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People near the site of the disaster say they’re sick. But officials haven’t recognized any link between those symptoms and the fire.

People say they can still taste the metal from the Moss Landing fire. But no one in the local, state, or federal government is able to say why.
The story of Moss Landing got little attention compared to the scale of the disaster. On January 16 — days before Trump reentered office, and as fires continued to burn in and around Los Angeles, when tempers and attention spans were already strained — the Moss Landing Power Plant ignited. We still don’t know what caused the fire, but we do know a few crucial facts: Nearly all of the batteries at the 300 megawatt facility, one of the world’s largest, burned up in the fire, sending a colossal plume of black smoke soaring up from the site for days.
Two months after the blaze was extinguished, many people who live in the vicinity of Moss Landing, a couple hours south of San Francisco, say they’re still sick from the fire. Community organizers on the ground say the number of sick people is in the hundreds, at least. The symptoms range, but there are a few commonalities. Many report having bloody noses in the days immediately following the fire. In the long weeks that followed, they’ve had headaches that don’t respond to pain medications, rashes that resemble burns, and a recurring metallic taste in their mouths. They all say their symptoms go away if they leave their homes and go further away from the site. But the U.S. Environmental Protection Agency and California state regulators have given the all clear.
I have spent weeks trying to get to the bottom of what happened at Moss Landing. I’ve interviewed people who lived in the area and say they’ve experienced breathing issues and other difficulties, many of whom have gathered on Facebook to share photos, stories, and symptoms. Others have offered testimony about these illnesses in public fora and town halls. Multiple lawsuits have been filed against Vistra, the company that runs Moss Landing, over the fire, citing these health issues. Vistra denies the existence of evidence proving pollution from the fire is making people sick, and told me in a statement that the company is “committed to doing everything we can to do right by our community.”
“Moss Landing is not only home to our facility, it’s home to our employees and neighbors,” the statement reads.
And yet, the people say, their symptoms persist. One of the people who told me about their condition is Sheryl Davidson, a former receptionist who lives in the rural nearby town of Prunedale. One of her joys used to be doing Medieval cultural re-enactments, but since the fire she’s been unable to participate.
“My nose just started bleeding. It was traumatic,” she told me. “And I had asthma, but my asthma was miniscule. My whole life, I just had an inhaler. But the inhaler wasn’t working.”
Davidson has other symptoms, including headaches. She says a lump also developed in her face beneath one of her eyes, of which she sent me photos. Despite concerns that something in the air from the fire may have made her sick, she hasn’t left her home, a house she’d lived in since she was a child.
Part of the reason: No one is telling her to leave.
Officials in Monterey County, where Moss Landing is located, acknowledged to me in a statement that they received reports from medical providers that local residents sought care for symptoms related to the battery fire. The EPA said on January 20 that air monitoring throughout the fire incident found no substantial releases of hydrogen fluoride, a fatal pollutant released from battery fires. Records indicate that EPA tested for the particulate matter as well, but there’s no evidence it monitored specifically for heavy metals in the air. Vistra told me it has been doing environmental observations since the incident and is sharing the results with regulators, but said in a statement that it “has not detected risks to public health at this time.”
Davidson may have stayed, but others have left Prunedale, including Brian Roeder, who remembers seeing the fire break out while at home and deciding to leave town with his wife and son out of an abundance of caution. When they got back days later, the fire had been put out. But Roeder told me his wife, who he said is immunocompromised, began reporting breathing issues shortly after they returned. His son started coughing, as well. They quickly left home again, and have been living out of short-term rental apartments far away from the battery plant for weeks.
“This community has been significantly damaged, and they are not coming in to help anybody,” Roeder told me. “There’s been behind the scenes efforts, there’s been some work, but nothing commensurate with the size of this disaster.”
“I know that L.A. caught on fire at the exact same time,” Roeder continued. “That was the huge focus for the state. I know that planes were going down and we had a change in administration. But the fact remains that we, here, cannot explain the absence of support for what is happening from the state. And there’s been a pronounced absence.”
