Should What You Pay For Electricity Come Down To How Much You Make?

Ratepayers with major California utility companies are getting a first look at what a new payment structure that would rely on household income to determine part of your monthly electric bill, instead of only how much electricity you use, might look like.

The new proposal would introduce a flat, tiered monthly fee system based on how much your household makes, and there would be a separate charge based on electricity usage. The state's three biggest utilities — SoCal Edison, PG&E and San Diego Gas & Electric — were required to submit the proposal to the California Public Utilities Commission under the recently-passed state law AB 205, which in part directed the PUC to come up with a fixed-rate system with at least three income tiers.

Some argue that this proposal would help provide bill relief to lower-income customers, and that it would encourage people to use electricity-based heating and cars. But there are still questions about the impact of higher fixed charges, as well as how utility companies will collect income information at all.

How would it work?

Kathleen Dunleavy, a spokesperson for Southern California Edison, joined our newsroom's public affairs show AirTalk, which airs on 89.3 FM, to discuss how this proposal might impact statewide electricity use — and your monthly bills.

Dunleavy says that currently, when you open your bill, you see your energy usage and how much you pay for it. Under the current system, there are fixed charges for things like electrical grid maintenance, customer support and income-based subsidies that are baked in as a percentage of the kilowatt per hour usage prices. So right now, while your bill might vary from month to month based on how much energy you use, you're still paying the same percentage towards fixed costs whether your household makes $30,000 or $300,000 a year.

But now, Dunleavy says, the state wants utilities to be more transparent about those fixed costs by taking them out of the usage rate, listing them as separate line items on the bill and tying those costs to households' income. Under the proposed system, customers in the lowest income tier would pay about $15/month, and those in the highest would pay $85/month. SCE says this is not a new cost or charge for customers, but rather a "change to the components of customer bills" that they say will make it so lower-income households are footing less of the fixed costs than higher-income households.

Potential incentives

Severin Borenstein, a professor and faculty director of the Energy Institute at UC Berkeley’s Haas School of Business, says that California is making drastic changes to revamp its electricity system. There’s a move towards cleaner energy, and there are many costs associated with wildfire prevention. These costs are currently being passed to customers through the kilowatt per hour usage rate, which is now three to four times higher than the actual cost of providing electricity, according to Borenstein.

“It’s massively distorting the electricity system,” Borenstein says — so the proposal is meant to rectify this by making the usage rate more reflective of the actual cost of providing electricity, and by making up that lost revenue through the fixed monthly charge.

And, Borenstein says, it would do less to discourage customers from investing in things like electric vehicles and induction electric stoves.

Currently, a resident who buys a heat pump, for example, would be paying “astronomical rates” every day they run it, Borenstein says, about 30-40 cents per kilowatt hour. A fixed cost that does not vary by usage could make electric options more attractive.

Borenstein says this happened with rooftop solar panels, and he believes the same would occur here.

But Ahmad Faruqui, an economist who focuses on the customer side of electricity consumption, says this is like a social experiment.

“Most people are not buying a heat pump or a car in any particular year. Probably less than five to 10% of the people are doing it,” Faruqui says. “So why suddenly impose this untested, not empirically-based algorithm on 11 million customers?”

Further, Faruqui says that there are already programs in place to assist low-income customers: they can currently receive a 30-35% discount on their bills, subsidized by other customers.

“My view is: The legislature really wants to assist the low-income customers, and I'm all for that,” Faruqui says. “Do it with a tax code, do not do it through the rate design, because there is no cost basis for saying that high-income customers are more expensive to serve than low-income customers.”

Why there may be significant implementation challenges

Faruqui says the fixed charges are much higher than the charges of peer utilities departments in other cities and countries — while the lowest-income customers would see a benefit, many middle class customers will actually see their bills go up.

Plus, this proposal is unprecedented in the U.S. and even globally, Faruqui says, because it is rife with bureaucratic red tape and potential for fraud. Many wonder how utility companies can verify incomes without bringing about privacy concerns — Dunleavy, from SoCal Electric, says that protecting customer privacy will be a top consideration. One possibility could be for a state agency or verified third party to take over this part of the process.

Another potential concern is that this could encourage overuse of electricity, but Borenstein says the rate will not be low enough for that would become a concern. He says he’s confident that if the rates are well-designed, and also vary based on what time people are using electricity, the grid would be able to handle it.

“The only way we are going to decarbonize the California economy is by massive electrification,” Borenstein says. “And we're just not going to do that charging people 30 or 40 cents a kilowatt hour. The electrification just doesn't pencil out.”

Listen to the conversation