Generation Markets Week
by Jeff Stanfield

California regulators have been recommended a decision to order the state’s big three investor-owned utilities to reduce the number of residential electric rate tiers, implement $10 monthly minimum bills this summer for most customers and immediately begin designing time-of-use rates.

The proposed decision of California Public Utilities Commission Administrative Law Judges Jeanne McKinney and Julie Halligan, issued April 21, would reduce the residential rate tiers of each utility from four to two, with the law judges reasoning that reduction of peak use, integrating renewables and shifting use to times when energy is available more cheaply cannot be encouraged with tiered rates because prices are set based on overall amounts of electricity used rather than when it is used.

“We find that a two-tiered structure will minimize the risk of large households paying a disproportionate share of electricity costs. In addition, a two-tiered structure will be the easiest for customers to understand and accept,” the law judges concluded in their proposed decision for the PUC’s consideration.

Tiered rates, also called inclining block rates, result in high-use customers paying more than what utilities spend to provide their energy services because they subsidize low-use customers, who pay less than their cost of energy services, according to the proposed decision.

Pacific Gas and Electric Co., Southern California Edison Co. and San Diego Gas & Electric Co. are asking the commission to permit them to reduce their four existing rate tiers to two tiers to reduce the customer cost shift. Some ratepayer advocate groups support the proposals of the investor-owned utilities, or IOUs, to reduce the number of tiers to two, but solar and environmental groups want three tiers preserved.

Reducing the number of tiers would lessen the difference between the maximum rates that high-use and low-use customers pay because higher rate tiers kick in as customers use more electricity. As the number of kilowatt-hours a customer uses increases during monthly billing periods, the rate per kilowatt-hour increases for usage in each tier. If gasoline were similarly priced, a customer pumping the first five gallons of gasoline might pay $3 per gallon but then pay $4 per gallon for the next five gallons, and so on.

High-use customers would get a break if the number of tiers is decreased. Still, the proposed decision aims to reduce rate subsidies to low-use customers first so that all customers pay prices that are more in line with utility costs of serving each customer.

“We find that the first step in rate reform must be a narrowing of the existing usage tiers so that electricity prices will be more in line with cost and so that customers can better understand their electricity rates,” the proposed decision said.

Minimum bills soon, fixed charges later

Also, fixed charges would be imposed in a few years so that customers pay more of the costs that are not included in volumetric rates. In the utilities’ individual general rate case design proceedings, they should identify fixed costs for purposes of calculating fixed charges to be effective in 2018 or later, the proposed decision states.

The law judges would have the PUC postpone implementation of any fixed charges that the utilities requested but in the interim would set monthly minimum bill payments beginning this summer at $10 for most customers and $5 for low-income customers on subsidized rates through 2017.

“This minimum bill shall remain in effect and subject to review in each electric utility’s GRC Phase 2 [general rate case, design phase] until such time as the utility has received approval for a fixed charge,” the proposed decision said.

Reducing tiers and instituting a universal minimum bill are just the first steps of the commission’s rate design reform efforts. The proposed decision sets a course for further residential rate reform over the next few years. For this the IOUs must evaluate opt-in and pilot time-of-use rates in preparation for widespread enrollment of customers, the law judges said.

Time-of-use, or TOU, rates would increase during peak hours of customer demand to more accurately reflect the cost of delivering electricity with peaking plants, transmission congestion charges and other expenses, they said. Higher peak use rates would encourage customers to shift power usage to periods of lower demand, deploy more energy efficiency measures and tap energy storage facilities, if they have them.

Each IOU must file no later than Jan. 1, 2018, a residential rate design application that proposes a default TOU rate structure to begin in 2019, the law judges recommended.

TOU rates good, tiered rates bad

The proposed decision concludes that TOU rates could reduce the need for additional infrastructure by flattening utility load curves so there is less need to build more infrastructure just to serve peak demand. TOU rates could lower utility costs, improve reliability and reduce greenhouse gas emissions.

“Neither flat rates nor tiered rates are designed to reflect the actual cost of energy. Because energy prices vary by time of day, only a time-of-use or time-variant rate structure can provide price signals that are indicative of actual energy costs,” the law judges wrote.

California has yet to attempt widespread rollout of residential TOU rates, though the commission has set default TOU rates for commercial and industrial customers. TOU rates for residential customers were not possible until widespread installation of smart meters made it possible to track customers’ usage by time, the proposed decision said, noting that nearly all nonresidential customers in California will be on mandatory TOU rates before the end of 2015.