Roeder also started a community organization called Never Again Moss Landing, which has been collecting its own samples of the environment in consultation with a professional lab. In doing so, Roeder became part of a broader effort in the U.S. to create public safeguards for battery storage technology in the wake of Moss Landing. Ground zero for this push is, fittingly, California, where the state Public Utility Commission has responded to the fire by requiring battery storage facility owners to make emergency response plans and adhere to modern fire codes for battery storage.
Some Democratic lawmakers in California want to go further, empowering localities to be the final decisionmakers on whether storage projects get built, as opposed to state regulators.
In some pockets of the U.S., this push for battery safety risks morphing into a threat to the energy transition. For my newsletter, The Fight, I’ve chronicled how towns and counties across the U.S., from New York City to rural Texas, are now banning battery storage, citing the Moss Landing fire and the fear another battery fire could happen in their backyards.
By many metrics, Moss Landing is an outlier. The Moss Landing facility was a giant field of batteries inside a former factory, essentially trapping all these combustible mini-bombs prone to “thermal runaway,” a phenomenon where rising heat from a fire leads to a chain reaction of chemical ignition, inside an insulated box. Concerns about thermal runaway are a reason why almost all battery storage today is installed in storage containers and with an appropriate distance between individual batteries.
But Moss Landing is also a crucial test case for the future of battery storage and public trust.
This morning, the renewables sector took a big stride towards attempting to calm the rage against battery storage. American Clean Power, the leading renewables trade group, released an analysis of 35 battery storage fires in the U.S. from 2012 through the end of last year. Many of the incidents involved “early-generation” battery tech, it said, adding that “improved safety measures, such as advanced thermal management, suppression systems, and containment enclosures, significantly reduc[ed] the likelihood of large-scale incidents.”
The analysis does not speculate as to what may have caused the fire at Moss Landing, simply noting investigations into the incident are ongoing. But at the same time, ACP released a new blueprint for safe battery storage development. In the blueprint, the association acknowledges that some of its recommendations — including a requirement that all battery storage facilities meet a new fire safety standard produced years after Moss Landing was commissioned — are aimed at “holistically addressing concerns generated by the Moss Landing Fire.”
Residents are deeply suspicious of the official assessments denying what, to them, are obvious health impacts. To be candid, I can’t blame them. It strains credulity to imagine a battery fire of this size and scope right next door to you somehow creating no pollution worthy of public concern.
“When you burn [batteries] it moves toxic chemicals into the air,” said Tracey Woodruff, a former EPA senior scientist and policy advisor specializing in chemical contamination of the environment, who now works at the University of California San Francisco. “If this is an uncontrolled burn, you can’t just say there isn’t going to be fallout from that or exposure to the population.”
There’s data making people afraid too. In late January, researchers at San Jose State University alerted the public that they’d discovered “unusually high concentrations of heavy-metal nanoparticles” and a “hundreds- to thousand-fold” increase in nickel, manganese, and cobalt — metals all present in Moss Landing’s batteries — in soil two miles from the power plant in the Elkhorn Slough Reserve, one of the state’s biggest estuaries. Exposure to these metals can cause serious health issues, some of which mirror the symptoms described by residents in the area who are sick.
Exposure to dust with heavy metals can be dangerous at even relatively low levels. A county health advisory shared with local medical professionals in February urged doctors to complete a comprehensive physical of anyone concerned about the impacts of the fire on their health. It noted that breathing or coming into direct skin contact with “heavy metal dusts and other particulate matter from smoke” can result in a metallic taste and difficulty breathing, as well as exacerbate underlying conditions like asthma.
Discovering the metals’ omnipresence in the Slough after the fire led Ivano Aiello, a researcher at SJSU who collected that data, to conclude that the contamination is probably more widespread than is publicly understood.
“I freaked out [after the study] because I was breathing the stuff. I was out there for days and I had no idea,” he told me. “Then I alerted the authorities … and they did their own investigation.”
