(5-8 min. read)
Electricity is the foundation of daily life in Los Angeles. And when the electricity bill arrives, it can be challenging to understand how the total amount is calculated, as it includes many factors beyond just the amount of electricity used. Our job at the Los Angeles Office of Public Accountability (OPA) is to promote the fairness and transparency of LADWP decisions by providing independent analysis of actions related to water and electricity rates, including analysis of how utility investments impact customers’ bills.
This short guide is intended to help the public understand what LADWP customers get when they receive and pay for their power bills, how rates that determine electric bills are created, and how OPA envisions its ongoing role as Los Angeles pursues a cleaner, more resilient energy future.
What Your LADWP Power Bill, and the Underlying Rates, Make Possible
LADWP is a publicly owned utility, so it has no shareholders and makes no profit. As a result, money collected through power bills goes back into operating and improving the electric system that serves Los Angeles and supporting other vital city services. This includes:
- Reliable and clean power that Angelenos can count on now and in the future: LADWP builds, operates, and maintains a massive system of power plants and renewable projects, plus delivery infrastructure like power lines, poles, transformers, and substations that bring reliable and clean electricity to homes and businesses. The utility constantly inspects and upgrades equipment across the grid as old equipment ages and the new technology becomes available; prepare for storms and wildfires; and defend the grid from physical and digital threats.
- Keeping bills affordable and service accessible: Revenue from LADWP power bills also supports programs that give consumers tools to manage energy use, which helps keep bills affordable. Programs like energy efficiency rebates and programs, solar programs, and demand response programs such as smart thermostats are funded through rates. LADWP also offers special discounts for eligible customers to help keep service affordable and accessible.
- Supporting utility operations that serve communities in an evolving landscape: LADWP is continuously investing in its workforce, bringing in new technology, and supporting operations to be more efficient and effective. These activities include things like training and hiring employees to meet evolving energy needs, and integrating new technologies like advanced meters and AI to help manage infrastructure and assets.
The Foundation of LADWP’s Residential Rate Structure is a Tiered Base Rate
To set residential rates, the Board of Water and Power Commissioners ( LADWP Board) considers and approves rate proposals developed by LADWP in a public setting. Proposed rate changes are then reviewed and adopted by City Council ordinance in a formal public vote. OPA plays an essential role in these processes by providing independent analysis and public reporting on rate proposals. In this role, OPA serves as an independent voice for the LADWP Board and City Council to consider.
The outcome of LADWP’s power rate setting process means most LADWP residential customers have tiered base rates. A base rate means that LADWP customers’ bills are reflective of how much they use. The more energy used, the higher the bill. Tiered pricing charges higher prices at higher usage levels, which typically results in lower usage being more affordable:
- Lower-use tier: The first block of energy used is billed at a lower rate.
Higher-use tiers: As usage increases, the price per unit of electricity (e.g., kilowatt-hour) increases.
A Power Access Charge to Help Cover the Costs of Maintaining the Grid
In addition to using tiered base rates that increase the cost of power as most residential customers reach higher usage levels, LADWP’s rate ordinance also applies a separate tiered and monthly Power Access Charge (PAC) for such customers. And like tiered base rates, PACs are a common occurrence in the utility sector across the United States (though their specific name and calculation varies by utility and state).
How is the PAC determined? The tiered nature of this charge means the amount is determined based on the highest monthly level of electricity delivered to a customer over the last year, influenced partly by the customer’s service zone (e.g., zip code). The fixed nature of this charge means it is applied to each customer as a single amount in a given month – either $2.30, $7.90, or $22.70 for the month. The minimum charge level ($2.30) applies to customers were in in the lowest-use tier for the year before (starting on October 1 or who do not yet have the necessary usage history), while the higher tiers apply to customers whose highest monthly level of electricity demand went into the higher power tiers.
LADWP’s PAC emerged out of a rate ordinance decision made by the LADWP Board and Los Angeles City Council in 2016 and is intended to help cover some of the costs of maintaining the electric grid. As a fixed charge, the PAC helps LADWP collect the fixed costs associated with serving each customer at their maximum demand level, such as costs to maintain power lines, transformers, and substations regardless of whether the customer needs that amount of energy in any particular month.
