Alternative providers may deliver more than 85% of the Golden State’s electricity by the mid-2020s, and there is a lot of uncertainty about how much they will be regulated.
One of the biggest ideas challenging today’s utility business model is the customer choice aggregation (CCA) movement in California.
By the end of 2017, a third or more of California’s investor-owned utility (IOU) customers will get electricity from alternative sources and/or providers and there will be 915,000 CCA customers. But that is just the beginning, according to a recent white paper from the California Public Utilities Commission (CPUC). The counties of San Diego (3.3 million) and Los Angles (10.2 million) are about to launch CCAs.
The CCA movement is gaining momentum, but an unlikely alliance of clean energy and consumer advocates and utilities are asking questions. Will CCAs impede California’s nation-leading drive to build clean energy and cut greenhouse gas emissions? Will they unfairly impose costs on customers?
Renewables driving CCAs
Dawn Weisz, CEO of CCA flagship Marin Clean Energy (MCE), told Utility Dive the movement is growing because “customers want cleaner choices” and CCAs “are building more renewable energy in California than the IOUs.”
But the CPUC white paper raised a bigger issue.
The limits to the commission’s authority over public power utilities has already “somewhat reduced the most optimal procurement and coordination of resources and utilization,” CPUC staff reported. “As non-IOU load-serving entities [LSE] serve an ever-greater percentage of load, the CPUC’s top-down approach to regulation will be challenged.”
Weisz confirmed that challenge. “It is important for the commission to regulate monopoly organizations with shareholder interests,” Weisz said. “But CCAs are managed by elected local government boards accountable to constituents, which makes CCAs accountable to constituents. It is a different relationship. The CPUC needs to understand that.”
V. John White, executive director of the Center for Energy Efficiency and Renewable Technologies (CEERT), told Utility Dive that leads to pivotal questions. “What is the role of the utility? If procurement devolves to the local level, how will policymakers and regulators plan? And can the state achieve its goals if further disaggregation of LSEs and power procurers leads to greater differences?”
Differences over charges
California’s 2002 Assembly Bill 117 established CCAs, White said. It allows “customers to aggregate their electrical loads as members of their local community.” The aggregation is done by municipal or county governments. As an alternative to incumbent IOUs, CCAs promise cleaner, locally-produced, lower-priced electricity.
MCE became California’s first CCA in 2010 and now serves 255,000 customers, the Staff white paper reported. Other active CCAs serve “a cumulative 660,000 customers.”
Cities and counties with more than 15,000,000 people are now considering CCAs, the paper said. More than 85% of retail load could be served “by sources other than the IOUs” by the middle of the 2020s, it noted.
That raises the question of how costs should be allocated among customers who stay with their utilities and CCA customers. The Power Charge Indifference Adjustment (PCIA) is the current mechanism.
The PCIA is the difference between the cost of the utility’s power procurement and the estimated future market value of an IOU’s portfolio. It fluctuates with changing market prices. None of the participants in the CCA debate support it.
Southern California Edison (SCE), Pacific Gas and Electric (PG&E) and San Diego Gas and Electric (SDG&E) submitted a Joint Utilities (JU) filing to the CPUC proposing a new mechanism. Their Portfolio Allocation Methodology(PAM) would be based on actual, rather than estimated costs.
In April, the CPUC opened proceeding 17-06-26 “to review, revise, and consider alternatives” to the PCIA, including the PAM proposal.
Alan Suleiman, director of marketing and public affairs for the just-launched Silicon Valley Clean Energy (SVCE), told Utility Dive the PCIA prevents SVCE from offering its customers a better price. “The PCIA is eating 20% to 30% of the difference between our price and the utility price and keeping bill savings to 1%.”
A recent JU filing agreed the PCIA “is fundamentally flawed.” But agreement between the JU and CCAs ends there.
SCE VP of Energy Procurement and Management Colin Cushnie told Utility Dive the utilities support the principle of choice. “But we do not support customer choice if it’s allowing customers to avoid costs that were incurred to meet their needs,” he said. SDG&E and PG&E concurred in email statements and endorsed the SCE-authored JU filings.
The JU argued the Commission must exercise its jurisdiction over CCAs “by enforcing binding IRP requirements” or it “will have less influence and ability to carry out its SB 350 directives” to drive “GHG reduction efforts.”
AB 117 makes it clear that “a community choice aggregation program shall not result in a shifting of costs” from departing to bundled customers, the JU filing argued.
Matthew Freedman, staff attorney for The Utility Reform Network (TURN), said the customer advocate usually sides with “those who want to move costs from customers to utility shareholders.” But this is different because “it is customer versus customer.”
Differences over procurement
In addition to differences over pricing, CCAs also create procurement challenges for utilities.
“CCAs represent great potential for innovation, but it is becoming increasingly apparent that they are preventing the utilities from being the procurement entities into the future,” CEERT’s White said.
TURN’s Freedman said buyers and sellers will always look to reduce the cost of compliance. But solving “for least-cost outcomes” can make a good policy “completely useless,” he said.
That is the JU concern, SCE’s Cushnie responded. Because of California IOU investments in renewables, the state has more than 5,500 MW of installed wind capacity and a U.S.-leading 10,000 MW of utility-scale solar capacity. But state-mandated early investments were made at far out-of-market prices.
