Photo courtesy of Julian Howard

As goes California, so goes the nation. Recent regulatory developments provide some rate stability for a reformed California energy market.

Last month, in an obscure utility load forecasting meeting, PG&E produced the simple table below showing the dramatic turn of customer counts in their territory in just four years. We’ve been hearing about Community Choice Aggregation (CCA) for years, but this chart crystalizes the transition and its effects on the California energy market. Previously monolithic and integrated, our IOUs are well down the path to being poles and wires companies as competitive municipal organizations take advantage of low energy prices and default opt-out provisions to capture market share from incumbents.

PG&E's load forecast assumptions for CEC and implications for PCIA charges

PG&E’s load forecast assumptions from the California Energy Commission.

Any other business faced with a near 50% drop in sales would be busy liquidating old contracts and trying to restructure to compete. That’s not how utility regulation works. Instead, utility companies like PG&E are incented to hold on to these contracts and they are mandated by state law to pass the losses from these contracts to customers signing up for CCAs as an exit fee.

Imagine this in TV. Do you see a Comcast exit fee on your Netflix bill?

Or Toys. Does your receipt from your latest Amazon toy purchase contain an exit fee for the now bankrupt Toys”R”Us?

Of course not. Welcome to the strange world of regulated monopolies.

The exit fee debate nears its end?

If those questions quickened your pulse, then imagine the energy warring parties brought to the eighteen month long proceeding to resolve issues around the exit fee, or in CPUC-speak the “Power Charge Indifference Adjustment” (PCIA). The case has over 600 regulatory filings from 33 parties with typical briefs of 200-300 pages. It’s been the kind of case that makes the Brangelina divorce seem like a minor skirmish.

“You can check out any time you like, But you can never leave!”

Part of the animation is that the CCAs have chosen to price very closely to the incumbents, typically only a percentage point or two below the IOU in order to build the credit needed for long term procurements. This has enabled very strong CCA margins; last year Peninsula Clean Energy had a higher operating margin than Google parent Alphabet! But a thin price difference means that the CCA business is very susceptible to changes in the exit fee, which has been growing 15-20% every year. Customers are similarly flummoxed, with no ability to determine whether a CCA will or will not save them money.

CCA status in California by area

The status of CCAs by region across California.

At long last, it appears that some regulatory certainty will be coming, with both a proposed and alternate decision ready for a September CPUC vote. There are small differences between the decisions, but both provide key relief of uncertainty by:

  • Reforming the method of calculation for more transparency and accuracy in established market benchmarks.
  • Creating a balancing account with a true-up so eventually costs, rather than forecasts, drive the charge.
  • Establishing a collar with a floor and cap. The proposals are different, but at least all participants will know what the charge is and know the limit of annual increase or decrease.
  • Allowing pre-payment. The decision refused to sunset the obligations but did allow both DA customers and CCAs to enable pre-payment of their PCIA obligations. With today’s low cost of capital, expect large companies to take advantage of this clause once effective.

Energy Management Implications

Our advice hasn’t really changed since 2016, when we first started providing tips to C&I customers on community choice enrollment. While calculation methods are helpful, it’s still not clear what the final PCIA increase will be, and the commissioners seem divided on how to account for costs incurred in the early aughts.

If one thing has changed, it’s that enrollment risk has gone down for 2019. This decision is not final, but assuming orderly conclusion, most customers should be able to analyze with good certainty CCA savings as soon as the 2019 rates are available.

What’s Next

Before anyone gets too excited about the decision, recognize that the issues that appear ready to be resolved largely address methods of calculation and rate stability. They don’t address the core of the ballooning costs, which are largely a function of existing IOU contracts that are worth less and less as renewable costs continue to decrease. Those issues have a variety of proposed solutions, but won’t get considered until next year. The proceeding remains open.

About Tom Arnold

Tom Arnold is co-founder and CEO of Gridium. Prior to Gridium, Tom Arnold was the Vice President of Energy Efficiency at EnerNOC, and cofounder at TerraPass. Tom has an MBA from the Wharton School of Business at the University of Pennsylvania and a BA in Economics from Dartmouth College. When he isn't thinking about the future of buildings, he enjoys riding his bike and chasing after his two daughters.

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