Engstrom: PG&E utility profits are out of control — here’s how to fix it

This Thursday, the California Public Utilities Commission (CPUC) will vote on how much profit PG&E will be allowed to earn over the next three years — a decision that will directly affect whether Bay Area electricity bills continue climbing or finally offer relief to struggling customers.

PG&E just posted record-breaking $2.47 billion in profits in 2024, even as one in five of its customers fall behind on their electricity bills. Electricity rates have climbed 40% in just three years. Meanwhile, the utility separately seeks an additional rate increase that could add $500 annually to customer bills by 2030.

In November, the CPUC proposed a modest cut to utility profit rates — just 0.35% across the board. That proposal already fell far short of what’s needed to ensure fair, reasonable energy bills for Californians. But this week, under pressure from utilities, the CPUC put out a revised decision that walks back even that modest decrease to just a 0.30% decrease for all investor-owned utilities.

Electric bills in California are higher than they should be, and this backtrack makes it worse. Walking back even a 0.35% reduction, the most modest of proposals, is outrageous. It signals that the CPUC is capitulating to utility pressure rather than protecting customers.

The commission can and must go much further. Mark Ellis, a former utility executive who worked for Sempra, the parent company of SoCal Gas and SD&E, has advocated for aligning utility profit margins with what the market actually supports. He argues that a fair return would be about 6% for most utilities under current economic conditions. If the CPUC aligned utility profit rates with that market reality, it could save $6.1 billion across all utilities statewide or $455 annually per household.

Here’s how utility profits work and why the financial stakes of this decision are so large for utility customers. When investor-owned utilities build infrastructure — power lines, substations, gas pipelines — they use both borrowed money and investor money to pay for it. They then pass along the costs to customers: interest payments to lenders and profit returns to shareholders.

Here’s the catch: As regulated monopolies, the profit rates utilities earn are not set by a market — but by regulators. In recent years, California regulators have authorized above 10%, more than double what U.S. government bonds pay. That’s remarkable, given that utilities are incredibly safe investments with predictable, guaranteed revenue. Yet, utilities are now asking for even more, with proposals ranging from 11% to 11.75%.

Utilities argue higher profits are needed to attract investors for big infrastructure projects, but that argument doesn’t hold up. California utilities operate with guaranteed revenues and inelastic demand, yet their profits are set as if they face real market volatility. There’s no credible justification for returns this high.

The financial stakes are massive. A study by the American Economic Liberties Project estimates that excess utility shareholder returns cost U.S. customers approximately $50 billion per year. In California, utilities spend tens of billions on infrastructure annually. Even a 1% to 2% change in their profit rates can translate to billions in savings for utility customers.

Reducing profit return rates would also curb utilities’ incentive for excessive, wasteful spending. The more power companies spend on infrastructure, the larger their profits. This creates a powerful incentive to pursue expensive projects that increase costs for customers, often with little benefit.

Take wildfire mitigation — a critical safety issue in California PG&E, SoCal Edison and San Diego Gas and Electric all plan to spend billions to bury power lines to prevent them from sparking fires. But other methods — like insulating power lines — are faster, cheaper, and can be nearly as effective in many instances. Utilities that profit from expensive projects don’t have an incentive to consider more cost-effective solutions. This perverse dynamic plays out across infrastructure decisions: the more utilities spend, the more they earn, creating a powerful incentive to pursue projects that increase costs for customers. It’s a system that rewards bloat over efficiency.

Californians should not be on the hook for excessive profits or wasteful spending that is not in the public interest. What would reasonable utility profits look like?

The choice before California regulators is clear: continue allowing utilities to extract excessive profits from ratepayers, or align these companies’ returns with how the market treats other businesses. Monopolistic utilities should not be special profit-making machines. California law requires CPUC to ensure rates are just, reasonable and affordable. By approving more reasonable returns at the Dec. 18 meeting, CPUC can get us there.

Jenn Engstrom is a state director at the California Public Interest Research Group.