The proposal from CPUC’s Public Advocates Office would both reduce fixed charges for the lowest-income earners to zero and limit how high they can go for the highest-income earners, as this chart indicates.
Matt Baker, director of the Public Advocates Office, highlighted the pressing need for action to reduce the impact of high and rising utility rates for Californians. The state’s average annual electricity costs are 25 percent higher than the national average and have well outpaced the rate of inflation over the past 15 years. Utility costs are set to rise even more dramatically in coming years, which will lead to higher customer rates at the same time that state policy is pushing people to buy EVs and electric heat pumps.
“Twenty years from now, we’re going to be using twice the amount of electricity we use now,” Baker said. “For the first time since the 1980s, we want people to use more electricity.”
Changing rate structures can’t alter the underlying costs that utilities are incurring, said Mike Campbell, a rate-design expert at the Public Advocates Office. “Our group has to work on how to set rates to do that,” and “we cannot look away from the inequities that are being created.”
At the same time, “the commission should move cautiously to not create backlash, to not create unintended consequences,” he said.
That’s why the Public Advocates Office has proposed a method to avoid fixed monthly charges for low-income customers while also limiting fixed monthly charges for the highest-income earners — tapping the California Climate Credit, a program that distributes money collected from the state’s greenhouse gas cap-and-trade program.
Currently, this program gives customers credits on their energy bills twice a year, totaling roughly $100 to $200 annually for many state residents. The Public Advocates Office would redirect that money to reducing monthly fixed charges, Campbell said.
“To be fair, someone might say, ‘You’re taking some money from some folks to do this,’” he said, since some of the program’s funding would be redirected from higher-income earners to those who earn less. “Yes, that would be happening,” Campbell acknowledged — but it’s a relatively small amount of money, and the benefits of using it to reduce future fixed charges would outweigh the benefits of twice-annual adders to customer bills, he argued.
How can utilities know how much money their customers make?
Hanging over these relatively abstract questions of rate design is a more fundamental problem: How can utilities learn how much money their customers make, information they would need in order to implement income-based fixed charges?
Utilities aren’t legally authorized to access federal or state income-tax data about their customers, Faruqui noted. Nor can they rely on customers volunteering this information, given privacy concerns and the risk of customers misstating their income to receive lower rates.
“This is mired in legal and administrative complications, even before we get to the magnitude of the fixed charge,” Faruqui said. “That’s why nobody else has done it.”
Baker of the Public Advocates Office agreed that this is a tricky question. “We don’t want the utilities to have this information or to be responsible for it,” he said. Still, there are ways to work around these restrictions that can be “seamless for the consumer and as unintrusive as possible,” he said.
Utilities and regulators are already tackling challenges around income verification and customer privacy in order to administer income-qualified rates like CARE and Family Electric Rate Assistance, he said. Those programs rely on customers self-reporting their income, along with follow-up income-verification tests that are less than ideal in terms of administrative cost and complexity, he said.
Over the past few years, the Public Advocates Office has been developing plans for dealing with these problems that could be applied to broader income-based rate structures, Campbell said.
One would be to enlist the California Franchise Tax Board to supply data to the CPUC via an anonymized database, he said. That database would include the vast majority of utility customers who have paid state income taxes in the past year.
But it wouldn’t actually expose any personal income information to the utilities, Campbell said. Instead, “the utility would ping that database and ask, ‘Should this account be in income bracket A, B or C?’” he said. Because no actual personal income data would change hands, this would avoid utilities intruding into customers’ private lives. “It’s fast, it’s secure, and the customer wouldn’t need to do anything.”
The problem with this approach is that it would require California lawmakers to authorize the tax board to share this data with the CPUC. The tax board already shares data in similar ways with other state agencies, so “we’re hopeful that the legislature would work on that, sooner rather than later,” to meet the July 2024 deadline, he said.
In the meantime, the Public Advocates Office is considering working with credit-rating agency Equifax to access its customer income data collected from paycheck-processing providers and other sources, in a similar anonymized manner, he said. That would require a more onerous customer process, however.
The system would assign all customers to the highest income bracket, then require them to contact their utility to attest their actual income. The utility would then inquire with Equifax to determine if the customer’s claim was accurate or not, again with no access to the customer’s actual income.
“The part we don’t like so much is that it requires the customer to do something,” Campbell said. But absent the legislature telling the state tax board to work with the CPUC, “it’s the lightest touch we could come up with.”
