In this episode, host Daniel Raimi talks with Meredith Fowlie, an associate professor at the University of California, Berkeley, and a faculty director at the Energy Institute at Haas. Fowlie contends that high electricity prices—an especially pronounced problem in her home state of California—disproportionately burden low-income households and discourage necessary electrification efforts. Reflecting on her own research, Fowlie considers a variety of potential reforms to electricity bills, such as shifting costs to wealthier households, and contends that better data are needed to understand how utilities are paying for climate mitigation efforts.
Listen to the Podcast
- Reasons for high power bills in California: “The key reason that California per-kilowatt-hour prices are high is that … we don’t pay much of a fixed charge at all, and instead, we’re paying these costs on a per-kilowatt-hour basis. So, what are these costs? They are infrastructure costs—transmission and distribution and power plants. They’re public programs like energy efficiency programs and subsidies for rooftop solar. And, increasingly going forward, [they] will include wildfire mitigation costs … A lot of different costs are showing up in those per-kilowatt-hour rates.” (7:42)
- High electricity costs may imperil decarbonization efforts: “There’s an emerging consensus that the most promising path to deep decarbonization runs through the power sector. The basic idea is to decarbonize the grid and electrify all sorts of things, from the car in my driveway to the water heater in my basement to some industrial applications. To make that happen, we need people, households, and firms to trade in their gas car for an electric car. But who wants to electrify when prices are so high?” (11:49)
- Adapting electricity policy as climate change progresses: “Where we’re heading with this is to ask the question, Should we be paying these costs on electricity bills? I think many of them boil down to climate change mitigation and adaptation investments. We don’t pay for floodwalls in water rates, so should we be paying for vegetation management in electricity rates, particularly given the affordability concerns?” (25:29)
Top of the Stack
- “Designing Electricity Rates for an Equitable Energy Transition” by Severin Borenstein, Meredith Fowlie, and James Sallee
- “Competitors to lithium-ion batteries in the grid storage market” episode of the Voltscast podcast with David Roberts
- Timber Wars podcast from Oregon Public Broadcasting
- Resources Radio podcast from Resources for the Future
- “Why Animals Don’t Get Lost” by Kathryn Schulz
The Full Transcript
Daniel Raimi: Hello and welcome to Resources Radio, a weekly podcast from Resources for the Future. I'm your host, Daniel Raimi. Today, we talk with Dr. Meredith Fowlie, associate professor in the Department of Agricultural and Resource Economics at UC Berkeley and faculty director of the Energy Institute at Haas. Along with her coauthors, Meredith recently published a working paper on the causes and implications of high electricity prices in the state of California. These high prices not only burden low-income households, but they also pose a hurdle to reducing emissions by electrifying transportation, heating, and other sectors. In today's episode, Meredith will describe proposals for reforming electricity pricing in California to address this complex and evolving challenge. Stay with us.
Okay. Meredith Fowlie from the University of California at Berkeley. Thank you so much for joining us today on Resource Radio.
Meredith Fowlie: Thanks for having me.
Daniel Raimi: So Meredith, today we're going to talk about a new working paper that you have out with a couple of colleagues called “Designing Electricity Rates for An Equitable Energy Transition.” But before we talk about the paper and the topics that surround it, can you tell us how you ended up working on environmental issues?
Meredith Fowlie: Sure. I think it started at summer camp. I grew up in Toronto, which is a really big city, but I was fortunate to spend my summers at camp. This was a pretty old school camp, so we would take these long canoe trips through Algonquin Park and Temagami. This was my happy place, but it was also like the late 1980s and early 1990s, so the impacts of acid rain were pretty hard to ignore. We were canoeing through these lakes with dying trees, and this had a pretty profound impact on me.
So, I wanted to learn more about the problem. I learned that we pretty much understood what the problem was, and that we even had some ideas as to how we could solve it, but the problem was still there. So I think that's when I started getting interested, not only in environmental issues, but environmental economics, because I was understanding that you can understand the problem and you can even have the technologies to solve it, but if you don't have the incentives to use those solutions, you still have a problem. So it all led back to lakes in Ontario.
