move into the last part of my remarks. So cost discipline must apply not only to day to day operating expenses, but also to capital investments. I'd like to speak more specifically to capital infrastructure costs and a rate making component called rate base.

I know a lot of focus has been paid to return on equity. Rate base is the other side of the equation in terms of utility profit. Rate base works in conjunction with ROE in terms of increasing a utility's profit.

It's a regulatory term that essentially represents the value of a utility's infrastructure assets on which the utility earns a profit or ROE. Ratepayers pay the cost of those assets over Time as well as the ROE that the utility is authorized to earn.

Because the profit included in customers rates and bills is directly proportional to rate base, utilities have a financial incentive to propose more capital spending than might be absolutely necessary. The electric utilities rate base has almost doubled in the last decade as they invest in Wildfire mitigation, reliability upgrades and infrastructure to support electrification.

Sustained increases in rate base places upward pressure on customers rates and bills. And as I noted earlier, the utilities have been allowed to request increases outside of the GRC process, making it extremely difficult to review their capital projects holistically. Utilities have a natural inclination to maximize profit.

So it is important to ensure that capital projects are really needed and prioritized, that costs are forecasted as accurately as possible, and that risks are not unfairly shouldered by ratepayers. This is essential to improving long term affordability.

In closing, the challenge is not simply to focus on today's rates, but to manage the costs that determine the underlying cost drivers that determine where rates and bills are ultimately headed.

This is how our office is focusing our advocacy in 2026 and beyond to help ensure that California, California's energy policy goals are met in a disciplined, accountable and affordable manner. Thank you.

Thank you. Thank you, Madam Director. So just for me to. Just to better understand the way things operate, have your Office recommended lower ROEs than what the CPC has approved?

Yes, but the PUC's decisions most recently have hewed very close to where our litigation position.

Gotcha. Okay. All right. And do you have a sort of philosophy as to how, as to a formula that should be used to determine the ROE?

And I think that Professor Borenstein and President Reynolds has spoken to this. There are lots of different inputs to be used in terms of determining, determining a fair, reasonable ROE. How do you approach it? We look at very complex studies that analyze the ROE of similar utilities. It gives us a range to look at.

We look also, especially more recently at the utilities reduced risk and specifically on Wildfire mitigation, because as the risk goes down, you know, honestly, so should certain mechanisms like memorandum accounts and balancing accounts and ROE. That risk is cost and that cost has been shifted to ratepayers over time.

Oh, yeah.

And so we are pushing back, trying to make sure that it shifts back to an appropriate balance.

You know, with that, do you see the Wildfire Fund having reduced upward pressure on rates or do you just think it's simply shifting risk?

I believe that the Wildfire Fund has reduced risk significantly. You know, we have investors coming through several times a year. I think they meet with Members as well. They meet with the utilities.

Reduce what kind of risk? Financial risk or fire risk?

Financial risk, yes. Yeah. And I think that they're very focused on the Wildfire Fund and the continuation of the Wildfire Fund. And that's for a reason because it helps reduce financial risk. And you know, there is a. There was a need and right now continuing need for that Fund. We understand that, but that should be reflected.

The lower risk should be reflected in other parts of the utilities business.

Do you how this, by the way, this is. The students want to know.

I got a note from the students about how your best understanding of how the system predicts fire risk, what the process by which you go through understanding what this year, next year, the next decade's fire risk is going to be so that as you try to incorporate that into your approach to these rate questions.

That's a great question. And honestly, thanks to the Legislature, we have a very good, robust process. We actually have a new agency established, the Office of Energy Infrastructure, that is responsible for looking at wildfire risk and how specifically to mitigate that risk across many different kinds of measures.

The utilities are responsible for assessing their risk, and I should say safety risk in General, wildfire risk is certainly a big chunk of that, but there's other kinds of risks as well. So the utilities are responsible for assessing their risks. They do that. Actually, President Reynolds mentioned this earlier.

They do that before they submit their General rate case application Commission takes a look at their methodologies. And by the way, as part of that process, which again, the Legislature last year has now made sure that the risk assessment that occurs is also aligned with, with the Office of Energy Infrastructure Safety's wildfire risk assessment.

So all that is now beginning to work in coordination across agencies.

Looks at the risks that the utilities identify, looks at modern technology, advancing technology, and California's on the forefront of this, by the way, advancing technology from undergrounding, covered conductor or weather stations, PSPS, et cetera, looks at all these different measures that have been developed to determine and from our point of view, determine the lowest cost, the cheapest, fastest way to mitigate risk.

