Borenstein, Severin, Fowlie, Meredith, and Sallee, James “Designing Electricity Rates for An Equitable Energy Transition” (February 2021) | WP-314 | Appendix | Github Repository
This report examines the causes and distributional consequences of the high prices for residential electricity charged by California’s investor-owned utilities (IOUs). It also considers reforms that would improve both the efficiency and equity of residential electricity pricing. We estimate avoidable (marginal) costs of electricity and demonstrate that IOU prices are two to three times higher than these cost estimates. California’s electricity prices are high because nearly all fixed costs are recovered through volumetric prices, because of subsidies for low-income households and customers with rooftop solar, and because rates are used to fund objectives not directly related to the provision of electricity. Prices are set to rise further due to wildfire mitigation and other factors. High and rising prices undermine efforts to decarbonize transportation and buildings through electrification. Moreover, we show that the current rate structure is highly regressive, more so than other ways of raising revenue, like a sales or income tax. We discuss the viability of alternative ways of recovering the costs of the electricity system that are more efficient and more equitable, with a focus on the creation of income-based monthly fixed charges on electricity bills.