CCAs can now procure renewables at “a third or a quarter” of those prices, Cushnie said. Departing load costs “left behind” raise costs for remaining customers, creating momentum toward CCAs, he said. That inclines utilities to pursue “least-cost outcomes” by limiting procurement.
CCAs are even more strongly motivated toward least-cost procurement solutions because they promise their customers lower prices, Cushnie said.
TURN’s Freedman has reviewed all publicly available CCA portfolio and contract information. “The problem is that they procure though short-term contracts for existing resources that would operate even if the CCA was not buying the generation,” he said.
It is true that as CCAs like MCE mature, they procure new resources that strengthen California’s climate change fight, he acknowledged. But “I am certain new CCAs are doing virtually zero procurement that is getting new resources built or getting incremental output from existing projects.”
MCE’s Weisz said the claim that CCAs are not building new and reliable power “is just completely false.” MCE’s resource mix exceeds state standards for reliability and renewable content.”
IOU procurement has slowed in response to fulfilled mandates and departing load, she said. But “MCE has contracted for 650 MW of new, California-based renewables that will be built for us and we now have over 800 MW of California-based renewables, either online or in development.”
White, Cushnie and Freedman all question whether CCAs have the financial backing and credit-worthiness to continue procuring renewables at the level that will support meeting the state’s climate goals.
Weisz said MCE “has a very strong balance sheet, including a $50 million reserve, has been debt-free for many years, and we have a strong credit threshold with our counter-parties.”
Freedman responded that, like the other CCAs, MCE does not have a credit rating. “$50 million is not going to mean a lot to a developer building a $100 million project,” he said.
Jan Smutny-Jones, CEO of the Independent Energy Producers Association, agreed. “Right now, none of the CCAs have a credit rating and the first rule of business is ‘credit is fundamental to doing business.’”
SCE’s Cushnie raised another concern. “The electric system is a very interconnected, complicated system and energy demand has to be instantaneously balanced with energy supply for the system to operate safely and reliably,” he said.
With each CCA procuring for its own needs, the system could be “balkanized” and energy might not be delivered “when the grid needs it,” Cushnie said.
Biggest CCA coming
Despite these challenges, the CCA movement continues to grow, with the largest such entity in the works in Southern California.
Gary Gero, chief sustainability officer for Los Angeles County, heads Los Angeles Community Choice Energy (LACCE). When fully operational, LACCE will have the biggest customer base so far added to the CCA movement.
LA County put up $10 million for Phase 1 of the program, Gero said. For Phases 2 and 3, “we are probably looking at something like $50 million in power procurement costs,” he said.
For that, LACCE will seek a line of credit or loan from a financial institution — commercial banks have already shown interest, Gero said. “Or the county may see opportunity in being a lender.”
He expects to have access to a cost of capital similar to, or lower than, IOU rates. “One of the newest CCAs just got a large line of credit for between 2% and 3%, which is competitive with the IOUs,” he said.
Suleiman said SVCE, too, is backed by credit-worthy municipalities.
Departing load charges
CEERT’s White does not question CCAs’ initiative and intentions but “they are pushing back hard” against the limited authority the CPUC has exercised over them.
MCE’s Weisz said CCAs are “hopeful the PCIA proceeding will produce more transparency about the data utilities have used to calculate departing load charges.”
SVCE’s Suleiman agreed the solution is in utility disclosure. The JU arguments about departing load costs are “only one side of the story,” he said. “The costs that make PCIA charges so high are in expiring contracts and owned plants that could be sold but the IOUs refuse to disclose details of those investments.”
Gero said LACCE “absolutely agrees that departing loads should cover whatever costs were incurred for our customers.” But, he added, “they want to just give us a bill. We want to know what we are paying for.”
Regulatory Assistance Project (RAP) Senior Advisor Mike Hogan told Utility Dive it is “naïve” to think either a utility or a CCA can determine for itself what the departing load charge will be. “It will be adjudicated before the commission in an open and transparent proceeding,” he said. “The utilities will have to justify their claims and the CCAs will have the opportunity to respond.”
But Weiss, Suleiman and Gero argued the CPUC may not have full jurisdiction over CCAs, just as it has only limited authority over public power utilities.
CCA best practices
Freedman said The Utility Reform Network wants to see CCAs succeed. “We are working toward effective policy based on best practices for CCAs.”
He is developing potential solutions likely to be in TURN’s PCIA proceeding testimony. They begin with procurement of new renewables rather than “just reshuffling,” he said.
A “radical idea” is to allow small LSEs like CCAs to seek rate recovery authority through the CPUC, he said. “That would make the deal much more financable by bringing down the CCA’s cost of capital and increasing the likelihood the project would get built.”
Another solution is having utilities buy projects and allocate the power and its costs to the CCAs, he said. It would not be the present practice of sending the CCA the bill because the CCA would get a fixed power price. “It is not an indifference charge, it is the cost of the power,” Freedman said.
Procurement purchases could also be done by a state agency, he said. The California Department of Water proved that mechanism worked in 2001.
The CPUC is also empowered by the law establishing California’s renewables mandate to create a third-party procurement authority to buy on behalf of LSEs, Freedman said. “The commission has never activated it, but it is in the code.”
The stakes for finding a solution are high.
“Issues of consistency and coordination between CPUC requirements and CCA independent authority” could, if unresolved, “diminish the long-term effectiveness” of California’s planning and “limit the state’s ability to meet its GHG emission reduction goals,” CPUC Staff reported.