California lawmakers adjust income-based utility fee stance, investor-owned utilities and others propose alternatives

Some California lawmakers have proposed repealing a measure approved by the state legislature in 2022 that was designed to protect low-income customers and beneficial electrification from the current third-highest electricity rates in the nation. According to data from the U.S. Energy Information Administration, California's residential electricity rates rank among the highest in the country.

The income-based fixed charge (IGFC) was originally proposed in a 2021 white paper by the University of California, aiming to shift some public policy costs from rapidly rising per-kilowatt-hour (i.e., volumetric) electricity rates to income-based fixed charges. In 2022, Assembly Bill 205 (AB 205) directed California regulators to implement the IGFC, which would be the first income-based rate design in the U.S. covering all customer classes. However, Assembly Bill 1999 (AB 1999), introduced on January 30, 2023, would replace the original plan with a significantly restricted fixed charge.

The IGFC has support from Democratic Governor Gavin Newsom but faces opposition from 20 Democratic state assembly members, primarily concerned about AB 205's impact on rooftop solar and appliance adoption. AB 1999, introduced as an alternative by opponents, has not yet moved out of committee and no further action has been scheduled.

Both sides agree that neither bill addresses the root cause of California's relatively high electricity rates—namely, the sharp rise in public policy costs that lawmakers have decided to recover through volumetric electricity rates.

"If revenue is to be collected from ratepayers rather than from taxes or other sources, then only bad options remain," said Mark LeBel, senior associate at the Regulatory Assistance Project (RAP). "Supporters of the IGFC are essentially arguing that it is the best of the bad options because it would allocate public policy costs based on customer income tiers," he added.

The debate over whether the IGFC is the best option for easing rate burdens intensified after a letter from lawmakers in October and an editorial in November. Both raised questions about the potential negative impacts of the IGFC on low-income customers and California's beneficial electrification goals.

"Fixed charges will not promote electrification," and "rate design cannot solve affordability issues because high bills stem from utility spending," said Brad Heffner, policy director at the California Solar & Storage Association (CalSSA). Reforms should eliminate fraudulent and deceptive utility practices, strengthen distributed energy incentives, and "shift public policy costs to taxes," he added.

Following the directive of AB 205, the California Public Utilities Commission is currently considering multiple versions of the IGFC for residential customers of the state's investor-owned utilities. A final order in proceeding R2207005 is scheduled for July 1.

A careful examination of the positions of the various parties reveals significant common ground on contentious issues such as income tiers and fixed charge amounts. There is even greater agreement that additional approaches are needed to achieve equity and electrification.

New demands

According to the California Environmental Justice Alliance (CEJA), since 2020, Pacific Gas & Electric's (PG&E) residential rates have increased by 63%, Southern California Edison (SCE) by 52%, and San Diego Gas & Electric (SDG&E) by 13%.

There is general agreement that these rising rates stem from costs associated with wildfire response, public policy programs, and new system infrastructure. But the proposed solutions differ significantly.

California nonprofit Clean Coalition supports a fixed charge of no more than $18.51 per month (depending on the utility) with zero charges for low-income households, according to stakeholder allies. The Joint IOUs, meanwhile, favor a fixed charge of about $51 per month as a "standard monthly fixed charge for SCE customers," although they also endorse a much lower charge for low-income groups.

Severin Borenstein, faculty director of the Energy Institute at UC Berkeley's Haas School of Business, says net metering compensation imposes significant costs on rooftop solar owners. He authored the 2021 paper that proposed the IGFC.

According to a February 28 memo from the Office of Public Advocates (OPA), net metering in 2024 is estimated to cost non-solar customers $6.5 billion. But solar advocates dispute the cost-benefit calculator used by the CPUC for that estimate.

Brad Heffner, policy director at CalSSA, says insufficient oversight of capital spending approved by utility regulators also adds to costs. An August 2023 state auditor's report agreed that review of utilities' projected costs, proposed rate increases, and completion of rate-funded work could be improved. But the report added that recent rate increases stem from unavoidable infrastructure, wildfire, and net metering costs.

In 2022, wildfire-related, low-income assistance, and other public purpose programs accounted for 27.7% of PG&E's revenue requirements. Although still a significant cost, for SCE it was 16.4% and for SDG&E 17%, according to data from a May 2023 CPUC report to the state Senate, as confirmed by the state Office of Public Advocates.

"As customers using solar, storage, and energy efficiency technologies reduce their electricity usage," recovering fixed costs in volumetric rates becomes more burdensome for non-solar owners, acknowledged Sachu Constantine, executive director of Vote Solar. "But that does not justify the $50-per-month fixed charges proposed by utilities and others," he added.

CEJA says the IGFC could "lower bills for most utility customers" by shifting some public policy costs from volumetric rates to higher-income individuals. With lower volumetric rates and fixed charges, households could afford "upgrading to electric vehicles and heating systems," and utilities could meet their fixed system costs, but excessively high fixed charges "would have significant unintended consequences," CEJA warned.

AB 1999 would cap fixed charges at $5 per month for low-income households and $10 per month for others. Higher fixed charges could burden low-income customers, said Democratic Assemblymember Jacqui Irwin, who introduced AB 1999, recently.

