How embarrassing is it when a state builds its rooftop solar compensation policy on a massive calculation error?
For this episode of the Local Energy Rules Podcast, host John Farrell is joined by regulatory economist Richard McCann, a partner at M. Cubed Consulting, to talk about his stunning debunk of the “cost shift” myth, which conclusively showed that rooftop solar is in fact a net benefit to all California utility customers.
Listen to the full episode and explore more resources below — including a transcript and summary of the episode.
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Richard McCann:
I realized that basically rooftop solar customers had saved utility ratepayers a bunch of money, billions of dollars, because they had invested in their own rooftop arrays that had met the peak load requirements of the utility system.
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John Farrell:
How embarrassing is it when a state builds its rooftop solar compensation policy on a massive calculation error? Since 2013, investor owned utilities have pushed a false narrative about rooftop solar in service of their own profits. Two years ago, the California Public Utilities Commission bought the lie based on a faulty study by the state’s Public Advocate’s Office. Joining me in May 2025, regulatory economist Richard McCann, a partner at M.Cubed Consulting shared the results of his stunning debunk of the faulty analysis and conclusively showed that rooftop solar is a net benefit to all California utility customers — a warning to any state that thinks following in California’s footstep on rooftop solar policy will have beneficial results. I’m John Farrell, director of the Energy Democracy Initiative at the Institute for Local Self-Reliance, and this is Local Energy Rules, a podcast about monopoly power, energy democracy, and how communities can take charge to transform the energy system. Richard, welcome to Local Energy Rules.
Richard McCann:
Well, thank you. Glad to be here.
John Farrell:
I would love to start by just asking you a little bit about how did you get to be doing this work that you’re doing? You’ve published a study about the cost and benefits of rooftop solar in California and sort of broadly as part of work you do as what you call a regulatory economist. How did you end up doing that kind of work?
Richard McCann:
Well, I’ve been in consulting my entire professional career starting out from my master’s program back in 1985. I guess I’m pushing 40 years here at this. And I got involved initially in water issues, but then also in energy planning over time. I actually worked on the study to close Rancho Seco in 1989. So I’ve done a range of energy studies, also water, work in California and environmental studies over time. And I started testifying for intervenor stakeholder groups in the mid-nineties in California, and I’ve been doing that kind of work since then. We don’t work for electric utilities. My other partner, Steve Moss, and I do a lot of this work together. I have a third partner who works in water policy issues, and I just had been progressing along doing some of this work in the early two thousands. I prepared the cost of generation report for the California Energy Commission for about a dozen years, and I also testified at the Federal Energy Regulatory Commission on behalf of the California parties about the market manipulation that was being done by the merchant power generators.
And so all of that’s kind of built up over time. And this issue came up in 2020 about changing the net energy metering tariffs that the utilities have with rooftop solar customers. And there’s about a third of the customers are actually commercial, agricultural, and industrial customers. And one of my clients is a group of agricultural clients, many of them large water districts, but also farming operations, and they have a particular kind of net metering contract where they can aggregate across multiple properties. And so I went in and prepared this analysis and in preparing that analysis, I went back to work that I have been doing over the previous 30 years of testifying in these electricity cases and found that basically the utilities have been consistently over-forecasting the amount of load growth that was going to occur and that load growth didn’t occur. And I did a chart that showed that in 2005, the Energy Commission had forecasted that the California Independent System Operator peak load was going to rise to over 60,000 megawatts by 2020, but in 2020 the peak load was only about 50,000 megawatts, which was the same as it had been in 2006.
And then when I looked at the growth in rooftop solar installed over that same time period, it was about 15,000 megawatts, which happened to be almost exactly the difference in the peak forecast that the CEC had forecasted back 20 years, 15 years before. And what we were seeing today, and as I dug into that more deeply, I realized that basically rooftop solar customers had saved utility ratepayers a bunch of money, billions of dollars, because they had invested in their own rooftop arrays that had met the peak load requirements of the utility system. So the utilities didn’t have to spend money on generation on transmission or there was some distribution that’s probably been displaced as well over that time. And when I started doing those calculations, I found that basically the amount of reduced rates revenue that was coming to the utilities was roughly equal to about the savings that had been created by these customers over that same time period.
So essentially it was a breakeven deal. And so that caught the attention of the California Solar and Storage Association about a year later, and they asked, would you dig into this? Because this assertion about a cost shift from rooftop solar customers to other ratepayers is becoming a more salient issue in the state, both at the Public Utilities Commission and in the state legislature. And so I dug in and started doing some analysis on that, and that’s what I’ve been doing for about a year now. I had testified for the rooftop solar industry before that in other states, but not in California. And so this is something new that I’ve gotten diverted into working on.
John Farrell:
Well, I want to ask kind of a framing question here. So the context in which we usually talk about it now, about this issue of the cost shift, is about rising electric utility rates. So people are saying, oh my gosh, rates are rising so much. California is, you can almost call it at a crisis level, with the amount people are charged on a per kilowatt hour basis, although obviously the amount that they pay on their bills is actually maybe still comparable to what is paid in other states just because people conserve a lot in California and because of the climate there. But in some of the research that you’ve done, one of the things I think is most interesting to ask is what is actually the biggest driver of rising electric utility rates?