Daniel Raimi: Wow. That's so cool. Did you end up studying environmental science or economics or something like that when you were an undergrad?
Meredith Fowlie: I went to Cornell and I went to do ecology because I was still thinking that it was just that we had to just better understand the problem. I stumbled into an environmental economics class taught by Duane Chapman and in one of his opening lectures, he talked about the acid rain program and I was completely taken. So I spent a lot of time in Duane Chapman's office.
Daniel Raimi: Yeah, that's great. Well, so as I said, today we're going to talk about a recent paper that you have with colleagues on electricity pricing. I think it will be useful to start off with some very basic background material, which will actually be useful for me in my day-to-day life. We all pay electricity bills on a monthly basis, but I have to admit, I never look at them. Most people probably don't look at them very closely. It's kind of a privilege to be able to do that, frankly, but that is a reality for me and maybe for some of the other listeners of the show. Can you start off by describing to us, just in general terms, what are we paying for when we pay an electricity bill?
Meredith Fowlie: Sure. And I'll start by admitting that I study this stuff and I don't look at my electricity bills very often, like you said, it's a privilege. Ours is a direct billing, so they just take it out of our bank account, and I rarely notice. I think one reason we don't pay close attention to what we're paying for every month is because they're so complicated to unpack. Right? So when you drive up to the gas pump, the price is there on a big sign, but when you open your bill, it's just a mess of tables and figures and formulas. So it's complicated.
And the other thing is that the units aren't super intuitive. So you think about the dishwasher loads you run, or in my case, the miles I drive, but it's hard to map those into kilowatt-hours. So like, when you think about a kilowatt-hour, my dishwasher consumes about a kilowatt-hour, my Chevy Bolt consumes about 29 kilowatt-hours for 100 miles, so that sort of puts at least into perspective what we're even talking about.
But most bills, when you sort of pick through those tables and charts, can be broken down into two parts: one is the cost per kilowatt-hour, and then you've sometimes got some fixed charges that don't depend on how much you consume every month. In terms of pricing per kilowatt-hour, depending on your utility, many utilities have staircases, which means the price you pay for the next kilowatt-hour depends on how much you've already consumed in that month. So you can see why it gets complicated quickly, because depending on where you live, what your staircase looks like, and how much you're paying per kilowatt-hour, prices really vary. But that's really the lay of the land when it comes to that complicated bill that you get every month.
Daniel Raimi: Great. We're going to talk about some of those fixed charges in particular, but maybe just to ground listeners, can you help us understand what those fixed charges are paying for? Like what are the physical assets they're paying for?
Meredith Fowlie: So here in California, as we'll talk about, we don't pay much in fixed charges at all. But I think the key that you're getting at, which is going to be really central to this work that we're doing, is that when we consume electricity, there's some basic costs that you have. When I run my dishwasher, electricity needs to be generated. So there's costs of the fuel that's consumed, if it's a fossil fuel, there's costs of the emissions that are released. If I'm running my dishwasher load at peak time, which I shouldn't be, but suppose I do, maybe there's a little bit of investment we had to make in transmission or generation to make sure that there was supply right when I demanded it. So there are these incremental costs that really depend on how much you're using at a given time.
But then there's a lot of fixed costs in the electricity sector, from big power plants that we're building or transmission infrastructure. Those costs don't depend on how much we're consuming at any given time, but are costs that we do recover in our rates. So what really varies across, depending on what utility you purchase from and where you live, is how much of those costs are recovered from you in a per kilowatt-hour rate and how much of those costs are recovered through a fixed charge that you pay every month regardless of how much you consume.
Daniel Raimi: That is super useful. Thank you so much. So let's dig now into the specifics of your recent work. The paper that we're going to talk about is really focused on California. One thing that some listeners might know is that California's electricity prices, on average, are higher than the national average. So can you start us off just with some basic reasons for why that is?
Meredith Fowlie: I can, but first, I want to make sure I'm clear that this is a team effort with my excellent colleagues, Severin Borenstein and Jim Sallee. So when I say we, that's who I'm referring to. California retail prices are high, and they're increasingly out of line with the rest of the country, and that's really the point of departure for this paper. What got us thinking about this was just trying to figure out why prices are so high and rising. I should mention that we're focusing on exactly the point where you started this conversation: the residential electricity prices, so what households are paying on their bills. We're also focusing on investor-owned utilities who supply most of the electricity in the state.
