This story is part of California voices, a feedback forum that aims to expand our understanding of the state and highlight Californians directly affected by the policy or lack thereof. Learn more here.
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In the late 19th and early 20th centuries, the Southern Pacific Railroad exerted near-total control over California politics, angering farmers who believed they were being gouged by high freight rates and fueling a powerful populist movement. .
Farmers’ complaints sparked several efforts to regulate them, eventually giving rise in 1911 to the California Railroad Commission. Just a year later, the commission’s rate-setting authority was expanded to natural gas, electric power, telephone and water utilities. In 1946, its name was changed to California Public Utilities Commission.
The commission’s five members, all appointed by the governor, oversee hundreds of billions of dollars in utility bills each year and issue their executive orders after incredibly complex legal and financial procedures.
In theory, the CPUC is protecting customers from monopolistic utilities. However, it also implements political decrees, such as switching power generation to renewable sources, and must – in its rate-setting role – ensure that regulated utilities make enough profits to maintain access to capital markets and debt.
It’s that latter role that comes into play when the CPUC sanctions steep increases in electric rates, as it has been doing in recent years, to the dismay of both residential customers and businesses that need electricity to survive.
California homes and businesses now pay the highest energy rates in the country, although their actual energy bills are marginally lower compared to other states due to California’s relatively mild climate.
Thirty-six years ago, California voters subjected insurance premiums to the same type of regulation by passing Proposition 103. It transformed the state insurance commissioner from a gubernatorial appointee to an elected position and gave the office new regulatory authority.
Sponsors of the measure promised that the regulation would keep a lid on consumer insurance costs and maintain that it has done so. However, unlike electric companies, insurers are not monopolies and cannot be forced to do business in California, so the insurance commissioner has an implicit duty to also maintain their profitability so that they continue to offer coverage.
In recent years, in response to costly wildfire payouts, insurers have left the state or refused to renew policies in fire-prone regions. Left uninsured, homeowners have flocked to the insurer of last resort, California’s FAIR plan, which not only has high rates but imposes strict limits on coverage.
It is a crisis that affects not only current homeowners, but also those who aspire to own a home and must have insurance to obtain mortgages.
Insurance Commissioner Ricardo Lara has proposed regulatory reform to entice insurers to continue issuing policies in California. It would allow them to include projections of future losses and reinsurance costs in premiums and speed up decisions about rate changes.
Lara is taking heat from Consumer Watchdog, whose leaders wrote Proposition 103 and which has received millions of dollars in “intervenor fees” for participating in rate-setting proceedings. However, Lara has the support of legislators whose constituents are seeing his policies disappear and Governor Gavin Newsom. Last week, Newsom backed one aspect of Lara’s plan by introducing a budget bill that, if signed into law, would expedite rate-setting cases.
“This proposal requires the Department of Insurance to modernize and streamline its rate request process to return to the expedited timelines outlined in Proposition 103,” said Alex Stack, a spokesman for the governor.
What is happening underscores how regulators must protect the profitability of the corporations they oversee. It’s something to keep in mind as the state expands financial regulation of the health care industry, which is by far California’s largest economic sector.
Ultimately, there is no free lunch.
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