Subsequent studies conducted by county and state environmental officials, including within the Elkhorn Slough, found no level of these heavy metals that they said could be conclusively tied to the fire. On March 19, farm advisors at the University of California Cooperative Extension undertook a “limited study” that found a “slight deposition of metals (copper and manganese) may have occurred in one agricultural field closest to the battery fire site,” but that the “concentration of metals measured were within normal ranges for all soil types evaluated.” Dole, the giant produce company, which has operations in the area, told me that on its end “no health impacts have been reported and no soil contamination has been detected as a result of the Moss Landing battery fire.”
But Roeder and many other members of the surrounding communities are worried there isn’t enough testing being done to find out whether contaminants entered the atmosphere, especially since air pollution is rarely spread evenly. Like Covid-19, the only way we will ever know the extent of the problem is with more testing, testing, testing.
Roeder is trying to do this work himself. On what he says is his own dime, he and other members of Never Again Moss Landing have collected dust samples across the region in consultation with a credentialed lab in the state, BioMax, which he told me reached out after the fire.
On Wednesday, a local NBC affiliate reported that Don Smith, a toxicologist at the University of California San Diego, confirmed elevated levels of nickel, cobalt, and manganese in the dust samples collected by Never Again Moss Landing. “There is reason to be concerned,” Smith told the TV station, adding that people living near the plant should wear masks regularly if they’re interacting with dust in their homes and be careful not to disturb soil in their yards. “Both manganese and, to a lesser extent, cobalt are known to be neurotoxins. And nickel, of course, is recognized as a carcinogen.”
Frustratingly, though, there is no solid proof to date of a conclusive link between the illnesses and metal exposure — just a lot of people with symptoms, a study that hasn’t been replicated in other pieces of research, and samples collected by residents who are also involved in litigation against the company. Still, that’s a lot of evidence of a problem. Medical mysteries are also common in environmental catastrophes like the Flint water crisis and the infamous DuPont PFOA debacle in Parkersburg, West Virginia, in which obviously sick residents butted heads with regulators for years, demanding information and testing.
What’s next for Moss Landing? The three counties most impacted — Monterey, Santa Cruz, and San Benito — just concluded a community health survey that solicited comments from potentially impacted residents and received more than 1,500 responses, according to figures I reviewed that were shared at a recent Monterey County public meeting. When that study is out, we’ll have a comprehensive view of the locations where the sick live to see where it lines up with the plume that emitted from Moss Landing.
Taking a wider view, any society that’s going to rely primarily on intermittent energy sources like solar and wind needs battery storage to keep the lights on. That will require winning the public’s trust in battery technology. The Moss Landing fire was bad, and over time risks becoming an East Palestine moment for the energy transition. But the lack of a loud, sizable government response to calm the nerves of people publicly claiming illness is likely to be even more damaging to the future of the battery sector.
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On Turkey’s COP31 win, data center dangers, and Michigan’s anti-nuclear hail mary
Current conditions: A powerful storm system is bringing heavy rain and flash flooding from Texas to Missouri for the next few days • An Arctic chill is sweeping over Western Europe, bringing heavy snow to Denmark, southern Sweden, and northern Germany • A cold snap in East Asia has plunged Seoul and Beijing into freezing temperatures.

The Trump administration on Wednesday proposed significant new limits on federal protection under the Endangered Species Act. A series of four tweaked rules would reset how the bedrock environmental law to prevent animal and plant extinctions could be used to block oil drilling, logging, and mining in habitats for endangered wildlife, The New York Times reported. Among the most contentious is a proposal to allow the government to consider economic factors before determining whether to list a species as endangered. Another change would raise the bar for enacting protections based on predicted future threats such as climate change. “This administration is restoring the Endangered Species Act to its original intent, protecting species through clear, consistent and lawful standards that also respect the livelihoods of Americans who depend on our land and resources,” Secretary of the Interior Doug Burgum said in a statement.
