The changing California electricity market

Publication June 2017

By Jeremy Waen and David Howarth, with MRW & Associates in Oakland, California

The California regulatory agencies are scrambling to get ahead of a rapidly changing California electricity market as millions of Californians are being offered an expanding slate of alternatives to fully bundled electricity service from the local investor-owned utility or “IOU”.

As many as 1.9 million customers are expected to use some form of customer choice by the end of 2017. More than 85% of the total utility load may depart to alternative suppliers by the middle of the next decade.

While competition in retail electricity supply is not new in California—retail choice was introduced in the late 1990s—that early foray into competition was hobbled by the California energy crisis in 2000 and by subsequent legislation capping the amount of load allowed to exit through direct access.

The driving factors behind the current exodus are the rapid expansion of community choice aggregators or “CCAs” and customers installing solar panels. (For background on CCAs, see “Another potential offtaker: community choice aggregators” in the August 2016 Newswire, “Huge potential new demand for power” in the October 2016 NewsWire, and “Financing Projects With Community Choice Aggregators” in this issue starting on page 1.) 

The amount of customer load served by CCAs now exceeds the amount supplied by power marketers. With many more communities either forming new CCAs or joining existing CCAs, the amount of load departing utility service is expected to increase substantially in 2018. 

Both the scale and the rate of load departures across the state are causing the California Public Utilities Commission and California Energy Commission to recognize that time is fleeting for policies to adapt to these changes. The regulators are particularly concerned about how the changes in industry structure are affecting their ability to ensure that California meets its aggressive greenhouse gas emission reduction goals.

The CPUC and CEC held a joint “en banc” meeting on these issues on May 19. The CPUC staff issued a white paper ahead of the meeting to tee up the discussion about how California can balance its priorities for greenhouse gas reductions, grid reliability, rate affordability, universal access and economic development in the rapidly evolving electricity market.

The white paper said the CPUC intends to initiate a formal rulemaking proceeding to explore the “future role(s), structure(s), fiscal and other functions of the three large California electric IOUs.”

En banc highlights

Many prominent figures attended. The meeting lasted all day. For the CPUC, President Michael Picker and Commissioners Carla Peterman, Liane Randolph, and Martha Guzman Aceves attended. For the CEC, Chairman Robert Weisenmiller and Commissioners Karen Douglas and Andrew McAlister were present.

Several commissioners made opening statements. The day was then divided into separate panel discussions exploring four topics: customer preferences, the state of customer choice, IOU perspectives on the situation, and the future of retail electricity services within California.

Picker said the state has no coherent plan yet to deal with the rapid load departures from the IOUs. He said there are two fundamental questions to answer: how do we organize the electric system to achieve our goals, and who is going to finance it? He said the “decision-maker” role is shifting from the regulators to the electricity customers as they exercise retail choice. This shift creates tension between the pursuit of statewide goals and local priorities. 

Weisenmiller said he wants to examine the consequences of moving away from a vertically integrated utility model and associated regulatory system. For example, he said the changing nature of the industry means California utilities are no longer signing bilateral contracts to buy capacity from independent generators, which has implications for how the state ensures reliability. He cautioned that “markets do not care about everyone” and the state must make sure this transition does not leave people behind. He said, “We are going into a future that, if we think about it and are clever, can work, but we need to get out in front of it.”

Numerous speakers shared their perspectives on the potential consequences of a rapid shift in the electricity load from the IOUs to CCAs and other suppliers. In an unusual instance of stakeholder alignment, the CCAs, power marketers, solar developers, ratepayer advocates, and even the IOUs clamored for policy reform. While they all seem to agree that changes are needed, consensus remains elusive around what specifically needs reform and how best to do it. 

A hot topic was how to handle the costs of future electricity supplies that the IOUs have already procured on behalf of ratepayers who are now leaving the utilities. These are called “legacy resource costs.”

State law already calls for “ratepayer indifference,” meaning the ratepayers who choose to remain with the local IOU should be neither better nor worse off as other ratepayers who choose to take their electricity from other suppliers. 

