November 28, 2018

How Community Choice Is Transforming California’s Retail Energy Markets

Kevin Haroff

For generations, Californians have depended on three large investor-owned utilities (IOUs)—Pacific Gas & Electric (PG&E), Southern California Edison (SCE), and San Diego Gas & Electric (SDG&E)—to meet most of their needs for electrical energy.

That is now changing. With the advent of community choice aggregation, California cities and counties are joining together to provide electricity directly to consumers, with only limited involvement by the IOUs. As they do, these communities are altering the character of the state’s retail energy markets in dramatic ways. 

With the passage of Assembly Bill 117 (A.B. 117, Migden, Stats. of 2002, ch. 838), the California state legislature authorized municipal and county governments to form community choice aggregators (CCAs), which combine the buying power of local consumers to purchase electricity on their behalf. In this way, CCAs give consumers greater control over the source of the power they pay for—for example, whether that source is a renewable energy facility or a gas-fired power plant—rather than leaving this decision to an IOU.

Today, there are 19 operational CCAs serving more than 8 million customers throughout the state. By the year 2020, CCAs are expected to serve over 18 million customers, and by the mid-2020s, CCAs (along with customer-sited roof-top solar and other direct access providers) could supply over 85 percent of the state’s total retail electricity load. This allows CCAs to help California meet its ambitious greenhouse gas (GHG) reduction goals, by providing greater levels of renewable energy and supporting the development of new renewable resources.

The path to success for community choice aggregation has not been an easy one. Regulatory challenges, including requirements to compensate the IOUs for costs previously incurred to supply power to current CCA customers—referred to as “stranded costs”—have made it difficult for CCAs to maintain competitive rates. Unless CCAs can respond effectively to these obstacles, the fate of community choice aggregation will remain uncertain.

The Introduction of Community Choice Aggregation

The concept of community choice aggregation is not unique to California. It has been authorized and implemented in one form or another by at least six other states (Illinois, Massachusetts, New Jersey, New York, Ohio, and Rhode Island). California, however, is where the concept has really taken hold.

A central feature of CCAs is their reliance on principals of local government control and accountability. Unlike the IOUs, CCAs are overseen by local elected officials, not corporate boards of directors. Moreover, CCAs are not operated as public utilities subject to the supervision of the California Public Utilities Commission (CPUC); instead, the CPUC’s role is largely limited to the review and “certification” of implementation plans that are developed by CCAs to describe “process and consequences of aggregation” by the CCA.

CCAs must offer consumers within their service area the opportunity to purchase electricity from them, but customers retain the right to “opt out” of CCA programs and continue to be served by the incumbent IOU. IOUs also still retain important responsibilities to provide CCAs with “appropriate billing and electrical load data, including, but not limited to, data detailing electricity needs and patterns of usage.” (Cal. Pub. Util. Code § 366.2(c)(9).) To facilitate the success of community choice, state law requires the IOUs to “cooperate fully with any community choice aggregators that investigate, pursue, or implement community choice aggregation programs.” (Id.)

Despite that requirement, the IOUs initially undertook several strategies specifically aimed at undermining this explicit legislative policy. Significantly, those strategies were implemented with a focus on California’s first successful CCA—MCE Clean Energy, in Marin County, California.

Beginning in 2003, the governing boards for the County of Marin and several municipalities located within the county began a preliminary assessment of the feasibility of establishing a CCA serving just their local jurisdictions in Marin. This led to the establishment of a local government task force in June 2006, that was comprised of elected officials from both the county and local municipalities to evaluate the formation of a joint powers authority to operate the Marin Energy Authority (MEA), which later became MCE.

The establishment of MEA in 2008 triggered a response from the IOUs, which were concerned about the threat CCAs represented to their historical near-monopoly over the state’s retail energy markets. Much of this response took the form of support for Proposition 16, or the “Taxpayers Right to Vote Act.” Proposition 16, which was on the June 8, 2010, ballot as an initiated constitutional amendment, would have required a two-thirds majority vote of a local electorate before any local government could establish a CCA program.