In Congress, meanwhile, bipartisan reforms to make federal permitting easier are advancing. Representative Scott Peters, the Democrat in charge of the permitting negotiations, called the SPEED Act introduced by Representative Bruce Westerman, the Republican chairman of the Natural Resources Committee, a “huge step forward,” according to a post on X from Politico reporter Josh Siegel. But Peters hinted that getting the legislation to the finish line would require the executive branch to provide “permit certainty,” a thinly-veiled reference to Democrats’ demand that the Trump administration ease off its so-called “total war on wind” turbines.
In World Cup soccer, Turkey hasn’t faced Australia in more than a decade. But the two countries went head to head in the competition to host next year’s United Nations climate summit, COP31. Turkey won, Bloomberg reported last night. Australia’s defeat is a blow not just to Canberra but to those who had hoped a summit Down Under would set the stage for an “island COP.” The pre-conference leaders’ gathering is set to take place on an as-yet-unnamed Pacific island, which had raised hopes that the next confab could put fresh emphasis on the concerns of low-lying nations facing sea-level rise.
More than a dozen states where data centers are popping up could face electric power emergencies under extreme conditions this winter, a grid security watchdog warned this week, E&E News reported. The North American Electric Reliability Corporation listed New England, the Carolinas, most of Texas, and the Pacific Northwest among the most threatened regions. If those emergencies take place, the grid operators would need to import more electricity from other regions and seek voluntary power cutbacks from customers before resorting to rotating blackouts.
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The United States is on the cusp of restarting a permanently shuttered atomic power plant for the first time. But anti-nuclear groups are making a last-ditch effort to block the revival. In a complaint filed Monday in the U.S. District court for the Western District of Michigan, a trio of activist organizations — Beyond Nuclear, Don’t Waste Michigan, and Michigan Safe Energy Future — argued that the plant should never have received regulatory approval for a restart. As I wrote in this newsletter at the time, the Nuclear Regulatory Commission granted plant owner Holtec International permission to go ahead with the restoration in July. Last month, the company — best known for manufacturing waste storage vessels and decommissioning defunct plants — received a shipment of fuel for the single-reactor station, as I reported here. While the opponents are asking the federal judge to intervene, state lawmakers in Michigan are considering new subsidies for nuclear power, Bridge Michigan reported.
Further north along Michigan’s western coastline, a coal-fired power plant set to close down in May got another extension from the Trump administration. In an order signed Tuesday, Secretary of Energy Chris Wright renewed his direction to utility Consumers Energy to hold off on shutting down the facility, which the administration deemed necessary to stave off blackouts. The latest order, Michigan Advance noted, extends until February 17, 2026. President Donald Trump’s efforts to prop up the coal industry haven’t gone so well elsewhere. As Heatmap’s Matthew Zeitlin reported last week, coal-fired stations keep breaking down, with equipment breaking at more than twice the rate of wind turbines.
Matthew had another timely story out yesterday: Members of the PJM Interconnection’s voting base of advisers met Wednesday to consider a dozen different proposals for how to bring more data centers online put forward by data center companies, transmission developers, utilities, state lawmakers, advocates, PJM’s market monitor, and PJM itself. None passed. “There was no winner here,” PJM chief executive Manu Asthana told the meeting following the announcement of the vote tallies. There was, however, “a lot of information in these votes,” he added. “We’re going to study them closely.” The grid operator still aims to get something to federal regulators by the end of the year.
Here’s a gruesome protocol that apparently exists when a toothed whale washes up. Federal officials arrived on Nantucket on Wednesday afternoon to remove a beached sperm whale’s jaw. Per the Nantucket Current: “This is being done to prevent any theft of its teeth, which are illegal to take and possess. The Environmental Police will take the jaw off-island.”
Members of the nation’s largest grid couldn’t agree on a recommendation for how to deal with the surge of incoming demand.
The members of PJM Interconnection, the country’s largest electricity market, held an advisory vote Wednesday to help decide how the grid operator should handle the tidal wave of incoming demand from data centers. Twelve proposals were put forward by data center companies, transmission companies, power companies, utilities, state legislators, advocates, PJM’s market monitor, and PJM itself.
None of them passed.
“There was no winner here,” PJM chief executive Manu Asthana told the meeting following the announcement of the vote tallies. There was, however, “a lot of information in these votes,” he added. “We’re going to study them closely.”
