Recent U.S. Department of Energy research verifies serious institution-based inequities in the power system's delivery of electricity, but it can be rectified, utilities, regulators and equity advocates said.
Lower-income households' utility service disruptions are five times more frequent than higher-income households, and service losses by households of color are "far more likely" than for whites, according to a November 2021 Lawrence Berkeley National Laboratory (LBNL) paper. For both of those types of households, "disconnection notices signal an emergency," the LBNL paper said.
If inequities "baked into the existing system" are not reversed, they "are likely to become more pronounced" as the energy transition accelerates because equity is also equitable access to clean energy, energy efficiency and rate relief programs, consumer, utility, energy and environmental justice representatives wrote in the LBNL paper.
Through fairly allocated costs and benefits, regulators "can absolutely address inequitable outcomes," Commissioner Abigail Anthony of the Rhode Island Public Utilities Commission told Utility Dive. But it is important to differentiate inequities in utility regulation "from inequities in other parts of the economy or society that are squeezed into utility bills and services."
Advancing equity requires new programs and rate designs that merge traditional cost of service regulation with public interest principles, power system stakeholders agreed. But those programs and rates must also protect against rising electricity costs that regulators, utilities and ratepayers in California and other states worry may slow the electrification needed for decarbonization and impede other ratepayer-funded policy goals, many said.
Innovative Arrears Management Programs (AMPs) and Performance-Based Regulation (PBR) are potential win-win alternative paths to equity and other policy goals for utilities and ratepayers, the stakeholders said.
"Energy equity is the fair distribution of the benefits and burdens of energy production and consumption," according to LBNL Senior Program Manager Lisa Schwartz, the paper's technical editor. It "can be a goal, tool or metric," because equitable affordability is a goal, customer participation in regulatory debates is a tool, and metrics validate "policies, regulations and programs."
Recent policy initiatives by at least 13 states and the Biden administration are taking regulation beyond its traditional objectives of reliable, safe and affordable electric service to a new objective of serving the public interest, Schwartz added. That change in regulatory priorities can change access to electricity service, access to energy efficiency and clean energy programs and rate-setting,
Other paper contributors expanded on that idea.
Equity is a "proactive" approach to "differences in opportunities and burdens," Chandra Farley, CEO of ReSolve, an energy and climate justice consulting firm, wrote in the "Advancing Just Energy in the South" section of the LBNL paper. A key step toward greater equity would be enabling the participation of coalitions of "clean energy, civil rights, and equity and environmental justice groups" in regulatory proceedings, she said.
Environmental and energy justice should be part of the "public interest" obligation of utilities, added Center for Biological Diversity Energy Justice Program Director and Senior Attorney Jean Su in the paper's "Climate, Environmental, and Energy Justice" section. Decisions about "fossil fuel pollution, climate disaster and ecocide" must protect vulnerable communities and deploy resources equitably, she said.
Access to uninterrupted affordable and reliable electric service is "vital" to all consumers, but "is not a priority in the current policy climate," National Consumer Law Center (NCLC) Senior Energy Analyst John Howat and NCLC Staff Attorney Jenifer Bosco wrote in the "Consumer Advocate's Perspective" section.
Traditional "cost-of-service ratemaking principles have resulted in inequitable allocation of energy costs and benefits by race and income" and "it needs to evolve," Howat told Utility Dive.
Regulators must "apply an equity lens" to decision-making, Commissioner Letha Tawney of the Oregon Public Utility Commission agreed. Just as utilities' corporate boards are realizing they cannot ignore climate change, they are also realizing that ignoring equity can risk the utility's operating license and financial losses from defaulting customers, she added.
Outside utility regulation, stronger standards for building and appliance efficiency and better zoning and siting codes are also needed to advance equity in energy, Howat acknowledged. "But equity in utility regulation must be improved and regulators have a toolbox to address it," he said.
For a "just transition," lower-income customers need basic electric power service at a limited cost and equal access to distributed energy resources (DER) with protections against up-front capital or credit requirements, Howat and Bosco wrote.