So the key reason that California per-kilowatt-hour prices are high is that … we don’t pay much of a fixed charge at all, and instead, we’re paying these costs on a per-kilowatt-hour basis. So, what are these costs? They are infrastructure costs—transmission and distribution and power plants. They’re public programs like energy efficiency programs and subsidies for rooftop solar. And, increasingly going forward, [they] will include wildfire mitigation costs … A lot of different costs are showing up in those per-kilowatt-hour rates.. So it's basically climate change adaptation that we're having to do in terms of vegetation management and grid hardening. A lot of different costs are showing up in those per kilowatt-hour rates.
Daniel Raimi: Yeah. That makes sense. And hopefully we'll have time to come back to that wildfire question in particular. There are some pretty obvious reasons why high electricity prices are not desirable, like the negative economic impacts, particularly for low-income households. You also highlight another really important downside of high electricity prices, which is that they could discourage the electrification of other parts of the economy. So you mentioned your Chevy Bolt: if you're paying high electricity prices for your Bolt, people might not buy Bolts, and they might buy some other vehicle that is more emissions-intensive. Can you just talk us through both of those major downsides to the high electricity prices?
Meredith Fowlie: Yes, I would be happy to. I want to plug another one of your podcasts that I think you did recently, because I think depending on where in the country your listeners live, some of them might not think it's not so obvious that electricity prices are too high. Because if conventional electricity production generates harmful emissions, you might think that we should actually be raising electricity prices to incentivize energy efficiency investments and conservation and things like that. So before getting into why prices are too high, I just want to underscore that fact and promote some work by Severin Borenstein and Jim Bushnell. They've been looking across the country and asking the question, are electricity prices too high? So they compare electricity prices paid by consumers to the marginal social cost, that cost I was talking about earlier with my dishwasher, or the fuel costs and the emissions costs. They do find that right now, a majority of Americans pay electricity prices that are above marginal social cost.
To give you a sense of how far above I'm going to come back to our paper. So for example, in my utility, Pacific Gas and Electric, which is the largest utility in the country, we estimate the social marginal costs of using electricity. Like, I turn on my lights, and what is the cost incurred by society overall, including the greenhouse gas costs? We estimated a social marginal cost of about 8 cents. Customers like me pay about 25, 26 cents, so that's a big gap between what it's costing to consume that electricity and what we're paying.
Getting back to your question, there's two reasons we should be losing sleep over that gap, which is only going to get bigger if we don't change course. One, as you hinted out, is sort of affordability and equity-related. What we're doing is we're taxing electricity consumption. We're raising revenues by pushing electricity prices higher than the true cost. It turns out that that's a really regressive way to raise revenues, even more regressive than consumption taxes and income taxes and gas taxes, because low-income households spend a disproportionate share of their annual or monthly expenditures on electricity. Increasingly, we're also finding that high-income customers don't consume much more than low-income customers. So it's loading a burden on households who are struggling to pay. That's the first reason to be concerned about these high electricity prices.
The second, which you talked about, is that there’s an emerging consensus that the most promising path to deep decarbonization runs through the power sector. The basic idea is to decarbonize the grid and electrify all sorts of things, from the car in my driveway to the water heater in my basement to some industrial applications. To make that happen, we need people, households, and firms to trade in their gas car for an electric car. But who wants to electrify when prices are so high? Those are sort of the two reasons we point to as reasons to be really concerned about these high electricity prices: both the affordability concerns, but also that we're basically putting a barrier in our most promising path to where we want to get to in terms of decarbonization.
Daniel Raimi: Yeah, absolutely. We've talked on this show before about some of the ways that the federal government tries to address that distributional issue. You mentioned low-income households struggling to afford their electricity bills. California also has programs to do similar things, which are particularly important given the high electricity prices that you just described. So can you give us just maybe a quick rundown of some of the major policies that do that at the federal level and in the state of California? Also, I know this isn't your area of expertise, but to the extent you can, could you help us understand what we know about the effectiveness of those programs?
