A new report published by Next 10 and the University of California, Berkeley Haas School of Business, “Designing Electricity Rates for an Equitable Energy Transition,” finds that California’s electricity prices are substantially higher than the national average and that they disproportionately burden low-income ratepayers throughout the state. The report offers several solutions, all involving various schemes to make electricity bills less regressive by shifting costs to wealthier Californians. A better response would be to revisit the many climate change-related requirements on the electricity sector that raised these costs in the first place. The implications go beyond California, as the Biden administration is considering similar measures on a national scale.
Californians pay nearly $1 per gallon more for gasoline than the rest of the country, but the disparity for electric bills may be even more painful and regressive. According to the report, “Southern California Edison (SCE) residential prices per kilowatt hour are about 45 percent higher than the national average,” while “Prices for Pacific Gas & Electric (PG&E) are about 80 percent higher, and prices in San Diego Gas & Electric (SDG&E) are roughly double the national average.”
The report emphasizes that these prices “are two to three times the cost of producing additional electricity.” In other words, the marginal cost to the utility of generating and delivering each additional kilowatt hour is only a fraction of what ratepayers are charged for it.
The reason is that utilities get to recover the costs of all the investments necessary to provide electricity, including generation, transmission, and distribution, as well as compliance with greenhouse gas measures. These outlays, plus a rate of return, are factored into the price per kilowatt hour Californians pay. By the way, this is why California utilities are often supportive of the state’s green agenda, at least to the extent the state Public Utility Commission allows the compliance costs to be a near-certain money maker for them.
But why so much higher than other states? According to the report, the explanation includes “the above-market cost of past purchases of renewable electricity and other mandated technologies, the fixed costs of transmission and distribution (including wildfire prevention and compensation), and energy efficiency programs and other public purpose expenditures.” Much is due to the higher costs associated with the state’s decarbonization agenda, including renewable electricity mandates favoring more expensive sources like wind and solar. The report notes that renewable costs have come down and are becoming less of a component.
Making matters worse, California’s incentive structure for residential rooftop solar “has disproportionately shifted cost recovery onto non-solar customers.” Residential solar has become widespread, particularly among the state’s wealthier homeowners. These households are “credited at the retail rate for every kWh of solar electricity they generate.” In fact, subsidized rooftop solar is so common among well-heeled Californians that the report finds “higher-income households now consume only modestly more electricity than lower-income households.” This serves to shift the cost-recovery burden onto the somewhat reduced volume of kilowatt hours generated by the utilities, and the resultant higher rates are then paid by the relatively less wealthy ratepayers who don’t have solar panels.
Not only are higher electricity costs a disproportionate burden on low-income Californians (and quite possibly a contributor to the ongoing exodus of individuals and businesses from the state in recent years), they also serve to undercut other environmental goals, such as electrification of transportation and space heating.
The report proposed a number of redistribution schemes in which new income-based taxes or fees are imposed and the proceeds used to reduce electric bills for those of less means. However, doing so is very unlikely to make whole all or even most people harmed by higher electricity costs. A better response would be to recognize the substantial and regressive costs of the climate agenda before imposing any more such measures. Other states, as well as the federal government, should look to California’s electricity system as a cautionary tale.