Richard McCann:
Well, that’s an interesting question. The one thing that we discovered by looking into this is it’s not rooftop solar, and it’s not shifting of costs from one set of ratepayers to another set of ratepayers, because it turns out that, and I can talk about this a little more, that the benefits that these customers are delivering is still about the amount of rate revenue that is being saved by the investments they made. So we can move on and set that aside as one of the causes. What’s really driving rates right now is rapidly rising distribution rates and rapidly rising transmission rates. But this is not a story that is something that’s happened recently. When you start looking back in history, this is something that’s been happening since 2002. In fact, California’s rapidly rising rates starting around 1990 is what drove us into restructuring in the first place.
Utility rates were a crisis in 1996 when we adopted restructuring, and the cause of the rising rates then were generation costs, a lot of uncontrolled QF costs, but also very large nuclear power costs from San Onofre and from Diablo Canyon. And so those elements drove up the rates, we had restructuring, then we had a disaster during restructuring because of some poorly designed market operations and some poor decisions about how to compensate the utilities. So then we came out of that, our rates went up by 4 cents a kilowatt hour after that, and then we had rising rates again starting from 2002. They stabilized around 2012 for a couple of years and then they started rising again rapidly. One of the driving factors being that the utilities signed excessively priced renewable power contracts in order to meet their renewable portfolio standard targets and to do it much more quickly than they should have.
So we ended up with excessively priced contracts. And currently the portfolio cost of those contracts are twice what you could go out and buy in the market for renewables if you were able to contract them today. But we’re locked out of it. California ratepayers are locked out of that new market because we already have so much renewable power that we’ve already over contracted for. So we have that aspect of it. And then starting around 2015 or 2016, the distribution rates really started to take off. Again, this is before wildfire expenses. Before the wildfire expenses arrived. Even when we had the big wildfire in 2017, the rates started going up a lot, but the utilities weren’t doing a lot to manage wildfire risk yet. That didn’t really start to hit rates until 2020 or so, but rates were already going up quite a bit. I looked back at the forecasts of increased load that the utilities were putting into their rate cases, their general rate cases from 2009 to 2018, and I found that PG&E had over-forecasted load over that time period by cumulative 99%, and Edison had over-forecasted by 76% and the PUC had authorized additional transmission spending or distribution spending, I should say, based on that excessive load forecast.
And so I don’t have the data to go back and do the auditing. Doing the auditing on that period is going to be a very expensive exercise, several million dollars for the PUC if they’re willing to go back and do that. But to look at the question of how much of that investment was actually used by the utilities in order to deliver power or do we have a bunch of gold-plated transformers out there that are serving our customers? And this came up, the reason why I started looking at that, was because PG&E in the 1990s had overbuilt around Fresno, which is a big farming area, well, the most productive farming county in the country, and that area is where my clients, agricultural clients, were. And so we went in and said, you’re building a bunch of distribution for suburbs that are not going to be built here and the suburbs were not built and we got the PUC to force them to not spend any more money on distribution in that area.
And so I think that the same thing again was happening 10 years later over that time period — the utilities anticipating this big housing boom because 2006, they were building lots of houses, and the housing boom of course crashed in 2009 and the utilities didn’t adjust their forecasts for what changed. So that’s one side of it. And then the other side is transmission where I just recently did an analysis. It’s up on my blog site where I looked at distribution investment from 2011 until 2023. And what I found is that transmission in California costs about 12 and a half cents a kilowatt hour to add to the system. And that transmission is built almost entirely to deliver grid-scale renewables, or to support the delivery of grid-scale renewables. So for example, they’ve reinforced the transmission ring around Los Angeles. Well, if they still had the same generation inside the LA Basin meeting their loads, the same fossil generation, they would’ve never had to reinforce the transmission ring around LA.
They had to reinforce it because they were importing a bunch of renewables out of the southeast deserts in California to Los Angeles. So that’s just one example of how transmission spending has also gone up quite a bit. And PG&E’s transmission rate, their retail rate, has gone up a thousand percent over the last 20 years. So this is an example of where this spending is probably happening. The thing is, it’s hard as an intervenor with a small consulting firm, to absolutely say, Yes, that’s what’s happening. It’s going to take an army of analysts to actually track this down and to point to where all of the successive spending has happened.
John Farrell:
Oh my gosh, there’s so many things I want to ask you about this. First of all, I think I just want to emphasize, as many listeners of this podcast know of course, a utility overspending is definitely a problem for customers, is not a problem for utility shareholders though, because that’s how they make their money, is that making those kinds of capital investments. So I just want to acknowledge here that there is this difference of interests between the investor owned utility shareholder and the customer that is supposed to be mediated by the Public Utilities Commission. So when you talk about an army of analysts needed to audit this, that’s where that army should be employed or where that work should have happened probably. Isn’t that right?
Richard McCann:
Yes, they have let things slip through, and too often the intervenor parties in these proceedings have focused on the trees and ignored the forest, and that’s just a very common outcome in all these cases.
John Farrell:
I’m going all the way back to your intro for just a second, which is to say I remember those cost of generation reports for the California Public Utilities Commission because I used them in some of my early work at the Institute. So thank you. I had no idea that I had this to your work way back then. I found this extremely useful. So I just wanted to mention that really quick before we move on. Let’s come back. You already kind of talked about this remarkable alignment between the peak demand forecasts that didn’t materialize and the rise of rooftop solar. Can you talk a little bit more about that? How has solar been meeting the peak demand needs? Some people talk about, oh, as we get too much solar, it doesn’t necessarily align with when we have peak demand. So my first question is, is it still working and serving that purpose of avoiding the utility, having to make investments, and do you think it can continue to do so? If rooftop solar were to continue to grow, if the Commission wasn’t actively trying to squash it via various mechanisms, could it continue to help mitigate peak demand growth?