But without "some form of rate restructuring," the growing non-electricity costs imposed on volumetric rates could lead to "serious inequities between the rich and the poor," said Matthew Freedman, staff attorney at The Utility Reform Network (TURN).

"Some proposals are too aggressive, but there are reasonable approaches," said Ed Smeloff, independent consultant at the Center for Energy Efficiency and Renewable Technologies (CEERT).

Such a reasonable approach—increasing fixed charges more gradually—could be a rate design solution for some other states.

A national solution?

With rates rising in many regions, some stakeholders and analysts believe this first-in-the-U.S. application of income-based rate design across all utility customer classes could be a potential solution for other states.

Massachusetts State Senator Michael Barrett (D) introduced Senate Bill 2529 in September 2023. The bill proposes an IGFC "to reduce financial penalties for customers switching to heat pumps, appliances, and electric vehicles." The bill remains in committee, and Senator Barrett's office declined to discuss it.

RAP's LeBel says limited income-based rate factors are not entirely new. "New Hampshire and Connecticut have low-income discounts in fixed charges, but no progressive charges for higher-income customers," he added.

Unlike most states, California's rates above marginal cost "make it reasonable to explore rate reform," LeBel continued. Hawaii's advanced rate design, being implemented, is a "less aggressive approach" to addressing high fixed costs and may be easier for other states to adopt.

Whether a state chooses an IGFC depends largely on the cause of its high fixed costs. Hawaii's high rates are driven by high oil prices; other states' rate spikes are caused by high natural gas prices or infrastructure costs, said Mohit Chhabra, clean energy lead and consultant at the Natural Resources Defense Council (NRDC). "The IGFC targets California's high volumetric rates," he added.

California's challenge is to lower volumetric rates and recover utility fixed costs through the IGFC without hindering electrification or unduly burdening low-income customers, stakeholders largely agree.

Consensus and tension

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

NRDC's Chhabra expects a fixed charge averaging about $25 per month, similar to that used by the Sacramento Municipal Utility District (SMUD). SMUD's fixed charge accounts for about 21% of its customers' bills. In comparison, a similar $25 fixed charge would represent about 15% of the average bill for California IOU customers, "which is not perfect but far fairer than current rates," he added.

But "a fixed charge above $15 per month is a high charge," and "the bill percentage doesn't matter because for customers, the unavoidable cost is the dollar amount," said CalSSA's Heffner.

However, SMUD's higher fixed charge has not created "as much customer burden as current IOU rates without fixed charges," because SMUD's overall rates are lower, said CEERT's Smeloff, a former SMUD board member.

The Joint IOUs, arguing for their $51-per-month proposal, say higher fixed charges and lower volumetric rates are essential for California to meet its 2030 zero-emission vehicle and beneficial electrification goals. Shifting more fixed cost burden to higher-income customers would enable low-income households to invest in electric vehicles and appliances with lower fixed charges, the filing says.

But according to a January 24 filing by the Solar Energy Industries Association, the bill savings from high IGFC proposals, especially for low-income customers, "contribute little to the high upfront costs of appliances and electric vehicles." The filing adds there is no evidence that an IGFC accelerates electrification as effectively as rebates and time-of-use (TOU) rates, which lower off-peak electricity prices.

CalSSA's filing adds that only an "unreasonably high" IGFC could lower volumetric rates enough to "significantly reduce" low-income customer bills, but could lead to customer "backlash."

TURN's Freedman also agrees that if fixed charges are too high, higher-income customers "might buy solar, batteries, and other technologies and leave utility service."

Most stakeholders acknowledge that the real solution has been overlooked, and some propose alternatives.

The real solution

Stakeholders largely agree that the real solution is shifting public policy costs to the public—i.e., the state's progressive tax base—although that option is considered unrealistic because elected leaders typically reject tax increase proposals.

"If social policy costs are not paid through progressive taxes, then only bad or suboptimal options remain," Vote Solar's Constantine and other stakeholders concur.

"Social policy and climate change are creating a huge new wave of costs," said Matt Baker, who left his position as executive director of the Office of Public Advocates (CalAdvocates) on March 5 to become a California Public Utilities Commissioner. "The February atmospheric river in California caused at least $1 billion in power system losses, possibly up to $3 billion," he added.

"There is no broad consensus on how to do it, but there is broad consensus that many costs should not be imposed on electricity customers," Baker continued. CalAdvocates is considering lowering off-peak TOU rates, strengthening oversight of utility spending, partnering with cost-competitive third parties, and low-interest bond measures to address costs, he said.

TURN's Freedman added that lowering utilities' return on equity and using new financing sources and methods to reduce the capital needed for infrastructure projects would also lower costs.

"There is no doubt that shifting social costs to the tax base would help address high volumetric rates, but 'it is equally important to force utilities to reduce spending,'" agreed CalSSA's Heffner.

"California should consider several limited reforms, including TOU rates and electrification rebates, implemented in a less disruptive manner," said RAP's LeBel.

But what is truly needed is "a way to pay for climate and public policy costs without heavily burdening low- and middle-income households and without making electrification unaffordable," said UC Berkeley's Borenstein, who conceived the IGFC concept, recently in response to AB 1999. The IGFC could still make progress "because of the anger over volumetric rates that will continue to rise if nothing is done," he added.