Why the electricity bill is so damn high

Or why climate change and construction costs have come for California's energy bills

Red sky at morning

Californians pay some of the highest rates for electricity in the country. We’re still eclipsed by Hawaii but only just barely. Average rate for residential customers range from 25 cents per kWh for SCE customers to just under 30 cents for PG&E customers to an eye-watering nearly 40 cents for SDG&E customers. 

The question is why is electricity so expensive in California? There are a couple of good reports issued every year (AB 67 and SB 695) that lay out the near-term trends. I’ll go through that and give a few thoughts of my own. The overarching message is that addressing climate change will be expensive, and that it’s more expensive the longer we wait (see, e.g., wildfires). In addition, the state electricity regulator – the California Public Utilities Commission (CPUC) – is not very well set up to patrol these costs.

High-level, there are a few main reasons for the recent cost increases.

• Wildfire-associated costs

• Solar rooftops have become expensive for everybody who doesn’t have a solar rooftop

• Transmission costs

• Construction costs

Note where costs are not coming from – the rapid increase in renewables in the generation mix. That’s not generally driving the increase in costs.

Let’s go through these in turn:

Wildfires

Put simply, wildfires are wildly expensive. They not only burn entire communities, kill people, and turn vast tracts of forest to ash, but they cost a lot to recover from and they cost a lot to prevent. 

Here’s how much wildfires cost consumers as a percentage of their electric bill:

Where are these costs coming from? About 90% of the cost are operational expenses – this includes increased vegetation management, funding a wildfire find, plus insurance that utilities are purchasing in order to have a backstop in case there is another fire large enough to bankrupt the utility. 

The capital proportion of this wildfire amount will grow as PG&E, especially, hardens lines to prevent them sparking wildfires. Much of the rate increase customers are seeing right now is due to this program. 

There was a huge fight about this at the CPUC. Read a lot more about it on p. 238 of this CPUC decision.

In a very unusual move, the judicial wing at the at the CPUC (the Administrative Law Judges (ALJs) split from the political wing of the CPUC (Commissioner John Reynolds, formerly of now-dormant robotaxi firm Cruise) in issuing a proposed decision. PG&E proposed a capital budget of $6.4b for hardening for 2023-2026. The ALJs approved a plan that cost $2.1b. Reynolds’ plan landed at $4.2b. The full commission ended up at $4.7b. The main difference between all the proposals was how many miles of lines PG&E would put underground vs string on fire-protective poles and conductors. Undergrounding is a far more expensive solution but somewhat more protective in the sort of wind events that spark wildfires.

I’d like to understand the politics and other factors that drove that decision. I’m guessing phone calls were made.

Rooftop solar

Utility customer who do not have rooftop solar subsidize those who do. The net metering solar program that was in place over the past decade was sweet for solar customers. There’s a reason the state made it much less lucrative going forward. That reason is that 10-20% of residential rates are due to residential customers cross-subsidizing solar residential customers. 

Percent of bill due to cross-subsidy of rooftop solar:

* for non-CARE customers, who do not pay income-linked rates. Numbers for CARE customers are similar. 

Transmission

This subsidy was growing as rates grew. In other words, if rates are 20 cents/kWh and then grow to 30 cents a kWh, and it’s a net metering regime, then the subsidy jumped 50%. Not only that, but the subsidy above cost (think about it as the profit) jumped many times that. That’s why the state has moved toward a less lucrative set of rules, called NEM 3.0.

Transmission costs have jumped in the past few years. The three large utilities in California draw the threshold between distribution and transmission a little differently. Nevertheless, transmission costs have shot up across the board.

The huge jump has been at PG&E as the utility struggles with wildfire costs. Total operational and capital-related transmission revenue requirement (basically, expenses customer pay) jumped from $1.2b to $3.1b from 2016 to 2023. The transmission and wildfire cost category overlaps, and this is mainly related to wildfires, but not entirely. FERC mostly governs transmission build-out and operations, and this federal agency has not been as much of a stickler for costs as have the CPUC and CAISO, which are state agencies.

Even more fun are the so-called “self-approved” transmission projects because you know who approves those? The utilities. You know who has the power to say no to “self-approved” projects? No one. In California, self-approved transmission projects are now 63% of transmission capital spend. 

Construction Costs

Utility costs are tightly linked to construction costs, since utilities are basically large construction and engineering firms. Construction costs in California – and around the country – have gone bonkers.

This is especially true for the sort of construction Utilities do that involve union trades, such as electricians. Here’s the Federal reserve data for rates paid to firms most closely linked to utility construction. Notice the huge jump in the past five years (red arrows), and especially in the past three years. The compounded annual growth has been about 10% over the past 3 years.

Union electricians in San Francisco (IBEW Local 6) make nearly $100 an hour. San Francisco is an outlier. But IBEW Local 11 members in Los Angeles are paid $62/hour. Neither of the wages quoted above include the roughly 20% pension benefit. Living wages are important and they can also seem expensive. 

The general construction price index in California has also gone up over the past 3 years by a similar amount, growing at an annual rate of about 11%.

What can be done?

The solutions to the huge cost increases aren’t easy. The CPUC is hamstrung in two major ways.

First, the CPUC tries to ensure cost reasonableness, but hasn’t historically seen itself as a policeman of utility policies. This is even more true now, as fewer CPUC staff are engineers and accountants capable of evaluating the reasonableness of utility construction proposals. This is especially true when commissioners step in to vote for the higher-cost capital plans proposed by utilities. It would take a change in orientation and hiring for the CPUC to really police utility construction costs. As anybody who has ever dealt with contractors knows the cost is the cost until you push back hard and tell them you won’t do the project at that cost.

Second, part of this is out of the CPUC’s hands and the buck stops with the feds. The FERC tends to approve transmission projects without much pushback and generous capital recovery. And, as noted, some transmission projects don’t require any state regulatory authority’s approval. There’s been some attempt to correct this, but it’s not clear to me what enforcement teeth state regulators have to say no to transmission.

This will be a long road, but the state needs to focus on beefing up the CPUC’s capabilities, orientation and authority to control costs.