Bill would end California experiment with income-based electric bills

Of all the ways California regulators are proposing to rein in fast-rising electric utility rates, few are as controversial as the plan to charge customers for electricity service based on how much money they make.

In fact, the proposal is controversial enough that some lawmakers are now trying to put a stop to it.

Last month, California Assemblymembers Jacqui Irwin (D-Thousand Oaks) and Marc Berman (D-Menlo Park) introduced a bill that would overturn a provision of a state law passed in 2022 that orders the California Public Utilities Commission to study and institute an ​“income-graduated fixed charge” for customers of the state’s three big utilities.

The newly introduced bill, AB 1999, would limit the CPUC to adding a fixed charge of no greater than $10 a month on customers’ bills to pay for the rising costs of maintaining the state’s utility grids, regardless of household income. That’s an amount far lower than what’s been proposed under several income-based rate plans.

“Rates have increased tremendously,” Irwin said in a Wednesday interview. ​“To add a fixed rate on to that, without thoroughly looking at what else we can do to drive down costs, is a mistake.”

Irwin, who is one of 22 California lawmakers who signed a letter to the CPUC protesting the income-based fixed-charge plan last year, also highlighted what she described as the overwhelmingly negative feedback she’s received from her constituents.

“Legislators are hearing stories about people who cannot pay their bills, about how much these utility bills have gone up — and about what an invasion of privacy it is to have to [disclose] their income to determine what they pay on their utility bill,” she said. 

The prospect of requiring the 11 million customers of the state’s three big investor-owned utilities, Pacific Gas & Electric, San Diego Gas & Electric and Southern California Edison, to pay monthly charges tied to their income has divided clean-energy and efficiency advocates since it was introduced.

Opponents say the charges would punish people who have installed rooftop solar or invested in energy efficiency or who are simply more frugal with their electricity use by burdening them with bills they can’t avoid. They also warn of administrative and legal challenges to providing utilities with customer-income data and fear the entire effort will distract from more practical ways to adjust utility rates to encourage electrification.

But supporters say the proposed charge could more equitably distribute the costs that contribute to Californians paying some of the highest electricity bills in the country. The sky-high electricity rates of the state’s three major utilities, which are set to increase further in the coming years, will discourage Californians from purchasing electric vehicles and electric-powered home appliances — two key tools in California’s decarbonization roadmap.

What’s more, nearly one in four customers of California’s three big utilities are behind on their bills. As electricity rates rise, more and more lower-income households will face the stark choice of paying their utility bills or paying for food, medicine and other essentials, they say.

“We cannot afford to take potential solutions off the table before they have the chance to be adequately explored, which the CPUC is in the process of doing,” Merrian Borgeson, California director of climate and energy at the Natural Resources Defense Council, said in a prepared statement. The CPUC is expected to make a decision this summer.

Today, California utilities recoup grid investments through volumetric charges: customers pay based on how many kilowatt-hours of electricity they consume. Other utilities, including many public utilities in California, also add fixed monthly charges to customers’ bills, though CPUC policy now limits fixed charges for the state’s three major investor-owned utilities to no more than $10 a month.

The problem with charging customers based almost solely on how much electricity they use, fixed-charge advocates say, is that the utilities’ biggest expenses aren’t linked to how much energy customers use but to delivering that power in the first place.

Those expenses — hardening and repairing power grids in the face of climate-change-driven wildfires and storms, and maintaining and expanding those grids to provide enough power for millions of Californians to switch from fossil fuels to electricity to power vehicles and heat buildings — already make up more than half of the costs of California’s big three utilities, as indicated in this chart from the CPUC’s Public Advocates Office, which is tasked with protecting consumers.

“There’s been a series of enormous rate hikes, and virtually all the costs have fallen into categories of wildfires, storm damage, and building up the distribution system for new connections or electrification,” said Matt Baker, director of the Public Advocates Office.

California’s big three utilities need a way to collect an increasing amount of money from their customers to pay for these crucial investments. Any policy that prevents utilities and regulators from considering fixed charges as a means of collecting those costs ​“takes away an important tool to make the rates equitable and get us to a low-carbon future,” he said.

