With California’s grid going through dramatic changes, San Diego Gas & Electric has approached the Legislature in Sacramento with a proposal that, at least at first blush, sounds pretty radical — it wants to get out of the business of buying and selling electricity.
Instead, the company is calling on the state to create a separate entity that would handle all those transactions.
SDG&E officials are quick to say it has no plans to go away — it and other investor-owned utilities in the state would still shoulder other responsibilities such as delivering power to customers through transmission and distribution facilities, maintaining poles and wires and taking care of billing and metering.
But it wants to be relieved of the job of purchasing the sources of electricity (natural gas, solar, wind, etc.) to meet customers’ energy needs.
“Choice is happening and we need to evolve with it,” said Kendall Helm, SDGE’s vice president of energy supply said. “And this old model … doesn’t make sense.”
The proposal comes as San Diego’s city council is expected this month to clear the way to form a community choice aggregation, or CCA, that would provide an alternative to SDG&E when it comes to procuring different sources of power.
CCAs and other changes to the power system
CCAs have sprung up across California in recent years, boasting they offer customers cleaner sources of power at roughly equal or sometimes even lower prices than traditional utilities.
Under the CCA model, local governments purchase the power.
Since elected officials often don’t have expertise in energy markets, many CCAs hire third parties with experience in energy markets to perform all sorts of complex scheduling and marketing transactions. Those third parties are paid by the CCAs through the rates the CCA charges to its customers.
A potential CCA in the San Diego area would likely include a joint powers authority that would fold in other municipalities such as Solana Beach, Del Mar, Encinitas, Carlsbad and Oceanside. That would make it one of the largest in California.
By state rule, once a CCA is established, customers in that given area are automatically signed up.
If customers feel more comfortable staying with the local utility, they can opt out of the CCA but it often requires customers to fill out a request form first.
SDG&E anticipates the creation of a CCA would result in about half of its current customers migrating to community choice.
Throw in the increasing numbers of customers getting their power from rooftop solar panels and private electric re-sellers called Direct Access providers — not to mention large industrial customers buying power directly from renewable generators — and SDG&E and other investor-owned utilities anticipate steep erosion of their customer base.
SDG&E officials have said more than 85 percent of retail electrical load could be supplied by sources other than California utilities by the mid-2020s. But its job delivering power to all customers — regardless whether they are in a CCA or other entity — will remain intact.
“We will always, for all customers, serve the delivery of energy through our transmission and distribution,” Helm said. “But if they have chosen another provider or another option and say, ‘I want this provider purchasing my energy,’ we don’t want to be purchasing their energy for them. They’ve chosen that provider. Let that provider do the purchasing.”
So what would take the place of the utilities when it comes to power purchases? And how would a change be structured?
SDG&E proposes creating a task force to look into the issue.
It would be led by the California Energy Commission (the state’s primary energy policy and planning agency), the California Public Utilities Commission (which regulates SDG&E and the state’s two other investor-owned utilities, Southern California Edison and Pacific Gas & Electric) and the California Independent System Operator (which oversees the operation of about 80 percent of the state’s electric power system, transmission lines and electricity market).
SDG&E in November asked lawmakers in Sacramento to introduce legislation creating the “Energy Procurement Task Force” by March of this year. Obtained by the Voice of San Diego, the draft bill looks to have the state establish a body that would handle power purchases and act as the default provider — in other words, assume the responsibilities investor-owned utilities now perform in that space.
The so-called “state-level electricity procurement entity” would be formed by Jan. 1, 2023 and get up and running no later than July 1, 2025. By then, the expected San Diego area CCA would be well under way.
“If 85 percent of customers are procuring their energy through a CCA or a (Direct Access) provider, it just makes sense there’s this third party entity that captures the (remaining) 15 percent,” said SDG&E spokesman Joe Britton. “Maybe it doesn’t make sense for the utilities to continue to do that.”
But one of the major reasons the state established a framework for CCAs to proliferate was to create competition and alternatives to the utility model. Wouldn’t shifting the responsibility of procuring power to a state-created “central entity” undermine that?
