California’s current strategy of recovering a myriad of fixed costs in electricity usage rates must change as the state uses more renewable electricity to power buildings and vehicles, according to the findings from a new report from the Energy Institute at the UC Berkeley Haas School of Business and non-profit think tank Next 10.

Data from Designing Electricity Rates for An Equitable Energy Transition reveal that the state’s three largest investor-owned utilities (IOUs) charge residential electricity customers much higher prices than are paid in most of the country—prices that are two to three times higher than the actual cost to produce and distribute the electricity provided.

These high prices result from uncommonly large fixed costs that are bundled into kilowatt-hour prices and passed on to customers. These costs cover much of the generation, transmission and distribution fixed costs, as well as energy efficiency programs, subsidies for houses with rooftop solar and low-income customers, and increasing wildfire mitigation costs.

Overall average residential rates, including those on low-income rates (CARE). In 2019, more than a quarter of California IOU customers were enrolled in the CARE program. When CARE customers are removed, average rates for non-CARE households are about 10% higher. Source: Designing Electricity Rates for An Equitable Energy Transition

What Californians pay is much higher than the true marginal cost of using electricity. This puts an unnecessary cost burden on low- and middle-income households as we transition to using clean electricity.

—co-author Professor Meredith Fowlie, faculty director at the Energy Institute at Haas

Compounding concerns over these high costs is the inequity of their distribution: as wealthier households transition to rooftop solar, the fixed costs are distributed through a smaller volume of kilowatt-hours delivered, raising the costs even more for remaining, lower-income customers.

Lower- and middle-income households are bearing a far greater cost burden for the state's power system than seems fair. We’re proposing solutions that would recover system costs through sales or income taxes, or an income-based fixed charge, which would pay for long-term capital costs while ensuring all those who use the system—and specifically, wealthier households—contribute equitably.

—co-author Professor Severin Borenstein

Source: Designing Electricity Rates for An Equitable Energy Transition

The report comes as an increasing number of Californians are struggling to pay their utility bills. About eight million residents currently owe money to investor-owned utilities, according to a recent presentation by the California Public Utility Commission. This is especially concerning as rates are projected to rise again due to wildfire-related costs.

Earlier this month, IOUs unveiled a plan to spend $15 billion over the next two years to prevent wildfire ignitions. The researchers found that while wildfire prevention programs are likely to be a major driver of price increases in the near future, there is a significant lack of transparent data on the total costs and how they are being passed on.

Key findings from the report include:

• California IOUs’ prices for electricity are out of line with the rest of the country. In the least expensive territory, Southern California Edison (SCE), residential prices per kilowatt-hour are about 45% higher than the national average. Prices for Pacific Gas & Electric (PG&E) are about 80% higher, and prices in the San Diego Gas & Electric (SDG&E) territory are roughly double the national average.

• These prices are two-to-three times the cost of providing the electricity, due largely to the burden of recovering fixed costs that don’t reflect the cost of providing addition power for electrification. From 66 to 77% of the costs that IOUs recover from ratepayers are associated with fixed costs of operation that do not change when a customer increases consumption.

• Lower- and middle-income households bear a greater burden. These households are increasingly responsible for covering high fixed costs as total consumption from the grid declines. Due largely to increasing rooftop solar ownership in wealthier households, higher-income customers now purchase only modestly more electricity than lower-income households (despite higher electricity demands), leaving lower-income earners to pay an increased share of the fixed costs.

• A more equitable model would recover costs from sales or income taxes, or an income-based fixed charge.

The report suggests potential changes to how utility fixed costs, as well as and environmental and low-income program costs, are recovered, including:

• Tax revenue: Raising revenue from sales or income taxes would be much more progressive than the current system, ensuring that higher-income households pay a higher share of the costs.

• Income-based fixed charge: A potentially more politically feasible option could be rate reform—moving utilities to an income-based fixed charge that would allow recovery of long-term capital costs, while ensuring all those who use the system contribute to it and also keeping costs affordable for all families. In this model, wealthier households would pay a higher monthly fee in line with their income. The report examines a variety of implementation options for this model.

We believe policymakers could consider pursuing an income-based fixed charge based on three criteria. Set prices as close to cost as possible; recover the full system cost; and distribute the burden of cost recovery fairly.

—co-author Professor James Sallee

Borenstein is presenting the report’s findings to the Public Utilities Commission today at an En Banc hearing on energy rates and costs in California. The En Banc centers around themes and concepts raised by a CPUC-authored white paper on California electric and gas cost and rate trends over the next decade.

The need to improve the safety and reliability of the electric system while meeting California’s climate goals and various statutory mandates will require careful management of rate and bill impacts to ensure that electric services remain affordable. As California continues transitioning to a more robust distributed energy resources marketplace with greater deployment of electric vehicles, it will be essential to employ aggressive actions to minimize growth in utility rate base and to protect lower-income ratepayers from cost shifts and bill impacts. This white paper explores the affordability of the grid of the future and is intended to stimulate discussion of potential solutions that will be necessary to ease this transition, particularly for California’s most vulnerable customers.

—En Banc White Paper

Resources

• En Banc White Paper (Utility Costs and Affordability of the Grid of the Future, Feb. 2021)