The three utilities that serve some 11 million customers in California filed a joint proposal with the CPUC on April 7, 2023. They want to implement a major change in how electricity is priced for residential customers. Currently, residential rates are entirely volumetric for two of the three utilities. For the third, there is a nominal fixed charge of less than a dollar.
They want to move a substantial amount of the customer’s bill toward a fixed charge and lower the volumetric charge by an amount that preserves the class revenue requirement. The stated objective is to promote electrification of buildings and transportation.
In the case of PG&E, the fixed charge would amount to $53 if it was levied equally on all customers, and the volumetric charge would be dropped from 34 cents/kWh to 22 cents/kWh. To put the $53 in perspective, here’s a comparison with fixed charges that are being offered today by 173 of the nation’s investor owned utilities. The median is $10. The highest is under $40 a month.
The two largest municipal utilities in California are LADWP and SMUD. The former has a three-tiered fixed charge which rises with usage. The highest value is $15. If the customer moves to a TOU rate, the fixed charge drops to $8. In the case of SMUD, a TOU rate is the default tariff and it comes with a fixed charge of $23.50.
Since the $53 number would appear to be politically untenable, PG&E proposes to raise it with customer incomes. While that is unprecedented nationwide, a provision in AB 205 allows for that to be done.
The details of the IGFC being proposed by PG&E and the other two utilities are shown below.
It’s unclear what impact this change in rate design will have on customer adoption of heat pumps and EVs. There is no empirical evidence to demonstrate that it will make a material difference in adoption rates, just theoretical conjecture originating from academic economists.
Moreover, this effect will take years to manifest itself, since in any given year, only 5-10% of HVAC systems, water heaters and automobiles turn over. These capital assets have long lives.
What can be measured much more easily is the immediate effect such a rate design change will have on customer bills. Those effects are shown below for three income brackets. The effects are shown two ways: in percentage terms and in numerical terms.
In every instance, customers with low usage are affected much more adversely than customers with high usage. In the fourth income bracket, customers whose bills are under $250 a month are harmed. Customers whose bills are $50 a month will see a 140% increase in their monthly bill. In this category would be single individuals living in condominiums, empty nesters living in very efficient homes, and families living in efficient homes with solar panels.
They would be penalized for using less energy, which is the opposite of the state’s goal to use energy efficiently. Millions of customers fall in this category. Many spent thousands if not tens of thousands of dollars to make their house energy efficient and to supply it with self-generated solar energy. Their investment will be rendered waste.
To put things in perspective, the average customer in the state uses 500 kWh a month. The monthly bill for the average customer is approximately $150 for SCE and PG&E and $200 for SDG&E. The changes in monthly bill across a range of existing bills for PG&E customers are shown below, first in percent terms and then in numerical terms.
The first two graphs are for customers in the third income bracket whose income exceeds $150K a year. All customers with bills less than $250 a month will see higher bills. Customers with average or below average usage will be hit the hardest. Customers with above average usage will come out ahead.
The corresponding graphs for the next income bracket are shown below. Customers whose bill are less than $150 a month will see higher bills. And, as seen above, customers with higher bills will gain the most.
Finally, the corresponding graphs for CARE customers are shown below. All customers come out ahead, and, once again, the larger users benefit the most.
In each of the three income brackets, higher use customers will gain more than lower use customers. Across the three income brackets, low use customers in the third income bracket will be hit the hardest.
This is a disaster waiting to happen. Everyone I have spoken with is shocked and up in arms. One said “I don’t understand how this is not political suicide for the CPUC. And then there’s Prop 26.” Another said it was a “terrible idea.” A third said that tracking customer incomes will be a “nightmare” and that middle and higher income customers with lower than average bills will see their bills go up. A fourth said: “Energy efficiency, demand response, solar, and storage are all yesterday’s news.” A fifth said: “I have to pay $92 before I have consumed a single kWh of electricity? That’s an outrage.” A sixth said: "This is just the silliest idea I have ever heard of. It completely decouples demand from price. Yikes!!!! Never mind the problem of administering an income based payment system. There is a huge amount of outright fraud in the current income-based rate discount plans. Are the utilities now going to be responsible for verifying reported household income levels and somehow recovering costs from scofflaws? Sometimes I just can't believe the stupid stuff that emerges in the California energy policy environment." A seventh said: "We are turning into the People's Republic of California. I expect nothing less than full wealth and income distribution with wealth and income based pricing at the grocery store, car dealership, university, toll roads, etc."
While there is a need to incentivize higher usage via electrification in the future, it should not come at the expense of penalizing lower usage today. Much of that was encouraged by state policy, such as appliance and building efficiency standards and utility programs that spend $1.5 billion on energy efficiency per year. It was also encouraged by increasingly higher electricity rates.
Why not make IGFC optional? Customers who are in the market for new HVAC systems, water heaters and EVs would find them of interest and may be interested in trading off lower energy charges with higher fixed charge. All other customers will be spared, and not hit retroactively with significant bill increases.