Recovering Costs in the California Retail Market: The Power Charge Indifference Adjustment

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Why has the Australian Federal Government gone about developing the National Energy Guarantee (NEG) rather than adopting the Clean Energy Targets advocated in the Finkel Review?[1]

California Retail Market

By Dr Drew Donnelly, Compliance Quarter.

According to the Federal Government, it is a matter of balance. Balancing emissions reduction goals with the need to maintain ongoing system reliability. Of course, perspectives will differ as to whether the NEG is getting that balance right[2], but what is undeniable is that renewable energy cannot prosper in a policy vacuum. Fostering renewable energy requires that all Governments make policy adjustments to other aspects of electricity regulation in order to maintain supply at a reasonable price.

In California, regulatory tension between renewables and system reliability has reached a head with a submission earlier this month of joint investor-owned utilities (IOUs, broadly equivalent to market retailers in Australia) to the California Public Utilities Commission (CPUC, broadly equivalent to the Australian Energy Regulator) on a methodology for cost distribution, the ‘Power Charge Indifference Adjustment’ (PCIA).

In today’s article, we look at the circumstances that have led to this situation and what is being proposed as a solution.

  1. California Retail Regulation

In California, most electricity is supplied by IOUs. IOUs purchase electricity from generators through the wholesale market much as a market retailer would in Australia. This market was deregulated in 1997 which allowed customers to choose their own electricity supplier. However, in response to the electricity crisis of 2000-01, the state partially reverted and customer choice was restricted. This meant, in general, that customers went back to being served by the big IOUs. In order to allow greater customer choice, including choice of clean/renewable energy provision, a Community Choice Aggregation (CCA) policy was developed.[3]

A CCA is an alternative energy supplier, run by a local entity or authority (such as a city or county) which aggregates the buying power of individual customers. This makes it easier, and potentially more affordable, for that local entity to source ‘green’ energy. While a CCA agreement will apply over a certain geographical area, individual customers can choose to remain with their existing electricity supplier (usually an IOU) and “opt-out” of the CCA. Provision by CCA is growing and some estimate that 85% of retail load served will be served by non-IOUs by the middle of the 2020s.[4]

  1. PCIA: The Challenge for IOUs

The growth of CCAs presents a significant challenge for regulated IOUs. They have entered into long-term supply contracts with generators based on the expectation of recouping costs from future retail customers. Many of these contracts secured generation of renewable and other clean energy at a time when the price was relatively high, and in the view of joint IOUs, this secured reliable supply and has been crucial to California’s renewable energy progress. But when the IOUs entered into these contracts, there was no way of knowing how the CCA model would grow, and how much cheaper it would be for CCAs to purchase renewable energy at current market prices. [5]This means that a mechanism is required to ensure that the customers who remained with IOUs are not required to pay disproportionately high prices to make up the shortfall.

In order to ensure that these costs are evenly distributed, the PCIA was developed. The PCIA allows the IOU to charge customers who have left for a CCA, for the cost of that past purchase of generation. It is based on an estimate of the future market value of the IOU’s portfolio of assets.

Because the present PCIA calculation is based on an estimate of costs, the IOUs argue that it is too low. PG & E, one of the IOUs, estimates that it has allowed them to recover only 65 percent of the costs.[6] The joint utilities propose a new methodology that would base cost recovery on actual costs rather than an estimate.

In response, CalCCA, the association that represents CCAs, denies that the scale is so balanced against IOUs, but accepts that the current PCIA is problematic. It proposes a different plan for fixing the PCIA including:

  • a voluntary auction for the old IOU agreements securing generation. This would give CCAs the opportunity to acquire those contracts and reduce the costs to IOUs;
  • optimization of utility portfolios. This includes “redistribution of supply in the utilities’ portfolios based on a more robust focus on prudent portfolio management principles and risk mitigation strategies”[7];
  • Returns from secured long-term bonds could be used to reduce IOU costs, whether through paying off debt or investing in less expensive infrastructure. As the calculation of the PCIA includes the cost of financing electricity-generation assets, this can lower the cost for the IOU.[8]

To read the submission of the IOUs see https://www.rtoinsider.com/wp-content/uploads/PGE-CCA-filing.pdf and for CalCCA see https://cal-cca.org/wp-content/uploads/2018/04/R1706026-CalCCA-Volume-2-PUBLIC-various.pdf.

To read more about the renewable energy market in California see https://www.compliancequarter.com.au/state-support-for-renewable-energy-in-california/.

 

[1] You can read about the NEG here https://www.compliancequarter.com.au/national_energy_guarantee_part_2/.

[2] See https://www.smartenergy.org.au/news/smart-energy-council-position-national-energy-guarantee for a prominent critique.

[3] For more information see http://www.energy.ca.gov/2006publications/CEC-500-2006-082/CEC-500-2006-082.PDF.

[4] See CPUC, Consumer and Retail Choice, the Role of the Utility, and an Evolving Regulatory Framework:

Staff White Paper, p3.

[5] For a useful summary of the IOUs’ concerns see https://www.utilitydive.com/news/california-customer-choice-advocates-ious-face-off-on-departing-load-charg/521358/.

[6] Ibid.

[7] See https://cal-cca.org/wp-content/uploads/2018/04/R1706026-CalCCA-Volume-2-PUBLIC-various.pdf, p3-1.

[8] See https://www.utilitydive.com/news/california-customer-choice-advocates-ious-face-off-on-departing-load-charg/521358/.

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