Designing Electricity Rates for An Equitable Energy Transition

November 5, 2021
Severin Borenstein, E.T. Grether Chair in Business Administration and Public Policy, Faculty Director, Energy Institute at Haas Professor, University of California, Berkeley
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This presentation examines the causes and distributional consequences of the high prices for residential electricity charged by California’s investor-owned utilities (IOUs). It also considers reforms that would improve both the efficiency and equity of residential electricity pricing. We estimate avoidable (marginal) costs of electricity and demonstrate that IOU prices are two to three times higher than these cost estimates. California’s electricity prices are high because nearly all fixed costs are recovered through volumetric prices, because of subsidies for low-income households and customers with rooftop solar, and because rates are used to fund objectives not directly related to the provision of electricity. Prices are set to rise further due to wildfire mitigation and other factors. High and rising prices undermine efforts to decarbonize transportation and buildings through electrification. Moreover, we show that the current rate structure is highly regressive, more so than other ways of raising revenue, like a sales or income tax. We discuss the viability of alternative ways of recovering the costs of the electricity system that are more efficient and more equitable, with a focus on the creation of income-based monthly fixed charges on electricity bills.

Severin Borenstein is Professor of the Graduate School in the Economic Analysis and Policy Group at the Haas School of Business and Faculty Director of the Energy Institute at Haas.  He is also Director emeritus of the University of California Energy Institute (1994-2014).   He received his A.B. from U.C. Berkeley and Ph.D. in Economics from M.I.T.  His research focuses on business competition, strategy, and regulation.  He has published extensively on the airline industry, the oil and gasoline industries, and electricity markets.  His current research projects include the economics of renewable energy, economic policies for reducing greenhouse gases, alternative models of retail electricity pricing, and competitive dynamics in the airline industry.  Borenstein is also a research associate of the National Bureau of Economic Research in Cambridge, MA. He served on the Board of Governors of the California Power Exchange from 1997 to 2003. During 1999-2000, he was a member of the California Attorney General’s Gasoline Price Task Force.  In 2010-11, Borenstein was a member of U.S. Secretary of Transportation Ray LaHood’s Future of Aviation Advisory Committee.  In 2012-13, he served on the Emissions Market Assessment Committee, which advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases.  In 2014, he was appointed to the California Energy Commission’s Petroleum Market Advisory Committee, which he chaired from 2015 until the Committee was dissolved in 2017.  From 2015-2020, he served on the Advisory Council of the Bay Area Air Quality Management District. In 2019, he was appointed to the Governing Board of the California Independent System Operator.