Fixed rates: How much is too much? 

Right now, much of the opposition to CPUC’s income-based fixed-charge plan has stemmed from what many critics say are excessively high charges proposed by the state’s three big utilities.

Currently, the average total household electric bill in California is $164 a month, with no fixed charges. Under the utilities’ joint proposal, income-based fixed charges for households with annual incomes between $28,000 and $69,000 would be $20 to $34 per month. Those earning between $69,000 and $180,000 would pay $51 to $73 per month, and those earning more than $180,000 would pay $85 to $128.

The utilities are also proposing to significantly lower the per-kilowatt-hour charges that customers pay to counterbalance the big increase in fixed charges, and to structure both fixed and volumetric charges in a way that allows lower-income customers to save money overall. Still, the proposal, if enacted, would instantly make California the home of the nation’s highest monthly utility fixed fees, according to analysis by clean energy research firm EQ Research.

This plan has drawn the threat of legal challenges from libertarian anti-tax groups. It has also taken fire from advocates of rooftop solar and energy efficiency who say the charges would unfairly increase bills for more efficient households and reduce them for heavy electricity users.

“Surprising ratepayers with a large fixed fee in their utility bills will set us backward on reaching our clean energy and grid resilience goals,” Edson Perez, California policy lead at Advanced Energy United, a trade group representing companies that both provide and purchase clean energy, said in a statement. ​“It will punish middle- and low-income families who already have low monthly energy usage or who have invested in energy efficiency upgrades or home solar and storage systems.”

Critics also question the way the policy was set into state mandate. Income-based fixed charges were first proposed in 2021 by Severin Borenstein, head of the Energy Institute at the University of California, Berkeley’s Haas School of Business, and colleagues. But they were pushed into potentially becoming state policy via a single sentence added to a 2022 energy bill, AB 205, which ordered the CPUC to study them and reach a decision on whether to implement them no later than June 2024.

No lawmaker has claimed credit for introducing the provision into the omnibus legislation, known as a budget trailer bill. AB 205 contained many other controversial policies such as keeping open the Diablo Canyon nuclear power plant and spending billions of dollars to guard against grid electricity shortfalls, which garnered far more public attention at the time.

“I think a policy change of this magnitude that affects so many ratepayers should have been fully vetted in the legislature,” Irwin said.

Ahmad Faruqui, an energy economist and utility-rate expert, called this a highly unusual way to introduce a major shift in ratemaking policy. Income-based charges have undergone no studies or modeling to indicate whether their claimed positive impacts will actually come to pass, he said.

Utilities have pledged to significantly cut per-kilowatt-hour charges to reduce the cost of adding EV charging and heat pumps to homes and businesses. But according to Faruqui’s analysis, the fixed charges being proposed by utilities would still lead to overall bill increases for millions of middle-income customers who use energy frugally and efficiently, while reducing overall bills for customers using the most electricity today.

“It pretends to make electrification affordable,” said Faruqui, a noted critic of the state’s recent policies on rooftop solar and utility rate design. ​“But why would people want to invest any more in electricity if their bills have doubled or tripled?”

Baker of the Public Advocates Office agreed that the utility proposals would ​“be inequitable and create rate shocks,” or sudden and unexpected bill increases, for those customers. That would anger customers and potentially counteract whatever benefits might come from charging them less per kilowatt-hour of electricity they use compared to today.

But critics of the utility plans are not necessarily against income-based fixed charges as a rule. In fact, many have lined up to oppose the $10 cap on monthly fixed charges in AB 1999.

“This bill would kill a critical opportunity to help get electricity bills under control for Californians in the midst of a crippling affordability crisis,” Theo Caretto, associate attorney at environmental justice group Communities for a Better Environment, said in a prepared statement. ​“The answer is to work with regulators to get this right, rather than sending us back to square one by dismantling this reform before it gets off the ground. We can — and must — ensure the wealthiest households pay their fair share.”

