California regulators see signs of a new energy crisis — can they prevent it?
Regulators raise hard questions as choice threatens to stall California’s clean energy policies
California’s regulators see a disruption coming that may not be exactly like the 2000-2001 energy crisis, but could have bigger, wider impacts.
The customer choice movement has added dozens of new power providers into the mix. Their inexperience and uncertain place in the regulatory scheme threatens the ability of regulators and policymakers to keep the state's focus on growing clean energy and cutting emissions. Some say it even threatens the state power system's reliability and affordability.
A California Public Utilities Commission (CPUC) report said 2017-2018 changes in renewables procurement could be "early warning signs" of a new energy crisis. A leader of the customer choice movement sees a plan already in place to prevent another crisis and says current challenges do not stem from the expanding choice movement.
As the customer choice movement expands, California's energy sector stakeholders continue to struggle with what CPUC President Michael Picker told Utility Dive is "scar tissue" from the state's 2000-2001 energy crisis.
A perfect storm
In 1998, after major legislative changes, California shifted its investor-owned utilities (IOUs) into a competitive retail market. It worked until the summer of 2000, when a “perfect storm” of factors drove the wholesale electricity price from Spring 1998’s $40/MWh to $250/MWh at the end of 2000.
The IOUs lost an estimated $12 billion to $14 billion. Pacific Gas and Electric (PG&E) declared bankruptcy. Only efforts by the CPUC saved Southern California Edison (SCE) and San Diego Gas and Electric (SDG&E). Total costs reached an estimated $40 billion to $45 billion.
Many of the factors that drove the crisis, including over-reliance on antiquated natural gas generation and the absence of reliability requirements, no longer apply. But major legislative changes, opening up the power sector to competitive forces, are once again being imposed and the market is in turmoil.
The CPUC has initiated an effort, welcomed by most stakeholders but praised by few, to confront the new circumstances before they force a crisis.
CPUC President Picker said local leaders and consumers are “voting for choice with their feet.” They are moving to customer-sited resources like rooftop solar and energy efficiency. They are also moving away from their utilities to new Direct Access and community choice aggregation (CCA) electricity providers.
In an effort to anticipate the consequences of these changes, the CPUC is calling for a dialogue that will lead to “a specific direction from the new legislative and market movement,” Picker said.
The energy crisis
The events of the summer of 2000 are recounted in “California Customer Choice; An Evaluation of Regulatory Framework Options for an Evolving Electricity Market,” a draft white paper released May 7 by the CPUC. This “Green Book” is intended to follow the CPUC’s 1993 “Yellow” and “Blue” books, which planned the state’s 1990s shift to a competitive market.
Legislation that empowered retail electricity providers (REPs) met an historically hot summer, rising demand and supply shortages. Bad actors, notably Enron, further manipulated the imbalance. Grid congestion worsened it and prices spiked. Blackouts and brownouts caused the IOUs’ credit ratings to be downgraded.
Sacramento finally empowered a central procurement authority, which signed long-term power purchase agreements (PPAs) for the IOUs. Though high-priced, they alleviated the supply shortages and tensions eased. Ultimately, the legislature enacted major reforms.
Among the reforms was an expansion of CPUC authority. A Resource Adequacy standard intended to prevent future supply shortages was imposed on all load serving entities (LSEs). And, in 2002, Community Choice Aggregation (CCA) was mandated by Assembly Bill 117.
The law allows cities and counties, when approved by the CPUC, to act as LSEs and take over IOU customers in their jurisdictions. CCAs control the resource mix and price of customers’ electricity, but they must comply with CPUC and state requirements, including California’s 50% renewables by 2030 mandate.
A new cap on Direct Access, which allows customers to contract directly for power with independent energy service providers (ESPs), was approved for non-residential customers in 2010. It is now fully subscribed at about 13% of IOU load.
CCAs and Direct Access play an important part of the “early warning signs” of a new crisis described by white paper lead author Diane Fellman in a May 3 webinar. The CPUC is particularly concerned about three key trends that threaten reliability, affordability and deep decarbonization, which are the “three pillars” of California’s post-energy crisis policy.
One trend is the “fragmented decision-making” that comes from the proliferating number of LSEs, a white paper FAQ explained.
There were nine CCAs serving load in California at the end of 2017, and 12 more are expected this year, according to CalCCA Executive Director Beth Vaughan. By the end of 2018, CalCCA forecasts more than 4.5 million CCA customer accounts, Vaughan told Utility Dive.
More than 85% of the state’s retail load could be served “by sources other than the IOUs” by the middle of the 2020s, according to a 2017 white paper from the CPUC.
The second trend is poorly coordinated procurement of the resources needed to ensure reliability. This is undermining the crucial post-energy crisis Resource Adequacy standard.
Jan Smutny-Jones, CEO of the Independent Energy Producers Association (IEPA), said the utilities don’t want to be responsible for customers moving to CCAs and CCAs say the IOUs have absorbed the available Resource Adequacy capacity. “As the system becomes more fragmented, more questions like this will come up,” he told Utility Dive.
