Rebalancing Rates for Electrification and Equity
Addressing some misunderstandings about California’s rate redesign proposals.
The California Public Utilities Commission’s (CPUC’s) current proceeding to develop income-graduated fixed charges (IGFCs) for residential electricity bills is getting a lot of press, most of it unkind, and much of it inaccurate. The proposals that the CPUC has received from the investor-owned utilities (Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric), ratepayer advocates (The Utility Reform Network and the CPUC’s Public Advocates Office), environmental groups, and the rooftop solar industry, among others, are a response to legislation California passed in 2022 requiring the CPUC to create and implement IGFCs by 2025. The initiative may have been inspired in part by a report that Meredith Fowlie, Jim Sallee and I released in early 2021.
The rate reform won’t increase revenues. What it will do is shift some of the payments from a volumetric basis (i.e., per kilowatt-hour) to a fixed monthly charge while lowering the burden on poor households. Currently, volumetric electricity prices cover nearly all utility costs, including fixed costs like maintaining transmission and distribution lines, vegetation management around those lines, compensating past wildfire victims, and upgrading and hardening the grid for climate change, as well as subsidizing low-income customers, rooftop solar customers, EV charging stations, battery storage, and R&D on new technologies. Many of these costs are responses to state policies and climate change, not part of standard utility operations. These costs are nearly entirely unchanged when an existing customer pulls an additional kilowatt-hour from the system.
As our previous reports and blog posts have spelled out, covering these system costs with volumetric charges (1) puts the burden disproportionately on poor customers and (2) raises the price of electricity relative to natural gas and gasoline, thereby discouraging electrification of homes and transportation. A uniform monthly fixed charge would address (2), but would worsen (1), so the new law requires different fixed charges for households based on income categories.
Most of the media coverage has highlighted the fixed charges, while giving little or no attention to the accompanying reductions in the volumetric price of electricity (with one exception), leaving many angry readers with the impression that this is a rate increase. It isn’t.
Still, the shift in rates will raise bills for some customers and lower them for others. “That’s not fair!”, some say, because bills will rise for many customers. But this response is premised on the view that the current system is fair, a system that pays for many of California’s energy and climate policies through what is effectively a tax on electricity. That tax that is more regressive than the sales tax and about as regressive as the gas tax. Dumping these shared costs on those least able to pay seems pretty unfair to me.
Opponents have raised a number of other objections in what has amounted to a fairly one-sided discussion. So, to help balance things out…
“Income redistribution shouldn’t be done through electricity bills, but rather through state tax policies.”
Unfortunately, our current electricity bills ARE state tax policy. It would have been great if the legislature had originally put, or would now move, many of these energy policy and climate costs into the state budget. A bill to do a bit of that failed in the legislature last year. So we are left with this imperfect alternative that legislators did approve, perhaps because it pays for policies through a mechanism that doesn’t point back to them. The IGFC isn’t doing redistribution through electricity bills; it is undoing some of the regressive redistribution currently in utility bills.
“This is a new idea that has never been tried before. We should start with a pilot program.”
The California electricity industry is going through drastic and very rapid changes – clean energy, electrification, distributed resources, increased wildfire risk and damages – and costs are rising with unprecedented speed. Just as we cannot afford a go-slow approach on addressing carbon emissions, we cannot afford a go-slow approach to fixing the distorted rates in order to make climate action equitable and affordable. The current structure is causing harm every single day.
California is innovating in so many other areas of decarbonization and green energy. This rate innovation is part of that process.
“Many households will see huge bill increases, particularly higher-income customers with solar.”
Actually, the great majority of middle and upper-income customers won’t see large percentage changes in their bills either way. Wealthy households who have low consumption from the grid will see the largest increases. These are mostly people who have made investments in rooftop solar, investments that have already paid off beyond their wildest dreams as the retail rates they avoid have skyrocketed. Even with IGFCs, anyone who installed solar before the net energy metering rules changed on April 15 (including the avalanche of customers who adopted over the last 4 months) will still see substantial savings from their investment, though not as enormous as they would if we continue to load all of the skyrocketing costs into volumetric rates.
“Customers just focus on their overall bill, not the particulars of volumetric price or fixed charge, so this will not encourage electrification.”
