Reality Checking California’s Income-Graduated Fixed Charge
After all of the heat of the debate, a bit of data analysis sheds some light.
Last week, California’s Public Utilities Commission moved forward with an income-graduated fixed charge (IGFC) for electricity customers, tied to a reduction in the volumetric (per-kilowatt-hour) price, as was mandated by 2022 legislation. After all the haggling, the proposal adopted isn’t a very large fixed charge and it isn’t very income graduated compared to what we envisioned in our 2021 report that proposed the concept. Nonetheless, opponents of any fixed charge went to the mat fighting this change, even those who just two years ago purported to support a fixed charge so long as it wasn’t levied only on solar customers.
This new fixed charge is for everyone, as is the reduction in the volumetric price. All households that are not on the low income program will pay $24.15 per month, a number that just happens to be nearly equal to the monthly fixed charge of Sacramento Municipal Utility District, the second largest muni in the state. Households on the low-income program will pay $6 per month.1 At the same time, the price per kilowatt-hour will decline on average by a bit less than $0.05 for Pacific Gas & Electric and Southern California Edison residential customers, and a bit less than $0.07 for households in San Diego Gas & Electric’s territory.
(Source)
Detractors suggested, or boldly stated, that this redesign would increase utility bills, even though the proposal makes clear that the fixed charge will be offset with a lower volumetric rate in order to collect the same revenue. Many in the heated opposition pointed out that the $24.15 fixed charge was twice the national average. They neglected to mention that the volumetric rates of these utilities are already more than twice the national average. In fact, the average fixed charge paid by California customers under this new plan will make up about the same proportion of the bill as the average in the rest of the country.
There have been lots of claims about the types of customers who would be hurt by the rate redesign, most of them presented without any analysis. So, since I spent much of last summer putting together data to analyze the types of customers who are often termed “energy hogs” by the same commentators, I decided to return to that analysis to do some digging of my own.
First some math to illustrate how the new rate design will work: a PG&E customer who is not on the low income (CARE) program, will pay a fixed charge of $24.15 to be connected to the grid regardless of how much they consume. They will also see a reduction in their price per kilowatt hour of $0.047. So, this change will cause a higher bill for those whose net consumption from the grid is less than 514 kWh per month (514×0.047=24.15) and a lower bill for those who consume more than that.
CARE customers will pay a $6 monthly fee. The decision is a bit murky on how much the volumetric rate will decline for CARE customers, but for these calculations, I assume that it is 65% of the drop for non-CARE customers (about $0.031/kWh for PG&E), because that is the standard discount to CARE customers. With those changes, a PG&E CARE household will save money so long as they consume more than 194 kWh per month. The average PG&E customer consumes about 470 kWh per month, so somewhat more than half of non-CARE customers will pay more and the vast majority of CARE customers will pay less.
To dig deeper, I went back to the 2019 Residential Appliance Saturation Survey (RASS) that collected energy, household, and demographic information on about 32,000 customers of these three utilities.2 When I used these data to analyze characteristics of households that use more and less electricity, as I reported in two blogs last August, I concluded that three factors – the number of people who live in the house, the climate where the house is located, and whether the owners have been able to install rooftop solar – explain 75% or more of the difference between high-consuming and low-consuming households.
I now applied the IGFC rate redesign of each utility to the households in the RASS to see how their bill would change based on their 2019 consumption, and to summarize the types of households that would see their bills change and by how much. (A few additional notes on the calculations are here.)
Obviously, the change is more likely to raise the bills of people living in milder climates, along the coast, who use fewer kWh per month. But the difference isn’t as stark as you might think. The average increase for households in the most moderate climate zones runs up to $5/month and the average decrease for inland customers in the hottest areas is about $6/month. This map summarizes the average bill change by California Energy Commission’s climate zones.
