Published in Learning Center • Understanding Your Bill

Understanding Tiered Rates: How Your Rate Increases with Usage

You notice your electricity bill is higher than expected. You look at the itemized charges and see that you paid different rates for different portions of your usage. This confusing billing structure is called a tiered rate system—and it's specifically designed to charge you more per kilowatt-hour as you use more electricity.

This guide explains how tiered rates work, why utilities use them, how to calculate your bill with tiering, and how they compare to flat rates when shopping for suppliers.

What Are Tiered Rates?

Tiered rates (also called "blocked rates" or "inclining block rates") divide your monthly electricity usage into multiple "blocks" or "tiers," with each tier charged at a different rate. The more you use, the higher your per-kWh rate becomes.

Simple Example

A utility might have tiered rates like this:

  • Tier 1 (First 500 kWh): $0.10/kWh
  • Tier 2 (Next 500 kWh, from 501-1,000): $0.12/kWh
  • Tier 3 (Usage over 1,000 kWh): $0.15/kWh

If you use 1,200 kWh:

  • First 500 kWh: 500 × $0.10 = $50.00
  • Next 500 kWh: 500 × $0.12 = $60.00
  • Over 1,000 (200 kWh): 200 × $0.15 = $30.00
  • Total: $140.00

Your effective rate = $140 ÷ 1,200 kWh = 11.67¢/kWh (not the 15¢ you might think)

Where Are Tiered Rates Used?

Regulated Utilities (Most Common)

Tiered rates are primarily used in regulated utilities where deregulation does NOT exist. This includes:

  • California: All utilities use tiered rates (rate tiers are aggressive)
  • Florida: All investor-owned utilities use tiered rates
  • Much of the Midwest: ComEd (Illinois), Ameren, and others
  • Parts of the South: Duke Energy, Southern Company in non-deregulated areas
  • Parts of the Northeast: National Grid, Eversource in regulated territories

Deregulated Markets (Rare)

In deregulated markets (Pennsylvania, Texas, Ohio, etc.), competitive suppliers almost never use tiered rates. However, the default utility supplier might still use tiering. When you shop for suppliers, most competitors offer flat-rate plans instead.

Key point: If you shop in a deregulated market and find a tiered-rate competitor, you'll likely find flat-rate alternatives that are cheaper overall.

Why Do Utilities Use Tiered Rates?

Utilities justify tiered rates with several arguments:

Official Reason: Conservation

Utilities claim tiered rates encourage conservation by penalizing high usage. The logic: "If you use more, you pay more per kWh, so you'll use less."

Reality check: Research shows tiered rates reduce usage by 3-8% depending on the rate spread. However, many energy experts argue this is inefficient—it punishes large families and homes in hot/cold climates equally.

Actual Reason: Revenue Stability

Tiered rates allow utilities to increase revenue without raising the low-tier rate, which impacts low-income customers. By charging more to high-usage customers, they can keep the low-tier rate politically acceptable while maintaining profit margins.

Historical Reason: Cost-Based Pricing

Originally, tiered rates reflected actual costs—serving high-demand customers cost more due to peak capacity requirements. Modern costs are different, but the rate structure persists.

Types of Tiered Rate Structures

Inclining Block Rates (Most Common)

Rates increase as you use more. This is what we've described above.

Example: 10¢, then 12¢, then 15¢ per kWh

Impact on bill: High usage = higher per-kWh cost

Declining Block Rates (Rare Now)

Rates decrease as you use more. This structure was common 20+ years ago but is increasingly rare due to renewable energy goals (utilities want to discourage high usage).

Example: 15¢, then 12¢, then 10¢ per kWh

Historical use: Rewarded industrial customers and large users. Mostly phased out.

Time-of-Use Plus Tiered (Hybrid)

Some utilities combine time-of-use rates (different rates for peak/off-peak hours) with tiered rates. This creates a complex matrix.

