Navigant Research Blog

CPUC Passes Residential Rate Reform

James Hansell — September 3, 2015

The recent California Public Utilities Commission decision (D.15-07-001) to alter the composition of residential electrical rates provides necessary reforms—despite suffering from poor public perceptions. While the changes reduce costs to high energy users and increase electric bills for early energy efficiency and solar adopters, they are a necessary correction to policies implemented over a decade ago during the California energy crisis and a step toward the sustainable growth of renewable energy.

Current Rate Structure

Prior to the energy crisis, the California utilities had two tiers of electric rates. Customers would pay a lower rate for each unit of energy until a baseline quantity was consumed and then a higher rate (only a 15%–20% increase over the base rate) for all additional energy. When utility revenue requirements increased significantly during the crisis, a law was passed to freeze lower rates in order to protect lower-income households from price volatility. Additional tiers were created, and increased revenue requirements were passed to the upper tiers so that the highest rate is now over 200% more than the lowest.

With high energy users paying significantly more than their cost of service, alternative options like residential solar are often in the customers’ financial interests. However, as long as the alternative costs are greater than the cost of service and less than the utility bill, individual incentives drive toward an outcome that is more expensive for the system as a whole. CPUC’s rate reform is an effort toward correcting the price signals while presenting a consistent bill to the customer and continuing to promote energy efficiency and distributed renewables development.

Components of Rate Changes

After consideration of several proposals, the utilities will return to a two-tier system with a 25% difference between high and low. The tier reduction will be implemented gradually from 2015 to 2018 to reduce rate shock to customers. A Super User Surcharge rate of 219% of the first tier rate will be charged for energy in excess of 400% of the baseline in order to maintain an incentive for conservation.

Rate Reform Comparison

Rate Reform Blog Graphic

                                           (Source: Navigant Research)

In the interest of aligning customer bills with system costs, the utilities are allowed to include a minimum bill of up to $10 per month. While residential rates blend energy and delivery costs into a single volumetric rate, the delivery costs are largely fixed and are based on customers’ maximum usage. Even if a customer’s net usage is near zero due to onsite generation, the grid is expected to be available on demand, and the minimum bill reflects this cost.

By 2019, customers will be moved to a default time-of-use (TOU) rate. Cost of service is greater when demand is high in the late afternoon and early evening, and lower overnight when demand is low. Charging customers commensurate with the system costs is expected to drive more efficient behavior. Utilities are required to begin developing pilot TOU tariffs immediately and deliver a final tariff in 2018 for implementation the following year.

Effects on Distributed Resource Economics

While these changes will reduce the incentive for the highest energy users to implement energy efficiency or rooftop solar, bringing the bottom tiers closer to the cost of service may allow for an overall increase in solar adoption. Similarly, customers already driven to solar by high utility rates may see a longer-than-expected payback period because of the flattened tiers. Despite the criticism for lowering costs for high energy users and increasing them for lower use households, the rate reform was a long delayed but necessary correction to support California’s energy policy goals.

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