California’s rate inequality is likely to worsen as energy transition advances

Residential customers of California’s three largest investor-owned utilities (IOUs) are being charged as much as two to three times more for electricity than it actually costs to produce and distribute, an inequality that impacts low- and moderate-income people the most.

That was one of the findings of Designing Electricity Rates for an Equitable Energy Transition, a new report from Next 10 and the Energy Institute at the UC Berkeley Haas School of Business. The report findings were slated to be presented at a hearing before state utility regulators on Feb. 24.

The high prices result from what the report said are “uncommonly large fixed costs” that are bundled into kilowatt-hour prices and passed on to customers. The costs cover 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.

Data from the report revealed that the state’s three largest IOUs—Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric—charge residential electricity customers much higher prices than are paid in most of the country.

It cited Pacific Gas & Electric for charging rates 80% higher than the national average.

Compounding concerns is the inequity of how the higher costs are distributed. The report said that as wealthier households adopt rooftop solar, the remaining fixed costs are distributed by IOUs across a smaller volume of kilowatt-hours delivered. This, in turn, raises the costs still higher for remaining, generally lower-income customers.

Recommended changes

The report outlined potential changes in how utility fixed costs, as well as environmental and low-income program costs, are recovered. It recommended raising revenue from sales or income taxes as a more progressive approach than the current system. It said such a shift would help ensure that higher-income households pay a higher share of the costs.

That approach might prove controversial, and the report said that a “potentially more politically feasible option” would focus on rate reform; here, utilities would move to an income-based fixed charge. That charge would still allow long-term capital costs to be recovered across all system users. It also would keep costs “affordable for all families,” the report said. In this model, wealthier households would pay a higher monthly fee in line with their income.

Such an income-based fixed charge would be based on three criteria, the report said: 1) setting prices as close to cost as possible, 2) recovering the full system cost, and 3) and distributing the burden of cost recovery fairly.

The report also warned that California electricity rates are projected to rise due to wildfire-related costs. Earlier in February, the state’s 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 near-term price driver, “a significant lack of transparent data” exists on the total costs and how they will be passed on.