So that has been the focus, I would say, of the Legislature, the governor's office and the state agencies involved in looking at lowering wildfire risk.

Yeah, by the way, beyond, I mean, the things you mentioned were things that are so directly related to traditional IOU investments. But there's a lot of other new

technological development happening on the firefighting side, the building hardening side, even on software that's trying to change behavior with regards to risk reduction in communities that I think the more we can be marrying these efforts across sectors and that's part of what this Earthquake Authority report is looking at, I think the better.

So there's a real opportunity for a virtuous cycle here with regards to risk reduction.

Can I follow up a bit also on your thoughts on this discussion we had about the Little Hoover Commission's recommendations and, you know, this suggestion that they had about trying to task the treasurer's office with providing some independent analysis of the cost of capital capital proceedings, you know, do you currently incorporate or consider the Treasury's expertise in capital markets and do you have a perspective on considerations for such an approach as we're trying to think about some additional firepower from outside of the PUC to help this process along?

Yes, I think it's a good idea, frankly. And we our office, more and more, you know, we're listening to the utilities quarterly meetings with shareholders. We find it very instructive to hear what they're saying to their shareholders to see if it lines up with what they're saying to everybody else. I think it's a big input.

I would say that the makeup, the shareholder makeup of some of the utilities has changed greatly over the last 10 to 15 years. So I think it's important and I think there's much more interest. How so? I think that the type of investors for some of the utilities have.

The attributes have changed

demographically or ideologically.

I would say that there are a lot more investors looking at utilities as not just, let's say it used to be widows and orphans a long time ago. I think that's changed.

Yeah. Okay. I'll follow up with you more on that. Is it your sense with the Wildfire Fund that there's an appropriate sort of level of risk that the shareholders are taking on under the current policy with regards to the Wildfire Fund,

I am very glad to see that with the continuation Fund that there is skin in the game for shareholders, let's put it that way. I think that was a. We supported the continuation of the Fund and that was a key component.

Okay. I'd love to get it just. And I know Senator Archuleta has some questions I'd like want to get a. Who controls the PAO's budget allocation? What's the CPUC's?

You control it.

The PUC doesn't have a say in that?

No. We are by statute 309.5 of the Public Utilities Code. Our budget is set independently of the commissions.

And do you feel as though you've got a good level of resources for staffing and for an independent evaluation of requests for GRCs and some of the other proceedings.

I do, actually, we do come before the Legislature with budget change proposals. We try to make sure that they are in line with the workload, of course, but we try to run lean and mean because if we're looking at the utilities operating costs, we should definitely be looking at our own and running as lean as possible.

And I believe we are.

Okay. Thank you, Senator Archuleta, thank you.

Thank you, Madam Director, for being here with us today. And I can't begin to say thank you enough for your voice and your organization that's standing up for the ratepayers and it's so important.

But are your hands tied to a degree, because some of the things that we heard today and the necessity, it seems like, that the utilities have to have this level of profit, this level that if the profit margin isn't there, then we have to subsidize it.

If there's a wildfire, there's issues, then we have to subsidize it some way somehow, but on the backs of the ratepayers. Is that what we're, what We heard earlier today and that what you have discovered, because reducing the cost is what every family is looking for, and they're looking for this session that we do something about that.

But how do we convince them to make these adjustments if they're all mathematical and they're all based on rates and based on profits and so on, how do we get them to move off that dime? And I mean dime.

Well, honestly, I think discussions like today help a lot because I think that it sheds a light on what the regulatory framework is, how it functions, how it's supposed to work, and raising good questions about, well, then what is going on? I think first of all it's transparency and then it's accountability, exerting discipline.

And so I think the more that that happens, the more that the utilities will be called to account. That is extremely important in the regulatory framework.

So your system in the future might be for public outcry, for public involvement, for city councils across the state to hear more from you and organizations like you to go ahead and transmit that information to the new President. We just heard. But we've got to do something so they understand that we're sick and tired of it.

As they say, we've got to see some action and some source of game plan that we are going to see a reduction over the future.

Yes. And I would also add to that, that you need a credible source of information, sources of information that can take the data, analyze it, present options and make recommendations. And that's what our office tries to do every day.

