Method used to calculate wholesale electricity cost may result in losses and liabilities

Community Choice Agencies affected by this problem

California Community Choice agencies (CCAs) procured more than $550 million of electricity last year to serve their customers. However, the current method used to settle the wholesale electricity transactions can result in substantial errors and unrecognized financial liabilities.

Inaccurate Settlement Data

At issue is how the settlement data, the basis for settling wholesale electricity cost, is calculated. The California Independent System Operator (CAISO) calculates a given CCA’s electricity cost by applying the wholesale prices to the settlement data, commonly known in the industry as Settlement Quality Meter Data (SQMD). According to CAISO Tariff, as Scheduling Coordinator Metered Entities, CCAs can report SQMD to CAISO through their Scheduling Coordinators. CAISO applies the wholesale market hourly prices to the SQMD to calculate wholesale settlement costs.

Rather than tallying up the total electricity consumed by their customers on an hourly basis, almost all operating CCAs use their respective Investor Owned Utility (IOU) partners’ load profiles to approximate their hourly system load. Uses of load profiles for wholesale settlement have been a common practice for municipal and investor owned utilities prior to smart meter deployments. However, the difference is that, while the municipal and investor owned utilities use their own load profiles, CCAs use the other utility’s (in this case an IOU) load profile. The implicit assumption is that the IOU’s load profile is a good proxy for the CCA’s load profile.

Utility vs. CCA Load Profile

It turns out, however, that a CCA’s load profile can deviate significantly from its host IOU. Based on a recent GridX study of a CCA’s load profile, the load profiles can differ as much as +/- 25% on an hourly basis (see the chart below). Key factors contributing to the deviation are the customer demographics, locations and climates. While the IOUs in California all have vast service territories spanning multiple climate zones and diverse economies and demographics, a CCA has a much more limited and homogeneous service territory.

Comparison of PG&E and one of the operating CCA’s in its service territory load profiles for a period of one month, or 720 Hours, (X-Axis), the blue line indicating PG&E and the orange line the CCA. To facilitate a better comparison, both load profiles are normalized to 100% (Y-Axis). The chart shows substantial deviation between two load profiles on an hourly basis.

Losses and Liabilities

Given that the electricity price can swing dramatically from hour to hour over the course of a month, the hourly settlement errors can potentially exceed +/- 25%. While the settlement errors can go either way, the financial impact on CCA however does not cancel out due to the accounting treatment of these errors. If the error is positive, in favor of electricity suppliers, the CCA is overcharged for the wholesale electricity and incurs losses; if the error is negative, in favor of the CCA, the CCA is undercharged for the wholesale electricity and therefore, according to the GAAP Accounting Rules, accumulates the financial liabilities. The latter, according to the Wikipedia, is defined as the future sacrifices of economic benefits that a company is obliged to make to other companies as a result of past transactions. Such liabilities can potentially be a fiscal ticking time-bomb for CCAs, since their removal may result in the payments in the future.

Procure and Pay for What Your Customers Consume to Ensure Financial Well-Being

To avoid SQMD-related settlement errors CCAs must accurately and precisely aggregate each of their customer’s hourly electricity consumption, using interval meter data, into system level load. In so doing, the CCAs can precisely procure and pay for the electricity their customers consume collectively, no more and no less, to minimize the losses and more importantly liabilities. A new method of settling their wholesale electricity procurement as outlined above is simple and effective and will ensure the CCAs financial well-being. For an industry that is expected to undergo tremendous growth over the next few years, a more precise wholesale settlement method would ensure the industry’s healthy growth.

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