Report reveals inequity in electricity pricing, calls for rate reform to help fight climate change

Researchers from the Energy Institute at Haas analyzed 11 million Californians’ utility bills and concluded that one-half to two-thirds of  the charges amount to a hidden electricity “tax.” The report was commissioned by nonprofit NEXT 10.

Power lines stretching out across golden California landscape
Photo: Pgiam for iStock

Every time a California resident switches on a light or toasts some bread, they’re helping to pay for the damage wrought by wildfires across the state.

In fact, one-half to two-thirds of the electricity bills paid by Californians subsidize costs beyond providing the electricity itself. Some of these costs are closely related to electricity, like the maintenance of infrastructure or investments in energy efficiency, while others are more tangential, like wildfire mitigation and victim compensation.

“The price that we pay for electricity doesn’t reflect the cost of supplying that electricity,” says Severin Borenstein, professor of the graduate school at the Haas School of Business and a co-faculty director of the Energy Institute at Haas. “And, importantly, all these programs that we finance through our electricity bills disproportionately burden low-income households. This amounts to a regressive tax.”

In a new report released today, Borenstein and Energy Institute colleagues Meredith Fowlie and James Sallee—both professors in UC Berkeley’s Department of Agriculture and Resource Economics—analyze the impact of this hidden “electricity tax” on Californians. They recommend two significant policy reforms to ease the burden on low-income households and spur consumer interest in the adoption of electric vehicles, heat pumps, and other electric technology.

The researchers suggest shifting some of the systemwide costs into the state budget, which is funded by less regressive forms of taxation: income and sales taxes. The remaining system costs could be paid using a monthly fixed charge on electricity bills that is tied to income, and therefore more progressive.

The report, “Paying for Electricity in California: How Residential Rate Design Impacts Equity and Electrification,” was commissioned by Next 10, a nonpartisan research nonprofit organization. It builds on the findings of a previous study released last year.

Tallying the invisible costs 

The three largest investor-owned utilities (IOUs) in the state—Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric—combine to serve over 11 million people. The researchers matched electricity use from these customers with census data to paint a picture of how much households with different incomes were paying for charges beyond the cost of electricity. These costs include maintaining the grid as well as policy goals such as wildfire mitigation, compensation for past victims of wildfires, investments in renewable technologies, and subsidies for rooftop solar, energy efficiency programs, and low-income customers.

The report finds that in 2019, IOU residential customers were paying an effective electricity tax that averaged $678 per year. The effective electricity tax was $809 for typical PG&E customers, $512 for SCE customers, and $786 for SDG&E customers during the period covered by the study.

They found that the lowest-income households, earning $25,000 or less per year, spend on average more than three percent of their income on these additional electricity charges. Households earning more than $200,000 per year, by contrast, spend half-a-percent or less of their annual income.

“Proportional to their income, lower-income households are paying more than three times what wealthier households are paying,” says report co-author Fowlie, co-faculty director of the Energy Institute at Haas. She also explained that as California invests more money in climate change adaptation and mitigation measures, and as extreme heat becomes more common, “it’s a safe bet that those costs will increase, pushing prices even higher. We should be even more concerned going forward about this relative regressivity.”

On top of this inequitable distribution of costs, the current electricity rate structure discourages many of the actions that are necessary for California to achieve its goals for fighting climate change. The researchers estimate that these extra charges on utility bills reduce the adoption of electric heat pumps by about one-third, and of electric vehicles by between 13%” and 33%. “This is particularly noteworthy given California’s recently adopted rule requiring 100% of new vehicles sold in 2035 be zero-emission.

“When people go to buy an electric vehicle or a heat pump, if they think carefully about not just the upfront costs but also the operating costs, then the amount California is charging these consumers is simply putting up a barrier to adoption,” Borenstein says. He noted, in contrast, that natural gas is priced at roughly the true cost to society, and gasoline is priced below its true cost.  “If we’re massively overpricing electricity while underpricing or correctly pricing these other, more carbon-intensive alternatives, then we’re undermining everybody’s incentives.”

A better way to pay

Two proposals emerged from analysis. The researchers advocate moving some of the system costs for the grid and policy goals out from under the purview of electric utilities and into the state budget. To cover remaining costs, they propose a fixed monthly charge based on income.

In the example the authors present for PG&E,  e. Households in the middle of the income distribution would pay $70-80 per month in additional fees. Those at the top of the income distribution would pay roughly $150 in fees. Borenstein recognizes that this sum is not negligible, but points out that the accompanying decline in the price consumers pay for electricity would mean that even customers in the highest income bracket would see their overall bills go up by less than $40 per month.

“Though economists play the role of the wet blanket, bearing bad news, I actually think this is a good news story,” Fowlie says. “Policymakers have at-the-ready the levers and instruments needed to respond to this issue.”

The strongest opposition to this work, interestingly, comes from the solar industry, as high electricity prices make solar installations more attractive. But, as the report makes clear, residential solar adoption occurs among predominantly higher-income customers. As these customers install panels and consume less from the grid, the current rate structure becomes even more inequitable, further shifting costs to low-income consumers.

The researchers are optimistic. Just this year, California Senate President Pro Tempore Toni Atkins put forward legislation to move some of these costs to the state budget; and California’s newest budget (AB205) requires the California Public Utilities Commission to implement an income-based fixed charge. It remains to be seen how large, and how progressive, this charge will be.

Borenstein sees this as significant progress. “Even two years ago, a lot of people were saying high electricity prices are a good thing as they force people to conserve,” he said. “Far fewer advocates and politicians are now talking this way, so the work we’ve done has moved the ball. They know the current system simply doesn’t work.”

Read the full report:

Paying for Electricity in California: How Residential Rate Design Impacts Equity and Electrification
By Severin Borenstein, Meredith Fowlie, and James Sallee
Commissioned by Next 10. Read the press release.
Media Contact: John Stodder (Better World Group) [email protected]

About the Energy Institute at Haas:

The Energy Institute at Haas helps create a more economically and environmentally sustainable energy future through research, teaching and policy engagement. The Energy Institute produces research and analysis backed by rigorous empirical evidence and the frontiers of economic research so that energy and environmental policy and business decisions are based on sound economic and business principles.

About NEXT 10:

Next 10 is an independent, nonpartisan, nonprofit organization that educates, engages and empowers Californians to improve the state’s future. With a focus on the intersection of the economy, the environment, and quality of life, Next 10 employs research from leading experts on complex state issues and creates a portfolio of nonpartisan educational materials to foster a deeper understanding of the critical issues affecting our state.