Tangled up with rooftop solar and much more
At the heart of the disputes over income-based fixed charges is a challenging dynamic: High per-kilowatt-hour rates might discourage some people from adopting electric heat pumps or cars, perhaps lower-income people in particular. But the same high rates might encourage different people to install rooftop solar and home batteries and make their houses more energy-efficient, perhaps higher-income people especially. So how should those competing interests be balanced?
The conversation about income-based fees is enmeshed in a much larger set of ongoing debates about how California should structure utility rates and policies to foster a shift to clean energy in an equitable way. Opponents of income-based fixed fees say they are simply another layer of unnecessary complexity meant to solve a problem that could better be tackled in other ways.
The Solar Energy Industries Association (SEIA) opposes income-based fixed charges, but given that the law now calls for them, the group has proposed a regime that would keep the charges much lower than any of the other proposals before the CPUC. Tom Beach, principal consultant at Crossborder Energy, argued in testimony on behalf of SEIA that fixed monthly charges aren’t just the wrong way to encourage people to electrify, but the wrong way to align what customers pay for power with the investments needed to reach California’s clean-energy goals.
“Far more important to promoting electrification are cost-based, time-sensitive volumetric rates,” Beach said. Customers of California’s big three utilities already pay time-of-use rates that charge different per-kilowatt-hour prices based on the hour that electricity is being consumed, he noted.
Time-varying rates are an important way to encourage customers to use less power when it’s most expensive to provide — such as during hot summer evenings when electricity demand risks outstripping supply — and to use more power when electricity is cheap and abundant, such as overnight when demand is lower, or at midday when solar power is flooding the grid.
Because many of the costs of running a utility are tied to building a grid that’s sized to meet peak demand, time-varying rates that encourage customers to reduce those peak demands can have a long-term impact on those grid costs.
Unfortunately, the issue of time-based rates versus fixed monthly charges has been tangled up with California’s fractious conflicts over rooftop solar policy. SEIA and other pro-rooftop-solar groups have been the loudest opponents of fixed monthly charges to date. And many of the groups that have fought for years to cut the value of rooftop solar are now advocating for the income-based rate structure, such as the Energy Institute at Haas, the Natural Resources Defense Council and The Utility Reform Network, a ratepayer advocacy nonprofit.
The CPUC’s recent changes to net metering have dramatically reduced the value of rooftop solar exported to the grid, but rooftop systems can still help homeowners lower their utility bills by reducing how much electricity they buy from the grid — for now. If significant fixed monthly charges are adopted, however, that remaining value would be eroded; a homeowner who reduced grid electricity usage would have little effect in reducing their bills.
At the same time, AB 205’s inclusion of a July 2024 deadline for creating income-based fixed rates has forced the CPUC to prioritize that policy work ahead of its broader efforts to create more flexible and time-varying rates. The fixed-rate issue is being handled as part of the CPUC’s “demand flexibility rulemaking,” indicating the intentions it set for the proceeding before AB 205 changed its priorities.
“Fixed rates kind of got shoehorned into this proceeding,” Monahan of Sierra Club said. “But the primary focus of this proceeding is rates that change throughout the day.”
In his SEIA testimony, Beach emphasized that fixed charges “by definition do nothing to encourage the stated goal of this rulemaking — encouraging customers to be flexible in when they impose demands on the electric system.”
Proponents of reducing the value of rooftop solar have highlighted the problem of solar-equipped customers lowering their utility payments, potentially at the expense of customers without solar who will need to pay a higher share of overall utility costs to make up the difference. But this rooftop solar “cost shift” pales in comparison to the rising costs of utilities hardening their grids, burying power lines, building new transmission infrastructure and other fixed costs.
That means income-based fixed charges, time-varying rates and any other rate-structure policy are just “part of a spectrum of solutions to rate issues in California, and preparing the grid to rely primarily on renewable energy,” said Campbell of the Public Advocates Office. “We want to move people off of using energy during peak demand, and transition to energy use when solar is plentiful at the middle of the day.”
But amid the debate over rate design, we’ve lost sight of the much bigger challenge of how to bring down utility costs overall, Campbell said. “We’ve been taking everything that utilities have collected as a given,” he said. “I’ve told commissioners, you can’t rate-design your way out of high costs.” Solving the problem of soaring electric bills will require broader efforts to control the costs of operating California’s utilities in an era of climate change and decarbonization — a vital and highly complicated challenge that can’t be done by fiddling with rate structures.
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