Richard McCann:
So it’s a two or three-part question there, and so I’ll
John Farrell:
Famous for these. Sorry, take it, chunk it up.
Richard McCann:
I just gave a very long answer. So you countered with a very long question. So the first thing is, there is a difference between customer peak demand and metered peak demand. And that difference is growing in California. And when you look into the amount of solar that’s installed and look at the shape, the profile of what solar output looks like from rooftop systems compared to the metered peak, that is what the utilities actually see on their meters, you see that the load shape, it’s basically the same now as it was 20 years ago. The customer peak is still at about three o’clock in the afternoon in California. And so the metered peak has actually shifted three hours later. It’s now around six o’clock, and that’s entirely because of the installation of rooftop solar. It was kind of interesting when I did the analysis and found that it had shifted on average over that time.
You can just see it in the data. And so what is happening is rooftop solar is currently meeting peak load. It’s just not the peak that the utility is seeing. And so it does have value for the peak load and one of the key elements I realized that indicates how important that is as a peak supply… there’s always a complaint, Oh, solar’s unreliable, It has variable output, It’s a big problem… Well, if you look at the variations in the metered peak load during the day, it’s not really any different than it was 20 years ago. There’s always minute-to-minute variations. People turn on lights, turn off lights, air conditioning comes on, goes off. There is some small increase in that variation I understand, but it’s not directly attributable to variations in solar output. That rooftop solar is actually very consistent. It’s what we call the portfolio effect is that if you have one hundred 10-kilowatt sized solar arrays, they are going to have a more consistent and reliable output than a single 1000-kilowatt generator over time because it’s the portfolio effect.
It’s why we are told to diversify our investments in stocks so that we don’t have big swings up and down. And you just see that in the data. In California, what they do is they subtract the rooftop solar output from the load forecast, and so it doesn’t show up. The California ISO doesn’t see that generation at all. It doesn’t show up. They don’t put in a reserve margin for it. Their 7% operating reserve margin is based off of the metered load, not off of the customer load. Their reserve margins for planning purposes are based on the reserve, on the metered load, not on the customer load. There’s benefits of various kinds that roll through this. And so you end up with this big gap between the metered load and the actual customer load. And an additional benefit that comes in is California and the west coast has a large amount of hydropower, most of which can be stored during a day and output at the peak time and then reduced overnight.
Well, if you look at it, that peak output from the hydropower has also shifted three hours. And so what’s happened is solar is actually creating a new peak load resource in the evening by basically shifting several thousand megawatts of hydro output on the west coast from two o’clock or three o’clock in the afternoon to six or seven o’clock at night. And so that is actually, solar is not only meeting the customer peak load at three o’clock, it’s creating a situation where more resources are available to meet the metered peak load at six or seven o’clock on top of that.
John Farrell:
And I can imagine this is only getting better with battery storage resources now being added to the grid left and right, that you’re now adding more capacity in which solar can dump power midday and that can then be shifted to meet that, as you call it, the metered load, the stuff that the utility is still planning for in the evening.
Richard McCann:
Right. Yes, yes. And so one of the things is there probably needs to be more serious analysis of what should the rooftop or distributed solar resources look like going forward and whether you should have the storage incorporated with the new solar installations, which is what California was trying to do with their new net billing tariff or NEM 3 that they came up with in 2022, although they kind of screwed it up when they did it, the prices are way too low and don’t actually reflect the true value of solar. So they’re not getting as much built as they need to get built going forward of distributed solar resources.
John Farrell:
I mean there’s sort of an irony there too because if, as according to your calculation, the benefits of solar were outweighing the costs, what the Commission started from was, How do we sharply reduce compensation for people who are just doing solar and then maybe adjust that to try to encourage people to do storage. What I hear you saying is from your study, number one, they shouldn’t have been so quick to try to cut compensation for solar producers because now we’re just getting less solar as a result of that even though it was still more of a benefit than cost. And in addition, it sounds like they also didn’t manage to do the transition to encouraging people to do storage very well.
Richard McCann:
Correct.
John Farrell:
Okay. So I want to come back to the transmission and distribution spending, and I really appreciated your kind of broad overview of what’s driving utility costs. I think that that sort of multi-decade history actually is kind of missing from our current conversation, and I think it helps to maybe unobscure some things that people ought to know more about. So you talked about the costs of nuclear plants back prior to the year 2000. You talked about the cost of restructuring, adding immediately to customer bills, having to clean up the mess that was the market design and then the manipulation by Enron. You mentioned that there were these premium price renewable energy contracts. I’d love to dig into that just a little bit more before we get back to the transmission and distribution. So I think what you said, if I understand correctly, is the thing that the utilities could have done differently was maybe not necessarily that they shouldn’t have gone out and bought renewables at that price, because they were expensive at that time, and part of the idea of the policy was we drive down the cost by getting some early market adoption, but you’re saying they basically bought too much too quickly and if they had gone maybe more slowly, it wouldn’t have turned out as expensive.