President Picker is especially concerned about reliability. He has not forgotten the 2011 Southwest blackout, he said. It left San Diego in the dark for 12 hours at a $130 million cost. “Those kinds of events cause doubts about everything on the grid,” Picker said. “It is our responsibility to avoid them.”
The third concerning trend is the lack of preparation for customers “stranded without service if their electric provider fails, as many did in the previous California deregulation,” the white paper reports.
To date, California’s power sector transformation has led only to “fragmented proceedings and legislative actions,” Fellman warned. “If we are not careful, we can drift into another energy crisis.”
The white paper offers details on how Texas, New York, Illinois and Great Britain have managed customer choice movements. But none offers a complete solution for California, the white paper reports. “We need a clear long-term vision” of “a lasting, stable platform that goes beyond short-term fixes,” the CPUC concluded.
View from the top
President Picker wants a stakeholder discussion. A new plan, like the one laid out in the Yellow Book and the Blue Book, is needed, he said. But first stakeholders must be asked to think through the right questions.
“Do we want more customer choice?” he asked. “Do we want individual or aggregated customer choice? Or do we want to stay with the kind of hodgepodge we have now?”
The hodgepodge caused 11 LSEs to ask for waivers on their Resource Adequacy obligations last year, he said. Natural gas units are shutting down because one-year contracts offered by Direct Access and CCA providers cannot sustain their operating expenses, he added. “That is a market failure.”
The commission’s proceeding to determine the right methodology to calculate the power charge indifference adjustment (PCIA) could help resolve the hodgepodge, Picker acknowledged.
The PCIA is a bill charge that compensates IOUs for generation procured in the past, at what are now above-market prices, to meet anticipated electricity demand now being lost to CCAs. IOUs claim the current methodology, which only approximates actual market prices and costs, undercompensates them. CCAs claim it overcharges them.
Both sides have proposed alternative PCIA methodologies. The PCIA's value will significantly impact IOU finances but could threaten the viability of some CCAs.
Picker neither endorsed nor rejected innovative proposals from the CCAs for securitizing IOU-owned assets and auctioning older, higher-priced PPAs. “We will continue to talk this question out,” he said.
Resolving the PCIA issue will eliminate some uncertainty, but not the challenge of CCAs’ lack of access to capital, Picker said. That has kept them from obtaining long-term PPAs in proportion to the scale of their potential need and forced them to serve load largely through short term contracts, he said.
A central authority for all procurement could resolve the procurement impasse and move the state toward its GHG reduction goals, Picker said. “We have a renewables standard, and everybody is talking about 100% renewables, but that doesn't necessarily translate into GHG reductions,” he said. “Should we go to a GHG reduction standard?”
"What does California really want from customer choice? Is it bright and shiny technology? Is it decarbonization? We need clarity on those questions to avoid the mistakes of 2000-2001.”
President, California Public Utilities Commission
The CPUC’s legislatively-mandated authority seems to empower it to create a central procurement mechanism and impose more oversight of CCA and Direct Access resource portfolios, Picker said. That could resolve current concerns about California's stasis in renewables growth, potential shortfalls in Resource Adequacy, and progress toward GHG reductions.
A central buyer that procures and finances contracts to meet state policy “is not now on the table, but we think we have the authority to obligate all LSEs to participate,” he added. “The challenge then would be enforcement.”
Picker insisted he is “indifferent” on customer choice. “My attention is on something bigger. What does California really want from customer choice? Is it bright and shiny technology? Is it decarbonization? We need clarity on those questions to avoid the mistakes of 2000-2001.”
The CPUC must implement a sustainable framework that “keeps the lights on and keeps electricity affordable,” he said. “And we need protection against potential CCA failures that leave customers stranded. We are not going to do anything to hinder them, but they need to be more transparent and accountable.”
The CCA view
CalCCA represents California’s community choice aggregators. Vaughan said the state’s dozens of pieces of “robust legislation” and its “21 separate CPUC proceedings" on growing utility-scale and distributed renewable generation and cutting emissions in a responsible way represent a strong plan to prevent another energy crisis.
But the commission's concern about the customer choice movement fails to recognize the success of this effort.
The Green Book “fails to recognize the important role CCAs play within their communities,” she emailed Utility Dive. “CCAs were created by the legislature in the wake of the energy crisis as part of the solution, to reduce volatility in the energy market,” Vaughan wrote. “The legislature hoped that CCAs would bring a mature and careful approach to protecting ratepayers.”
CCAs have already procured more than 1,100 MW of new renewables to “meet the needs and perspectives of their communities,” Vaughan said. New solicitations will add 800 MW more, she predicted.
The Green Book’s “dire claims and vague recommendations aren’t backed up by data or specifics, and appear to be more about protecting and expanding the CPUC’s role than solving any issues.”
Executive Director, CalCCA
CCAs are also driving IOU prices down. “Previously, the monopolies in many communities meant consumers had no option but to pay the bill they received from their IOU,” she said. “Now they have choices.”
