The Conundrum of Electricity’s Cost In California

Utility Costs And Affordability Of The Grid Of The Future An Evaluation Of Electric Costs, Rates And Equity Issues

May 2021 (California Public Utilities Commission)

Executive Summary

“Senate Bill (SB) 695 (Kehoe, 2009) requires the CPUC to prepare an annual report addressing electric and gas cost and rate trends as well as actions to limit or reduce utility costs. 1 For 2021, the CPUC is taking a different approach to this report in order to provide a longer-term rate forecast and to leverage a wider array of subject matter expertise from within the CPUC as well as externally in academia and the energy industry. The goal is to evaluate longer term system costs and policy risks. The draft of this report (the SB 695 Report or White Paper) laid the foundation for an “En Banc Meeting on Cost and Rate Trends” held on February 24, 2021, which provided a venue for discussing potential options for addressing the trends and impacts identified herein.

The CPUC faces multiple intersecting policy mandates that require a delicate balance to avoid unintended consequences. If handled incorrectly, California’s policy goals could result in rate and bill increases that would make other policy goals more difficult to achieve and could result in overall energy bills becoming unaffordable for some Californians. Electrification goals and wildfire mitigation planning are among the near-term needs, for example, that place upward pressure on rates and bills.

Another regulatory risk that has been identified in prior SB 695 reports and is further detailed in this white paper is a continuing increase in capital investments that are recovered in rate base by the investor-owned utilities (IOUs). While capital investments by IOUs will be necessary to meet California’s energy and climate policy goals, they can result in higher bills for customers. Evaluating the reasonableness of these investments in a cleaner, more efficient grid raises affordability and equity implications that merit further investigation.

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While this white paper does not explore a comprehensive, detailed breakout of all essential cost categories and their incremental impacts on IOU rates, it evaluates select areas of projected costs of specific programs and policy priorities, including transportation electrification (TE) and wildfire mitigation plan (WMP) implementation. The decision to highlight these specific areas of cost is informed by recent findings of staff analysis and the desire to bring their relative impacts on overall rate forecasts into sharper focus within the broader operations and revenue requirements of California’s IOUs. The figures below provide the illustrative impacts of projected wildfire spending relative to the other major bundled2 residential rate components from 2021 through 2030.

The rate forecasts developed as part of this white paper, in conjunction with estimates of natural gas rates and gasoline prices, were used to project total energy bills for a representative high energy usage household located in a hot climate zone based on rates for each of the major IOUs, as presented in the figures below. These projections show that, for energy price sensitive households, bills are expected to outpace inflation over the coming decade. The implication is that, if household incomes are expected to generally increase at the rate of inflation, energy bills will become less affordable over time.

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The policy goals and regulatory requirements that create upward cost pressures appear manageable over a longer time horizon, but if not managed correctly, they could trigger equity and affordability concerns for vulnerable customer populations over the short- to mid-term horizon. There is the potential for a growing divide in the cost of service between customers participating in behind-the-meter (BTM) or distributed energy resources (DER) and those who are less likely to do so. Moderate- to higher-income customers are more likely to invest in DERs such as solar photovoltaic (PV) systems, electric vehicles (EV), and storage technologies, and the advanced rate offerings that support them. This enables them to shift load and take advantage of potential structural billing benefits, which often results in a cost shift onto lower-income and otherwise vulnerable customers. Without the prudent management of IOU revenue requirements, rate base, rate structures, and DER incentives, California’s continued progress toward the optimized grid of the future may widen this chasm between participants and non-participants of DER opportunities.

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There are three critical and overlapping regulatory fronts that must be actively managed to address this fundamental equity risk for vulnerable customers:

1. The costs and timing of fulfilling clean energy and electrification mandates;

2. The relatively rapid pace of rate base growth; and,

3. Revenue shifts to lower-income non-participants from Net Energy Metering (NEM) and other DER incentives

Problem Statement

The need to improve the safety and reliability of the electric system while meeting California’s climate goals and various statutory mandates will require careful management of rate and bill impacts to ensure that electric services remain affordable. As California continues transitioning to a more robust distributed energy resources marketplace with greater deployment of electric vehicles, it will be essential to employ aggressive actions to minimize growth in utility rate base and to protect lower-income ratepayers from cost shifts and bill impacts. This white paper explores the affordability of the grid of the future and is intended to stimulate discussion of potential solutions that will be necessary to ease this transition, particularly for California’s most vulnerable customers.

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Key Findings

Across all three IOUs since 2013, rates have increased by 37% for PG&E, 6% for SCE, and 48% for SDG&E. 4 The growth in rates can be largely attributed to increases in capital additions driven by rising investments in transmission by PG&E and distribution by SCE and SDG&E. While the utilities have made major financial commitments to wildfire mitigation and transportation electrification, these costs have not been fully reflected in rates so far. This paper finds that transportation electrification investments are not expected to contribute to significant rate growth in the near term, but that wildfire mitigation efforts will. Furthermore, higher than national average returns on equity (ROE) are a more modest but not insignificant factor that has amplified the three IOUs’ revenue growth in recent years.

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While tracking rates is important, customers care more about their bills than rates. California bills have typically been lower than most of the country in recent years, but those trends are changing. In 2019, SDG&E’s bundled residential average monthly bill ranked 142nd highest out of about 200 IOUs, even though its rate was among the top 20 highest. PG&E, however, is showing a 2018 and 2019 monthly bill ranking of 94th highest and 70th highest, respectively, meaning PG&E’s bills are higher than most of the IOUs being ranked. Further, SCE’s bills, while still lower than the median (#100 ranking), moved up in the rankings from 136th highest to 122nd highest between 2018 and 2019.

Looking forward, the paper’s 10-year baseline forecast shows steady growth in customer rates (nominal $/kWh) between 2020 and 2030 for the three IOUs:

• PG&E: $0.240 to $0.329, or about an annual average increase of 3.7 percent

• SCE: $0.217 to $0.293, or about an annual average increase of 3.5 percent

• SDG&E: $0.302 to $0.443, or about an annual average increase of 4.7 percent

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By 2030, bundled residential rates are forecasted to be approximately 12 percent, 10 percent, and 20 percent higher, respectively, than they would have been if 2020 actual rates for each IOU had grown at the rate of inflation.5 However, when the analysis focuses on households in the hotter regions of the state, household bills (electric, natural gas, and gasoline) are forecasted to rise at an annual rate of 4.5 percent, as compared to a 1.9% inflation rate.

While the cost to further reduce GHG emissions in the electric sector to 38 million metric tons (MMT) compared to a target of 46 MMT would increase bills by $4 to $9 a month, a well-managed effort to move customers to all electric homes and electric vehicles could result in over a $100 a month reduction in overall energy bills. This means that, in order to avoid large increases in energy bills, customers will need to adopt technologies that require large up-front investments. In the absence of subsidies and low-cost financing options, this could create equity concerns for low- to moderate-income households and exacerbate existing disparities in electricity affordability…” click here for more

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