Meredith Fowlie: Like you said, I'm not an expert in the span of federal programs we have in place, but we do have a number of programs in place. I will say the list is getting longer as states try to respond to the devastating level of utility debt that accumulated over the course of the pandemic. Wearing my empirical researcher hat, it can be really hard to evaluate these programs, because they're typically rolled out in a way that kind of confounds program evaluation, because households that are motivated to participate in these programs are often in more need of assistance than those who don't participate.
Daniel Raimi: Right.
Meredith Fowlie: So what we typically try to do, when we're trying to figure out the impact these programs are having, is to carefully compare participating households to non-participants. But it can be really hard to know what to make of differences across those two groups. Is it due to the program participation difference, or is it due to these other factors that drove some households to take up the program and others not to? So, sort of a shameless plug for the research agenda we have going on right now. We're really trying to work with utility companies before we roll out some really innovative programs, targeted at helping low-income households afford their electricity bills, to try and design and implement these programs in such a way that we can learn what's working and what's not. These are important programs and we want to target our scarce resources effectively.
So, post pandemic, California utilities are poised to roll out an arrears management plan type of program, which basically offers to households who do have utility debt the following proposal: if households can pay their bills over the next 12 months, they can incrementally reduce the debt that they owe the utility to the point that if they pay the bill consistently over a period of 12 months, that debt gets eliminated. There are some innovative programs being put in place to try and help households get back on track and relieve them of some pretty large utility debt. I think the most important program we have in place right now is this California Alternative Rates for Energy program. I'm trying to define my acronyms, so that's CARE.
Daniel Raimi: Thank you.
Meredith Fowlie: This program is really important. It offers a pretty significant discount on energy prices for low-income households. For electricity, the discount is 30 to 35 percent on the price that households pay per kilowatt-hour. The one thing to keep in mind is that using our estimates, these CARE customers—these low-income customers—are still paying twice our estimate of the efficient price that is the social marginal cost. So, we're still taxing these low-income households to raise these revenues. While the program is really important and it does offer a significant subsidy, it's still the case that these households are paying a price that's far above the social marginal cost. Even with this program, households are still struggling to keep up with their energy bills. Right now in California arrears now exceed a billion dollars, which is up from, I think, $400 million pre-pandemic.
Daniel Raimi: Wow.
Meredith Fowlie: This is a fraught conversation. The question has been posed, why are we using electricity bill assistance to address some of our concerns about redistribution and income inequality? It's clear that these bills, or struggles to pay bills, are a symptom of deeper problems. What our paper tries to advance is this observation that we are taxing electricity. This is a really regressive tax and we should be looking for alternative ways to raise needed revenues.
Daniel Raimi: Yeah. And so let's transition now. We’ve been describing the problem, if you will, over the last few minutes, you and your coauthors propose some alternatives to the policies that are currently in place, or maybe some additions to the policies that are in place, to address this issue of high electricity prices. Can you lay out for us what some of those proposals are?
Meredith Fowlie: Yeah. I think one solution would be to move some of these costs that we're loading into electricity prices onto a different tax base. This is an example from Severin, my coauthor, who's always good at thinking of really illustrative examples. If you cut down a tree next to a power line, you're paying for it with electricity bills. Right. You're putting that cost into rates, because it's the utility that's responsible for cutting down that tree. If you're cutting down a tree also to manage wildfire risk, but it's far from a power line, then that cost gets put on the state budget. Some of the costs we're putting into electricity rates are for things like climate change adaptation. So I think we should be asking the question, why are we putting these costs in the electricity bills, given the equity and the efficiency implications of doing so?
One solution would be to move some of these costs out of electricity rates. But raising these kinds of taxes, such as a carbon tax or an income tax or gas tax, would be less regressive than the electricity tax, but raising these taxes can be a heavy political lift. I think that's why we see some of these costs put into electricity rates.
