"Energy service is capital-intensive. The wires and poles, generators of transformers, pipelines and compressors of the labor and equipment required to put that capital into service are expensive. Customers don't pay for the cost of everything upfront, because many grid assets have a lifespan of 40 to 50 years. They can be financed. Utility companies can obtain and deploy capital to build these assets and recover the costs over time for customers. For customers, this financing means the cost of our universal service is spread out over time, but that time also adds an additional cost: the cost of the capital of the debt and equity used to fund the infrastructure built out up front, and that additional cost is the subject of this proposed decision."
"Specifically, this proposal sets the rate of return for California's large investor-owned utilities, which has been used as an important financial input across the PUC ratesetting proceedings. In setting the rate of return, the Commission works within a longstanding framework. Our decisions must follow legal requirements, and in making these determinations, we are bound by the law as defined by the Supreme Court, including decisions requiring that utilities' financial integrity requires enough revenue – not only for operating expenses – but also for the capital costs of the business."
"These capital costs include service on the debt and dividends on stock. The stockholders' return should be roughly equal with returns on investment in other businesses with corresponding risks. The return should also be sufficient to assure confidence in the financial integrity of the business so as to maintain its credit and attract capital."
"Utilities' maintaining credit ratings and attracting capital has a positive impact on customers. Lower costs to borrow money translates to lower ratepayer costs to pay for the long-lived assets that make up our energy infrastructure. Of the components that make up the rate of return, the return on equity is where much of the debate among parties lie.
"...the return on equity requires the Commission to determine what return is sufficient to attract equity investment, given the risks involved. The return on equity can get technical, including debates over proxy groups and financial models. I want to focus briefly on the balance this proposal strikes."
"The Commission has a duty to set just and reasonable rates. Every cost we authorize flows through to customers, and we must be disciplined in what we approve. At the same time, we must authorize returns sufficient to maintain financial integrity and attract the capital necessary for the utility to meet the service obligations – obligations that include substantial infrastructure investment in the coming years, and critical wildfire mitigation work, all of which will benefit customers.
"Some parties in this proceeding argue for significantly higher returns into the 11% range and above. Those parties that note that while California has real risks, we've also built substantial risk mitigation that other jurisdictions lack. Financial Risk mitigation – like the wildfire fund established under AB 1054 and expanded by SB 254 – represent over $20 billion in ratepayer backstop protection, a backstop that simply doesn't exist in other states where utilities face catastrophic event risk.
"We've authorized ratepayer-backed securitization that credit agencies consistently describe as credit-supportive, and utilities are investing billions in physical and operational mitigation: undergrounding, enhanced powerline safety settings...that they themselves have indicated have reduced their ignition risk by over 90%. And the regulatory environment supports those investments and continues to support the utilities advancing their safety cultures and maturing their safety management systems, efforts that will continue to expand our physical risk management beyond the considerable efforts to date. This isn't to minimize California's risk. It's to recognize that we've built risk management infrastructure in ways that should be reflected in this decision."
"Even with this decision, I would further note that the Cost of Capital mechanism allows for adjustments to the rate of return between rate cases if market conditions shift significantly, the kind of regulatory predictability that credit ratings agencies recognize as supportive."
"Some parties argued for returns on equity well below the national average, some below 7%. I think the proposed decision is correct to decline this advocacy as well. We need returns commensurate with risk and sufficient to attract capital. Setting returns too low doesn't just affect utility shareholders – it affects whether these companies can finance the great investment and wildfire mitigation work that customers depend on that impacts the grid service customers receive and impact the borrowing costs that customers pay."
"The mitigations I described are real and meaningful, but so is the risk, and so is the capital of these utilities need to attract, and that's the tension at the heart of this proceeding. Utilities have invested billions of dollars in mitigation and reduced the ignition risk by over 90% and yet devastating fires remind us that much work remains. Both of these things are true. The question for this commission is how to set a return on equity that reflects both of these realities, the progress made, and the risk that persists. This proposal reduces the authorized return on equity by 30 basis points from the current level. That's a meaningful reduction. It signals that California's risk mitigation is ensuring the wildfire fund is operational."