One former Commissioner at the CPUC who has been campaigning against the change said that “virtually all low-income customers in San Francisco and Oakland, and maybe even farther than that — those people are going to pay more”. That seemed unlikely given that most of the lowest income customers are on CARE, but I checked the data: in both the Bay Area and statewide over 80% of CARE customers will see lower bills under the new proposal, and hardly any will see an increase of more than $2 per month. In fact, statewide, customers on CARE will save an average of $6-8 per month. Of course, since the proposal is revenue neutral, that means non-CARE customers will pay more on average, about $2-$3 per month.
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Many news reports quoted individuals claiming that wealthy people who live in big houses would be the primary beneficiaries. But, as my previous work showed, usage is correlated with the number of people who live in the house, so those “energy hogs” are disproportionately homes with many occupants, who are generally consuming less electricity per person. The figure above focuses only on non-CARE customers (since we know that nearly all CARE households will save money), presenting the average bill change by the number of people living in the house. The new rates will have little impact or even decrease bills for non-CARE households with many occupants, while bills will tend to increase for individuals living alone.
One major weakness of the new rate design is that it does not income-graduate the fixed charge among customers who are not on the low-income program. All of these customers will pay the $24.15 fixed charge. The CPUC didn’t have much flexibility on this, because the legislation did not include any authority to access income data from the state tax authority.
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One can break out customers by percent of poverty, a measure that accounts not just for household income, but also for the number of people who live in the house. The figure above shows the average bill change by quartile of percent of poverty. For comparison purposes the figure also includes CARE customers. The lowest 25% of PG&E customers who are not on CARE will see an average bill increase of about $4 per month, while the next quartile’s average bill will go up by about the same. The next highest will see an average increase below $2 per month, and average bills for the wealthiest quartile won’t change much at all. Even though they are more likely to have solar, the wealthier households on average still consume somewhat more from the grid than the less wealthy, so they will save more from this rate redesign.
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Of course, there will be larger losers (and winners) than these averages, as shown in this figure that combines all 3 utilities. Many will claim this is unfair. But that claim is premised on the view that the current system of collecting all costs volumetrically – including many costs that have little or nothing to do with the quantity of electricity the household consumes – is fair. I would strongly disagree with that view.
As I said in a previous post, raising needed revenues on utility bills is far from a perfect way to manage the extra costs above the actual expense of providing Incremental electricity to a customer. Effectively, we are paying for public policies and the impact of climate change by taxing electricity, and that tax falls disproportionately on low-income households. The IGFC is a step in the right direction. It reduces the burden somewhat on the most disadvantaged and makes it slightly more affordable to electrify cars and homes. These calculations demonstrate that the majority of customers will see modest bill changes up or down. There is still a lot of work to be done to make electricity affordable for poorer families and to make electrification financially attractive for everyone.
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Suggested citation: Borenstein, Severin. “Reality Checking California’s Income-Graduated Fixed Charge” Energy Institute Blog, May 13, 2024, energyathaas.wordpress.com/2024/05/13/reality-checking-californias-income-graduated-fixed-charge/
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- Much of the media coverage has said that low income customers will pay $6 or $12. The $6 charge applies to customers on CARE, the primary income program that includes over one-quarter of households. The $12 charge is for customers on FERA, which includes around 0.5% of all customers. The separate charge for FERA seems to be a fig leaf to technically meet the requirements of the legislation which was for a three-tier income-graduated fixed charge. ↩︎
- Worth noting that the number of households with rooftop solar has more than doubled since 2019, so this understates the number of households with low billed consumption from the grid who will see increases, but since the rate redesign is revenue neutral it also understates the benefit to households without solar. ↩︎
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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.
Energy Institute Blog 
My 3 unit building has a 4th account for our common lights & electricity. Bit of a bummer we’ll have to pay the fixed charge for an account that uses little power & doesn’t represent any additional people. Oh well.
This data is quite interesting, but the argument is a bit disingenuous. If the objective is to increase renenues (leaving aside that as seperate argument), it is ludicrous to say you are doing that by lowering kWh costs. One could raise the same extra revenue by leaving those kWh rates the same and increase fixed charges by a much smaller amount. So clearly there are unstated priorities here.
