What’s new in energy rates and who sets them?
Aside from weather, usage and energy market conditions, your energy bill is impacted by regulatory proceedings at the California Public Utilities Commission (CPUC). SDG&E, alongside consumer advocates and other key stakeholders, participates in numerous CPUC proceedings throughout the year. We are committed to keeping you up to date on those proceedings that could affect what you pay for energy.
Cost of capital application will not increase monthly bill
On April 20, 2022, SDG&E, along with other major utilities in the state, submitted a required cost of capital application to the CPUC seeking approval to update our rate of return on capital investments in gas and electric operations. If approved, our request will reduce SDG&E’s rate of return and will not increase the monthly bill for the average residential customer.
To build, operate and maintain the infrastructure – such as poles, wires, pipes and substations – needed to deliver reliable, safe, and clean electricity and natural gas to customers, we must raise funds by either issuing debt or raising equity. The cost of debt is the cost to raise capital through borrowing, while the cost of equity is the cost of obtaining and retaining capital from investors. Taken together, these costs are known as the cost of capital.
SDG&E is seeking approval for a rate of return of 7.48%, which represents a modest decrease from our current, authorized ROR of 7.55%. Our proposed rate of return for 2023 is the lowest among the major utilities in California. The ROR is never guaranteed. It is merely an opportunity to earn that return.
Striking the right balance
Our request for a lower rate of return reflects our conscientious effort to balance the interests of our customers and shareholders whose investments help ensure our region’s energy system can be as reliable, safe, and clean as possible.
Our proposed rate of return will enable SDG&E to raise the funds needed to build and maintain the infrastructure of the future – one that minimizes wildfire risks and builds on our unmatched record of reliability, all while meeting ambitious local and statewide climate and environmental goals. Additionally, it will also help reduce future borrowing costs to customers as a result of higher credit ratings.
Utilities’ cost of capital proposals are thoroughly scrutinized by CPUC and a variety of stakeholders, including consumer advocates, before the CUPC authorizes an acceptable rate of return.
SDG&E proposes to implement the 2023 rate of return effective Jan. 1, 2023.
New rates took effect Jan. 1, 2022
At the start of every year, SDG&E and other utilities across California are required to update energy pricing to reflect the costs of providing clean, safe and reliable service to customers.
On Jan. 1, 2022, SDG&E updated our electricity and natural gas rates. Our residential average electricity price increased by about 7.5%. Natural gas price was 25% higher in January 2022 compared to year ago, due to a global surge in the natural gas market. Natural gas is used to generate electricity, so an increase in natural gas prices also affects electricity prices.
The price SDG&E pays for electricity and natural gas is the exact same price our customers are charged. There is no markup of any kind and SDG&E makes no profit on energy procurement.
Aside from market conditions, other factors that impact your energy bill include usage, weather, state mandates, and climate resiliency investments. For a more detailed explanation of the key drivers for the Jan. 1 rate increases, please check out this article posted on the SDG&E NewsCenter.
How do SDG&E electric bills compare?
We've always been honest that our electric rates are higher. However, most customers are more concerned about how much their bill is at the end of the month. Our usually moderate climate means less energy is consumed. So while rates have increased, SDG&E's average monthly residential electric bill is the lowest among California's major utilities and below the national average.
So why are SDG&E rates higher than other utilities?
There are several reasons:
- Higher use of renewable energy to address climate change
- Development of the nation's leading wildfire safety program to keep our communities safe
- Technology subsidies required by the state and paid for by customers, such as Net Energy Metering, increase electricity costs for customers without solar by about $260 per year
- Legislative mandates that account for about 24% of electricity rates
- Improvements to ensure the power grid remains reliable even during the few extreme hot days of the year
Another factor impacting SDG&E electric rates is declining sales. This is a tough one to explain. Because of our mild weather and the amazing job customers have done with conservation and solar installations, less electricity is being used. Less electricity use means the cost of the power grid is spread across fewer electricity sales (kilowatt-hours), which results in higher rates. Without this decline in electricity sales over the past decade, rates would be about 17% lower. Many water utilities in San Diego are facing this same challenge.
That's why SDG&E has the lowest average monthly electric use in the entire country and lower than average bills, but among the highest rates.
What's the good news? As more customers switch to electric vehicles and electric appliances like heat pump water heaters, electricity use is expected to grow significantly in the future, helping to reverse trend.
Who sets energy rates?
All rates and any fees paid by SDG&E customers are regulated and approved by multiple public agencies and with the participation of many stakeholders in a transparent, thorough review process.
The most prominent agency is the California Public Utilities Commission (CPUC). This agency consists of five people appointed by the governor. Any time SDG&E wants to start a major project, upgrade systems or change any rates, we must submit a detailed application to the CPUC. We’re required to demonstrate how the request fits within California’s energy future and how it could affect annual or multi-year costs and rates for customers.
Those applications then go through a rigorous review process by the CPUC and other interested stakeholders to ensure that SDG&E is making prudent and fiscally responsible decisions — for our individual customers and community at large.
After the review process, the CPUC issues a decision based on what is fair and reasonable for customers. We then incorporate any needed changes from the CPUC ruling, whether it's rates, or other revisions to what is proposed in the application.
For example, every four years SDG&E files a General Rate Case (GRC) request. This determines the amount of money needed for operational expenses like costs for building, operating and maintaining equipment including substations, distribution poles and transformers, as well as SDG&E's highly-skilled workforce. Other proceedings include Energy Resource Recovery Account (ERRA), which covers fuel and purchased power costs such as electricity, and a Cost of Capital proceeding which sets forth the rate of return the company can earn on its capital investments. All of these must be approved by the CPUC before SDG&E charges its customers.
In addition to the CPUC, the Federal Energy Regulatory Commission (FERC) approves the retail transmission portion of rates.
While the CPUC and FERC regulate rates, there are additional agencies that provide oversight of SDG&E, the power grid, and the state’s energy policies:
- California Air Resources Board (CARB)
- California Energy Commission (CEC)
- California Independent System Operator (CAISO)
- Office of Energy Infrastructure Safety