May 01, 2013

Marin Energy Authority: A community choice aggregation program for electricity service

Greg Stepanicich

Marin County, located across the Golden Gate Bridge from San Francisco, is well-known for its environmental stewardship. The County government has been at the forefront in adopting climate change and greenhouse gas reduction plans. In 2006, based on initial studies, the County’s Greenhouse Gas Reduction Plan called for the exploration of community choice aggregation (CCA) as a means to achieve the most substantial reduction in greenhouse gas emissions of all the identified programs that were within the power of Marin local government to implement.

Under a CCA program, the County, cities, and towns would purchase or generate the electricity provided to its customers. By controlling the generation component of electricity service, local government would have the power to make electricity greener in Marin. The exploration of this program was funded and staffed by the County of Marin and a task force made up of elected officials was formed to evaluate whether a CCA program should be implemented. On December 19, 2008, a joint powers authority called the Marin Energy Authority (MEA) was formed initially consisting of the County and seven cities and towns. Today the MEA consists of all eleven cities and towns in Marin, the County of Marin, and most recently the City of Richmond which is located across the Bay to the east in Contra Costa County. This article discusses the legal framework that was established and the key legal issues that had to be resolved in order to implement this innovative program.

The enabling statute

In 2002, after the electricity deregulation meltdown in California, the state legislature adopted a statute authorizing cities and counties—either individually or jointly through a joint powers authority—to conduct a CCA program. Cal. Pub. Util. Code § 366.2. The local public agency conducting the CCA program is responsible for purchasing or generating electricity for its customers and the incumbent investor-owned utility is required to distribute this electricity to these customers through its existing infrastructure. The customers are charged a generation rate by the public agency and a distribution rate by the investor-owned utility.

Section 366.2 prohibits CCA programs within any area served by a local government-owned electric utility. Thus, CCA programs are limited to areas served by investor-owned utilities. A public agency seeking to serve its community through CAA must offer electricity service to all residential customers within its jurisdiction and may offer its service to commercial and industrial users. When a public agency establishes a CCA program, extensive notice about this program must be provided to all potential customers within its jurisdiction. This notice must explain that each customer may opt out of the CCA program and keep its electricity generation service with the incumbent investor-owned electric utility. In California, CCA is a customer opt-out program which means that each customer within a CCA agency’s jurisdiction automatically will be enrolled unless the customer affirmatively states that it is opting out of the program.

Although the California Public Utilities Commission was given the power to review and approve the implementation plan for the CCA program, for the most part CCA agencies are authorized to operate without Public Utilities Commission oversight. Customer rates are set by the CCA agency’s governing body and power purchase agreements may be entered into without Public Utilities Commission approval.

The legal structure for the Marin Energy Authority

Like many states, California law authorizes cities, counties, and other public agencies to join together to establish by written agreement a joint powers authority. Cal. Gov’t Code § 6500 et seq. Under California’s Joint Exercise of Powers Act, the parties to a joint powers agreement can exercise common powers throughout the jurisdiction of the member agencies. Public Utilities Code Section 366.2 expressly authorizes cities and counties in California to establish and operate a CCA program pursuant to a joint powers agreement. Under such an agreement, a separate legal entity may be established governed by its own governing board.

The MEA joint powers agreement provides for the MEA to be a separate legal entity governed by a board of directors consisting of one elected official appointed by the governing body of each member. The MEA has the power to enter into contracts in its name, acquire and manage buildings and other facilities including electricity generation facilities, incur debt as permitted by state law, and hire staff.

Key issues addressed before formation

Under California Government Code Section 6507, the joint powers agreement may provide that the debts, liabilities, and obligations of the joint powers agreement are not the debts, liabilities, or obligations of the individual members of the joint powers agreement. This was a critical protection to the local entities in Marin County when exploring CCA. None of the local public agencies were willing to risk exposing their general funds to the debts, liabilities, and contractual obligations of a CCA program under which power purchase agreements would be entered into to purchase electricity for distribution to its customers. Creating a liability firewall was an essential part of establishing the CCA program. Without it, the MEA would not have been formed.

