As California customer choice expands, are reliability and affordability at risk?

CPX Editor’s Note: The views expressed in this article do not reflect those of the Center for Climate Protection. Please see the Center’s comments in response to the CPUC’s “Green Book” on customer choice. This can be found on the CPX Regulatory Page.

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The customer choice movement is exploding in California.

As many as a dozen groups have begun aggregating residential and commercial-industrial consumers under a law that allows alternative electricity providers to take over utility customers. In addition, retail providers and large commercial buyers are seizing the moment and urging lawmakers to extend the opportunity for the direct purchase of electricity by consumers outside such aggregations.

Between the two, California’s investor-owned utilities (IOUs) could have less than 20% of their retail sales left by the mid-2020s if regulatory challenges and legislative votes go in favor of customer choice. Until those challenges and votes are resolved, energy procurement is nearly at a standstill and questions about enforcement of California energy policy are growing.

Many say this disruption from multiplying power providers in California could put the state’s nation-leading achievements in decarbonization, affordability and reliability at risk.

The disruption and risks from proliferating energy providers were the key focus of a June 22 forum on customer choice with members of the California Public Utilities Commission (CPUC) and the California Energy Commission (CEC) alongside representatives of community choice aggregations (CCAs) and energy service providers (ESPs).

The two big questions on risk

ESPs market power directly to commercial and industrial (C&I) buyers while CCAs are municipally-backed electricity providers authorized by California law to take on utilities’ customers. Along with investor-owned utilities, they are collectively known as load serving entities (LSEs).

To get at the question about impacts on California’s environmental and reliability progress, regulators at the meeting asked two specific questions about the growing disruption’s risks.

The first focused on California’s resource adequacy (RA) needs. It is not clear if the fast-multiplying but disaggregated CCA, ESP, and incumbent utility LSEs can take on the extra burden and cost of underserved regions.

The other question was how to manage customers moving between LSEs in search of the best deal. Until now, IOUs acted as providers of last resort (POLRs). But they are losing revenues to new competitors.

CCAs and ESPs could be serving 85% of California’s electricity customers by the mid-2020s, according to a 2017 CPUC white paper. With 15% of their customer base left, IOUs would not have the financial resources to be POLRs. But the new LSEs’ business models may not suitable to serving needs beyond their own customer bases.

In one panel, CPUC President Michael Picker told Sonoma Clean PowerCCA executive Deb Emerson that the answers of CCAs and ESPs to meet the state’s RA and POLR needs were “whistling past the graveyard.”

She replied that CCAs need more cooperation from the commission.

It is not simply CCAs, Picker responded. The CPUC had eleven requests from all types of LSEs in 2017 to be excused from RA obligations and that seems to put customer needs at serious risk.

The Green Book

The CPUC raised these concerns in a white paper released May 7: “California Customer Choice; An Evaluation of Regulatory Framework Options for an Evolving Electricity Market.” The “fragmented decision-making” of dozens of new power providers responding to rising demand for customer choice could put the state’s standards and electricity customers at risk, it reported.

The CPUC white paper was subtitled the “Green Book” to remind stakeholders of the 1990s “Blue Book,” which mapped out changes in California’s energy sector that led to the state’s 2000-2001 energy crisis. Energy sector turmoil in 2017-2018 could be an “early warning sign” of a new energy crisis, the Green Book said.

One concern highlighted by the Green Book is that poorly coordinated procurement of resources needed to ensure reliability is undermining the RA standard put in place after the energy crisis.

Another is the lack of preparation for customers “stranded without service if their electric provider fails.” During the energy crisis, Pacific Gas and Electric (PG&E) and Southern California Edison (SCE), the state’s two dominant electricity providers, faced financial disaster when customers stranded by an imploding retail market unexpectedly returned.

Advocates for customer choice do not believe their movement represents a threat.

In the California Community Choice Aggregation (CalCCA) filing for the conference, the advocacy organization recommended the CPUC “remove comparisons between the growth of CCAs and the lead-up to California’s 2000 energy crisis.”

The paper conflates “increasing customer choice and over-reliance on short-term energy markets” and blames customer choice, CalCCAcontended. This is “a false comparison” and ignores “safeguards and structural changes” now in place “that reduce the risk of another crisis.” Those protections include distributed generation, CCAs, an RA requirement and improved generation management by utilities.

