Fall 2009

A Parable of Public Power: Community Choice Aggregation

By Joseph Kleinman, Skyhorse Media Inc., August 2009

Behind the myriad transformations underway in energy today runs a single thread. Tangled, knotted, broken in many places, it nevertheless forms an imperfect web that sustains the progress of civilization itself. That thread is the uneasy truce between public and private ownership of power production. The fate of one, little-appreciated California statute, AB 117, captures how difficult it is to maintain any truce at all in times of change.

Public participation in energy production and distribution is a logical outgrowth of a democratic system that represents the public interest. Not surprisingly, it is also a key driver of progress and innovation. Municipal utilities in California, LADWP and SMUD, in Los Angeles and Sacramento, for example, have been market leaders in renewable power initiatives and energy efficiency programs. Similar foresight in power purchasing protected the customers of these public utilities from the worst financial effects of the 2001-2 power crisis in California. The lessons of the crisis did not escape California lawmakers. In a display of insight only possible against the backdrop of a public outcry, the California Assembly passed a singular piece of legislation that sought to expand the potential for public participation in energy resource development - Assembly Bill 117.

Sponsored by Carole Midgen and chaptered in 2002, AB 117 became known as Community Choice Aggregation (CCA), and put into statute the right of municipalities to pool their constituents and compete in the market for their energy needs. It was direct injection of public competition in the power market with two main incentives: stabilize rates for the CCAs consumers, and build a market for smaller-scale renewable power facilities. Ambitious citizens, like those in Marin whom Midgen had represented in the State Senate, wanted to expand solar programs. Determined public agencies in the San Joaquin Valley saw a way to aggregate and bargain with other energy service providers for long-term, low-rate power contracts. By building a client base among several towns and cities, each could create a joint agency to design a CCA Implementation Plan, apply for review by the California Public Utilities Commission (CPUC), and start to make their dreams come true.

California wasn't alone in exploring the CCA option. In Ohio, more than 600,000 former customers of investor-owned utilities (IOU), from 118 different cities, now get their power from The Northeast Ohio Public Energy Council. Their energy supply contract guarantees a discount ranging from 4%-6% when compared with IOU rates. The Rhode Island Energy Aggregation Program supplies municipal facilities in 36 cities and towns, and has saved its members millions in energy costs. A study conducted for interested California communities by Navigant Consulting predicted an average electricity cost savings of 3%, even with the expense of new, renewable energy generation facilities included.

There are several evident advantages of the CCA model. The CCA buys power for its customers, but delivery is still the responsibility of the existing utility. It can maximize savings by picking among suppliers, without necessarily incurring the cost, and risk, of operating generating facilities. If the members of the CCA want to build power plants for their community, as tax-exempt municipalities their financing is substantially less costly than private companies face. And, CCAs can allocate their funds as the members see fit, investing in the most modern, efficient power plants, or in energy efficiency improvements to reduce power demand overall.

As with most good things, there was a catch. The energy crisis that led to AB 117 had also bequeathed a legacy of long-term power contracts entered into by the IOUs. The law was scrupulous that this, and any other obligations that the utilities had undertaken in anticipation of serving all its customers, would be reimbursed over time by CCA customers as an exit fee when operations commenced. For CCA advocates, the ominously named Cost Recovery Surcharge (CRS) became the price of freedom, as well as a wormhole into uncertainty.

Those elected to make laws, as well as those who willingly choose to initiate, support or change them, know well how slowly the wheels of government can turn. Even in that context, getting Community Choice Aggregation off the ground in California was like crawling through fresh asphalt on a hot day. Passed in 2002, it was another year before the CPUC initiated a rulemaking procedure to develop guidelines for the program. By that time several local governments throughout the state showed interest in starting a CCA. If any of them were expecting another shoe to drop, they didn�t have long to wait.

