Equitable Rate Reform FAQ

Improving how we pay for shared electric system costs in California


Spencer DeMera

This blog was co-authored with Sylvie Ashford, The Utility Reform Network, former NRDC Schneider Sustainable Energy Fellow.

California has launched a process to reform electric rates with two primary goals: 1) Equity—more fairly distributing shared electric system costs, and 2) Decarbonization—lowering the price of clean electricity so that customers can make the switch away from gasoline in cars and fossil gas in homes. This includes authorizing an “income-graduated fixed charge” that moves some of the shared costs of the electric grid from energy prices into a monthly fee based on household income.

This charge will more equitably recover shared grid costs while also reducing the price of electricity consumption, or the volumetric rate, to encourage clean electric appliance and vehicle adoption. Utilities will not be allowed to collect any additional revenue from customers—the new monthly charge collected will be equal to the reduction in volumetric rates.

NRDC, in a joint proposal with The Utility Reform Network (TURN), has recommended a monthly charge that would be graduated in three income tiers and reduce the price of electricity by 20 to 25 percent making clean electricity more competitive compared to fossil gas and gasoline. About a dozen parties have submitted proposals and responses. The California Public Utilities Commission (CPUC) is instructed by Assembly Bill 205 to approve a design by summer 2024. This blog addresses frequently asked questions about California’s equitable rate reform process.

How will the monthly charge affect customer bills?

Across parties’ proposals, low-income customers will benefit the most because they’ll pay the lowest monthly charges. Also, Californians who live in hot areas and need more electricity for air conditioning will benefit more on average than those in more temperate regions.

Under TURN/NRDC's proposal, the thirty percent of California households eligible for the CARE and FERA low-income programs, as well as those living in deed-restricted affordable housing, 31 percent of households, would pay a $5 monthly charge and have average total bill savings of about $10-$40 a month (15 percent bill reduction on average). Middle-income customers, 47 percent of all households, with annual household income up to $150,000 would pay a $42 monthly charge and have only minor bill impact (1 percent on average). Higher income households, 22 percent of all households, would pay a monthly charge of $62 and see bill increases of $20–25 on average each month (16 percent bill increase on average).

How does equitable rate reform encourage electrification?

TURN/NRDC's proposal will reduce volumetric rates by 20 to 25 percent. If it is cheaper to power a car or heat a home with clean electricity than fossil fuels, customers are more likely to adopt clean electric appliances and cars. Recent research demonstrates that the price of electricity overwhelmingly influences whether new homes are built with electric heat pumps. Empirical data also demonstrate that when the price of electricity is lowered customers buy more electric appliances over time. Similar results apply to electric cars as well; researchers from UC Davis found that each cent increase in electric rates corresponds with a 1.5 percent decrease in adoption of electric cars.

How will these monthly charges impact energy efficiency and rooftop solar plus storage uptake?

There can still be a strong incentive for both efficiency and distributed generation, especially in California where rates are high. If the TURN/NRDC proposal is adopted, residential volumetric electric rates will be close to what they were in 2020. Unfortunately, they will still be among the highest in the nation. These electricity prices provide more than enough of an incentive for customers to adopt energy efficiency measures and rooftop solar plus storage.

California’s new rooftop solar and storage policy, called the Net Billing Tariff or NBT, is based on getting a payback of around nine years for new solar systems. This is achieved in part through a pre-determined subsidy that is set to ensure these systems pay for themselves in less than ten years. We recommend that this subsidy be re-calculated if needed to ensure this payback for new solar and storage systems.

Customers also adopt energy efficient appliances and rooftop solar plus storage for many reasons. These include environmental values, superior service from energy efficient products, bill savings, and using solar plus storage as backup power in case the lights go out. Reforming electric rates will impact potential bill savings, but it won’t impact all the other benefits.

