Meet the latest disruption for utilities: community power

By Debra Kahn | 06/09/2016 07:42 AM EDT

Behind the vanguard of distributed energy, another threat to traditional utilities’ hegemony has been steadily rising. Under the community choice model, local governments can form energy agencies that buy electricity from sources other than the incumbent utilities. The attraction is, variously, lower retail rates, a higher mix of renewable energy, or simply local control.

Behind the vanguard of distributed energy, another threat to traditional utilities’ hegemony has been steadily rising.

Local power agencies — under the distinctly wonky moniker of "community choice aggregation" — are gathering steam in California as an alternative to retail sales from utilities.

Under the community choice model, local governments can form energy agencies that buy electricity from sources other than the incumbent utilities. The attraction is, variously, lower retail rates, a higher mix of renewable energy, or simply local control.


San Francisco, San Diego, San Jose and Los Angeles County are all moving toward community choice programs. Sixty percent of California residents who aren’t already served by municipal utilities could be in CCAs by 2020, according to an analysis by the Center for Climate Protection, a nonprofit that sees community choice as a potent tool to reduce greenhouse gases.

Paul Fenn, who is known as the father of the CCA model for his authorship of enabling legislation in Massachusetts in 1997 and California in 2002, calls their advent a "slow explosion."

"It’s basically the whole coast of California," he said. "It’s one of those things that took a long time to explode."

"I don’t know why they’re not talked about," said Mark Ferron, a member of the board of California’s grid operator, the California Independent System Operator, and a former California Public Utilities commissioner. "They’re certainly on the utilities’ radar screen."

Pacific Gas and Electric Co., the state’s largest utility with 5.4 million electricity customers, has 370,000 CCA customers in its territory. That number could rise rapidly with San Francisco’s program, which started last month with 30 megawatts serving 7,400 commercial customers and plans to add 20 MW — enough to serve up to 48,000 residential customers — by November.

San Francisco is offering a mix of natural gas and 35 percent renewable energy from Calpine Corp., as well as a 100 percent renewable option, which comes from Iberdrola Renewables’ Shiloh Wind project in Solano County. About 220 customers have opted for the "super green" option, which costs about $6 more per month, according to the San Francisco Public Utilities Commission.

While 35 percent isn’t much greener than PG&E’s own mix of about 27 percent renewables, San Francisco has other plans to differentiate itself. It will offer net-energy metering "more attractive than what PG&E is offering," spokesman Charles Sheehan said, so customers with rooftop solar can join, as well as a feed-in tariff to incentivize local renewable projects.

California’s rules for CCAs require the programs to send several notices offering customers the option to stay with the incumbent utility. San Francisco expected an opt-out rate of around 20 percent, but so far only about 1 percent has chosen to stay with PG&E, Sheehan said.

"It’s something that a lot of people seem to want," said California Public Utilities Commissioner Mike Florio.

Besides buying wholesale renewables, the programs can offer incentives for rooftop solar and other renewables, and can finance larger-scale local installations, as in the case of the state’s first CCA, Marin Clean Energy.

Begun in 2010, the program now covers all of Marin and Napa counties and is reaching into Contra Costa and Solano counties. It charges about a penny more per kilowatt-hour than PG&E does and plans to become fully cost-competitive this September.

Its electricity, from a combination of renewable energy credits, large-scale hydropower and generic "unspecified" electricity, is 52 percent renewable, compared with PG&E’s mix of about 30 percent renewables. For another penny per kilowatt-hour, customers can upgrade to 100 percent wind power; another 6 cents will buy supplies from a 2-MW solar plant within the county that’s scheduled to come online later this year.

The laws have changed

The state’s utilities have had years to get used to CCAs. A 2002 state law expressly allowed their creation, but the first one didn’t emerge until 2010.

After PG&E sponsored a ballot initiative that year that would have required local governments to achieve a two-thirds vote before forming CCAs or municipal utilities, a 2011 law created a "code of conduct" for utilities to abide by; they are now required to use shareholder money if campaigning against CCAs, among other guidelines. Since then, there have been more attempts to hamstring CCAs at the ballot box and in the Legislature, but all have failed.

"Things have definitely changed," Sheehan said. "New laws have helped streamline and regulate the process, and it’s much easier for CCAs to get off the ground."

