TXOGA Analysis: Key Takeaways from California’s Implementation of Income-Based Electricity Rates

The following is an analysis by Texas Oil & Gas Association (TXOGA) Chief Economist Dean Foreman, Ph.D:

The State of California is pursuing a controversial path with recent legislation that enacted income-based electricity prices. The implementation of this initiative under 2022 California energy law, which unless repealed must be completed by July 2024, has sparked furor over its implications for privacy, economic efficiency, and sustainability.[1]In essence, the policy introduces a system where the amount paid by a household for its electricity connection is determined by its income. This approach, unprecedented in its scope and execution, raises profound questions about fairness, privacy, and the fundamental principles governing access to essential services. It has also caused a political backlash, as it has become apparent that the requirement was introduced without debate via a state budget process[2], and lawmakers neglected to understand what they were enacting.[3] California Governor Gavin Newsom endorsed the measure.[4] After nearly two years of regulatory proceedings and implementation, the California Public Utilities Commission (CPUC) proposed to replace the income-based charges with fixed fees, but at least for now the plan remains in place and is a highly charged political and economic issue.[5]

TXOGA is highlighting this issue because it is an object lesson in what can happen when utility system costs rise beyond control and become unaffordable. Consumers ultimately pay the price, and in Texas the average industrial electricity rates have risen by nearly 14% within two years and now stand 10.7% and 15.1% above those in Louisiana and New Mexico, respectively, per the Energy Information Administration as of January 2024.  Since Texas’ economy is the nation’s top industrial electricity consumer, cost increases are important considerations to the Lone Star state. We must learn from and avoid California’s electricity debacle, foster the reliable and cost-effective provision of electricity across Texas, and thereby guard our economic security and energy leadership.

An Unprecedented Approach to Utility Pricing

California’s move to income-based electricity charges represents a radical departure from traditional utility pricing models. Historically, utility rates have been structured around usage and the cost-of-service provision, with considerations for low-income households typically addressed through targeted assistance programs.

By instituting a broad, income-based pricing system, California is navigating unchartered waters, potentially setting a precedent for how other essential services might be priced in the future. However, this shift also introduces complexities and challenges that undermine the initiative’s sustainability and fairness.

Discriminatory and Inequitable

Income-based pricing inherently discriminates between residents based on their income, imposing a financial burden on higher-income households regardless of their actual electricity consumption.

This approach fails to account for the realities of household finances and the economic principles of economic efficiency and proportionality in taxation and service charges. By levying additional charges on higher-income households, which may have invested in energy-saving measures such as rooftop solar panels, efficient appliances, and high-density insulation, the policy penalizes efforts towards energy independence and sustainability.

In some cases, households earning $180,000 or more are now required to pay as much as $200 per month for a “base rate” grid connection and other mandatory fees in some areas, even if they largely self-supply electricity.[6] Higher-income households also may have greater mobility to leave California, eventually threatening the state’s prospective tax base.

In addition, the sliding scale of electricity rates based on income brackets introduces a tiered system that could exacerbate social divisions. Households barely above income thresholds could find themselves disproportionately affected, facing significantly higher charges than their marginally lower-income neighbors. This tiered structure risks creating arbitrary distinctions and unfair financial pressures on middle-class families, challenging the notion of equitable access to essential services.

Privacy Concerns and Invasive Income Verification

Perhaps the most contentious aspect of this policy is the requirement for households to submit their IRS 1040 tax returns to utility companies for income verification.[7] This mandate represents a significant intrusion into personal privacy, exceeding norms for utility service provision. The requirement to disclose detailed financial information to a utility provider raises serious concerns about data security, the potential for misuse of sensitive information, and an erosion of trust between consumers and service providers.

Moreover, this approach marks a dramatic shift in the relationship between utilities and residents, transforming utility companies into de facto agents of income assessment. The implications for privacy of both personal and financial information are profound, calling into question the appropriateness and ethics of such a system.

Unsustainable Solution to Underlying Issues

The rationale for California’s income-based electricity rates—recovering increased systemwide costs—highlights concerns with the state’s energy policy and infrastructure investments. However, it also appears to be a short-term measure that is mismatched with a systemic problem: the need for comprehensive reform in how electricity is generated, distributed, and priced.

The policy does not address root causes of high systemwide costs, such as inefficiencies in the energy grid, the transition to renewable energy sources and increased intermittency, and the need for significant infrastructure investments. Instead, by redistributing the financial burden based on income, the state risks undermining the incentives for energy conservation and investment in renewable energy, ultimately detracting from the state’s broader climate goals.

Conclusion and Texas’ Implications

California’s implementation of income-based electricity charges raises significant concerns for fairness, privacy, and sustainability. The policy serves as a cautionary tale of the complexities and unintended consequences of attempting to foist social equity objectives onto essential utility services.

As Texas policymakers oversee Electric Reliability Council of Texas (ERCOT) and its own dilemma with increased intermittency and systemwide electricity costs for reliability, the introduction of new ancillary services and impending Performance Credit Mechanism (PCM) provide critical junctures for reflection and planning.[8,9]

California’s approach represents an extreme of what can happen when ratepayers are left with the bill for a blank check issued on their behalf by policymakers. And the resulting approach in California, which will impose an increasing burden on the only customers with an ability to pay, could tee off a financial death spiral as well as unintended consequences for energy conservation and investments. Further, it underscores the importance of pursuing policies that ensure sustainability, responsibility, and efficiency of the electricity market without resorting to invasive and discriminatory practices.

As ERCOT administered its ERCOT Contingency Reserve Service in 2023 and seeks to implement the PCM—with a cost upwards of $1 billion—it is imperative that policymakers assess potential impacts on consumers and the broader energy market. By learning from California’s failures, Texas has an opportunity to craft policies that support a reliable, fair, and innovative energy future, ensuring that essential services remain accessible and affordable without compromising reliability, economic security, consumer rights or environmental objectives.

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[1]See Income-Based Electric Bills: Fact and Fiction – Legal Planet (legal-planet.org).
[2]See CA’s income-based utilities saga began with budget misuse | Opinion (calmatters.org).’

[3]See Electricity prices are shocking the lawmakers who voted for them – POLITICO and Bill would end California experiment with income-based… | Canary Media.

[4]See Newsom Stands By ‘Equitable’ Electricity Bills as Opposition Builds (freebeacon.com).
[5] See California regulator takes income-based electric bills| Canary Media.

[6] Income-graduated connection charges range as high as $128 per month for households earning at least $180,000 in annual income, regardless of family size or electricity consumption, and are levied in addition to other charts in some utility service areas. See Income Based Electric Rate System Proposed by California Energy Companies – California Globe and California braces for new electric plan: Make more, pay more | Fox Business.
[7] California utilities sought to have the state utilize a third-party income verification service, but the California Public Utility Commission ruled that utilities should expand their verification for low-income program eligibility to their entire customer base. See docs.cpuc.ca.gov/PublishedDocs/SupDoc/R2207005/6698/520423684.pdf and Required Income Document Guide (pge.com).

[8] ERCOT’s implementation of its Contingency Reserve Service (ECRS) “generated artificial shortages that produced massive inefficient costs, totaling more than $12 billion in 2023.” See IMM Report December 2023.pptx (ercot.com).

[9] See Texas slows development of annual $1B performance credit mechanism designed to boost grid | Utility Dive.

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Founded in 1919, TXOGA is the oldest and largest oil and gas trade association in Texas representing every facet of the industry.

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