Inside California's rate restructuring plan and the battle for fixed charges looming over it
CPUC decision on tiers, time-of-use rates sets up fight for fixed cost recovery
California regulators united behind a new rate framework before the Independence Day holiday, but lurking behind the decision is a bigger one for utilities and renewables advocates alike.
The California Public Utilities Commission (CPUC) voted unanimously on July 3 to flatten the current four-tiered electricity rate system to two tiers, push for time-of-use (TOU) rates by 2019, and make other noteworthy changes to how utilities bill customers.
San Diego Gas and Electric (SDG&E), Southern California Edison (SCE), and Pacific Gas and Electric (PG&E), California’s investor owned utilities (IOUs), hailed it as a step toward making rates fair. The state’s utility watchdog condemned the decision, the ratepayer advocate is concerned about it, and solar advocates are studying it warily. All recognize a decision on fixed monthly charges was deferred
It “fully comports” with the three rate design principles needed to transition to “smart rates” that will lead to “a smart future,” said Regulatory Assistance Project Sr. Advisor Jim Lazar.
The first principle is that customers must be able to connect to the grid “for no more than the cost of connecting to the grid,” Lazar said. “The maximum $10 per month customer charge, after 2018, easily covers the cost of a connection to the grid.”
Second, grid services and power should be paid for in proportion to how much and when they are used. TOU rates price electricity higher when it is in higher demand. “The inclining block TOU rate, applicable to both distribution costs and power supply, keeps these costs volumetric, as they should be, and will reflect time differentiation in the near future.”
Finally, customers should get fair and full compensation for the power they send to the grid. Because the decision leaves net energy metering (NEM) in place and moves to TOU rates, distributed generation owners will pay the appropriate price for electricity they use but “if they can supply power to the grid at high-cost hours, they will receive higher bill credits.”
The decision, reached after a three year proceeding, balances (1) the need to reform a problematic rate structure imposed by AB 1X, the post-2001 energy crisis legislation against (2) the need for a price signal customers can understand and respond to that targets the cost and environmental impacts of electricity use.
“The first step in rate reform must be a narrowing of the existing usage tiers so that electricity prices are more understandable and less distorted,” the decision explains. Current residential rates do not provide a “useful” price signal and are “so far from cost that immediate change is necessary.”
Because the four tier rates have long allowed low-usage customers to pay below cost and forced high-usage customers to pay more than cost, “change will require an incremental increase in rates for lower tier usage.”
But the new two-tier design, to be gradually implemented beginning in November and culminating in 2019, will continue to allow low-usage customers to pay a lower rate than high-usage customers. It also includes a super-user electric surcharge (SUE) for very high electricity consumers.
Most importantly, the CPUC rejected requests from IOUs for fixed monthly charges. The inconsistency in methodologies IOUs proposed for calculating fixed charges revealed a necessity for more careful study, regulators decided.
The decision does, however, allow IOUs to request monthly fixed charges in general rate cases going forward.
In place of a fixed charge, the commission ordered the immediate implementation of a minimum bill of $5 per month for low income customers and $10 per month for all other customers.
The decision also ordered IOUs to file a design by January 1, 2018, that shifts all customers to TOU rates by default by 2019, excluding only customers who voluntarily opt out. The utilities must also run both opt-in and default pilots on TOU rates.
Reaction from uilities: SDG&E
“We were hoping for more immediate relief but we are on the right path,” said SDG&E Spokesperson Amber Albrecht. “This new rate structure inserts more fairness and transparency into electric utility bills.”
SDG&E tier 3 and 4 customers now pay “136% more than those in the lowest tier” and those in the lowest tier “pay 15% less than the cost of the basic delivery of electricity,” she explained. “This brings rates more in line with the true cost of service.”
With the new two tier plan, the higher users’ bills will come down while the lower users’ monthly bills will likely edge up to around $2 to $5, Albrecht said.
The current first tier is a calculation of a baseline amount of electricity consumption, she explained. A customer that uses between 101% and 130% of that amount of electricity pays a tier 2 rate. That customer pays a tier 3 rate for usage of between 131% and 200% of that baseline amount of electricity. And usage above 200% of it costs the tier 4 rate.
Beginning in November 2015, a transitional three tier plan begins and, in March 2016, the two tier plan goes into effect, with rates slowly collapsing toward their final levels. By 2019 the tier 2 rate will be about 25% higher than the tier 1 rate.
