California Residential Electric
Rate Redesign

Background

In 2001 during the energy crisis, California passed legislation that froze volumetric electricity rates for a large portion of residential electricity usage (i.e., usage less than 130% of the baseline energy allowance or customer tiers 1 and 2). As utilities' costs increased over the years, because tiers 1 and 2 were frozen by law, increases could only be borne by those customers consuming above 130% of baseline levels (or customers in tiers 3 and 4). As a result, the difference between the lowest and highest tiers has become very large, and rates for tiers 3 and 4 to more than double those for tiers 1 and 2.

In June 2012, the CPUC opened a Rulemaking to examine existing residential electric rate design, with the intention of ensuring that rates are both equitable and affordable for the foreseeable future, including for low-income customers.

 

On October 7, 2013, Governor Brown signed into law AB 327 (Perea), which allows the CPUC greater flexibility in setting residential rates, as well as:

  • Repeals rate increase limitations on energy usage tiers 1 and 2 (up to 130% of baseline) to allow rate reduction in tiers 3 and above.
  • Revises rates for low-income ratepayers, pursuant to the CARE program such that the aggregate discount is between 30% and 35% the bill.
  • Limits fixed charges to $10/month for non-CARE customers and $5/month for non-CARE customers.
    • Fixed charges may not increase by more than the consumer price index each year, starting on January 1, 2016.
  • Allows for a reduction in the number of energy usage tiers in residential rates, but requires rates to have at least two tiers.
  • Prohibits mandatory or default time-of-use pricing before January 1, 2018.
  • Requires the CPUC to develop a new net metering rate, which would become available on January 1, 2017.

In response to AB 327, the CPUC issued a Ruling in October 2013 and created two tracks for the Residential Rate Redesign proceeding.

2014 Rate Changes

The first track addressed near-term issues of incremental changes to residential rates in 2014 that would allow increases to rates for usage in the lower tiers.A Settlement Agreement amongst the utilities, ORA, and other consumer groups was filed with the CPUC in March 2014, which would establish mechanisms to make progress in reducing the tier differentials while taking into account the negative impacts the changes would make on some customer bills. The CPUC issued a Final Decision in June 2014, adopting the Settlement.

Long-Term Rate Design Structure

In this phase the CPUC considered whether alternative rate designs having fewer usage tiers can better achieve the state’s electric rate design objectives. The CPUC also considered whether and how the utilities should transition to time variant pricing, which is a pricing strategy where electric prices are based on the time when electricity is used.This longer term track continues to examine optimal rate designs consistent with the 5 key principles outlined in the CPUC’s 2008 Rate Design Decision:

1. Be based on marginal cost.

2. Be based on cost-causation principles.

3. Encourage conservation and reduce peak demand.

4. Provide stability, simplicity and customer choice.

5. Encourage economically efficient decision-making.

Utility Proposals

On February 28, 2014 the utilities submitted Rate Design proposals to the CPUC, requesting:

  • Move quickly to undo a decade’s worth of rate increases on the upper tiers in three years.
  • Ramp-up quickly to statutory maximum fixed charge of $10 per month for non-CARE, and $5 for CARE.
  • Did not address the effect of increasing rates on bill impacts, when combined with expected revenue increases.

PG&E: 

  • Impose $10 fixed charge by 2017.
  • Reduce rate tiers from four to three in 2015, then to two tiers in 2018.
  • Introduce monthly fixed charge:
    • 2015: $5
    • 2016: $10
    • Ensuing Years: inflation adjustment

 Edison  

  • Increase fixed charge to $10 for non-CARE and $5 for CARE customers by 2017.
  • Reduce tiers from four to two between 2015 and 2018 and reduce the price difference between the high tiers and low tiers to pre-energy crisis levels.

SDG&E: 

  • Introduce monthly fixed charge:
    • 2015: $5
    • 2018: $10 plus an inflation adjustment
  • Transition to 2 tiers starting in 2015, with a 20% differential between the tiers by 2018

Evidentiary Hearings on long-term rate design issues were held at the CPUC in November 2014.
 