The PJM board was always going to make the final decision on what it would submit to federal regulators, and will try to get something to the Federal Energy Regulatory Commission by the end of the year, Asthana said — just before he plans to step down as CEO.
“PJM opened this conversation about the integration of large loads and greatly appreciates our stakeholders for their contributions to this effort. The stakeholder process produced many thoughtful proposals, some of which were introduced late in the process and require additional development,” a PJM spokesperson said in a statement. “This vote is advisory to PJM’s independent Board. The Board can and does expect to act on large load additions to the system and will make its decision known in the next few weeks.”
The surge in data center development — actual and planned — has thrown the 13-state PJM Interconnection into a crisis, with utility bills rising across the network due to the billions of dollars in payments required to cover the additional costs.
Those rising bills have led to cries of frustration from across the PJM member states — and from inside the house.
“The current supply of capacity in PJM is not adequate to meet the demand from large data center loads and will not be adequate in the foreseeable future,” PJM’s independent market monitor wrote in a memo earlier this month. “Customers are already bearing billions of dollars in higher costs as a direct result of existing and forecast data center load,” it said in a quarterly report released just a few days letter, pegging the added charges to ensure that generators will be available in times of grid stress due to data center development at over $16 billion.
PJM’s initial proposal to deal with the data center swell would have created a category for new large sources of demand on the system to interconnect without the backing of capacity; in return, they’d agree to have their power supply curtailed when demand got too high. The proposal provoked outrage from just about everyone involved in PJM, including data center developers and analysts who were open to flexibility in general, who said that the grid operator was overstepping its responsibilities.
PJM’s subsequent proposal would allow for voluntary participation in a curtailment program, but was lambasted by environmental groups like Evergreen Collaborative for not having “any semblance of ambition.” PJM’s own market monitor said that voluntary schemes to curtail power “are not equivalent to new generation,” and that instead data centers should “be required to bring their own new generation” — essentially to match their own demand with new supply.
A coalition of environmental groups, including the Natural Resources Defence Council and state legislators in PJM, said in their proposal that data centers should be required to bring their own capacity — crucially counting demand response (being paid to curtail power) as a source of capacity.
“The growth of data centers is colliding with the reality of the power grid,” Tom Rutigliano, who works on grid issues for the Natural Resources Defense Council, said in a statement. “PJM members weren’t able to see past their commercial interests and solve a critical reliability threat. Now the board will need to stand up and make some hard decisions.”
Those decisions will come without any consensus from members about what to do next.
“Just because none of these passed doesn’t mean that the board will not act,” David Mills, the chairman of PJM’s board of managers, said at the conclusion of the meeting. “We will make our best efforts to put something together that will address the issues.”
California energy companies are asking for permission to take in more revenue. Consumer advocates are having none of it.
There’s a seemingly obvious solution to expensive electricity bills: Cut utility profits.
Investor-owned utilities have to deliver profits to their shareholders to be able to raise capital for grid projects. That profit comes in the form of a markup you and I pay on our electricity bills. State regulators decide how much that mark-up is. What if they made it lower?
A growing body of evidence suggests they should at least consider it. In principle, the rate of return on equity, or ROE, that regulators allow utilities to charge should reflect the risk that equity investors are taking by putting their money in those utilities, but that relationship seems to have gotten out of whack. Among the first to draw attention to the issue was a 2019 paper by Carnegie Mellon researchers which found that since the 1990s, the average “risk premium” exhibited by utility ROEs as compared to relatively risk-free U.S. Treasury bonds has grown from 3% to nearly 8%.
“An error or bias of merely one percentage point in the allowed return would imply tens of billions of dollars in additional cost for ratepayers in the form of higher retail power prices,” the authors wrote.
Subsequent research reproduced and built on those findings, showing that a generous ROE creates a perverse incentive for utilities to increase their capital investments, leading to excess costs for consumers of $3 billion to $11 billion per year. Now, the ex-chief economist of a major U.S. utility company, Mark Ellis, is putting his own analysis out there, arguing that unreasonably high ROEs are costing U.S. energy customers $50 billion per year, or over $300 per household.
