Dive Brief:

• California regulators on Friday passed a major residential electric rate reform plan, Greentech Media reports, striking a compromise between energy efficiency advocates and the state's three large investor-owned utilities (IOUs).
• Members of the California Public Utilities Commission (CPUC) voted unanimously to change the state's existing four-tiered rate structure to a two-tiered structure with a 25% cost difference between the two. The new rate plan for residential customers will also include a "super-user electric surcharge" that will charge customers extra if they use more than 400% of the average California resident's monthly electricity consumption. 
• Many solar and efficiency advocates opposed the changes because the old four-tiered structure charged high-demand customers more, increasing the incentive to invest in rooftop solar and efficiency upgrades. Instead of increasing charges throughout the month for high-demand customers, the regulators said, utilities should institute robust time-of-use rate structures to incentivize consumers to use energy at the right times.

Dive Insight:

The four-tiered utility rate structure was originally instituted in the aftermath of the California energy crisis in 2001 as a measure to protect ratepayers from market volatility. In the years since, the IOUs argued that the structure charges high-demand customers too much, and that their bills subsidize lower-use ratepayers, who in turn have less incentive to invest in energy efficiency or other technologies. 

Consumer advocates have defended the four-tiered rate design, saying that it prevents lower-use customers, who by and large tend to have lower incomes, from being charged too much. At the CPUC meeting where the vote took place last week, several public commenters reportedly pushed the commissioners to consider a compromise proposal from Commissioner Mike Florio, which would have established a three-tiered rate system with a 33% difference between the top and bottom rates.

But in the end, the commission settled on a simpler, two-tiered structure, writing in its decision that consumers are usually ignorant of their electric rate tier, and that even if the structure four-tiered structure drove solar and efficiency investments, it did not sufficiently reduce electricity demand.

"There is no evidence in this proceeding that conservation increases on a direct and predictable relationship with the steepness of an inclining block rate," the commissioners wrote. 

Instead of an emphasis on different tiers, the CPUC directed utilities to focus more on customers' demand throughout the day. Each of the IOUs, the decision reads, should begin the process of designing time-of-use rates, and be ready to have those rates be the default for their customers by 2018. 

The TOU plans should “offer a menu of different residential rates designed to appeal to a variety of residential customers, with different time periods and rate differentials,” the decision reads. Already, the Sacramento Municipal Utility District has seen impressive results with such programs, especially when TOU rates were made the default option for customers.