There are clear public policy disadvantages to lowering rates: it reduces the incentive for energy efficiency and solar. Other than punishing those who already invested in those beneficial technologies, the only why one might advocate such a change is to provide an incentive for people to add load to the grid. Some may hope that that will provide net decarbonization, but it only likely to make a less stable/more volatile grid.
Otherwise, the only public policy motivation left is income redistribution…and that is the role of the legislature, not the the PUC. Taxes not rates is how we are supposed to do such things. This policy change definately goes the wrong way as far as the role of setting rates. The good news is that it has been a bit blunted from what some would want. The bad news is that it could be camel’s nose under the tent.
In the past we have used tariffs to generate income for things that have nothing directly to do with utility costs, but are deemed to have social value: efficiency improvements, low-income subsidies, solar, decarbonization, etc. The argument should first be which of these we want, then who should pay for it. Trying to hide one’s prioritization under a miasma of data and tangential arguments is disingenuous.
Re: “If the objective is to increase renenues (leaving aside that as seperate argument), it is ludicrous to say you are doing that by lowering kWh costs.”
Response: That is not the objective. In fact, the charge is designed to be revenue neutral — though I know some people will scoff at that. This fixed charge approach will modestly lower the the monthly electric bills for most residential ratepayers and therefore make it a bit more attractive to add a heat pump or induction stove, etc., as we move toward more electrification.
Re: The new fixed charge design “reduces the incentive for energy efficiency and solar.”
Response: The incentive for energy efficiency still exists in the higher-priced late-afternoon and early-evening hours. In CA, we generally don’t need reduced demand mid-day given the abundance of cheap power, a good part of which is solar. In fact, we should be encouraging people to charge their EVs and do their laundry, etc., during this time.
Re: “In the past we have used tariffs to generate income for things that have nothing directly to do with utility costs, but are deemed to have social value: efficiency improvements, low-income subsidies, solar, decarbonization, etc. The argument should first be which of these we want, then who should pay for it.”
Response: What you say about tariffs being tied to programs that may have “social value” but no direct nexus to utility costs is true. But the argument should foscus on which of these programs actually work cost effectively according to data analysis. Moreover, a fair number of these programs are established in state law, and that also liimits arguments on which programs “we want, then who should pay for it.”
The utilities claim that it is revenue neutral. What they didn’t say that it reduces the expenses of the utilities (paying rooftop solar less), thus increasing profits.
It more than doubles the payback period for rooftop solar. This makes rooftop solar extremely unattractive. Claims here have been made that only the rich can afford rooftop solar. Formerly, those claims were false; now they are true.
Worse yet, reducing volumetric rate does not discourage energy conservation! 50% of electric energy in California is derived from fossil fuels. (While biomass is a sustainable source it is still a GHG.) Really, we can’t do this anymore, but yet, now there’s no incentive.
Rooftop solar is a distributed energy source. This means it’s less susceptible to outages due to mechanical failures. The construction of rooftop solar is not paid for by the ratepayer. It requires fewer transmission lines.
This last point is the true reason why the utilities are trying to crush rooftop solar. Almost all of the utilities profit comes from building transmission lines <– link to SCE document stating such.
Another point. From where did this $24 come? (note: percentage the same? sure, Californians pay 2 to three times the rest of the nation for electric energy.) I would like to see the source documents that come up with that number: As with typical businesses, what is the cost of the grid? Since the grid has to be sized for the maximum load, volumetric measurements are moot. The connection should be based upon panel size. A 100A panel should be charged 1/2 of a 200A panel.
So where does one find the sum of all expenses related to the grid. (I’ll be a forensic accountant could have a field day with that!) Certainly this must have been considered when coming up with $24?
What is the sum of the current (times voltage) for all panels? This exists. I worked specifically on that project “Transformer Load Management” in 1976. In fact, it would be negligent not having it.
Now one would divide the former by the latter. Multiplying by the panel size and, viola! a ratepayer’s part of the bill.
