Will the CPUC reject illegal cost shifts onto millions of Californians served by Community Choice Energy programs?
Current proposals for Resource Adequacy Capacity valuation, and the lack of a GHG-free energy premium, are just two of the ways the CPUC's current proposal improperly shifts costs.
The following is a Viewpoint of Nick Chaset, CEO of East Bay Community Energy
More than 160 cities and counties throughout California have chosen to participate in community choice aggregation (CCA) over the last eight years. There are 19 CCA programs operating successfully across California — from Humboldt County to Los Angeles, Placer County to Monterey Bay. Community choice is proving to be a powerful force in driving greenhouse gas emissions reductions, keeping energy costs down, providing transparency and accountability, and investing in innovative programs and projects to meet the needs of millions of Californians in their local communities.
The future of CCA in California hangs in the balance, however, due to proposed reforms to the so-called Power Charge Indifference Adjustment (PCIA) that would illegally shift costs from bundled, investor-owned utility (IOU) customers to CCA customers.
Instead of adopting these reforms, the California Public Utilities Commission (CPUC) should consider a set a common-sense adjustments to the PCIA that will ensure equity and stability as California's continues to move forward to decarbonize. The CPUC is scheduled to decide on the PCIA reforms on October 11.
A quick introduction to CCAs and the PCIA
Community Choice Aggregators are local governmental agencies buying electricity for their community members in place of investor-owned utilities like PG&E, SCE and SDG&E. The county of Alameda, along with many cities in the county, created East Bay Community Energy (EBCE) to accelerate deployment of GHG-free energy, and to invest in the community EBCE serves.
CCA customers must pay ongoing charges to the IOUs for the unavoidable, above-market costs of power supply commitments entered into by the IOUs while CCA customers were still served by the IOU. The single largest such charge is the PCIA — state law requires it be set in a manner that avoids shifting costs between either CCA or IOU customers.
The PCIA has been controversial. Both CCAs and IOUs claim the current PCIA methodology unfairly shifts costs onto their respective customers. Right now, the CPUC is considering two proposals that would change how the PCIA is calculated.
Unfortunately, the two proposed decisions currently under consideration by the Commission both have fatal methodological flaws that result in significant — and illegal — cost shifts on to CCA customers. Based on PG&E's own analysis, the "Alternative Proposed Decision" (APD) would result in a greater than 18% increase in the PCIA rate and more than $300 million in cost shifts — and increased bills — onto millions of CCA customers across California, including the hundreds of thousands of CARE customers currently served by CCAs.
Table 1 – Comparison of current PG&E PCIA and APD PCIA
The Commission has an opportunity to make some straightforward changes – based on well understood energy market dynamics — to their PCIA proposals that can fix the key methodological flaws and ensure that the PCIA treats both CCA and utility customers fairly.
Utility rates declining
Utility rates are going down, despite customer departure for CCAs, even without changes to the PCIA.
A misunderstanding that seems to have become embedded in the minds of many involved in the PCIA debate is that IOU customer rates are rising as a result of the CCA transition. In fact, in PG&E and SCE's most recent 2019 rate forecasts, both utilities forecast generation rate reductions of more than 10%. This despite seeing record rates of load departure to CCAs. You heard that right — bundled customer rates are going down while ever more customers depart to join CCAs.
Getting the PCIA right
With that misunderstanding disposed of, we turn to how to properly set the PCIA.
The Commission faces a difficult task as it attempts to "reform" the PCIA. The current PCIA is so complex and opaque that only the IOUs can calculate it, using proprietary models that cannot be reviewed by CCAs for accuracy. Managing this 'Rube-Goldberg' machine is made all the more difficult by statutory requirements that no costs be shifted between CCA or IOU customers.
That being said, the Commission should focus on two specific PCIA errors. Taken together, these errors could result in drastic increases to the PCIA and a significant, and statutorily illegal, cost shift onto millions of CCA customers across California, including millions of low-income residents and small business owners.
1. The Commission is undervaluing resource adequacy
Far and away the largest problem with the proposals now before the Commission is how Resource Adequacy (RA) Capacity is valued for PCIA purposes.
Before turning to the problems with the proposals, here's a quick recap of what RA is about.