There are many studies showing that customers understand the changing cost of consuming electricity at different times of day, which is more complicated than understanding that part of your bill is fixed and part is volumetric. Solar companies have for years marketed their products by explaining exactly how solar adopters can take advantage of different marginal rates under increasing-block pricing to save money. More recently, they have promoted the value of a battery to shift demand to lower cost periods. Similarly, sellers of heat pumps, electric appliances and EVs will be able to explain how lower volumetric rates help customers save by switching away from natural gas and gasoline. It is clear that customers learn how to respond to different rate designs. The key is to make those rate designs equitable and reflective of actual costs, so that when customers do respond they are also helping achieve California’s goals.
“This will kill the rooftop solar industry.”
Customers who can afford it and are not renters will still have incentives to install solar if they include a battery. Even the volumetric prices being proposed by the utilities (the lowest proposed volumetric rates) would remain well above the levelized cost of a solar+battery system.
The cities of Alameda and Sacramento – which have volumetric rates similar to the proposals from the investor-owned utilities and have in recent years adopted rooftop solar policies like the one that covers post-April 15 systems – found that solar installations have continued at a good clip, though not the exponential growth we’ve seen in investor-owned utility territories. But they have shifted dramatically towards including batteries. That’s what we need, because adding more rooftop solar without batteries does little to reduce carbon emissions or help the grid. Solar adopters with a battery will then be ready to participate in a virtual power plant program so the battery can be used to help the grid through the most difficult days.
“Lowering rates will discourage energy efficiency.”
The new rates would still be far higher than the actual incremental cost of supplying electricity, so they will certainly not encourage wasteful use of electricity. What they will do is encourage a shift from gasoline for transportation and from natural gas for home heating, hot water heating, clothes drying, and cooking. Given how clean California’s grid is today, and how much cleaner it will be in the coming years, switching major energy services from oil and natural gas to electricity is much more critical for our policy goals than discouraging usage that people actually value more than it costs society.
“This does nothing to lower skyrocketing costs.”
That’s right. California is making a lot of investments to achieve decarbonization and to respond to climate change impacts on the state. This rate rebalancing won’t change that one way or the other. It also won’t reduce utility cost structures or inefficiencies. But asserting that we shouldn’t fix rates because utilities are inefficient is like arguing that we shouldn’t address climate change until utilities have wrung out every ounce of waste.
“This is just a utility profit grab.”
The rate redesign has no effect on utility revenues at all if customers maintain their current consumption levels. But the change also gives customers the option to increase their consumption at an additional cost that is closer to, though still well above, the full cost to society of that additional usage. When some customers respond by increasing electrification of their homes and vehicles, revenues will rise. Ratepayer advocates – who endorse this approach to rate redesign – will surely be watching to assure any extra net revenues are used to cover fixed costs and further lower rates.
“Utilities shouldn’t be collecting income information on customers.”
The utilities agree. In fact, they would prefer a uniform fixed charge that has no income basis, but that approach would hurt poor customers. The most likely implementation of the IGFC will be to have a reliable third-party – a state agency or a university or other nonprofit – create a confidential database of household incomes and then share only the fixed charge category of each household with the utilities.
The current debate and media coverage has also failed to recognize two important benefits of this redesign.
First, collecting less revenue through volumetric fees and more through fixed charges would substantially lower the volatility of bills. The scorching summer month or the freezing winter month that pushes up usage won’t increase bills as much if volumetric rates are lower. More stable bills mean less bill shock and fewer customers who can’t make payments.
Second, income-graduated fixed charges also mean lower average bills for the people who have borne – and will continue to bear – the biggest brunt of environmental damage from energy usage and climate change. The lower fixed charges will disproportionately go to people living near freeways and industrial facilities, and those in the hottest areas of the state.
Getting to sustainability
Lowering volumetric rates by adopting income-graduated fixed charges isn’t a perfect solution. We must continue to press the legislature to move energy and climate policy costs out of electricity bills entirely, and the CPUC and utilities to reduce inefficiency. But IGFCs are a positive step in breaking the unsustainable current trajectory of California’s electricity rates.
Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.
