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| Fig. 1: Seal of the California Public Utilities Commission. (Source: Wikimedia Commons) |
Residential electricity rates in the state of California have recently become a contentious issue. Californians pay some of the highest electricity rates in the nation and they are continuing to rise, with electricity prices statewide having increased 30 percentage points faster than inflation since 2019. [1] The causes cited for Californias electricity rates being dramatically higher than other states include surging costs to deal with wildfire damages and adaptation, the states ambitious decarbonization policies, and improperly allocated costs of rooftop solar. [2]
Many efforts have been made by governments, non-profits, load-serving entities, and others to address rate reform in the state of California. Here we will explore the status quo and structuring of California electricity rates for most residential customers. We will focus on economic research on the most efficient alternative to the current rate structure. We then explore prospects for reform and political resistance to rate changes across California.
To understand California electricity rate reform, one must understand the process by which rates are actually set. In the state of California, as in the entirety of the United States, electricity rates are heavily regulated by government processes. [1] Most of the customers in the state are served by investor-owned utilities (IOUs), most notably Pacific Gas & Electric (PG&E), Southern California Edison (SCE), and San Diego Gas & Electric (SDG&E), shown in Fig. 1. [1] These IOUs are given a right to monopolize a specific territory for electric service, but in return, follow a heavily regulated process to determine both the revenue they earn and the rates they ultimately charge to customers. [1]
Broadly, this process follows three steps. Firstly, the California Public Utilities Commission (CPUC) determines the revenue requirement for each IOU, or the value of capital investment the utilities can recover in addition to a set rate of return. [1] Secondly, costs are allocated between residential, industrial, and commercial customers, and lastly, residential rates are divided between fixed and volumetric charges. [1] Fixed charges refer to a set charge that is the same for all customers in the same customer class, whereas volumetric charges vary based on the quantity of energy consumed by a particular customer. [1] In the state of California, most costs are recovered through volumetric charges and are as high as $0.45/kWh, as in the case of San Diego Gas & Electric. [1]
The rising electricity rates has led to an outcry among consumer advocates in the state, who note the harm that these high rates have on lower-income consumers. One option for relief has been posited by California Governor Gavin Newsom, who announced in September that millions of dollars of refunds would be distributed to residential customers through a program called the California Climate Credit. [3] The funds for the credit come from Californias Cap-and-Trade Program and will result in a rebate of at least $61 per household. [3] Although Newsoms use of the Climate Credit demonstrates one way of providing relief for California customers, a growing body of economics research proposes that tackling rate structures directly, as opposed to rebates, is the most effective and efficient way to meaningfully lower costs for consumers.
Much economics research has been devoted to finding more efficient alternatives to electricity rates. One major school of thought revolves around changing the consumption charge of electricity to be set equal to the social marginal cost of electricity, as was described by Borenstein and Bushnell. [4] They broadly find that in most places in the United States, consumption charges are dramatically higher than the social marginal cost of electricity. This prevents customers from electrifying in ways that most help decarbonization efforts, for example replacing gas stoves with electric or switching from an IC vehicle to a hybrid or EV. [4] If electricity is priced efficiently, at the combined cost of environmental damage and the cost of generation, then the marginal benefit to society of an extra kWh of electricity is equal to its marginal cost. [4] Economists argue that the mispricing of the consumption charge in California is a key contributor to societal loss in the state. Disproportionately high volumetric rates hurt low income customers and actually discourage the types of electrification, like replacing gas stoves, that actually lead to the greatest societal benefit. [1]
Proponents of higher volumetric charges argue that they encourage energy efficiency and conservation. [1] Though research has found that these higher rates do actually lead to conservation, economists argue the electricity they prevent from being consumed would actually be more beneficial to society than the emissions they carry. [1]
Given that the efficient pricing of the volumetric charge is at the social marginal cost, this would necessitate rate structures to dramatically alter the fixed, monthly charge of electricity consumption. This is where this issue becomes politically thorny and will be elaborated upon in the next section.
The California Public Utilities Commission has the authority to adjust fixed monthly charges for IOUs. [1] However, much resistance stands in the way. For instance, in 2024, a group of 18 California legislators sent a letter to the CPUC claiming that there is little to stop utilities from continuing to increase electric rates once they secure the highest fixed charges in the country. [5] Further resistance exists in the solar industry and in some environmental groups. [5] In addition, higher fixed and lower volumetric rates and likely to raise bills for low-energy users or highly energy efficient users something that would likely face great political resistance and poses a challenge for rate reform.
In conclusion, much research exists about the best prospects in California for electricity rate reform. Economic research has broadly found that setting volumetric costs equal to the social marginal cost of electricity, and adjusting fixed costs as necessary, is the most economically efficient way to meet the needs of customers and fulfill the revenue requirement of the utility. Despite the research behind this, the path faces significant political resistance from various stakeholders in the electricity industry. Regardless of the outcome, Californias residential electricity rate structure is sure to levy major consequences on all of the states residents.
© Emily Winn. The author warrants that the work is the author's own and that Stanford University provided no input other than typesetting and referencing guidelines. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.
[1] G. Petek, "Assessing California's Climate Policies - Residential Electricity Rates in California," California Legislative Analyst's Office, January 2025.
[2] S. Song, "California's Power Rates Are Second Highest in U.S., Soaring Bills Projected to Continue," KTVU Fox 2 Oakland, 9 Jan 25.
[3] V. Catlin, "California to Give Out Millions in Electricity Refunds Next Month; Do You Qualify?" Fox 40, Sacramento, 25 Sep 25.
[4] S. Borenstein and J. Bushnell, "Do Two Electricity Pricing Wrongs Make a Right? Cost Recovery, Externalities, and Efficiency," Am. Econ. J. Econ. Policy 14, No. 4, 80 (2022).
[5] A. Beam, "California Proposal Would Chgange How Power Bills Are Calculated, Aiming to Relieve Summer Spikes," Associated Press, 28 Mar 24.
