Why SDG&E wants to get out of the business of buying electricity

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.”

Outstanding contracts

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.

SDG&E Is Looking to Leave the Power-Buying Business

In a dramatic sign of California’s changing energy market, San Diego Gas & Electric wants to stop buying and selling electricity.

In recent days, the company has asked lawmakers to introduce legislation that would let SDG&E reduce its role – while also pushing the state to enter the energy market in a big way.

The company’s vision could eventually require the state to buy out its long-term power contracts and possibly pay the company for several natural gas-fired power plants it owns.

SDG&E is pitching this idea as the company prepares to lose about half of its power customers within the next few years.

Last month, San Diego Mayor Kevin Faulconer said he wants to form a “community choice” agency, known as a CCA, to buy and sell power on behalf of the city’s 1.4 million people. Other smaller cities across the county are likely to join that effort, creating an electricity buyer’s club that will compete with SDG&E and leave the company with more power than it can sell.

“We think it makes better sense for SDG&E to eventually move out of the commodity role,” said Kendall Helm, the company’s vice president of energy supply. “But it’s important to always provide clean, safe and reliable delivery to all customers in our service territory.”

That may sound like it’s bad for business, but it may be more of an opportunity. A well-run utility can make a steady profit from delivering power.

SDG&E – one of the region’s largest employers – makes most of its money that way, which is why its bottom line won’t be at much at risk if it stops selling power. The company already gets guaranteed revenue from the sprawling system of power lines and cables it’s built over the last century to each home and business in the region. It also delivers natural gas.

Instead, the company is looking to shed the risk it now faces trying to buy power for a customer base that is looking to jump ship.

“Signing contracts that are 10 and 20 years in length while the cities are discussing the possibility of joining together to buy their energy from a CCA provider will be tricky to say the least and thus we are looking at what the best options are for the near future related to our efforts,” SDG&E’s vice president for government affairs, Mitch Mitchell, said in a Nov. 14 letter to state Sen. Ben Hueso. (Disclosure: Mitchell sits on Voice of San Diego’s board of directors.)

For years, most California power companies did it all – they owned both the power and the lines that delivered it to customers.

Now, following years of deregulation and changes in the industry, the state’s three big energy utilities – Southern California Edison, Pacific Gas & Electric and SDG&E – no longer own all of the power they deliver. Much of their power comes from long-term contracts they signed with other companies.

Even that market is eroding as governments enter the energy market.

SDG&E’s parent company, Sempra Energy, sees that and recently paid just under $9.5 billion to control Texas’ largest utility, Oncor, which only delivers electricity.

In the future, SDG&E could look more like Oncor.

The question is how to get there.

A draft bill, which Hueso’s office provided, shows what SDG&E is asking lawmakers to consider. The company urges the state to create a way for the company to sell off its long-term power contracts to a “state-level electrical procurement entity.” The first step would be a state-level task force to sort through all the issues involved, which would be many.

Matthew Freedman, a staff attorney for The Utility Reform Network, said there are already discussions about the state stepping in to help develop renewable power resources. But those discussions are about developing new power – like geothermal projects in Imperial County – not paying companies for existing contracts.

“That is the legitimate part of what SDG&E is teeing up, but I don’t think they are the right messenger,” he said. “Their motives are not pure on this, and what they have put on the table now is more of a manifesto than an actual proposal.”

For one thing, it’s not clear what state agency would step up to pay for all of this.

One power-buying entity already exists at the state level, a small division within the state Department of Water Resources known as California Energy Resources Scheduling. The division – known as CERS by the few people who know about it – was created in 2001, during the energy crisis, to buy and sell power to avoid rolling blackouts across the state. But in the nearly two decades since the crisis, only a skeleton crew now runs the division, mostly to ensure the state is fully compensated for the power it bought years ago.

There’s also the matter of the power plants SDG&E does own – four plants that generate power by burning natural gas. The draft bill would make sure the company is “fully compensated” for those plants in certain scenarios. This could put the state in the awkward position of paying for fossil fuel-fired power even though California lawmakers this year set a goal of having all electricity sold in the state come from renewable resources by 2045.

SDG&E said it’s already taking steps to minimize the number of gas-fired power plants it owns. For a while now, it’s been expecting that it would be forced to buy another gas-fired plant from Texas-based energy company Calpine for $280 million. The forced sale is part of a bizarre deal involving former California Public Utilities Commission President Michael Peevey.

Helm said SDG&E has worked out a deal with Calpine that would not require SDG&E to buy the plant.

SDG&E gets the rest of its power – roughly three-fourths of the electricity it sells – from other sources, largely long-term contracts it signed with wind and solar farms across the southwestern United States and northern Mexico. It cannot make money on the power it buys and then resells from customers.


