State Regulator Adopts New Rate Structure for Residential Customers

The commission’s decision helps align rates with the cost of service.

During the energy crisis in 2001, the California Public Utilities Commission adopted a tiered residential rate structure that had unintended consequences — high-usage customers have been paying large subsidies, and low-usage customers have benefited for 15 years.

Recognizing the growing unfairness, the commission adopted a new rate structure on July 3 that is more cost-based, and it will provide customers living in high-temperature areas long-overdue relief from punitive high electric rates. The commission was empowered to make the changes after the Legislature approved AB 327 in 2013, which enabled commissioners to change the rate structure that had been frozen during the energy crisis.

Russ Garwacki, SCE director of Pricing Design and Research, explains what the commission’s decision does — and what it doesn’t do.

Q. There have been reports of widespread, large rate increases for low-usage customers, with some asserting it’s a giveaway to the wealthy. Is that true?

A. There is a lot of misunderstanding about the commission’s new rate structure.

Under the decision, low-usage customers will see an average $1.50-$2 a month increase each year as the changes are phased in over four years. Medium-usage customers will see an average $2 a month bill increase during the same time period, while high-usage customers will see an average $1.50-$2 a month decrease during the transitional time.

What also is important to understand is the single biggest impact happened in 2014 when low-usage customers began to pay rates more aligned with the cost to provide them with electric service. The monthly bill impacts were small, about $3 a month for low-usage customers. Some people have mischaracterized the size of the impacts because they don’t understand what the changes were and what the future changes will be.

Q: Why did it take so long to change the rate structure?

A: The rate structure created during the energy crisis was frozen in 2001 by the Legislature. Over time, with the frozen lower-tier rates, the rate structure departed increasingly from any cost basis and imposed ever greater inequities on large-family households that were pushed into higher tiers in hot climates. The decision helps align rates with the cost of service.

Q: Under the new rate structure, will low-usage customers be subsidizing wealthy customers?

A. There are wealthy customers who are large users, just as there are wealthy low-usage customers. There are two different issues here. First, low-usage customers won’t be subsidizing other customers — this new structure partially corrects the subsidy low-usage customers have been enjoying for 15 years. Since 2001, many of their costs were paid by other customers. Under the new rate structure, low-usage customers will be paying a greater portion of their own costs. They still receive below-cost service.

Secondly, there is a misperception that high-usage customers are wealthy customers. The commission reviewed the evidence and found that this relationship was weak. A significant number of high-usage customers are low-to-moderate income families or seniors on a fixed income, many of whom live in warm climates where the need for air conditioning puts them into the higher-cost, top-tier rate levels.

Q: What about low-income customers? What happens to them?

A. Protections for low-income customers remain in what is known as the CARE program (California Alternate Rates for Energy). Nearly one-third of SCE’s 4.3 million residential customers are on the low-income rate. On average, low-income customers’ bills are about one-third lower than those for other customers — this commission decision preserves the CARE protections for low-income customers.

Q: Some are saying SCE’s profits will increase as a result of this decision. Is that true?

A: No. Changing the structure won’t result in a change in the overall amount SCE collects from all customers or the profit it makes. In other words, the slice of the pie that residential customers pay stays the same. How that slice of the pie will be divided among residential customers is what will change.

Q: Some are saying the new rate structure takes away incentives for conservation. Is that true?

A. No. Incentives for conservation will continue under the new rate structure — in fact, they’ll actually increase. Low-usage customers haven’t had incentives to conserve because their rates had been frozen for years. With the new structure having them pay closer to their cost of service, they will have an incentive to conserve. Conservation incentives will remain in place for high-usage customers. While they’ll be paying lower subsidies, the more electricity customers use, the higher price they’ll pay, which will continue the incentive to conserve.

Q:  What is a minimum bill? Does that mean non-CARE customers will see $10 monthly bill increases, and CARE customers will see $5 monthly bill increases?

A. A minimum bill isn’t a rate increase for most customers. What the commission has ordered is that the total amount of a monthly bill for non-CARE customers will be at least $10, and the total monthly bill for CARE customers will be at least $5. If customers’ bills already are higher than those amounts, their bills won’t change.

Q: What are time-of-use rates, and when will they be implemented?

A. Under time-of-use rates, the cost of electricity depends on the time of day and time of year the energy is being used. Default time-of-use rates are scheduled to take effect in 2019. SCE and the other investor-owned utilities will develop pilot programs for residential customers in the next few months.

Q: What is the timeline for implementing the new rate structure?

A. The new rate structure will be phased in over four years. In 2015, four tiers will remain. The commission is requiring a minimum monthly bill be adopted this year of $10 for non-CARE customers and $5 for CARE customers.

The number of tiers will be reduced to three in 2016, and in 2017, there will be two tiers, along with a super-user surcharge the commission adopted. The super-user surcharge will send a signal to conserve specifically for those customers that use more than twice the monthly average amount of electricity in any given month.