You also need an understanding of rate making, which is complicated, but in some ways it's not so a basic understanding of rate making within the PUC, within our office and you know, frankly, other key stakeholders that are participating in the process

and getting the General public to understand about equity versus cost versus profitability. So they understand that it is a business that we need and if we can't help them, they can't help us. We, we've got to find that happy medium, I guess.

And you know, the rate base increases pertaining to profitability is important, but at the same time, every household in California is suffering right now and they need some adjustments. So I again, thank you and please stay with us, be involved and let us be part of your outcry as well.

Thank you.

Thank you.

Senator Becker,

thank you. Thanks for your report and thank you for being here and everything you said. I'll just ask one quick question, just one note. Just in General, I think that we didn't discuss in the last panel too is just that's been a focus of the Legislature.

I think the last few years is also just streamlining a lot of the clean energy projects, for example, you know, because that adds a lot to costs, right when we have just excessive timelines and to get things done.

So just wanted to note that in General it's one thing we've and I think we'll hopefully return to that again this year, but we're trying to do permanent streamlining and make things faster.

One of the challenges I know advocates face, and I think possibly your office too, is kind of information asymmetry when, you know, get there's kind of hundreds of paces of dense technical information you have to parse through in a limited time frame.

Is there anything the Legislature could do to help advocates have better access to data and information? You need to more effectively to be more effective at spotting opportunities for efficiencies and push back on potentially on costs.

I really appreciate that question because it is a daily battle for us to sift through sometimes thousands of pages of utility data, hundreds and hundreds of accounts depending on the size of the utility and trying to follow, you know, what did the utility spend on and then figuring out was it reasonable.

But first we have to figure out, you know, what accounts to look at. The challenge is making sure that we can look at all the accounts, all the accounts that the utility has all the accounts are regulatory accounts. They're all utility accounts. Let me give you an example.

It actually is an example from a water utility recent General rate case. Actually, it's been several General rate cases where this comes up where the water utility is looking for recovery for costs associated with giving very luxurious jewelry to their staff. Ratepayer funded jewelry, expensive sporting events, etc.

This comes up in the General rate case and our staff uncovered it and we keep uncovering it and it keeps coming back. And sometimes the utilities will go, oops, oh yeah, that shouldn't be there. And they'll take it out.

So they'll adjust the request, but we want to follow up and make sure they really did adjust, that ratepayers truly are not paying for it in their bills. And the way to get at that is to see those accounts, all the accounts. So it's a real story. Very true.

And a concerning one as well. Thank you. Thank you for that answer,

Senator Richardson.

Thank you, Mr. Chairman. I just have a few quick questions. First of all, I have one from a colleague who is out of town and unable to be here.

The person asked, can you speak to what tools the Public Advocates Office has in its disposal to ensure ratepayer money is used appropriately and how does the PAO review utility accounts? Which is what was just asked here.

Thank you. Again, I will emphasize the point that our discovery rights are ability. Our ability to look at all of the utilities accounts where they book their costs is fundamental to our work and we should have the ability to look at all the accounts. And do you not?

We have some utilities that are fighting us at every step of the way.

Okay. And other than discovery, do you have any other tools at your disposal to ensure ratepayers money is being used appropriately?

We do. We have, and I don't mean this to sound trite, I actually genuinely mean this, we have incredibly talented staff. They are passionate about their work. They understand the mission given to us by the Legislature to advocate on behalf of Ratepayers Day 1.

When they start with us, we make sure they understand their mission and what we're advocating for. That is our number one tool. And then once we have our resources, then getting at the information that the utilities have. So I would say those two tools working in tandem are what we need.

We are also trying to keep up with advanced technology, GIS mapping, geographical spatial analysis, basically using that kind of tool in terms of assessing the utilities wildfire mitigation plans and whether they're targeting the riskiest areas in the state that is advanced technology.

And we're seeing, especially with our most newly hired employees, they're coming in the door from college, having taken some of those classes. It's been a big boost to our analysis.

So staying ahead of the curve and being on top of, you know, what technologies are out there that make our analysis more streamlined, easier, et cetera, those are important tools for us.

Okay, thank you. Real quickly, on your page three, it stated that you in 2025 highlights, you advocated for guardrails to protect against data center cost shifts.

I don't expect you to get give us that full report today, but could you please provide to the Committee what you did and what you found and you know, what your recommendations are. I am quite concerned, which is why I asked the question earlier, who's really planning and looking at how much electricity we're actually going to need?