Suggested citation: Borenstein, Severin, “Rebalancing Rates for Electrification and Equity” Energy Institute Blog, UC Berkeley, May 1, 2023, https://energyathaas.wordpress.com/2023/05/01/rebalancing-rates-for-electrification-and-equity/
Severin Borenstein View All
Severin Borenstein is Professor of the Graduate School in the Economic Analysis and Policy Group at the Haas School of Business and Faculty Director of the Energy Institute at Haas. He received his A.B. from U.C. Berkeley and Ph.D. in Economics from M.I.T. His research focuses on the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing. Borenstein is also a research associate of the National Bureau of Economic Research in Cambridge, MA. He served on the Board of Governors of the California Power Exchange from 1997 to 2003. During 1999-2000, he was a member of the California Attorney General's Gasoline Price Task Force. In 2012-13, he served on the Emissions Market Assessment Committee, which advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases. In 2014, he was appointed to the California Energy Commission’s Petroleum Market Advisory Committee, which he chaired from 2015 until the Committee was dissolved in 2017. From 2015-2020, he served on the Advisory Council of the Bay Area Air Quality Management District. Since 2019, he has been a member of the Governing Board of the California Independent System Operator.
A case can be made that IGFCs are a form of Wicksellian benefit taxation, i.e. not redistributionist. (Whether a better proxy for lump-sum benefit taxation can be found is an open question.) The underlying principle of public finance (ala Kaplow-Shavell) is to leave redistribution to efficient instruments of redistribution, i.e. not meddling with redistribution within individual sectors. IGFCs add the principle of undoing sectoral policies that violate the Kaplow-Shavell dictum and have perversely redistributed income in the first place.
You seem to be as biased in favor of this change as those who are opposed are against it. And your use of hyperbole doesn’t help your case at all.
“These are mostly people who have made investments in rooftop solar, investments that have already paid off beyond their wildest dreams as the retail rates they avoid have skyrocketed.”
I have made a significant investment over the past several years in solar+storage, as well as electrification of my home (replacing all propane appliances with heat pump equivalents) with one goal among many being that when I retire (which I did last year) I could keep my utility bills to an affordable minimum. My investments have not “already paid off” – they continue to pay off but have not come close to covering my investment. And they are not paying off “beyond my wildest dreams.” They are paying off exactly as I expected them to. It’s not rocket science to come up with a reasonable estimate of payback, and I did not have any wild dreams.
I am not opposed to a fair fixed monthly charge. I pay $16 per month now to be on SDG&E’s EV rate. I would not object to paying somewhat more. I’m not poor, but I’m not wealthy either, just a retired professional. But what has been proposed seems to be a massive bait and switch foisted on those of us who made an investment in good faith, that the CPUC and the IOUs would honor the agreement that we made when we paid a lot of money up front to help promote renewable energy and electrification on the assumption that a deal is a deal. There’s little enough trust in the system as it is. This goes a long way towards reducing it even further.
This blog does a good job of correcting some misunderstandings about the rate change proposals, but it perpetuates a couple of inaccuracies or simple falsehoods.
1. “adding more rooftop solar without batteries does little to reduce carbon emissions or help the grid”
This is patently false. California needs much more solar, and is building it as fast as it can to meet demand for renewables. A kWh produced from rooftop solar does just as much to reduce carbon emissions as a kWh produced from utility scale solar. 1/3 of all PV install in California over the past 5 years has been on residential rooftops, so it is among the biggest sources of reducing carbon emissions. Additionally, rooftop solar avoids ratepayer costs for all the transmission that would otherwise be needed if this solar was instead developed at utility scale sites, including all the associated O&M, ROE, and additional “vegetation management”.
RE: skyrocketing costs
“California is making a lot of investments to achieve decarbonization and to respond to climate change impacts on the state.”
This conflates multiple factors and in doing so it perpetuates the idea that switching to renewables is driving up costs. Since renewables have become the least cost source of generation, even when including some storage for dispatchability, it seems disingenuous and simply wrong to say that switching to lower cost and zero emission resources is contributing to rate increases. Quite the contrary, continuing to burn fossil fuels would increase ratepayer costs and greatly add to societal costs.
