As promised two months ago, Gridium spent a day in late May attending a recent CPUC en banc hearing on the future of retail choice in California. After a full day of discussion, and some time to reflect and read deeper into the comments, our conclusions are that the odds of a near term opening remain low, but there are more than a few indications that the market might open in some limited ways in the near future.
This has implications for how facility professionals should approach alternative supply decisions, especially if you need to make an opt-out decision or are just learning you are opted in.
The hearing keyed off a white paper outlining the changing market dynamics in California, and discussed issues related to customers, distributed generation, suppliers and IOUs. While the paper and comments continued to stress the collision of technology and public policy, the distributed generation issues were muted. Most of the discussion centered on issues related to Community Choice Aggregation (CCA) and Direct Access (DA).
Full Retail Choice? Why Not?
In a sense, the California market is already open. Direct Access is capped to new customers but serves ~ 13% of the load. And as of this summer, active CCAs like Silicon Valley Clean Energy provide an alternative to many large population centers and whose ranks are expected to expand rapidly in the coming years.
As many Gridium customers have experienced, the choice offered by CCAs feels like a bit of Hobson’s choice. Unless you are focused on easy procurement of green power, the benefits from the existing CCAs are currently anemic; the rates are set at a tiny discount to existing bundled service rates. The material change for facilities would only really come if the market opened to third party generation. Currently, Direct Access customers enjoy 15-20% savings on electric service and more options for managing long term supply attributes and volatility.
Those savings are material to many facilities, so as the commission hearing prompted for opinions, it was interesting to hear the major supporters and detractors of full retail choice:
- CCAs: First up, the CCAs are vocal opponents. Despite launching with an appeal for competition, they argue that Direct Access will “cherry pick” their profitable customers and erode their ability to be a force for local procurement. This is a rich claim given their 20% operating margins are approximately the same as Google’s.
- IOUs: Surprisingly neutral. What was clear from their comments is that the IOUs are increasingly resigned to their future as a distribution utility. They don’t make money from generation, and therefore their concerns center on issues of stranded costs, fairness, and the ability to satisfy state renewable goals.
- Consumer Groups: Groups like TURN generally look askance on DA. Their major concerns are retail regulation (e.g. slamming, fair pricing, etc.) as well as the cost allocation issues. While these are no doubt issues, they also clearly pointed out the difficulty of reaching state goals with no CPUC authority on CCAs or DA providers.
- Customers: To their credit, the CPUC listened carefully to customers–like the University of California–that are active participants in Direct Access about why the market should be open. Economics are a part of the story, but we also heard compelling arguments for managing volatility, developing hosted renewables and using Direct Access to accomplish more stringent environmental goals. The last point is worth emphasizing. Not many sustainability professionals would be comfortable highlighting a 1991 co-fired wood pulp plant as part of their renewable strategy. That’s exactly what you’re buying from one of the CCAs.
A crack in the door: DA in CCA territories?
Despite the diversity of opinions about the eventual opening, there may be a near term opening for Direct Access in the territories served by CCAs. At the hearing, the argument was advanced that by statute the CCAs must permit DA providers to sell to and service their customers. This is intriguing and may provide for near term access to the market. The thinking is, once load has departed to a CCA in a county or municipality, why would it matter that a portion of that load goes to other generators?
The Vassal State
Stakeholder opinions are a factor in how a full market opening will play out. A broader issue concerns the natural diffusion of authority that comes with opening the market. The IOUs are essentially vassal states to the legislature and CPUC; the vehicle for a raft of public policy initiatives including the highly successful and rapidly achieved RPS and greenhouse gas reduction initiatives. Take that generation away from three closely regulated entities and give it to a broad mix of municipal entities or even hundreds of suppliers and you suddenly have eroded your ability to achieve your goals across a number of vehicles. Case in point? The service list for the en banc included 21 active proceedings where the commission currently has regulatory authority.
Sure, each CCA or DA entity has to comply with the RPS and other resource adequacy requirements. But they simply file plans that get approved, the regulatory relationship doesn’t allow for further control. The challenge only deepens as the State’s climate goals start accelerating, and the legislature moves to further increase and accelerate the RPS targets. California can’t meet its climates goals without a massive electrification of transportation and the investment that goes with it. Higher renewable penetration means intermittency–and the need for careful procurement to manage system peaks. The issues go on and on, and everywhere you look, distributing procurement to individual parties makes things harder, not easier. That is especially true because these changes will require billions of dollars in investments and the IOUs are the only truly credit worthy counterparts in the market.
Consider the regulation of another quasi public good–public transportation. Authority for the Bay Area’s public transport is spread across 28 separate transit agencies, each with its own board, staff and operating team. There are 10 major providers, none with over 50% rider share, and each with their own fares, maps, schedules and stations that don’t connect. It’s no wonder tech companies prefer to run their own bus fleets. If the commission is considering its own role in the matter, one suspects there is an acute sense of this tension.
A big divorce and a big fight brewing
We started the discussion with a reminder that the market is already open in California. And despite the fact that the hearing was on the future of retail choice, every speaker during the day came back to hammer home their position on the issue of stranded costs. The CCA trend is a massive divorce, unprecedented on scale in recent memory of load from IOUs to other parties. And the very margin that supports creation and profit of CCAs leaves the IOUs and its parties stranded with expensive contracts they no longer fully need. No one disputes the need to allocate those stranded costs, but no one agrees on how to do it.
If you take alternative service in California, this allocation charge appears on your bill as the PCIA charge, which has been growing at a good clip. At $20/MWh, it–for some time in 2016–made CCA service more expensive than bundled service. 2017 represents even more departing load, and the PCIA is forecast to increase least 16% in 2018. Reform has been suggested on the PCIA methodology, and the IOUs have unilaterally proposed an alternative Portfolio Allocation Methodology (PAM) which immediately met with eleven howls of protest from market participants. There is no wonder, the initial estimates presented at the meeting of the PAM charge are $37/MWh. That is enough to make both CCA and Direct Access completely uneconomic.
SCP’s forecast of various departing load charges. Courtesy Sonoma Clean Power.
There is enough uncertainty and disagreement that the issue will likely not be resolved until the last possible moment for 2018 rates.
So, I got the CCA opt-out postcard. What do I do?
Ok, we’ve covered a lot of ground, and hopefully explained why this is an important issue that should be on your radar, especially if you spend over $1M a year.
If you’re in an opt-out decision, our advice remains as before, to be deliberate about your decision and clearly understand the risks and benefits. Relative to earlier in the year, we view an increase in the risks, with a potentially fatal rise in the departing load charges being argued. With modest benefits, there is a lot of sense in simply delaying the decision. Opt-out now, wait for the dust to settle, and then make a decision after the big divorce is over.
Secondly, even if you’ve received a bill from a CCA, its not too late to opt-out. You can opt out with no penalties or issues within 60 days of transitioning service. Many customer’s mailrooms assumed the postcards where marketing issues and don’t realize they have been opted in until a bill is received.
Lastly, if you are interested in Direct Access and have meters in CCA territories, you might have a near term path to Direct Access. Recognize that the commission is a stakeholder run framework, so if this is important to you, work with your supplier to provide a letter of support.
A final note. If you have insomnia or are considering a career change to a regulatory analyst, grab some popcorn and watch the eight hour meeting. And then’s lets have a coffee and chat some more.