“There will always be a default provider,” Helm said. “We’re just saying it doesn’t need to be SDG&E. And there are many places in the U.S. and around the world where it’s not the investor-owned utility who is the default provider, so it’s not an untested model.”
SDG&E, like the other investor-owned utilities in the state, have agreements with other power companies that typically range from five years to as long as 25 years. But with utilities serving fewer customers as CCAs and asother programs grow more popular, what happens to those contracts?
That’s a key part of SDG&E’s push for a state-level “central entity.”
Part of the entity’s responsibilities, as SDG&E sees it, is to shrink those portfolios. The state — or a third-party group — could buy some of the contracts that have shorter terms left on them. Other contracts could be re-assigned to the central entity. And, Helm said, excess resources can be taken off the table through auctions and markets.
Crucially, the draft bill calls for utilities receiving “full cost recovery” from those contracts.
“We have commitments to developers who absolutely do want to be made whole,” Helm said. “We can’t just walk away from contracts.”
Bill Powers, an engineer, consumer advocate and frequent critic of SDG&E, says the company is “pretty bulked up on utility-owned assets” and therefore sees the proposal to the Legislature as an opportunity.
“This is SDG&E and Sempra (SDG&E’s parent company) doing what they do, which is looking for the most favorable financial pathway for themselves,” Powers said. “And I’m sure if they could get a sympathetic legislator to float legislation that gives them a financially advantageous exit from the generation business, why not take it?”
What kind of effect would the proposal have on monthly bills for ratepayers?
“I really can’t predict that,” Helm said. “It will depend on the choice they make … If they are receiving service from a CCA in the future, it will depend on the choices their CCA makes and it will depend on power markets and all those other factors.”
CCA customers pay a monthly exit fee (called a Power Charge Indifference Adjustment) each month on their bill.
Over the years, utility customers — through their rates — have paid power companies to build things like power plants and sign long-term power contracts with independent power producers. The exit fee is designed to make sure those costs are not unfairly shouldered by customers who decide to remain with their traditional utility instead of joining a CCA.
Last October, the utilities commission adjusted the exit fee, which varies depending on the service territory of each of the state’s three investor-owned utilities.
SDG&E has estimated the new exit fee will come in at 3.3 cents per kilowatt-hour. That would equate to approximately $16.50 per month for a prospective residential customer who uses 500 kWh per month.
But backers of CCAs want the utilities commission to rehear the decision, complaining the fees have been adjusted too high, which they argue will reduce the financial incentive for prospective customers to jump on the CCA bandwagon.
If SDG&E’s proposal for a “central entity” is eventually adopted, Powers suspects ratepayers may be left on the hook.
“If the state were to legislate that it’s now state responsibility to keep all of these owners of capacity and owners of utility-owned generation whole, then inevitably it’s the citizens of the state who are going to pay for it,” Powers said.
Helm said SDG&E is focusing on investing in assets that help integrate renewable energy into the grid. About 45 percent of the electricity the company delivers comes from renewables, a higher percentage than SDG&E’s instate rivals at PG&E and Southern California Edison.
“If we were out of (the) procurement (business), we would probably not continue to try to build new plants,” Helm said.
Nicole Capretz, executive director of the Climate Action Campaign and a major advocate for CCAs in San Diego, said it’s too early to tell if the SDG&E proposal is a net positive or negative but “it’s good to know they (SDG&E) are rethinking their business model and adapting to a new world view. Eventually, it might make sense for them to just be in the wires business.”
SDG&E sent a letter in November to state Sen. Ben Hueso, D-San Diego, that outlined the proposal. Hueso is chairman of Senate’s energy committee. Hueso’s office said the senator is still reviewing the proposal and is not ready to comment on it.
“It’s something we’re obviously going to be vetting thoroughly,” said Erin Hickey, Hueso’s communications director.
Why SDG&E wants to get out of the business of buying electricity, by Rob Nikolewski, The San Diego Union-Tribune, January 13, 2019.