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October 15, 2014

Poisoned Chalice: California rate design reform and its consequences for rooftop solar, efficiency, and conservation

Last year the California Legislature passed a bill (AB 327 - Perea) granting the California Public Utilities Commission (CPUC) the ability to make broad changes to how the state's investor owned utilities (PG&E, SCE, and SDG&E) charge customers for electricity. In his departing comments (PDF) from the CPUC, former Commissioner Mark Ferron observed that the bill was "a poisoned chalice" because "the Commission will come under intense pressure to use this authority to protect the interest of the utilities over those of consumers and potential self-generators, all in the name of addressing exaggerated concerns about grid stability, cost and fairness."
 
Sure enough, that intense pressure has begun. Utilities are now asking the CPUC to significantly change rates that would hurt low-income customers and, as an analysis by the Sierra Club demonstrates (PDF), cripple the market for rooftop solar and efficiency upgrades. At public meetings throughout the state, hundreds of Sierra Club members, clean energy workers and consumers are speaking out against the proposed changes.  
 
La ratepayers
Speaking out against utility proposed rates at a public participation hearing in Fontana

What Utilities Want: Fixed Charges and Flat Rates

Currently, electricity rates are "tiered" so the more you use, the more you pay. Initial consumption is charged at a low rate, with rates increasing significantly with energy use. This structure rewards conservation and is in large part responsible for the rapid growth of rooftop solar in California because it makes energy-savings investments economic for customers with high energy-usage. Energy bills are also almost entirely tied to the amount of energy consumption with few unavoidable fixed charges.

Last summer, utilities succeeded in passing AB 327, which removed protections limiting the price of energy at lower consumptions levels and allowed utilities to seek CPUC approval of a "fixed charge" of up to $10 on energy bills.  With the passage of AB 327, utilities are now seeking to exploit AB 327 to its fullest by asking the CPUC to:

1) add the maximum permissible monthly fixed charge of $10 to each customer's bill in 2016, rising over time from there;
2) collapse the existing four-tiered rate structure to just two tiers, with only a small difference in the rates charged between tiers.

What Fixed Charges and Flat Rates Do:  Hurt Low-Income Customers and the Environment

Let's unpack the impact of the proposed utility changes. First off, what does a fixed charge mean for your average customer bill?  Well, opening up my bill from Southern California Edison, every bill my family pays begins with a 99 cent "basic charge" at the top of my bill. If you're an SCE customer, yours is about the same. That charge is going to jump to $10 per month. Nothing I do, from conserving energy to going solar will offset that charge. It's fixed on my bill, which means my family has to pay ten bucks every month to SCE before we consume a single kilowatt hour. This type of charge is bad policy for two reasons.

Graph

As shown in the above graph, fixed charges punish those that conserve and consume little energy by significantly increasing the cost of the little energy they do use. Unavoidable charges also reduce everyone's incentive to reduce energy use by reducing the savings from conservation and measures like rooftop solar. For example, in its analysis of the utilities’ proposed rates, the Sierra Club determined (PDF) that the $10 fixed charge would increase the average payback period for a rooftop solar investment for SCE customers by an average of 1.4 years, making the decision to go solar significantly less economic.   

SCE's primary argument is that maintaining the grid has costs and everyone should pay for it, regardless of how much energy you use. If that sounds nuts to you, join the club. It's sort of like a grocery store charging you $10 bucks a month to cover the costs of their dilapidated shelving units, before you walk in the door. A better policy is a minimum bill. Unlike a fixed charge, which affects all customers, a minimum bill is only triggered when a bill would otherwise fall below the minimum rate. A properly set minimum bill ensures all customers contribute to grid expenses without significantly impacting conservation and low-income customers like fixed charges do.
 
SCE also wants to reduce the tiers from four to two with little difference in price between tiers. Typically, my family stays within the first two tiers. Over time we have invested in insulation, an attic fan, and replaced some more energy efficient light bulbs. Even during this recent heat wave, we've only barely climbed into the third tier. Under the SCE's proposal, tiers one and two would increase into one single more expensive tier, while tiers three and four would drop significantly. In other words, families like mine would see their bills go up while energy hogs would see their bills drop. On top of that, flat rates make it more difficult for energy hogs to do the right thing by significantly reducing their economic incentive to invest in rooftop solar and efficiency measures.

What's the justification? Well, utilities say the current rate structure is unfair because high energy users pay a disproportionate share of costs of the energy grid. However, energy hogs should pay more because they impose greater costs by driving the need for new gas plants and more expensive peak power. In addition, rates should reinforce state energy and climate policies, not undermine them. Rates with meaningful differences between tiers are not only fair, but also critical to encouraging clean energy solutions like energy efficiency or rooftop solar. At minimum, utilities should include three balanced tiers. The third tier should be twice the tier one rate so that customers are encouraged to use less energy.

Time for the PUC to Stand Up to Utilities and Defend State Clean Energy Goals

In his closing remarks (PDF) on the "poisoned chalice" of rate design, former Commission Ferron called on his fellow commissioners to "be bold and forthright in defending and strengthening our state’s commitment to clean and distributed energy generation." The CPUC should reject the utilities' proposed fixed charge and extreme tier flattening and ensure rates continue to foster a clean energy economy. You can weigh in now by sending a comment to the CPUC today. A final CPUC decision on rates is expected in early 2015.

-- Evan Gillespie, western region deputy director, Sierra Club

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