Residential Electricity Pricing in California: We Need an Overhaul, not a Tune-Up

power-poles-503935_1280Here at Environmental Defense Fund (EDF), we love win-win solutions. This is why we’re big fans of time-of-use (TOU) electricity pricing (a type of time variant electricity pricing). As I’ve written before, TOU pricing better reflects the true cost of electricity, which fluctuates throughout the day. What’s more, it brings with it significant benefits for the environment, electric reliability, and people’s wallets. By empowering customers to better control their energy bills and reduce our reliance on fossil fuels, everyone wins with TOU pricing.

Thankfully, the California Public Utilities Commission (CPUC) included TOU pricing as one of the key elements in their plan to reform residential electricity rates. But how and what Californians pay for electricity – the best way to structure rates – is currently up for debate at the CPUC.

The CPUC issued its proposed decision on restructuring California’s residential rates and moving customers to TOU rates in the new structure, which EDF strongly supports as an evolutionary leap forward. Subsequently, Commissioner Mike Florio issued an alternate proposed decision that nudges the current tiered rate system forward with a time-variation “adder.” Unfortunately, Florio’s alternate proposal amounts to more of a tune-up than the substantial overhaul required to prepare for a future grid that runs on carbon-free renewables, like wind and solar, and also powers our cars, trucks, trains, and boats.

EDF and other stakeholders – including utilities prefer the original proposed decision because it more strongly assures that TOU rates will be used to their full potential. Yet, the alternate proposal has many merits too, and will similarly usher in TOU. The CPUC will vote on which version to adopt later this month with the opportunity to issue changes based on either proposal.

Proposed decision vs. alternate proposed decision

The good news is, both the proposed decision and the alternate proposed decision direct California’s three investor owned utilities – Pacific Gas and Electric (PG&E), San Diego Gas and Electric (SDG&E), and Southern California Edison (SoCal Ed) – to develop TOU rates for widespread use, including transitioning some customers to TOU pricing automatically (a good thing, according to research on opt-in versus opt-out programs). If EDF’s recommendations are embraced, this will include technology enablement for those who need the most assistance in adjusting to time-variant pricing.

There are, however, a few substantial differences between the two proposed decisions:

1) Language about TOU: The proposed decision orders transitioning customers to TOU rates starting in 2019 after several years of pilot studies. In contrast, the alternate proposed decision more softly requires utilities “establish a goal” of defaulting customers to TOU. This difference may seem too small to matter but these directives are for the utilities to interpret, so the CPUC must be clear that TOU is to be the default.

2) Number of tiers: The original proposed decision consolidates and simplifies the current four tiered rate structure into a baseline allocation of energy at a set price according to regional energy burden (i.e., how much electricity an average home needs for basic services such as lighting and cooling) with a TOU electricity price. In other words, it creates essentially two-tiers where the upper (TOU tier) may vary with time of day.

The alternate proposed decision recasts the current four-tiered rate structure into essentially three tiers: a baseline tier and higher usage surcharge, but allows price to vary with time. In the tiered rate system, the price per unit of electricity increases as a customer uses energy during the month. Higher users pay more per unit of energy than low users when their usage exceeds a prescribed level. The high-use surcharge of the alternate proposed decision is essentially a third tier, but it will be communicated to customers as a line-item surcharge. Similarly, the baseline rate (first tier) will be reflected as a line-item rebate. Reflecting the tiered pricing through line-items on the bill is a good approach to preserving the price differences associated with time-variation. That is, if the tiers and time-variant price components were combined, it could be a confusing message to market. Tiered rates mix up the message about shifting energy use to align temporally with when it’s cheapest, including times when there is an abundance of renewable energy available – one of the biggest benefits of TOU. Instead, a TOU rate without the tiers will be easier for customers to understand – and respond to – by avoiding energy use during the time of the day when it’s most expensive.