Not only does this hurt consumers, it also makes the energy transition more expensive and less politically palatable.
That’s what environmental and consumer advocates are worried about in California, where the Public Utility Commission is currently considering requests by the state’s four largest energy companies to raise each of their ROE. Utilities in the state have reported record profits amid a worsening affordability crisis. On Friday, the commission signaled that it would instead lower the companies’ ROE — although not nearly as much as advocates have recommended. A final decision is expected in December.
“It’s a joke,” Ellis, the former utility executive, told me of the commission proceedings. “If you read the proposed decision, they don’t address any of the facts or evidence in the case at all.” His own analysis, which he submitted to the California commission on behalf of the Sierra Club, proposes that an average ROE of 6%, down from about 10%, would be justified and has the potential to save California energy customers more than $6 billion per year.
Utilities, of course, disagree, and have brought their own analysis and warnings about the risks of lowering their ROE. Regulators are left to sort through it all to figure out the magic number — one large enough to appeal to investors, but not so large as to throw ratepayers under the bus.
How does the ROE work its way into your bill? Let’s say your local utility, The Electric Company, has a regulated return on equity of 10%, and it plans to spend $100 million to build new substations. Utilities typically finance these kinds of capital projects with a mix of debt (loans they will have to pay interest on) and equity (shares sold to investors). Then they recover that money from ratepayers over the course of decades. If The Electric Company raises half of the capital, or $50 million, via equity, an ROE of 10% means it will be able to charge ratepayers $5 million on top of the cost of the project. That additional $5 million is factored into the per-killowatt-hour rates that customers pay. The profit can then be reinvested into future projects, issued to shareholders as dividends, paid out to executives as bonuses — the list goes on.
The energy research group RMI, which agrees that the average utility ROE is much too high, estimates the surcharge currently makes up between 15% and 20%% of the average customer’s utility bill. “Setting ROEs at the right level is necessary to bring forward a rapid, just, and equitable transition,” RMI wrote.
Utilities, however, say the “right level” is likely higher, not lower. They warn that in reality, lowering their ROE would trigger a cascade of negative effects — credit downgrades, higher borrowing costs, lower stock prices, investors taking their money elsewhere — that would push energy rates up, not down. These effects would also make it more difficult for utilities to invest in projects to clean up and expand the electric grid.
Timothy Winter, the portfolio manager of a utility-focused fund at the investment firm Gabelli, told me this “virtuous cycle” runs in both directions. Higher ROEs lead to a lower cost of capital, which leads to more investment, better reliability, and lower rates, he argued. Winter said that if California regulators reduced utility ROEs to 6%, investors would flee the state.
Between growing wildfire risk and the bankruptcy of California’s largest utility, PG&E, California energy providers are too exposed to warrant such low returns, he said. As a comparison, he noted that U.S. Treasury bonds, which are generally viewed as risk-free, yield about 4%. “If it’s a 6% return with an equity risk, they’re not going to do it,” he said of investors.
I probed Winter a bit more on this. Is that really true given that utilities are still, in many ways, the opposite of risky investments? They have captive customers, stable income, and are seeing skyrocketing growth in demand for their product.
This caused him to spiral down into an investor’s worst nightmare scenario. “Yes, there is a risk,” he said. “If a regulator is willing to give a 6% return and they used to give 11%, how do I know they’re not going to decide, okay, rates keep going up, next rate case it’s going to be 4%?” After that, he said, how can investors be sure the government won’t end up taking over the utility altogether?
Travis Miller, a senior equity analyst at Morningstar, was more measured. He hesitated to tell me whether a 6% ROE would hurt utilities’ ability to raise capital. “What usually happens” when regulators lower the ROE, he said, “is the utilities just decide not to invest very much, so then they don’t have to raise capital.” He would expect the California utilities to “invest to maintain reliability and that’s about it,” meaning that “a lot of new data center build that is planned in California would have to go elsewhere.”
