SDG&E looks for 4.54 percent rate increase for 2020

April 24-- Apr. 24--If San Diego Gas & Electric gets what it is asking from the California Public Utilities Commission, the power company's shareholders in 2020 will receive a a greater return to account for the costs and risks associated with the state's deadly wildfires, while ratepayers will pay higher bills.

SDG&E, along with California's other investor-owned utilities, filed what is called a "cost of capital" application Monday with the utilities commission, known as the CPUC for short.

If approved by CPUC commissioners, average electricity rates in SDG&E's service territory would increase from 26.25 cents a kilowatt-hour this year to 27.4 cents next year, a rise of 4.54 percent. For a typical residential customer living in the company's inland climate zone and using 500 kilowatt-hours a month, a bill during a summer month would increase $5.59, according to SDG&E estimates.

Natural gas rates would increase 4.9 percent for an average residential bill, going from $34.60 a month to $36.29, a rise of $1.68 for a typical customer who used 24 therms.

As part of its application, SDG&E asked the commission to raise its return on equity -- essentially, the return shareholders receive -- from 10.2 percent to 14.3 percent.

That's a sizable increase but the two larger investor-owned utilities in the state asked for even more.

In their own cost of capital filings, Southern California Edison requested an increase of shareholder returns from 10. 3 percent to 16.6 percent and Pacific Gas & Electric asked the CPUC to raise its return on investments from 10.25 percent to 16 percent.

All three utilities cited the risk of wildfires and their associated costs as the primary driver for the higher numbers.

SDG&E's application asked for a return on equity of 10.9 percent and then included a 3.4 percent "risk premium" to account for what the company said are the "the unique wildfire liability risks" posed in the state. Adding the two percentages together accounts for the 14.3 percent figure.

SDG&E spokesman Wes Jones said the company's request "is similar to past cost of capital filings but also includes proposals to account for the increased wildfire risks and liabilities that are prevalent in California."

Mark Toney, executive director of the consumer utilities advocate The Utility Reform Network, also known as TURN, said "it's hard to see the justification" for the increase asked by three utilities, including SDG&E.

"That is a 40 percent increase that (SDG&E officials are) asking for in their profit margins," Toney said.

PG&E filed for bankruptcy in January after its electrical equipment was linked to a series of devastating fires in its Northern California service territory. Edison's power lines, local state and federal fire investigators said, ignited the 2017 Thomas fire that scorched Ventura and Santa Barbara counties.

Although the Lilac Fire in December 2017 destroyed 157 structures, San Diego of late has largely escaped the deadly string of fires that have ripped through other parts of the state. But Wall Street credit ratings agencies have included SDG&E and its parent company, Sempra, on downgrades along with other California investor-owned utilities and SDG&E remains on a "negative" watch.

Stock prices for PG&E and Edison's parent company dropped dramatically when last year's fires blazed.

After the 2007 Witch, Guejito and Rice fires destroyed more than 1,300 homes in the San Diego area, SDG&E has spent more than $1 billion in wildfire prevention and fire-fighting measures -- such as upgrading more power poles from wood to fire-resistant steel, undergrounding power lines, developing a network of 177 weather stations in fire-prone areas and leasing helitankers to douse fires when they break out.

SDG&E's program has been held up as a model for the other utilities in the state to replicate -- which made Toney question why the company is asking for a similar increase in shareholder return as PG&E and Edison.

"They, from all appearances, have had fewer catastrophic fires in the past few years," Toney said. "So for SDG&E to also be asking for a really astronomical increase ... it's like they are just trying to jump on the gravy train or bandwagon, whatever you want to call it. It's like, well, if those utilities can ask for a higher rate, we're going to as well."

Jones of SDG&E said, "While we believe our wildfire mitigation programs are extremely effective, the liability construct that exists today in the state of California results in a higher return on equity than would otherwise be the case. If approved, the cost of capital proposal would help SDG&E continue to enhance community resiliency, wildfire safety and clean energy technologies."

Paul Patterson, an analyst who covers utilities for the New York City research firm Glenrock Associates, said, "I can't recall in recent memory" profit margins between 14 to 16 percent for major utilities. But he was quick to say what is requested by companies and what is actually approved by a commission are two different things.

"I do think it shows the unique situation California is in," Patterson said. "You don't see people (in other states) saying, 'we've got wildfire risk that throws this extra element on this.'"

The applications by SDG&E, PG&E and Edison initiate a long process of responses, protests, testimony and rebuttal from various interests in CPUC proceedings before the commission makes a decision on each request. SDG&E's application proposed Dec. 5 as a date for a final judgment but Toney thought that sounded overly ambitious.

"That's very fast for one of these cases," he said.

Should the CPUC approve a big jump in the return for shareholders, would that placate Wall Street investors? Patterson said he didn't know.

"I don't think the way to resolve this is through a cost of capital proceeding," Patterson said. "I think the way to resolve this for everybody -- ratepayers and the companies, etc. -- is to come up with a workable plan to resolve this wildfire conundrum" in California.

Saying "utilities either in or on the verge of bankruptcy are not good for Californians, for economic growth, or for the state's future," a "strike force" put together by Gov. Gavin Newsom released a report earlier this month listing a number of recommendations to state policymakers to mitigate the effects of wildfires.

Among the remedies, the report listed making changes to the legal doctrine known as "inverse condemnation." As interpreted in California, the doctrine holds that power companies can be held liable for damages should their equipment spark a wildfire, even if the utilities have followed applicable safety rules.

Utilities have complained inverse condemnation makes them particularly vulnerable to financial ruin but power company critics have insisted it is essential to ensure utilities properly maintain their equipment and uphold safety procedures.

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