Because CCAs will continue to procure to meet the state’s renewables, GHG reduction and reliability goals, Vaughan does not see the need for the central buyer proposed by the Green Book. She agreed the state faces a Resource Adequacy challenge. But it is not caused by the choice movement, she insisted. “Not a single CCA requested a [Resource Adequacy] waiver in 2017.”
The innovative CCA proposal to securitize and auction IOU assets to drive down the value of the PCIA got IOU acknowlegement in May 7 through May 11 hearings, Vaughan reported. PG&E acknowledged that securitization “is a great financing tool” and is “worth considering.”
Overall, the Green Book’s “dire claims and vague recommendations aren’t backed up by data or specifics, and appear to be more about protecting and expanding the CPUC’s role than solving any issues,” Vaughan said. The commission should “either address these issues in existing proceedings or open a retail choice proceeding. There is no need for additional legislative engagement.”
California Wind Energy Association Executive Director Nancy Rader and Center for Energy Efficiency and Renewable Technologies (CEERT) Executive Director V. John White agreed with Vaughan about a Green Book failing.
“The Commission has the tools it needs to address these concerns,” Rader emailed Utility Dive. “It just needs to exert effective leadership.”
CEERT's White said the paper overlooks the need “to rethink the role of the CPUC.” It “seems to be an attempt at thought leadership but it offers no course of action,” he said.
Matt Freedman, staff attorney for ratepayer advocate The Utility Reform Network (TURN), called the Green Book “a good wake-up call for regulators and legislators.”
California’s evolving market is “a classic collective action problem,” he emailed Utility Dive. A crisis can be avoided if an entity or entities will take responsibility for “advance planning.”
Customer Choice Aggregators "are well-intentioned, but they are a triumph of enthusiasm over experience. If they are going to take on the role of electricity provider, they must learn to be stewards of the grid.”
V. John White
Executive Director, Center for Energy Efficiency and Renewable Technology
Both Freedman and White agreed with a concern raised by Picker. Moving ahead without coherent planning could lead to urban and coastal CCA customers imposing harm on rural and inland customers not associated with CCAs, Freedman said. The threat is that procurement of local and low cost renewables generation by CCAs would leave inland and rural electricity customers dependent on higher-priced legacy resources.
IEPA’s Smutny-Jones said the Green Book effectively lays out the issues. “There are no ah-ha moments, but it will help structure a public discussion,” he said. “And it reminds us that when the system got stressed by the earlier energy crisis, the carefully planned program unraveled pretty quickly.”
On procurement and a central buyer
White and Freedman agreed with Picker that a central planner could resolve challenges with procurement by focusing it on California’s policy goals.
Procurement must not be left to CCAs, White said. “They are well-intentioned, but they are a triumph of enthusiasm over experience. If they are going to take on the role of electricity provider, they must learn to be stewards of the grid.”
Central planning might require a new state agency that can be transparent, can avoid micromanagement, and will coordinate LSE investment, White said. Freedman stressed that a “central procurement structure” must remain state jurisdictional.
IEPA’s Smutny-Jones was especially concerned about procurement because only one CCA has proved credit-worthy, and procurement at the necessary scale is unlikely without good credit. His members “expect their contracts to be honored in full,” he added.
On the PCIA
Stakeholders contacted by Utility Dive unanimously expect a ruling in the PCIA proceeding by the end of the summer that will clarify CCA financial obligations to IOUs for investments made to serve customers who moved to CCAs.
Freedman expects the CCA proposals for securitizing IOU-owned assets and auctioning higher-priced PPAs to be postponed or deferred to the legislature. But Smutny-Jones said the parties may still find middle ground. “The IOUs want compensation for their investments,” he said. “The CCAs want a defined PCIA so that they can move ahead with some certainty.”
White said the methodology imposed by the commission to calculate the PCIA value could make CCA promises of electricity prices lower than utility prices impossible to fulfill.
Despite the popularity of the CCA movement, a wide range of stakeholders, including many in the renewables and environmental communities, support a realistic PCIA value, he said. “We have driven down the price of new wind and solar, but we still have to pay for the early contracts that drove those prices down.”
CCA representatives have, in the past, questioned the CPUC’s authority on this issue and may appeal to the legislature for intervention, White said. “But overturning a decision with the utilities, the CPUC, probably labor, and some renewables and environmental advocates against them will be difficult.”
Which way for CCAs?
Vaughan sees the CCAs meeting their procurement obligations and leading California’s electricity consumers away from the IOUs, leaving the utilities to administer the power system’s wires and poles.
But Smutny-Jones agreed with White that CCAs may find promises of more renewables, lower prices and local economic investment “at cross purposes.” That may be why they are now emphasizing that they are greener than the IOUs and will support local economic development, but making fewer claims about lower electricity prices, he added.
White stressed that some CCAs are doing interesting things with vehicle electrification and reliability, in partnership with IOUs. “They seem to be learning they have responsibilities, as stewards of the grid, to do more than promise renewables at a low cost,” he said. “Everybody has to grow up and wrap their heads around the real challenges we face.”