Richard McCann:
Correct. And so what they could have done instead is staged the contracts, layered them in over time so that they didn’t have this rush of new renewables that they had between 2008 and 2012. They bought almost their entire portfolio in that time period. And the other thing that they did is sign contracts for 20 to 30 year periods, which means that basically they locked out the ability to go back out 10 years from now and sign new contracts at half the price because we got savings in solar generation from learning by doing. We locked ourselves out because of that and they could have signed 10 year contracts and had those signed in first and then had 10 years with a provision for renegotiation or something along those lines over that time. So those sorts of things they really blew. And then on top of that, PG&E refused to sell parts of their portfolio to the new community choice aggregators that were emerging because basically they were trying to kill them, and they got called out on that. There was a state law that was passed that said that they could not campaign against the CCAs because they were campaigning against Marin Clean Energy, the first CCA. So all of that led to this situation where we’ve just simply have totally messed up the renewable portfolio costs in the state and locked in all of these excessively high rates on that side of the ledger.
John Farrell:
I’m so glad you mentioned the CCAs because I actually talked to Dawn Weisz who is the CEO at Marin Clean Energy way back in, it was one of the early podcast episodes they did, about that fight with PG&E just to get these community procurement agencies stood up, and I think David Roberts on Volts actually just had her on recently to talk about kind of how that has developed over many years. So a couple opportunities for folks to go and learn more about that. I want to ask you one other thing about the renewables. So you mentioned specifically, and this gets into our conversation about the transmission and distribution spending, which I think is my core interest here in terms of what’s driving utility rates. You mentioned in Los Angeles, they reinforced this kind of transmission ring around Los Angeles to help facilitate the import of renewable energy from large scale installations like in the deserts to the east.
I’ve worked with, for example, Bill Powers who is down in San Diego and in Los Angeles. I remember him doing some analysis, maybe not specific to LA, I think it might’ve been around San Diego, but he’s essentially saying it would be cheaper to meet our clean energy needs with rooftop solar, especially on commercial buildings where you’d build it at a fairly large scale, than it would be to import renewable energy. Is that any part of the analysis that you’ve done or do you have any thoughts about whether or not that could have actually been a way to save ratepayers money when they were out doing a lot of procurement at that time?
Richard McCann:
Oh, sure. Bill’s analysis of the Sunrise Powerlink, where he found that the cost was around 9 cents a kilowatt hour to build that project at the time, that was what made me think to look harder into the transmission costs. And it took me a little while to figure out how I was going to tease out that cost, and then I realized that I could do it fairly simply by compiling the revenue requirements that were incrementally added by the utilities over a set period of time. And I also realized that the state has not added any fossil generation since around 2012. Nothing of that type is being built in the state, at least not on a large amount. And so if I picked the right time period, I was going to be able to largely attribute the increased transmission to the new renewable generation that was being built at the time.
And it turned out that the correlation factor, that is, it’s called R squared, the measure of the variation in revenue increases that could be attributed to the addition of new generation, was about 89%. So it’s a very powerful result, even though I only have about 12 years of data, it’s not a great number for doing that kind of analysis, but coming up with such a high value indicates that it’s probably pretty close to the actual value that you would derive. And an engineer wouldn’t do this. An engineer would go out and try to gather all the reports and study all the various links. And as an economist, I go, no, I just need to know the relationships and not really have to deal with all of the specific pathways in which these costs occur. I can just look at the overall result of what happens.
And one of the hidden secrets of electricity planning is that it’s not load growth that drives transmission spending. It’s load growth that drives addition of generation, and the addition of generation is what drives transmission spending basically. Transmission is largely just getting the power from a generator to a substation, and that just gets people. In their mind, it used to be that load growth and generation rose together and transmission spending also rose at the same rate. And so you could say, oh, it looks like load growth drives transmission. Well, now that we’re in a situation where there’s no load growth, and we have massive increases in transmission spending, it becomes revealed that it’s actually generation that’s causing transmission spending increases, not load growth.
John Farrell:
And that just makes it so much more interesting too when you talk about it being generation, because of course, to your example earlier about the difference between customer load and metered load, utilities aren’t actually seeing load growth both because of ongoing strong conservation programs in California, but because customers have installed 15,000 megawatts of rooftop solar, which has kept that peak from growing. So that sort of broke the mold then on doing this correlation between load and transmission. Now it really is very clear that you’re building transmission to support large scale energy generation projects that need transmission.
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John Farrell:
We’re going to take a short break. When we come back, I ask Richard about the lax oversight of utility transmission and distribution spending, the evidence that utility profits are excessive, and a step-by-step debunking of the California Public Advocate study about rooftop solar, with Richard’s analysis showing that rooftop solar provides benefits for California solar and non-solar customers alike. You are listening to a Local Energy Rules podcast with regulatory economist Richard McCann, a partner with M.Cubed Consulting. Hey, thanks for listening to Local Energy Rules. We’re so glad you’re here. If you like what you’ve heard, please help other folks find us by giving the show a rating and review on Apple Podcasts or Spotify. Five stars if you think we’ve earned it. As a bonus, I’ll gladly read your review aloud on the show if it includes an energy related joke or pun. Now, back to the program.
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John Farrell:
I was debating whether I was going to ask you a question that would make me sound stupid because of my two statistics classes, and I’ve decided I’m going to skip making myself sound stupid and leave it with what I think you had a very good explanation of what happened about that relationship.