That’s why the Public Advocates Office, along with key environmental justice and ratepayer advocacy groups, have proposed much lower fixed charges instead.

Those include a joint proposal filed by the Natural Resources Defense Council and ratepayer advocacy nonprofit The Utility Reform Network, as well as a compromise proposal from the California Environmental Justice Alliance. While they differ in details, all include much lower monthly fixed charges than what utilities are proposing, as the chart below shows.

“I would guess that the commission would choose on the lower side of the fixed rates,” Baker said. ​“I would be shocked if they chose the utility proposals.”

The complexities of income-based rates — and the alternatives

Just how utilities would be able to access customer-income data to assess an income-based fixed charge is ​“mired in legal and administrative complications,” Faruqui told Canary Media last year.

Utilities are asking the California legislature to pass a law that would allow the California Franchise Tax Board to supply data to the CPUC to create an anonymized database that utilities could use to rank customers into various income classes.

But until such a law is passed, utilities would have to make use of the ​“income-verification” processes they now use to enroll customers in low-income assistance programs, which require customers seeking bill reductions to provide documentation proving their household income, Baker said. For use in assessing income-based fixed charges, that process might default all customers into the highest income bracket, then require each customer to prove to their utility that they earned less than that amount.

That creates the risk of ​“a whole range of consequences for customers who fall through the cracks,” said Brian Turner, Advanced Energy United’s Western states policy director. If that policy is enacted, ​“we think there are going to be a whole bunch of news stories about folks slapped with high charges when they don’t deserve it” because they weren’t aware that they needed to tell their utility that they don’t earn as much money as they were assumed to.

All of these complications will have to be worked out before utilities can implement any income-based charges, Baker said. While the CPUC is expected to issue an order on the policy this year, any real-world changes for customers wouldn’t be set to go into effect until 2026 at the earliest, he said.

Meanwhile, some groups that oppose fixed charges outright are asking the CPUC to instead prioritize another structure to reduce the cost of building and maintaining the grid to support electric vehicles and electric-powered heating: time-of-use rates.

These time-varying rates are higher at times of high power demand, when power grids are under the most stress and generation is costliest to provide, and lower when grid capacity and electricity are abundant. Customers of California’s three big utilities already pay time-of-use rates set in place by another CPUC decision in 2015. But the California Solar and Storage Association trade group and the Clean Coalition advocacy group have filed proposals asking the CPUC to create even greater differentials between the cost of ​“on-peak” and ​“off-peak” power consumption, to push customers to use less power when it’s most expensive for utilities to supply it.

Time-of-use rates are one of the tools that utilities and regulators can use to incentivize customers to change how they use electricity in ways that lower utilities’ costs of providing it, Baker said. ​“We want to have a fixed charge as low as possible and have a time-of-use rate that’s as high as possible without causing undue pain,” he said.

But Baker noted that ​“extreme” time-of-use rates could end up punishing customers who can’t avoid using electricity when it’s most expensive — people who live in the hottest parts of the state and can’t afford to insulate their homes or buy more efficient air conditioning to reduce their summer afternoon and evening electricity consumption, for example. It can also cause a similar ​“bill shock” as excessively high fixed rates could cause, although for different reasons.

Whatever mix of time-of-use rates and fixed charges the CPUC ends up choosing, however, California utility rate policies can’t remain as they are today, he said. That’s why the Public Advocates Office doesn’t support AB 1999 and wants to keep the CPUC’s options open.

The CPUC’s decision to limit monthly fixed charges to no more than $10 was set into policy in 2015 as part of a broader reform of residential rates and solar net metering, at a time when ​“there was little solar, there were almost no batteries, there were almost no battery-electric cars,” Baker said. ​“We’re in a very different world now…we have a lot of big costs that are coming at us, and we’re going to have to find a way to equitably spread those costs.”

Irwin agreed that California policymakers have to get utility costs in check. But she suggested that increased oversight of how the state’s big utilities are investing in wildfire prevention and grid expansion should be part of that effort. ​“The priorities are how to make a more resilient grid and implement fire mitigation — but do it in a smarter way.”