Fixed-fee utility scheme will raise bills and reduce conservation

California has adopted a new rate structure for residential utility customers that’s designed to make their electric bills more equitable and affordable, and encourage them to shift to electric appliances and vehicles. The likely result, however, will be higher utility bills – and an increase in electricity usage at a time when the state is struggling to avoid blackouts. The new system will also undermine the state’s conservation goals.

In response to Assembly Bill 205 signed by Gov. Gavin Newsom in 2022, the California Public Utilities Commission has adopted a new fixed charge on customers’ bills. Residential customers of Southern California Edison and San Diego Gas & Electric will see the hike beginning in 2025, while customers of Pacific Gas & Electric and some smaller utilities will see the increase the following year.

While well-intentioned, this new fixed charge of $24.15 could end up costing customers money and wasting energy in the long run – two outcomes that actually run afoul of California’s conservation and equity goals. Leave it up to the California Legislature to design a law that contradicts its stated goals and that misunderstands basic economics.

Residents currently pay for electricity based solely on the amount of electricity they use. By introducing a fixed charge, customers are unable to mitigate or avoid this cost. A portion of the bill will still be based on how much they consume, but this shift suggests the state is less interested in conservation and more interested in throwing a lifeline to the utilities.

It’s pretty simple. If more of one’s bill is fixed and less of it based on usage, customers will be incentivized to use more electricity since it will add less to their bill. In fact, some of the law’s backers saw that perverse incentive as a feature – not a bug – of the new rate structure. Utilities have long complained about California’s rate design because it encourages customers to use less electricity. In theory, this fixed charge is supposed to cover the minimal amount of costs to serve a home or business, but the state is reducing an important price signal that encourages people to conserve.

If it is costly to keep their lights on for an hour on a sunny day, it may encourage customers to install more efficient appliances, install solar or use electricity at a later time when prices are lower. This is the state, after all, that since 2001 has been sending text messages asking residents to save energy to avert blackouts.This current pricing structure was developed in the 1970s when the CPUC adopted policies requiring electricity rates to focus on energy efficiency and conservation. So, rates were entirely based on total consumption. Simply put, a customer who uses a lot of electricity is a drain on the system and should pay for those costs. California officials eventually decided this pricing structure wasn’t granular enough, so they reformed it to account for high and low demand times. For example, prices are higher on a really hot day when everyone is running their air conditioning and there is limited available electricity. These rates provided a signal not only for the customer to be more efficient, but for the electricity system as a whole to be more efficient.

California has some of the highest electricity rates (although its bills are mid-pack because we use less electricity overall) in the country, and this is largely because residential customers have not had a fixed charge as part of their bill. In most states, utilities charge residential customers between $10 and $12 a month with a separate price for the consumption portion. California’s new fixed charge is more than double that typical price (although it will be lower for some low-income customers).

In shifting to a fixed charge, the CPUC had to make several determinations. Notably, it chose to ignore a long-standing principle that state commissions use to make these decisions: The person causing the cost should pay for the cost. Instead, the CPUC mainly decided on a dollar amount, then worked backward to figure out what costs could be recovered through the fixed charge.

This change undermines California’s long-standing preferences for energy efficiency and conservation. Introducing a fixed charge, especially one as high as adopted by the CPUC, means customers may now decide that using electricity during times of high demand and high prices is fine. This runs the risk of enabling major electricity waste. This could be just the beginning, too.

By muting the price signal, California may no longer be a national leader in solar deployment and energy efficiency. Instead, the state is reducing conservation incentives and risks losing market opportunities for new products and services that can help customers save money by using less electricity. Many people will also pay higher bills, which increasingly feels like California’s unofficial motto.