So knowing that transmission and distribution investments by utilities are driving a lot of the cost increases for California ratepayers, and as you said that they’re not really associated with wildfire mitigation. We know transmission is associated with new generation, but the distribution stuff seems to have started increasing before that. I mean, you sort of answered this question when you talked about needing an army of auditors to find out how the money was spent for some of these cases, but it seems like the more I read about this, the more I am learning that it seems like there’s not really a lot of scrutiny about some of these expenditures. For example, I had Claire Wayner from RMI on the podcast recently to talk about her report on what she called the regulatory gap that suggested that utilities can make actually pretty big investments in transmission without a lot of state or federal oversight. I know you’re mostly an economist, but is that your assessment digging into these numbers as well that there’s really not been a lot of scrutiny of how much spending is happening?
Richard McCann:
No, there isn’t. That was one of the reasons why I had put in my testimony starting in 2009 about this discrepancy between what they were forecasting for load growth and what you could see was actually happening on the ground, both with Energy Commission forecasts and their recorded load, and how that was building up cumulatively over time. And what I was trying to trigger was a deeper dig into why the utilities were asking for $2 billion in “load growth” spending for distribution in each one of their rate cases when there was no load growth. This was something where the Public Utilities Commission and some of the associated the Public Advocate’s Office that we used to be, it had previous names like three other names before that, weren’t digging into this. And some of the key intervenor groups were not really pursuing this question either because they got caught looking at the trees. And even there, part of it is the intervenor compensation incentive is, you need to show you made a difference in a rate case. It’s much easier to show you made a difference when you say, oh yeah, that power pole replacement program that they have going right now is not cost effective in this particular neighborhood.
And you can show it and, Oh yeah, we made a difference in the decision and you need to compensate us a couple hundred thousand dollars for our effort. Rather than if you do go in for they are over investing and we show that they’re over investing by $2 billion and then the commission overrules you, you risk not getting any compensation for the million dollars that you spent to try to prove that case. So you go for the small ball, you don’t go for the home run because it’s too risky for the financial viability of your organization.
John Farrell:
This feeds so well into my next question about Mark Ellis, who has been on my podcast to talk about his focus on utility rate of return. So he’s a former Sempra executive. Sempra is the umbrella company for
Richard McCann:
SDG&E and SoCal Gas. Yes.
John Farrell:
Yeah, thank you. And so he left the utility business and in that role, I should say, he was in the C-suite advising the executives on where should you put your money? And he was saying essentially the rate of return you’re earning is so great, stop doing any kind of speculative investing on side businesses and put all your money into infrastructure because we’re earning a huge amount on that. So he really is, to your point about the forest versus the trees or going for the home run, he is interested in telling people to focus more on this issue of utility rate of return, how much they earn for making those infrastructure investments. And in a recent op-ed that he had in the SF Chronicle, he said, investor-owned utility profits have outstripped inflation by nearly 50% in the past three years, but at publicly-owned utilities rates are still going up, but almost 50% slower than inflation — it might seem like a really dumb softball question, but do you see evidence to suggest why there’s such a substantial difference between the investor-owned utilities and the publicly-owned ones?
Richard McCann:
Well, the investor-owned utilities earn money on every dollar of capital that’s invested. They earned 10% return almost guaranteed. I testified in that same cost of capital case that Mark testified in on behalf of the Environmental Defense Fund, and we put in a data request, please list all of the disallowances of investment that you’ve had over the last 10 years or something like that. And they came back with almost nothing. I can’t remember if the number was less than $50 million or it might’ve been like nothing. And so nobody is telling them, no, you can’t spend this money. And they come into these cases knowing that what they ask for is going to get knocked down. So they overbid. It’s just they approach it not as a legitimate cost recovery case, but rather as a negotiating process in which they aim high and then they get knocked back to what they actually expected to spend and earn return on.
And so I did the analysis. I came up with a similar rate of return that Mark did using a completely different method where I looked at a combination of matching the market value of the utilities to the book value of the utilities. When I was doing the analysis, the market value was about twice the book value. So essentially customers are paying for twice the authorized amount of investment because they really pay based on the market value of the utility. And then I looked at the return of the utilities, what they were earning in terms of their price earning ratio compared to the rest of the stock market. And over the 10 year period that I looked at, the utility return on equity was about three or four percentage points higher than it should have been based on doing that kind of analysis. And what was interesting is there was another academic study that came out in 2019 that basically came to the same answer using a different method, and then more recently another study that came out of the UC Energy Institute by two students there that they also came up with 7%. So it was kind of like, yeah, there’s all of these answers that are saying the standard business school way of doing this analysis using capital asset pricing models is giving an answer that’s way too high.
John Farrell:
It’s probably too technical for our crowd, but suffice to say that if you’re making 10% return right now and everything, all the evidence, suggests you should be making 7%, that’s lots of dollars, lots of millions of dollars that customers are overpaying for electricity based on how much utilities are earning.
Richard McCann:
Yes. Yes.
John Farrell:
I want to come back to your specific analysis that you did with CalSSA about the impact of millions of customer-owned solar arrays in California. Can you just give a brief summary of what was the top line? Is customer-owned solar good for customers?
Richard McCann:
Yes. We’ve found in doing our analysis that it looks like those customers are delivering an actual benefit of about $1.5 billion a year. The Public Advocate’s Office had claimed that it was $8 billion of net costs and cost shifts, so we basically showed there was a swing of about nine and a half billion dollars in terms of the actual benefits accruing from these customers.