As stakeholders prepared to debate the cause and extent of energy sector turmoil, a potential new disruption emerged.


A new bill, more uncertainty

Among the protections put in place after the energy crisis was a limit on direct access by commercial-industrial customers to 13% of utility load. This cap made those customers good candidates for choice aggregations. But a new bill could allow them to act independently through ESPs, which would dramatically impact the size and leverage of CCAs.

On June 11, Senator Robert Hertzberg introduced Senate Bill 237, which would alter the legislatively-imposed cap on direct access and allow ESPs to serve all C&I customers.

“As more and more entities leave IOU service for CCAs, there is a desire by commercial and industrial customers to also have a more direct role in selecting their electricity mix,” Hertzberg spokesperson Katie Hanzlik emailed Utility Dive.

But the bill ups uncertainty in a power sector thought by some to be on the verge of crisis due to IOU financial instability. PG&E and SCE, already reeling from the loss of customers, now face potentially bankruptcy-inducing liability for 2017 wildfire devastations.

The Hertzberg bill “flips the CCA model on its head” by giving the CCA’s C&I customers a new option, Picker told San Jose Mayor Sam Liccardo, whose city is launching a CCA. “Would you favor giving that same choice to all of your customers?”

The San Jose CCA would like to collaborate with ESPs who are taking CCA customers, so the load loss will not be “a sudden shock,” Liccardo said, echoing IOU reactions to the emergence of CCAs.

The movements and threats of movement of customers between LSEs is causing a “disaggregation of risk management,” Picker said to Liccardo. “What should the structure of the provider of last resort be? And how do we have that conversation with all these different LSEs?”

“I don’t pretend to have the answer,” Liccardo replied.

Provider of Last Resort

Matt Freedman, staff attorney with ratepayer advocacy group The Utility Reform Network, said SB 237 would add to potential instability by increasing the number of customers who might respond to a change in rates by “making new choices.”

SB 237 could cause “a big migration of CCAs’ C&I customers to direct access providers,” he said. In 2001, direct access providers dumped customers to the utilities, which compounded the market failure, he added. “We don’t know that will happen again, but we live in uncertain times.”

Policies that encourage retail electricity customers to move between electricity providers are problematic, according to Ralph Cavanagh, senior attorney and energy program co-director with the Natural Resources Defense Council (NRDC). Cavanagh served as a Green Book advisor and co-keynoted the conference.

The potential heightened turmoil that would be introduced by the Hertzberg bill makes the need to settle the question of the POLR all the more important.

California law does not provide for a POLR, but having one “is in the public interest,” he emailed Utility Dive. The POLR would be “a single decision maker” responsible for resource procurement and portfolio management, “subject to state and/or local regulation.”

Pat Wood III was Cavanagh’s co-keynoter and also a Green Book advisor. The former Chair of both the Federal Energy Regulatory Commission and the Texas Public Utilities Commission is a strong advocate for competition and markets. But he agreed with Cavanagh on the need for a POLR, whether it is an IOU or a CCA.

The IOUs essentially agree with Cavanagh and Wood on the need for a POLR, according to emails from SCE VP for Energy Procurement & Management Colin Cushnie, SDG&E spokesperson Helen Gao, and PG&E spokesperson Ari Vanrenen. Each noted that, as customers migrate to other LSEs, the POLR concept must be rethought.

The CPUC needs to recognize that the POLR responsibility “comes with burdens and risks that need to be compensated,” SDG&E’s Gao said.

“It worries me that CCAs may not be doing the kind of risk management and contingency planning we expect and require.”

Michael Picker

President of the California Public Utilities Commission

“Sufficient financial safeguards and regulatory oversight need to be in place to protect departing, remaining and returning customers from potential market failures, including the potential failure of one or more LSEs,” Cushnie added. State consumer protection laws “may not be sufficient.”

The CPUC must also ensure that the POLR “can be relied on for an extended time,” PG&E spokesperson Ari Vanrenen said.

“Some CCAs are interested in considering a transition to a POLR, but there is no consensus among the CCA community,” CalCCA Executive Director Beth Vaughan emailed Utility Dive.