I did a napkin calculation getting my data from an SEC filing when SDG&E provided it and came up with $16 for a 200A panel
All this handwaving, charts, graphs, this pretending to care about the poor that is not already on CARE, this focusing on CARE customers* is obfuscation. Follow the money.
The utilities profits go up with this change (revenue neutral-lower expenses)
OSD
*Less than 20% of eligible CARE recipients are enrolled. If every Californian were eligible, (below 200% of poverty line) then we’re only talking about 20% of the customers. It’s the other 80% that we need to be addressing.
Can you direct us to analyses on how this is expected to impact greenhouse gas emissions? Many of us who are following energy these days are doing so because of a concern for climate. Citations apprecaited! Thanks.
How was the $24+/month determined? I recall someone saying there is no quantified analysis justifying that amount. You did not address, other than to say it is similar to SMUD. I think it is appropriate to assign “all” fixed costs to this fixed charge…. but what portion of fixed costs are covered by this fixed charge?
If assigning all fixed costs to fixed charges was appropriate, then you would be paying 50% of your average grocery bill just to enter the store! Retail businesses have many “fixed” costs such as employees, rents and loans, insurance, utility bills and taxes, but they universally recover those costs through variable charges as per unit prices. This is how a competitive market works. The fallacy is to believe that fixed costs must be collected through fixed charges.
Another fallacy is that many of these costs are “fixed.” Energy efficiency is the worst example–it directly offsets variable cost energy use which benefits all consumers. It’s hard to believe that this somehow got lumped with “fixed” costs. Another is wildfire mitigation costs. Those are discretionary incremental investments made to benefit less than 5% of utility customers–they just happen to cost $125K to $175K per customer! It’s not economically efficient to spend this amount (and there are much cheaper alternatives) but instead the cost has been smeared to everyone else. (However that already happens with a lot of other utility costs as well.) So many of these costs are called “fixed” simply because the CPUC is unwilling to closely examine whether these investments are cost effective compared to other approaches. It’s a term of cowardice rather than technically accurate.
Thank you for a very refreshing analysis of this new rate. This still doesn’t explain why consumers in Washington state pay essentially the same 9 cents/kwh for electricity generated as we do, and then only a flat fee about about $35/month for delivery. Why is California’s transmission and distribution of electricity some much more expensive that in most other states?
The CPUC summary of the decision does not explain HOW can the IBFC value be changed in the future. This is a key question.
I found a (the?) latest proposed decision of the Administrative Law Judge and it seems to say that the IOUs can request any change at the annual true-up period. I am not familiar with that process but I remember a comment from somebody (I believe Commissioner Lynch) indicating the burden of proof for this type of change was very low, and suggesting that it would be fairly easy to increase the value of the IBFC annually. Given the current financial incentives to IOUs, this process to approving future IBFC changes seems problematic.
Thanks for the analysis . I was listening to the sound bite news , and thinking “if there is a topic that doesn’t work well as a sound bite , this is it!”
I attended a very good online workshop on IBFC. One of the speakers came with many years of renewable advocacy and made a key point that can be summarized as: “people are not spreadsheets”. Even if all the numbers of this post were all right, people do not do what the spreadsheets say, so the right approach is to *test things out gradually*.
That gradual approach is also what earlier analysis from CPUC recommeded, but it is not what the final decision did.
(I’ll post a reply if I can find the name of the speaker).
Thank you for this analysis. It does put the hyperbole into perspective.
While I strongly disagree with both the principle applied (rates should vary with income) and with the methodology applied (incorporating costs other than the cost to connect to the grid plus metering) into the fixed charge, I agree that the impact of this shift will be modest to most customers.
The cost shifts FROM the high-consuming central valley and mountain zones TO the wealthier coastal zones is expected, but your zone-by-zone analysis is very helpful.
I agree that the fixed charge is twice the national average, but the volumetric rates will remain more than twice the national average. While that seems balanced, that does not make it efficient or equitable.