Do we have it? How much is it going to cost? How soon are we going to get it? And everything that I'm hearing about these data centers are that the costs potentially go to the ratepayer and can be quite extensive.

So any information I'm a new Member on the Committee, so any information you have on the guardrails that you've put in place to help with the data center cost shifts, I'd be interested in reading. The second thing is on page six, number three, it says key questions for evaluating ratepayer impacts.

And I'm assuming these are questions that your Department asks, does it require ratepayer funding that is commensurate with the quantifiable ratepayer benefits? If yes, when will those benefits be realized in the near term, over how many years and in later years.

So I'd be interested in learning more about that, how the actual ratepayer funding is related to the benefits that they're receiving. My next follow up had to do with on the next page seven, number three, phase out ratepayer funding of programs that are not cost effective.

So if you have provided this Committee in the past any recommendations of those programs that should be phased out, if you would share them again with us, that would be great. And then finally it was briefly mentioned earlier this morning.

For example, I'd like to learn a little bit more about the solar program and how it was intended that people who got solar, they'd receive sufficient electricity for themselves and would be putting more into the grid.

But it appears that some of the more lower income areas are actually funding the power that individuals with the solar programs are receiving. So any information you might have on that, I'd Be interested. Thank you very much. I'm going to head out. I'm being called to a budget meeting as we speak.

But I look forward to working with you going forward.

Thank you. Thank you, ma'am. Thank you. Senator Archuleta Had a one follow up question.

You know what I'm listening to and again, thank you for being here. But I feel that you're the cop on the beat and you're looking and seeing what's going on in the energy world, and yet you're bringing the items to the table for us to see, but you don't have the power to do anything about it.

We need you to participate with us so we can be your power through your information. Because of their issues and wrongdoings and, and money is being thrown out like water, then we need to know about it and so then we can act because we have the power to bring people to the table.

Well, you may not, but I see you have a vital role here and I think we need to elevate your status any way we can because we don't have the time and wherewithal, to be honest with you, to do the things that you're doing, but we certainly have the time and wherewithal to act upon the knowledge that you bring us.

So if there's punitive action that needs to be taken, then we need to know about it. So I am in total support of what your agency is doing and look forward to seeing you rise to the top so you can be part of our Committee. And thank you, Mr. Chair.

Thank you, Senator Stern.

Thank you, Mr. Ozawa. I know we've spent a lot of time on ROE and a lot of time on wildfire risk. I just. Why have you for just a second longer shift over to the rate based part of it and helping us understand what kind of savings potential there exists in this arena?

We know that aside from the wildfire risk, that the distribution grid upgrade cost, at least as anticipated, could be quite substantial in the decade ahead.

If you take into account building electrification, electric vehicles, and then just sort of General upgrades to substations and circuits and, you know, distribution grid transmission Systems, integration of DERs, you know, people are talking about more demand, flexibility, all that kind of work that's going to have to happen on that distribution grid.

We know that there are lots of people involved in this GRC, these GRC cases and sort of weighing in. That's sort of the picture we've got. But there's scores of other cases underway. Just looking through the work plan, I think I named 53 that's a cross boundaries, but even just within energy, I think you're in the mid-30s.

My understanding is that often you at PO are sometimes the only one, even in one of these proceedings as a counterparty to the applicant. Is that the case?

That is the case, yeah.

Do you have any concern about the lack of interaction, say between cases that are affecting the rate base and the GRC process that in other words, they run in sort of disaggregated manner? Is that. That's something you see as a sort of pattern that. I don't know. Concerning.

It's extremely concerning.

Especially when, if you go back to the chart that I showed you about the increasing rate base, the more that the utilities are allowed to request increases to propose capital infrastructure projects outside of the General rate case and makes it much more challenging for the commission and for key parties that want to look at that need to look at the information and look at it.

All these projects, capital investment projects, try to prioritize them, try to get the utility to prioritize their capital infrastructure projects. You can't do that if the proposals are in different proceedings before the commission.

Forty different silos, each with its own sense of urgency. No stacking in terms of priority.

Exactly. Exactly.

Beyond even just a staff resources issue, it's even just the actual prioritization of the spending itself.

Right, right. I would like to come at this from a different angle as well. Because electrification is very important focus for our office. We are trying to get at future costs.

We issued a study last year and in that study we looked at the distribution system across the three utilities to see where there could be future growth on their physical system that didn't require upgrades. And overall, how much was it going to cost to get to electrification that is being planned for.

