More than 120,000 utility customers in California participate in net energy metering (NEM) programs, according to the California Public Utilities Commission (CPUC).

Not surprisingly, the Golden State has become ground zero in the debate over the future of NEM programs.  

Is net metering unfair?  

NEM’s critics say it is “unfair” because it shifts costs from one group of customers to another group of customers.

Brent Gale, a senior vice president at Berkshire Hathaway Energy, a holding company which owns several regulated utilities, expressed similar concerns about the “fairness” of net metering in a strategy document that he wrote for a legal conference in July.

“Maintaining the status quo and allowing DG customers to continue to be served by residential rates that do not reflect the costs of serving DG customers and which shift costs to other customers is arguably the situation that would be deemed unreasonably discriminatory,” Gale wrote in the document.

But does this make the NEM subsidy unfair?

The Edison Foundation’s Institute for Electric Innovation finds NEM to be unfair.

"Because residential retail rates are almost always designed to recover most of the power system’s fixed costs through kWh charges, a DG customer will avoid paying some or all of its fair share of the fixed costs of grid services," the organization wrote. "Ultimately the fixed costs that the DG customer does not pay, which are significant, will be shifted to other retail customers [...] DG customers should pay their fair share of the cost of the grid because pushing any of this cost onto non-DG customers raises serious economic efficiency and fairness issues."

Net metering not the only cross-subsidy in electricity rates

In a world where the NEM subsidy was the only cross subsidy embedded in electric utility rates, the institute's argument would make sense. The typical residential customer with rooftop solar in California pays about 19% less than what it costs the utility to serve them, according to a study recently conducted for the CPUC. Needless to say, however, NEM is not the only cross subsidy embedded in electric rates. Electric utility rates are riddled with cross subsidies.

California’s electric rates are based on everything but marginal costs. In other words, the size of a customer’s utility bill depends primarily on the amount of electricity they use and whether they receive a discount. As a general matter, high-usage customers pay significantly more for electricity than low-usage customers.

In addition, affluent customers pay significantly more than low-income customers. Currently, nearly one-third of residential customers served by investor-owned utilities receive a discount on the price they pay for electricity.

The typical California residential customer with rooftop solar consumes 15,000 kWh per year, which is substantially more than the 6,800 kWh per year consumed by the average residential customer, according to the Institute for Electric Innovation. Similarly, the median income for residential NEM customers is about 34% higher than the median household income of all residential customers served by investor-owned utilities in California.

It is precisely the residential customers who had paid more than their “fair share” of the system’s costs for more than a decade so that other customers could pay less than their share who are now installing rooftop solar.  

The utility regulatory model is the real problem 

The typical residential NEM customer was subsidizing the price of electricity for other customers (i.e., either low-income customers or low-usage customers) before installing rooftop solar.

Rather than creating a new subsidy, rooftop solar merely reverses the direction of a subsidy that was designed into rates in the wake of the 2001 electricity crisis.

While residential NEM customers may receive a subsidy, NEM customers in the aggregate still pay more than their full cost of service for utility service, according to a study by Energy and Environmental Economics (E3), an energy and economics research company based in San Francisco.

E3 was commissioned by the CPUC to evaluate the ratepayer impacts of the California’s NEM program and “the degree to which NEM customers pay bills commensurate with their estimated share of the total utility cost of service.”

The study concluded: “With renewable DG, NEM residential customers pay 81% of their full cost of service compared to 154% before DG, and non-residential NEM customers pay 113%, compared to 122% before DG.”

If the NEM subsidy is unfair because it shifts costs from one group of customers to another group of customers, it is arguably more equitable than the non-NEM subsidies it replaces. Shifting 19% of a customer’s cost to another customer is less egregious than shifting 54%.

In the bigger picture, the debate over the fairness of this or that subsidy is a red herring. Electric utilities are clinging to a industrial-age regulatory model that is ludicrously ill-equipped for calculating things like cost, return and rates in an era of anemic demand growth, aging infrastructure and shifting policy goals.

“It is clear that setting a rate of return cannot, even in principle, be reduced to an exact science,” wrote U.S Supreme Court Justice Stephen G. Breyer in his 1982 book Regulation and Reform. “To spend hours of hearing time considering ‘rate of return’ models is of doubtful value; and suggestions of a proper rate – carried out to several decimal places – give an air of precision that must be false.”

Historically-based price regulation and cost-of-service rate-making are not viable strategies for socializing the cost of public infrastructure in the 21st Century.

This is the message. Net metering is merely the messenger.