When Memorandum and Balancing Accounts Expand Beyond Their Original Purpose

Introduction – From Intended Use to Expanded Application

In the first blog of this series, we explained how memorandum and balancing accounts function within the utility ratemaking framework.¹

Originally intended as targeted tools for limited circumstances, memorandum and balancing accounts now play a much larger role in how utility costs are ultimately recovered from customers.

In practice, these accounts increasingly operate as a parallel cost recovery structure alongside the traditional General Rate Case process.

As more utility costs are tracked and recovered through these accounts, they are changing:

• when and how frequently costs appear in customer rates;
• how financial risk is allocated between utilities and customers; and
• how utility spending is reviewed over time.

In some cases, costs are no longer evaluated as part of a forward-looking utility budget through a General Rate Case, discussed in Blog 1. Instead, costs may be tracked over multiple years and incorporated into customer rates later – sometimes after substantial balances have accumulated.

This shift has important implications for transparency, customer affordability, investor-owned utility (IOU) cost discipline, and regulatory oversight.

Accumulation of Costs and Delayed Rate Recovery

Over time, utilities have increasingly relied on these accounts to track large categories of costs outside of traditional base rates, creating a growing pipeline of future cost recovery requests that may not yet be reflected in customer bills.

The scale of these balances can be significant. As noted in Blog 1, California’s three largest investor-owned electric utilities have more than $2 billion in costs that have not yet been requested for recovery and therefore are not currently reflected in rates. However, when including additional wildfire-related costs that are pending before the CPUC for recovery approval, the total amount of wildfire-related costs not yet reflected in rates grows to approximately $9.3 billion.²

Figure 1. Wildfire-Related Costs Incorporated Into Rates and Pending CPUC Approval, and Overall Anticipated Future Costs Not Yet Requested for Recovery

*Overall anticipated future cost recovery as of Oct. 2025 (SCE and SDG&E) and Feb. 2026 (PG&E). Includes Wildfire Expense (WEMA), Wildfire Mitigation Plan (WMPMA), and Catastrophic Event (CEMA) Memorandum Accounts, and non-wildfire related accounts.

“Approved costs” and “costs awaiting approval” include CEMA and WMPMA, in addition to many other miscellaneous accounts requested in the WMCEs.

Substantial balances may accumulate in these accounts before the utilities bring them to the CPUC for review and before they are included in customer bills. And the utilities can submit numerous separate requests to the CPUC, which makes it difficult to fully assess cumulative rate impacts across multiple proceedings.

For example, in our recent fact sheet examining PG&E’s expected cost recovery requests, we found that although PG&E publicly stated that rates were declining, the utility still had substantial additional cost recovery requests pending before the CPUC and not yet reflected in rates.³

In prior Public Advocates Office testimony involving a California water utility, we found that accumulated surcharge balances of approximately $199 million, if recovered over a three-year period, could translate into an additional 24.5% increase in customer bills on top of rates authorized in its general rate case.⁴

But these examples are only the tip of the iceberg. While the scale and context differ, these examples illustrate how costs tracked through these mechanisms may ultimately affect customer affordability.

When “Unforecastable” Costs Become More Routine

Another important development is the increasing misuse of these accounts to seek recovery for costs that should be predictable or recurring, and as such, included in a utility’s general rate case request.

Some categories of costs now tracked through these accounts – such as wildfire risk mitigation, vegetation management, infrastructure hardening, and certain operational activities – are costs that utilities should be able to forecast and not need special accounting treatment outside of the general rate case.

In many cases, utilities may have sufficient information to anticipate and forecast at least portions of these costs through the general rate case process.

As these accounts are increasingly used for recurring categories of spending, the distinction between truly “unforecastable” costs and costs that can reasonably be forecast becomes less clear.

Challenges for Review and Oversight

As memorandum and balancing accounts expand in number and complexity, reviewing costs across multiple proceedings becomes increasingly difficult.

Unlike costs reviewed within a general rate case – where spending proposals are evaluated as part of a broader utility budget and alongside competing priorities – costs tracked in separate accounts are often reviewed individually and in different CPUC proceedings over time.

This structure can make it more difficult to:

• assess total balances across accounts;
• evaluate cumulative rate and bill impacts;
• identify broader cost trends; and
• evaluate tradeoffs across utility spending priorities.

Oftentimes, the use of these accounts can prevent a more comprehensive and comparative review of total costs that a full general rate case process would provide.

The complexity of these accounts, which often have many accompanying sub-accounts, can also create challenges in verifying costs and ensuring that customers are not paying twice for similar expenses. In one case involving PG&E, for example, the Public Advocates Office found that the utility redeployed workers and equipment – activities already funded through the general rate case – and then recorded costs for that same work in a separate memorandum account (its Catastrophic Event Memorandum Account, or CEMA) to seek additional recovery from customers. Despite not incurring any additional materials or labor costs, the utility effectively sought to recover twice for the same activities.⁵ In one proceeding involving a California water utility, for example, the Public Advocates Office demonstrated that invoices previously used to support surcharge recovery were later resubmitted to increase base rates.⁶

Implications for Cost Discipline and Risk Allocation

Concerns regarding the potential overuse of these mechanisms are not new. In a 1985 CPUC memorandum discussing balancing account ratemaking, the CPUC’s Executive Director warned that expanding reliance on these mechanisms could reduce “management incentive working to minimize costs.”⁷

Under a traditional ratemaking framework, utilities are generally expected to forecast costs in advance and manage spending within an approved budget. This process is no different than any other business setting a budget and having the discipline to set priorities to operate with the budget. When costs are instead tracked and recovered after they are incurred, a greater share of financial risk is shifted from utility shareholders to customers.

In prior proceedings, the Public Advocates Office has argued that increasing reliance on surcharge and balancing account recovery mechanisms may reduce incentives for utilities to accurately forecast costs within the traditional ratemaking process.

These concerns can be particularly pronounced in certain two-way balancing accounts, where utilities may recover differences between forecasted and actual costs through later rate adjustments. By contrast, one-way balancing accounts generally maintain stronger cost discipline because utilities remain responsible for costs incurred above authorized levels.

A national AARP report examining the increasing use of utility surcharges similarly concluded that these structures can weaken incentives to control costs, shift financial risk away from shareholders, and move costs onto customers. The report also found that surcharge mechanisms may receive more limited or expedited review than costs evaluated through a full rate case.⁸

Setting the Stage for Policy Considerations

Memorandum and balancing accounts remain important tools for addressing extremely limited utility costs that are substantial, unforecastable, and outside the utility’s control.

However, their expanded use means that a growing share of utility costs are now being tracked outside of the utility’s authorized budget and may be incorporated into customer bills at a later time, often at a time determined by the utility.

This shift has implications for transparency, affordability, cost discipline, and how financial risk is allocated between utilities and customers.

In the next blog, we will examine policy considerations and potential approaches for ensuring that memorandum and balancing accounts are used in a way that supports cost discipline, transparency, and effective regulatory oversight.