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Op-Ed

Pricing of electricity could use a jolt

Common-sense pricing systems that consider the time at which energy is used could save consumers money on their power bills and encourage conservation.

November 13, 2011|By Frederick Taylor-Hochberg

Here are some things Californians deserve from their power providers: a fair and reasonable price for electricity, household bills that are easy to understand and based on the actual cost of producing power, and rates that encourage conservation yet don't punish low-income customers who can't afford to make their homes more energy efficient.

The price of a kilowatt hour should speak, and this is what it should be saying: Don't waste energy, and if you can avoid it, don't run your dishwasher or do your laundry at times when California's power plants are already straining to meet demand.

As it stands, the pricing structure for the majority of residential electricity consumers in California meets none of these goals. Most people pay for electricity under a tiered pricing system, which means that different levels of consumption carry different prices per kilowatt hour.

For example, in Southern California Edison's service territory, a house that consumes small amounts of electricity (i.e. in the lowest tier) is charged just 5 cents per kilowatt hour; a house that consumes a lot (i.e. in the highest tier) gets charged 23 cents for every kilowatt hour beyond a certain amount. The lower tiers are priced far below the true cost of producing power; the upper tiers are priced far above that cost.

At first blush, this system would seem to make sense. Don't the high prices of the upper tiers give people an incentive to avoid them by turning off lights and not running appliances? And don't rich people, who often have big, energy-hungry houses and swimming pools, subsidize the rates of the poor by shouldering the burden of the upper-tier prices?

Not really. A growing body of research suggests that not only does tiered pricing fail to meet these goals, it is counterproductive: It neither encourages conservation nor helps low-income people pay for power.

Why? First, because consumers simply don't understand the price tiers, which means they don't conserve power even if it would be cheaper to do so. Think about your own utility bill. When was the last time you really scrutinized it? And even if you have done so recently, did you really understand what was going on with all those tiers?

Another problem is that the tiers are set in such a way that a wealthy couple living in a newly built condominium with efficient appliances is charged the same price as a poor family living in a home with no insulation and old appliances. The result is that the wealthy couple stays in the low tiers and gets a lower bill.

Finally, because tiers charge the same price per kilowatt hour regardless of what time of day the electricity is used, they don't encourage people to conserve at the times when it really matters. Tiers ignore the fact that the cost of producing power is related to the time at which it is produced.

During the day, businesses and large office buildings are humming along, sucking up vast amounts of juice. During these peak demand hours, utility companies often have to turn to expensive and polluting "peaker" plants to keep the supply flowing. Electricity should cost more during these times, but because tiered prices are blind to when a kilowatt hour is consumed, it doesn't.

So what should be done? An alternative way to charge for energy, known as time-of-use pricing, is beginning to gain some traction, and it makes economic and environmental sense.

The idea is to do away with complex tiers and instead charge consumers a price based on the time of day they consume a kilowatt hour, with higher prices during peak times and lower ones during off-peak times. This would encourage people to consume power when it's cheaper and better for the environment to produce, and it would discourage them from using it at peak times.

It would let consumers take charge of their own electricity bills: Instead of accidentally slipping into an upper tier and getting charged exorbitant rates for electricity, people could make informed decisions about when to consume and set simple behavioral rules, such as washing clothes at night.

Time-of-use pricing is no magic bullet, and it can't succeed without excellent outreach to consumers to educate them about the system, something utilities are not always good at. Pacific Gas & Electric (the utility covering much of Northern California) learned the importance of education the hard way: It rolled out new "smart" electric meters without clearly explaining what it was trying to do and how consumers would benefit. The result was a huge outcry against the new meters. Many people claimed that they were broken, or shooting out harmful electromagnetic radiation, or were just an unabashed attempt to charge more.

But surely the utilities can learn to do better. If rolled out properly, common-sense pricing systems that consider the time at which energy is used could save consumers money on their electricity bills and encourage conservation.

In the meantime, what can you do? What many people don't know is that time-of-use rates exist for Los Angeles Department of Water and Power residential customers, but they are optional and not well publicized. The program has been around since the early 1990s, but a mere 1,650 households have signed up for it — that's about a tenth of a percent of the DWP's approximately 1.26 million customers.

Let's get that number up a notch. Call your power provider and ask to be put on time-of-use rates. If you live in Los Angeles, you don't have to wait for broader policy changes to do your part for California.

Frederick Taylor-Hochberg is a graduate student in public policy at UC Berkeley. He was an intern last summer with the California Public Utilities Commission, where he did research on electricity rate design.

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