July 15, 2024 by Phillip Quadrini
I used to design PG&E rates. Here’s how to fix some of California’s recent inexplicable fee changes
How do we lower rates for electric vehicles and heat pumps in a manner that treats all residential customers equally? There's an easy four-step answer
The California Public Utilities Commission recently approved a fixed monthly fee of $24.15 that will be added to most electric bills, coupled with a 10% reduction in electric rates. It was enacted out of fear that California’s exorbitantly high electric rates would make customers less likely to purchase an electric vehicle or heat pump. However, the $24.15 fixed monthly fee is a very blunt instrument. In an attempt to fix one problem, it creates another: Lower-income customers who use less electricity will pay more while higher-income high-volume users will pay less.
Fortunately, electric rates can be redesigned to do the opposite while significantly lowering the cost to charge an electric vehicle or power a heat pump — all without the $24.15 fixed monthly fee.
How can I say this?
I designed PG&E’s residential electric rates for a quarter century, from 1994 to 2018, first as a senior rates analyst and later as a regulatory analyst. This included testifying multiple times before the California Public Utilities Commission on electric rate matters concerning the residential and small commercial classes. I designed California’s first electric vehicle rate in 1995 and its first battery storage rate in 2018.
PG&E has about 800,000 small-use residential customers with modest incomes — many are seniors — who mostly live alone in small apartments. Because they are not poor enough to qualify as low-income, their electric bills will jump by 20% to cover the $24.15 fixed monthly fee. Those with the highest incomes and highest electric usage, the 5% of customers who use 3½ times the average, will see their bills drop 7%. In dollar terms, this will be a $16 per month increase for customers who use the least power and a $55 per month decrease for the highest-use and wealthiest customers — without requiring they purchase an electric vehicle or heat pump.
That makes no sense.
Fixing this is actually quite easy. But it requires a basic understanding of how residential rates are designed.
California has a two-tiered residential rate structure that ensures that an individual with a modest income and housing can purchase, at the discounted Tier 1 rate, the minimum amount of gas and electricity necessary to live. These minimum amounts are called “baseline allowances.” State law generally sets them at 50% to 60% of average electric consumption and 60% to 70% of average winter gas consumption. The state has also established climate zones so those living in extreme climates, such as Bakersfield, receive higher baseline allowances than those living in mild climates, such as San Francisco. The Tier 1 (baseline) rate is set 25% below the Tier 2 rate and applies to about 55% of total electric usage within each climate zone. Redesigning these rates to lower most customers’ bills can be done. Here’s how:
1. Lower the current Tier 1 rate by 10%, the same level under the newly adopted fixed monthly fee.
2. Increase the percentage of total residential usage eligible for the discounted Tier 1 rate from 55% to 80%. As a result, more than 80% of customers would see most, or all, of their Tier 2 usage converted into Tier 1 usage and charged the lower rate. Their average bills would drop about 11%.
3. Raise the Tier 2 rate to make up for revenue lost in Steps 1 and 2. Consequently, the 5% of customers who are the highest users would see bill increases ranging from 10% to 35%.
4. Require that all residential rate schedules be tiered. Currently, two un-tiered electric vehicle rates provide large discounts to high users for their entire usage, not just for charging their electric vehicles. Incentives to charge an electric vehicle at home should be the same for everyone.
This brings us to the original issue. How do we lower rates for electric vehicles and heat pumps in a manner that treats all residential customers equally, without resorting to a $24.15 fixed monthly fee? Again, this is quite easy.
The average electric vehicle uses 300 kWh to travel 1,000 miles per month, or about 250 kWh for a plug-in hybrid and 350 kW for an all-electric vehicle. The solution then is to increase a household’s total baseline allowance by 250 kWh or 350 kW per month for each electric vehicle. This is already done for customers with qualified medical conditions, who typically receive an extra 500 kWh per month in baseline allowances. The same could also be done for customers with heat pumps for space heating and water heating. The result would be that all customers pay the same low rates for their electric vehicles or heat pumps regardless of their income or other usage.
These solutions might sound complicated, but they are not. I would be happy to explain it to the California Public Utilities Commission and the state Legislature if they'll have me.
Philip Quadrini analyzed, designed and managed energy-efficiency programs as a 25-year PG&E employee before moving on to electric regulation. He lives in Sausalito.