CPUC percurrent and reliability policies now actively discourage the IOUs and CCAs from procuring new standalone solar and focus on utility scale storage and solar plus storage. There have been almost no new standalone utility scale solar projects built over the past few years but there are a lot of storage and hybrid projects coming online. The main reason why 1/3 of the solar installed in California over the last 5 years is roof top solar is because the utilities and CCAs have been building storage projects to help move the solar production to other times of the day.
Behind the meter solar can still help the grid but increasingly it too needs to have a storage component so it that will help meet both afternoon demand and the evening net peak.
“… volumetric electricity prices cover nearly all utility costs, …” This generalization may be true, but I am at a loss to find where these costs are published. And all of the discussion here relies on that data. Therefore, I must ask, “Please provide a link to the balance sheet that itemizes all of the utilities costs.” so that we can get on the same page. The SEC filings do not provide that data.
A good article thanks for clarifying this proposal. Several questions: 1) Why are the electricity rates for Sacramento and the city of Alameda cheaper than PG&E in the first place? 2) What is the cost per tonne of CO2 reduction for electrification? Consistently, proposals are made for electrification forgetting that the reason is to reduce CO2 production, which has to be done at the lowest cost. For example, I have toured several new Berkeley condominiums that have the required heat pump water heaters:- but in a unventilated closet! Since all this will do is make the air in the closet cold and absorb heat from the condominium in the first place, this may well be more expensive and use more electrical power than just installing an electric water heater. This is true especially considering the higher cost of the heat pump water heater with potentially more costly repairs. 3) What will be the effect of adding vehicle to grid electric vehicles as proposed for new EV’s in California in this bill? https://www.scientificamerican.com/article/what-it-would-take-for-electric-vehicles-to-help-power-the-grid/#:~:text=CLIMATEWIRE%20%7C%20A%20new%20California%20bill,some%20technological%20hurdles%20to%20overcome.
When Dr. Borenstein and his colleagues first published the concept of “income-based fixed charges” I laughed. As I read through it, I had a hard time taking it seriously. It is such a drastic departure from the century-old tradition of regulation, that rates should reflect the cost of providing service. This proposal turns the electricity rate design into a form of income tax to pay for part of the bundle of costs in the electric utility revenue requirement.
Hawaii, which has similar high rates to California, is in the process of moving to a truly cost-based rate framework. There will be two components to the fixed charge. The first is for billing and collection, and is $5 – $10/month. These costs vary by customer — the costs of sending a bill are no different for a mansion than for a studio apartment. The second is for the Grid Access — the cost of connecting from the shared grid to the customer premises. This consists of a final line transformer and a service drop from the pole (or underground conduit) to the house. This cost varies with the size of the customer connection — much higher for a mansion than for a studio apartment.
All other costs are to be recovered volumetrically, as they should. The rates will be time-differentiated, with mid-day (when solar is producing) the cheapest, overnight will cost two-times the daytime charge, and the early evening, from 5 – 9 PM, will be three-times the daytime charge. The evening charges will be in the $0.60/kWh range. These rates will encourage conservation, encourage load-shifting (doing laundry when power is cheap) and help with electrification efforts (heating water and charging EVs when power is cheap).
The main problem in California is the magnitude of the utility revenue requirement, not the rate design. In most of the country, a fixed charge of $5 – $15/month comes with a volumetric price of $.11 to $.15/kWh. In California, the price per kWh is two or three times the national average.
The CPUC refuses to address their generous profit allowance, generous capital structure, generous executive compensation, and failure to securitize failed investments to remove the profit component from those. I’ve written a longer piece on this dilemma that I recommend: https://energycentral.com/c/pip/california-%E2%80%9Cincome-graduated-fixed-charge%E2%80%9D-proposal-probably-impossible-implement
“The main problem in California is the magnitude of the utility revenue requirement, not the rate design.”
It may well be that the CPUC should revisit the IOUs’ “profit allowance,” “capital structure,” and other revenue-related requirements. But as Jim Bushnell pointed out in January, “California’s rising prices can be traced to higher energy procurement costs, increases in transmission, and most significantly, distribution costs,” along with wildfire mitigation and damages. https://energyathaas.wordpress.com/2023/01/17/more-breaking-news-california-electricity-prices-are-still-high/.
“…rates should reflect the cost of providing service. This [IBFC] proposal turns the electricity rate design into a form of income tax to pay for part of the bundle of costs in the electric utility revenue requirement.”