So what we did was also think, suppose we can't raise other taxes. We still need to raise these revenues from electricity customers. Is there a better way to do that? And we said we're economists, so the first step is to get these prices right: the price per kilowatt-hour. So let's say we've set the electricity price per kilowatt-hour equal to our best estimate of what it costs society, the social marginal cost. If we do that, then the prices are quite a bit lower so we have all these other revenues that we still need to recover. So then we thought, okay, well, how can we do it more fairly than we do it right now? And we also had to think about various administrative and legal constraints that are going to limit our choice set.
But what we basically proposed is some ideas for getting the conversation started. The point of departure is to recover the remaining revenues that we need to recover in income-based fixed charges. The idea would be to have income categories, and as you step up in income, you pay a larger fixed charge. To put this in perspective, if we set the rate equal to our social marginal cost estimate, we'd have a cost recovery gap of over $4 billion.
So we would need to spread that out over the residential customers. If we spread it out equally, that's $75 per month. But if instead we said, okay, the lowest income category is going to pay no fixed charge, and those customers will just pay the social marginal cost per kilowatt-hour. Then the highest income category would pay a monthly charge of about $150 per month. That sounds like a lot, but remember, we're paying lower per kilowatt-hour rates. So the monthly bills of those high-income customers would increase by much less, maybe $50 on average, but we are shifting that fixed cost recovery burden onto households that are in a better position to pay it.
Daniel Raimi: That's so interesting. It's kind of analogous to just like marginal income tax rates for higher income earners.
Meredith Fowlie: Exactly. So, in my little example that I just talked about, we made that staircase commensurate with the progressivity of the sales tax. If we'd made it commensurate with the progressivity of the income tax, that last step would be much higher. So you can do it in any number of ways. We were just trying to think through how one could do it and what that would imply for the cost burden across households.
Daniel Raimi: One of the really nice things about this concept is that, as you say, people are still paying the marginal cost for the actual electricity they consume. So it doesn't distort behavior in ways that we might not want.
Meredith Fowlie: That's right. I don't know if time permits, but I wanted to flag one important way that the current rate structure has been distorting behavior. It's one that's fairly controversial at the moment in California. When you're a high-income customer—I'm fortunate enough to be in this category—and you're paying really high electricity prices, like 25 or 26 cents, you've got an outside option and that is to invest in solar panels on your roof.
So we put solar panels on our roof because our electricity rates were really high. I'm producing electricity right now, it's powering my laptop as I speak to you, and that means I'm avoiding paying that 25 cents. Right. But the cost we're actually avoiding is closer to 8 cents. What this has meant is that as more and more households adopt solar panels, that shifts the fixed cost recovery onto the households that don't have solar panels, and the households that consume more of their electricity from the grid. And, because solar panels have been adopted, on average, by wealthier homeowners, there are equity implications to that cost shift. So it does get complicated quickly when you have these high prices that distort choices on intensive and extensive margins.
Daniel Raimi: Yeah, absolutely. And I can't resist, but I have a new tool that I have started using here on the podcast, which is the acronym bell. And it goes like this.
Meredith Fowlie: Oh, no I thought I had—
Daniel Raimi: So, it wasn't actually an acronym, but you said intensive and extensive margins, which I think our non-economists probably won't get. So could you just quickly explain for us what those terms mean?
Meredith Fowlie: Yeah. What I should have said, when I see my high electricity bill, I might use electricity less intensively. I might run around and turn off lights and tell my daughter to have shorter hot showers so our electric water heater isn't working so hard, or I might change my investment decisions, or I will be less likely to adopt an electric water heater because my prices are so high. Thank you for keeping me honest.
Daniel Raimi: Sure thing. So listeners might be hearing this a little more often now in the show, but it's my child's xylophone that I have taken as the acronym bell. In any case, back to one more question before we go to our final Top of the Stack segment. We alluded to this a little bit earlier in the conversation, and you brought it up a couple of times already: the role of wildfires. We've done several episodes here on the podcast about wildfires in California and their connection with the electricity system. What do you and your coauthors suggest for this really challenging issue of addressing wildfire risk while still trying to maintain reasonable electric rates in California?
