California’s for-profit utility electricity rates – including Pacific Gas and Electric Company (PG&E) – have risen sharply over the past five years, faster and higher than municipal utility rates, or national averages. While energy experts don’t fully agree on the causes of the upsurge, there are at least three main cost drivers.
First, the utilities are still paying for expensive renewable power contracts they signed a dozen years ago. More recently, they failed to adequately hedge against electricity market price volatility. As a result, the amount PG&E compensates for power generation jolted upward by more than 50 percent from 2022 to 2024.
Second, building transmission to wheel that renewable power from distant locales to where it’s needed was much pricier than expected, costing an average of 12.5 cents per kilowatt-hour.
Third, the utilities vastly overbuilt their distribution network – poles, wires, transformers – to serve electricity demand that hasn’t materialized. Add in wildfire costs – periodically inflamed by the latest conflagration – and investor-owned utility (IOU) rates almost doubled over the past 15 years.
Politicians and policy makers are struggling to agree on ways to tame utility inflation. Several options are on the table. The utilities and government could stoke electricity demand; more sales would help pay for the oversized grid, soaking up excess distribution capacity. This had been the plan all along; electrify buildings and cars to shift from fossil fuel-powered vehicles and household-reliance on gas, thereby reducing climate-altering carbon emissions. Along these lines, the San Francisco Board of Supervisors recently advanced an ordinance to require significantly renovated buildings to go all-electric.
The problem is that high electricity rates discourage fuel switching, and the federal government has largely abandoned Biden Administration-era support for electric vehicles, or the very idea that greenhouse gas emissions are a problem at all. Data centers could emerge as prodigious energy consumers, but not in a way that’ll create beneficial demand, since they tend to require substantial power at specific times and places, triggering the need for even more investment. These facilities are also equipped with diesel or fossil gas backup generators, contributing to an already oversized, emission-leaky, BUG fleet.
Services presently provided by utilities, such as wildfire management, which represent roughly 10 percent of costs, could be extracted from rates and shifted to public sector budgets. This could transform largely incompetent mass tree trimming enterprises into a more thoughtful ecosystem management approach, overseen by proper scientists, wildlife experts and environmental specialists, rather than IOU executives. Utilities would pay their share for ecosystem operations, as would insurance companies. In cases where a geographic area preferred undergrounding utility services, such as in Palisades after last year’s wildfires, they could pay for it themselves rather than socializing such expenses across all ratepayers.
Utilities could be (much) better regulated. Under the present structure, once policymakers have blessed IOUs’ proposed expenditures, they face little risk for making errors. Ratepayers must pay for sales that don’t materialize, and for underused or unnecessary equipment. Given that IOUs profit from developing distribution, they have substantial incentives to over-build. This should change, with shareholders shouldering at least equal risks as ratepayers, and lower rates of return when poor investments are made.
The energy sector could be partially deregulated, to allow dispersed, diverse, resources to steadily reduce the need for an expensive centralized grid. Under present rules one neighbor can’t sell excess power from their rooftop solar array to another to charge an electric vehicle. Nor can a community decide to network a collection of photovoltaics, small-scale wind, and batteries to help bolster overall resiliency. These types of “small is beautiful” initiatives, if thoughtfully coordinated with grid investments, could greatly improve affordability.
Widespread municipalization of IOU service territories, as San Francisco is struggling to do, would represent the most revolutionary of changes. That won’t happen, though, without substantial political support. Even after multiple bankruptcies, escalating rates, and wildfire-related murder charges, PG&E and the other IOUs remain largely invulnerable to significant reform. Which suggests that the real solution to higher electricity rates might be at the ballot box.