Dive Brief:

• Residential customers in San Diego Gas & Electric Co., Pacific Gas & Electric Co. and Southern California Edison service territories paid an effective “electricity tax” that averaged $678 in 2019 due to California’s rate structure, a new report from the University of California, Berkeley’s Energy Institute at the Haas School of Business and Next 10 has found.
• California uses volumetric rates to pay for numerous programs and costs, including infrastructure, wildfire damages, energy efficiency programs, low-income subsidies and rooftop solar, according to Severin Borenstein, a professor of business administration and public policy at Haas. “If you think of that as a tax that’s being added to the true cost of providing additional electricity, that tax is very regressive,” he said.
• These high prices could also throw a wrench in California’s plans to bring more electric vehicles onto its roads as well as electrify its built environment, according to the report. The state is currently aiming to have 100% of new passenger vehicle sales be zero-emission by 2035.

Dive Insight:

An initial report put out last year by the Haas School of Business and Next 10 took a closer look at how electricity rates in California are used to cover non-incremental costs of electricity supply, including a variety of state programs. It found the practice has led to a large, growing gap between actual retail electricity prices and the social marginal costs.

This time around, the researchers analyzed billing data from 11 million households in PG&E, SCE and SDG&E service territories and found that on average, customers contribute $678 per year due to that residual cost burden. More than two-thirds of the total bills of PG&E and SDG&E customers went to these residual costs, while SCE customers pay a little over half of their bill toward them, the study found — meaning that the way in which California is covering these costs is the main contributing factor to electricity costs. 

“California has the most generous low-income program. California has had the most generous rooftop solar subsidy program, paid for out of rates. California of course is facing wildfire costs… [that] are extremely large relative to most other places — so there are a lot of extra costs added into electricity rates in California, compared to most other states,” Borenstein said.

These costs are also spread unevenly across households, the study found. As of 2019, the quarter of households with the highest electricity use paid more than $850 on an annual basis, while one-quarter of households contributed less than $220.

And while current rate structures saddle higher-income households with a greater portion of these costs, lower-income households actually pay a much larger share of their income to them, “so much so that the effective electricity tax is more regressive than the state sales tax,” the report found. 

These residual costs could also hurt the state’s efforts to electrify its transportation and building sectors. The report estimates that this “tax” raises the cost of operating an electric vehicle by around $600 a year, which could reduce EV adoption by between 13% and 33%. It also increases the annual cost of switching from natural gas to electrified heating by around $600.

The researchers outlined ways in which California could address these challenges, including by moving some of these costs from ratepayer bills to the state budget, where they would be covered by increases to sales or income tax. In addition, California could consider implementing income-based fixed charges, the report says, that “would similarly increase equity and efficiency at the same time.”

It’s time for the state legislature, governor and California Public Utilities Commission to take an urgent look at reforming how the state allocates costs related to the electricity system, Next 10 Founder Noel Perry said in a statement.

“Working together, the utilities and the state government can eliminate a growing disincentive to clean power conversion, and lift an economic burden that falls heavily on those least able to pay,” Perry added.