Borenstein, Severin “Regional and Income Distribution Effects of Alternative Retail Electricity Tariffs” (October 2011), WP-225: Full Paper
Since 2001, California’s investor-owned utilities have operated with very steep increasing-block residential electricity tariffs, under which the marginal price increases as the customer’s monthly usage rises. At the same time, these utilities have imposed little or no monthly fixed charge, despite the fact that a significant share of their costs do not vary with the customer’s consumption quantity. There are now moves to reduce the steepness of the increasing-block pricing (IBP) and to impose fixed monthly charges (FCs). Building on Borenstein (forthcoming), I examine how such changes would impact different regions of the state and households in different income brackets. I find that, contrary to frequent assertions, IBP does not penalize customers in high-use (i.e., hot) areas on average because the baseline quantities for IBP reflect regional differences in average consumption. In fact, a switch to a flat electricity price would not change average customer bills in these areas. Imposing a FC that is equal for customers in all regions and reducing the price on the higher tiers to offset that revenue would have a slight benefit for customers in hot areas. In my earlier work, I showed that moving from IBP to a flat tariff would harm low-income customers, though the impact is muted by the CARE program, a means-tested program that offers lower rates to low-income households. I examine here the impact on households in different income brackets of imposing a FC and reducing the price on higher tiers to offset the revenue change. I find that low-income households who are not on the CARE program would receive little of the benefit from lowering marginal prices, so the bills of such households in the lowest income quintile (approximately) would increase on average by 69%-92% of the fixed charge. Unlike moving to a flatter marginal rate schedule, imposing fixed charges is likely to have little or no incentive effect for low-income households.