In 2017, the SUE will go into effect, with customers who use 400% of the baseline amount of electricity paying at 119% of the tier 1 rate.
“This was the commission’s way of giving a signal to those who need to conserve because they are using exorbitant amounts of energy,” Albrecht said. It is expected to be levied on about 2% of SDG&E customers. “Each IOU’s rates will be slightly different but the basic pattern will be the same.”
“This is the first step in a broader discussion about the modern electricity bill,” Albrecht said. “Now we know what the framework will be. Moving forward, the CPUC will have a number of proceedings and make a number of decisions on things like net energy metering.”
Reaction from utilities: SCE and PG&E
Our estimates find the high usage customers are paying $600 million in subsidies per year to low usage customers, said SCE Director of Pricing Design Russ Garwacki. “Even when fully implemented in 2019, there will still be significant subsidies left in the rate structure but this does provide relief.”
The new plan corrects an overpayment by higher usage customers without asking lower usage customers to subsidize them, he added, and nearly a third of SCE’s 4.3 million residential customers will continue to be covered by the California Alternate Rates for Energy (CARE) program which provides rates discounted by 30% to 40% for all the utilities’ lower income consumers.
A related CPUC proceeding set some of the rate changes into effect last year and SCE tier 1 customers are already paying about $3 per month more without serious consequences, he explained.
Neither the new flattened tiers nor the TOU rates will add to utility profits because the California utilities are “decoupled,” Garwacki said. “We don’t make money based on the amount of electricity customers use. If they use more, our costs go up but that revenue is all pass-through and we don’t make any margin on it.”
“It is important you decouple that relationship if you are trying to further energy efficiency and conservation,” he added.
Both Albrecht and Garwacki argued that the new rate design will not take away customers’ incentive to be more efficient about their electricity consumption.
“Flattened tiered rates for the entire customer population provide a better conservation signal,” Garwacki said. Lower rates for tier 2 customers will reduce their incentive to be more efficient, he acknowledged.
But higher rates for tier 1 customers provide them with an incentive to conserve. “There is a point-counterpoint. And that extends to the incentive to go solar. A recent CPUC energy division report found solar adoption is higher under flatter tiers.”
The decision “very much was a compromise and balancing of a large number of issues,” Garwacki said. The minimum bill is an example.
It is not, as characterized, a replacement for a fixed charge, he said. “For a zero usage or very low usage customer, they act virtually the same. But there are very few customers with very low usage. Once you move above that $10 minimum bill, it has no impact.”
The commission decided to deal with the tiered rate structure now and deal with the fixed charge in 2019, he explained. But the implication of the minimum bill is that even the lowest usage customers should pay “some fair share” for the distribution system, he added.
“They viewed the minimum bill as a first step toward fixed charges. That is not what we asked for but it is a step in the right direction.”
Rates follow cost with a TOU structure and it is important to provide that cost signal for residential customers, Garwacki said. SCE just completed transitioning all its non-residential customers to TOU rates. Studies are beginning to demonstrate that, over time, usage shifts and the load profile flattens in response to them.
“It is not as large as some imagine because electricity is what economists call inelastic,” he said. “Most customers use electricity to facilitate their businesses and don’t want to drive their businesses around their electricity rates. But we are talking about a large number of customers, so even small reactions provide significant benefits.”
SCE wanted an opt-in to TOU rates, based on the success demonstrated by an Arizona Public Service opt-in TOU program and because that option seems to offer the most customer choice , Garwacki said.
The commission disagreed. “They didn’t want to take as long to get customers on TOU rates. A default TOU with an opt-out option preserves customer choice but there would be more customers remaining on it.”
SCE will now turn to helping customers understand how to benefit from the new rates. “We will make it as easy as possible for them to select what the best rate structure,” Garwacki said. “It is all about implementation now.”
PG&E, for its part, was more tight-lipped about the decision.
“We are still reviewing the decision,” PG&E Spokesperson Ari Vanrenen said. “For now, we are committed to helping our customers understand the charges and to use energy more efficiently to save money.”
Reaction: The consumer watchdogs
The proposed TOU rate for PG&E, California's Office of Ratepayer Advocates (ORA) was quoted in the decision, “would result in a 0.4% decrease in total load consumption and an 11% decrease in peak load consumption.”
In terms of how it will impact ratepayers, “the decision was a little less moderate than what we had hoped,” an ORA Spokesperson told Southern California Public Radio (SCPR). Some 80% of customers will see monthly increases “in the range of $10 or more."