Why is the IBFC such “a drastic departure from the century-old tradition of regulation, that rates should reflect the cost of providing service” when the same thing could be said for NEM program? In fact, the CPUC said just that last year in its annual SB 695 report on “Actions to Limit Utility Costs and Rate Increases”:
“Because many of the costs recovered in volumetric rates are fixed costs that do not vary with energy usage, compensating NEM customers for their generation at volumetric rates means that utilities recover a disproportionately small share of fixed costs from NEM customers. In order to recover the full
authorized revenue requirement, retail volumetric rates must rise, disproportionately burdening nonparticipating customers, who on average have lower incomes than NEM customers.” (P. 10)
So, it was ok for NEM customers to be subsidized by a de facto tax on non-NEM customers, but the IBFC would somehow not be ok? Isn’t that a double standard?
“But as Jim Bushnell pointed out in January, “California’s rising prices can be traced to higher energy procurement costs, increases in transmission, and most significantly, distribution costs,” along with wildfire mitigation and damages. ”
Yes, and the IOUs have spent exorbitantly with little oversight from the CPUC. When we look at the costs of municipals in California, we see a sharp divergence beginning prior to the wildfires in these rising costs, so this cannot be blamed on “being in California.” There’s a strong effect beyond state law and policy driving these rising costs. Much of this investment has been for load “growth” that has not materialized, as I started documenting more than a dozen years ago in testimony at the CPUC. Just taking the utilities’ proposals and explanations at face value has been a mistake that has had immense consequences.
As for what costs are fixed vs. variable, the CPUC has made the simplistic mistake of taking a snapshot view instead of the dynamic view over time of how changes in usage should be driving infrastructure investment. For example, the utilities within the CAISO have avoided 6 to 11 GW in new peak investment since 2006 through investment in distributed solar (rooftop + commercial) based on the 2005 CEC IEPR forecast. Given that GWH loads have remained constant (even fallen) over that period and the noncoincident loads reported in the utilities’ GRC Phase 2 filings also have remained level over that period, there’s no particular reason why T&D investment should have increased over that period either. Jim Lazar has commented here and elsewhere, delving further into this point. If marginal costs are supposedly so low, then average costs must be falling, not rising. But in fact retail transmission costs have been RISING rapidly over the last decade, which absolutely means that marginal costs are HIGHGER than average costs. (https://mcubedecon.com/2022/12/20/the-fundamental-truth-of-marginal-and-average-costs/) So it’s clear that infrastructure investment, which looks “fixed” to a casual unsophisticated observer, is in fact influenced significantly by additions of distributed energy resources.
“Much of this [IOU] investment has been for load “growth” that has not materialized, as I started documenting more than a dozen years ago in testimony at the CPUC.”
To the extent that the IOUs have made infrastructure investments to handle load growth that has yet to materialize, won’t that likely change as electrification rapidly ramps up demand and consumption between now and 2035? Even the oft-cited Vibrant Clean Energy Study (released last year or the year before), which was commissioned by the rooftop solar industry, predicts that most of our power is still going to come from the grid.
“For example, the utilities within the CAISO have avoided 6 to 11 GW in new peak investment since 2006 through investment in distributed solar (rooftop + commercial) based on the 2005 CEC IEPR forecast.”
Aren’t you referring to the “old peak” — that is, during the energy crisis and in the years immediately after? The peak has now shifted to post solar hours, and that has certainly created at least some new costs. In addition, we’re still curtailing a lot of utility-scale solar during the late morning and afternoon hours which of course can also drive the price of solar to or near zero.
First, the IOU infrastructure investment for the past 15 years was not intended for electrification and in fact was not designed until recently to accommodate the changing needs of the system, including integrating DERs and increasing capacity within existing neighborhoods. It was wasted on prospective expansion that did not materialize. It’s revisionist history to assert that this spending somehow now is a unrealized benefit. (It’s also not clear why past and current customers should be paying for a benefit that will accrue to future customers. I have proposed that utilities be held to a “used and useful” standard before rolling these investments into ratebase.)