Clearly, the biggest potential losers in an energy scheme that includes CCAs are the state's three IOUs; San Diego Gas & Electric (SDG&E) in the south, Southern California Edison (SCE) in southern and central California, and the big gorilla, Pacific Gas & Electric (PG&E) that serves the remainder of the state. Three of the most determined communities, San Joaquin Valley, San Francisco, and Marin County are in PG&E's service territory. If San Francisco alone formed a successful CCA, PG&E stood to lose 5% of energy sales, or somewhere in the neighborhood of $45 million per year.

CPUC deliberations offer ample time for commentary on proposed programs. While the law expressly stipulated, "all electrical corporations shall cooperate fully with any community choice aggregators," the IOUs were well within their rights to nitpick the proposed implementation. Since the issue of first concern was the contentious cost questions about the CRS, the exit fee to leave utility service, it was hardly surprising that activity related to AB 117 took place on an average of every other week. Complicating matters further, the IOUs claimed that power contract information related to the CRS was confidential, so the CCAs could never precisely determine the extent of their liability. As a result, it took all of 2004 for the commission to render a decision. And that was just Phase One.

Phase Two began early in 2005, and proceeded much as before; the IOUs jockeyed for economic advantage at every turn. The law insured that no customer who chose to "opt-out" of the CCA and return to the utility would suffer added cost for their choice, and the IOUs exploited any imaginable scenario in which this might occur and sought redress from the CPUC. They came up with regulatory hurdles and issues of risk that could disadvantage the municipalities under a CCA structure. CCA advocates, and local agencies representing the communities, had to allocate substantial time and resources to counter these arguments. Despite the IOUs efforts, the CPUC delivered a present in the form of their Final Decision shortly before Christmas 2005, and found in the CCAs favor on most issues.

San Joaquin and Marin had, by now, both begun the delicate process of establishing an agency to represent the dozen or so member cities, and administer the CCA. As early as 2004, they started to conduct feasibility studies, risk assessments, and hold workshops and presentations for all the stakeholders. The complexity of energy issues, and the number of parties involved, stretched the timeline farther than anyone expected. San Joaquin moved fastest, however, and by November of 2006 formed the San Joaquin Valley Power Authority. Two months later, their implementation plan was submitted to the CPUC, and by the spring the SJVPA became the first Community Choice Aggregation program certified in California.

The plan provided for the SJVPA to purchase power from the Kings River Conservation District, an existing lead agency that operates two generating plants and manages water resources in the Valley. David Orth, General Manager of KRCD, is a strong supporter of the CCA program and was a prime mover in its creation. He expected that progress would come quickly after the CPUC certification, but instead, "We found ourselves in mid-2007 being shifted away from implementation by filing a complaint with the Public Utilities Commission regarding PG&E's conduct." In direct conflict with the language of the law, Orth remembers, "PG&E began blatantly, in 2007, to oppose our efforts, and market against Community Choice in general." Having failed to choke off public competition by injecting disincentives during the rulemaking process, the giant utility now took a direct approach. PG&E marketing staff began to appear at city council meetings of the CCA member cities and sew fear of dire consequences if they were to continue to support the program.

Preparation of a business plan for a joint powers energy agency took somewhat longer in Marin. But by October of 2008, an ordinance was released to create the Marin Energy Authority (MEA), and over the next two months, the County government and seven towns and cities voted to approve it. The CCA initiative was branded as Marin Clean Energy (MCE), a proposal to "buy renewable power collectively and directly". All of this activity had not, of course, escaped PG&E's attention, and similar pressure began to be applied. Jamie Tuckey is on the Sustainability Team of the Marin County Community Development Agency. She says, "PG&E has taken on a role that is competitive in nature towards MCE. They have continuously encouraged cities and towns not to join the Marin Energy Authority by using what some might call scare tactics and misinformation." PG&E spokesperson Katie Romans says the utilities supported the original legislation, but the plans that were developed, "have created financial risks for the communities, and PG&E will continue to oppose those efforts on behalf of our customers."