Additionally, while high electricity rates mean higher potential savings from efficiency measures and solar plus storage, rates being as high as possible isn’t a good thing (especially when clean cheap renewables power an ever-increasing share of California’s grid). First, consumers should be encouraged to electrify when cheap clean electricity is abundant; current high electric rates discourage beneficial electric use. Second, California’s current rates are so high—between $0.50 and $0.70/kWh during summer on-peak periods in SDG&E territory—that they have regressive impacts and are fast becoming unaffordable for lower income customers to meet their basic needs. Third, some tools to reduce bills—such as deep energy efficiency retrofits and solar plus storage—aren’t available to all customers, especially renters, while equitable rate reform will benefit all low-income customers, including renters.

Will the utilities now have access to private customer income data?

Even the utilities agree they should not handle customers’ private financial data directly. TURN/NRDC recommend that a third-party administrator, such as a nonprofit or government agency, facilitate all income verification efforts and assign customers to income tiers. That way, the utilities only know a household's tier designation—high, medium, or low income—but never touch a customer’s personal records.

Is there a simple way to implement this?

Yes. We've proposed an enrollment process that minimizes cost and protects low-income customers. First, roughly thirty percent of California households already enrolled in the CARE and FERA programs would be defaulted to the low-income tier without taking additional action. This is critical to minimize barriers for households most in need. Next, customers can report if they belong in the middle tier and consent to income verification by a credit agency service if needed; this type of verification is already used by public programs like CalWORKs and CalFresh. The remaining customers who don’t request verification for the middle-income tier will be defaulted to the high tier, and can request income verification at any time.

Customers can appeal their placement in the event of any discrepancy, and modelled income estimates would be used for targeted customer outreach. In the longer term, pending legislation, it may be possible to establish a new income verification database with the help of the California Franchise Tax Board, which would enable a more complex graduation of income tiers.

Is there a precedent for this policy?

Yes. Offering discounted utility services based on household income isn't a new idea. California and Massachusetts already have low-income electricity rates. At least 9 other states have electric utilities that offer percentage of income payment plans (like Ohio and Colorado) or tiered discounts (like New Hampshire and Indiana) for low-income households.

The LIHEAP, LIHWAP, and Lifeline programs fund such discounts on low-income energy, water, and phone bills nationwide. The only difference here is additional tiers to make pricing less regressive and protect middle-income customers.

The most obvious precedent for progressively funding societal costs is our tax system, which pays for most of our shared infrastructure. Federal and state taxes are extremely progressive, graduated across seven and nine income brackets, respectively.

What does income have to do with the cost of providing electric service? Shouldn’t customers pay for what they use?

Through volumetric rates, Californians will still pay for the costs they cause the grid based on how much electricity they use, and when they use it. But the costs of maintaining poles and wires, wildfire hardening, and past electricity contracts are all independent of how much electricity Californians consume today. How these fixed costs are recovered is a matter of fairness and judgement. Recovering these costs through an equitable monthly charge based on each household’s ability to pay is fair, progressive, and lowers usage rates, which better aligns the costs for consuming electricity with those of producing and delivering it.

Does instituting a monthly charge mean that utilities will have new guaranteed earnings? Will utilities make more money?

No. Instituting monthly charges does nothing to change utility revenue or profit. Monthly charges, and any other changes to rate design, merely impact how a utility collects revenue, not how much revenue it collects. Revenue amounts are set by utility rate cases at the CPUC.

Does this completely solve California’s expensive electricity problem?

No. Much more is needed to reduce rates in California. Changing rate design to include a monthly charge does not change how much revenue utilities collect. Although reforming rate design is part of the strategy for addressing affordability and encouraging electrification, this proceeding will not solve the core problem of excessive utility revenue requirements collected through rates. To ensure affordable customer bills, California must keep the total utility revenue requirement in check, recover fixed costs of the grid fairly, and fund more costs through taxes, rather than rates.

This post has been updated to reflect the most recent savings estimates.

Related Blogs