Income-Based Utilities Plan Is the Most California Plan Ever

It ignores basic economics in pursuit of ideology.

It’s no surprise that California officials have long struggled with basic economic concepts, but it is nevertheless surprising that they would embrace the latest plan to rework the way that the state’s utility companies charge customers for their electricity. Simply put, the new rules directly work against the state’s climate change goals of shifting toward a non-fossil-fuel future.

Gov. Gavin Newsom last year signed Assembly Bill 205, which directed the California Public Utilities Commission to approve a simplified, fixed-rate billing structure. As the bill analysis explained, the law “requires the fixed charge to be established on … an income-graduated basis with no fewer than three income thresholds, such that a low-income ratepayer would realize lower average monthly bills without making any changes in usage.”

This week, the state’s three largest regulated utility companies — Southern California Edison, Pacific Gas and Electric, and San Diego Gas and Electric — detailed the new structure to the Public Utilities Commission. Based on news reports, it would create a fixed charge of between $20 and $34 a month for low-income households and between $85 a month and $128 a month for the wealthiest households.

Southern California Edison told KTLA News that “approximately 1.2 million of its lower-income customers will see their bills drop by 16 percent to 21 percent” and that “overall rates will decrease by about 33 percent per kilowatt hour for all residential customers.” It’s important to carefully parse these statements to understand what’s really going on.

The proposal is revenue neutral, so it simply is shifting costs from lower-income people to higher-income people. Yes, volumetric rates — those based on the amount of electricity one uses — are going down, but the fixed rate (that pays for infrastructure, various utility programs, and stranded costs) will be going up. The main problem: Such a rate structure reduces the connection between how much electricity you use and how much you pay.

“California’s proposal would shift cost recovery to the fixed portion of customers’ bills, which would remove the price signal to enable energy efficiency and match consumption with grid conditions,” said Chris Villarreal, a utility expert, former California Public Utilities Commission analyst, and my colleague at the R Street Institute. He argues that the plan “will make it more difficult to integrate renewable energy and electric vehicles efficiently (and) undermines its clean energy transition.”

Here’s the weirdest part about this oddball proposal. Its advocates seem to be trying to increase electricity usage. For instance, the Los Angeles Times summarized the views of University of California, Berkeley professor James Sallee, who argued that “because the fixed charge is designed for customers to save more money as they increase electricity consumption, it will encourage ratepayers to adopt cleaner technologies that align with the state’s clean energy mandates.”

In other words, the more electricity you use, the more you save because the volumetric rate is going down and there’s nothing you can do about the increased fixed rate. Presumably, the state’s goal is to push people into electrical dependency to hasten the state’s shift from fossil fuels. The reality might be dramatically different.

This is where we return to those elusive economic concepts. When the cost of an item goes up, people tend to consume less of it and use that resource more efficiently. It should be no shock to learn that, say, tenants who pay their own utility bills tend to use much less electricity than tenants whose bills are paid by the landlord.

Sallee made the following argument in the Los Angeles Times: “Suppose you want to hook up your electric car and you want to electrify your home heating or your water heater. You’re going to be rewarded under this rate structure because you’re going to be consuming, on net, more electricity from the grid.” He’s right, but why should we want that?

As energy economist Ahmad Faruqui explained in Energy Central, “There is no empirical evidence to demonstrate that it will make a material difference in adoption rates” of new electrical appliances – especially given that “these capital assets have long lives.” Furthermore, he notes that the measure incentivizes higher electrical usage in the future “at the expense of penalizing lower usage today.”

California’s electrical grid already is overburdened. As a CalMatters article reported in January, “State officials claim that the 12.5 million electric vehicles expected on California’s roads in 2035 will not strain the grid. But their confidence that the state can avoid brownouts relies on a best-case — some say unrealistic — scenario: massive and rapid construction of offshore wind and solar farms, and drivers charging their cars in off-peak hours.”

The state also is far behind in building needed power lines. “California’s race against time to build power lines,” is the headline in an April 6 report in the Los Angeles Times. It pointed to a new study from the California Independent System Operator, which is calling for the state in the next decade to “spend at least $7.5 billion on transmission projects that would support renewable energy growth” and “another $1.8 billion on projects that would help prevent blackouts.”

Creating a new billing structure that incentivizes electrical use will only increase the stress on the state’s creaking system. Obviously, lawmakers champion the policies in the name of social equity, but less-noble motives could also be at work.

For instance, the utility companies have long feared that the state’s solar policy (Net Energy Metering) would lead to a death spiral — as customers flee the utilities, thus driving up stranded costs, thus causing more people to flee. By increasing fixed costs and reducing volumetric costs, the plan will discourage solar energy adoption by narrowing the price gap. How does that help achieve our climate goals?

The rate plan has myriad other problems. How will utility companies evaluate people’s household income without requiring the equivalent of an income-tax filing? The plan could raise state constitutional issues, or almost certainly lead to lawsuits over the proposal. But the bottom line is that it ignores basic economics in pursuit of ideology, which makes it perhaps the most California plan ever.