The idea of CCAs serving as POLRs should be explored, Marin County Supervisor Kathrin Sears, representing the Marin Clean Energy CCA, told the conference. It would eliminate “distortions” about CCA capabilities and “reflect the reality that CCAs are the default providers in our service areas.” IOUs could fill the role in areas without a CCA, she speculated.

When she offered nothing more concrete, President Picker responded to the speculative tone of Sears answer. “It worries me that CCAs may not be doing the kind of risk management and contingency planning we expect and require,” he said.

Marin Clean Energy “does think about risk management and the POLR issue,” Sears said. “But like the CPUC, we are struggling with these complex questions, a lot of factors should be considered, and we want to be part of the conversation.”

RA and a central buyer

A second major risk represented by the choice movement is that disaggreged procurement could leave gaps in supply previously provided through California’s RA provision.

President Picker repeatedly pressed the point that disaggregation of providers could compromise RA. In certain transmission-constrained load pockets, the only viable supply may be natural gas generation from older plants kept in service only by high-priced contracts.

CCAs and other LSEs “are unwilling to meet the costs,” Picker said. He suggested the possibilities of a central buyer for RA, opening RA to competitive bidding, or appointing one of the IOUs to manage RA. “We can’t just not do anything,” he said.

Most conference participants seem to “prefer coordinated RA procurement by utilities and CCAs,” NRDC’s Cavanagh said. The CPUC can allocate costs to make sure no LSE with procurement responsibilities “is ‘leaning on’ the rest of the system.”

Wood’s preference for markets, rooted in the Texas success of retail choice, informed his RA solution. Each LSE can have “an obligation to procure an amount of RA equal to its pro-rata share of the market, and there is a residual market for RA to be offloaded or bought, as customer numbers change.”

Allocating RA between LSEs worked when the IOUs did the bulk of the procurement, SCE’s Cushnie said. “Now, utilities have an uncertain portion of the load and are not in a position to do that.”

During this transition period, RA should be done by a “reliability procurement agent” or “central buyers that can partner with the CPUC and other regulatory agencies,” he said. SDG&E and PG&E took similar positions.

CalCCA’s Vaughan said all LSEs have RA compliance obligations and “CCAs take their obligations seriously.”

The proliferation of LSEs “has shone a light on issues that have existed with the current RA regulatory framework,” Vaughan added. In its pre-conference filing, CalCCA proposed using the ongoing CPUC RA proceeding to consider a multiyear RA requirement, cost recovery, and better identifying where RA is needed.

Better together

Customer choice can work in California, the conference keynoters said at the end of the day. But the risks it could represent must be addressed.

Enabling customer choice is critical, Wood told the conference. That requires “competent oversight.”

Despite his preference for capacity markets, California’s inclination is to have LSEs do RA, he acknowledged. A long-term goal could be market-managed RA with “a lot of oversight.”

“The real issue is better coordinating procurement, finding where resources can be shared and where local diversity works, and seeing each other as partners, not as antagonists.”

Ralph Cavanagh

 Senior attorney and energy program co-director, Natural Resources Defense Council

Centralized authority has potential, “but decarbonization can be done faster and cheaper with decentralized customer decision-making,” he asserted. “Customer choice is happening. California needs to recognize this and work with it in ways that benefit everyone.”

Competitive markets transfer the risk of investment from the backs of captive customers onto the pocketbooks of people who know how to manage that risk, Wood said.

As much as possible, California’s regulators should express the goals of the state’s policies and let the market go to work, he said. “Billions of dollars and gigawatts of clean energy are the reward for getting that right.”

NRDC’s Cavanagh said the 2000-2001 energy crisis left few in California ready to suggest “the genius of the marketplace is enough. But community choice aggregation is not the same thing.”

The new LSEs “decentralize resource procurement,” he said. “But their representatives have acknowledged the need for high standards for decarbonization, affordability, and reliability, and the CPUC and CEC have the tools to ensure they meet those standards.”

One entity procuring for the state under CPUC and CEC oversight might be more efficient, “but we don’t have that, we have many smaller entities getting larger,” Cavanagh said. “The real issue is better coordinating procurement, finding where resources can be shared and where local diversity works, and seeing each other as partners, not as antagonists. We’re better together.”

As California customer choice expands, are reliability and affordability at risk?,  by Herman K. Trabish, Utility Dive, July 9, 2018.

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