Bridging the Equity Gaps in California’s Income-Based Electricity Rate Proposal

BlogEnergy Equity

Jordyn Bishop April 24, 2024

As a regulatory attorney, I often see eyes glaze over when talking to my family and friends about the wonky energy policies I work on. That is decidedly not the case whenever I talk about utility rates. California's electricity prices are out of control and ratepayers are fed up. Media outlets are full of stories documenting recent rate hikes, the devastating impacts on customers, and the public outcry against both investor-owned utilities and the state regulator responsible for approving the rates these utilities can charge-the California Public Utilities Commission.

I see many Californians justifiably outraged about their energy bills, and at those they hold responsible for the dramatic increases. But I don't see the same intensity about the striking inequities in who's really feeling the economic impacts of rising rates. Yes, utility bills are increasingly unaffordable across the state-1 in 5 households are struggling to pay their energy bills-but low-income families are hit the hardest. This too deserves our outrage. And demands immediate action.

California residents owe the Investor Owned Utilities more than $2 billion in past due bills, and low-income households carry a disproportionate amount of that pandemic-era debt. Mounting energy bills force low-income homes to choose between paying rent and paying their utility bill. The consequences are severe-unpaid bills can result in utility shut-offs or housing evictions. With skyrocketing rates, more and more households are facing energy and housing insecurity despite residing in the fifth largest economy in the world.

The burden of California's soaring energy rates also disproportionately falls on communities of color. The data is unequivocal: Black, Latinx, and Indigenous households suffer from higher energy burdens, meaning they spend a larger percentage of their income on energy bills as compared to white households. These inequities are not accidental; they are deeply rooted in our nation's long history of systemic injustices. Racist policies like redlining and discriminatory housing practices confined many communities of color into disinvested neighborhoods with older grid infrastructure and less energy-efficient housing stock, directly contributing to the higher energy burden uniquely imposed on these communities.

The energy affordability crisis does not stop at economic and housing inequities; it's also an environmental and climate justice issue. Low-income communities of color are much more likely to live near sources of pollution including dirty, polluting energy sources like gas-fired power plants. These communities are bearing the brunt of higher energy burdens plus higher rates of respiratory illnesses and many other health impacts. We also know that many of these very same communities are overburdened by climate-driven extreme weather impacts, further exacerbating the disparate health and wealth conditions in California's communities of color. So, as Californians demand that lawmakers and regulators interrogate rising utility rates, we also need to hold them accountable to the compounding injustices burdening low-income communities of color. We need to fiercely commit to centering racial equity in all conversations and policy decisions about energy affordability.

What's going on with California's electricity rates?

California boasts some of the highest electricity rates in the nation. Several factors contribute to these high prices, some of which are pretty complex. What's not complex is that our bills are high in part because ratepayers are seen as a source of revenue for investors and for statewide policy expenses. Investor-owned utility customers are paying for much more than just our electricity usage when paying the utility bill. When a BIPOC, fixed-income household like mine pays our PG&E bill, we're also paying for excessive corporate salaries and historic shareholder profits; we're paying for significant increases in wildfire-related expenses; and we're paying for a long list of state-imposed policy costs (many of which do not equitably benefit BIPOC communities).

Critics have called our current electricity rate system broken, unsustainable, and in need of serious reform. But the conversation really started to shift in 2021 when the Energy Institute at UC Berkeley's Haas School of Business reported that the state's high electricity rates are also inequitable. The authors found that the current electricity rate structure-meaning volumetric or per kilowatt hour pricing-is regressive because it imposes a relatively higher cost burden on lower-income households.

Volumetric pricing means that all costs, including fixed costs unrelated to electricity consumption, are collected in rates based on how much electricity that household uses. We already know that low-income and BIPOC households spend a greater percentage of their income on their electricity bills compared to their white counterparts. So, by recovering all fixed costs in a volumetric rate, low-income customers are forced to pay the same per kilowatt hour charge as the wealthiest residents in the state, meaning utilities are collecting a larger percentage of a low-income household's income to cover costs that have nothing to do with their electricity usage.

To address this regressive rate system, the Energy Institute introduced the concept of an income-graduated fixed charge or IGFC as a pathway to more equitable (read: less regressive) rates. Not too long after, the California Legislature enacted Assembly Bill 205 (AB 205) directing the CPUC to authorize an IGFC to recover the fixed costs that do not vary based on electricity usage and to lower volumetric rates, and that low-income ratepayers must see a lower average monthly bill as a result.

Under AB 205, the CPUC must authorize an income-graduated fixed charge by July 1, 2024. Electricity rates are decided through ratemaking proceedings, a meticulous and often mysterious process regulated by the CPUC. For the last year or so, the CPUC has been evaluating several contentious proposals for designing the IGFC. The Greenlining Institute advocated for proposals that focus on the needs of priority and low-income communities-such as the designs put forth by the California Environmental Justice Alliance and the Sierra Club.

The Problem with Fixed Charges vs. The Promise of Income-Based Rates

Many energy justice practitioners have historically advocated against fixed charges as they can also be regressive, potentially even more so than volumetric rates. Flat fixed charges raise serious red flags because they ultimately stabilize a utility's revenue. With fixed charges, utilities are authorized to collect a guaranteed amount from each household each month, regardless of how much energy they use or conserve. And anything that excites or benefits profit-driven utilities should be examined closely to see who it may harm. Again, a flat fixed rate means low income families are paying a greater percentage of their incomes to utilities, often for their profit.

