As Community Choice Aggregation Expands, the Battle Over “Exit Fees” Intensifies

Community choice aggregation (CCA) continues to emerge as a favorite tool for towns, cities, and counties interested in pursuing local control over their energy supply, increased renewable electricity generation, and local job creation and economic development (see "More Communities Choose Their Own Energy Future" in the August 2016 issue). CCA is an energy supply model that puts the local government in charge of choosing electricity sources for all residents, businesses, and municipal accounts, while keeping the region's existing investor-owned utility (IOU) responsible for delivering power, maintaining the grid, and providing consolidated billing and other customer services.

The CCA entity has complete authority to enter into electricity contracts on behalf of the aggregated customers that it serves. Generally, a CCA entity can establish rates that support its power mix (usually comprised of between 50% and 100% clean energy), while utilities receive a fee for distributing the power to the CCA entity's customers.

Small but Growing

CCA currently exists by law in seven states-California, Illinois, Massachusetts, New York, New Jersey, Ohio, and Rhode Island-and a number of other states are currently considering enacting CCA laws. CCA entities provide electric service to a large range of municipalities, from small towns and rural counties to large cities such as Chicago and San Francisco.

The recent growth of CCA entities has been staggering, particularly in California, where it threatens to inundate the state's three largest IOUs. In fact, the IOUs-Pacific Gas and Electric Co., Southern California Edison, and San Diego Gas & Electric Co.-have recently reported that in aggregate, potential load departure from CCA entities could be up to about 80% of their total retail load, or approximately 150,000 GWh (see "Should Investor-Owned Utilities Be Worried About Community Choice Aggregation?" in this issue).

The Battle Over "Exit Fees"

In California, a central issue associated with CCA is how customers leaving the utility for a CCA entity are allocated the above-market costs of legacy utility procurement contracts purchased on those customers' behalf prior to their departure from utility service-the so-called "exit fee." The California Public Utilities Commission (CPUC) has labeled this exit fee the Power Charge Indifference Adjustment (PCIA). Thus far, California is the only state to allow such exit fees.

Both the state's CCA entities and the IOUs criticize the current incarnation of the PCIA. The CCA entities believe that it provides the utilities with an anti-competitive cost-shifting tool to protect their monopoly and disrupt any semblance of customer choice. The entities also criticize the lack of transparency associated with the PCIA and the fact that the PCIA amount is not counterbalanced by utility savings and avoided costs associated with customers departing. The CCA entities point to the near doubling of exit fees in recent years as proof that the utilities intend to use them to stifle future CCA in California.

The IOUs also believe the PCIA is flawed. However, they argue that it does not adequately prevent cost shifting to bundled service customers. They believe that the current administratively set Renewable Energy Credit (REC) and Resource Adequacy (RA) benchmarks used to calculate PCIA rates overstate the market value of the utilities' generation portfolios. The utilities argue that when they sell excess energy at market prices due to load departure, they do not receive revenues sufficient to cover the underlying PCIA benchmarks. According to the utilities, their bundled service customers are then left paying for this shortfall.

Portfolio Allocation Method Unlikely to Resolve Issues

The IOUs have recently begun shopping around the idea of replacing the PCIA with a portfolio allocation method (PAM) that would eliminate reliance on administratively set benchmarks by instead allocating the pro-rata portion of the actual net costs and benefits of their respective generation portfolios to both bundled service and departing load customers. They contend that this method would facilitate a retrospective true-up to reflect actual costs and benefits and would be more effective than the PCIA at meeting the statutory indifference requirement that all customers pay their share of legacy utility procurement costs.

However, the proposed PAM methodology seems to suffer from many of the same flaws for which the CCA entities have criticized the PCIA, including the general lack of transparency associated with evaluating the PAM proposal, regulatory barriers associated with benefit allocation, and failures to adequately monetize benefits and avoided costs. For these reasons, the CCA entities are unlikely to accept the PAM methodology.

Given that CCA is a possible business tool for local communities to establish greater local control, this question of cost allocation will loom large over CCA growth across the U.S. Other states with CCA programs and those considering them will closely watch this battle as it develops and pay careful attention to whether, and how, the CPUC attempts to resolve the issues that both the CCA entities and the IOUs have with the PCIA. a-

-Vidhya Prabhakaranis a partner andEmily Sangiis an associate with Davis Wright Tremaine in the firm's San Francisco office.

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