Second, the peak load is the peak load. Rooftop solar did shift the peak from 3 pm to 7 pm, but it also reduced the projected peak for 2020 from 58,000 MW to 47,000 MW (and the latter during a 1-in-35 year heat storm). That the peak is later in the day has not created a need for new investment, and since thermal loads are less in the evening than in mid afternoon, the capacity of existing equipment has increased as a result.
As for curtailment of renewables, it has been just about one percent of total load. Further, we will be rethinking how we plan and build renewables in the future. That’s far from being a crisis. We’re likely to build excess amounts because there are no added operational costs to generate, and use that excess capacity to manage variability. Many studies are showing the benefits of this approach. Matching capacity directly to loads is an obsolete way of thinking.
The proposal was perfectly clear. The objections do not arise out of misunderstanding of but rather out of the approach. The approach arises out of state law which perhaps arose out of a what appears to be a policy discussion paper rather than a rigorous scientific paper with interdisciplinary peer review. It is good to see that the utilities are only complying with CPUC mandate and did not come up with the idea on their own.
The blog post blithely skipped over or dismissed the objections. I am not mollified by such quantitative justifications as “at a good clip.” It will be interesting to see how the approach will be implemented without violating privacy rights. It also seems unfair or unequal treatment to allow an administrative body of politically appointed, rather than duly elected, officials to set “taxes” based on income. It is at best unwise. This is the only time that I have ever agreed with Loretta Lynch; this approach will do nothing to bring rates down.
Finally, what about the other 40% of California Ratepayers that are not subject to CPUC regulation?
On the last comment about the rate payers who are customers of publicly owned utilities and not subject to PUC jurisdiction, SMUD, and few smaller POUs have already implemented fixed charges into their rates. SMUD’s is not income graduated so does not have the appearance of being as extreme as the IOU proposals, but I believe if you average out the utility proposals and SMUD’s current rates they collect about the same percentage of total revenue from fixed changes. SMUD adopted a NEM tariff a few years ago that is similar to the new NEM 3.0 that just went into effect for the IOUs. SMUD also implemented TOU rates ahead of the IOUs. This is not a coincidence. The PUC sometimes looks to SMUD to go first on rate design changes since SMUD has a high degree of customer trust and everyone else can learn from how they roll out changes.
I’d like to respond to two of these statements:
1. “Unfortunately, our current electricity bills ARE state tax policy.”
Answer me this: can I itemize this new fixed charge on my state / federal tax return (ignoring SALT for the latter)? The answer is NO! This is a hidden tax that I can’t even get a tax deduction for — awesome!
I calculate this policy as effective tax increase of ~0.5% on my household income.
2. “Wealthy households who have low consumption from the grid will see the largest increases. These are mostly people who have made investments in rooftop solar, investments that have already paid off beyond their wildest dreams as the retail rates they avoid have skyrocketed.”
What about, oh I don’t know, households that earn >$180k but simply don’t use much electricity? Those along the coast (PG&E Zone Q/T)? Or those in apartments which have inherently lower power bills? My family rents (so no solar) but we work hard to reduce our electricity bills. This policy will double or triple my electricity bills. I don’t have any solar that’s “paid off beyond” my wildest dreams to help me sleep at night.
Further on the characterization of $180k household income as “wealthy,” I challenge you to purchase a home in the Bay Area or LA or SD as a young family on $180k. I’m not sure older generations in this state understand what it takes to live here today if you didn’t buy a home in the 90s/00s. $180k doesn’t buy you ANYTHING (again, speaking of the Bay Area, LA, or SD), despite the characterization here of $180k household as “wealthy” for CA.
Clearly, the income-graduated fixed charge is getting huge pushback from customers. It also involves serious privacy and implementation issues in determining household income.
Why not just set a lower fixed charge for CARE customers that leaves them indifferent to the change in the rate design and charge all other customers a higher, uniform fixed charge?
If the CARE customers’ fixed charge is based on the assumption that they will continue their current levels of consumption, those CARE customers who consume more in response to the lower volumetric rates will benefit from increases in their consumers’ surplus.
mixing ‘social policy’ [such as welfare, equity, and fees etc] with ‘tax policy’ [ie tax credits etc] is difficult to manage. my thought has long been that all should pay ‘market rates’ and any ‘welfare’ component be paid as a separate benefit along with other payments such as SSI; paying via the already existing UI [unemployment] system would not be difficult.