In California only one published appellate court decision has addressed the liability of the members of a joint powers agreement for the liabilities of the energy aggregation authority. Tucker Land Co. v. State of California, 94 Cal. App. 4th 1191(2d Dist. 2001), review denied (2002), addressed a real estate deal gone bad in which the defendant Mountains Recreation and Conservation Authority (Mountains Conservation Authority) was held liable to the Tucker Land Company (Tucker) for over $6 million in damages in a prior lawsuit. In the subsequent action, Tucker sought a declaration that the constituent members of the Mountains Conservation Authority were jointly and individually liable for this obligation. The court of appeal rejected this argument relying upon Government Code Section 6507 and the language of the joint powers agreement insulating the members from the Authority’s debts, liabilities, and obligations. Further the court rejected the argument that the members of the Mountains Conservation Authority should be liable for its obligations on an alter ego (piercing the corporate veil) theory. In rejecting this argument, the court noted that the Mountains Conservation Authority had followed the organizational formalities of establishing and operating a joint powers agreement and that Tucker presumably was aware of the provisions of its formation agreement. However, in dicta the court noted that this liability firewall only applied to contractual liabilities and not tort liabilities.

Due to the risk of potential tort liability arising from the MEA’s operations, two safeguards were implemented by the MEA. First, the joint powers agreement provides that the MEA will defend, hold harmless, and indemnify the members from the negligent acts or omissions or willful conduct of the MEA. Second, this indemnity is supported by insurance policies held by the MEA naming the members as additional insureds.

In addition, the MEA has implemented a third layer of liability protection. All contracts entered into by the MEA require the party contracting with the MEA to agree that its only legal recourse is against the MEA and that it will have no legal rights or remedies against the individual members. This contractual provision substantially reduces the risk of an alter ego liability claim being brought against members of the MEA in a future dispute.

These multiple layers of liability protection provided sufficient assurances to Marin County and the participating cities and towns to enter into the joint powers agreement and participate in a CCA program.

Another key organizational issue was establishing a voting system for the MEA’s Board of Directors that protected the interests of both large and small members. When the MEA was first formed, its membership was limited to Marin County which consists of cities and towns ranging from approximately 2,000 to 50,000 residents and an unincorporated County area similar in size to the larger cities. Thus, the electrical load of each member would vary greatly. The bigger members wanted a voting system that accounted for their larger electrical loads while the smaller members wanted to insure that Board decisions were not dominated by the larger members with the smaller members effectively having no voice.

The solution to this potential problem is a two-tiered voting system. For a matter to be approved, it must receive both a majority vote of the members and a majority vote of the electrical load. Exceptions are provided for a limited number of matters requiring a two-thirds vote such as amending the joint powers agreement or terminating a member for materially violating the provisions of the joint powers agreement.

The MEA needed to be established before a power purchase agreement could be negotiated and executed. However, the members were reluctant to commit to the CCA program until they knew whether a viable, financially sound power purchase agreement could be entered into with a reliable energy provider. To address this concern, a provision was added to the joint powers agreement requiring the MEA to provide a copy of the initial power purchase agreement at least 90 days prior to consideration of the agreement by the MEA’s Board of Directors and each member was given the right to withdraw from the MEA without any cost upon 30 days prior written notice to the MEA and its members.

Looking forward

The MEA offers its customers two types of service—“light green” and “deep green.” Light green service presently consists of 50 percent renewable energy while deep green service consists of 100 percent renewable energy. Prior to providing electricity service to customers in 2010, the MEA entered into a full requirements power purchase agreement with a single provider that required at least 25 percent of the delivered electricity to be from renewable energy sources. Today, the MEA has 15 power purchase agreements with 10 providers, and in 2012, 51 percent of the energy mix came from a wide range of renewable sources, including wind, solar, biomass, and small hydroelectric. The customer base will reach approximately 120,000 customers by this July, which constitutes about 80 percent of the customers receiving electricity in the jurisdiction of the MEA. The MEA plans to enter into additional power purchase agreements for renewable energy in order to reach its goal of providing 100 percent renewable energy. From the start, the MEA has reliably provided electricity to its customers at a price comparable to the rates charged by the investor-owned public utility.

Greg Stepanicich

Greg Stepanicich is a shareholder in the San Francisco office of Richards, Watson & Gershon. He prepared the formation documents for the Marin Energy Authority and continues to serve as its special counsel.