That $8.5 billion “cost shift” that regulators say falls on non-solar customers — and is partly responsible for our outrageous electric bills? It doesn’t exist.

No, rooftop solar advocates told the good-government Little Hoover Commission at a recent hearing, rooftop solar doesn’t cost other customers money, it actually saves them money. The real force behind our crazy soaring electricity rates is rapacious utility companies — and the regulators who allow them to collect way too much money, they said.

So rather than being the big bad wolf, rooftop solar is more Goldilocks, saving non-solar customers some $1.5 billion per year in avoided costs, they argued. How? Because the big investor-owned utilities haven’t had to build as much expensive infrastructure to meet demand.

Solar, they said, has been “scapegoated.”

“Why does California have such high rates?” asked Richard McCann, who authored a report for the California Solar and Storage Association refuting the existence of a cost shift. “It’s really the utility spending driving rate increases. The key question, really, is how do we control utility spending, not how do we make everyone pay for uncontrolled spending.”

Arguments refuting the solar cost shift have been presented to — and largely rejected by — the California Public Utilities Commission, the Public Advocate’s Office and many energy experts, but they got their day in the sun at the Little Hoover Commission’s second hearing on the woes of California’s energy system and we might fix them on March 27.

The infuriating backdrop: Our electric bills in California are the highest in the nation, save for poor Hawaii. Rates have doubled over the past decade. They’re about twice the national average and continue to rise, outpacing inflation. The investor-owned utilities (IOUs) — Southern California Edison, San Diego Gas & Electric and Pacific Gas & Electric — rake in big profits, even as they seek rate hikes.

Today, for-profit utility rates in California are 67% higher than those of public utilities, Consumer Watchdog has said. Experts at Little Hoover’s first hearing laid blame on the CPUC for allowing all that to happen; as well as on the expense of hardening the grid to withstand wildfires; on the cost of programs that lower monthly bills for low-income customers; and on the hotly contested solar cost shift.

It’s important to understand here that the investor-owned utilities don’t profits selling electricity. That’s essentially a pass-through cost. Rather, they’re granted a (too?)-generous return on their capital investments (such as the aforementioned grid-hardening). The CPUC allows Edison, SDG&E and PG&E a 10%-plus return on these capital investments, which provides a perverse incentive for them to pursue the most expensive options rather than the least expensive options, critics charge. And ratepayers foot the bills for it.

In contrast, publicly owned utilities — like Los Angeles Department of Water and Power and Sacramento Municipal Utility District — issue debt for their infrastructure projects. The interest rate on that debt is some 4-5% right  now, McCann told the Commission — substantially lower than the 10-plus percent return the utilities are allowed. And that 10% is after taxes; the before-tax return is some 14%, he said.

At the highest levels, the discourse over our electric bills has revolved around cost-shifts and fixed-use charges and “How do we change who pays for what?” said Dave Rosenfeld, executive director of the Solar Rights Alliance.

“There’s some merit to asking that question,” he told the Commission. “But if that’s all we’re talking about, all we’re doing is rearranging the deck chairs on the Titanic.”

The biggest driver of costs, he said, has been long-distance poles and wires. “In the last 20 years, there’s been a mismatch between spending and peak demand. How do we reduce that spending on poles and wires?

“The solar customer is your friend, your ally, in the overall fight.”

Good day, sunshine

The Commission’s staff would agree. With restraint.

“Beyond advancing clean energy goals, California’s robust rooftop solar adoption … has helped prevent blackouts by easing grid strain during peak summer demand,” the Commission report said. “Solar plus battery storage enhances grid resilience, allowing homeowners to maintain power during wildfire-related shutoffs. Additionally, by supplying energy to both solar-equipped households and the broader grid, rooftop solar has reduced the need for new thermal power plants.”

California generates an impressive proportion of its energy from non-fossil fuels: 65% of total generation in 2024 came from solar, wind, geothermal, biomass, hydroelectric and nuclear power, it said.

That breaks down this way: Utility-scale solar, 18.5%; small-scale solar, 13%; hydroelectric,12.4%; nuclear, 7.5%; and wind, 6%. This makes California the nation’s No. 2 state when it comes to using renewable energy sources; Texas, gasp, outshone us at No. 1, with its heavy use of wind power, according to the U.S. Energy Information Administration.