CPUC Decision

On July 3, 2015, the CPUC issued a revised Decision that would order:

  • No fixed Charges in Near Term: The reasonableness of monthly fixed charges is to be determined in future rate design proceedings. While rate flattening efforts are underway, it is a bad idea to impose new fixed charges.
  • Minimum Bills: Minimum bills are preferred to fixed charges in the short run, and the limitation on fixed charges does not apply to minimum bills, but it is reasonable to maintain the same cap.
  • Tiers: Key next steps are to reduce the number of rate tiers to two. For a small number of very large users (consuming at or above 400% of baseline), a “Super-User Surcharge” would be added in 2017 to tiered rates but not Time-of-Use rates.
    • Though a transition to a 2-tiered structure (with a 25% differential) by 2019 was stated as a goal, annual increases in baseline rates are limited to the residential average rate increase plus 5%. SDG&E is allowed to transition to2 tiers more quickly than the other two utilities.
       
  • Default Time-of-Use (TOU) Rates: Utilities must file Rate Design Window applications with the CPUC by January 1, 2018 to roll-out default TOU rates in 2019 (and the utilities may propose fixed charges at that time).
  • Interim TOU Pilots: Pilot studies testing various optional Time-of-Use rate designs will be conducted in 2016 to 2018.
    • The optional rates in a pilot should include rates a baseline credit.
    • Options without a baseline credit also are allowed.
    • “Progress in Residential Rate Reform” workshops will be held twice annually.
    • Stakeholder Working Groups were established for the Pilot and Marketing, Education & Outreach.
     
  • Phase 3:A new third phase will be established to investigate:
    • Interpretation of state law required for vulnerable customer groups.
    • Data requirements for utilities' 2018 interim Residential Rate Design requests, which will launch default Time-of-Use rates in 2019.
    • CARE restructuring under AB 327.
    • Options for leveraging the FERA, the federal low-income program, to provide direct incentives to large income-qualified households.

ORA Position

ORA supported the need for California to address the unintended consequences of legislation passed in 2001 during the energy crisis that froze volumetric electricity rates. ORA supports the need to reduce tier rate differentials.However,ORA advocates that the CPUC consider the cumulative rate impacts of correcting these rate differentials over time. In order to make improvements to residential electric rate design, ORA worked with other stakeholders to shape AB 327 as well as to develop a policy framework that will allow the CPUC to consider residential rate designs that utilize time-of-use meters (“smart meters”). This will allow California to benefit from ratepayers’ investment in this technology and encourage energy conservation by giving customers the tools needed to adjust energy usage to reduce bills.

ORA is advocating on these key policy issues for long-term rate redesign:

New Fixed Charges: ORA opposes the imposition of new fixed charges (monthly fees that will not vary based on customer usage) because fixed charges reduce a customer’s incentive to manage their energy usage, conserve energy, and would disproportionately harm customers that use the least amount of energy per month.


Reducing Tier Differentials: ORA supports carefully reducing tier differentials to avoid rate shock to customers. One factor that will affect the speed of reducing tier differentials is the increase in utility costs. If the CPUC approves large utility revenue increase , the large bill impacts on low-usage customers will need to be taken into account and more time will need to be taken in collapsing tiers.


Time of Use Pricing: ORA supports moving to Time of Use pricing for residential customers, and ensuring customers may choose an alternative tiered rate option. ORA supports a gradual return to a two-two tier system (with a standard per kilowatt hour rate, and a lower rate for baseline energy usage) with the intention of moving to a “time of use” pricing structure.ORA supports Time of use rates that would have different rates for peak and non-peak consumption hours, as opposed to tiered rates where a customer faces higher rates once a specific amount of energy is consumed during a billing period.Time of Use rates will more efficiently target the most expensive and polluting hours for producing energy, and give customers greater ability to adjust their consumption to reduce their bills.

See ORA's June 11, 2015 Comments on the Alternate Proposed Decision.

See ORA's May 11, 2015 Comments on the Proposed Decision.

See ORA's May 18, 2015 Reply Comments on the Proposed Decision.

See ORA's January 5, 2015 Opening Brief.

See ORA's September 15, 2014 Testimony on 2015 Rates and Beyond: ORA Rate Design Proposals & Response to Scoping Issues.

See ORA's September 22, 2014 Brief on Time of Use Pilots.


 

Proceeding Status

See the Proceeding docket.

Resources

Senate Bill 695 (2009, Kehoe) – previous California rate design Legislation.

History of ORA's Position