Posted on February 22, 2013

Tom Bottorff: California’s Electric Rate System is Broken and Needs to be Fixed

By Tom Bottorff

Martha Johnson, senior pastor of Compassion Christian Center in Bakersfield, was shocked when she received a bill from PG&E for $874 in July 2009. “That caught my eye because I’ve never had a bill that high,” she said.

Hundreds of other dismayed Central Valley residents also complained that summer about unexpectedly high bills, triggering protests, hearings and a lawsuit against the utility. An investigation ordered by the California Public Utilities Commission (CPUC) determined that soaring bills in nearly all cases resulted not from utility errors but from rate increases that “compounded the financial impact” of increased customer energy usage “caused by a heat wave.”

The brutally hot weather that summer, which made Central Valley residents crank up their air conditioners full blast, was out of anyone’s control.

Tom Bottorff

PG&E Senior Vice President Tom Bottorff says California's current electric rate system is unfair and inefficient.

But steep electric rates – which reached as high as 44 cents per kilowatt-hour that summer, up from 36 cents a year earlier – were a man-made problem.

They resulted from outdated California laws that make PG&E and other investor-owned electric utilities pass along most of their cost increases to customers who use moderately more than the average amount of electricity in any given month – regardless of where they live or how much they need.

Fresno Assembly member Henry Perea recently introduced Assembly Bill 327, the Ratepayer Equity Act, to help fix the problem and prevent another crisis for California utility customers. It would restore the CPUC’s historic authority to establish a fair and reasonable system of residential electric rates.

Under California law, residential customers pay higher prices for additional electricity – through a system of “tiers” – as they use more. In 2001, after the energy crisis, the Legislature capped rates for the lowest two tiers and for low-income customers who receive special discounts under the California Alternate Rates for Energy program, or CARE. Subsequently, increased costs for utility services were borne entirely by upper-tier users. That dynamic drove PG&E’s top-tier price to an astounding 50 cents in early 2010.

Senate Bill 695, enacted in October 2009, gave some relief by allowing rates in the lowest two tiers to increase gradually. PG&E managed to bring its top rate down to 34 cents today – which is still double the average cost of service, and much higher than utilities outside the state are authorized to charge.

Without further reform, however, top-tier rates will spiral up again as they absorb the bulk of new utility costs for modernizing the state’s power grid, improving electric reliability, and buying clean but costly renewable energy.

By 2022, PG&E’s top residential rate could reach 54 cents – far above the level that triggered protests in 2009 and almost 37 cents more than the lowest tier rate.

It’s no wonder customers unlucky enough to consume in the higher tiers view such rates as punitive. A surprising number of them have modest means. Of non-CARE households with annual incomes between $30,000 and $60,000, about a third pay in the two top tiers, far above the actual cost of serving them.

Meanwhile, many PG&E customers whose usage falls entirely in the two lowest tiers don’t need the subsidies they receive. Of the million households with annual incomes of $100,000 or more, about 40 percent pay only Tier 1 or 2 rates, well below the average cost of service.

Ironically, subsidies for the two lowest tiers also send large numbers of PG&E customers the wrong signal about the need to limit energy use. As a result, some economists believe that California’s tiered rate system has no overall beneficial effect on conservation, contrary to the intent of the Legislature.

In short, California’s current rate system is unfair and inefficient. We need to bring rates back into line with costs and stop penalizing customers who may have limited ability to change their consumption in the face of steeply rising top-tier rates.

Many other experts agree. In December 2012, the prestigious Little Hoover Commission, addressing issues of electric costs in California, issued “a call for rate reform” to spread costs more equitably and give customers more accurate price signals.

To properly respond to the needs of customers, however, the PUC must be given the power to act on their behalf.

That’s why PG&E strongly endorses Perea’s bill to restore to the PUC its traditional authority to craft a system of fair and reasonable electric rates that will most benefit California and its millions of residents.

Tom Bottorff is PG&E’s senior vice president for regulatory affairs. This commentary originally appeared in the Sacramento Bee.


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