California lawmakers backpedal on income-based utility charges as IOUs, others propose alternatives

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Some California lawmakers have proposed repealing a measure the legislature approved in 2022 that would protect low-income customers and beneficial electrification from electricity rates that are now the nation’s third highest. 

The income graduated fixed charge, or IGFC, was proposed in a 2021 University of California white paper as a way to partially shift the funding source for some of the state’s public policies from its fast rising per kWh, or volumetric,  power prices to income-based fixed charges. In 2022, Assembly Bill 205 ordered California regulators to implement the IGFC, the first U.S. income based rate design across all customer classes, but Assembly Bill 1999, introduced Jan. 30, would replace the original proposal with a significantly limited fixed charge.

The IGFC is backed by Governor Gavin Newsom, D, and opposed by 20 democratic assemblymembers largely concerned about AB 205’s impact on rooftop solar and electric appliance adoption. AB 1999, the opponents’ replacement bill, has not moved out of committe and has no actions scheduled.

Neither bill resolves the fundamental causes of California’s relatively high electricity rates, which are the skyrocketing public policy costs that lawmakers have decided to recover through volumetric prices, IGFC advocates and opponents agree.

“If the revenue is to be collected from ratepayers instead of through taxes or another source, it leaves only bad choices,” said Regulatory Assistance Project, or RAP, Senior Associate Mark LeBel. “The IGFC advocates are essentially arguing that it is the best of the bad choices because it would distribute public policy costs based on customer income tiers,” he added.

The debate over whether the IGFC is the best bad choice to relieve ratepayer burdens heated up following an October letter and a November editorial from lawmakers. Both raised questions about the IGFC’s potential negative impacts on low-income customers and California’s beneficial electrification goals. 

“Fixed charges do not promote electrification,” and “rate design cannot address affordability because high bills are due to utility spending,” said California Solar and Storage Association, or CalSSA, Policy Director Brad Heavner. Reforms should eliminate fraudulent and deceptive utility practices, strengthen distributed energy resource incentives and “move public policy costs to taxes,” he added.

As directed by AB 205, the California Public Utilities Commission is now considering multiple versions of an IGFC for residential customers of the state’s investor-owned utilities. The final order in docket R2207005 is due July 1.

A close examination of the parties’ positions reveals significant middle ground on the controversial questions of income tiers and fixed charge amounts. There is even more agreement that alternative approaches to equity and electrification are also needed.    

The new need

Residential rates have risen 63% for Pacific Gas and Electric, 52% for Southern California Edison and 13% for San Diego Gas and Electric since 2020, according to the California Environmental Justice Alliance, or CEJA.

There is wide agreement these rising rates are due to costs for addressing wildfires, public policy programs and new system infrastructure. But proposed solutions are starkly different.

The California nonprofit Clean Coalition supports fixed charges no higher than $18.51 per month, depending on the utility, and zero charges for low income households, according to stakeholder allies. The Joint IOUs favor fixed charges as high as about $51 per month as the “standard monthly fixed charge for SCE’s customers,” though they too favor much lower charges for lower income groups.

There are significant costs for the net energy metering compensation to rooftop solar owners, according to Severin Borenstein, faculty director of the Energy Institute at the Haas School of Business at the University of California, Berkeley, who authored the 2021 paper originating the IGFC.

Net energy metering will cost customers without solar an estimated $6.5 billion in 2024, according to a February 28 OPA memo. But solar advocates dispute the CPUC’s cost-benefit calculator on which that estimate was based.

Inadequate oversight of utilities’ regulator-approved infrastructure expenditures also added costs, said CalSSA Policy Director Brad Heavner. Scrutiny of utilities’ projected costs, proposed rate increases and completion of rate-funded work can be improved, agreed an August 2023 state auditor report. But recent rate increases were due to unavoidable infrastructure, wildfire and net energy metering costs, it added.

In 2022, wildfire-related, low-income assistance and other public purpose program components of electric rates to meet revenue requirements were 27.7% for PG&E. Though still significant costs, they were lower for SCE, at 16.4%, and for SDG&E, at 17%, according to data in the May 2023 CPUC report to the state Senate confirmed by the state public advocates office.

“As customers with solar, storage, and energy efficiency technologies reduce their electricity use,” recovering fixed costs in volumetric rates becomes more of a burden for non-solar owners, acknowledged Vote Solar Executive Director Sachu Constantine. “But that does not justify the $50 per month fixed charges the utilities and others have proposed,” he added.

An IGFC can “lower bills for most utility customers” by shifting some of the public policy costs now in volumetric rates to higher earners, CEJA said. With a lower volumetric rate and a fixed charge, households can affordably “upgrade to electric cars and heating systems,” and utilities can meet their fixed system costs, but a fixed charge that is too high, “will have significant unintended consequences,” CEJA cautioned.

AB 1999 limits the fixed charge to $5 per month for low-income households and $10 per month for others. Higher fixed charges risk burdening lower income customers, agreed AB 1999 sponsor Assemblymember Jacqui Irwin, D, recently.  

But without “some kind of rate restructuring,” the growing non-electricity costs imposed on the volumetric rate could lead to “profound unfairness between the haves and the have-nots,” said Matthew Freedman, staff attorney with The Utility Reform Network, or TURN.

“Some proposals push the envelope, but there is a reasonable approach,” said Ed Smeloff, an independent consultant to California’s Center for Energy Efficiency and Renewable Technologies, or CEERT.

