A looming problem and a proposal.
California is staging a COVID-comeback. Vaccination rates are on the rise. Public schools are slowly opening up. My favorite little league baseball team is back on the field.
I can see light at the end of my pandemic tunnel. But I’m going to make it through this with my family, my job, and my health intact (sanity not so much). Others are not as fortunate.
Unpaid energy bills are one measure of the economic pressure that some households are under. Since the pandemic took hold, these bills have been piling up. The graph below tracks arrears – wonkspeak for unpaid electricity and gas bills – households owe to California’s largest utility PG&E.
Across California’s three investor-owned-utilities, residential arrears now exceed $1 billion. That’s up from $412 million pre-pandemic. Dividing these total arrears by the number of accounts in arrears works out to over $500/customer.
Households that have lost jobs or worse will struggle to pay off this debt. I understand that unpaid utility bills are a symptom of deeper problems that energy bill assistance cannot fix. But if we want to target relief to households that need it, utility debt forgiveness seems like a shovel-ready assist.
The catch, of course, is that these overdue bills need to be paid by someone. Shifting these costs elsewhere is particularly fraught in California where we typically pay for energy assistance programs by pushing high retail energy prices even higher. We need a relief mechanism for customers who have not been able to keep up with their bills during the pandemic. We also need a better way to pay for it.
The Fraught Economics of Energy Assistance
In California, discussions about post-pandemic energy debt assistance are playing out against the backdrop of energy assistance programs we already have in place. The most important is CARE (California Alternate Rates for Energy) which offers discounted energy prices to qualifying households. The graph below shows that CARE customers get a significant discount on electricity prices.
The graph plots discounted CARE electricity prices, standard residential rates, and our estimate of the social marginal cost for PG&E over time. Details can be found here.
The graph also shows that CARE prices, although discounted, are still really high! We’ve estimated that the CARE price is now double the social marginal cost of supplying electricity. In other words, low-income customers are paying twice what it marginally costs — including climate change impacts — to get electrons to their homes.
We pay for this CARE discount (and other energy assistance programs) by raising the energy prices other utility customers pay. This is inefficient because it moves consumer prices even farther above the true incremental cost. This can also have unintended impacts on affordability for lower-income households who do not qualify for CARE but do struggle to pay energy bills. These data show that over half of the arrears that have accumulated over the pandemic are owed by non-CARE households.
I see social value in shifting energy debt burdens off of households hit hard by the pandemic. But I also see problems with paying for this energy assistance via higher energy prices.
A Better Way to Pay?
Are there better ways to pay for post-pandemic debt relief programs? One option would be to get in line for a piece of that $15 billion California budget surplus. But that line is long and the prospects uncertain.
Here’s another idea. Every year, revenues from cap-and-trade permit sales are transferred to residential utility customers in lump-sum payments. The original purpose of these climate credits was to encourage public support for the cap and trade program and reduce adverse impacts on low-income households. But all customers of a utility get the same credit payment. My guess is that many don’t even see these climate credits on their bills. So why not target these transfer payments at folks who notice and need them?
A half-baked proposal: Households that are already participating in bill assistance programs such as CARE would continue to receive the climate credit by default. Non-CARE households could be defaulted out of the credit program – but could opt back in if they want to keep the credit.
How much revenue could this redirect into bill assistance? When utilities have changed program defaults in the past, this has had a huge impact on customer participation. Multiplying the number of non-CARE households by the average carbon credit value from recent years for PG&E, SDG&E, and SCE respectively yields approximately $630 million in revenues. That’s approximately equal to the increase in residential arrears owed to these three utilities since the pandemic took hold.
These calculations are rough. And there are important implementation details that would need to be worked out (e.g. how should this climate credit value be allocated across utilities? How can households who need the transfer easily opt back into receiving it?). But if the alternative is raising retail energy prices for everyone, these details are worth negotiating.
Targeting Benefits and Costs
As regulators scramble to respond to the accumulating mountain of energy debt, there has been an appropriate focus on how to target relief at households who really need it. But the success of an energy assistance program will also hinge on how we pay for it. In California, we have a habit of paying for energy assistance – among other things – with higher energy prices. Here’s an opportunity to break that habit. As we crawl out from under this pandemic, we should be looking for ways to pull costs out of California’s energy prices, versus pushing more costs in.
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Suggested citation: Fowlie, Meredith. “California’s Billion Dollar Energy Bill Question” Energy Institute Blog, UC Berkeley, April 5, 2021, https://energyathaas.wordpress.com/2021/04/05/californias-billion-dollar-energy-bill-question/