Wednesday, January 23, 2019

California CCAs Spur Worry of Regulatory Crisis

By Jason Fordney

SACRAMENTO, Calif. — Few parties in California are happy with the way the state’s community choice aggregator (CCA) program is turning out, legislators learned during a Wednesday hearing at the state capitol.

In a discussion that at times grew tense, state senators heard how the evolution of California’s CCA program has shifted hundreds of millions of dollars in costs to investor-owned utility customers because of long-term procurement contracts signed by IOUs a decade ago in a radically different energy environment. The result is consternation among ratepayers and elected officials about increased costs — rather than the promised benefits of restructuring — and alarm about resource planning.

Hueso | © RTO Insider

The situation “has become a very obvious conflict to people such as myself, and I am sure other legislators have been caught in the crossfire of this debate,” State Sen. Ben Hueso, chairman of the Senate Committee on Energy, Utilities and Communication, said at the opening of the hearing.

The State Legislature authorized the creation of CCAs with the passage AB 117 in 2002, after municipalities in the Los Angeles and San Francisco areas lobbied in response to a failed deregulation effort that in part caused the Western Energy Crisis of 2000/01. The law allows local governments to form CCAs by aggregating retail customers and securing electricity supply contracts to serve them. CCAs are growing rapidly in California and also exist in Ohio, New York, Massachusetts, New Jersey, Rhode Island and Illinois.

California Public Utilities Commission President Michael Picker told the committee that the state’s retail electricity industry is being deregulated once again as it was in the mid-1990s, but this time by technology.

“We are being deregulated from the bottom up, and there is no real plan as to how it fits together,” Picker said. Amid later questioning and discussion, he told the lawmakers, “I am looking to you for direction.”

CPUC President Michael Picker (foreground) and CPUC Energy Division Director Ed Randolph Address the Committee | © RTO Insider

In an effort to spread the costs of legacy contracts, the IOUs in April proposed that the state adopt a new formula for allocating costs of departing CCA and other retail-choice customers, called the portfolio allocation methodology. (See Utility Proposal Would Increase Legacy Costs for California CCAs.) That approach would replace the current IOU exit fee levied on departing customers, called the power charge indifference adjustment (PCIA), which is meant to address the old contracts. The PUC is taking a look at its deregulation strategy. (See California to Reconsider Retail Choice.)

PG&E Calls for Quick Action

California’s IOUs initially resisted the creation of CCAs by introducing a ballot proposition to make their growth more difficult, but that measure failed. The utilities said they are left holding the bag for long-term procurement decisions made years ago in an industry environment that has changed significantly in terms of rate structures, prices and technology. Those costs are being borne by a dwindling rate base — including low-income customers.

community choice aggregator cca

Malnight | © RTO Insider

PG&E Senior Vice President Steven Malnight told the committee that the legacy contracts, numbering more than 200 and signed in 2007 and 2008, enabled third-party resource developers to invest billions of dollars in California, create thousands of jobs and help the state to become an economic leader.

The IOUs “see a significant challenge that is in front of us — that needs to be addressed quickly — on cost allocation,” Malnight said. When the contracts were procured, the IOUs were planning to service their customers for up to 20 years.

“The assumption was that those customers would stay in our service territory, and that we would need to serve them,” he said. “Today, we know that reality is significantly different.”

About 30% of PG&E’s customers switched to third-party services, a number that is estimated to rise to 50% by 2020. PG&E procured energy on behalf of those customers and now must reallocate costs through the PCIA. Under that methodology, departing customers are assuming only about 65% of the costs that should be allocated to them. The remaining costs are being paid not by utility shareholders but by remaining IOU customers, many of them in areas without a CCA option, he said.

About $180 million has been shifted from CCA customers to IOU customers, he said, which will grow to $500 million by 2020. “I know in California that we do think big — but that is a lot of money,” Malnight said. Long-term contracts are often needed to provide resources to deal with renewable integration and protect grid reliability, and IOUs are generally over-procured and have limited options for solving that problem.

“We can’t arbitrarily walk away from that contract, [and] turn it over to a CCA or anybody else,” he said.

California Coalition of Utility Employees counsel Marc Joseph told the committee that in 2007, IOUs were facing renewable mandates when their cost was much higher and the industry and its technologies were young. It was a seller’s market, but CCAs now function in a “buyer’s market.”

IOUs could be paying back those contracts for decades, and the PCIA does not work to make IOU customers “indifferent” to the creation of CCAs. But CCAs are basing their current economic decisions on the current structure of the PCIA program, he said.

“It is easy to see the train wreck that will come,” he said, telling the legislators CCAs “will come running to you to bail them out.” He urged a slowdown in the CCA program while the PUC examines the PCIA issue, he said. Many new renewable developers are ready to build, but the result is no customers because IOUs are over-procured. As a result, in California “we have had a crash in the construction of new renewable projects” after healthy growth in 2016 at a time when large federal subsidies are available.

Contract Holders Expect to Get Paid

Independent Energy Producers Association CEO Jan Smutny-Jones told the committee that the group’s members built a lot of the renewable projects in California and also do some business with CCAs, as well as holding the IOU contracts.

“We expect those contracts to be honored,” he said, adding that “we are not really interested when someone else says something else should happen with those contracts.” They are private contracts subject to contract law and out of the jurisdiction of the PUC, he noted.

“This is a big issue. This state has a very good history of honoring contracts with my member companies. … We need to keep that up,” Smutny-Jones said. Not honoring the contracts would send a strong negative signal to companies considering investing in California.

Bradford Questions CCA Fairness

Bradford | © RTO Insider

Sen. Steven Bradford, who represents parts of Los Angeles County, said that CCAs can “pick and choose” which customers they serve. That assertion drew disagreement from Sonoma Clean Power CEO Geof Syphers, but Bradford insisted that “you can — that’s why you are in Marin, that’s why you are in Sonoma.”

IOUs have an obligation to serve customers, and “you wanted to be everything a utility is, other than report to the PUC,” Bradford said. As a State Assembly member in 2014, Bradford introduced legislation that was viewed as anti-CCA. It would have put default provider status back to the IOU rather than the CCA, but the bill was defeated after opposition from CCA supporters that argued that CCAs shouldn’t be subjected to the same oversight as IOUs.

At its conclusion, Hueso said the hearing had been “enlightening” and that he was concerned about creating an ungovernable system. The committee plans to hold more discussions on the future of CCAs.

“Nobody talked about a collapse of our system, but there were a lot of comments that alluded to that,” Hueso said.

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