For utilities, the fixed charge offers a stable revenue stream. The companies know how many households they serve, and they can plan on the fixed amounts that those households will pay each month. Households that go solar would still pay the fixed charge, since most of them draw electricity from the grid when the sun doesn’t shine.

This approach provides financial stability for the utility and access to the grid for all. Consumers would benefit because with a certain amount of income guaranteed, utilities could charge significantly less per kilowatt-hour for the actual electricity that households use.

One significant concern is that if electricity costs less, people may use more of it, which could undermine efforts toward energy conservation and lead to an increase in emissions. In our view, the way to address this risk is by fine-tuning the two-part billing structure so that it covers only a portion of the utilities’ costs through fixed charges and incorporates the rest into the variable usage rates.

Put another way, combining a lower fixed charge with a higher variable charge would ensure that utilities can still cover their fixed costs effectively, while encouraging mindful energy use among consumers. Ensuring affordable electricity for consumers, fair cost recovery for utilities and overall fairness and efficiency in the energy market requires striking a delicate balance.

Another argument from critics, often labeled “energy socialism,” asserts that higher-income households might end up subsidizing excessive electricity use by lower-income households under the income-based rate structure. In our view, this perception is inaccurate.

Wealthy households would pay more to maintain the grid, via larger fixed charges, than poorer households, but would not subsidize lower-income households’ energy use. All income groups would pay the same rate for each additional kilowatt-hour of electricity that they use. Decisions on energy use would remain economically driven, regardless of consumers’ income level.

While our research supports California utilities’ approach in principle, we believe their proposal has shortcomings – notably in the proposed income brackets.

As currently framed, households with annual incomes between US$28,000 and $69,000 would pay a fixed fee of $20 to $34 per month. Households earning between $69,000 and $180,000 would pay $51 to $73 per month, and those earning more than $180,000 would pay $85 to $128.

The middle-income bracket starts just above California’s median household income. Consequently, nearly half of all California households could find themselves paying a substantial monthly fee – $51 to $73 – regardless of their actual electricity usage.

It could be hard to convince consumers to pay significant fixed fees for intangible services, especially middle-income residents who have either gone solar or may do so. Not surprisingly, the proposal has encountered considerable pushback from the solar industry.

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