That reasonable approach, a more gradual increase in the fixed charge, may be a rate design solution for some other states.

A national solution?

As rates rise in many parts of the country, some stakeholders and analysts see this first U.S. application of an income-based rate design across all utility customer classes as a potential solution in other states.

Massachusetts state Senator Michael Barrett, D, introduced Senate Bill 2529 in September 2023. It proposes an IGFC “to reduce the financial penalty imposed on customers who shift to heat pumps, electric appliances, and vehicles.” The bill is still pending in committee and Senator Barrett’s office declined to discuss it.

Limited income-based rate factors are not completely new, said RAP’s LeBel. “New Hampshire and Connecticut have low-income discounts in their fixed charges, though there are not graduated charges for higher income customers,” he added.

Unlike most states, California’s higher-than-marginal-cost rates “make exploring a rate redesign reasonable,”  LeBel continued. Hawaii’s Advanced Rate Design, now being implemented, was “a less drastic approach” to addressing high fixed costs, and might be an easier change to make for other states. 

Whether a state chooses an IGFC or not depends largely on the causes of its high fixed costs. Hawaii’s high rates are caused by high oil prices, and other states’ rate spikes are caused by high natural gas prices or infrastructure costs, said Mohit Chhabra, technical lead and advisor, clean energy, for the Natural Resources Defense Council, or NRDC. “The IGFC addresses California’s high volumetric rate,” he added. 

California’s challenge is to reduce the volumetric rate and recover utility fixed costs through the IGFC without impeding electrification or over-burdening low-income customers, stakeholders largely agreed.

Consensus and tension

Many stakeholders, including UC Berkeley’s Borenstein and TURN’s Freedman, expect regulators to propose a simplified IGFC.

It is expected to have fixed charges averaging about $25 per month, comparable to those used by the Sacramento Municipal Utility District, or SMUD, said NRDC’s Chhabra. SMUD’s fixed charges are about 21% of its customers’ bills. By comparison, a similar $25 fixed charge would represent about 15% of the average bill for California’s IOU customers, “which is not perfect but is far more equitable than current rates,” he added.

But “a high fixed charge is anything over $15 per month,” and “the percentage of the bill is not important because it is the unavoidable cost in dollars that matters to customers,” said CalSSA’s Heavner.

SMUD’s higher fixed charge has, however, not caused “as big a customer burden as current IOU rates without a fixed charge,” because SMUD’s overall rates are lower, said CEERT’s Smeloff, a former SMUD board member.

A higher fixed charge and a lower volumetric rate is critical to meeting California’s zero emission vehicle and beneficial electrification by 2030 targets, said the Joint IOU filing in justifying its $51 per month proposal. Moving more of the fixed cost burden to higher income customers would allow lower income households with lower fixed charges to invest in electric vehicles and appliances, the filing said.

But the bill savings from the high IGFC proposals, especially to low-income customers, “make only a small contribution” to the high upfront costs of electric appliances and vehicles, according to a Jan. 24 Solar Energy Industries Association filing. There is no proof the IGFC will accelerate electrification as effectively as rebates and time-of-use, or TOU, rates that reduce the off-peak price of electricity, it added.

Only “unreasonably high” IGFCs would lower volumetric charges enough to “significantly reduce” low-income customers’ bills, and they would likely cause a customer “revolt,” added CalSSA’s filing.

With a very high fixed charge, upper income customers “may buy solar and batteries and other technologies and defect” from utility service, TURN’s Freedman agreed.

Most stakeholders acknowledged that the real solution is being ignored and some have proposed alternatives.

The real solution

A real solution would shift the costs of public policy to the public, the state’s progressive tax base, stakeholders largely agreed, though that option is considered unrealistic because elected leaders generally reject proposed tax increases.

“If social policy costs are not paid through a progressive tax, there are nothing but bad, or second-best, choices,” Vote Solar’s Constantine and other stakeholders agreed.

“Social policy and climate change are causing gigantic waves of new costs,” said Matt Baker, who left his position as executve director of the Public Advocates Office, or CalAdvocates, to become a commissioner with the California Public Utilities Commission on March 5. “California’s February atmospheric rivers costs were at least $1 billion in power system damages and may reach $3 billion,” he added.

“There is not widespread agreement on how, but there is widespread agreement that many costs should not be imposed on electricity customers,” Baker continued. CalAdvocates is considering a lower off-peak TOU rate, more scrutiny of utility spending, working with cost-competitive third parties and low-interest bond measures to address costs, he said.

Reducing utilities’ return on equity and using new sources of and approaches to financing to reduce the capital needed for infrastructure projects will also reduce costs, TURN’s Freedman added.

There is no question that moving social costs to the tax base would help solve the high volumetric rates problem, but “it is also important to force the utilities to spend less money,” CalSSA’s Heavner agreed.

California should consider multiple limited changes, including TOU rates and electrification rebates, “and implement them in a way that is not too disruptive,” RAP’s LeBel said.

But what is really needed is “a way to pay for climate and public policy costs without crushing burdens on low- and middle-income families and making electrification unaffordable,” UC Berkeley’s Borenstein, the IGFC concept’s originator, recently said in response to AB 1999. And progress is still possible on IGFCs “because of outrage at a volumetric price that will keep rising if nothing is done,” he added.