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Guy
What's up with California electricity rates?
They are the highest of any State on the mainland. Only Hawaii has higher rates. This is a follow-up to my earlier essay: The divergent economics of electric utilities
The basic concept of how the electric utility business should work is
that if a utility has an expensive fuel mix, it will have to charge high
rates or prices to customers (electric utility A). And, vice versa
(electric utility B).
As reviewed in my earlier essay the real world does not always work that way. And, California is a case in point.
For this analysis I will benchmark California electricity cost and price or rates vs the other 10 US States included within the same electric grid network called the Western Interconnection (yellow within the map below).
When you compare California’s electricity rates to the other 10 States within the Western Interconnection, California is a wild outlier. It’s rates are over twice as high as the Median for all 11 States within the Western Interconnection.
The scatter plots below show how much California is an outlier regardless of what fuel one focuses on. California is such an outlier, that it was very challenging to even fit LOESS models (with 90% confidence intervals) to the data. When focusing on Hydro and Nuclear, California was too divergent for LOESS models to work properly.
Data source:
For fuel mix on the X-axis, I used the data from the Nuclear Energy Institute (NEI) as of 2021 (most recent data available). Oddly enough, they had by far the best data for fuel mix at the State level nationwide.
For the electricity price charged to customers (for all sectors combined) on the Y-axis, I used Table 5.6.A as of June 2023 from the US Energy Information Administration (EIA).
The main message from the above scatter plots is that regardless of what fuel you focus on, there is not a linear relationship that fits California. While the other 10 States charge between 9 and 14 cents per kWh, California charges 25.5 cents per kWh. These are representative prices when aggregating all sectors (residential, commercial, etc.). Thus, California's high electricity prices have a lot more to do with California than its actually relatively low-cost fuel mix leaning mainly on renewables and natural gas.
The cost of different fuels
The best data I found was from Lazard showing a time series trend from 2009 to 2023 for all the main energy fuels used to generate electricity.
As shown on the above graph, you can see that Solar and Wind have become
the most competitive fuels associated with the lowest costs. Natural
gas is very close behind the two renewables. Coal is quite a bit more
expensive. Nuclear is a lot more expensive, and its cost is rising.
Fuel costs for the Western Interconnection States
To figure this out, we just need two inputs:
- The cost of each fuel. We got that from Lazard; and
- The fuel mix for each State. We got that from the NEI data.
With the above, we can easily figure out a representative estimate of the fuel cost for each State, including California.
Based on the above estimation, California has the 4th lowest fuel cost
among the 11 States within the Western Interconnection. Therefore, you
would expect that California electricity prices would be the 4th lowest.
Instead, California has by far the highest electricity prices.
Profitability
Given that California has a low cost of fuel and that it charges by far the highest electricity rates or prices, California electric utilities should have by far the highest profitability.
The table below simply discloses the difference between Rates minus Costs to be equal to Profit. The Profit margin is simply Profit/Rate. As shown, the estimated Profit margin for California at 69% is far higher than for the other States.
California imports 30% of its electricity. It imports the electricity
from the 6 States shown on the table below. Imports are associated with
wholesale rates. I did not have information on such specific rates.
Instead, I used the lowest rates I could find within the EIA data set
(Industrial rates).
As shown above, California imports come in a bit lower at 6.8 cents per
kWh vs. 7.9 cents per kWh for its internally generated electricity.
Considering imports, California's estimated Profit margin is even a bit
higher at 70%.
The California situation
The California situation defies economic logic. It has low fuel costs and
high prices or rates passed on to customers. At the opposite end, you
have Wyoming which has high fuel costs (relying mainly on Coal which is
much more expensive than renewables and natural gas). Yet, it manages to
pass on low prices or rates to customers. What gives?
California utilities should be doing well with rent-seeking profits. They are not
California has two main electric utilities:
a) Southern California Edison (SCE). Its parent company is Edison International. It serves 15 million people.
b) Pacific Gas & Electric (PGE) serves 16 million people in Northern and Central California.
