When it comes to electricity, California often gets highlighted as a case study of what can go wrong. The easiest example is the state’s high electricity prices. According to ChooseEnergy.com, the average Golden State retail electricity rate is 29.54 cents/kilowatt-hour, 46th highest in the nation. Hawaii is the highest, at 43.18 cents/KWh. Idaho and North Dakota are the lowest at 10.54 cents/KWh.
But rates vary widely in California, EcoWatch reports. The highest rate in the state is 65.46 cents/KWh, the lowest is 8.27 cents. The average monthly bill is $134.88 for an average usage of 572 KWh. In an attempt to deal with California’s high electricity prices, the state is considering changing the way its investor-owned utilities charge, which affect lower-income customers the most, switching from the conventional volumetric rate (you pay for what you use) to a combination of what amounts to an income tax on a portion of the bill, plus smaller volumetric charges.
What accounts for the wide disparity in the state’s rates? Economists Meredith Fowlie and Duncan Callaway at the University of California Berkeley’s Energy Institute at Haas take a close look at California electricity prices. In a blog posting, they note, “These high prices are slowing progress on electrification, fueling affordability concerns, and rising fast. Our PG&E rates have increased by more than 35% over the past two years. Ouch.”
But then there is the low end of the rates in California, observing that “there are over 50 electricity suppliers in the state. What’s going on with these other guys?”
The answer is that the state’s three dominant investor-owned electric companies – Pacific Gas and Electric, San Diego Gas and Electric, and Southern California Edison – which together serve the greatest number of customers – dominate the prices. Public power systems – municipal utilities and rural electric cooperatives – have substantially lower prices.
The Haas economists write, “What we found most striking is the relatively high prices charged by the three largest investor-owned utilities (IOUs). Proponents of public power might argue that differences in ownership structure explain the widening price gap between ‘public power’ and the IOUs. But the truth is more complicated. Understanding what is driving these price differences is going to be important as electricity sector costs escalate.”
Teasing out the price data, Fowlie and Callaway note that “size matters.” They note, “One important difference between California’s big IOUs and the public power providers is the scale of operations. PG&E delivers 78 million MWh annually to over 16 million people across 70,000 square miles. The scale of public power operations is much smaller. For example, Silicon Valley power (City of Santa Clara in the graphs) delivers 4.4 million MWh to approximately 60,000 customers across a more densely populated 18 square miles. Cost comparisons across private and public suppliers would ideally take these differences into account.”
But size in California matters in an economically-unconventional way. “The largest share of an electric utility’s costs is sunk into its power system infrastructure. All else equal, spreading capital costs over a larger amount of output should allow bigger utilities to supply electricity at lower prices. Squinting at these coarsely estimated relationships, we do not see revenues rising more slowly with sales among the larger IOUs. This could indicate that the IOUs are failing to fully leverage scale economies.”
Why is this the case? What else is going on? The blog points to differing costs of supplying power and “pursuing various public policy goals” which can vary “a lot across communities.”
In California, a major difference in costs that face the IOUs and the public power systems is wildfire management. Fowlie and Callaway write, “By far, the most significant driver of recent rate increases has been climate change adaptation in the form of wildfire risk mitigation. Back in March, PG&E was approved to spend a mind-blowing $18 billion on wildfire risk mitigation through 2025. An additional $1.1 billion was added last month. SCE has also filed its 2025 GRC application requesting nearly $1 billion annually in expenses and $7.31 billion in capital expenditures in 2023-2028 for wildfire and vegetation management.
Is the takeaway from this analysis that public power is a better deal for consumers? Not necessarily, argue Fowlie and Callaway. The write that “it’s not clear to us that local governments would be more adept at providing electricity supply more cost-effectively than the regulated IOUs. Moreover, community exit from large IOU systems via municipalization could impose significant cost burdens on those left behind.”
The message they see from their analysis is that “rapidly escalating power sector costs are straining the regulatory system we depend on to keep investor-owned utility expenditures in check. Regulators at the Public Advocates Office and various consumer groups have been calling for more oversight of IOU revenue requests, particularly where wildfire costs are concerned. Given the billions of ratepayer dollars at stake, California should heed this call. Investing today in finding better ways to contain or reduce these costs will pay dividends in the form of lower power prices.”
–Kennedy Maize
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