John Farrell:
Can you walk through that? The thing I really appreciated about your study, and it was covered in Canary Media as well, and I’ll have a link to that news article where they gave this summary of your study, but could you walk… There were I think five main things that basically the Public Advocate’s Office got wrong in their analysis of rooftop solar costs and benefits. Can you just walk through that, because I think it’s really important for people to understand that you can have someone in theory in this business, they are intervening in all the time and still make really big mistakes about how to calculate the value and the costs from rooftop solar.
Richard McCann:
And I’ll just add that we’ve actually done some further analysis since then that shows that the benefits are even bigger than what we published that was done in January. So for example, the transmission costs data that I used had a lower value in that analysis than what I actually derived recently. So the first problem that they had was they used a capacity factor for the solar units that was too high. They said 20%, everybody else says it’s 17% to 18%. That was a billion dollar difference right there. They calculated the avoided retail rates without taking into full account the fact that most solar customers are on time of use rates. So they had overestimated that, that was close to another billion dollars, and then they ignored the fact that 15% of rooftop solar customers are actually on the loan income subsidy program CARE, and that would knock it down several hundred million dollars more in terms of the savings.
So all of those errors, and other people have indicated that we’re right on these issues, is about two and a half billion dollars just right there, right off the top. So now we’re down to $6 billion roughly in terms of what’s remaining. The next one is that they implicitly asserted that the utilities own the right to charge customers the full retail rate for electricity that is generated off their rooftop and consumed by the customer directly from the rooftop. So the utility is providing no services whatsoever to the customer, yet they are under obligation, in this view, to pay the utility for the full retail rate. And it’s about, 50% of the output of rooftop solar is consumed directly by the customer. It doesn’t get past the meter, and so that knocks down the estimate by another $4 billion.
John Farrell:
I want to just dwell on this for a second because it, only in the energy wonkosphere is this even considered controversial, and even then it’s just a few people who I think are quacks. But the utility is saying, you customer have spent thousands of dollars on a solar array to produce electricity for your own use, the electricity that comes off those panels and immediately runs into your house and powers your fridge and your washing machine and your phone charger, you’re supposed to pay us for that. And that’s $4 billion of what we’re counting against you in this analysis of rooftop solar.
Richard McCann:
Right. And sort of an interesting analogy is the difference between a battery EV and a plugin hybrid, and because I have a plugin hybrid, using this analogy, every time I fill up my plugin with gas, I should be paying PG&E for the electricity that I’m not using because I’m using gas instead.
John Farrell:
All right, we’re down $6 billion out of the $8 billion from the public advocate’s office.
Richard McCann:
Yeah. Wow. Right. So the next one is they used the current avoided cost calculator to calculate the value of the electricity. The thing is, is the avoided cost calculator is only forward-looking, and it only uses very short-term avoided costs in order to value solar. So it ignores the capacity value of solar. It uses an investment in transmission and distribution as though it’s only next year, you’re only avoiding next year’s investment, not investment 20 years down the road, and that number was around 6 cents a kilowatt hour. Well, if you do the analysis I did, which was to go back and look at what was actually avoided, look at the combustion turbines that weren’t built, the transmission lines that were not built, the distribution lines that were not built, it turns out that there’s about $2 billion of additional benefits that they ignored in their calculation, and that takes us down to zero.
So now we’re at zero. The benefits and the costs are weighing off against each other. Then further, those CARE customers that we were talking about, well, other customers don’t have to pay the CARE subsidy, so they’re actually saving not having to transfer money to those customers. That’s about another $150 million. It’s not a big number, but it’s an example of how something that they overlooked. But then the other big thing that they really overlooked was that these customers are still paying the utility for power that they buy beyond what their solar array produces. And we asked for data requests to the utilities, well, how much are they paying? Well, it turns out they’re paying over a hundred dollars a month on average in terms of bills. Well, the average bill is somewhere around $200 a month. So these customers are contributing, their bill is about 50% of the average bill for all of their customers, and the utilities claim that their fixed costs are about $50 a month.
Well, if you do a little bit more math, it turns out that these customers are contributing on average about $70 a month to the fixed costs. So they’re ignoring that it’s another one and a half billion dollars of contribution to fixed costs. And when you add all of that up, you go, well, actually these customers are contributing a billion and a half dollars or more to reducing the revenue requirements for the utilities. What’s the question here? What’s going on? So because so many people, there’s certain people who have been saying there’s a cost shift for so long, they can’t bring themselves to admit that this analysis is actually correct. And so they try to say things like, well, you’re connected to the grid and so you have to pay for the grid. And I go, well, we are. We’re paying $70 a month for something that you say costs $50 a month, so therefore you need to set that aside. We’re paying for the grid and the connections and those fixed costs. What is it that you’re actually trying to assert is that we’re not paying for?
John Farrell:
Right. I find this fascinating on two levels. One is I also have solar panels on my house here in Minnesota, and I pay more per month than I did before I put them up at this point 6 years ago because I have two plug-in cars and a heat pump. And I imagine a lot of other solar customers in California are similarly saying, Hey, now that I produce my own electricity, I want to use it for other things, and so I’m going to invest in things — you have a plugin hybrid vehicle, for example — that use electricity. So I just think it’s funny that we have this notion somehow that because I’m finding some way to produce my own electricity that I’m no longer part of the grid system or contributing to the grid system when at least my personal experience is Excel energy is doing just fine. They’re getting plenty of my money even after I did that solar investment. I guess the second thing though is, to your point about people having this cost shift language in their head for so long is, I can’t think of the exact term of the aphorism, but it’s basically never count on someone who’s understanding something whose paycheck demands that they do not understand it, right?
