Californians’ electricity bills will soon depend on their income

Most of the time, what you pay for electricity or water or gas depends on how much you use. Leave the air conditioner and the lights on all night, and your electricity bill will spike. Take long, relaxing bubble baths every day, and your water bill will climb.

But California is about to challenge that basic logic, in an attempt to curb rising rates and help electrify the state's approximately 14 million homes. A new state law will require its three investor-owned utilities to charge customers fees for electricity based not only on how much electricity they use, but also on how much money they make.

Depending on the proposal the state ultimately adopts, Californians making more than $180,000 a year could end up paying an average of $500 more on their annual electricity bills, while the lowest-income residents would save around $300 per year.

The proposed changes are sparking backlash.

Supporters argue that the plan will help the state electrify by lowering costs for residents that might not otherwise afford it. Critics, including many California residents, say that it will eat into progress on energy efficiency and that it is unfair to those who are conserving energy.

Ronald Dawson, a retired data manager who lives in Eureka, Calif., said he and his wife have always been careful to save energy: only running the washer during off-peak hours and living without air conditioning. The new fixed charge alone, he said, would be more than his typical monthly electricity bill. "It's a bait-and-switch," he said.

The debate beginning in California touches on the question that all states will have to face sooner or later: Who should pay for the damage climate change is doing to the electricity grid?

For the past decade or so, California has been stuck in a vicious cycle when it comes to climate change. The Golden State embraced wind and solar far earlier than many other states, with enthusiastic homeowners slapping solar panels on around 1.3 million homes; the state now generates around a quarter of its electricity from renewables.

But even as California has hustled to move away from fossil fuels, the effects of a warming planet are transforming the sunny state — and threatening how nearly 40 million people get their power. California is becoming hotter and drier, raising the risk of wildfires sparked by aging, failing power lines. The state's three largest investor-owned utilities — Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric — need to upgrade their infrastructure to shore it up against rising temperatures and fire risk.

All that work means California's electricity prices have gone sky-high. California's average retail electricity price is around 20 cents per kilowatt-hour, almost double the national average. And some customers see prices much higher than that: Pacific Gas & Electric offers rates that start at $0.31 per kilowatt-hour and climb to as high as $0.50 per kilowatt-hour depending on the time of day.

"In the last decade, electricity prices in California have skyrocketed," said Matthew Freedman, a staff attorney for The Utility Reform Network, a nonprofit consumer advocacy organization headquartered in San Francisco. In the past 10 years, Freedman explained, non-discounted electricity rates at PG&E have increased 84 percent; SDG&E rates have gone up 137 percent.

Those high prices could deter Californians who want to electrify their homes and vehicles to cut carbon emissions. In general, switching out gas heating for an electric heat pump or a gas-powered car for an electric car saves money and helps the planet. But high electricity prices change the calculus. In some cases, people who electrify their homes might end up paying more.

That's where the new law, which passed last summer as part of a larger energy bill, comes in. First proposed by researchers at the University of California at Berkeley and the nonprofit Next 10, the plan would split utility costs into two buckets: Fixed charges, which everyone has to pay just to be connected to the grid, and variable charges, which depend on how much electricity you use. Proponents say that the creation of fixed charges would cover things like wildfire preparedness and grid updates — and would also lower electricity costs based on usage. In theory, that would make it easier to convince Californians to electrify.

But, in a twist from how many other utilities do it, the fixed charge would be based on how much money the electricity user makes.

"A flat fixed charge is still pretty regressive," said Meredith Fowlie, a professor of economics at UC Berkeley who helped write the initial proposal. "If you can mimic an income tax, it's less regressive."

The California Public Utilities Commission, which regulates private utilities in the state, hasn't decided what those income-based rates will look like yet. (The commission has until next July to sort it out.) But the proposals that have been put forward thus far by nonprofits and the utilities themselves have sparked concern among consumers.

For example, the proposal from the three largest utilities in the state starts fixed charges at $15 for the lowest-income residents of the state and raises them to a whopping $128 for customers of San Diego Gas & Electric who earn more than $180,000. In turn, use-based rates would drop by 10 to 20 cents per kilowatt-hour. Other groups have suggested more moderate fixed charges: The Utility Reform Network and the Natural Resources Defense Council, for example, have suggested fixed charges that vary from $5 to $76.

Fowlie points out that the system will help low- and middle-income households that spend a lot of cash on electricity bills. "It would really reduce impacts on lower-income households," she said. She also notes that the utilities aren't getting any more cash from the proposal — they’re just rejigging the rates from entirely use-based to a mix that includes fixed costs.

Your landlord could be your biggest obstacle to going electric

But many Californians are not convinced. Hundreds of angry comments from residents have flooded into the utilities’ commission's website. Most worry that the high fixed charges will turn customers away from energy efficiency; others say it will disincentivize installation of rooftop solar.

"This proposal actually discourages conservation," Dawson, the retired data manager, wrote to the commission. "Those that live without air conditioning and conserve electricity or who use solar energy ... will still be required to pay the monthly fees."

Curtis Benz from Vista, Calif., wrote: "I am scheduled to have solar installed on my home next month but after finding out about this proposal I will be canceling the install. It is unfortunate that people who are spending tens of thousands of dollars to provide energy to the grid are not being rewarded." (Rooftop solar has been another source of controversy in California; the utilities recently changed the amount they reimburse homeowners for the solar they deliver to the grid.)

The question is whether lower prices for using electricity will spur more electrification. Higher-income Californians are more likely to spend money on electric cars, heat pumps and energy efficiency improvements. But if the majority of those residents’ bills are taken up by a large fixed charge, the relative benefit of those changes is much smaller. Lower-income Californians, by contrast, will have a higher proportion of their bills from the power they use — but they are also less likely to own their homes and be able to make efficiency improvements.

Jim Lazar, a utility rate expert, also has serious doubts about whether the law can be enforced. "It's extremely difficult to get income information, and extremely easy to game," he said. He points to shared housing situations, where multiple young people, all in different income brackets, might be living together — or to older, retired Californians who have zero income but high levels of wealth. "What if you just let your nine-year-old be the utility customer?" he said. "They don't have any income."

Rich customers could also simply exit the grid. With rooftop solar and a battery, some wealthy Californians could separate themselves from grid costs entirely. Some households are disconnecting in Hawaii, where electricity rates are even higher than in California. And if high-income residents leave the grid, they will leave behind low-income consumers who will continue to struggle to pay higher and higher electricity rates.

There is also the question of whether the cost of the grid infrastructure and wildfire resilience should be looped into utility bills at all. "We would prefer that these costs be paid for through income taxes," Freedman said. But historically, the California legislature has been hesitant to take on that responsibility — and in the meantime, funds are desperately needed.

Some experts have suggested alternatives. Lazar said a better way to boost electrification is to offer special rates for consumers who get rid of natural gas. "Someone puts in a heat pump, they get 400 kilowatt-hours a month cheap in the winter," he said as an example. "If you can target the cheap power, you can solve the electrification challenge."

For the moment though, California is pressing ahead with its plan, and other states could follow. The Golden State was one of the first states to quickly embrace renewables; it's also one of the states most affected by the rising cost of climate change.

"This is a uniquely California problem now," Fowlie said. "But I think we’re a leading indicator of where other states could be headed."