"Utilities have made real investments in hardening the systems and improving their operational risk mitigation. These aren't just theoretical protection. They're part of how California continues to manage utility risk. At the same time, this reduction reflects that the progress is incomplete. We're not yet at a place where California can be treated as equivalent to utilities in states without wildfire exposure. The reduction is calibrated, recognizing improvement without declaring victory."
"I think the decision gets it right, reducing the authorized return while maintaining the financial integrity required by law that recognizes both the real mitigation progress California has made and the real risks that remain – that the balance our duty requires and the balance our decision strikes."
Commissioner Matthew Baker
"One of the most important investment market decisions made from the CPUC this year is today's decision on Cost of Capital. Approaching this decision, I found it helpful to think back to the words of Scott Hempling, one of my mentors, and to really think like a simple-minded regulator – whose job it is to filter out the noise and focus on the fundamental mechanics of utility regulation – and at its core, that really just needs two things: make sure that the lights stay on and the people can afford to pay them.
"To achieve this, we rely on the foundational Hope and Bluefieldstandards...which ensure that utilities have to have an opportunity to earn a fair return comparable to similar risk investments at a just and reasonable rate. The proposed decision recommends a lower return on equity than what is now currently authorized.
"But I want to note that this decision is not made in isolation. Rather, it is the result of incorporating all the relevant perspectives and evidence from the record to ensure that the return is commensurate with today's market realities and risk profile. With that context, I looked at this through four contextual areas.
First, what constitutes a reasonable ROE to attract capital investment here in California? In other words, what is the opportunity cost of equity capital sufficient to motivate investors to fund necessary infrastructure for safe and reliable service?
The second is risk-based. Returns should be commensurate with the risk compared to other investments, whether it's a government bond or high-tech stock. And higher risk utilities should receive a higher ROE.
Third: ratepayer protection. Rates must not be excessive and must adhere to the just and reasonable standard while maintaining affordability for customers.
And finally, the financial viability. The utility must sustain its credit worthiness in order to support capital.
"All of these things make it in the public interest. And in many ways, California's electric utility future is very bright. The state's economy has grown to become the world's fourth largest economy. Our electric demand is forecasted to grow multiple times over over the next two decades. We remain a leader in clean-energy initiatives and infrastructure in deployment. These tailwinds create substantial growth opportunities in the utility sector, but they only provide half the picture.
"The other side is the electric system, and utilities that finance and operate the system face substantial wildfire-driven headwinds that increase cost, necessitate significant investments in wildfire risk mitigation, have led to higher borrowing and capital costs because these are associated with very California-specific facts and California specific wildfires. And these wildfires have led to very devastating events. They've led to higher insurance costs and billions in insurance liability and infrastructure costs that are borne by ratepayers.
"They also threatened by the viability of public utilities throughout the state. The presence of extensive overhead power lines and excessive fuel lines, combined with increasingly hot, dry conditions and strong winds creates ideal conditions for major wildfires. And...we've aggressively moved to mitigate the risk from these wildfires. Our utilities are fundamentally better prepared for catastrophic conditions today than they were in 2019.
"The commission has authorized historic levels of ratepayer funding specifically to prevent utility equipment from sparking fires, and because of this focus on safety and hardening, California now possesses what is arguably the most wildfire resilient grid in the world.
"But given the conditions that we're facing right now, this is still not enough. We have a lot more we need to do. And it is within this context of massive investment in safety balanced against a growing burden on ratepayers, that I want to return for a minute to the specifics of the decision.
"This proceeding has an extensive record, which the assigned judge used to determine a reasonable ROE range for each utility based on its specific risk profile. Using proxy groups, the proposed decisions weigh the evidence to determine the risk profile of the California IOUs compared to similar IOUs, and this decision falls within the established range, and I am supporting the provisions of the proposed decision to adopt a lower ROE than is currently authorized, but still remains well within the reasonable range, and are still higher than the national averages going back to at least 2014.
