Imagine you go to the grocery store and when you put your items on the counter, the checkout clerk asks you your annual income. I can only guess about the number of swearwords you would use in your response—I would bet it would be between zero and four—but I can almost guarantee the gist of your response: “That’s none of your damn business.”
It really isn’t the checkout clerk’s or the store’s business. Fortunately, no one in California’s grocery stores is asking that question. At least not yet. So why am I even discussing this? Because Californians will soon be subject to an income test to determine how much they will pay for their electric utilities. In April of this year, three major utilities—Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric—proposed to California’s Public Utility Commission (PUC) that they be allowed to charge customers a rate based partly on income. When I first read about this months ago, I blamed the utilities. I shouldn’t have. It turns out that they are trying to comply with a law that California’s legislature passed. The law requires the PUC to base rates in part on a household’s income. From each according to his ability, to each according to his need. Marxism lite, anyone?
These are the opening 2 paragraphs of David R. Henderson, “California Gets a Jolt of Marxism,” Defining Ideas, June 22, 2023.
An excerpt:
Borenstein goes on to point out that the artificially high prices Californians now pay for a kilowatt-hour cause us to use less electricity and more natural gas for our homes and businesses and more gasoline for our cars. He argues that the price per kilowatt-hour should be brought down closer to its incremental cost so that we would use more electricity, including in electric cars.
There are three problems with his argument.
I also consider the loss of privacy about our incomes.
Read the whole thing.
READER COMMENTS
Brandon Berg
Jun 25 2023 at 8:51am
It’s not that far a leap: We already pay for government services based on income, with no respect whatsoever to usage of said services. And electricity is arguably a quasi-governmental service. Sure, it’s a private good, but so are education and health care.
California already having one of the most spitefully progressive tax systems in the country, and with the SALT deduction out of commission for the time being, raising explicit taxes on the upper middle class is a bit tough. This allows them to raise taxes in a way that will cause naive consumers to blame utility companies, rather than the government.
Peter
Jun 25 2023 at 12:24pm
Old news,they already do that effectively in grocers with SNAP and WIC.
Jon Murphy
Jun 25 2023 at 1:06pm
How SNAP and WIC are run is nothing like this.
Peter
Jun 25 2023 at 8:18pm
Functional it’s the same thing. The grocer screens what you can buy based on your declared income level to the state. Try buying a six pack with WIC and see if the grocers you. It’s goods discrimination based on your declared (used EBT card) income level to the grocer.
Jon Murphy
Jun 26 2023 at 6:42am
No. Functionally that’s not how SNAP works (if you want, I’ll link you to my dissertation which has a chapter on SNAP).
SNAP is an application-based program in which income matters but is hardly the sole variable. Indeed, there are some households who get SNAP making upwards of $60k!
Further, the grocer doesn’t “screen” what you can buy. They have no say in the matter one way or the other (other than choosing to accept SNAP).
Finally, SNAP users still face the same price for goods (with rare exceptions) as non users.
David R Henderson
Jun 25 2023 at 2:12pm
Even if it were true that they do that with SNAP and WIC, this is not old news. The legislation was passed only a couple of years ago and the changes will be implemented in 2024.
Andrew
Jun 25 2023 at 12:40pm
What I was struck by is how much this looks like an electric company wish list. Electric companies have a hard time implementing price discrimination (no coupons, no branding, etc.) and have many customers who use little of their services due to rooftop solar and an interest in conservation. The state has kindly rectified both these problems for them.
I worry that this will be very bad for the environment as usage increases and will lead to more black and brown outs. Also it is now feasible to go completely off grid. Houses with solar installed just need a battery and a backup generator. We could end up in an even worse situation a few years down the line with a decreasing share of the population bearing increasing “fixed” costs.
Richard W Fulmer
Jun 25 2023 at 3:08pm
Here in Texas, more and more people are installing natural gas fueled backup generators as our power has become less reliable thanks to intermittent power sources such as wind and solar. Has anyone has done a study to determine the carbon footprint of manufacturing, transporting, installing, and running tens of thousands of backup generators for homes and businesses? What is the carbon footprint of increased brownouts and blackouts?
I’m increasingly skeptical of the government’s top-down “solutions” to climate change. We now know that corn-based ethanol mandates resulted in more emissions, is the same true of wind and solar?
One of the problems with government programs is that people become dependent on them to the point that they’re politically impossible to kill. Kevin D. Williamson once observed that when the government does stupid, it does immortally stupid.
Airman Spry Shark
Jun 25 2023 at 3:08pm
Expect uneconomic solar installations to boom. Manufacturers & installers won’t income discriminate, so the breakeven point moves more for higher income households to disconnect from the grid altogether*. And as they leave the pool, the fixed costs of the utility will be amortized over fewer payers pushing everyone’s rates higher, making more previously inframarginal installations positive NPV. Rinse & repeat.