The utilities aren’t eager to expound on how they view CCAs today. Southern California Edison Co., which is home to Los Angeles’ nascent CCA program, is neutral on them, per the 2011 law. "SCE’s position is NEUTRAL on CCA programs," spokesman Robert Laffoon-Villegas said.

San Diego Gas & Electric has applied to the CPUC for approval to spend shareholder money on communicating about CCAs. A November 2015 filing asks for permission to form an independent marketing division to fill the "informational vacuum" created by the 2011 law.

"This vacuum is the product of the utility’s concern that it might be accused of advocating against CCA, as opposed to the utility simply participating in a healthy public discussion of the region’s efforts and progress toward a greener future," SDG&E wrote. "Moreover, this vacuum is often filled by information from CCA proponents who seem to believe that non-utility service is the only means by which to achieve a greener and more local energy supply. … SDG&E understands the goal of such local efforts but does not believe that a CCA program is the only means to such an end."

In the meantime, spokeswoman Allison Torres said SDG&E "supports a customer’s right to choose its electricity service provider, including a community choice aggregation; unfortunately, we’re prohibited from participating in discussions specific to CCA by the CCA code of conduct."

Observers say there shouldn’t necessarily be a conflict between investor-owned utilities and government-owned electricity suppliers.

"I don’t know that they’re necessarily a threat to the utilities, other than they represent a change, and anytime you give customers choice, the monopoly incumbent is not going to be too pleased about that," Ferron said. "At least the ones I know about, [CCAs] don’t have any aspirations to operate the distribution grid, so the role of a distribution system operator, which utilities perform in part, I think will be intact."

‘The threat lies in the eyes of the beholder’

California utilities don’t make money on electricity sales, so they won’t lose profits to community choice. But to the extent that they depend on rates to fund fixed expenses, they face a shrinking pool of customers to shoulder increases. That increases the risk of driving more governments to CCAs — a similar cycle to that posed by rooftop solar systems.

On the other hand, distribution-side grid upgrades are an opportunity for profitable investment.

"The threat lies in the eyes of the beholder," said Ahmad Faruqui, a principal with the Brattle Group. "I think utilities are concerned about these new forces that are going to threaten their revenue recovery for their fixed costs. As long as that is assured, they should not see it as a threat."

State regulators allow the utilities to levy a charge on departing CCA customers to compensate them for the cost of the power that the utilities had already purchased to serve anticipated load. That has cut into CCAs’ cost-competitiveness, but regulators say it’s needed to make up for the expensive long-term contracts that utilities signed in the early days of the state’s renewable portfolio standard.

"We’ve been very successful through the RPS and other programs of driving down the cost of renewables, but now you’ve got these 20-year contracts that the utilities were told to enter into that are two to three times the price it is today," Florio said. "Nobody wants to pay for it, but it’s kind of the price we paid to build the market, and if you say only the customers who stay with the utility have to pay that, everybody leaves and the last person is paying a billion-dollar utility bill."

Some environmentalists are skeptical that CCAs can stimulate low-carbon energy as well as utilities can. The Natural Resources Defense Council argues that CCAs make it harder for utilities to do long-term, comprehensive energy planning due to uncertainty about their future customer base. "That also means it is less likely that the utilities will invest as much in long-term projects promoting clean energy, like renewables," said Lara Ettenson, the group’s director of California energy efficiency policy.

An advocate in the Los Angeles region disputes that community choice will hurt renewables or utilities’ ability to do long-term planning.

"You can easily forecast the trends of what’s happening right now," said Joe Galliani, organizer of the South Bay chapter of the climate action group. "Any utility executive worth their salt can see what’s coming."

Los Angeles has two CCA efforts underway: a group of 20 cities including Torrance, El Segundo, Carson and Beverly Hills, and a separate program that the county of Los Angeles is considering for its unincorporated areas. Galliani is involved in the cities’ effort and estimates they could be ready to launch by the summer of 2017. He envisions the CCA growing gradually from the original core, similar to Marin Clean Energy’s trajectory.

"At least 50 percent of the load of the IOUs is going to go to CCAs in this state," he said. "At some point down the line, it’s going to be a third IOU, a third [municipal] and a third CCA. This is a train you can’t stop."