For low-income households, being able to afford utility service is a constant struggle. The average American household spends 2-3% of its income on its energy bills, but for a low-income family, the energy burden can be more like 15-20% (or higher). Customers may have to decide whether to put money toward utility bills, to avoid a disconnection, versus paying for food, rent or medicines — difficult choices when all of these items are necessities. Policies are needed to ensure that vulnerable populations do not have to forego vital utility service. One policy used in several states, the percentage of income payment plan (PIPP), can help low-income households keep the lights on, but may not provide an incentive to conserve. Reforms to PIPP programs can preserve affordability while encouraging customers to save energy.

How PIPP works

Ohio was the first state to launch a PIPP program, in the 1980s, to address utility affordability concerns; similar mechanisms have since been adopted in other states like Illinois and Pennsylvania. In each state the details may vary; however, the basic premise is that eligible low-income customers pay a percentage of their income towards electric and gas service, rather than paying the full monthly bill. Ohio sets this percentage at 6% of household income for each utility bill (gas and electric), and Illinois sets it at 3% of income for each bill. Customers who have combined gas and electric service offered by one utility or have electric heat pay 10% of their household income total. Eligibility can be determined by the individual state or utility implementing the program. In Ohio, eligible customers have household income at or below 150% of the federal poverty guideline (FPG). Customers will not be disconnected so long as they make PIPP payments.

The under-payment, the difference between the full bill and the customer’s PIPP payment amount, is recovered via a charge to all customers. In Ohio, a PIPP rider is added to all customer bills (residential, commercial and industrial) to compensate the utility. Arrearages may also be collected in the event that a customer’s household income increases beyond eligibility for PIPP; in that event, the customer becomes responsible for paying back remaining money owed through a long-term payment plan. Some programs may include a debt forgiveness feature such that for each month a payment is made, a month of arrearage payments is forgiven. In Illinois, for example, customers who make an on-time regular payment receive a one-twelfth reduction in total arrearages. The goal is to give the customer an incentive to pay down their debt in a more manageable way and to be able to see the light at the end of the tunnel. All arrearage payments are deposited into the PIPP collection account and credited against the PIPP surcharge.

How to give PIPP customers an incentive to conserve

One flaw of this program is that tying payments to income instead of usage provides no incentive to conserve. A PIPP customer will pay the same bill amount whether using 600 kWh or 1,000 kWh. This can result in higher energy bills, which at the same time increases the PIPP surcharge and the amount of the debt owed if and when a customer graduates from PIPP. One option to address this concern is to create a conservation incentive so that some of the savings from reduced usage are passed on to the customer. For example, the utility could create a baseline of usage for a dwelling based on historical monthly data for that dwelling over the past three to five years. To the extent that a PIPP customer conserves and uses less than the baseline, adjusted for weather, the monetized value of the energy savings would be split between the utility and the customer through a reduction in that customer’s monthly bill. While some may argue that the conservation savings should go to lower the overall arrearage, doing so would not incentivize the customer to reduce usage nearly as much. These customers are struggling on a daily basis and need the savings now, not at some uncertain time in the future.

Below is a hypothetical illustration of how adding a conservation incentive would work.

Customer monthly income                                                 $1,500
Customer payment (6% of income)                                                         $90
Customer bill [$10 customer charge + (1,000 kWh x $.12/kWh)]                             $130
Customer arrearage amount collected through surcharge (bill amount of $130 minus customer payment of $90)                                                          $40
Customer monthly income                                                   $1,500
Customer payment (6% of income)                                                         $90
Customer historical bill [$10 customer charge + (1,000 kWh x $.12/kWh)]                                                       $130
Customer current bill with incentive mechanism [$10 customer charge + (900 kWh x $.12)]                                                       $118
Value of savings due to conservation (1,000 kWh minus 900 kWh = 100 kWh x $.12)                                                         $12
Customer share of savings on bill ($12 x $.50)                                                          $6
Customer total bill ($90 minus $6) $84
Customer arrearage amount collected through surcharge (bill amount of $118 minus customer payment of $84 )                                                         $34
Reduction in PIPP collection account ($40 minus $34)                   $6

This hypothetical uses the 6% income payment requirement under the Ohio program and assumes eligibility at 150% of the FPG. The amount of savings and the reduction in the customer’s arrearage account may vary based on the details of a state’s PIPP program.

Note that the additional conservation savings would be voluntary and there would be no penalty for not participating or reducing consumption. Indeed, in some households, reducing consumption may not be possible — though it could be made so by encouraging participation in energy efficiency and weatherization programs for low-income customers. This would increase the savings in the years immediately following the efficiency or weatherization improvements and would provide a further incentive for PIPP customer participation in these programs.

Non-PIPP customers would also benefit from conservation by PIPP customers, as noted in the table above. Since the charge to non-PIPP customers is what pays the difference between actual bills and PIPP payment amounts, any reduction in electricity usage will reduce the overall arrearage account and the amount paid by all other customers via the bill rider. For all customers but especially for customers whose incomes are low to moderate but not low enough to qualify them for PIPP (for example, those whose incomes fall into the range of 151–200% of the FPG), a reduction in the monthly surcharge would be welcomed.

Thus, this conservation adder creates multi-layered benefits. It reduces the amount that the PIPP customer must pay in a given month, freeing up badly needed dollars to cover other necessities; it reduces the amount of subsidies paid by other customers; and it reduces consumption and the pollution that comes with it. Injecting a non-punitive conservation incentive into the PIPP program would help advance energy efficiency, while also providing benefits to vulnerable populations. It would also reduce our carbon footprint and lower bills for all utility customers, regardless of whether they are enrolled in PIPP.