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California Energy Markets / Bottom Lines

[April 6, 2018 / No. 1482]

Acrimony and Acronyms: IOUs, CCAs Issue Dueling PCIA Reform Proposals

The state's investor-owned utilities and community choice aggregators issued their long-awaited proposals for reforming the Power Charge Indifference Adjustment on April 2, setting the stage for a final PCIA showdown at the California Public Utilities Commission.

IOUs and CCAs have not agreed on much when it comes to the PCIA, but they have found common ground in the shared belief that the current PCIA—a charge levied on departing load customers to ensure they pay for legacy energy resources procured on their behalf—is unfair because it fails to achieve its intended purpose of preventing unfair cost shifting.

The two groups also appear to agree that the assumptions used to calculate cost responsibility can lead to vastly different outcomes, as reflected in the new proposals filed in the commission's PCIA proceeding [R17-06-026].

IOUs complain that the current PCIA methodology relies on administratively set benchmarks that are overstated relative to actual market prices, and this, in effect, leads to cost shifts as the utilities sell off power they no longer need.

Pacific Gas & Electric asserts, for example, that under the current PCIA in 2017, CCA customers in its service territory paid only 65 percent of the costs of energy procured on their behalf, resulting in a subsidy by bundled PG&E customers of about $180 million. The cost-shift problem has been exacerbated by the explosive growth of CCAs in California in recent years, according to a joint proposal by PG&E, Southern California Edison and San Diego Gas & Electric.

"The current methodology was not adopted in an environment of rapid load departure and therefore was not designed to be highly scalable," the joint proposal notes.

Meanwhile, the California Community Choice Association has found that a roughly equivalent cost shift of $173 million could occur in the exact opposite direction—from bundled customers to departing load customers—if alternative assumptions are used.

More specifically, CalCCA said that when it took the current PCIA market-price benchmark calculation (which sets short-term market prices for energy, capacity and renewables portfolio standard attributes—"only three of the many products and attributes in the utilities portfolio") and used CPUC-approved estimates of longer-term market values for capacity and green-adder assumptions, "the IOUs' conclusion is flipped on its head."

Data based on actual retail sales; data for 2018 onward based on current internal load forecasts.
Source: PG&E, Edison, SDG&E

CCA and Direct Access Load as Percentage
of IOUs’ Load

Year

PG&E

Edison

SDG&E

2010

7%

10%

16.6%

2011

10%

12%

16.6%

2012

11%

13%

17.6%

2013

12%

13%

18.3%

2014

13%

13%

18.3%

2015

16%

13%

18.1%

2016

17%

14%

18.7%

2017

25%

14%

17.9%

2018

39%

17%

19.3%

2019

54%

2020

55%

2021

56%

2022

58%

"The wide range of cost shift outcomes emphasizes the importance of re-examining and reforming the current PCIA benchmark," CalCCA's proposal states.

With aggregation continuing to accelerate in California, and the CPUC projecting up to 85 percent of load departing from IOUs by the mid-2020s, a major question remains: What to do with the glut of high-cost, long-term renewable-energy contracts in the utilities' portfolios?

The IOUs propose to replace the current PCIA methodology with a new cost-recovery framework consisting of two parts: the Green Allocation Mechanism, or GAM, and the Portfolio Monetization Mechanism, or PMM.

'The current methodology was not adopted in an environment of rapid load departure.'

GAM and PMM would replace a cost-allocation construct proposed previously by the utilities, dubbed the Portfolio Allocation Methodology, or PAM.

Under GAM, green resource attributes associated with RPS-eligible resources and large hydro facilities would be allocated to all load-serving entities, as would net costs.

Costs recovered from departing load customers would equal actual pro rata costs incurred (e.g., contract costs owed to generators, operations and maintenance costs, and California Independent System Operator generation-related charges), less pro rata market revenues for those resources (energy and ancillary-services revenues, for example).

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"RPS-eligible and large hydro-electric resources will be critical resources to meet California's policy objectives," the IOUs note. "Allocating portfolio attributes and net costs of these resources will ensure that all customers equitably benefit and pay for these important resources."

PMM would apply to nuclear, natural gas and energy storage resources and would entail actual market transactions to calculate cost recovery from departing load customers.

In PAM, the IOUs had proposed allocating all of the joint utilities' respective portfolio attributes to all load-serving entities. The shift to GAM/PMM "is intended to be responsive to CCAs' desire to build 'green' portfolios and to avoid a need to allocate 'brown' resource attributes to them," the IOUs said.

CalCCA's reform proposal has several components aimed at reducing costs charged to customers and developing a more accurate PCIA calculation. They include a measure that would securitize the rate base of utility-owned generation in the utilities' PCIA-eligible portfolios for their remaining service lives.

Under this measure, CalCCA proposes to raise capital through a bond issuance and repay the IOUs for their remaining investment in their generation facilities: about $4.2 billion for PG&E and $1.5 billion for Edison.

The current revenue requirements associated with the rate base would be replaced by the lower interest and principal payments on the securitized bonds, providing an initial decrease in the amount charged to bundled customers of over 50 percent, the association said.

"In addition to the direct savings to bundled customers, the reduction in generation revenue requirements will also reduce the forecasted uneconomic costs of the utilities' generation portfolios, thereby reducing the PCIA," the proposal notes.

CalCCA also recommends a voluntary buydown program for PCIA-eligible power-purchase agreements, with the goal of reducing uneconomic costs associated with the utilities' RPS-eligible PPAs. Aggregators would pay willing generators an upfront lump sum in exchange for reducing the contract prices for generation in future years, in effect buying down the contract price.

"Generators may be willing to provide a significant reduction in the contract costs, if they place a higher value than the utilities' ratepayers do on an immediate cash payment rather than earn[ing] contracted revenues over time," CalCCA said.

As for market-price benchmark modifications, CalCCA has suggested revising the capacity value in the PCIA benchmark to consist of both a short-term value of excess capacity sold into the market and a long-term capacity value remaining in the portfolio. The association would also like to see additional values recognized through separate benchmark components, such as the value of non-RPS-eligible greenhouse gas-free resources and ancillary services.

And not to be outdone on the acronym front, CalCCA has introduced the concept of a Staggered Portfolio Auction, or SPA, through which utilities would offer power generated under renewable-energy PPAs, GHG-free resources and energy storage in multiple tranches over time.

The auctions "would rectify the existing inequity in which departing load customers are obligated to pay the costs of these resources in the PCIA," CalCCA said, "but denied meaningful access to use of these resources." Leora Broydo Vestel


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