The notion that fixed charges should be based on income may be said to have originated in California with the publication of a paper by Next10 in 2021. It put forward the notion of an income graduated fixed charge (IGFC) as an equitable way of promoting electrification in homes. Five income tiers were proposed. As an example, for PG&E, which serves 5.5 million customers in northern California, the charge for the fifth tier was set at $185.
In 2022, California passed a law, AB 205, which contained a brief clause saying the California PUC (CPUC) may authorize IGFC.
- "The commission may authorize fixed charges for any rate schedule applicable to a residential customer account. The fixed charge shall be established on an income-graduated basis with no fewer than three income thresholds so that a low-income ratepayer in each baseline territory would realize a lower average monthly bill without making any changes in usage. The commission shall, no later than July 1, 2024, authorize a fixed charge for default residential rates."
In April 2023, the utilities and other parties filed their IGFC proposals with the CPUC. Four income tiers were proposed. For example, PG&E proposed a fixed charge of $92 for the fourth tier.
In May 2024, the CPUC approved a fixed charge of $24.15 per month, basing it on the value set by SMUD, a municipal utility that serves the state’s capital and surrounding areas. It proposed lower values for two categories of low income customers who are the CARE or FERA programs.
To put the $24.15 fixed charge in perspective, it’s worth noting that the national median of fixed charges across more than 170 investor-owned utilities is $12 a month. Most of the fixed charges are under $20 a month. The $24.15 is the second highest fixed charge among investor-owned utilities.
There are several reasons why the IGFC is a bad idea, not worthy of emulation anywhere else in the US or, for that matter, in the world. Here’s why:
- Fixed charges should be based on cost of service, according to widely accepted principles of regulation. That usually means they should reflect the cost of metering, billing and customer care. In some cases, they may also include the cost of the line drop from the transformer.
- Rates should be changed gradually. Currently, the median fixed charge in California is $0. Changing them abruptly to the second highest value in the US is a violation of the widely recognized principle of gradualism.
- Cost of service does not vary with income. It is based on the factors identified above. IGFC violates the cost causation principle.
- Income data is confidential and cannot be disclosed to a third party without the individual’s consent. IGFC violates confidentiality.
- Basing fixed charges on income and lowering volumetric charges to ensure that utilities recover the approved revenue requirement creates a redistribution of income across customers. Frugal users, efficient users and green users who are not “low income” end up paying higher bills. They are penalized needlessly, for no fault of their own.
- Low-income customers whose bills go down are unlikely to save enough money to be able to buy heat pumps or EVs. A very large percentage of their homes are rented and many low income customers don’t own cars. Their budgets are focused on the five essentials of life: food, clothing, shelter, education and transportation. Whatever they save on electricity by the IGFC is likely to be spent on these five essentials of life rather than on electrifying their homes and their transportation.
- The IGFC is nothing but a shell game between fixed and variable charges and is unlikely to promote electrification. It’s a distraction from tasks for regulatory bodies and utilities: lowering electric bills, enhancing reliability and improving customer service.
References
https://www.sfchronicle.com/california/article/pge-electricity-flat-rate-changes-19450917.php
https://energycentral.com/c/um/cpuc%E2%80%99s-flat-fee-2414-good-bad-and-ugly
https://energycentral.com/c/um/lets-put-fixed-charge-cpucs-proposed-decision-pd-perspective
https://www.ocregister.com/2023/12/18/whats-wrong-with-basing-electricity-fees-on-household-incomes/
https://contracostaherald.com/californians-face-higher-electricity-rates-based-on-income/