By - Michael Drost

California reforms residential electricity rates

Energize Weekly, July 8, 2015

California regulators dramatically changed the way utilities can create electricity rates last week, opting to replace the current four-tiered rate structure with a two-tiered structure that penalizes the most egregious energy users while giving many others a break.

In a unanimous decision, the California Public Utilities Commission (CPUC) voted to narrow the gap between prices paid by consumers who use less electricity and those who use more, while also rejecting proposals by utilities to charge fixed rates for customers who install rooftop solar panels. Instead, the CPUC agreed to start a “minimum bill” approach, whereby customers will be charged a minimum $10 a month to be connected to the grid, or $5 for low-income households.

The new reform package will also impose a “super-use electricity surcharge” that will charge customers a fee if they use more than 400 percent of the average California resident’s monthly electricity consumption. Experts say the plan will likely incentivize utilities to create “time-of-use” (TOU) rates that charge customers more to use electricity during peak hours, as well as to adopt technologies that can manage hour-by-hour consumption.

The current four-tiered rate scheme is a byproduct of the California electricity crisis of 2000 and 2001, in which the state experienced a shortage of electricity supply caused by capped retail prices and market manipulation. In the aftermath of the crisis, lawmakers effectively froze rates at the lower two tiers, while rate increases to pay for equipment and generation upgrades affected only the upper two tiers. This scheme remained in place until 2009, when the freeze on the lower two tiers was lifted, while in 2013 the state ordered a complete overhaul of the electricity rate structure. The resulting reform package would limit the four-tiered rate scheme to two, with a 20 percent price difference between customers.

One proposal favored by utilities would be to permit fixed, monthly charges versus a minimum monthly bill. The CPUC said of the former that investor-owned utilities (IOUs) “failed to meet their burden to justify a monthly charge to cover fixed costs”, and instead opted to allow utilities to propose minimum bills.

A major component of the plan that will eventually affect all ratepayers will be to end rate increases throughout the month for high-demand customers, and instead have utilities scale up costs on a 24-hour basis. The decision directs California IOUs such as Pacific Gas & Electric (PG&E) and Southern California Edison (SCE) to “promptly begin the process of designing TOU pilots” and come up with default TOU rates by 2018. This move has long been studied by California energy officials as a way to reduce demand when the grid reaches its daily peak, as well as incentivize investments in renewable resources, such as wind and solar.

Some of the changes will start affecting ratepayers this year, including the “minimum bill” component, while the electricity surcharge element will go into effect in 2017. The changes should be fully phased in by 2019.

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