This article is written in response to an article by Professor Meredith Fowlie in the Energy Regulation Quarterly.^[1] She is one of the original proponents of a new rate design proposal that embodies an income-graduated fixed charge (IGFC).

Fowlie’s article focuses on the one million households that have installed solar panels in the state. They made their investment to both expand the use of green energy, at the behest of state and federal incentives, and to combat rising bills, based on expectations about stability in the rate structure. The return on their investment in solar panels, estimated to run in the tens of thousands of dollars, would be significantly lowered by the IGFC. If they had known that the IGFC would be levied, most of them may not have made that investment.

In a section entitled “Solar losers, don’t be sore losers,” she tells the reader that she has solar panels on her roof and will also face higher bills once the IGFC is in place. Then she goes on to say, “Fellow solar losers, we hope we can take a step back and recognize this as a big win for California and the climate.” Unfortunately, her claim is likely to come across as gratuitous advice to other solar customers.

There is no question that the bills of customers with rooftop solar, as well as those who made significant investments in other energy saving measures, are going to rise, often substantially, if the IGFC is imposed by the California Public Utilities Commission (CPUC). If a middle income solar customer in the PG&E service area with an income in the fourth income bracket put forward by the three investor-owned utilities has a current bill of $50 a month, it will rise to $124 a month, an increase of nearly 150 per cent.^[2] A customer with a current bill of $100 a month will face a new bill of $156, an increase of 56 per cent. The value of their investment will be severely degraded.

Similarly, any household that has invested thousands of dollars to enhance the energy efficiency of their home by replacing their HVAC equipment, installing double or triple pane windows, and adding ceiling and wall insultation will also see the value of their investment being degraded.

But solar and energy efficient customers won’t be the only losers. Any household that uses energy frugally and is a middle income customer would see its bills go up. So will single-person households and couples living in small apartments. The lower their current bill, the more it will go up in percentage terms.

These two groups – energy efficient customers and frugal customers – comprise millions of customers in California. Neither is mentioned by Fowlie. She chooses to ignore the significant collateral damage to these millions of Californians in her single-minded focus on customers with solar panels. Should the IGFC come to pass, it will erode the credibility of future government incentives that are designed to encourage customers to make environmentally-enhancing investments, those whose economics is predicated on the stability of the regulatory compact .

A detailed analysis of how the IGFC will hit consumer pocket books across the four income brackets in the utilities’ proposal shows that, in a reversal of fortunes, large users in all income brackets will benefit from the IGFC. It also shows that all customers in the lower two income brackets will benefit from it.^[3] It’s worth noting that California Alternate Rates for Energy (CARE) customers already get a 35 per cent discount on their electric bills. It will probably rise to 50 per cent under the IGFC.

WHERE FOWLIE ERRS

The article suffers from several limitations and makes several unsubstantiated assertions. First, it asserts without offering any empirical, or even analytic, evidence that the IGFC will accelerate electrification. A more likely outcome is an increase in overall electricity use (if Fowlie’s hypothesis is correct), with only a small portion focused on converting uses from fossil fuel to electricity. That increase is more likely to exacerbate reliability concerns in the state, which have been surfacing all too often since 2020, with little environmental benefit.

That unproven hypothesis underlies the provision in AB 205^[4] regarding IGFC. It was never debated or discussed before it became the law. The provision was slipped into a backdoor “budget trailer” bill. That is a sad comment on the state of democracy in California. To make matters worse, in what appears to be a sleight of hand, the CPUC has decided not to allow a public hearing session focused on getting customer comments, and it has also decided not to hold evidentiary hearings on the matter. The irony is that the CPUC is discussing the IGFC in a proceeding devoted to enhancing load flexibility, ignoring the fact that high fixed charges are likely to discourage load flexibility.

Second, the article neglects to mention that income provides no cost-related basis for setting fixed charges and raises important data reliability and privacy issues. The first question is, where else is that being done, and if so, how have they ironed out these key details? How will income data be obtained, to begin with? What coercive steps might be adopted to compel releasing such data to private corporations? Even if the income data becomes available, are utility IT and billing systems capable of processing it month after month and billing customers on time.

There are multiple reasons^[5] why that cannot be done as easily as presupposed by the academic proponents of the IGFC. We speak from experience, derived from assisting utilities, regulators, and consumer advocates in the regulatory process over several decades. We have never encountered such a proposal.

Third, the article skips over the fact the $92 fixed charge for customers in the fourth tier that’s being proposed by PG&E is nine times higher than the national average of $11, nor does it acknowledge that the current fixed charge is zero. Even the $51 fixed charge that’s being proposed for the third tier is nearly five times higher than the national average.