Again, these differences might not seem important, but we must be deliberate in helping customers to manage their bills by planning the daily timing of their energy use. For programs like TOU to work, folks need to easily understand how the pricing works and how they can save money.

3) Consideration of greenhouse gas emissions: Both the original and alternate proposed decisions suggest that the CPUC does not have enough information to tell whether or not TOU rates can reduce overall household energy use. EDF strongly supports requiring the investor owned utilities develop peer-reviewed evaluations of the emissions-reduction potential for TOU. In addition, a menu of dynamic tariff options (e.g., tariffs that vary hourly or subhourly based on real-time wholesale energy prices) that integrate utility-scale renewables and reward distributed energy resources (e.g., energy efficiency, rooftop solar, and energy storage) are also recommended. EDF is eager to be a helpful partner in scoping and executing the studies.

4) Fixed charge vs. minimum bill: The original proposed decision would allow for the eventual adoption of a fixed charge, while the alternate would implement a minimum bill charge. Both are aimed at making sure each customer pays for at least some portion of their fair share to use and maintain the central electric grid on which we all rely.

However, a fixed charge is just that: fixed onto each bill and is anticipated to be larger than a minimum bill charge. A minimum bill, however, sets a floor for how much a customer can pay on their monthly bill. This minimum bill keeps intact incentives for clean distributed energy resources like rooftop solar, while the fixed charge can diminish savings from these upgrades and extend the payback period. One this topic, EDF, consumer advocates, and other environmental groups favor the alternative proposal for a minimum bill instead of fixed charges.

EDF’s recommendation

Taking these differences into consideration, EDF supports the adoption of the original proposed decision – with one caveat: we agree with the alternate proposed decision’s adoption of a minimum bill instead of a fixed charge.

Further, for this to be successful, these aspects need to be incorporated into the final decision with directive for utilities to develop and be accountable for strong education, outreach, marketing, and enablement. This is particularly important for low-income customers enrolled in utility programs like the California Alternate Rates for Energy (CARE) program, which provides low-income customers with a 30-35 percent discount on their electricity and gas bills.

We all know making big changes to residential electricity rates is difficult. We also know it’s vital for California to realize a clean energy future if we are to avoid the damaging effects of climate change (like the historic drought we’re currently experiencing). So, why not take this opportunity to develop truly innovative electricity pricing that delivers a win-win for all Californians and sets a standard for the rest of the nation?

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  1. Posted June 11, 2015 at 2:33 pm | Permalink

    Here here Jaime! Default (Opt-out) Time-Of-Use pricing clearly creates the greatest transparency between what electricity costs and what customers pay, and that's a good thing. Opt-out, Time-Of-Use pricing is also one of the best strategies to maximizing the value that customers, communities, and society can obtain from those expensive smart meters utilities are installing (and charging to customers). In fact, our primary and secondary research indicates that without Opt-Out, Time-Of-Use pricing, the customer cost-benefit ratio for smart meters is negative (Smart Grid Hype & Reality, Wired Group Publishing, 2014)! Let's hope other regulators follow California's logical lead.

    But regarding the overall usage reductions associated with time-of-use pricing, I believe the research is fairly clear: customers on time-of-use rates reduce their use. (In fact, skeptics like me believe this is the real reason most utilities — both for-profit and non-profit, both those which own generation and those which do not — oppose Opt-out, Time-Of-Use pricing.) You may wish to review the secondary research published in the March, 2005 issue of Public Utilities Fortnightly (Efficiency and Demand Response: Twins, Siblings, or Cousins?). Chris King and Dan Delurey examined 24 well-controlled studies of dynamic pricing conducted in Europe and North America over 2 decades. They found an average reduction in overall use of 4%, with some studies finding as much as a 20% reduction. You can access the paper here:

  2. James Fine
    Posted June 17, 2015 at 7:06 am | Permalink

    Thanks for your helpful response. We agree that customers reduce their overall energy use on time-of-use (TOU) pricing. I will definitely look into the secondary research you suggest.

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