Adjustment Factors to Support Ongoing Expenses
In addition to the base rate and PAC, LADWP also uses cost adjustment factors to help ensure that it has enough revenue to cover expenses of great importance and/or that tend to often fluctuate significantly. Like other parts of the LADWP rate, the use of adjustment factors is also a common practice across the utility industry to help pay for various costs – some of which are outside of what the utility controls. Examples of costs covered via adjustment factors include complying with state energy mandates, managing natural gas price variability used for power generation, or responding to or preparing for extreme weather events.
LADWP applies several different cost adjustment factors that each serve a specific purpose and are adjusted based on the utility’s estimated expenditures. These adjustment factors are layered on top of one another, meaning an individual customer’s bill will include costs from multiple utility programs.
Amounts included in LADWP cost adjustment factors are based on budgets and expenditures that are presented to and approved by the LADWP Board. The LADWP Board also receives information on how past budgets and cost-adjustment approvals relate to actual expenditures to ensure accurate regular true ups in accordance with the electric rate ordinances.
LADWP’s cost adjustment factors include:
- Capped Energy Cost Adjustment (ECA): Recovers costs of fuel, purchased power including renewable resources (LADWP does not always generate the power it provides), and demand side management costs, including revenue losses.
- Variable Energy Adjustment (VEA): Recovers expenditures for non-renewable fuel like natural gas and non-renewable purchased power, as well as the cost of legal fees, judgments, and settlements.
- Capped and Variable Renewable Portfolio Standard Energy Adjustments (CRPSEA and VRPSEA): Funds renewable energy investments, including operations, maintenance, and debt repayment for projects needed to meet renewable energy requirements and other goals.
- Capped Reliability Cost Adjustment (RCA) and Incremental Reliability Cost Adjustment (IRCA): Funds part of LADWP’s Power System Reliability Program (PSRP), which supports and replaces aging infrastructure in power distribution, transmission, and generation to support reliability.
- Energy Subsidy Adjustment (ESA): A small adjustment (generating less than 1% of total revenue) that funds customer assistance and other subsidy programs and has been fixed since 1997.
The size of the ECA is capped due to prior decisions, meaning it is insufficient by itself to cover all related utility expenditures, , particularly as expenditures to meet California’s mandated renewable energy goals continue to increase. Therefore, LADWP uses other cost adjustment factors, to recover qualifying expenditures above the capped ECA.
In addition to the tiered base rate and pass-through adjustment factors, LADWP electric bills also include the Utility Users Tax (UUT) and State Energy Surcharge. These taxes are not part of the LADWP rates and are therefore not included in this primer.
Looking Ahead: An Energy Transition that Requires Transparency, Accountability, and Partnership
The next decade has already begun to shape Los Angeles’ power system. To accommodate new and emerging technology while supporting the existing aging system in a cost-effective way, LADWP must do multiple things at once:
- Keep the lights on today. Reliable power requires constant investment, and those investments have real costs. Repairing and maintaining power plants, replacing transformers, upgrading substations, expanding renewable generation, and training utility workers all require funding. If revenues fall short, LADWP risks underinvesting in a system that is reliable, safe, and resilient.. If spending is excessive or poorly managed, bills can go up more than they should, contributing to the growing affordability challenges many Los Angeles residents face.
- Build the power system of the future. Guided by its strategic long term resource plan called LA100, the utility has a roadmap to invest in the future energy system. Within this plan, LADWP would make major investments in energy utility bread-and-butter infrastructure, such as transmission and substation systems, renewable energy, and expanded customer programs; as well as newly emerging areas like batteries, hydrogen-capable generation, and next generation demand response. Following through requires transparent rates that clearly serve a public purpose.
As we move forward, OPA’s priorities remain the same:
- Transparency: Making rate decisions and financial information open and understandable.
- Accountability: Evaluating whether LADWP’s rate proposals, plans, and assumptions are data-driven, appropriate, and reasonable.
- Affordability: Protecting ratepayers from unnecessary or excessive costs while supporting investments that secure long-term clean power reliability
Through these principles, Los Angeles can continue building a power system that operates reliably, sustainably, and fairly – for every Angeleno, today and in the years to come.
To read more about LADWP residential water rates, click here.