How Does the Newly Passed Power Charge Indifference Adjustment Affect California Community Choice Agencies?

Introduction

The California Public Utility Commission (CPUC) voted in October 2018 to adopt a new methodology for calculating the exit fees paid by community choice aggregator (CCA) customers.  The exit fee, or the Power Charge Indifference Adjustment (PCIA), is the calculated rate paid by departing CCA customers for power supply cost stranding resulting from leaving Investor Owned-Utility (IOU) generation service.  The dispute between IOUs and CCAs will continue as some of the later details of the methodology are ironed out in a Phase 2 proceeding, scheduled for early 2019.

Mechanics of New PCIA Methodology

The new PCIA methodology has both positive and negative impacts on CCA financial positions and risk.  The primary negative impact comes from a reversal of the CPUC’s original decision not to include legacy utility-owned generation in the cost stranding.  Also, the decision removed the 10-year cost recovery limit on older generation-related commitments that were previously in place.  Both of these methodology components increase the PCIA rate, making it more difficult for CCAs to remain competitive with incumbent IOUs.

On the positive side, some of the uncertainty related to the PCIA calculation has been removed beginning in 2020 where the $0.005/kWh cap is placed on the year to year PCIA rate changes.  Finally, value for greenhouse gas free resources, renewable resources, and capacity attributes will be included as a credit to the stranded cost.  The inclusion of these values may reduce the PCIA rate as the stranded resources often provide more benefit to the IOUs than what is currently being captured in the market price benchmark.

The PCIA numbers shake out at a resounding “the world’s okay” for Southern California Edison (SCE) and San Diego Gas & Electric (SDG&E) CCAs.  Despite the $700 million under-collection in 2018 by SCE (who knew summer was hot?), the 2019 PCIA leaves enough headroom for CCAs to weather the storm in 2019.

Operational CCAs in PG&E service territory may find it challenging to remain competitive in the short term, but the storm should subside within the next few years as PG&E’s stranded costs start to take a steep dive and the PCIA falls back to a more palatable level.

While the CPUC’s decision was seen as unfavorable to CCAs and competition, the effects will not likely be significant enough to change the overall landscape for CCAs.  Emerging CCAs may defer launch or join existing agencies; overall CCAs should continue to operate effectively and offer their customers local control, targeted programs, and rate discounts.

Estimated Economic Metrics Going Forward

The following chart presents the estimated “head room” or amount CCAs can pay for power supply and still be competitive with their incumbent IOU.

Projected Headroom

Projected wholesale headroom in cents/kWh for each of the big three IOUs.

Summary

While the recent CPUC decision is not a favorable decision for CCAs, the impacts can likely be weathered even by newer CCAs.  For established CCAs, the impacts of the decision can likely be absorbed with drawing on reserves, pursuing distributed energy resources, and changes to rate discounts and programs.  For newer CCAs, the time to build reserves may increase and rate discounts may need to be lowered.  It may also take longer to fund energy efficiency and other programs, and fewer greenhouse gas-free resources will be affordable.  However, under current power prices and projections, it is expected that CCAs could be organized such that they are feasible.  Emerging CCAs may wish to consider filing an Implementation Plan by year-end 2019 for possible launch in 2021 contingent on yet to be known wholesale power prices and PCIA calculations to be verified closer to launch.