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About one in four American households experience some form of energy insecurity. Within this group, Black, Indigenous, Latine, low- and moderate-income (LMI), and other disadvantaged communities face a disproportionately higher burden.[i] Past efforts to mitigate energy insecurity have focused on downstream strategies such as bill assistance and weatherization. But upstream innovations in the utility ratemaking process have the potential to address the structural drivers of energy affordability themselves.[ii]
Over 70 percent of household energy services in the United States are delivered by investor-owned utilities (IOUs). IOUs are privately owned entities regulated by state public utility commissions (PUCs). In exchange for monopoly power within their service territory, IOUs are subject to government-set prices with guaranteed rates of return, which are determined through a formal ratemaking process. IOU retail rate increases are routinely reviewed by PUCs through “rate cases” in which a judge considers relevant evidence, negotiates with the parties involved, and issues decisions that determine the IOU’s revenue requirement and how the associated costs will be allocated among customer classes. PUC regulators must balance the interests of utility shareholders and ratepayers, with social and environmental policy goals such as energy conservation and affordability an important consideration.
Approaches to Advancing Energy Affordability via Utility Ratemaking
There are three categories of common utility affordability ratemaking approaches, all of which are explained in greater detail (including their advantages and challenges) in Table 1:
Segmentedrate classes help deliver targeted and differentiated rates based on customers’ income, location, usage, or other criteria. Unlike uniform fixed charges, which lead to higher energy burdens for low-income households, income-based fixed charges charge customers according to their ability to pay, with higher income customers paying more fixed charges. Variable volumetric charges through increased block pricing structures or time of use rates can encourage energy-saving behavior and lower daily peaks. These measures—when accompanied by technologies that improve access to relevant information or automate action—can overcome negative impacts on LMI households.[iii]
Low-income discount programs subsidize qualifying residential customers’ electricity bills by applying credits or rebates through federal funding, state grants, and/or on-bill tariffs. Lifeline rates and straight discount models are the most straightforward administratively, though percent-of-income payment plans, which include across-the-board energy burden caps that allow for household-level aid determination, have become increasingly popular. Tiered discount models offer the most targeted discounts, but precise income verification requirements impose a higher administrative burden.
Budgeting strategies help reduce variance in monthly bill charges for fixed-income households. Budget billing shields customers from bill volatility during the summer and winter months when energy consumption tends to increase. Prepayment programs help low-income customers pace themselves and reduce utility debt accumulation, though they also undermine typical consumer protections such as disconnection notices and seasonal shut-off moratoriums.[iv]
Through greater adoption of common ratemaking approaches, utilities and regulators can potentially go a long way toward addressing energy insecurity. However, maximizing the impact of these approaches will ultimately require addressing their drawbacks (see Table 1). For instance, income-based fixed charges, percent-of-income payment plans, and budget billing offer targeted aid to low-income customers, but may require the passage of legislation or complex administrative procedures for implementation. Future research can explore whether and how coupling complimentary approaches would help overcome the specific challenges involved, with the effect of further reducing energy insecurity for disadvantaged households and communities.
[iii] Lee V. White and Nicole D. Sintov, “Varied Health and Financial Impacts of Time-of-Use Energy Rates across Sociodemographic Groups Raise Equity Concerns,” Nature Energy 5, 16–17 (2020), https://doi.org/10.1038/s41560-019-0515-y.
Almost 34 million American households were considered energy insecure in 2020 (the latest date such data were compiled by the US Energy Information Administration), with the majority foregoing...