California has 39 million people. The remaining 8 million Californians are served by San Diego Gas & Electric (3.7 million people) and many other municipal electric utilities. San Diego Gas & Electric is a subsidiary of a very large utility holding company, Sempra serving 40 million people.
In view of the above, you can easily get relevant financial information only for SCE and PGE. However, together they are most representative as they serve close to 80% of California’s population.
To assess how well SCE and PGE are doing, let’s just review the stock performance of their respective holding companies vs. the utility industry as characterized by a utility ETF (Utilities Select Sector SPDR Fund).
Looking at the change in stock price since 2018 you can see that SCE (Edison International) has underperformed the industry as its stock price declined by — 6.57% vs, a gain of + 8.67% for the industry.
Meanwhile, PGE’s performance has been genuinely disastrous. It filed for bankruptcy in 2019. Since 2018, its stock price declined by — 66.67%. PGE has been in and out of bankruptcy (Chapter 11) several times since the early 2000s due to gigantic liabilities associated with wildfires. Based on its current stock price, investors do not think PGE is out of the woods.
PGE’s troubles started long before their most recent bankruptcy filing in 2019. These two charts extracted from PGE Annual Reports show that its stock started underperforming the utility industry since after 2016. And, that since 2019, its stock has pretty much remained in the doldrums.
Fires are not unique to California. When you consider that California is
nearly as large as Oregon and Washington combined, the acres burned
percentages are probably roughly equivalent between the three States
(California, Oregon, and Washington) shown on the graph below.
However, if you focus on California, you can explain PGE’s financial troubles.
The maps above show that before 2000, California fires were pretty much spread throughout the State. And, they were mild. Starting in the 2000s, Northern and Central California (PGE’s territory) experienced far more forest wildfires than the remainder of the State. Average acres burned per year was far higher than in Southern California.
Whether any other utility could have manage these chronic fire disasters better than PGE is unclear.
To summarize, how can we explain the California electric utilities financial under-performance?
a) Well for PGE, the answer is crystal clear. It got repeatedly hammered by huge liabilities associated with forest wildfires;
b) SCE must have also incurred significant costs to mitigate fire risk;
c) There are probably other costs imposed by State regulations that make operating a utility in California far more expensive than in other States.
The bottom line is that California utilities charge in average 25.5 cents per kWh just to get by. This is over twice as much as the Median for the States within the Western Interconnection (10.0 cents) and for the entire US (11.7). That’s even though, California has a cheap cost of fuels (leaning on renewables and natural gas).
Outlook for California's electricity rates
California’s electricity rates are bound to rise further above other States’ rates. This is the case for several reasons:
a) California is leading the US in the electrification revolution. It has mandated that all new auto sales be EVs by 2035. It has mandated that all new homes and buildings have all-electric appliances right now. And, all-natural gas appliances sales will be banned by 2030. So, the demand for electricity is going to go way up;
b) PGE has filed an application to raise its electricity rates by 26%! That is to spend billions to place electric lines underground to prevent future fire incidents.
Regulators are considering other proposals that would shield the line
instead of undergrounding them. This more cost-effective solution would
call for a 9% rate increase. It is uncertain which rate increase
proposals regulators will approve. In either case, PG&E will have
probably one of the highest electric utility rates on the Mainland.
PG&E residential rates already run near 36 cents per kWh and above
before the mentioned rate increases.
Is California "Collapsing" continued
I am following up on my earlier essay Is California "Collapsing"?
In a nutshell, can California lead the electrification revolution with its very ambitious mandates (all new car sales to be EVs by 2035, and no gas appliances in new homes now)?
The question leads to other considerations and questions:
a) California has already the highest electricity rates on the Mainland. And, these rates are paused to increase even more;
b) California already imports 30% of its electricity from other States within the Western Interconnection (WI). Do those other States within the WI even have the capacity to export that much more to California?;
c) Can California electricity demand, electricity rates, and electricity imports all go way up simultaneously?
THE END