The public’s opposition “was loud and clear, as was utility support,” according to The Utility Reform Network (TURN) Executive Director Mark Toney. “This is a lose-lose for customers, but business as usual for the CPUC, which has once again done PG&E, Edison and SDG&E’s bidding.”
“This decision did not avoid fixed charges,” TURN Communications Director Mindy Spatt said. "It opens the way. They just said it would have to be done in a rate case. It puts fixed charges on the table for the future.”
According to TURN research, Spatt said, it will increase bills for people who can least afford it "while energy hogs get a break on the backs of people who are doing their best to conserve.”
TURN prefers the minimum bill to the fixed charge because it will have less of an impact on lower income customers. Like SCE, it wants TOU rates to be an opt-in and not the default choice. “If TOU rates are good for customers, they will choose them. But they should not be imposed,” Spatt said.
TURN was frustrated that an alternate proposal from Commissioner Mike Florio, which eliminated fixed charges completely, was withdrawn. “At the last minute,” Toney said, it “was abandoned in favor of rushed revisions to the original proposed decision by President Picker. TURN, other parties, and the public were shut out.”
TURN “will definitely be seeking reconsideration,” Spatt said.
“Most importantly, we're glad to see that the commission has not adopted fixed charges – and recognized that there’s no evidence to justify them,” said Solar Energy Industries Association Spokesperson Ken Johnson. “These rates are workable, although we believe a greater tier differential would more appropriately reflect the costs of high energy users.”
The flattened tiers, he added, “should significantly mitigate any concerns the utilities have about cost shifts among ratepayers.”
"This decision is an important part of the process to incorporate more distributed resources into the system,” said Solar Electric Power Association Executive Vice President and Chief Strategy Officer Tanuj Deora. But rate design “needs to be articulated as part of a broader conversation on the utility business models."
“The proposed decision achieves the utilities’ goal of flattening the tiers while also making the entire rate system more equitable for ratepayers,” said SolarCity Public Affairs Director Will Craven. “If net metering remains in place, this decision will continue to allow Californians to go solar.”
“Because the tiers are flattened and the rates are more closely tied to cost, more middle usage customers will consider solar,” Garwicki said. “A recent CPUC energy division report found solar adoption is higher under flatter tiers.”
The main event – fixed charges
A just-released study from Lawrence Berkley National Laboratory showed that TOU rates and fixed cost recovery charges balance one another and have relatively little impact on electricity bills.
The decision makes two fundamental points about fixed charges before its ruling: (1) AB 327 permits, but does not require, fixed charges in residential rates if they offset non-volumetric costs; and (2) the debate is about whether utilities should be able to use fixed charges to recover fixed costs.
“Until there is resolution over the appropriate recovery of these fixed costs, the exact extent of any subsidy between low usage and high usage customers remains unknown.”
The decision then sets four pre-conditions to further consideration of fixed charges.
- Calculation of the fixed charge must be approved in a general rate case
- That calculation must use a methodology approved through a rigorous series of CPUC sessions and procedures
- An IOU may only request the fixed charge through its approved 2018 Residential rate design window
- The IOU’s default TOU must have been implemented for at least one year before the fixed charge can be implemented
One of the “big wins” in this three-year rate proceeding was postponing fixed charges until at least 2019, which avoids punishing those who don't use as much energy, the ORA Spokesperson told SCPR.
The purpose of a fixed charge, SCE’s Garwicki said, is to base rates on the cost of service. The utility estimates the cost of serving an average residential customer is $30 per month. It argued all customers should have a $10 per month fixed component added to their rates that would reduce the volumetric rate and be closer to the cost of service.
But the commission said it wanted to more completely understand what goes into the fixed cost calculation, Garwicki said. “They needed to fix the elephant in the room, the tiered rate differentials. There is time to deal with the fixed charges down the road.”
TURN "absolutely" objects to fixed charges, Spatt said. “The decision does not authorize fixed charges but it tells the utilities to ask for fixed charges in their rate cases and the commission will be fine with them. We are going to fight it tooth and nail.”
“We count more than a dozen net metering and rate design proceedings underway across the country that will have major implications for rooftop solar,” said VoteSolar Regional Director Susannah Churchill.
“We are very much in the middle of an existential fight over the future of customer-sited solar in the U.S. and, as the state with by far the biggest solar industry and over a quarter million solar roofs already, all eyes are on the CPUC to see whether the agency will continue to stand for solar progress and customer choice, or cave to that utility pressure.”