As we reported last month, the biggest case in a reformed California energy market finally provides some clarity on whether commercial customers can save money buying through local Community Choice Aggregation (CCA) rather than taking bundled service from PG&E, SCE, or SDG&E.
On a 5-0 vote held this morning, the Commissioners at the California Public Utilities Commission decided that the Alternate Proposed Decision (APD), rather than the initial Proposed Decision, was the preferred method for allocating exit fees (PCIA) to customers using an alternate energy supplier such as a CCA or energy retailer.
At issue in this long battle was which party bears the costs of selling unneeded IOU contracts. Because these contracts were set many years ago with higher prices, and because the IOUs no longer need the contracts as a wave of CCA load departs, the energy contracts must be sold, often at a steep loss. In siding with the APD, it appears the Commission is adhering tightly to the legislative directive to maintain “cost indifference” so that no group of customers, whether supplied by the utility or supplied by a CCA or Direct Access provider, would benefit from not paying a fair share of historic utility energy contract costs. The decision means that the PCIA charge beginning in January 2019 will be at each utility’s forecast of the market loss from its legacy contracts, rather than at a fixed price that other parties proposed.
The butterfly effect of small changes
PG&E’s updated sample rates for the APD are troubling for the future of CCAs in California. Although final rates won’t be announced until the middle of next month and won’t take effect until January, initial calculations for E-19 and E-20 customers are that the APD turns enrolling in a CCA into a money-losing proposition. In the near term, the current small bill savings of 1-2% could easily become increases of 6-10% over PG&E rates starting in January 2019. Losses would be even higher for lower rate classes where the PCIA forecasts filed exceed $30/MWh! While there can be environmental benefits to CCA service, that’s a steep price to pay, especially as SB100 now mandates all providers increase the green supply at a faster rate.
Although these changes seem small on a bill, they are large enough to have broadranging effects on the CCAs. CCAs typically have very high operating margins, ranging from 15-25% annually. With that margin, the operating model could fund staff, offset some of the old PCIA charges, leave 1-2% for customer savings and fuel accumulation of capital reserves. The new, higher PCIA charges puts pressure on the entire organization, from staff to capital reserves to customer savings. A final whammy: providing these savings becomes even more difficult in the future because the CCAs must also respond to a decrease in generation costs forecast for 2019. While total rates are still forecast to increase, the increases are in distribution costs that all customers pay, irrespective of energy supply.
Leaving rates higher than PG&E risks a shrinking customer base and public relations risk since over 80% of CCA customers don’t even understand that they are enrolled. There does appear to be enough margin for CCAs to deliver rate savings and still survive as organizations. But the margins for CCAs will rapidly shrink, and significantly challenge each CCA’s stated goal to build $100M reserve funds and credit worthiness for new renewable builds.
And that is where this decision might begin the beginning of the end for CCAs as we know them today. CCA survival likely means being relegated to buying energy from existing renewable and traditional power plants and running lean and mean. That is incompatible with their charter to create local community programs and assets while also building and buying new additional renewables. As just one example, you can probably kiss goodbye to programs like SCPs $4,000 subsidy for electric vehicles.
The same cost trends affect energy retailers operating under California’s modest Direct Access program. Direct Access providers are in a better position here since they’ve long had to deliver in a more competitive environment–however, this change does likely mean customers savings from direct access will be reduced.
The proceeding remains open and now moves to the issues of (1) allocating the utility’s contracts, and associated benefits such as RECs and Resource Adequacy capacity, to the CCA and DA providers and (2) reducing the over-procurement that fueled this cost shift battle in the first place. Once opted out, you can’t re-enroll in CCA service for one year, but at the pace of the regulatory discussion, we expect it will be another year before the second phase of the proceeding is resolved.
What should you do?
Our longstanding advice has been to remain on bundled service and wait this case out.
If you enrolled or were accidentally enrolled, now is the time to pay the modest fee and start the six month waiting period to return to PG&E bundled service. If you are Direct Access customer, you will pay these new higher exit fees as well, even if you were previously grandfathered. You should have been hearing from your supplier all along, but if not, now is the time to ask about budget impacts in 2019. With the passage of SB237, which expands the electricity cap by 20% in 2019, Direct Access providers may also come knocking to help you through the transition.
As always, these issues remain head-spinningly complex. If you want to chat, reach out and we’ll help you understand what these changes mean for your buildings.