Return on equity also isn’t the only thing investors look at, Miller added. They consider the overall regulatory environment. Is it predictable? Is it transparent? He said there have been cases where regulators cut a utility’s ROE but the overall regulatory environment remained strong, and other instances where the cut to ROE was “another sign of a deteriorating relationship” — a phrase that brings to mind Winter’s panic about government takeovers. (I should note, advocates for public takeovers of utilities cite this whole dynamic around the need to woo investors and the perverse incentives it creates as a key justification for their cause. Publicly-owned utilities — which serve about 1 in 7 electricity customers in the U.S., including in large cities like Sacramento, Los Angeles, and Seattle — don’t charge an ROE.)
When I spoke to Ellis about his proposal, I fired off all of the utility arguments I could think of. Won’t utilities stop building stuff and making the investments we need them to make if they can’t earn as much? “They have a legal obligation to continue to invest,” he said. But will they be able to raise equity? They don’t necessarily need to raise new equity, he responded, suggesting that utilities could reinvest more of their profits rather than distributing the money as dividends. This is not how utilities traditionally operate, he admitted, but it’s an option.
Prior to taking up the consumer cause, Ellis spent 15 years in leadership and executive roles at Sempra Energy, the parent company of San Diego Gas and Electric and SoCal Gas — two of the companies that petitioned for higher ROE. “I know how they think about this issue,” he told me, asserting that the arguments the companies make to regulators do not match how they think about ROE internally.
During our interview, Ellis described the current state of utility regulation of ROE in California as “reprehensible,” “egregious,” “heartbreaking,” and “a huge injustice.”
In the analysis he submitted to the utility commission, Ellis not only makes the case that the average U.S. utility’s ROE is much higher than is necessary to attract capital, but also that the potential impacts to consumers of lowering it — i.e. the potential to hurt a utility’s credit rating and increase its cost of debt — would be outweighed by customer savings.
He argues that to justify their requests for higher ROEs, the utilities use forecasts from biased sources, cherry-pick and manipulate data, and make economically impossible assumptions, like that earnings will grow faster than GDP.
Stephen Jarvis, an assistant professor at the London School of Economics who has conducted research on ROE rates, has reached similar conclusions about them being excessively high. Nonetheless, he told me he sympathized with the challenge regulators face. He said there was no “right” answer for how to calculate the appropriate ROE. “Depending on the assumptions that you use, you can come up with quite different numbers for what a fair rate of return should be,” he said.
The sentiment echoes the preliminary decision the California Public Utilities Commission issued last week, when it observed that all of the proposals submitted in the proceeding were “dependent on subjective inputs and assumptions.”
Ellis said the decision contained a “smoking gun,” however, proving that the commission didn’t really do its job. Changes in ROE are supposed to reflect changes to a company’s risk profile, he said. The risk profile for Southern California Edison, which is facing lawsuits related to the Eaton Fire and already paying out hundreds of millions of dollars to survivors, has certainly changed in a different way than its peers. Regardless, the commission made the exact same recommendation for each utility to reduce ROE by 0.35%. “The Commission clearly is not looking at the evidence.”
There is likely some truth to that. “It’s more art than science,” Cliff Rechtschaffen, who served for six years on the California Public Utilities Commission, told me when I asked how the people in those seats attempt to calibrate ROE. He acknowledged there was a self-reinforcing element to the process — regulators look at where investors might go if the rate of return is too low, and use that to determine what the rate should be. “But the rates of return that are set in other jurisdictions are, in turn, influenced by the national utility market, which includes your own utility market,” he said.
Similarly, regulators rely on market analysts, investment advisors, investment bankers, and so on, who have an inherent interest in building up the market and ensuring healthy rates of return, he said. “That makes it harder to discern and do true price discovery.”
Rechtschaffen said he was glad that environmental and consumer advocates were bringing greater scrutiny to ROE, adding that it was the “right time” to do so. “Particularly in this environment where utilities have forecast that they’re going to be spending tens of billions of dollars on capital upgrades, do we need the same rates of return that we’ve seen?”