*Assuming that the fixed fees would only be charged to connected customers.
Mark Brady
Jun 25 2023 at 3:50pm
As soon as I began reading your post, I thought to myself “Price Discrimination”! Do we know that the regulated electricity supply corporations did not lobby for the change in the law, or if they did not, nonetheless welcome this policy?
Marxism lite? It sounds like corporate statism heavy!
David Henderson
Jun 25 2023 at 4:47pm
Good question.
Actually, Marxism lite often overlaps with corporate statism heavy.
Ahmed Fares
Jun 25 2023 at 6:23pm
re: the utility death spiral
A quote which adds to Andrew’s comment about fixed costs being borne by a smaller number of users but notes that this is an iterative process. A “death spiral” is also known as a “downward demand spiral”:
Peter
Jun 26 2023 at 4:39am
Well and renters; you know the majority of Americans. Tax incentives for solar don’t cover rental properties hence the “poor” get hit because we reward slumlords and homeowners.
robc
Jun 27 2023 at 9:52am
34.2% is a majority?
nobody.really
Jun 26 2023 at 1:08pm
A fine excuse to review some public policy concepts.
In natural monopolies, setting price equal to marginal cost fails to generate sufficient revenues to finance an operation. Ergo, we need some mechanism to raise those revenues. Setting price above marginal cost can work but it requires some way to avoid competition and it results in suboptimal consumption. An alternative strategy is to set marginal cost equal to marginal revenue but provide an additional method to raise revenues—a method unrelated to consumption. The study of these mechanisms is called public finance.
In every discussion of public finance, the first objection raised by the neophyte is that the public should not be expected to pay for something that does not conform to the neophyte’s tastes and preferences. The professor sighs, notes that everyone has different tastes and preferences, that we have a legislative process for reconciling those tastes and preferences, and that this process exceeds the scope of the discussion of public finance.
Ideally all the costs of a transaction would be captured by the parties to the transaction in the market. But the list of market failures includes negative externalities, an adverse consequence that befalls entities who are not part of a voluntary transaction. Pollution represents the archetypical negative externality. Burning fossil fuels produces pollution. Substitutes for burning fossil fuels include rooftop solar generators, electric vehicles, and various energy storage technologies that facilitate use of intermittent sources of generation, such a solar and wind power.
Various policymakers argue that the public would benefit by reducing the combustion of fossil fuels, and thus the public should pay for it.
Agreed—although this illustrates a broader conceptual problem: We have various ways to understand “marginal cost.” Under some circumstances, consuming additional electricity will require additional investment in transmission, and it would make sense to include that additional cost as part of the marginal price charged to ALL customers—before the additional transmission is built. But after the additional transmission capacity is built, that investment becomes a sunk cost and should no longer be recovered by the marginal price; it should be recovered by the other, non-consumption mechanism.
Industrial customers oppose this argument. They argue for apportioning costs to those who CAUSE it, not those who BENEFIT from it. Utilities design their transmission systems to meet the peak demand of their customers. And on that peak day, residential customers tend to consume most of the energy—but they tend to consume less energy throughout the rest of the year. Industrial customers tend to consume a lot of energy, but at a uniform rate throughout the year. If the utility must build its transmission system to serve the peak day, why should industrial customers bear a larger share of those costs simply because they exploit an underused capacity the other 364 days of the year?
Perhaps Borenstein should have cited the theory of Ramsey Pricing, which argues that the optimal way to allocate these costs (in the absence of public financing) is to allocate fixed costs to customers with the least elasticity of demand. Poor customers often find themselves disconnected; that reflects powerful demand elasticity. In contrast, affluent customers are famously impervious to increased prices for electricity in the short run (although there is growing evidence that they modify their behavior in the long run). So at least in the short run, Ramsey Pricing would support the idea of setting prices for poor consumers at no more than incremental cost, and recovering the non-incremental costs elsewhere.
Henderson responds in the same manner as do people who embrace the “just wage” theory and who object to “price gouging”: How dare any price differ from my expectations!
I imagine that Finns set fines to deter people from violating the law. The Finns reason that a fixed fine—say, $100—would pose an unreasonable burden on a person earning $12,000/yr, but would provide a negligible disincentive to those earning $75,628,000/yr (that is, $103,600 x 2/day x 365 days/yr).
I do not embrace the theory that public policy should make it easier for the rich to violate the law than for the poor. Ergo, the Finnish policy strikes me as reasonable (if perhaps administratively cumbersome. “I’m sorry, sir, but you’re credit card has a $100,000/day maximum. Do you happen to have the extra $3600 in cash?”).
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