In our view, the guiding principles of Smart Rate Design^[6] should be as follows:

1. Customers should be able to connect to the grid for no more than the cost to connect to the grid;
2. Customers should pay for power supply and for grid services in proportion to how much they consume, and when they consume it; and
3. Customers supplying power and other services to the grid should receive full and fair compensation; no more and no less.

This first principle has been approved by nearly every utility regulator in the US, approving fixed charges that recover the cost of the final service connection to the shared grid, plus the costs of metering and billing. In most cases, this results in a fixed charge that ranges between $5 – $15/month.

The current utility fixed charges in California are far below the national average, with two of the utilities having no fixed charge at all and the third having a fixed charge of just under $1 per month. We agree that these should be converted to cost-based fixed charge to recover billing and collection costs – the very costs that form the basis for fixed charges for nearly every other regulated utility. That number may come in at $15 a month and be discounted for lower income consumers, and waived entirely for the lowest income consumers. That would meet the requirement of the law, and allow a reduction in the per-kWh rate by about $0.025/kWh. This would not create severe financial dislocation among customers.

While California has been noteworthy in going beyond the conventional approach in several regulatory areas such as on promoting energy efficiency, renewable generation, and, yes, even rooftop solar, it has also stumbled badly at times. Failure to consider the unintended consequences of its market restructuring initiative nearly a quarter century ago led to an epic market implosion and a series of botched solutions. Fifteen years ago, the state urged the utilities to invest heavily in renewable energy resources when they were more expensive than conventional forms of energy, largely foregoing the technology enhancements that now make solar, wind, and battery storage competitive with conventional generation. The proponents of the IGFC are asking yet again for approval a dramatic diversion from conventional wisdom on the same “trust us” basis that led to those earlier disasters.

CALIFORNIA NEEDS BETTER RATE DESIGNS THAN THE IGFC

Professor Fowlie shows graphically that there is a mismatch between household solar generation and system marginal costs. While the accuracy of her graph is open to question, if the issue is indeed present, it can be fixed more productively and directly by following the steps outlined below.

First, address the core problem that is making rates unaffordable in California — rapidly escalating utility costs. Why are rates going up? The article mentions mitigating wildfire risk and repairing damages as a reason, implying it is the primary factor. Yes, it’s a reason but it is a relatively minor factor to date. Even for future rate increases, it is not the key driver, PG&E has asked for a 46 per cent increase in revenue requirements from 2022 to 2026 — of that, only 7 per cent is for wildfire risk management. Electric rates in the Golden State have been higher than the US average long before wildfires arrived. Data from the US Energy Information Administration show that they have been higher than the US average since 1979, and took a strong upturn in 2016 prior to the 2017 wildfire conflagration. California also has higher allowed profit rates, higher executive compensation rates, and, yes, higher energy taxes than the national average.

Taken together, California rates are 2-3 times higher than those in nearby states like Arizona, New Mexico, Nevada, Utah, Idaho, Washington, and Oregon. This graph from the US Energy Information Administration shows that California’s rates are the highest in the continental US:^[7]

The article seems to suggest that California has higher rates because of factors such as wildfires and solar cost-subsidies. The fact is that California’s average residential rates began rising faster than the national average long before these two factors came into play, as seen in the graph below.

The real culprit has been an almost willful ignorance of changing industry conditions. The utilities added generation and grid enhancements based on a belief that demand would just keep on rising. Instead, loads and peak demands have stagnated since 2006. Even the record peak caused by beyond historic temperatures in 2022 was only 4 per cent higher than the 2006 high. The utilities failed to anticipate how building and appliance codes combined with rooftop solar installations in response to rising rates would suppress demand. And they have been told about these changes for over a decade.

Any risk associated with those misjudgments unfortunately has been shifted away from shareholders to ratepayers and taxpayers. Correcting that fundamental misalignment of incentives must be the starting point. Doing otherwise is just rearranging the deck chairs on the Titanic.

Second, change the rate structure to better track costs. The utilities and the CPUC bear responsibility for keeping an inappropriate rate structure in place and for continuing to raise rates. One of us is on PG&E’s EV2-A rate, which resembles the rate shown in the article. The off-peak rate, which applies from midnight to 3 pm and accounts for two-thirds of the hours of the day, has been going up at 15 per cent a year since 2019.

In California, all residential customers of investor-owned utilities have been moved to a default TOU rate with much smaller differentials between peak and off-peak rates. Providing customers with such an anemic TOU rate erodes their incentive to use power off-peak when it is cheaper to serve and benefits accrue to all ratepayers in lower costs. It is nothing but a check list type of exercise which will yield no savings to customers or to society as a whole.