SDG&E Is Looking to Leave the Power-Buying Business, by Ry Rivard, Voice of San Diego, November 19, 2018.

Here’s what customers might pay if they leave SDG&E for a community choice alternative

In one of its most closely watched decisions of the year, the California Public Utilties Commission is scheduled to vote Thursday on one of two proposals dealing with the exit fees customers pay if they leave investor-owned utilities like San Diego Gas & Electric and opt for a government-run alternative.

“It’s a bigger issue that we all need to be talking about,” said Beth Vaughan, executive director of California Community Choice Association, a trade group dedicated to promoting what is called Community Choice Aggregation, or CCA, which allows any city, county or combination thereof to form an entity to take over the responsibility of purchasing power for their communities.

Under the CCA model, utilities like SDG&E still maintain transmission and distribution lines (such as poles and wires) and handle customer billing. But the CCA purchases the sources of electricity, with municipal government officials ultimately making the final decisions on power purchases.

Since the first CCA was established in the state in Marin County in 2010, the numbers have grown with many CCAs boasting they have greener portfolios than utilities. Last month, the 19th CCA in California went online and San Diego’s City Council and Mayor Kevin Faulconer are seriously considering adopting a CCA as well.

But once a CCA is established, its customers must pay an exit fee (called a Power Charge Indifference Adjustment) to the utility each month to offset the costs utilities have racked up building things like natural gas power plants over the years — all with CPUC approval. In addition, utilities have been directed to develop renewable energy projects to meet the state’s aggressive climate targets.

The exit fee is at the center of Thursday’s hearing in San Francisco.

Using a complex methodology, the CPUC determines the exit fee’s amount (which is different for each of the state’s three investor-owned utilities). The five members of the commission are adjusting the fee and will consider two different proposals.

The first, submitted by a CPUC administrative law judge, is lower than the other, which has been proposed by Commissioner Carla Peterman.

Roughly speaking, the current exit fee for SDG&E’s service territory is 2.5 cents per kilowatt-hour for residential customers.

Under the administrative law judge’s proposal, the fee for residential customers would go up to 3.46 cents per kilowatt-hour. Under Peterman’s plan, it would go up to 4.25 cents.

If the exit fees are too high, CCAs complain customers have less financial incentive to opt out of the utility model. If the fees are too low, power companies complain they are not being fairly compensated for their infrastructure costs.

CCA supporters have criticized Peterman’s proposal.

If passed, Vaughan said it “could have a sharp increase in costs from the CCA side of the equation. So when we look at what CCAs do and all the programs they bring and everything else, the question is, can CCAs still launch?”

Saying, “I’m optimistic CCAs will still persist,” Peterman pushed back on claims her plan is weighted toward utilities and said the commission is obligated to look out for customers who decide to remain with utilities as well as those who opt for community choice.

“Of course, if there is a cost that goes up that’s going to have some impact in terms of how an organization is going to decide to move forward,” Peterman said. “But based on the cost estimates that we have, we don’t think these costs are so extreme as to be the driving factor.”

Peterman said the two competing proposals were very similar. The difference, she said, lay primarily on her submission taking into account costs of utilities’ “legacy” projects — such as the soon-to-be shuttered Diablo Canyon Nuclear Power Plant and some natural gas facilities in SDG&E’s service territory.

“It is important to fix this now so that communities like San Diego can go forward with accurate information about their cost obligations and then form their CCA in a manner that is sustainable,” Peterman said. “It may not be the outcome some folks love, but I think it’s providing some certainty going forward.”

Vaughan wants Thursday’s vote to be delayed until Oct. 25, citing the fact that Peterman’s proposal was revised last Friday.

“We need some clarification” about the changes, Vaughan said.

The mayors of San Francisco, San Jose and Oakland also called for a delay, issuing a joint statement Tuesday that called the process “rushed, opaque and with little concern for rate-paying customers.”

In an email, Peterman said the revisions “make very limited substantive changes” to her proposal and mentioned the commission already postponed a previously scheduled vote last month.

“This proceeding has been an open and transparent process from the beginning with many parties poring over thousands of documents,” she said. “The evidence in the case has been submitted and the case has been closed for some time now.”

Proposed CCA Exit Fee (PCIA)

For San Diego Gas & Electric’s service territory

Administrative Law Judge proposal:

Residential forecast: 3.46 cents per kilowatt-hour

Medium to large commercial forecast: 2.17 cents per kilowatt-hour

Commissioner Peterman proposal:

Residential forecast: 4.25 cents per kilowatt-hour

Medium to large commercial forecast: 2.67 cents per kilowatt-hour

Source: CPUC


Here’s what customers might pay if they leave SDG&E for a community choice alternative, by Rob Nikolewski, The San Diego Union-Tribune, October 10, 2018.