California Utilities Unveil Plans for Retail Electric Rate Reforms

by Paul Ciampoli
APPA News Director
April 17, 2023

Pacific Gas & Electric, Southern California Edison Company and San Diego Gas & Electric recently submitted residential electric rate reform proposals to the California Public Utilities Commission that call for a customer income verification process that would be administered by a third-party contractor supervised by the CPUC.

The electric rate proposals come in response to a state law (AB 205) passed in 2022 requiring the California Public Utilities Commission to adopt a fixed price based on household income to help fund electric delivery infrastructure such as poles, wires, meters and customer service. The CPUC must adopt a new electric rate structure no later than July 1, 2024.

“Current residential rate structures based primarily on volumetric rates do not reflect cost of service, are not equitable, and do not send appropriate price signals to encourage broader 6 adoption of greenhouse gas reducing technologies,” the investor-owned utilities said in their April 7 filing.

They said that the artificially high volumetric rates in existing residential rate structures pose affordability challenges for many lower- and moderate-income customers, very high bills for larger users, and monthly bill volatility.

The utilities said their proposals to combine an Income Graduated Fixed Charge (IGFC) with lower volumetric rates on all residential rate schedules will improve equity.

“Our proposals will bring customers’ rates closer to the cost to serve them, result in greater month-to- month bill stability, and provide low-income customers with bill reductions, on average, relative to the current rate structure.”

They also said the lower volumetric rates will encourage decarbonization by making transportation and building electrification more affordable. “More cost-based electricity prices will compare more favorably to prices of gasoline and natural gas.”

Income Verification is Key Part of Proposal

The utility said that an important part of their proposal is the recommendation that income verification for purposes of assigning customer households to the appropriate IGFC level be administered by a third-party contractor supervised by the CPUC, as is done for a state program for telecommunication companies.

The utilities noted that they currently perform a limited form of income verification in the narrow context of opt-in discount programs.

“However, the process of assigning all of California’s residential electric customers to income categories is unprecedented, and requires capabilities and processes that are best administered by a state agency – and are far beyond prior utility experience and capabilities,” they told the PUC.

“Adding the resources and systems necessary for the energy utilities to perform such income validation would not be cost effective. Doing so also raises sensitive issues of consumer privacy, cybersecurity, and utility-customer relations.”

Utilities Detail Benefits of Proposals

SDG&E, PG&E and SoCal Edison said that their proposals provide several benefits compared to the current, primarily 4 volumetric, rate structures for the IOUs’ residential electric customers.

Specifically, they said that while the energy environment in California “continues to evolve rapidly, the residential rate structure for investor-owned, regulated utilities has become outdated and misaligned with the new energy landscape.”

As the three utilities continue to build and maintain necessary critical infrastructure to help enable California’s energy transition, collecting residential customers’ fixed costs through volumetric rates unfairly shifts fixed costs from lower to higher-use customers and disincentivizes beneficial uses of electricity, they said.

Because nearly all of their fixed costs are recovered through such volumetric prices, “the price customers pay when they turn on their lights is substantially higher than the marginal cost of providing that electricity.”

They went on to say that while they have proposed to substantially reduce volumetric electricity rates for all residential customers, the proposals also recognize many customers may not be able to electrify in the near term.

A key priority of the proposals is to provide bill savings for customers in specific income brackets. The IGFC proposals provide annual bill savings for these customers, on average, without changing their energy consumption, according to the utilities.

CPUC Public Advocates Office Also Weighs In

Meanwhile, the Public Advocates Office at the CPUC (Cal Advocates) also weighed in at the Commission in the proceeding.

The office proposed an IGFC framework “that promotes affordability and encourages electrification by reducing volumetric rates, provides additional bill discounts for low-income customers, and recovers the electric utility’s cost to serve in a more equitable manner than current rates,” it said in an April 7 filing.

“Absent an IGFC, persistently high volumetric rates will continue to exacerbate affordability issues over time and discourage electrification,” the office said.

Cal Advocates recommended the Commission adopt an IGFC based on Cal Advocates’ proposed structure presented in its filing for all residential default and optional rate schedules.

It said this structure consists of progressively higher fixed charges across three identical income brackets for California Alternative Rates for Energy (CARE) and non-CARE residential customers.

The differentials (i.e., the difference in fixed charge levels between income brackets) are set higher between the second (i.e., customers making between $50,000/year and $100,000/year) and first (i.e., customers making less than 12 $50,000/year) income brackets to provide more reductions to low-income customers whereas the differential is set lower between the third (i.e., customers making more than $100,000/year) and second brackets to facilitate implementation of the IGFC.

Cal Advocates estimates that this proposal will reduce overall volumetric rates by 16%-22% depending on the investor-owned utility compared to the same rate absent such a fixed charge.T

To mitigate impacts on low-income customers, Cal Advocates also proposes to redeploy the California Climate Credit to offset fixed charges to the greatest extent possible for customers in the first income bracket.

Click here for the filings made by the utilities, Cal Advocates and other parties in the proceeding.