"I will support this decision as it balances the need to attract capital for safe, reliable utility service with the imperative to protect ratepayers from higher costs, and it accomplishes this by setting a fair rate of return that I believe can help maintain affordability.
"I want to note that in setting the ROE, we are making a prediction that the number we set will adequately compensate the investors for the risk they are willing to take. However, the Commission cannot know how the investment community will evaluate future risks and opportunities. Consequently, we must rely on the Commission's collective best judgment to balance the short-term cost consideration with investor reactions to perceived risks. If we are wrong, that could lead to an increase in the cost of borrowing. If we are correct, this decision will not adversely affect the utilities' ability to attract people to invest in California's future.
"But there are no simple, cost-free solutions to reducing wildfire risk. Our utilities and ratepayers are uniquely exposed to climate-driven catastrophic wildfires. Though progress has been made, continuous planning and resilience remain essential efforts to prevent future devastating fires.
"Wildfire-related costs constitute nearly 30% of PG&E's revenue requirement. Since 2019, approximately $40 billion in wildfire-related expenditures has been added to rates or ratebase of the three largest utilities. We have one utility that is currently working to have an investment grade credit rating, while others can face potential down downgrades due to investor concerns about wildfire risk. This situation could increase the borrowing cost and hamper utilities' ability to raise the necessary equity for the system investments that that are required.
"And I want to emphasize...the legislature established the $21 billion wildfire fund by ratepayers and shareholders. This first time in the country that shareholders have paid for part of the insurance of wildfire insurance in 2019. This was initially expected to last 10 years. However, this summer, the legislature thought it was prudent to replenish the fund amid concerns about the Southern California fires earlier this year.
"While this is a positive step, it does not eliminate the risk of investing in California utilities, nor guarantees that ratepayers will be not left paying for damages. The ratepayers continue to bear the burden of insuring against catastrophic wildfires. Achieving lower rates will be challenging, and utilities operating in high fire-threat districts – whether they be publicly owned or investor owned – may face significant financial viability also leading to increased rate pressure. And these risks cannot be mitigated solely through ROE.
"We hear we will need additional reforms to strengthen the wildfire fund and modify liability rules in a way to protect the electric system and ratepayers. Solving downstream affordability and reliability issues depends on a fair solution to the wildfire crisis. Yet, even without Utility Reform, the CPUC will maintain a sound regulatory stance and continue to ameliorate a great a large amount of that risk. We will continue monitoring efforts to reduce the risk of utility-caused wildfires. We have to address utility applications in timely and consistent manner. We will continue to track the risk factors, the cash flow and other financial metrics that investors and lenders also track, and we will act decisively to address exigencies that will impact the cost of borrowing and the financial viability of utilities.
"Within this context and acting on the best available information, I believe this decision will help utilities secure the capital needed for a resilient, safe grid without overburdening families and business."
Commissioner Darcie Houck
"The issues presented in this proceeding are difficult issues to work through. We're grappling with both an affordability crisis and the need to ensure investor-owned utilities can access capital to maintain safe and reliable services for California ratepayers. The timelines are tight, the record is voluminous, and the stakes are high. So I do not take these comments lightly.
"The application before us – the request of the electric and gas utilities to set their rate of return – is a challenging one. Setting a rate of return consists of three major decisions:
Setting a capital structure;
Setting a cost of debt; and
Setting a return on equity.
In the case before us, the issue that was most contested by the parties was the return on equity. Setting a return on equity is a topic that has challenged regulators and jurists for over a century. And while the cost of debt is relatively easily calculable and the capital structures can be set generally within a small range of reasonable outcomes, the cost of equity is not something that can be easily measured or agreed upon."
"In this case, we have disagreements about the cost of equity ranging from a high of 11.75% to a low of 6.11%, a difference of over 560 basis points. In 1912, Justice Holmes wrote on adjusting rates of return in Cedar Rapids Gaslight Co. v. Cedar Rapids that an adjustment of this sort under a power to regulate rates has to 'steer between Scylla and Charybdis.' On one side, if the franchise is taken to mean that the most profitable return that could be got free from competition is protected by the 14th Amendment, then the power to regulate is null.
