Fingers are pointing in all directions. From renewables to unneeded generation to large and sometimes rural populations, the cause of California’s alarmingly high and forever increasing electric rates is finally getting the attention it deserves. But the explanations given are often the wrong ones – California’s ambitious renewable portfolio standard has in fact been a success, capturing economies of scale without imposing overwhelming financial burdens on consumers. And while utilities used to focus on building new power plants to generate profit, those days are, for the most part, in the past (at least in California).
TURN has noticed over successive rate case cycles the bulging figures included in all manner of distribution capital spending. From “smart grid” to “grid modernization” to boring old infrastructure replacement, the Investor Owned Utilities (IOU’s) in California are making big bets not on the generation of power, but the delivery of it. The data below shows our spider sense is supported by the underlying data – distribution spending primarily for capital infrastructure projects is the culprit of rate increases over the last 10 years. This is driving unprecedented increases in rate base, which means these expenses, including utility profits, will be paid off for decades to come.
Let’s take a look at the inflation-adjusted revenue requirement for the generation component versus the distribution component for PG&E, the state’s largest utility. Note that revenue collected for generation is inherently more volatile because it includes the cost of energy procured each year, which fluctuates due to changing demand and fuel costs.
PG&E Generation Revenue Requirement ($ 2015)
PG&E Distribution Revenue Requirement ($ 2015)
The trend is clear – over the last decade or so the generation rate component has generally risen with inflation, peaking in 2009 and coming back down, while the distribution rate has increased over and above inflation by about one billion dollars from 2004-2016. In nominal terms, though both rates have increased, the distribution rate component is much more significant in explaining rising rates in California.
This is also apparent focusing on the relative portion these two primary rate components comprise of the total retail rate. Though generation (green) is certainly the largest component of the total system rate, it’s portion has actually decreased over time while the distribution component (orange) has increased.
PG&E Rate Component Comparison
Data from Southern California Edison shows a similar trend between 2010 and 2016, when the distribution portion of the rate grew from 32% to 37% while the generation portion decreased from 57% to 41%. This trend will likely continue. In its current rate case filing, Edison proposes an extra $2 billion in primarily premature and unneeded “grid modernization” expenditures to “integrate” distributed energy resources on just 20% of its system. Guess where this new expensive program would land – in distribution rates.
Californian decision makers would be smart to examine why the distribution rate component has become so fat- in the meantime, making sure to only approve expenditures that are necessary and provide benefits to the public is critical as rates and bills reach unprecedented levels in California.