One part of that just transition is ratepayer-funded programs with income-based discounts that include consumer protections against unreasonable charges and fees and can help those customers recover from arrearages, they said.
Regulators can also authorize utility programs to increase those customers' access to rooftop solar, community solar and other clean energy and energy efficiency technologies that reduce bills, Howat and Bosco added.
Incentives and rates for EVs in lower-income communities and multifamily housing should be prioritized, Howat and Bosco wrote. Smart meters could also benefit lower-income consumers but must include protections against remote disconnections and unworkable rates that may come with smart meters, they added. And prepaid electric services, often proposed for lower-income households, do not work because those customers do not have tools to limit their usage, they said.
The cost of these equity tools remains a concern, regulators, customer advocates and utility representatives agreed.
Someone has to pay
Utilities from large investor-owned utilities (IOUs) like Southern California Edison and Commonwealth Edison to the diverse members of the American Public Power Association are committed to advancing equity, representatives told Utility Dive. But many face hard choices about spending.
Utilities with "sustained high rates of rate base growth" and "returns well above their cost of capital," have kept customer rates stable, but that is unlikely to last, a February 2021 Lazard Asset Management note reported. The market is not "pricing the risks properly" for how falling returns could threaten utility financial stability, Lazard added in advising investors to take a "low exposure" to the regulated utility sector.
Utility executives facing equity-related expenditures will almost certainly want "rate recovery" that leads to rising rates for many customers, Arkansas Public Service Commission Chair Ted Thomas told Utility Dive.
Equity is important, but "somebody will have to pay," agreed retired Brattle Group Principal and rate design authority Ahmad Faruqui. "Legislators don't realize rate increases could slow transportation and building electrification" and they "reject tax funding of policy objectives," he said.
Howat disagreed that tax funding is a better solution. Taxpayer funding of bill assistance and weatherization programs has fluctuated with political circumstances while "comprehensive ratepayer-funded assistance programs may require 1% to 3% of utility revenues but will be consistently funded if the utility is allowed to recover its costs through rates," he said.
The challenge of balancing costs and equity was one of the issues addressed in the "Utility Perspective on Energy Equity" chapter of the LBNL paper by Portland General Electric (PGE) Senior Director of Resource and Regulatory Strategy and External Engagement Nidhi Thakar and Office of Diversity Equity and Inclusion (DEI) Community Outreach Manager Jake Wise.
"The power system today creates disproportionate burdens on those least able to shoulder them," they wrote. PGE plans" respectful dialogue" with environmental and equity justice community organizations about developing programs and prices that "are fair, reasonable and equity-centered," Wise told Utility Dive.
The energy transition requires all stakeholders to "be conscientious about rising rates," Thakar added. But utility regulation's "purely economic approach, that worked in the past, will no longer work" with today's technologies and equity concerns.
California's work on rate assistance programs shows the difficulty of balancing affordability and equity, she and other stakeholders agreed.
Is equity too expensive?
The rate impacts of equity are "a pimple on the tail of the dog," said Jennifer Dowdell, a senior policy expert for consumer advocacy group The Utility Reform Network (TURN).
The bigger question "is how to accommodate equity and equal access in utility services within an environment of ever-increasing utility costs and rising rates," she added. "Equity and public purpose programs are not extras, but the current pace of rate increases does call overall affordability [of electricity service] into question."
Rates of California's three dominant IOUs have risen steadily since 2013 and may be 10% to 20% higher in 2030, according to a May 2021 assessment by the California Public Utilities Commission (CPUC).
Funding from taxpayer revenues is an alternative to ratepayer funding of policy objectives like equity, Dowdell said. Indicative of a potential change in lawmakers' inclinations toward public funding for equity is the California legislature's 2021 approval of AB 135, which directed $1 billion to bill assistance for lower-income customers, she added.
The California Alternative Rates for Energy (CARE) and Family Electric Rate Assistance (FERA) programs, which will cost $2.2 billion a year through 2026, reduce lower-income customers' bills but impact other customers' rates, said Natural Resources Defense Council (NRDC) Climate and Clean Energy Program Senior Scientist Mohit Chhabra.