Proposition 16 was defeated by California voters in 2010. Moreover, PG&E’s campaign strategy prompted a response from the California legislature. In 2011, the legislature passed Senate Bill 790 (S.B. 790, Leno, Stats. of 2011, ch. 599), which was designed to “establish a code of conduct, associated rules, and enforcement procedures, applicable to electrical corporations in order to facilitate the consideration, development, and implementation of community choice aggregation programs, to foster fair competition, and to protect against cross-subsidization by ratepayers.”

California Public Utilities Commission Decision No. 12-12-036, Decision Adopting a Code of Conduct and Enforcement Mechanisms Related to Utility Interactions with Community Choice Aggregators, Pursuant to Senate Bill 790, Rulemaking 12-02-009 (Dec. 20, 2012).

S.B. 790 created a more open playing field for community choice aggregation in California. Since it was adopted, additional CCAs have been formed by local governments throughout the state.

Meanwhile, MEA (now known as MCE) has continued to play a leadership role within the CCA community. In 2018, MCE expects to have a 78 percent GHG-free supply portfolio, and it plans to steadily increase its use of GHG-free energy with the goal of achieving a 100 percent GHG-free supply portfolio by 2025.

Current Challenges Facing CCAs in California

Despite the success of community choice aggregation, CCAs continue to face daunting challenges. Among the biggest are those involving the issue of “non-bypassable” charges, which essentially are charges that must be paid to reimburse the IOUs for stranded costs—costs they previously have incurred to supply electricity to customers who subsequently have switched to a CCA. These charges must be included in the electricity rates paid by CCA customers.

The most controversial non-bypassable charge is the Power Charge Indifference Adjustment (PCIA). The PCIA is essentially an “exit fee” paid to compensate IOU customers for the fact that the IOUs previously entered into long-term contracts to supply power to customers they no longer serve. The expectation initially was that PCIA charges would go down as the IOU’s high-cost, long-term contracts expire over time; however, just the opposite has occurred.

In December 2015, the CPUC approved PG&E’s request to nearly double the fee charged to MCE customers, despite strenuous objections from the CCA community. The CPUC established a PCIA Working Group in 2016 to address concerns raised by various parties regarding PCIA transparency, certainty, and access to data, but it produced little in the way of consensus to reform the PCIA process. PG&E, SCE, and SDG&E jointly submitted a proposal for a new Portfolio Allocation Methodology (PAM) as an alternative to the existing PCIA methodology; however, the CPUC rejected that proposal as premature, and instead instituted a rulemaking process to consider new alternatives to the PCIA.

On October 11, 2018, the CPUC issued a decision in the PCIA rulemaking that remained highly favorable to the IOUs. Among other things, the decision would allow utility-owned power plants built before 2002 to be included in PCIA calculations, as well as remove an existing 10-year cap on the inclusion of post-2002 costs. The CPUC’s decision will result in a sharp increase in PCIA rates for CCA customers when it goes into effect in January 2019 and arguably is inconsistent with the requirements of state law. As a result, the decision may be subject to additional administrative and (potentially) judicial review.

Conclusion

The advance of community choice aggregation and its impact on California’s retail electric markets are something few people might have predicted ten years ago. It already has produced significant benefits for California consumers, both in the form of electricity cost savings to ratepayers and through its support for the development of new renewable energy resources that are helping the state reduce its contribution to climate change. At the same time, the expansion of CCAs and other non-traditional providers into California’s retail energy markets will present significant challenges for policymakers in coming years.

Aside from technical challenges associated with grid reliability and integration, perhaps the biggest hurdles facing community choice aggregation are political. CCAs pose a substantial competitive challenge for the regulated IOUs. That challenge is only expected to increase in the next decade. As in the past, competition between the IOUs and CCAs can be expected to spill over from local retail markets to the legislature and the CPUC. Existing and new CCAs will need to remain alert to competition in all those venues if they hope to play a continuing role in realizing California’s renewable energy future

    Kevin Haroff

    Published:November 28, 2018

    Kevin Haroff is an attorney based in San Francisco, a vice chair of the International Environmental and Resource Law (IERL) Committee of the ABA’s Section of Environment, Energy, and Resources, and a member of the board of directors of MCE Clean Energy, California’s first community choice aggregation entity. The views expressed in the article are the author’s own and do not represent the views of MCE or any other organization.