California's RA program has two goals. First, to ensure the availability of sufficient resources to safely and reliably serve customers. Second, incentivize the siting and construction of necessary new resources. Load Serving Entities (LSE) like CCAs and IOUs procure RA Capacity so that generation resources are available when and where needed.
The proposals before the Commission value RA using an administratively set benchmark based on a survey of recent short-term RA Capacity purchase transactions for forecast purposes, with a later "true-up" using a price derived from actual short-term RA Capacity sales. The benchmark and the true-up result in unrealistically low prices, and so a preposterously large PCIA.
Both the benchmark and true-up explicitly do not account for any long-term value or environmental benefits by relying solely on one-year sales and purchases of existing natural gas capacity. This is all the more remarkable when you realize that short-term sales are only 10% of all RA transactions.
This lack of recognition of long-term value of power supply resources, and especially long-term RA Capacity value, is particularly troubling in light of the fact that the Commission is separately considering major rule changes to the RA program that would mandate 3- to 5-year forward procurement of RA.
A more accurate assessment of the market value of RA Capacity must reflect the long-term contracts that LSEs actually enter. In the RA market, longer term contracts have higher prices, particularly during constrained summer months. The Commission's 2017 RA report recognized this market dynamic when assessing reported forward RA prices.
"It also appears that further out years have higher prices for the summer months. This may indicate that years in the more distant future may have more constrained supply in the summer months than the closer future years," the report said.
Even if the Commission fails to recognize the long-term value of RA Capacity over the typically 20+ year forward commitments in the IOUs' portfolios, at a minimum, it must recognize the forward market value of the proposed 3-year ahead RA Capacity procurement requirement that LSEs actually face.
Figure 2 illustrates just how far off the proposed RA valuation is when 3-year forward RA Capacity contracts and preferred resources are added to the calculus.
When accounting for multi-year RA Capacity costs and preferred resources, the RA Capacity benchmark value rises by more than 50% to $57.99/kW-year. This example illustrates the distance between the Commission's proposal and the actual market dynamics facing both CCAs and IOUs. To ensure a semblance of equity between CCA and IOU customers as it relates to RA Capacity value, the Commission must adopt a benchmark that includes forward RA Capacity procurement and preferred resources.
2. In a de-carbonizing California, including a GHG-free and other environmental value is essential
On September 10, 2018, California Governor Jerry Brown signed SB 100, which puts California on a path to a 100% GHG-free electricity supply by 2045. At East Bay Community Energy, 38% of our energy supply comes from renewables and 47% of our energy supply comes from GHG-free sources.
Yet, the Commission has continued to omit a valuation of these GHG-free resources from the PCIA calculus. In so doing, it is not accounting for the premium value of GHG-free resources to CCA customers — some of which CCAs are buying from IOUs at the very premium price the Commission is disregarding. Every dollar that a CCA pays an IOU for GHG-free energy should directly reduce CCA customer PCIA obligations, yet the Commission's proposed PCIA omits a GHG-free premium, and so artificially inflates the PCIA.
The Commission has already recognized in another proceeding that GHG-free resources command a premium price, underscoring the need for a GHG-free premium in the PCIA. In the Commission's Integrated Resource Planning proceeding, the Commission directed load-serving entities to procure "resources that reduce GHG emissions up to the point that the marginal cost of doing so equals the GHG Planning Price" set by the Commission at $15.17/ton in 2018, $22.19 in 2025 and then rising to $150/ton in 2030.
Separately, analysis by the Climate Policy Initiative of California's current cap and trade market results in a GHG-free energy premium over $6/MWh.
The question in front of the Commission should not be whether a GHG-free and other environmental premium is required to ensure there is no cost shift onto CCA customers, but what the appropriate level of premium should be. On this point, there is not a clear answer, but starting with Commission and CAISO data is a place to start.
Where does the Commission go from here?
Protecting CCA customers from cost shifts is an equal part of the Commission's mandate alongside protecting bundled customers. The current proposals for RA Capacity valuation, and the lack of a GHG-free energy premium, are just two of the ways that the Commission's current proposal improperly shifts hundreds of millions of dollars of bundled customer costs onto CCA customers.
The Commission can still move towards equitable treatment of the millions of Californians who are served by CCAs today by valuing RA Capacity and GHG-free energy to reflect on-the-ground market dynamics. As someone who is responsible for running a CCA that will serve over 1.5 million Alameda County residents by the end of 2018, I sincerely hope they do.