Costs associated with IOU procurement have the potential to become stranded costs due to load departures. IOUs are already allowed to address this problem by collecting a non-bypassable charge known as the power charge indifference adjustment or “PCIA” from customers who move to other electricity suppliers. The PCIA is collected by the IOUs via a line-item charge on departing customers’ bills.

The three big California IOUs say the present PCIA methodology is broken and that more costs are being stranded due to the increasing number of customers departing for other suppliers. They say these costs are unfairly being borne by remaining ratepayers on the utility systems. The utilities want the CPUC to use a “portfolio allocation mechanism” that would replace the PCIA entirely and assign to the departed load the net costs and benefits of the IOU legacy resources rather than just the net stranded costs as is done currently.

The alternative service providers presented differing opinions. Geoff Syphers, CEO of Sonoma Clean Energy, a CCA, said the legacy resources largely overlap with CCA-led procurement because the IOUs failed to take into account CCA load departures in their procurement forecasts. As a result, much of these legacy resources are doubly procured on behalf of CCA customers. While Syphers agrees the PCIA needs reform, he does not agree that the utility proposal is the solution. 

Syphers says that the IOUs should be required to mitigate legacy costs, which is not required by the utility proposal, and there must also be rate certainty for all parties and an end to double procurement.

The commissioners gave little insight into how they might resolve the legacy resource cost issue. Commissioner Peterman said the CPUC is treating the matter “with the utmost urgency.”

Future utility role

Utilities are required by law to serve anyone who wants electricity. CEC Chairman Bob Weisenmiller asked panelists repeatedly, throughout the day, how California should address the utility role as providers of last resort. 

The state has used directives to utilities about what type of electricity they supply as the primary tool to implement its goal of moving to greater reliance on renewable energy. The IOUs say the need to act as providers of last resort and to implement state goals in how they procure power sometimes pulls them in opposite directions.

In other states, utilities often serve the residual customer base with short-term, market-rate electricity purchases. Utilities in California have been pushed for state policy reasons to make long-term purchases to address state goals on greenhouse gas reduction, affordability, reliability and economic growth. The IOU panelists said balancing these roles becomes unsustainable in an increasingly competitive electricity market with declining utility bundled loads.

Another panelist, Sue Tierney, who served as a public utilities commissioner during utility deregulation in Massachusetts, said that while competition and retail choice exist in 14 other states, California is uniquely situated due to its climate-oriented policies and procurement mandates. Other states have effectively leveraged competitive markets to drive down electricity rates for customers while balancing the need for grid reliability, but no other state has had to figure out yet how best to leverage the competitive market to pursue greenhouse gas-reducing objectives. 

According to panelists, states like Hawaii and New York are making progress in that direction, but are either too uniquely situated (in the case of Hawaii) or not far enough along (in the case of New York) to impart best practices onto California’s efforts. 

Several panelists spoke to the need to resolve the tension between state policy to encourage deployment of rooftop solar and other forms of distributed energy while also defaulting to utility-centric procurement.

Panelists with interests in solar technologies said the regulators should focus on rate stability and improved rate structures to support use of solar and battery storage to help with greenhouse gas reduction and grid reliability. While the IOUs have strong balance sheets and are well situated to leverage economies of scale, it remains hotly debated whether the IOUs can act quickly and innovatively enough to support distributed generation. 

Other panelists argued for greater state efforts to push electrification of the transportation sector. One panelist, Nora Sheriff, on behalf of the California Large Energy Users Association, made a case for expanding the use of demand response to help achieve the state’s goals. Another panelist drew a parallel between California’s approach of using the IOUs to implement state goals and “Soviet-style central planning.” 

Road ahead 

The California electricity market is in transformation. As the CPUC staff said in the white paper, the drivers of change are “accelerating whether [regulators] want them to or not.” The CPUC and CEC are attempting to adapt state regulatory policies, but the road ahead and timetable are uncertain. Market participants should prepare for a significant period of regulatory uncertainty and engage with the regulators on what they would like to see emerge from the policy review. 

Participants in the day-long en banc meeting left with their heads spinning, filled with wonky thoughts after a wide range of issues was raised. The commissioners who presided over the meeting listened, but gave the audience little sense of how they might resolve the issues. 

Only one thing remains certain: California is moving to widespread and competitive customer choice with potentially profound effects on the electricity market.


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