“Community Choice” or a Chance for Profit?
by Victoria Brandon
Redwood Chapter Chair
Recent upheavals in the Community Choice Aggregation (CCA) business model are threatening to put this very promising new method of supplying our energy needs at risk.
Here’s the way it is supposed to work: by “aggregating” consumer buying power to create an alternative to a utility company monopoly, CCAs can negotiate with competitive suppliers and developers to obtain better prices and a higher percentage of renewables. Nearly five percent of Americans in over 1300 jurisdictions now buy energy in this way. That includes residents of Sonoma County here in Redwood Chapter, where Sonoma Group worked hard for years for the creation of Sonoma Clean Power.
CCAs offer a number of benefits: lower rates, a “greener” power grid, job creation, opportunities to source electricity locally, and the ability to create a stable, long term power supply system that remains under local control rather than being operated for the benefit of long distance investors. It’s also a very safe investment for local governments, since there’s typically a 20-30 percent spread or “margin” between the wholesale and retail price of electric power. After providing for a five percent rate decrease and allocating another five percent to run the program, 10-20 percent is left to build up a reserve fund, develop new local renewable power sources, and subsidize energy efficiency projects in new and existing buildings. Such a substantial margin allows startup costs to be repaid very quickly, and reserves accumulate at a rate several times higher than the original investment. For example, Sonoma Clean Power’s initial investment of $2 million was paid off after less than a year’s operation, and annual profits of $12 million are now flowing into the system. Furthermore, if several local governments collaborate to operate a CCA under a Joint Powers Authority (JPA), the general funds of all are completely shielded from potential debt liability.
CCA proposals have recently been made in Humboldt, Mendocino and Lake Counties. There are many potential advantages, but the decision has to be approached carefully, after weighing all the alternatives and conducting detailed independent feasibility studies.
That’s particularly true because these proposals do not follow the model that has proven successful elsewhere. Instead, a private for-profit company called California Clean Power is offering a “turn key” operation by which they would pay upfront costs and guarantee minor savings to ratepayers and a more substantial payment to local government in exchange for future profits, none of which will necessarily be devoted to accumulating reserves, developing local renewable power sources, or financing energy efficiency. In effect, local ratepayers would have a choice between two monopoly utility companies, without the public option that was the intent of the 2002 legislation that enabled CCAs in California.
A great many questions arise.
Where will the money go? Here are the figures for Lake County: assuming the usual 20 percent opt out rate of customers who prefer to stay with PG&E, and a 20 percent margin (a minimum), the CCA can be expected to reap a profit of about $3 million annually -- money that will enrich outside investors instead of staying within the CCA for the benefit of local consumers. According to an independent analysis conducted by the County of San Mateo, “The community benefits represented by CCP appear to be much smaller than the CCA could otherwise achieve under a self-administered model . . . In particular, CCP appears to be retaining a disproportionate share of the financial benefits that could otherwise accrue to the CCA under a self-administered model.”
As a corollary, why should ratepayers be offered a mere two percent savings (instead of the five percent that is usual elsewhere) while more than twice that amount is presented to local government? This is after all the ratepayers’ money.
Is this proposal even legal? Three specific points seem to be very shaky.
- California Public Utilities Commission (CPUC) legal counsel and other experts have unanimously held that all ratepayer money (including return on investment) has to stay within the CCA: it is not available for payments to the general fund, much less to be siphoned off as profit.
- Transfer of ratepayer money to county coffers may also be impermissible under Proposition 26 since it could be considered a tax requiring voter approval, especially since CCP proposes to “guarantee” these payments.
- Entering into a contract without first investigating alternative providers evades the competitive procurement process normally required by governmental entities.
What about public oversight and transparency? Under the draft agreement, all revenues would go to CCP, with no apparent obligation on their part to provide an accounting, or for the county to conduct an audit. In contrast, all other operating programs in California have public finances. CPUC requirements for a CCA require “due process” and “disclosure,” which may be difficult to achieve when finances are not scrutinized by the local government that authorized CCA formation.
What about risk? Investors can protect themselves from a downturn by pocketing short term profits, declaring bankruptcy, and switching customers back to PG&E (at substantial cost to ratepayers), but the contract does not appear to promise ordinary risk management practices such as building significant operational reserves, establishing public fiscal oversight, and emphasizing long-term procurement. And without formation of a JPA, the general fund might be at risk for program liabilities -- even though the county will have no operational control or oversight.
And finally, what’s the hurry? These proposals were put forward with very little public notice or participation. Multi-year contracts are proposed, involving billions of dollars of ratepayer money. San Mateo County’s independent evaluation raises many serious substantive concerns. A different contractual model (for example based on fee for service), formation of a JPA between each county and its municipalities, formation of a JPA involving all three counties, or arranging to join the ongoing operations of Sonoma Clean Power or Marin Clean Energy are all options worth considering.
It’s time for the responsible agencies in Humboldt, Mendocino and Lake Counties to step back, draw breath, and exercise the due diligence that the citizenry deserves -- before handing over millions of dollars of our money.