California consumer price regulation often protects companies

In the 19th century, California began experimenting with regulating the prices of vital services and commodities. Nearly 150 years later, Californians still don’t know if it’s working as we debate whether to expand the practice.

Years of bitter conflict between Central Valley farmers and the monopolistic Southern Pacific Railroad over freight rates led to creation of a railroad commissioner’s office in 1878. It later became a commission and in 1945 morphed into the California Public Utilities Commission with broad authority to set rates for transportation services, electric power, natural gas and water supplied by privately owned utilities.

The CPUC, whose members are appointed by the governor, has become a vast bureaucracy that oversees tens of billions of dollars in service charges affecting the budgets of virtually every California household and businesses large and small.

The immensely complicated applications that utilities file for rate changes involve not only what customers must pay but how the commodities they are selling are generated or acquired. Even marginal changes can have immense financial impacts, which lead to intense technical, legal and political conflicts — and occasional scandals.

Even if it attempts to act dispassionately, the CPUC is seemingly caught between two mandates: protecting consumers’ interests in having dependable and fairly priced services while providing utilities and their shareholders with profits sufficient to borrow money and attract investment capital.

The recent conflict over rooftop solar panels is a case in point. While it angered solar panel suppliers and their customers, the PUC’s decision to make home installations less lucrative responded to its mandate to protect utilities’ long-term finances.

Another example is the CPUC’s recent decision to grant Pacific Gas & Electric an overall 13% rate increase, citing the giant corporation’s precarious financial situation because of liabilities for disastrous wildfires and new mandates to put rural transmission lines underground.

Californians’ electric utility rates are already among the nation’s highest, so increasing their bills is understandably unpopular, drawing the ire of editorialists and consumer advocates. However, the CPUC essentially endorsed PG&E’s contention that higher rates are needed to protect its long-term financial health.

The wildfires that plague PG&E and other utilities have also upset California’s fire insurance market, which offers another example of the trade-offs involved in regulating the prices of services and commodities.

Seven of the state’s 12 largest fire insurers have either frozen or reduced their customer bases, saying that the threat of future wildfires must be included in premiums to maintain a viable insurance market.

That’s forced increasing numbers of homeowners in fire-prone regions to rely on the state’s last-ditch FAIR insurance program, which has very high premiums and tight coverage limits, and itself could be clobbered by future fires.

Gov. Gavin Newsom and legislators punted the issue to Insurance Commissioner Ricardo Lara, who appears ready to allow insurers to include estimates of future wildfire liability in their premiums, and also the cost of reinsurance, in return for offering more coverage and removing the pressure on FAIR.