At The Greenlining Institute, we advocate for race-conscious policy solutions. We also believe that if designed correctly, income-based policies can help advance equity in energy affordability. Despite lingering concerns about fixed charges and cost shifts, and despite strong preferences for race-conscious solutions, the income-based component of AB 205 made this policy promising.

A well-designed IGFC could address regressivity in volumetric rates and flat fixed charges. AB 205 also seemed to recognize the cost inequities baked into the current rate system. And by cost inequities, I'm not just referring to regressive rates or the highly-debated cost shift from solar adoption, but rather all of the cost shifting that happens over the entire ratepayer base.

Many statewide policy and program costs are shoved into the ratepayer base. This includes distributed energy resource tariffs like net energy metering, but it also includes things like research and development, energy efficiency programs, and transportation electrification incentives. Utility customers pay for these things through electricity rates, but not everyone equitably benefits from or has access to these ratepayer-funded policies and programs. All of this amounts to cost shifting, because all ratebased cross-subsidies result in some level of cost shifting (though the purported value or extent of costs apparently shifted must be closely scrutinized).

I spent months socializing these somewhat unpopular viewpoints and sharing the equity-centered criteria that I'd be looking for in the CPUC's proposed decision to redistribute fixed costs across income levels. While I agree with the many voices saying the IGFC is not a silver bullet solution for a broken rate system, I also believe an income-focused attempt at reform is better than maintaining the status quo.

While awaiting the CPUC's proposed decision and encouraging others to do the same, I remained cautiously optimistic that the final outcome would be a step in the right direction for advancing equitable energy rates in California. Race-conscious policy is at the root of our energy equity theory of change, but equitable income-based policies can potentially help us get closer. Potentially.

Unrealized Equity Promises - The CPUC's Proposed Flat Rate

In March 2024, the CPUC issued its long-awaited IGFC proposal. The proposed decision disappointingly fails to adopt an income-graduated fixed charge structure, as was originally proposed by the Energy Institute and then legislatively mandated by AB 205. Instead, the CPUC proposes a monthly flat rate of $24.15 for all households serviced by investor-owned utilities. There's a discount for customers enrolled in the IOU's income-qualified bill discount programs, but this is a far cry from the equity-focused, income-graduated rate system that they could have proposed.

I was hoping to see progressive income tiers to address the regressivity in existing rates and to account for California's stark racial wealth disparities and regional high costs of living. I was hoping to see fixed charge amounts equitably distributed across our state's wide range of income levels, and reflective of higher-income households' higher carbon footprints. And most importantly, I was really hoping to see lower-income households be defined much more broadly than just customers enrolled in specified utility bill discount programs.

To be eligible for either the California Alternate Rates for Energy program or the Family Electric Rate Assistance program, a household must have an annual income below 200% or 250% of the federal poverty level. Understanding this poverty threshold measure is important since it may determine which households are eligible for a discounted flat rate under the CPUC's IGFC proposal. (CARE customers would pay a discounted flat rate of $6, and FERA customers and eligible deed-restricted affordable housing residents would pay $12.)

Federal poverty thresholds are dependent on household size. For example, in a four-person household, 200% and 250% of the FPL calculates to incomes below $60,000 and $75,000 respectively. A long standing problem with the FPL however is that it fails to account for state and regional cost of living variations. California has a significantly higher cost of living than the national average, plus many in-state areas with even higher living expenses.

For example, in Bay Area cities like Hayward or Richmond, a family of four with an income of $100,000 qualifies as a low-income household, according to area median income standards. Given the high cost of living in these areas, a low-income threshold like this for a four-person household is not that surprising to me. What's surprising is that this family does not qualify for any utility bill discount programs and would therefore be lumped in with all other income-levels under the CPUC's proposal, including with very high-income households.

So, if you are not eligible for CARE or FERA and you don't happen to live in eligible affordable housing, then the CPUC is proposing that your household be billed at the same flat rate as millionaires and even the wealthiest 1% of Californians. This is not an income-graduated rate structure; this is a flat rate charge that poses the same regressivity red flags that it was supposed to address. By proposing a uniform flat rate with limited discounts for CARE and FERA customers, the CPUC's proposal misses the mark.

So where do we go from here?

The CPUC says it opted for a uniform flat rate as the first version of IGFC, using only the existing CARE and FERA income verification process for discounts, for both "ease of administration" and because the CPUC "needs additional time" to develop the income verification processes. The Proposed Decision establishes a working group to develop a proposal to improve processes in the second version of the IGFC.

I can acknowledge the difficulty of designing a progressive income tier system complete with income verification processes by AB 205's statutory deadline of July 1, 2024. But I also feel very strongly that California's leadership in combating the energy affordability crisis must be synonymous with leadership in addressing the needs of those most vulnerable to it. As soaring energy rates threaten to leave vulnerable Californians in the dark, the CPUC's first proposal must prioritize affordability for low-income households and not just those eligible for CARE and FERA. Equity is not just a buzzword, it requires intentional and ongoing work. We can and we must do difficult things.

The Greenlining Institute filed comments on the proposed decision, and we expect the CPUC to act on the proposal during the May 9, 2024 voting meeting. We urge the CPUC to prioritize equity and energy affordability for low-income households over ease of administration for utilities. We call on the CPUC to fiercely commit to embedding equity and Environmental and Social Justice Action Plan principles into the proposed decision as outlined in our comments. We call on the Legislature to look beyond AB 205 as our state needs serious rate reform action to address both California's climate goals and the ongoing energy affordability crisis. Together, we must strive towards a future where our clean energy system is equitable and affordable for all communities.