For 2040 for the future and other. Other. Let me be clear, other stakeholders are doing this too. And we are. We. We think that's great. The more the better. Because the more we can do this, we can.

Our state can kind of hone in on how much it's going to cost us to electrify how much is going to cost in terms of system upgrades, resources, et cetera. We need to get at that number. And the more we do it, I think the better the data will be. So it's okay if we're providing bookend.

We're just trying to get to refine our methodologies and we try to reach out to key stakeholders to vet our study to make sure if they have a different way of coming at it. We want to hear that those efforts are important as well, because if you get it wrong, it's going to increase rate base.

We could have utilities investing in things that aren't necessary, aren't sequenced. Well, and the same thing with transitioning away from natural gas to electrification. We've got to do that in a very measured way. Not to mention the fact that we're dealing with a material that explodes. There's safety issues, but it's a whole different system that's pressurized.

So we have to be very careful about how we make that transition. And SB 1221, which requires the commission to conduct pilot programs for that transition to help determine how best it should happen, we are participating in that proceeding. We think it's going to be very helpful, very helpful.

So there's a number of ways to get at that. But all that goes towards making sure we can try to reduce rate base as much as possible.

And are there, are there systematic impediments? I asked about that asymmetry to President Reynolds and he indicated, you know, there is some asymmetry between regulated entities and the regulators. Just in terms of how much you can keep track of when you're all alone in one of these proceedings and you're doing what you can.

I mean, how do you actually build in all those sort of capital intensive rate based proceedings? How do you find sufficient analytical heft to be able to sort of provide that holistic analysis? I mean, are we missing, where are we missing functionality there? Is it having stronger energy division input? Is it something in the intervener process?

Where does that extra help come from? Is it just beefing up with the PAO is capable of thoughts on that?

Yeah, it goes back to that line of inquiry. I mean, there's a whole host of other questions that follow that initial set of questions, but it goes along with that. So we're raising those kinds of questions, but we have to make sure that we get the answers we need to do the proper analysis.

And that goes back to other questions that were raised today in terms of discovery rights. Being able to see the utility information unvarnished and holding them accountable for explaining their proposals.

Do you lack, is that a lack of statutory direction on that front or is that more of a pattern and practice of just how things are done?

What would be helpful is a legislative affirmation of our discovery rights. Frankly, explicit affirmation.

Okay, that's helpful, concrete. I'll yield back. Let that help.

I just want to take a moment because this also happens to be your annual PAO report on all things in addition to these rate related issues, obviously you remember the whole carrier last resort discussion and I just wanted to ask a couple questions about the decision of PAO to file this joint proposal related to these obligations.

So, you know, as you know, there's just a lot, you know, there continues to be a lot of concern about the possibility of folks losing lifeline support for their telephone service.

So I just, I wanted to know if you had any comments you could just make about the extent to which the PAO's proposal ensures, you know, that households lose affordable home telephone service.

Yes, thank you for that question. So the joint proposal is with AT&T. And I want to emphasize it's not a settlement, it's a joint proposal, which means that we came together and agreed on a path forward. Settlement implies compromise. We don't feel we compromised.

And in terms of what we didn't compromise on was a set of principles that we actually filed with the Commission in its carry of last resort proceeding. And all the principles are geared towards making sure that customers are protected should a carrier be relieved of its obligation as a carrier of last resort.

The joint proposal is in line with our principles. It's also in line with our statutory mandate, I should add. So the joint proposal is meant to be, to us, it's meant to be a supplement to the PUC's staff proposal on the carrier of last resort.

It's not meant to replace it, not to, meant to improve it, it's meant to supplement it. And by supplement I mean it provides a expedited path for the carrier to exit its Kohler, its obligation if it commits to certain things. And I'm going to run down a list of what those commitments are.

So in order again to exit their Kohler obligation, they must do it in exchange for, first of all, they can only relinquish their obligation where there is at least one service provider that offers high quality wired service, otherwise not eligible can't exit.

And in those areas, this means that customers will not be left without access to communication services.

By definition, it does not include areas where there's only one landline service provider that provides service over, you know, Plain-o telephone service by definition, because there has to be at least one service provider in that area that provides high, high quality communication services.

But isn't one of the problems that there's nothing in the proposal that ensures service for everybody?