Richard McCann:
Yeah. Never admit the truth when it’s inconvenient to you.
John Farrell:
And we know for a fact that utilities, more than a decade ago, that the Edison Electric Institute, the trade organization of investor-owned utilities, warned utilities that this was going to affect shareholders, that customers doing rooftop solar would save money. I mean, just as an example, that $2 billion of benefits that you talked about in not built infrastructure, transmission lines, et cetera, that was saved because solar was built, that is $200 million, at their 10% rate of return in return to utility shareholders that was missed because rooftop solar customers made that investment instead. So it’s very clear to me, and I hope increasingly clear to other people, that utilities have strongly, strongly motivated arguments in this conversation because of the fact that their profits depend on building things instead of rooftop solar customers.
Richard McCann:
And I actually used that motivation on behalf of a client about 10 years ago. I have a set of clients who own mobile home parks for the state association, and they have private utility systems that were built back in the fifties and sixties because of the way the rules existed for utilities. They didn’t want to build them, but they were forced to, and they have been trying to transfer those systems to the utilities. And I finally pointed out to the utilities that if they bought the systems and invested in them and rolled them into rate base, they were going to make more money. And it was like a light went off in their head and they had been opposing this strategy for about 10 years. Then suddenly the light went off and they went, oh, yeah, now we’re all in, and they just went gangbusters for this program. So it’s just understanding their motivation is sometimes key to figuring out how to get them to change their behavior.
John Farrell:
Well, Richard, thank you so much for this conversation. Thank you so much for your detailed analysis of the benefits and costs of rooftop solar and the debunking of some longstanding myths about solar. To wrap up, what advice would you give either to utility regulators in California or other states if they care about making electricity affordable? What should be their top priorities? Where should they be looking for what is making electricity more costly?
Richard McCann:
Long term, they need to change the regulatory model, and I’ve written up some on this, but something more involved than just performance-based rate making. So setting targets for utility spending and having them transparent and enforceable so that they’re much harder to game than what the utilities can do. The other thing is to audit utility spending and make sure that it’s “used and useful,” which is a technical legal term in which the utilities can be held to show that whatever they’re investing is actually being used by customers. And it’s a good case that there’s probably a lot of stranded capital investment out there that we are still paying for that actually shareholders should be eating the cost of, or figuring out some different way of recovering that cost over time. So taking transmission assets and recovering them over 60 years instead of 40 years if we have too much transmission doing things like that in order to still leave shareholders essentially financially whole, but lower rates in the long run.
John Farrell:
Well, Richard, thanks again for joining me. I just really appreciate the work that you’ve done, the evidence-based approach that you’ve brought to the debate in California, and I really hope that it helps unlock some better solutions.
Richard McCann:
Yep. Well, thank you for the opportunity for speaking with you, and hopefully we make a difference.
*****
John Farrell:
Thank you so much for listening to this episode of Local Energy Rules with regulatory economist Richard McCann, partner at M. Cubed Consulting, about his study showing the net benefits of rooftop solar to California’s electricity customers, solar and non-solar alike.
On the show page, look for a link to the study and an excellent Canary Media summary article, as well as other research by Richard on what drives utility bill costs in California. We’ll share a link to Bill Power’s Sunrise Powerlink transmission alternatives analysis and we’ll also have links to my podcast with Sachu Constantine of Vote Solar about California’s solar policy mistake (episode 192), my conversation with Claire Wayner about the loophole for utility transmission investments (episode 233), and my conversation with Mark Ellis about how to reduce excessive utility profits by targeting their rate of return (episode 226).
We’ll also post a link to two podcasts with Dawn Weisz, CEO of the community choice agency Marin Clean Energy: my interview with her from 2014 (episode 19) that I mentioned during the interview, and the recent one she did with David Roberts at Volts.
Local Energy Rules is produced by myself and Ingrid Behrsin, with editing provided by audio engineer Drew Birschbach.
Tune back into Local Energy Rules every two weeks to hear how we can take on concentrated power to transform the energy system.
Until next time, keep your energy local, and thanks for listening.
Rooftop Solar Actually Saves Ratepayers Billions
California’s electricity rates continue their climb, sparking widespread concern among ratepayers. While many point fingers at rooftop solar, Richard McCann, an energy economics expert, argues this common assumption misses the mark entirely.
“Rooftop solar customers had saved utility ratepayers a bunch of money, billions of dollars.”
McCann, who has testified in electricity cases for three decades, has found that utilities have consistently mismanaged spending and forecasting for years, ultimately saddling consumers with billions in unnecessary costs.
The truth is that rooftop solar customers have actually saved California utility ratepayers billions of dollars. These personal investments in solar arrays have in fact met peak load requirements, in turn reducing the need for utilities to spend on new generation, transmission, and some distribution.
This finding directly challenges the common assertion of a “cost shift” from solar customers to other ratepayers.
“It’s not rooftop solar, and it’s not shifting of costs from one set of ratepayers to another.”
The Real Drivers of Soaring Electricity Bills
For years, California’s investor-owned utilities have peddled the “cost shift” myth, claiming that rooftop solar customers are burdening other ratepayers with higher electric bills. Instead, McCann’s study points to mismanaged, decades-old decisions, to explain why California’s electricity rates are high and increasing rapidly.
