California’s green energy push raises utility profits – U

June 14, 2013 by  
Filed under Green Energy News

Anybody lucky enough to have money saved has seen their income decimated by the historic crash in interest rates since the Great Panic of 2008. My money market account is paying a lousy 0.15 percent a year, for example.

So imagine my surprise to learn recently that California’s politically appointed regulators are still allowing utilities to charge us more than 10 percent on the capital they invest to keep the lights on. This seemed incredible, so I did some digging.

Spoiler alert: I was surprised again, because those fat returns — 70 times the return from my credit union — are probably justified, especially given the political risk in California.

For owners, utilities can be wonderful businesses. That’s why Warren Buffett has bought two since 2008.

His most recent deal came last month, for NV Energy, the Nevada utility that serves Las Vegas. Buffett paid a 23 percent premium to the stock market value, yet he clearly considered it a bargain.

NV’s value had slumped recently, and there’s potential in fast-growing Nevada. But Buffett was mostly after the steady, low-risk return on equity that’s available from a regulated monopoly.

In the case of San Diego Gas Electric, the California Public Utilities Commission decided in December to cut its authorized return on common equity to 10.3 percent a year. That’s down from the 11.1 percent the regulator allowed from 2008 to ’12.

In Finance 101 class, students learn that people won’t invest unless the return compensates them for their risk.

U.S. Treasurys are considered “risk-free,” so they pay the lowest return around; the 10-year Treasury’s yield was 2.15 percent Thursday. On the other hand, a venture capitalist might expect a 100 percent return on a startup, because the next four investments might go bust.

Generally, a big non-utility company that consistently earns 20 percent on shareholder equity is considered a good performer — and a good investment, if you can buy the stock at a discount.

Utilities are considered low-risk, for the most part. In California, customers generally pay all costs. This includes fuel, labor, taxes, debt service … just about everything.

In return, the utility doesn’t get to “mark up” the energy it delivers. This makes that return on equity incredibly important, both to consumers and utility shareholders.

For example, SDGE’s big transmission line, the Sunrise Powerlink, cost nearly $2 billion to build. Under the PUC’s rules, the utility borrowed half of the powerline’s cost and tapped shareholder capital for the rest. The cost of debt goes straight onto utility bills. But the half that shareholders funded earns more than 11 percent a year under federal rules.

For its vast distribution network and power plants, SDGE is authorized to collect 10.3 percent for its equity portion.

In 2008, when 10-year Treasurys were paying nearly double today’s yields, the PUC lifted SDGE’s earnings to 11.1 percent. Even with the cut to 10.3 percent in December, this spread remains wider than before 2008.

The PUC’s consumer advocate argued for a reduction to 8.75 percent.

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