I'm going to keep going. Okay, so the also there is a commitment that the carrier of last resort provide lifeline service. Now, we did not agree with AT&T on how long our position remains, it should be in perpetuity. So there was an agreement there and that's. We have made that clear to the commission.

Commission needs to decide that. The other thing is that the AT&T has agreed to in the areas where they would like to be relieved of their obligation, they commit to significant build out of the fiber network with a priority to low income and disadvantaged communities.

And this buildup needs to be measurable and verifiable and is enforced by the PUC by the way. So it explicitly recognizes ongoing PUC authority. So I want to also add that currently California is on the bottom half of fiber build out in the country.

We uncovered this through a study that we published last year or early this year. This proposal in terms of fiber build out would put us on the top half of most of the states in this country. And practically what that means is that more Californians will have access to telehealth, to online education, governmental services, et cetera.

We think this is a huge advance in terms of public interest. Of the public interest while protecting customers, making sure that they will continue to have access to reliable service.

But the build out in the proposal is only in those areas where fiber already folks already have gigabit level service, right?

Well, it could be multiple service providers only one among them needs to have one gig offerings, but the requirement is multiple service providers only and one needs to provide one gig service.

So that what we're saying is that the carrier can be relieved of its obligation, can seek relief of its obligation as long as there are other providers in that area.

Yeah, I mean, you know, the concern about effectively what you're proposing is only going to impact those areas where it already exists. I mean...

It's going to impact areas where there's already choice and choice of high quality service.

So the question is just there are other communities that are not going to be...

That are not part of the joint proposal. They are not. So rural communities don't tend to have that choice. They are not going to be eligible for... The carrier will not be able to pursue this expedited path for a lot of rural communities, most rural communities. And by the way, you know, some of these communities do not want... They want to own and operate their own systems.

And what we have said, we've recommended in the commission's COLA proceeding is that the commission carve a path out for them to require the carrier of last resort to work with those communities to facilitate ownership and operation of their own systems. So we steer clear of those communities, and we want to make sure that they have discretion.

Okay. I think for several reasons we're going to want to have a separate conversation about this. Because I know, you know, as you know, it continues to be an area of real concern. And I think I'm, I think...

Well, there are implications to, there are potential implications to the, to aspects of this proposal's approach that I think we would just want to make sure get addressed. And I think we just, it's going to take us kind of going through some details with you, so look forward to that. All right. Any final questions?

We're already past, it's almost 12:30, so I just apologize. And we've got a wonderful new next panel coming along. So I appreciate your work and thank you for your presentation. And let's call up our stakeholder perspectives panel. So we've got Matthew Freedman from TURN, who's here.

We've got Travis Ritchie from Berkeley Law Center for Law, Energy, and Environment. And then Jose Torres from the Affordable Energy Campaign. Great. So let's start with you, Mr. Freedman.

Yeah. Thank you, Mr. Chairman, Members of the Committee. My name is Matt Freedman. I am a staff attorney with TURN, the Utility Reform Network. Happy to be here today. Last year, TURN worked with the Legislature on a package of electricity affordability measures that were designed to promote accountability and a lower cost for ratepayers.

The primary measures involved alternative financing of investments in transmission and distribution through two mechanisms. First, public financing and ownership of new electric transmission, and second, securitization of distribution investments, including spending on wildfire mitigation. Substituting lower cost debt financing for high cost, utility shareholder equity can reduce ratepayer costs by between one third and one half over the life of the asset.

The IOUs, the investor owned utilities, are forecasting over $100 billion in new capital expenditures over just the next few years. And the California Independent System Operator has forecasted in its 20 year transmission plan that up to $60 billion of new capital investments are needed to connect resources to meet the state's decarbonization goals.

The Legislature has made some progress on alternative financing in 2025, but far more remains to be done. SB 254 that Members of this Committee know well was slated to require the utilities to securitize $15 billion in wildfire mitigation capital expenditures, but last minute changes to the bill reduced this amount to $6 billion.

SB 254 also authorized incremental steps forward to support public financing of electric transmission projects through an accelerator program administered by GO-Biz. But this initiative represents a significantly scaled down version of the original concept that was included by bills authored by Senator Becker and Assembly Member Petrie-Norris.

Given the scale of future capital spending, the Legislature should take additional steps to expand the use of alternative financing given the clear benefits for ratepayers. Our second proposal last year was to enhance PUC scrutiny of utility spending requests that would drive up rates beyond inflation and to consolidate review of such requests.