While lauding rooftop solar’s contribution, the Commission’s staff report trod carefully on the burning question of whether a solar cost shift exists.

“(A)nalysts disagree about whether those programs increase or decrease costs for residents who do not install solar panels,” it said. “Witnesses at the first hearing generally argued that the installation of rooftop solar increases rates for other customers,” while witnesses at this hearing argued exactly the opposite.

In its even-handed way, Commission staff explained the history of California’s investment in rooftop solar, which began in 1996. Then, to encourage its adoption, the state introduced Net Energy Metering (NEM), allowing homeowners with rooftop solar panels to earn credits for sending electricity they generate but don’t use to the grid for their neighbors to use. Those credits are applied to their bills at the retail rate, offsetting not only the cost of electricity generation but also transmission, distribution and other communal expenses — like the cost of reducing bills for low-income people.

NEM was revised in 2016 with slightly different terms, and dubbed “NEM 2.0”. Both versions are guaranteed for 20 years from the time of installation, and solar owners can bank their credits for exporting energy during the day to offset the cost of pulling power from the grid at night and on cloudy days.

The utilities pay rooftop solar owners three to four times as much for their power as they pay for renewables sourced from elsewhere, regulators and some experts say, resulting in a huge cost that’s borne by non-solar households — between $4 billion and $8.5 billion, depending on who you ask. About a quarter of a non-solar customer’s electric bill — 21% to 27% — covers the costs their solar neighbors aren’t paying, the Public Advocates Office estimates.

Despite the solar industry’s arguments that the cost shift concept is based on faulty assumptions and isn’t real, regulators disagreed. In 2023, the CPUC revamped how rooftop solar credits works yet again, but only for owners of new systems (leaving the multi-billion dollar cost shift in place).

Now new systems get far less generous credits — some 75% lower than the older systems. This led to a precipitous decline in new solar installations between 2023 and 2024 — of 66% — as well as the loss of at least 17,000, the solar industry says.

Others argue that this decline is a temporary market correction after the surge in installations that came as customers rushed to lock in higher NEM benefits before the program disappeared. “These analysts believe that solar adoption — especially when paired with battery storage — will stabilize over time as the market adjusts to the new tariff structure,” the Commission report said.

California isn’t done reallocating how electricity customers pay for fixed costs. There may be another attempt to lower credits for the NEM owners who were grandfathered in in 2023. And a monthly “income-graduated fixed charge” ($24 for most customers, $12 for low-income folks) kicks in later this year for solar and non-solar customers alike.

Solar reps argued that rooftop solar customers still buy electricity from the big utilities, paying $105 a month on average, and so do contribute to the system’s fixed costs. A commissioner responded that, because they get to roll back their rates, they’re not paying those fixed costs at the same rate other customers are.

A commissioner also noted that some 80% of solar panels are made in China.

Fix?

Many ideas are being floated to address the mess we find ourselves in:

• Strengthen the CPUC’s review process for approving utility spending. Boost staff to enhance oversight, require stricter cost evaluations before approval, improve financial accountability, reduce its focus exclusively to energy.

• Make the Public Advocates Office independent. It’s the branch of the CPUC that represents the little guy. Outside the CPUC, it could serve as a more impartial watchdog in rate-setting decisions.

• Decrease utility profits, particularly the high return guaranteed by the CPUC for infrastructure investments. In addition to lowering the rate of return, use external funding sources to reduce rates, authorize public ownership of new transmission projects, and pay for it using lower-cost bonds.

• Consider performance-based profit models that reward utilities for efficiency rather than infrastructure expansion.

• Address the cost of existing NEM contracts, the last of which will sunset in 2043, by shortening thelength of legacy benefits, ending them when a home is sold, implementing a Grid Benefits Charge for solar users, aligning compensation rates with system installation dates.

The Little Hoover Commission’s next hearing on the energy issue will feature testimony from those who’ve taken the brunt of the beatings so far — the CPUC and the investor-owned utilities, as well as the California Energy Commission, the state’s primary energy policy and planning agency. Should be a hoot! We’ll keep you posted.