“Despite the long history of policy support for TOU rates in California, the various California pilot projects, and the near ubiquity of smart meters, adoption of TOU rates is still extremely low in California,” the proposed decision said.

The law judges wrote that Arizona Public Service Co. is a model for utilities seeking customer adoption of opt-in rates, with 53% of that utility’s residential customers on TOU rates as of 2015. APS neighbor Salt River Project in Arizona also has high opt-in acceptance, with 30% of its customers on a TOU rate. In Canada, Ontario required all distribution utilities to offer default TOU rates by 2011, and currently 97% of residential customers in Ontario are on TOU rates.

If adopted, the proposal would affect solar net-metered customers, too. Vote Solar and the Solar Energy Industries Association argued that existing residential rates and the net energy metering tariff work jointly to determine a customer’s bill so the commission should require the utilities to retain existing rate schedules for solar customers.

The solar groups said solar customers made investments based on existing rate structures and rate differentials, so solar customers should be allowed to keep existing tariffs. Vote Solar argued that making significant changes to rate structures or adding new demand or customer charges could have significant impacts on the customers’ distributed solar investments.

Low-income subsidies impede cost-based rates

The primary argument in support of the steep tiers is that high-usage customers will purchase rooftop solar technology or make significant purchases of energy efficiency technology to reduce overall consumption, the proposed decision said. Yet, many customers, such as those in multilevel condominiums and apartments, cannot install solar under any incentive, and many lower-income customers have energy-inefficient homes that use large amounts of electricity.

“Low-income and middle class customers are less likely to be able to afford significant energy efficiency improvements. … And they may not have sufficient credit or property interest to qualify for rooftop solar programs,” the proposed decision said.

The Sierra Club was among parties objecting that the proposed decision calls for unfair rate increases for low-income customers.

“This decision might as well have been written on utility stationery. The commission basically handed the utilities exactly what they have been lobbying for,” the Sierra Club’s My Generation Campaign Director Evan Gillespie said in a news release. “This proposal … jacks up bills for low-income customers, lets energy hogs off the hook, and will slow the transition to clean energy. Meeting our climate goals just got harder. … Overall, the majority of households can expect their bills to go up if this plan is adopted.”

The Greenlining Institute, which often weighs in on utility rate issues in representing communities of color, says on its website that the poor pay more than half of their income for energy. The group also has been a party in the proceeding with a focus on advocating affordability in residential rate changes and the impacts of rate design on vulnerable customers.

The proposed decision discussed at length the impact of the rate design proposals on low-income customers and concluded that the PUC will continue work on a rate design that is cost-based, is substantially fair to all customers and does not jeopardize customers’ access to a sufficient amount of energy. The proposed decision orders utilities to reach out to low-income customers to promote through existing commission programs opportunities to improve energy efficiency.

About 3 million customers of the big three utilities now benefit from subsidized rates. The PUC has approved billions of dollars in low-income customer assistance despite fraud concerns. For the California Alternate Rates for Energy, or CARE, and Energy Savings Assistance programs, the PUC in past decisions directed the IOUs to achieve better-than-90% enrollment of eligible customers, and ratepayer advocates have lobbied to expand eligibility with higher income allowances.

In 2012, the PUC approved CARE program budgets totaling $3.8 billion for PG&E, SoCalEd, SDG&E and Southern California Gas Co. for a three-year program cycle ending in 2014. The PUC also approved more than $1.1 billion for the period for energy efficiency assistance to low-income households.

PG&E on April 21 reported to the PUC’s advisory Low Income Oversight Board that more than 1.4 million of its customers were participants in the CARE program in March and estimated that it reached 87% of those eligible for CARE rates. SoCalEd reported nearly 1.3 million CARE participants, or 86% of those eligible. SDG&E reported 274,192 CARE customers, or 74.1% of those eligible.

The program has continued to expand, but budgets for the 2015-2017 cycle are still being considered. The PUC says on its website that low-income customers get 30% to 35% discounts on their electric and natural gas bills.

An April 14 PUC report on customer use data for electricity and gas by region said the highest concentration of CARE customers in California is in the South Coast/Inland Region, where 48% of electricity customers and 56% of gas customers are CARE customers. The Central Valley ranks second, with 25% of electric and 24% of gas customers receiving CARE assistance.

PG&E, SoCalEd, SDG&E and APS are subsidiaries, respectively, of PG&E Corp., Edison International, Sempra Energy and Pinnacle West Capital Corp.