"If we paid for CARE through the state budget, as we do with similar lower-income programs for food and medical care, it would lower rates 3% to 4%," Severin Borenstein, professor of business administration and public policy and faculty director of the Energy Institute at the University of California, Berkeley's, Haas School of Business estimated for Utility Dive. Borenstein is also a member of the California Independent System Operator Board of Governors.
Importantly, rising rates are a disincentive to the electrification needed to reduce emissions, Haas Institute economists and NRDC's Chhabra agreed.
The conundrum for policymakers is that equity costs imposed on rates increases the cost of electricity, Borenstein, Chhabra and others said. That could discourage customer investments in electric appliances and electric vehicles and slow the transition to building and transportation electrification which is essential to moving away from natural gas heating and gasoline-powered cars.
Electrification is more likely if the purchase and operating costs of EVs or appliances are lower than gasoline or natural gas alternatives, Chhabra said. Both fossil fuel and electricity prices are high now, but EVs generally cost more than gasoline-powered cars, and customer surveys show those factors likely add up to a marketplace disadvantage, he added.
But governments may be able to achieve policy goals like increased equity through utility bills if they give regulators more authority over rates and programs," Rhode Island Commissioner Anthony said. "We can improve equity through better rate designs and programs that more fairly allocate costs and benefits."
There is rising interest in performance incentives and arrears management as regulatory approaches that, as Commissioner Anthony suggested, might more equitably serve all stakeholders.
Performance incentives for utilities can limit rate impacts for accomplishing policy goals, Arkansas Commission Chair Thomas, NCLC's Howat, and others agreed.
There can be "meaningful incentives" for achieving "affordability metrics" that show "evidence of decreasing disconnections" and "increased energy assistance engagement," Howat said.
Performance incentives for equity can bridge the gap between the public interest and utility financial interests, "but developing meaningful metrics in societal equity is difficult," Regulatory Assistance Project (RAP) President and CEO Rich Sedano cautioned. Many find incentives tested to date to be inadequate to advance equity, he added.
Utilities have developed few equity objectives without legislated mandates, said Commissioner Jennifer Potter of the Hawaii Public Utilities Commission. But performance incentives of "about $2 million each year" in Hawaii's nation-leading performance-based regulation framework call for "equity and social justice" and new "metrics and scorecards" focused on equity are being studied, she said.
Besides performance-based regulation, another potential way to cost-effectively increase equity is through strong Arrearage Management Programs (AMPs) that have already worked in some states, consumer advocate Howat and Penni McLean-Conner, executive vice president, customer experience and energy strategy, at Eversource Energy agreed.
"For each month a customer in arrears pays the current bill, one-twelfth of the arrearage is forgiven," Eversource's McLean-Conner said. "At the end of a year on the program, the arrearage is completely eliminated." AMPs also offer utilities savings because part of the arrearage is collected and costs for pursuing arrearages is eliminated, and they provide regulators with a tool to support vulnerable customers, she added.
With discounted rates and customer education about energy efficiency programs, AMPs make up "a framework that regulators and utilities can use to take customers to a different place," and can be to the utility's advantage, McLean-Conner said. Howat agreed. The energy efficiency programs are a crucial part of the framework because they help customers keep bills more affordable, they both said.
Both bad debt and AMP costs "are paid by all ratepayers, but data shows customers on these programs, by paying their bills, contribute" to limiting utility costs, McLean-Conner said. Eversource's Connecticut program had a 20% completion rate and 79% of participants made at least one payment, which gave all customers and the utility "some benefit," she added.
It is not yet clear how revenue losses with and without AMPs compare because "the explosion of the need for arrears forgiveness from COVID" has made data assessment complicated, she said.
But COVID has also brought "an explosion of interest from regulators around the country" in AMPs because "it is a small cost for all customers that provides a lot of value for vulnerable customers," McLean-Connor said.
Most utility regulation includes various public interest considerations, but the emphasis on equity is growing "as public attitudes and capabilities to address equity change," RAP's Sedano said. That might be because "people dissatisfied with government can change it."