"On the other hand, if the power to regulate withdraws the protection of the amendment altogether, then the property is not. This is not a matter of economic theory, but a fair interpretation of a bargain. So neither extreme can have been met – a midway between them must be hit.
"Interpreting this text, regulatory commissions now set upper and lower rates of return that we consider a reasonable range as we try and thread the needle hitting that midway. I worry that since Justice Holmes wrote this in 1912 the metaphorical path between his monsters have only gotten narrower today.
"On the one hand, the investor-owned utilities raised concerns, stating that with too low a rate of return, they will have trouble attracting investment, investment they need, in large part to invest heavily in critical wildfire safety. This is essential work, but it is costly for investor-owned utilities to do this work. They must be able to access capital markets, and to do so, they need to have a sufficiently attractive return.
"The difficulties the utilities are facing in California are unprecedented. The investor-owned utilities currently operate in an environment with extremely high wildfire risk, and are unique in that California has a doctrine of inverse condemnation, combined with some of the highest property values in the country. California's investor-owned utilities have made great strides in addressing wildfire risk through vegetation management, strategic undergrounding and other investments such as covered conductor, but the threat of wildfire still remains.
"This combination means that, for the investor-owned utilities to maintain investment-grade ratings, the state must maintain a wildfire liability fund. Recently, the legislature passed SB 254, which created a wildfire fund continuation account, adding $18 billion to the wildfire fund. However, we have seen commentary from rating agencies raising concerns regarding the need for future increases in the amount available in the fund beyond the additional $18 billion, and the incorporation of replenishment mechanisms or other enhancements following the state's most recent wildfires.
"This commentary from the rating agencies show that our actions here cannot fully guarantee the investor-owned utilities' credit ratings, no matter what number within that reasonable range we land on for the return on equity...On the other hand, we have rising costs and a crisis of affordability affecting people across California and across the country.
"The affordability crisis is not limited to electric rates. It's not lost on me that the unemployment rate nationwide just hit its highest point since 2021. Meanwhile, the rate of inflation is lower than it was in 2021 and 2022 but the cost of consumer goods have not gone down. Prices instead continue to rise, albeit at a slower rate. According to the California Legislative Analyst Office, while California's average hourly rates are up 25.3%, since 2020 – rents are up 41.8%, mid-tier home payments are up 73.9%, bottom-tier home payments are up 78.4%.
"Californians who get their health insurance through the state marketplace are facing an average of 10.3% premium increases next year. Californians on the FAIR Plan are facing a 36% home insurance rate hike. Auto loan delinquencies are the highest they've been since 2010; student-loan delinquencies increased from 0.5% last year to 9.6% this year. In this case, SCE briefed the Commission that its customer arrearages, as of December 2024, were 800% of pre- COVID levels. Cal Advocates' third quarter 2025 electric rates report show that 21.2% of electric IOU customers are in arrears, owing an average of $642 and the last three years, the average residential electric rate has increased 38% for PG&E, 41% for FTE and 9% for San Diego Gas and Electric, even though San Diego Gas and Electric average per kilowatt rate remains the highest among the investor-owned utilities in California. Every economic indicator tells us that we're living in a time of extreme precarity for working Californians. So I want to be clear, the decision before us will slightly decrease rates relative to maintaining the status quo."
"The rate of return proposed today will provide the utilities with slightly lower returns this year, totaling almost $100 million less than the total return across all four utilities than they would if we kept the current rates of return. On the other hand, due to the increase in ratebase authorized for the four utilities here, the returns authorized by the decision represent an $840 million increase in total authorized return from 2025, which will increase in future years.
"California investor-owned utilities are projected to grow ratebase at nearly a 10% compound annual growth rate. With the current rates of return and ratebase, the investor-owned utilities will earn a combined total return of $12.2 billion this year. So I want to be clear: roughly 1/5 of those dollars are going to go to servicing debt. Looking forward to next year and beyond, with the adoption of this PD, projected total returns will increase by about $1 billion each year that thereafter. Each point of ROE has a combined projected revenue requirement impact of about $32 million over three years.
