What is an IOU portfolio?
An investor-owned utility (IOU) electricity supply portfolio includes all the energy resources an IOU has procured to provide power to customers. These include long-term contracts with renewable energy resources and utility-owned generating facilities.
What are “legacy” energy resources?
Legacy energy resources are power supply commitments that the IOUs made in the past. These include capital-intensive utility-owned generation facilities (e.g. nuclear, natural gas, hydroelectric plants) and expensive long-term renewable energy contracts with third parties. Legacy resources account for billions of dollars in above-market costs in IOU energy portfolios, and IOUs rely on California ratepayers to pay the costs. Community choice aggregation (CCA) customers continue to pay for legacy resources through the Power Charge Indifference Adjustment (PCIA) fee.
What do you mean by the benefits of a legacy resource?
Legacy resources are a burden because the electricity they generate is very expensive compared to today’s market prices, resulting in billions of dollars in above-market costs that accrue to all ratepayers. However, there are also valuable products associated with the electricity produced by legacy resources – such as resource adequacy, RPS attributes, and GHG-free attributes – that can be used by energy providers to meet their clean energy goals and reliability requirements. These resources are particularly valuable during supply-constrained conditions as California has been experiencing. But under the current structure, these products are retained by IOUs. So, while CCA customers must pay their fair share for legacy resources, CCA customers do not have fair access to all of the beneficial products they are paying for. There is no good policy rationale for this inequitable treatment of CCA customers versus their IOU counterparts.
What is meant by “fair and equal access?”
While CCA customers must pay their fair share for legacy resources, CCAs do not have fair access to all of the beneficial products they are paying for. That’s because the IOUs have full control over legacy energy resources and get first dibs on the valuable products to meet their own compliance requirements. SB 612 ensures “fair and equal access” because all customers – bundled (IOU) and departing load (CCA) — equally share the costs and benefits of legacy contracts.
How are legacy resources managed today? What are the problems?
IOUs have full control over legacy energy resources (PCIA portfolios) and get first dibs on the valuable products to meet their own compliance requirements or to ‘green’ their power content labels. In addition to getting first dibs on valuable products in the PCIA portfolios, the IOUs are also in full control of what to do with the remainders, or excess resources. In short, IOUs make CCAs pay for the resources but then IOUs get to keep whatever they want, and get rid of what they don’t, in a manner that reduces the value of the resources and drives up the PCIA. Further, IOUs manage the portfolios so they have zero compliance risk with RPS (SB 350) or RA obligations, and leave CCAs at risk for their compliance obligations.
Problem #1: Timing of sales of excess resources
IOUs have full control over when to sell the valuable products that remain in the portfolio after they get to pick and choose what they want. Then they release excess products into the market at a time of their choosing. The timing of the release can have deep impacts on CCAs if the IOUs have held the products past the compliance dates for RPS and RA, which in practice they do, so CCAs can’t use them to comply with their requirements. It also reduces the value of the products because there are no longer interested buyers, which in turn drives up the PCIA. Timing is especially critical now given the scarcity market for system RA, with potential delays of new projects coming online. Given the scarce market, it’s crucial that CCAs be given fair and timely access to legacy assets they are paying for.
Problem #2: Packaging of excess resources
IOUs get to choose how to ‘package’ excess legacy resources. Take a 20-year RA contract, for example. The IOU can choose to sell portions of the RA in short-term slices such as one-year periods. So, they may give up 2 MW of RA for one year, and keep the rest for their own customers’ compliance. This is a vastly different product than long-term RA that IOU customers receive and the value of the product is not optimized because SB 350 gives long-term products more value than short-term products. This has the net result of driving up the PCIA (lower value = higher PCIA).
Problem #3: CCAs’ open positions are (artificially) larger due to lack of access to legacy resources
Because IOUs have full command over the PCIA portfolios and can pick and choose what they want to keep and sell, their open positions are kept small. This can create serious ripple effects for the CCAs as the CPUC directs LSEs to procure based on their open positions, rather than load share, as they’ve done in the Diablo Canyon procurement order. Because the IOUs open positions are smaller, they’re going to get smaller allocations than the CCAs.
What types of benefits do CCAs have fair and equal access to under SB 612? What is the value for CCAs? SB 612:
- Gives CCAs equitable access to PCIA resources to meet a part of their RPS compliance requirements
- Gives CCAs equitable access to RA to meet RA compliance requirements
- Gives CCAs equitable access to GHG-free resources to reduce the carbon intensity of their own portfolios
- Increases the value of the RPS products in the portfolio by enabling long-term allocations to CCAs (rather than just short-term sales, which don’t meet the 10-year requirement)
- Reduces the likelihood of “unsold” RA or RPS products, which are given zero value in the PCIA calculation (and therefore increase the PCIA)
How does SB 612 provide fair and equal access?
SB 612 ensures all LSE (IOU, CCA, ESP) customers have equal access to the benefits of the resources they are paying for, and that the costs to all ratepayers are minimized. The bill does this by:
- Providing IOU, CCA, and direct access customers equal right to receive, on a voluntary basis, legacy resource products that were procured on their behalf in proportion to their load share if they pay the full cost of those products
- Requiring the CPUC to recognize the value of GHG-free energy and any new products in assigning cost responsibility for above-market legacy resources, in the same way value is recognized for renewable energy and other products
Will SB 612 benefit only CCA customers?
It will benefit all customers: CCA, IOU, and ESP. If you’re improving the value of any product in the PCIA portfolio – by enabling long-term allocations to CCAs, rather than just short-term, for example – you’re going to increase the value for all customers. Today, there’s little incentive for the IOUs to improve the value of what they sell and thus reduce the PCIA.
Isn’t the CPUC already directing the IOUs to maximize the value of legacy resources?
There is some oversight of the IOUs’ management of legacy resource portfolios, but not nearly enough. It’s a ‘needle in a haystack’ in the IOUs’ annual review process at the CPUC to determine recovery of fuel and purchased power costs through rates (aka the Energy Resource Recovery Account, or ERRA, compliance proceeding). The commission 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. Background on the WG3 consensus proposal can be found here.
What happened in Working Group 3? Why weren’t these issues resolved by the CPUC?
SB 612 stems from a consensus proposal that was developed by CalCCA, Southern California Edison, and Commercial Energy in the Working Group 3 phase of the PCIA proceeding over a period of more than a year. The CPUC sat on the consensus proposal for 405 days and then pushed out a proposed decision just before SB 612 had its first hearing on April 20. The Commission then issued a final decision on May 20. The decision provides some partial fixes but falls well short of the comprehensive solutions that SB 612 provides.
Is SB 612 still needed?
Yes. The bill is needed now more than ever. The decision does not uphold the core principles of fairness/equity and it will maintain the current shift costs from IOU customers to CCA customers.
How is the decision problematic?
It doesn’t resolve inequities, it shifts costs/risk to CCA customers, kicks the cans down the road/punts on critical issues (RPS implementation, GHG-free allocation), and once again rejects a thoughtful, solutions-oriented multi-party consensus proposal developed over a year by SCE/CalCCA/Commercial Energy.
What are the cost shifts?
Everyone pays the same costs but not everyone gets the same benefits. CCA customers are being used to shield IOU customers from higher cost risks and compliance risks (allows cost and compliance risk to fall only to CCA customers).
Why is the CPUC favoring IOU customers?
The Commission’s historical role is to protect IOU customers. While CCA customers make up more than a quarter of the population in California, the CPUC continues to use the same old lens which focuses only on protecting IOU customers (the same lens it used when there were no CCA customers).
Why should the Legislature weigh in?
The decision demonstrates why it is critical for the Legislature to weigh in on high level principles in addressing PCIA issues. SB 612 at its core is about fairness and equity. It aims to ensure that both IOU and departing load customers, who have equal cost responsibility for the IOUs’ legacy resources and contracts, receive equal access to the benefits of those resources. The PD rejects the SCE/CalCCA/Commercial Energy proposal that embodies this principle and, in fact, enshrines the opposite result: while departing load customers will continue paying their share of resource costs, the IOU gets first choice of the resources it will use to serve its own customers.
Will the CPUC continue to have a role in implementation?
Yes. SB 612 leaves many implementation details in the hands of the CPUC. SB 612 presents a “35,000 foot” directive for equity in access to PCIA resources, but the Commission will be responsible for filling out what will be a very detailed framework.
Don’t IOUs already have the ability to sell the energy? If so, why is this bill necessary?
Yes, IOUs have the ability to sell energy. And they do. On their timeline, when it suits them and how it suits them. SB 612 ensures all LSEs – IOUs, CCAs, ESPs – have the same access to legacy energy resources, in proportion to their load share if they’ve paid the full cost.
How does proportional access work?
In the simplest terms, LSEs would get what they pay for. Attributes will be allocated proportionally on a vintaged basis, using the same vintage assignment system that’s used to determine the PCIA. Under this system, 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. CCA and direct access 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).
Who would buy the energy if the CCAs don’t want it?
Any remaining excess legacy resource products not taken by CCA, or direct access customers (all LSEs) could be sold by the IOUs on the wholesale market.
What happens if the “excess” energy is not sold on the CAISO market?
With all LSEs having equal access to PCIA portfolio products the likelihood of unsold RA or RPS products is reduced. Unsold RA or RPS products are given zero value in the PCIA calculation (and therefore increase the PCIA).
If this bill were passed, how much RPS would be available to CCAs and how much would they take?
If the bill passed, IOUs, CCAs, and direct access providers (LSEs) would have equal right to receive legacy resource products, including RPS energy, in proportion to their payment of the resources. These offers, or allocations, would be voluntary, so it would be up the LSEs to decide if they want to take them.
Why would the IOUs not want to give the CCAs their proportionate share now?
SB 612 is based on the consensus proposal that was put forth by CalCCA (CCAs), Commercial Energy (ESP), and Southern California Edison (IOU). The bill puts a system in place to implement the proposal. Other IOUs may not want to give the CCAs their proportional share because they want to retain first right of refusal (aka first dibs) on the valuable products.
Won’t the implementation of this bill mean that CCAs will procure less renewables?
SB 612 would not change the total amount of resources that must be procured to meet California’s climate and reliability goals; there will be the same ‘need’ in the market to procure long term renewables. It changes only who has the obligation to procure those resources, placing proportional responsibility on the IOUs. Right now, the IOUs have excess supply relative to their customer-base and therefore are not procuring long-term renewables. The primary impact of CCAs accessing the benefits of the resources they already pay for would be to reduce the RPS resources that CCAs are bound to procure and increase the IOUs responsibility commensurately – a zero sum game.
If IOUs have to buy more long-term renewables, won’t it cost bundled customer more (creating a cost shift)?
No. When the IOUs today retain (call dibs on) a product in their portfolios for compliance or other purposes, they must pay the market price benchmark. If, instead, they have to go to the market, the price should be the same – the market price.
Won’t CCAs be able to take on nuclear energy?
CCAs will be given the option – not a requirement — to accept, on a voluntary basis, an allocation of GHG-attributes from nuclear energy in the IOUs’ PCIA portfolio. The implementation of SB 612 will not in any way extend the operation of Diablo Canyon beyond planned decommissioning dates of 2024 and 2025.
Why is this voluntary? Shouldn’t CCAs be required to take their portion?
This is voluntary because, depending upon their open position, all LSEs may not need or want an allocation. SB 612 requires IOUs to offer any remaining excess legacy resource products not taken by IOU, CCA, or direct access customers to the wholesale market through regular solicitations. This will reduce the likelihood of unsold RA or RPS products, which are given zero value in the PCIA calculation (and therefore increase the PCIA).
Are IOUs required to take their share, or is it voluntary for them, too?
There are no rules that prevent the IOUs from selling or allocating their portfolios in the market and rebuilding their customers’ portfolios with different products (in fact, CCAs suggested encouraging this approach in a 2018 CPUC proceeding).
Who established the value of an energy resource or the “market price benchmark?”
The CPUC established the methodology for calculating market price benchmarks (MPBs), which are an administratively determined set of proxy values that represent the market value of the products and attributes in the IOU’s resource portfolio. MPBs are estimated each year as the value per unit with the three principal sources of value in utility portfolios (Energy Value, RPS Value, and RA Value).
Why is it necessary to have a market price benchmark?
Market price benchmarks (MBPs) are part of a complicated calculation that is used to set PCIA rates. The PCIA is derived from the utility’s “indifference amount,” which 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, or portfolio market value (PMV). PMV is derived from the total eligible generation in megawatt hours (MWh), or capacity in kilowatt-months (kW-month), multiplied by the market price benchmarks.
What does it mean to “recognize the value of GHG-free energy”?
Currently, through the Power Charge Indifference Adjustment (PCIA), CCA customers are required to pay a portion of the costs to operate IOU generation assets, such as large hydropower and nuclear facilities (utility-owned generation resources), which carry GHG-free value. The GHG-free attributes of such resources can be sold in the market.
PCIA charges are only supposed to cover the difference in cost between the price at which IOUs bought the resources and the price at which IOUs can now sell the resources. IOUs sell the electricity from these resources in the market administered by the California Independent System Operation (CAISO). Therefore, the total cost CCA customers pay for these GHG-free resources in the PCIA is reduced by the revenue IOUs receive in the CAISO market for the energy generated from these assets. However, the CAISO revenue does not reflect any value for the GHG-free attributes of this energy.
CCAs requested the CPUC establish a GHG-free benchmark to reflect the value of the GHG-free attribute and reduce the PCIA fee by that amount. This is a similar approach to the existing Renewable Portfolio Standard and Resource Adequacy benchmarks that reflect the value of those resources and reduce the PCIA rates. The CPUC denied the request to establish a GHG-free benchmark; this results in a cost shift from IOU to CCA customers because CCA customers are paying for a portion of the GHG-free attributes that the IOUs claim for its own customers (aka bundled customers). Under SB 612, CCAs would have equitable access to GHG-free attributes.