For their part, PG&E representatives counter MEA's assertion that it can provide 50% renewable power at, or under, the utility's rates. They claim that customers will have to pay at least 20% more for renewable resources. They are quick to point out that the energy service market has deteriorated along with the economy, and that local communities would be unwise to go looking for third-party suppliers of power under current conditions. Indeed, that was precisely the predicament of San Joaquin Valley. First out of the shoot with a certified implementation plan, the Kings River Conservation District had selected Citigroup Energy as its balance of power provider in January of 2007. David Orth recalls, "The market was there to support our objectives in late 2007, early 2008, but PG&E had thrown up such an obstacle, such an uncertainty in the marketing and rules conduct arena, that we had to stop and get that straightened out."

Specifically, PG&E asserted that they were entitled to make each member of the CCA liable for the collective obligation of everyone else. Called Joint & Several Liability, it is an absolute poison pill for a joint power agency like the SVJPA. California law, however, clearly leaves such an arrangement up to the discretion of the members. Still, PG&E, with the support of the other IOUs, took their case to the CPUC three times. Each time the claim was thrown out. Eventually, PG&E was forced to reimburse the SJVPA $450,000 in legal fees. Nevertheless, says Orth, the tactic achieved its goal, "Having to fight that battle, for over a year, had a significant effect on our timing." By late 2008, the parent company of Citigroup Energy was embroiled in the mortgage meltdown, and the energy provider withdrew from its contract.

Whether the Marin Energy Authority will face the same conundrum is a question to be answered soon. A Request for Proposals was issued to 129 potential energy service providers in May 2009. The date for submissions has not yet elapsed, but only 20 organizations attended the pre-bid conference. Still, seven years after AB 117 was made law, The San Joaquin Valley Power Authority in the only certified California CCA, and recent news does not bode well. After the departure of Citigroup Energy, they struggled to line up energy service contracts. In late June 2009, David Orth announced that "market conditions" required the suspension of activities for the CCA program. It is, without question, a major setback for public participation in the energy markets in California. Mike Campbell, who worked at PG&E for years, and is now Director of the CCA program for the San Francisco PUC, is facing the same potential fate as Dave Orth, but remains determined. His prescription? "The key is to more clearly define the role of the incumbent utilities. Local governments are not cued up to compete with the monopolistic incumbent utility for energy service. And if that's what we have to do, it's going to be difficult for anybody to succeed."

One of the great ironies in the story of this orphaned legislation is that energy is, and will increasingly be, a central driver of economic cycles, and likely the key to how well we, as a nation, will live from now on. Without question, the biggest barrier to a Great Awakening is public complacency, the persistent presumption that, "Hey, when I flip the switch, it's there, so why do I care where it comes from?" A consumer society assumes energy is a commodity that's not supposed to come in flavors. Despite the recent saturation of Green Media, most Americans still view the "green" message as an ad campaign that�s overstayed its welcome in the 24-hr news cycle. In complete contrast, the legislators who represent those overwhelmed and overburdened citizens are obsessed with energy. Under consideration in the 2009 California legislature are no fewer than 15 bills that address energy or climate issues. In the sea of legislation that floods Sacramento, AB 117 is a Delta Smelt, a small fish on the verge of extinction.

This disconnect in American public policy, this schizophrenic reaction in matters of energy and climate, represents the gravest threat to public participation in power markets. On reflection, the tactics of traditional power providers like PG&E and free-market fundamentalists have, at most, a moderate impact on the public paralysis. They simply use the available fear and ambivalence of the population to their logical advantage. Still, there are many people, in both the private and public sectors, who recognize the situation as the very definition of 'unsustainable'. The changes in electric generation, in transmission, in fuels, in efficiency and demand management, are inescapable; but they will only happen if both sides agree to participate in a competitive marketplace that includes, and adequately represents, the public's interest. Similarly, the cost of a build-out at this scale, the assumption of risk involved, also has to be shared. The alternative, public apathy and a monopolistic energy industry - in other words, business as usual - is a trip down a dark street indeed.