Sacramento Municipal Utility District (SMUD) has implemented a much better TOU rate design as the default tariff in its service territory which includes the state capital and adjacent regions. Other states have adopted much more effective default TOU rates as well as opt-in TOU rates that are easy for consumers to understand.^[8] California should be a follower, not a leader, on this.

In addition to offering TOU rates, a dynamic element can be added to enhance load flexibility on critical system days. This can be done through peak-time rebates (PTR) or critical-peak pricing. The state of Maryland offers PTR as the default to all residential customers and it has yielded significant benefits to customers and to the power system as a whole.

Third, there are better ways to promote electrification.^[9] For example, if we want to encourage electrification directly, and not just increased air conditioning loads, we should target those marginal-cost-based rates at new electricity uses that displace natural gas and gasoline. Customers who replace a furnace with a heat pump, or a gas car with an EV could be given an allowance equal to the projected use for a heat pump or EV priced at a much lower rate. Many utilities do this, in one form or another, today. California even has a system in place today to grant each customer a climate-zone and housing-type customized “baseline” allocation of low-cost power which could be augmented for this purpose. The billing system changes for this solution would be far less complicated than trying to tie income to specific households.

Fourth, encourage current NEM 1 and 2 solar customers to install a battery. Those batteries will defer costly grid upgrades by shifting use away from peak periods and will improve system reliability. They will also provide resilience against increasingly frequent and annoying power outages, mostly stemming from a poorly maintained grid.

THE CPUC SHOULD REJECT THE IGFC AS “NOT READY FOR PRIME TIME”

The IGFC violates all principles of rate design as the director of rates at a very progressive utility that’s focused on electrification told one of the authors. The Howard Jarvis Tax Foundation that originated Proposition 13 has already indicated that it will challenge this as a “tax” that requires voter approval. There are numerous loopholes in the utility proposal. The three of us, along with a dozen others, including academics, consultants, executives, regulators and researchers, filed ex parte comments^[10] with the CPUC asking the commission to reject it.

We agree that California rates need to be changed to enable an economic transition away from fossil fuels. As noted earlier in this article, there are far better ways to achieve this goal than the proposed IGFC.

* The authors are energy economists with several decades of experience in designing electric rates. They have each testified multiple times before regulatory commissions on rate design issues in the US and abroad, presented often at conferences and published numerous articles on the subject in academic and trade journals.

1. Meredith Fowlie, “New Electricity Rate Reform in California” (August 2023) 11:2 Energy Regulation Q, online: ERQ <energyregulationquarterly.ca/articles/new-electricity-rate-reform-in-california>.
2. The energy charge will drop by 36%, or $18. The new energy charge will be $32. When added to the $92 fixed charge, the new bill will be $124.
3. Ahmad Faruqui, “What Will Happen if the CPUC Approves the Utility Proposals to Implement Income Graduated Fixed Charges?” Energy Central (1 August 2023), online: <energycentral.com/c/um/what-will-happen-if-cpuc-approves-utility-proposals-implement-income-graduated>.
4. AB 205, Committee on Budget. Energy.
5. Jim Lazar, “The California “Income-Graduated Fixed Charge” Proposal Is Probably Impossible to Implement. There are Better Options Available” Energy Central (25 April 2023), online: <energycentral.com/c/pip/california-“income-graduated-fixed-charge”-proposal-probably-impossible-implement>.
6. Wilson Gonzalez, “Smart Rate Design for a Smart Future” (15 July 2015), online: Regulatory Assistance Project <www.raponline.org/knowledge-center/smart-rate-design-for-a-smart-future>.
7. “US Electricity Profile 2022” (2 November 2023), online: U.S. Energy Information Administration <www.eia.gov/electricity/state>.
8. Examples include Colorado, Hawaii, Michigan, Missouri, Oregon and Washington. Ahmad Faruqui and Ziyi Tang, “Time Varying Rates (TVRs) are moving from the periphery to the mainstream of electricity pricing for residential customers in the United States” (21 August 2023), online (pdf): Brattle <www.brattle.com/wp-content/uploads/2023/07/Time-Varying-Rates-TVRs-Are-Moving-from-the-Periphery-to-the-Mainstream-of-Electricity-Pricing-for-Residential-Customers-in-the-United-States.pdf>.
9. Ahmad Faruqui, “Promoting electrification without penalizing efficiency: An alternative to the income graduated fixed charge” Energy Central (10 August 2023), online: <energycentral.com/c/um/promoting-electrification-without-penalizing-efficiency-alternative-income>.
10. “Notice of written ex parte communications: The CPUC should not adopt Income Graduated Fixed Charges for Electricity” (30 May 2023), online (pdf): <docs.cpuc.ca.gov/PublishedDocs/Efile/G000/M510/K287/510287693.PDF>.