Meredith Fowlie: This is a really great question. And really, the main thing we suggested in our report, which I should have mentioned as the first chapter in a longer research agenda, was a suggestion or a plea for better data. Because when we set out to answer this question, we realized it was really hard for us to disentangle. For example, we know what utilities are spending on transmission infrastructure or distribution system infrastructure, but what's hard to disentangle is which of those investments are made for wildfire risk mitigation, and which are just made for improving and sustaining the system. I do think it's going to be important to disentangle those pieces. I'm wary of the xylophone, so I will define this acronym: the California Public Utility Commission, or the CPUC, is also looking very carefully into this. They are starting to collect the data we'll need to divide these costs into “wildfire category” and “other.”
What they conclude is that wildfire costs probably haven't hit the rates too hard just yet, but they are coming into the rate base as utilities make these investments in vegetation management and system hardening, and they project pretty significant impacts on monthly bills by 2030. I think the baseline scenario was like 3 cents per kilowatt-hour in 2030. That's a pretty significant increase.
I think where we’re heading with this is to ask the question, Should we be paying these costs on electricity bills? I think many of them boil down to climate change mitigation and adaptation investments. We don’t pay for floodwalls in water rates, so should we be paying for vegetation management in electricity rates, particularly given the affordability concerns? I should say, this is preliminary work because we just don't have the data we need just yet, although the California Public Utility Commission is working to improve that situation going forward.
Daniel Raimi: That's so interesting, and it sounds like a good episode for a future podcast once the data are available and you're able to do some analysis, because that's the sort of thing that we're going to see around the country in a variety of contexts.
Meredith Fowlie: Certainly in the Pacific Northwest, yeah.
Daniel Raimi: Yeah. Well, Meredith, this has been so interesting. Really fascinating work with Severin Borenstein and Jim Sallee. We really appreciate you coming on the show. We'll close it out now with our regular Top of the Stack question, which is asking you to recommend something that's on the top of your literal or metaphorical reading stack that can be related, even if tangentially, to the environment.
I'll start with an article that I read a few weeks ago that I still think about almost every day when I see birds flying overhead, which is this article in the New Yorker called “Why Animals Don't Get Lost.” It's from the April 5th issue of the New Yorker written by Kathryn Schulz, who's a really great science writer. It's all about animal migration and the sort of internal compasses that animals have, and the different theories for why they're so incredibly good at getting to where they want to go over these vast distances of often thousands and thousands of miles.
It made me appreciate looking up and seeing birds flying overhead and wondering how on earth they're so good at getting to where they want to go and then back again each year. It's just written wonderfully, as most New Yorker articles are. “So Why Animals Don't Get Lost” is really fun. There's a great story about a cat that starts it off and then a lot of the rest of the article is about birds. But how about you Meredith, what's on the top of your stack?
Meredith Fowlie: Great. Well, “So Why Animals Don't Get Lost?” is now on the top of my summer reading list. So I think probably some of your listeners are in the same boat as I am. I've had two elementary school kids doing school in the living room for the past 14 months. So, not much time for reading unless it's Percy Jackson. But I am listening to some great podcasts. I've really come to rely on podcasts when I walk the dog or make dinner. So of course, this podcast is a favorite. I really appreciate you and RFF putting this together, because it's always super insightful. But the other ones I have been listening to recently are Dave Roberts' Volts podcasts, wonky but amazing. I'm listening to his deep dive into battery storage. The other one, I'm going to make my kids listen to on the next road trip, is one called “Timber Wars” from Oregon Public Radio, and it digs into the history and politics of old growth forest, and it's really worth a listen. So those are the two podcasts on my listening list these days.
Daniel Raimi: Yeah, that's great. Yeah. I really enjoy both of those. And “Timber Wars,” especially, for people interested in socioeconomic impacts of energy transitions, there are all these really fascinating analogies.
Meredith Fowlie: Yep. Really great.
Daniel Raimi: Yeah. Great. So Meredith Fowlie from UC Berkeley, thank you again so much for joining us on the show, and for all of the work you do. We've only touched on a small subset of your fascinating work. But thank you so much for coming on and helping us understand this issue of electricity prices in California. We really appreciate it.
Meredith Fowlie: Well, I really appreciate you having me and giving me the opportunity to talk about this and for making these podcasts available. Really important and always a great listen.
Daniel Raimi: Great. Thank you so much.
Meredith Fowlie: Thank you.
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