“What’s really driving rates right now is rapidly rising distribution rates and rapidly rising transmission rates.”
After a disastrous restructuring in the late 1990s—triggered by high generation costs and expensive nuclear plants—rates jumped by 4 cents per kilowatt-hour. Then utilities signed excessively priced renewable power contracts too quickly between 2008 and 2012, prompting a new rate surge. Those 20-30-year agreements now cost twice what new renewable power would, trapping California ratepayers into higher prices and preventing access to cheaper market alternatives. Notably, rates spiked starting around 2015-2016, even before they were impacted by significant wildfire expenses.
“PG&E had over-forecasted load over that time period by a cumulative 99%, and Edison had over-forecasted by 76% and the PUC had authorized additional transmission spending or distribution spending.”
Utilities also consistently over-forecasted load growth, leading the Public Utilities Commission to authorize unnecessary distribution spending based on inflated projections. For instance, the Energy Commission predicted peak load would surpass 60,000 megawatts by 2020, but it remained around 50,000 megawatts, the same as 2006. Rooftop solar installations, totaling about 15,000 megawatts, almost perfectly offset this over-forecasted amount, saving utility ratepayers billions. (The problem of utilities over-forecasting load growth is not confined to California).
Rooftop Solar’s Powerful Peak Performance
“It looks like those [rooftop solar] customers are delivering an actual benefit of about $1.5 billion a year.”
Rooftop solar is in fact a salve, and a cost-saver, for meeting California’s electricity needs. While the utilities’ metered peak demand (the amount utilities serve after customer-sited solar has been subtracted out) has shifted to later in the evening, around 6 PM, customer peak demand still occurs around 3 PM, which rooftop solar directly serves.
McCann explains that rooftop solar’s output remains very consistent due to a “portfolio effect” – the idea that one hundred 10-kilowatt sized solar arrays are more consistent and reliable than a single 1,000 kilowatt generator.
“Rooftop solar is currently meeting peak load. It’s just not the peak that the utility is seeing.”
Furthermore, solar indirectly creates a new evening peak load resource by shifting several thousand megawatts of hydropower output from the afternoon to later in the day. This means solar not only meets customer peak but also enhances resources for the metered peak.
Unmasking the Public Advocates Office Miscalculations
McCann’s study for the California Solar and Storage Association exposed significant miscalculations by the Public Advocates Office (PAO) regarding rooftop solar’s true value. The PAO’s errors have enabled the “cost shift” myth to take hold.
The PAO made several mistakes, including overestimating solar unit capacity factors, miscalculating avoided retail rates, and ignoring low-income customers. Crucially, the PAO implicitly asserted utilities own the right to charge customers for electricity generated and consumed directly from their own rooftops, a $4 billion error.
“50% of the output of rooftop solar is consumed directly by the customer. It doesn’t get past the meter.”
They also underestimated avoided utility investments in generation, transmission, and distribution by about $2 billion. Ultimately, McCann’s analysis revealed a $9.5 billion swing towards actual benefits that rooftop solar generates for the state’s ratepayers.
Path to Affordable Power: Regulatory Reform
“Long term, they need to change the regulatory model.”
To make electricity affordable, regulators must overhaul the current regulatory model. Utilities, as investor-owned entities, earn a nearly guaranteed 10% return on capital investments, which incentivizes overspending. McCann advocates for performance-based ratemaking with transparent and enforceable targets for utility spending, making rates much harder for utilities to manipulate, and auditing investments to ensure they are “used and useful” – a technical legal term in which the utilities can be held to prove that whatever they’re investing in is actually being used by customers.
McCann proposes stretching out asset recovery periods for transmission assets, for example, from 40 to 60 years, to lower rates while keeping shareholders financially stable. He also suggests, however, that shareholders should bear the costs of much stranded capital investment currently paid by ratepayers.
Episode Notes
See these resources for more behind the story:
- Read the study that shows that the real reason electricity rates have increased dramatically in recent years is out-of-control utility spending and utility profit making.
- Review the Canary Media summary article of the report.
- Check out other research by Richard McCann on what drives utility bill costs in California, and Bill Power’s Sunrise Powerlink transmission alternatives analysis.
- Listen to these related Local Energy Rules episodes:
- Episode 192 with Sachu Constantine of Vote Solar about California’s solar policy mistake;
- Episode 233 with Claire Wayner about the loophole for utility transmission investments;
- Episode 226 with Mark Ellis about how to reduce excessive utility profits by targeting their rate of return;
- Episode 19 with Dawn Weisz, CEO of the community choice agency Marin Clean Energy, as well as another recent interview she did with David Roberts at Volts.
For concrete examples of how towns and cities can take action toward gaining more control over their clean energy future, explore ILSR’s Community Power Toolkit.
Explore local and state policies and programs that help advance clean energy goals across the country using ILSR’s interactive Community Power Map.
This is the 239th episode of Local Energy Rules, an ILSR podcast with Energy Democracy Director John Farrell, which shares stories of communities taking on concentrated power to transform the energy system.
Local Energy Rules is produced by ILSR’s John Farrell and Ingrid Behrsin. Audio engineering by Drew Birschbach.
For timely updates from the Energy Democracy Initiative, follow John Farrell on Twitter or Bluesky, and subscribe to the Energy Democracy weekly update.