A principle purpose of regulation is to enforce on monopolies the pricing discipline that markets impose under competition. This charge violates that fundamental function of regulation. Safeway, Ralphs, and Walmart do not charge me to be a customer; they build their production, transmission, and distribution costs, plus their store, personnel, and parking lot costs into the volumetric prices for each item. That’s a natural result of competition.
Costco DOES charge a fixed fee (about 1% of revenue), but the purpose is to discourage “shoppers” from cluttering the store, limiting entrance to “buyers.” You seldom see anybody come through Costco with less than $100 of stuff in their basket.
But your analysis shows that this is unlikely to create a huge reaction. Thank you.
Jim Lazar, Olympia
Author: Electricity Regulation in the US: A Guide, and Smart Rate Design for a Smart Future, both downloadable at http://www.raponline.org
The principle isn’t that rates should vary by income. The principle is that social policy costs should be funded from the state budget and not from utility electric revenue requirement. Because these social policy costs aren’t funded appropriately, the IGFC is a second best solution. Further, there is good reason to collect fixed costs of the grid progressively like other social infrastructure. The IGFC is a step forward in that direction as well.
Your theories of rate design are unfortunately inaccurate and have caused mass confusion. That’s a topic for another day; this blog series has covered those issues to some extent and so have I through testimony.
Mohit, Jim Lazar has worked with Ralph Cavanagh at NRDC on rate design and energy efficiency issues since before you were born (and I was in high school). His reports and textbooks have been used widely for establishing rate design principles, including at the CPUC. You would be well advised to start with his suggestions and then justify your modifications. You’ve driven well outside your lane in this critique.
I’m the author of two books on utility cost allocation and rate design, and have appeared as an expert witness in more than 100 regulatory proceedings before twenty different state and federal regulatory agencies. I prefer the adjective “experienced” over the writer’s more derogatory descriptive.
Nearly all regulators limit fixed charges to customer-specific costs, recovering all “upstream” costs in volumetric rates. Yes, there are a few exceptions (and many electric cooperatives) which include upstream distribution costs in fixed charges.
Perhaps it is best to cite a Washington UTC Order, involving Pacific Power and Light Company, to show a typical regulatory response:
“The Commission is not prepared to move away from the long-accepted principle that basic charges should reflect only “direct customer costs” such as meter reading and billing. Including distribution costs in the basic charge and increasing it 81 percent, as the Company proposes in this case, does not promote, and may be antithetical to, the realization of conservation goals.” Docket UE-140762, Order 08, P. 91
More recently, the Hawaii PUC adopted very specific guidance for BOTH the establishment of the “customer charge” and also the “grid access charge.” The customer charge will include ONLY metering and billing costs, and be uniform for all residential consumers. The GAC will include the cost of final line transformers and service drops; it will ultimately be based on actual customer demand (in either direction) as that determines the capacity required for these components. (Until the customer demand data is available, an interim uniform GAC is being applied to all residential consumers). All other costs will be recovered in the time-varying volumetric charges. The effective rate in place today is:
Customer Charge: $8.40/month
Grid Access Charge: $11.36/month
Off-Peak (9AM-5PM): $0.1925
Overnight (9PM-9AM): $0.3678
Peak (5 PM – 9 PM): $0.5432
The off-peak rate makes it economical to use timer controls on hot water heaters, using the storage in the tank. It also makes it economical to charge electric vehicles. Hawaii is achieving some electrification goals with these rates, reducing gasoline and propane usage. California could learn from it’s neighbor to the West.
Jim Lazar, Author, Smart Rate Design for a Smart Future.
Intimidation by resume thumping isn’t a good look and it won’t work either. I recommend sticking to the issues. Some of which are covered here, here, here, and here.
Also, pricing examples of grocery stores etc. aren’t a useful comparison because grocery stores aren’t regulated monopolies with revenue decoupling. There are, however, many examples in the market of firms low variable costs that charge customers fixed monthly fees. See, for example, your local gym, Netflix, T-Mobile etc.