This was included in SB 254, but removed from the final package due to intense opposition by the utilities themselves. This was a missed opportunity, and I want to talk more about it. So we have five options today for promoting accountability and affordability in the current legislative session.

First, using inflation as a benchmark for applying heightened scrutiny to cumulative utility spending requests. As has been discussed today, a primary driver of massive rate increases over the last five years has been increased utility spending. And to get a handle on rates, future spending has to be subject to greater scrutiny by the PUC.

Currently, the PUC considers utility spending proposals in a series of one off cases. There's no coordinated consideration of overall utility spending requests, and this is particularly true given the diminishing portion of utility spending that is included in the general rate case.

The utilities take advantage of this, by the way, by constantly submitting separate cost recovery applications, each of which is considered in a vacuum. To address this structural flaw in the PUC process, the Legislature should direct the PUC to routinely consider the cumulative impact of all spending requests. In particular, we call for the following requirements to be adopted.

Each utility should submit as part of its general rate case an inflation constrained spending scenario that reflects the utility's highest needs. And the PUC should only authorize expenditures in excess of inflation if the utility provides clear and convincing evidence that these additional expenditures are necessary to ensure the safe and reliable operation of the system.

The PUC should apply heightened scrutiny to any utility requests beyond those presented in the general rate case that would increase spending beyond inflation. And this approach would require the utility to provide a greater showing of need for cumulative spending that exceeds inflation.

But simply the purpose of this is to separately identify the utility's needs from its wants to apply greater scrutiny to excessive spending proposals. And it wouldn't prevent the utility, the PUC, from approving more spending. It simply imposes a higher burden on the utility and requires a consolidated review.

Secondly, we propose limiting the use and review of balancing accounts and memorandum accounts. This topic came up earlier today. The PUC has authorized the utilities to record increasing amounts of spending in balancing accounts and memorandum accounts, and when the balances of these accounts are placed into rates, they can cause huge spikes that exacerbate affordability challenges.

This approach has replaced the traditional method of forecast rate making, where the amount of total expense and capital to be incurred over time is forecast in a general rate case. Under forecast rate making, the utility is forced to live with the annual revenues that are approved in the case.

If the utility overspends, the excess can be assigned to shareholders. Balancing and memorandum accounts, though, essentially allow the utilities to run up large and unpredictable balances that are presented at a later date for recovery in rates, and many of these costs are subject to minimal review before they go into rates.

Ratepayers have to live within their household budgets. Utilities should have to do the same. The Legislature should direct the PUC to limit the use of balancing in memorandum accounts and force the utilities to live within the budgets created in their general rate cases.

Third, return on equity. A lot of conversation today. We propose a lower return on equity for certain categories of capital investment. The PUC generally provides a single return on equity to each utility for all their capital investments that are subject to state jurisdiction.

The Legislature should consider directing the PUC to adjust the equity return provided for certain types of capital costs that are less risky for the utility or that lower other risks for utility shareholders.

For example, capital costs that are included in a balancing account, capital costs exempted from a reasonableness review, and capital costs relating to wildfire mitigation and or undergrounding. And I understand Mr. Ritchie will talk about this in his statement.

A lower return on equity is justified if the capital investment lowers the risks to shareholders, as is the case for wildfire mitigation and undergrounding projects. Fourth, linking ratepayer funded utility executive compensation to rate discipline and affordability.

One way to help align the motivations of utility management with the interests of ratepayers is to link a portion of top employee compensation to affordability goals or limits on rate increases. Now the good news is there currently is a statutory prohibition so that ratepayers don't pay for the cost of executive compensation.

But the bad news is this prohibition only applies to officers of the utility, which is a very small group of top employees. Around six, for example, at PG&E. The Legislature could require the PUC to tie a portion of ratepayer funded compensation for a much larger group of top level utility employees and ensure that those utilities, those employees are motivated to pursue affordability and rate reduction goals.

And the success on those efforts is measured by the amount of compensation that they receive in rates. And finally, encouraging utility employees and contractors to report wasteful overspending. When the PUC evaluates the reasonableness of utility spending proposals, it relies on critiques raised by non-utility parties like TURN and the Public Advocate's Office that participate in proceedings.

The PUC rarely rejects or reduces a utility spending request in the absence of competing proposals raised by non-utility parties. TURN and the Public Advocate's Office and other consumer parties do our best to identify excessive spending by the utilities. But there are many examples of unreasonable spending that we fail to catch.

