A Tale of Two Rate Structures

It was the best of designs, it was the worst of designs.

"Rate design for the one percent" -- that’s how California Public Utilities Commissioner Peter Florio characterized a proposed decision now before the Commission, poised to change how residential customers pay for electricity. Commissioner Florio's statement is hyperbole, but just barely: after the changes made by the proposal, over 90 percent of households would pay higher bills. That extra revenue would be used to fund bill savings for the state's biggest energy users, with over half of the benefits flowing to the 2 percent of households using the most energy.

The proposal adopts almost wholesale all the regressive changes requested by the utilities, including approving fixed charges of up to $10 starting in 2019. The judges who wrote the proposal admit that it "would have an excessive impact on [the bills of] low-usage customers." In response, Commissioner Florio put forth an alternative decision that is smart, forward-thinking, and deserves swift approval. The Commission will decide which decision to approve as soon as June 25.

There are three main benefits to Florio's proposal:

Fixed Charges: First and most important, Florio's plan denies the utilities' request to impose fixed charges. Fixed charges are the latest tactic from utilities across the country aimed at stifling growth of local clean energy. As my colleague Casey Roberts has written, these fees are unnecessary, regressive, and send the wrong economic signals, and the trend toward adopting them is especially worrisome in California, a state proud of its longstanding commitment to energy efficiency and conservation. By reducing the amount of the bill that can be saved by conserving energy, fixed charges dampen the price signal to conserve, and reduce the economic case for investing in energy efficiency, rooftop solar, or battery storage. They also disproportionately raise bills on low users, who are more likely to be low-income.

The Florio decision recognizes these problems and instead adopts a minimum bill. Under a minimum bill, customers are not automatically subject to an unchangeable surcharge.  Instead, any bills under a certain amount (in California, likely $10) are rounded up. In this way, a minimum bill only affects customers with very low usage. This policy addresses the utilities' concerns that some households are able to lower their bills so much that they no longer cover the cost of staying connected to the system -- without discouraging conservation or penalizing low users.

Tiered Rates: Second, Florio's plan largely maintains California's existing tiered pricing system. Under the current system, customers pay a low price for their first, "baseline" quantity of electricity, and then more for each successive tranche as the month progresses. This pricing scheme is in line with California law, which considers electricity a necessity and requires a basic quantity be available at a low price. Tiers also support conservation because customers with high usage have more potential to conserve and are financially encouraged to do so when cutting back at the margin results in noticeable savings. The judges' original proposal would largely undo California's tiered rate system so prices are nearly the same for all customers, large and small -- increasing the bills of the vast majority of customers, and correspondingly decreasing bills for the state's highest consumers of energy. (For context, your bills will go down if you're a Pacific Gas and Electric customer using over 900 kilowatt hours a month. That's over twice as much as the average PG&E customer uses, and enough to dry seven loads of laundry a every day for a month, or to brew 200 pots of coffee every day for a month).

Florio's decision also flattens the current tiered price structure somewhat, by reducing the number of tiers from four to three, and by reducing the price differential between the top and bottom tiers (now the top tier is twice as expensive as baseline; under his decision it would be 175 percent higher). These changes would have much more moderate impacts.

Time of Use ("TOU"): Both plans would move customers to TOU pricing starting in 2019, unless the customer chose to opt out and stay on tiered rates. On TOU rates, electricity costs less in the morning and late evening, when demand is low and (consequently) when electricity is cheaper to generate. By encouraging people to shift their electricity consumption away from peak times, TOU pricing helps prevent dirty, inefficient, and expensive power plants from coming online to meet high electricity demand. It also facilitates the transition to a more flexible grid by more appropriately valuing energy storage, distributed generation, conservation, and emerging technologies that can automatically shift or shed load. This transition is overdue and will help make the grid more reliable and resilient, and support California's aggressive greenhouse gas and climate goals.

Both plans support the transition to TOU pricing, and both would also implement a baseline credit -- a discount of about 10 cents per kilowatt hour on a baseline quantity of electricity. But Florio's proposal is superior because it additionally recommends an "excessive use surcharge" -- an extra fee of a few cents per kilowatt hour on consumption well above average. This policy is intended to mirror the structure of tiered rates, where high users receive price signals encouraging them to conserve. It's also necessary so that TOU rates make sense for  low users: otherwise, small users who switch from tiered rates to TOU rates might see their bills might rise sharply, and large users would see their bills go down, even if they didn't shift any of their load like the rates are meant to encourage.

Florio's plan supports California values of conservation and equity. The original proposal undermines these objectives. The Commission's choice should be obvious.