PG&E fee keeps Diablo Canyon open — but is it a slush fund?

By Malena Carollo, CalMatters

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State utility regulators next week are slated to wrap up a three-year effort to keep open California’s only remaining nuclear plant, Diablo Canyon. 

The final step: Hammering out how plant-owner Pacific Gas & Electric must spend and report how it uses a controversial statewide fee to keep the facility open. 

One member of the California Public Utilities Commission, critical of the level of scrutiny being given to funds in the case, has twice held the matter back from a vote. Consumer and nuclear safety advocates argue that commissioners will be greenlighting an annual slush fund of hundreds of millions of dollars for the utility that could end up enriching shareholders if they approve it as  proposed.

“The commission is ready to throw in the towel and say they’re not interested in spending the time and resources on fighting this,” Matthew Freedman, lawyer for The Utility Reform Network, said. “They’re going to let PG&E do what it wants.”

“They’re going to let PG&E do what it wants.”

Matthew Freedman, lawyer for The Utility Reform Network, a consumer advocacy group.

PG&E argues that state regulators don’t have the authority to conduct the level of oversight advocated by critics such as The Utility Reform Network, and it shouldn’t be hemmed in on how it can use the fee that the Legislature enabled. It has made the case that spending the fee on other approved areas besides Diablo Canyon can also help control costs for customers.

Originally expected to close this year for economic reasons, Diablo Canyon saw its operations extended until 2030 to give California more energy security while transitioning to renewable sources. The controversial bipartisan legislation that enabled the plant to keep running was approved in the wake of heat-related blackouts in 2021, as well as a subsequent state report determining renewable energy didn’t cover California’s needs yet. Gov. Gavin Newsom signed the bill into law in 2022.

Today, Diablo Canyon provides about 8% of the state’s total energy and about 17% of its carbon-free energy. 

The legislation was unusual in that it allowed PG&E to charge both its customers and those of other utilities a fee for energy the plant produces. The logic behind the move was that Diablo Canyon is a resource benefitting the entire state. But instead of handing the specifics of the fee off to the California Public Utilities Commission, which typically oversees the complicated and deliberative process of ratemaking, it set the fee amount directly in statute – $13 per megawatt hour. 

Called a “volumetric performance fee,” the charge is meant to replace the return on investment PG&E would typically get for the plant and provide compensation for any potential liability from the increased risk of running an older plant. It is forecasted by the utility to cost, in 2026, $190.8 million for PG&E customers,  $59.7 million for Southern California Edison customers, $12.9 million for San Diego Gas & Electric customers.

PG&E shareholders are explicitly prohibited from benefiting from the fees under the law. 

But state utility regulators have thus far declined to require PG&E to provide enough detail into how it spends the fees to confirm that shareholders truly aren’t benefitting. 

“California law requires that PG&E spend the volumetric performance fees to advance critical public-purpose priorities, including accelerating customer connections to the grid and reducing operational and system risk. State law also expressly prohibits profit by PG&E shareholders,” Jennifer Robison, spokesperson for PG&E, said in a statement. “Our proposal outlines detailed accounting mechanisms and controls that PG&E uses to demonstrate compliance with state law each year.”

Under the law, PG&E is expected to use the fees toward approved expenses at Diablo Canyon. If the fees aren’t needed there, it can spend on six other categories meant to benefit the public. These include:

• Bringing new customers’ power online.
• Safety for customers and employees.
• Bringing more renewable or zero-carbon energy onto the grid.
• Reducing the carbon footprint of buildings.
• Grid resilience.
• Education and communication.

The proposed decision adds a few more constraints. PG&E would be required to spell out how many customers benefit from each project it spends the fees on. It would also need to say how these projects help keep customer bills down, although a revision released Tuesday reduced this requirement, allowing PG&E to not comply with that aspect as long as it explains why. 

PG&E is also expected to report how the fees were spent in “major work categories,” predetermined buckets the utilities already use to categorize their spending for the commission. These buckets have a spending cap on them – if PG&E goes over the allotted amount, shareholders pay for the overspend, and goes under, shareholders keep the difference.

But PG&E is only required to report such categories in which the fee is used, preventing regulators from seeing the net effect on shareholders. The net effect is important, the Utility Reform Network said, because PG&E could strategically use it to give shareholders more money overall. And while PG&E would report all of those categories during its general rate case, that case only happens every four years, as opposed to the annual filing for the Diablo Canyon fee.

The Utility Reform Group proposed broader reporting on this to better see the flow of money, which would allow the commission to better see if costs shareholders normally cover were being funded with the Diablo Canyon fees. The commission agreed in its decision that the spending plans as set out don’t have enough detail to determine this currently, but that such a requirement would be “overly complex if not infeasible or speculative analysis.”

A state analysis noted that the legislation had no “guardrails” preventing PG&E from using the fees for expenses that would have been paid by shareholders.

Concern about the fees being used to benefit shareholders was brought up as early as the 2022 law’s inception. A state Assembly analysis noted at the time that the legislation had no “guardrails” preventing PG&E from using the fees for expenses that would have previously been paid for by shareholders, “thereby freeing up ratepayer dollars elsewhere for capital expenditures [PG&E] may earn a return on.” 

Advocates also asked the commission to require that PG&E use the fees to cover a predicted annual budget hole. PG&E is currently predicting an operating loss at the plant of about $583 million on average each year.  

The Utility Reform Network, the Alliance for Nuclear Responsibility, and the Green Power Institute asked the commission to require PG&E to use the fees to reduce this hole first before allocating money on other allowed public projects. Reducing this deficit, they argued, would lower bills for not just PG&E customers, but those of the other two major utilities that are charged the fee. Money spent on the allowed public benefit projects, on the other hand, only benefits PG&E’s territory.

The commission declined, instead saying it “strongly encourages PG&E to take their underlying reasoning into account as a guiding principle.” 

PG&E has pushed back strongly against limitations on how it spends the fees and reports that spending, as well as prior approval of its fee spending plans. It has also challenged limitations on its fee spending or mandates to prove that its costs were reasonable. In a March comment filed with the commission, PG&E argued that having to report how the fees were spent in major work categories went beyond the scope of the 2022 law. It also took the issue before an appellate court and the Supreme Court of California, saying that by requiring it to spend in certain ways, the commission undermined the 2022 law and “called into question the economic viability of extended operations at Diablo Canyon.”

Both courts declined to take up PG&E’s case, and the commission denied the utility’s request to reconsider its proposed decision.

This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.