California Introduces Graduated Income-Based Electric Rates

Brian McCowan, Zondits staff, 8/15/2023

For most California residents, electric rates will soon be based partly on customer income levels. A controversial law passed last year required regulators to establish the new rate structure by the summer of 2024. The California Public Utilities Commission (CPUC) is now considering several proposals detailing how the new rates will work. The reformed rates are to be adopted by the state’s large investor-owned electric utilities: Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric. Combined, they service about 75% of the state. 

The standard U.S. model for residential electric rates is to bill customers for consumption (volumetric rate) along with a fixed rate(s) for sharing the cost of maintaining the distribution network. Within customer classes, each customer is billed the same volumetric and fixed rates regardless of income level. 

Although some utilities offer subsidies for low-income households, the new California rate structure will replace a portion of the volumetric energy costs with a monthly fee based on customer income levels. The model is equivalent to a graduated income tax and would lower energy costs for lower-income residents while raising rates for those with higher incomes. 

Proponents of the graduated income-based rate structure claim the changes will more fairly share the increasing burden of electrical energy costs and allow a wider proportion of the population to transition from gas heat and gasoline-powered vehicles to electricity powered by renewable energy. A common criticism of the promotion of electrification is that customers in the higher income brackets are better able to invest in heat pumps, induction cooking, and EVs. 

Critics of the proposed rate structures claim that although lower-income residents may be able to better afford to electrify their homes and vehicles, natural energy conservation based on cost may suffer. Concern is also expressed that investment in residential solar and battery storage may suffer, as the financial incentive is reduced, and that previous investors in solar will be unfairly treated. California has some of the highest electric rates in the nation, encouraging some degree of conservation through efficiency and consumer behavior. 

Proposals for the rate structure details are being put forward by both utilities and non-governmental organizations. The affected utilities have jointly proposed a plan that, according to their testimony before regulators, will “support affordability and increased bill stability.” Their proposal would establish income tiers, with each utility proposing specific charges for each income tier. Monthly fixed rates would start at $15 and top out just shy of $130. Volumetric rates would drop by approximately 30-40%. 

However, the CPUC is considering at least 10 alternative proposals. One such proposal has been put forward by a consortium of organizations that includes The Utility Reform Network (TURN), a nonprofit advocacy group, the Natural Resources Defense Council (NRDC), and the Sierra Club. Their proposal includes smaller flat fees starting at $5 and averaging between $30-40 per month for the utilities’ customers. The resulting drop in volumetric rates would also be more modest, averaging about 20%.  

Sierra Club attorney Rose Monahan told Canary Media that the organization has long opposed flat fees, “It discourages energy conservation and efficiency, and if you have a high fixed charge, it can discourage people from investing in rooftop solar or battery storage.” 

Ahmad Faruqui, an energy economist with the Brattle Group is also concerned that the new rates could restrict clean energy investments. Online technology magazine CNET reported that Faruqui has warned that the plan would punish customers who use less electricity, especially higher earners. “Millions of customers fall in this category, spending thousands, if not tens of thousands of dollars, to make their homes energy efficient and to supply them with self-generated solar energy. Their investment will be rendered wasted,” he stated. Faruqui calculates that some of these customers will see their rates rise by 140% after they have invested substantially in efficiency and clean power projects. 

Zondits will continue to follow this developing story. 

For a deeper look at the controversial proposed rate structures: