The PCIA Story

The California Community Choice Association is engaged in ongoing efforts to reduce the Power Charge Indifference Adjustment (PCIA) for all ratepayers. California’s investor-owned utilities (IOUs) use the PCIA to recover above-market costs associated with their power portfolios. The impact of the PCIA on ratepayers is a major concern because it has increased by hundreds of millions of dollars in recent years. We believe more can be done to reduce the PCIA.

Why Reduce the PCIA?

PG&E PCIA Revenue Requirement Trend*

With millions of California residents and businesses struggling to meet their monthly expenses, a situation that has been exacerbated by the COVID-19 pandemic, it is more important than ever that we look for ways to scale back ratepayers costs, while simultaneously staying on track to achieve ambitious climate action goals.

But how can we both reduce costs for energy consumers and maintain, even accelerate, our path to a carbon-free energy future? The California Public Utilities Commission (CPUC) recognized in its 2018 Phase 1 PCIA decision that utilities need incentives to manage their PCIA portfolios more aggressively and initiated a Working Group 3 (WG3) phase of the proceeding to focus on portfolio optimization and cost reduction so that only unavoidable costs are recovered through the PCIA. The WG3 phase “offers the promise of meaningful progress toward reducing the levels of above-market costs going forward,” the CPUC said. 

Working Group 3 focused on ways to optimize IOU portfolios and reduce above-market costs.

After nearly a year of dedicated work, the working group co-chairs – CalCCA, Southern California Edison, and Commercial Energy – filed a consensus proposal with the CPUC in February. The proposal would require utilities to optimize their energy portfolios by more actively managing contracts and increase transparency into the PCIA process in order to save costs for all customers.

The WG3 proposal puts forth a number of ways IOUs can more actively manage their portfolios to reduce above-market costs. Under the proposal, load-serving entities (LSEs) would have access to products in IOUs’ PCIA portfolios through allocations, market offers, and assignments of product attributes. The proposal also provides a framework to facilitate reductions in total PCIA portfolio costs through buy-outs/buy-downs or other types of transactions. Further, the framework would provide for increased transparency of IOUs’ optimization process.

It’s been 337 days (and counting!) since the working group submitted its proposal to the CPUC. We are still waiting for the CPUC to act so ratepayers can realize the cost savings.

How is the PCIA Calculated? Warning: It’s Complicated!

The PCIA is set annually in the IOUs’ Energy Resource Recovery Account (ERRA) proceedings. It includes above-market costs related to power supply commitments that the IOUs made many years ago. These include Utility-Owned Generation (e.g. nuclear, natural gas, hydroelectric plants) and long-term renewable energy contracts with third parties. The PCIA is derived from the utility’s Indifference Amount, which is updated annually in each IOU’s ERRA proceeding. The Indifference Amount is the difference in the target year between the cost of the IOU’s supply portfolio and the market value of the IOU’s supply portfolio.

PCIA savings can result from either the cost of the portfolio going down, or the value going up.

Each generation resource and departing customer is assigned a “vintage.” A distinct portfolio of generation resources is identified for each vintage year based on when a commitment to procure each resource was made. Customers are assigned to vintage years according to the date they depart bundled IOU service. Customers continuing to receive bundled service from the IOU are included in the latest vintage (e.g. vintage 2021 in the current application). Each vintage is assigned a separate Indifference Amount and customers are responsible for the cumulative PCIA rates for their vintage.

The table below shows IOUs’ forecast above-market costs for 2021 (Line C), which amount to $3.9 billion combined. IOUs will collect the above-market costs from ratepayers through PCIA rates. Cost values for SDG&E are estimates, as precise cost figures are confidential.

IOUs’ Portfolio Costs, Value, and Above-Market Costs (in billions of dollars)

What is the PCIA Cap and Trigger?

In 2018, the CPUC established a “cap” on annual PCIA increases of .5 cents/kWh to minimize the change in the PCIA from one year to the next, noting that the “cap protects against volatility in the PCIA.” The Commission directed the IOUs to track “undercollections” as a result of the cap in a PCIA undercollection balancing account. IOUs must file a PCIA trigger application requesting a rate increase when the undercollection amount reaches 7% and the utility forecasts that the undercollection will reach 10%. If the Commission grants the rate increase, the IOU must bring the undercollection down to 7% and maintain the balance below that level until January 1 of the following year, when the PCIA rate adopted in that utility’s ERRA forecast proceeding will take effect.

In July, San Diego Gas & Electric filed the first-ever PCIA trigger application. Under SDG&E’s proposal, customers would experience a dramatic rate spike, with an increase to some residential customers of roughly 93 times the .5 cents/kWh annual rate increase cap. This extraordinary increase would be followed by an almost equally precipitous drop. Hence, the cap/trigger mechanism could generate the volatility it was created to avoid. PG&E and Southern California Edison also filed trigger applications this year, but neither proposed recouping the undercollection in 2020.

Our PCIA Work Continues

CalCCA will continue to advocate for PCIA solutions that reduce costs and increase stability for all ratepayers.

Check back soon for more on the PCIA!

*Chart credit: Brian Dickman/NewGen Strategies