Californian utilities charging three times more for power than it costs to produce

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A new study released by the Energy Institute at the UC Berkeley Haas School of Business and non-profit think tank Next 10 has found that the three largest investor-owned utilities (IOUs) in California charge residential electricity customers much higher prices compared to other US states.

Energy prices in California are two to three times higher than the actual cost to produce and distribute the electricity provided, the study has found.

The high prices are due to uncommonly large fixed costs that are bundled into kilowatt-hour prices and passed on to customers. The costs cover much of the generation, transmission and distribution fixed costs, energy efficiency programmes, subsidies for houses with rooftop solar and low-income customers, and increasing wildfire mitigation costs.

The study Designing Electricity Rates for An Equitable Energy Transition also found that low and middle-income households carry the burden of the high costs of energy prices. The majority of wealthier households transition to onsite rooftop solar generation hence are charged lesser generation, transmission and distribution fixed costs compared to low and middle-income households.

The release of the study comes at a time an increasing number of Californians are struggling to pay their utility bills. About eight million residents currently owe money to investor-owned utilities, according to the California Public Utility Commission.

California IOUs are predicting energy prices to increase again due to wildfire-related costs. This has pushed the utilities to plan a $15 billion programme over the next two years to prevent wildfire ignitions.

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Other key study findings include:

  • In the least expensive territory, Southern California Edison, residential prices per kilowatt-hour are about 45% higher than the national average.
  • Prices for Pacific Gas & Electric are about 80% higher, and prices in the San Diego Gas & Electric territory are roughly double the national average.
  • From 66% to 77% of the costs that IOUs recover from ratepayers are associated with fixed costs of operation that do not change when a customer increases consumption.

California’s current strategy of recovering a myriad of fixed costs in electricity usage rates must change as the state uses more renewable electricity to power buildings and vehicles on the path to carbon neutrality.

Moving utilities to an income-based fixed charge would allow recovery of long-term capital costs, while ensuring all those who use the system contribute to it and also keeping costs affordable for all families. This model would ensure wealthier households pay a higher monthly fee in line with their income.

F. Noel Perry, founder of Next 10, who commissioned the report, said: “There’s no question that we need to power buildings and transportation with California’s abundant clean electricity. The climate and health benefits will be enormous.

“The question is, how can we change the inequitable and unsustainable way we currently pay for electricity?”

Professors Severin Borenstein, Energy Institute at Haas, adds: “We’re proposing solutions that would recover system costs through sales or income taxes, or an income-based fixed charge, which would pay for long-term capital costs while ensuring all those who use the system—and specifically, wealthier households—contribute equitably.”