Cost-Recovery Battle Begins for SB 1221: Rate Base, Regulatory Assets, or No Recovery at All?

EXECUTIVE SUMMARY

Senate Bill 1221 has moved into a cost-recovery decision: whether pilots are treated as infrastructure or customer programs. Utilities are seeking near-parity with traditional gas investment economics, while other parties are trying to limit recovery or confine costs to participating customers.

The CPUC's handling of this matter will determine whether pilots scale as a system-level transition tool or remain targeted, customer-funded projects.

WHAT HAPPENED AND WHEN: On March 27, parties responded to a CPUC ruling that turns SB 1221 into a cost-recovery decision: who pays, how fast, and whether utilities earn on electrification. At issue is the tug of war between Public Utilities Code §663(b)(8), which prohibits a rate of return on Behind-the-Meter costs, and §663(b)(9), which requires the CPUC to set a rate of return and recovery period for zero-emission alternatives.

The ruling frames three options:

• Option 1: debt-cost carrying charge only;
• Option 2: regulatory asset with reduced return; and
• Option 3: debt recovery plus performance-based upside.

Each encodes a different answer to the threshold question: whether SB 1221 pilots behave like infrastructure or customer programs.

PARTY POSITIONS

Utilities converge on one point: pilots won't scale unless they have financial symmetry with traditional gas investments.

• PG&E argues for full authorized Weighted Average Cost of Capital (WACC) on regulatory assets (not a reduced rate), distinguishing regulatory asset treatment from capitalization while insisting the return level should be identical.
• SCE requests full cost recovery, including time value of money but declines to endorse any of the ruling's three options.
• SoCalGas/SDG&E reject all three options as inadequate, arguing amortized investments should receive full WACC, and invoke the July 1, 2026 statutory deadline to reinforce the need for workable rules fast.

The most important split in the record is not utilities vs. advocates, but within the advocates. TURN argues that BTM costs should be amortized O&M expenses with carrying costs capped at the commercial paper rate. It opposes regulatory asset treatment as a prohibited return by another name, and argues that Options 2 and 3 both introduce an equity return component that §663(b)(8) forecloses.

Sierra Club and the Natural Resources Defense Council are closer to the utility position: they propose a hybrid of Options 2 and 3 and explicitly state they would accept full WACC recovery as an alternative. Their data shows regulatory asset treatment over 10 years reduces Year 1 bill impacts by more than twelvefold versus immediate expense treatment.

The Indicated Shippers argue that BTM costs should not be recovered from ratepayers at all, through any mechanism, and instead should be borne by participating customers or non-ratepayer sources. Their position rests on cost-causation principles and §451's just and reasonable standard.

The Shippers advance on-bill financing and the recently authorized Tariff On-Bill pilot (via D.25-12-021) as the preferred alternative, keeping repayment responsibility with the benefitting customer. They also warn that socializing BTM costs would exacerbate affordability pressures for remaining customers and accelerate gas system contraction. If adopted broadly, their approach would confine SB 1221 to customer-funded pilots rather than system-level transition.

The Coalition of California Utility Employees reinforces this with legislative history: §663(b)(8) was added on April 25, 2024 specifically to prohibit BTM costs from receiving capital asset recovery, limiting the rate-of-return authority §663(b)(9) would otherwise provide.

UNRESOLVED DESIGN QUESTIONS

Three questions are decisive.

• First, classification: system-level investment or customer-specific expenditure.
• Second, timing: expense now or amortize over time.
• Third, return: positions range from no ratepayer recovery (Shippers), to commercial paper rate (TURN), to midpoint debt/WACC (Sierra Club/NRDC), to full WACC (PG&E, SoCalGas/SDG&E).

These choices cascade, and Option 3’s contingent shareholder incentive cuts across all three, making it the most consequential unresolved question in the record.

INSTANT ANALYSIS

• The utility coalition is more unified and more assertive than anything else in the record. PG&E and SoCalGas/SDG&E are asking for full WACC on regulatory assets (near-identical financial footing with traditional gas capex). That almost certainly exceeds what the CPUC will authorize, but it sets the ceiling.
• Sierra Club and NRDC's willingness to accept full WACC recovery, combined with their quantitative case against expense treatment, gives the CPUC environmental cover to authorize a meaningful return on BTM regulatory assets. TURN and the Indicated Shippers will challenge that outcome aggressively, in reply comments and in whatever comes next.
• Option 3 deserves more attention than it has received. The ALJ invested significant design work in that construct (debt-cost floor plus performance upside tied to demonstrated avoided costs).

Whether a contingent shareholder incentive constitutes the "rate of return" §663(b)(8) prohibits is genuinely unsettled, and how the CPUC resolves it will have implications beyond this proceeding.

The probable landing zone: regulatory asset treatment with a return below full WACC, likely Option 2 range, possibly with an Option 3 overlay. That caps utility earnings, which means participation skews toward projects with strong avoided-cost economics. The practical implication is selective rollout, not systemwide acceleration, unless the performance incentive proves robust enough to shift utility calculus on marginal projects.