"So the increase from the PD to the revised one that's before us today carries with it an increase in cost to rate payers of roughly $160 million. Before getting to how I will vote, I want to say that I do think, from a process standpoint, the Commission should revisit how these applications are processed. I'm not sure that looking at the Cost of Capital every three years makes sense anymore. I would be supportive of making this proceeding an annual application, similar to the ERRA applications.
"Issuing a Cost of Capital decision that's bound to a three-year period increases the consequences of going too high (or too low) on authorized rate of return, and makes it difficult to find the right middle ground. Second, I think we need to take a closer look at the capital structures that are authorized here. Most of the testimony in the proceeding focused on the return on equity, but capital structures are important to consider as well. We have authorized the same capital structures as initially authorized and Decision 19-12-056, and this decision continues those structures. Also, I think we need to look closely at the cost of debt. Since at least 2004, our Cost of Capital decisions have cited to Decision 90-11-057 to approve forecasted cost of debt. In 1990 our cost of capital proceedings were annual applications, and in the instant proceedings, have forecasted debt cost looking years into the future.
"Yet even Decision 90-11-057 – when we had annual applications – that decision stated that, in future Cost of Capital cases, we may investigate the differential between the established cost of debt and the cost of debt actually issued. In the instant case, cost of debt was not contested and briefed. This may have been partly due to the timing of the issuance of the update to the debt exhibits, which coincided with service of rebuttal testimony. But I do think the time is right to reconsider these and other process issues, and determining Cost of Capital as we go forward.
"Last October, in discussing a decision that reduced the utilities authorized rate of return by 42 basis points, I quoted FPC v. Natural Gas Pipeline Co., which stated that, once the Commission has set a rate of return that allows the company to operate successfully and attract capital, the questions of the just and reasonable are at an end, so far as the investor interest is concerned. That decision states that once we have set that rate, we have a duty to consider the consumer interest in determining what is adjusted reasonable rate.
"While I believe that this decision provides the utilities with a sufficient rate of return to attract capital, and the commission did land on a reasonable range for that return on equity, I do not think that the decision threads the needle sufficiently to consider the full impact to the customer interest. And I want to reiterate that I don't make this decision lightly. This is a very difficult decision...A lot of thought and time has gone into considering how to land with this proposed decision.
"It's not an easy decision, and there are tough decisions to make here, in determining the balance of need for the investor-owned utilities to attract capital, which they have to do, and the need to balance customer interest, particularly where customers are continuing to take on more and more risk.
"I understand my colleagues' position and why they support the decision, and there are very good reasons to support this decision, which does lower the return on equity, which is going in the right direction.
"But I don't disagree with the circumstances described by my colleagues, and I share their concerns regarding the need for the investor-owned utilities to maintain investment-grade ratings and to access capital at the lowest possible cost. That said, in my opinion, the decision does not strike the right balance up to the customer side of the pendulum, and therefore I will not be voting for it. I do. In closing, want to reiterate my
Commissioner Karen Douglas
"We've seen it over the past years, that it costs a lot of money, and it involves a very significant obligation on the part of the utilities to raise capital to invest it in making the infrastructure safer, in undergrounding lines, where appropriate, in upgrading the infrastructure, putting in covered conductor, investing in other advanced technologies to improve public safety.
"We're also engaged in an energy transition in which we have significantly changed our system. We've got a lot of new resources online. There's a tremendous amount of opportunity and work and expansion of key infrastructure that California is going to need and benefit from for a long time, but the utilities have to be able to raise the capital to make these investments. And as has been noted, this decision reduces the return on equity from where it was set in our last decision.
"We've heard from both sides and all sides. I think in the course of this proceeding, we certainly heard from the utilities saying that they think it needs to be higher. And we've heard from a large number of speakers today wanting it to be lower, and we have established mechanisms that we have to use and establish tests that we have to look at in setting the return on equity. This has been a proceeding that developed the voluminous records that really looked at the issues, and I think the ROE you proposed in this decision is reasonable, and it's absolutely within the parameters that we need to consider. I think it is coming out in the right place, and so for that reason, I will be supporting the decision."