Who is in the best position to know when utilities are overspending or otherwise squandering ratepayer money? Their employees and the employees of their contractors. The Legislature should consider methods of incentivizing these individuals to disclose information about wasteful spending to the Public Utilities Commission.

If any information obtained from an employee is used to reduce the amounts collected in rates, the employees should receive significant financial incentives and be protected against retribution. And this proposal could be combined with the PUC investigative unit concept that's going to be discussed by Mr. Ritchie.

So here are some ideas for consideration. We've got more. We look forward to working with this committee and Members on a suite of affordability and accountability proposals this year. Thank you.

Thank you. Mr. Ritchie. Oh yeah, sure. Please. Just real quick.

Thank you, Mr. Freedman. Right to the point. Excessive spending. Give me some examples of what they're doing. The vacations, yachts, what's going on? Give us an example of this excessive spending.

So those are the easy ones, right? The sort of the gold plated appliance situation. I'm actually thinking about something that's much bigger than that. Where the utilities, as has been discussed today, are structurally motivated to spend on capital rather than expense. Because expense is a pass through. Capital goes into rate base. That's how they make their money.

So in many cases, the utilities are always pushing higher capital spending as opposed to using an expense program to achieve the same result. So in that situation, I think we could find that folks on the inside would have far better insights into what's happening. I'll give you one other example.

In the implementation of the energization direction that was provided by the Legislature in SB 410, PG&E came in and asked for a huge amount of additional spending to be recovered in rates. And one of the things that we found is that PG&E is relying extensively on external contractors to do this work of energization.

The external contractors cost about three times as much as internal labor. Now you think on the one hand that the utility would be motivated to spend less. But on the other hand all of these costs go into rate base. Rate base is how they earn profit. So there are conflicting incentives here.

So as much as I'd like to think that this kind of mechanism would find the gold plated watches that are being given, I think that some of this other stuff is actually much more significant. And that's where having folks on the inside that would be motivated to tell the true story could yield huge dividends.

So obviously you're against outsourcing because of the cost. Two to three times what it would normally keep an employee within the system, even with benefits, a lot cheaper than outsourcing. Is that what I'm hearing?

I don't think we have a general position on outsourcing, but in this situation, the numbers are what they are. This is what was shown in the case. And when we looked at it, it really caught our attention. And we asked for the PUC to take a hard look at PG&E's use of much more expensive contractors for this work. And the PUC had very little interest in addressing this in its final decision.

Thank you for your input.

You're going to find that Mr. Ritchie's going to touch on some of these issues. So let's go to you.

Thank you, Mr. Chair. Thank you, Mr. Chair, Senators. Appreciate being here. Travis Ritchie with the UC Berkeley Center for Law, Energy, and the Environment. I know we're short on time, so I'm just going to try to skip to some of our proposals.

Before I do that though, I wanted to provide some kind of two points to stress about these proposals that we're putting here today. The first is that these are a work in progress. I think the information that we submitted says working draft on the top. And that's for a reason. We're still taking feedback from folks.

And the way we generated these was we held a convening in last December in 2025 with various experts to discuss these ideas. These ideas that I brought before you today are CLEE's ideas. They're not from the group, but they were inspired by that discussion.

So we were trying to hone in on some of the topics that were discussed and bring those here. I'm trying to click forward here to bring you along. If folks could bring me to the proposal number one. It might be just delayed. Well, we'll see if it starts clicking wildly then. So the first of our proposals has to do with some of the topics that we've discussed in various forms today. And it combines a few things.

And the top is wildfire really is where the cost driver is here. And so we were looking at how do you combine these ideas of rate based spending, capital spending, the returns on equity that are provided for capital spending. And particularly as it pertains to wildfire. This is a big piece of spending. Of the 40 billion spent in the past five years, 60% of that has been on mitigation efforts.

So this isn't just paying victims funds. This is actually going out and doing the work, the tree trimming, trying to make our system safer. Now it's important to do those costs. What we are seeing is that a lot of those costs have been operational.

They've been the tree trimming stuff, the labor, the folks going out there and doing the hard work. We're starting to see that converting more towards capital expenditures. Things like undergrounding, things like investing in the poles. This isn't necessarily a bad thing. Sometimes shifting from operational expenditures to capital expenditures can be the most efficient thing.