Recent Legislation Will Significantly Change How Utilities Calculate Residential Electricity Rates; according to August 29, 2023 California State Audit of the California Public Utilities Commission (CPUC)
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The Legislature is requiring the CPUC to authorize a fixed charge based on income in default residential electricity rates starting no later than July 1, 2024, along with an additional charge that is based on usage. Essentially, the more a household earns, the more it will pay for recurring charges that are not directly affected by energy usage. These fixed charges should generally cover a utility’s cost of providing electric grid access to customers, including its ongoing costs related to billing and customer services. They should also cover a utility’s other costs that do not directly correlate to customers’ usage of electricity, such as expenses related to preventing and mitigating catastrophic wildfires.
The new legislation gives the CPUC broad flexibility in setting the exact amounts of the fixed charges. However, it states that the CPUC must ensure that the charges it authorizes do not unreasonably impair environmental incentives related to issues such as conservation and do not overburden low-income ratepayers. It requires the CPUC to assign the charges according to at least three tiers of income so that low-income ratepayers receive lower average monthly bills without making any changes in their electricity usage.
In response to this legislation, SCE, SDG&E and PG&E have submitted a joint proposal to the CPUC for a new system that they believe will lower utility bills for lower-income customers while also providing transparency regarding how much it costs the utilities to actually deliver electricity to customers. Table Nine illustrates the three major utilities’ initial proposal, which includes three primary income tiers and additional discounts for customers at the lowest income levels. The utilities assert that their proposed fixed charges vary by utility because they each have unique revenue requirements, customer distributions, and service options.
The CPUC’s proceeding to determine the final fixed charge amounts was ongoing at the time of this audit, and it intends to resolve questions that the utilities and others, including Cal Advocates, have identified. For example, the CPUC will need to determine whether or how a third party, such as a state agency, could verify customers’ household incomes. Further, Cal Advocates has issued its own proposal, with generally lower fixed charges for each utility, which it indicates will provide lower-income customers with more cost savings while also allowing customers with solar power systems to significantly reduce their energy bills.
Under the Cal Advocates’ proposal, the per-kilowatt hour rate of electricity would be higher than the rate under the utilities’ proposal, but the fixed charges would range from about $10 to $42 per month, depending on annual income and the utility. Thus, lower-usage households could see lower bills under the Cal Advocates’ proposal than under the utilities’ proposal, but higher-usage households could see higher bills that also vary more by month.
The economic impacts of basing electricity bills on income remain unclear. Studies we reviewed have indicated that fixed charges are a way to lessen the effect of utility costs on lower-income households and ensure that bills better reflect the actual costs to manage utility infrastructure and generate and deliver electricity. Some other utilities, such as municipal power companies, already include a monthly fixed charge in electricity bills. However, California would be one of the first states to base these charges on household income. Although this type of reform may reduce bills for certain households, it will likely raise payments for others, including high-income households in energy-efficient homes. Environmental groups have also indicated that this new structure would need to be balanced with incentives for conservation because even the most efficient households would not be able to reduce their bills to less than the fixed charge amount. Thus, the CPUC’s eventual decision may significantly affect residential billing and usage in the coming years.