Example:

  • Off-peak: 10¢/kWh for first 500, then 12¢/kWh
  • Peak: 15¢/kWh for first 200, then 18¢/kWh

Real-World Examples: How Tiered Rates Impact Your Bill

Example 1: California (PG&E) - 2025 Rates

PG&E uses aggressive tiered rates:

  • Tier 1 (0-396 kWh): $0.179/kWh
  • Tier 2 (396-1,500 kWh): $0.237/kWh (+32% increase)
  • Tier 3 (Over 1,500 kWh): $0.325/kWh (+37% increase from Tier 2)

If you use 1,800 kWh (typical home):

  • Tier 1: 396 × $0.179 = $70.88
  • Tier 2: 1,104 × $0.237 = $261.65
  • Tier 3: 300 × $0.325 = $97.50
  • Total: $430.03
  • Effective rate: 23.9¢/kWh

Example 2: Florida (Duke Energy) - 2025 Rates

Duke Energy uses gentler tiering:

  • Tier 1 (0-1,000 kWh): $0.1085/kWh
  • Tier 2 (Over 1,000 kWh): $0.1220/kWh (+12% increase)

If you use 1,500 kWh (typical home in hot climate):

  • Tier 1: 1,000 × $0.1085 = $108.50
  • Tier 2: 500 × $0.1220 = $61.00
  • Total: $169.50
  • Effective rate: 11.3¢/kWh

Note: Duke's tiering is much gentler than PG&E's, reflecting different state policies on conservation.

How to Calculate Your Bill with Tiered Rates

Step-by-Step Process

Step 1: Identify the tier thresholds on your bill (e.g., 500 kWh, 1,000 kWh)

Step 2: Find the rate for each tier

Step 3: Calculate usage in each tier:

  • Tier 1 usage = minimum of (your usage, tier threshold)
  • Tier 2 usage = (your usage - tier 1 threshold), or 0 if you didn't reach it
  • Tier 3 usage = (your usage - tier 2 threshold), or 0 if you didn't reach it

Step 4: Multiply each tier usage by its rate

Step 5: Add them together

Worked Example

Your rate structure:

  • 0-600 kWh: $0.11
  • 601-1,200 kWh: $0.135
  • Over 1,200 kWh: $0.16

Your usage: 1,400 kWh

Calculation:

  • Tier 1: 600 × $0.11 = $66.00
  • Tier 2: (1,200 - 600) × $0.135 = 600 × $0.135 = $81.00
  • Tier 3: (1,400 - 1,200) × $0.16 = 200 × $0.16 = $32.00
  • Total: $179.00
  • Effective rate: 12.79¢/kWh

Tiered Rates vs. Flat Rates: Which Saves More?

In deregulated markets, you often have a choice between tiered default suppliers and flat-rate competitors. Which is better depends on your usage.

Scenario Comparison

Tiered utility: 10¢ (Tier 1), 12¢ (Tier 2), 15¢ (Tier 3) with 500 kWh thresholds

Flat-rate competitor: 11.5¢/kWh

Usage: 600 kWh (below tier threshold)

  • Tiered utility: 600 × $0.10 = $60
  • Flat-rate competitor: 600 × $0.115 = $69
  • Winner: Tiered utility by $9

Usage: 1,200 kWh (crosses thresholds)

  • Tiered utility: (500 × $0.10) + (700 × $0.12) = $50 + $84 = $134
  • Flat-rate competitor: 1,200 × $0.115 = $138
  • Winner: Tiered utility by $4

Usage: 1,800 kWh (high usage)

  • Tiered utility: (500 × $0.10) + (500 × $0.12) + (800 × $0.15) = $50 + $60 + $120 = $230
  • Flat-rate competitor: 1,800 × $0.115 = $207
  • Winner: Flat-rate competitor by $23

Key insight: If you use below-average electricity, tiered rates favor you. If you use above-average, flat rates are better. In deregulated markets, shopping lets you escape tier penalties.

How to Minimize Tiered Rate Impact (If You Can't Shop)

1. Shift Usage to Off-Peak Hours

If your utility offers time-of-use rates or has lower rates in certain hours, concentrate high-usage activities there. Example: Run your AC/heat only during lower-rate hours.

2. Reduce Peak-Month Usage

Some utilities reset tiers monthly. If you use 400 kWh in one month and 1,200 in the next, the second month hits higher tiers. Try to smooth usage.

3. Install Solar or Battery

Reducing total usage is the only guaranteed way to avoid high tiers. Solar reduces usage and often qualifies for incentives in states with tiered rates (California, Florida).

4. Upgrade to Efficient Appliances

ENERGY STAR appliances use 10-30% less electricity. If you're paying 15¢/kWh in the top tier, efficiency is worth more than in a flat-rate market.

5. Shop If Available

In deregulated markets, you can often escape tiered rates by choosing a flat-rate supplier. This is usually the fastest solution.

Key Takeaway

Tiered rates charge you more per kWh as you use more electricity. They're common in regulated utilities and rare in deregulated markets. If you live in a tiered market, understand your thresholds and calculate the true cost of usage increases. If you're in a deregulated market, compare tiered utilities to flat-rate suppliers to see which saves more money for your usage level.

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