Risks Outweigh Benefits of “Community Choice” Electricity
By Wendy Lack
Contra Costa county and its cities are weighing the risks and benefits of going into the electricity business. State law allows cities and counties to create Community Choice Aggregation (“CCA”) agencies to generate, purchase and sell electricity to residential, commercial and government customers. CCA advocates seek to offer consumers a wider range of renewable energy options than those currently available from local utility companies.
Community Choice programs are new to California. Currently the state has three operational CCAs: Marin Clean Energy (established 2010), Sonoma Clean Power (established 2014) and Lancaster Choice Energy (established 2015). San Francisco’s CleanPowerSF is expected to launch its program later in this year.[i]
Contra Costa county and its cities may join an existing CCA, create their own or do neither. Because these programs carry significant financial risk to taxpayers, they deserve careful consideration.
A. What is Community Choice Aggregation?
California allows city and county officials to operate “communitywide electricity buyers’ programs.”[ii] Commonly known as community choice aggregators, or CCAs, these are new government agencies created by Joint Powers Agreement among several cities and counties (though individual cities may run their own CCA programs).[iii]
The local utility company such as PG&E provides transmission, distribution and customer billing services to the CCA agency for a fee that is passed along to consumers.[iv]
Once a city council or county governing board votes to join or establish a CCA, all customers automatically buy CCA electricity. However, customers may elect to “opt out,” to continue buying electricity from the local utility company.
B. What Advantages Do Community Choice Proponents Claim?
Community Choice programs allow city councils to decide how to meet their energy needs. For example, CCAs can build and maintain their own renewable power sources, such as solar and wind farms. Advocates claim CCAs help the local economy and the environment. Critics say renewable energy projects are undesirable and most people don’t want solar or wind farms located in their communities; and the risks and costs of these projects aren’t justified given their limited useful lives.
CCAs can build local power sources at less cost than private utilities because government agencies can borrow money using tax-exempt bonds and loans that are cheaper than financing available to investor-owned utilities like PG&E. Advocates say these savings could be passed on to consumers. Critics say cities and counties already struggle under heavy debt and unfunded liabilities (some to the point of service delivery insolvency), so assuming more local government debt is reckless. In addition, Joint Powers Agency debt is not reportable on each member’s financial statements, so it doesn’t get the public scrutiny it deserves.
CCAs can reduce, but do not eliminate, reliance on fossil fuels. Because power generation from wind and solar is intermittent, use of traditional fossil sources is necessary to ensure 24/7 power. In fact, use of renewables increases demand for fossil fuels.[v]
About 67% of the nation’s electricity is generated from fossil fuels (coal, natural gas, and petroleum).[vi] These sources reliably provide cheap energy. In contrast, solar generates only 0.4% and wind 4.4% of the nation’s electricity, despite decades of government subsidies.
Proponents of CCAs seek to increase the use of renewable energy sources. Critics observe that the growth of CCAs offers financial and political gain to consultants, employees, renewable energy companies, public officials and others who profit from their proliferation, all at taxpayer expense.
C. Is CCA electricity cheaper than PG&E?
CCAs aim to keep their prices competitive and reasonable, but cannot guarantee cheaper rates. Given their emphasis on relatively expensive renewable energy sources, over the long term CCA prices necessarily will exceed those of utility companies. When a CCA’s costs increase, it may use reserves to subsidize rates to keep prices competitive with utility companies. However, rate subsidies are unsustainable over the long run.
Marin Clean Energy (MCE) has been operational since 2010. Initially, rates for MCE’s cheapest electricity option were slightly less than PG&E. Today MCE offers three options, all of which cost more, on average, than PG&E. MCE estimates its customers pay a monthly average of $4 to $32 more than PG&E, with the “cleanest” energy options the most expensive.
Sonoma Clean Power (SCP), established in 2014, offers customers two options. Its basic option costs about $7/month less than PG&E, while its all-renewable option costs about $11/month more than PG&E.
Lancaster Choice Energy (LCE), established in 2015, offers customers two options. Its basic option costs about $2/month less than Southern California Edison, while its all-renewable option costs about $10/month more than SCE.
CCAs must maintain competitive rates in order to minimize loss of customers to the local utility company. CCAs rely on expensive renewable energy sources, so their prices likely will exceed those of utility companies. Under these conditions, it remains to be seen whether CCAs can retain customers over the long term.
D. Is CCA electricity “greener”?
Defining “renewable” energy is complicated, given California’s extensive energy regulations. To most consumers, “renewable” energy means energy that generates little or no pollution or greenhouse gas emissions, such as wind, solar, nuclear, hydro and geothermal power. Currently PG&E generates 56% of its power from non-fossil-fuel sources.[vii]
California’s Renewables Portfolio Standard narrowly defines “renewable energy” sources to include only biomass and biowaste, small hydroelectric, solar and wind.[viii] The standards don’t count power generated by nuclear and large hydropower plants (dams) as “renewable energy.” As a result, 48% of the energy generated by California utility companies doesn’t qualify as “renewable,” despite the fact it generates no greenhouse gas emissions.[ix]
Under state renewable energy standards, Marin Clean Energy offers electricity options that claim to be 50% to 100% generated from renewable sources. It is noted, however, that the accuracy of MCE’s claims are questioned by critics, due to MCE’s controversial use of renewable energy credits, or “RECs,” that allow relabeling or “greenwashing” of fossil-fuel sources as renewable.[x] (Use of RECs by CCAs may be on the decline, due to consumer concerns the practice is misleading.)
Sonoma Clean Power offers two options that claim to be 36% and 100% generated from renewable sources. Sonoma Clean Power limits its use of renewable energy credits to 3%.
Lancaster Choice Energy offers two options that claim to be 35% and 100% renewable.
San Francisco’s CCA, CleanPowerSF, set to launch in early 2016, will offer two options that claim to be 33-50% and 100% renewable. Renewable energy credits have been particularly controversial in San Francisco.[xi] It remains to be seen whether CleanPowerSF will use them.
PG&E offers two electricity options. The basic service is 27% renewable (and 56% free from greenhouse gas emissions, including 21% from nuclear and 8% from large hydropower). PG&E also offers a 100% Solar Choice option.
All California power providers must meet state renewable energy standards to provide at least 25% of their electricity from renewable sources by the end of 2016; 33% by the end of 2020; and 50% by the end of 2030.[xii]
E. What are the risks of Community Choice?
The following is a list of eight important CCA risks that local agencies and taxpayers face.
1. Holding On to Customers
CCAs must retain customers to survive. Those that grow improve their odds of long-term success because costs can be spread over a larger number of ratepayers. Energy is cheaper when bought in bulk. Larger CCAs can more easily construct new energy sources, such as local solar or wind projects, that may reduce costs in the long-term.
To remain solvent, CCAs must retain customers and grow their customer base. To attract customers, CCAs must offer prices competitive with the local utility company.
2. Market Risk
Energy is a commodity and all commodities are inherently risky.[xiii] Energy investments are highly volatile, price-sensitive and subject to economic and political fluctuations in a global marketplace.
With investor-owned utility companies, like PG&E, consumers and stockholders share market risks. With CCAs, ratepayers bear the full risk.
Energy is a long-term business. Procurement contracts are non-cancellable and can span 30-40 years into the future. This means CCA members are financially liable for significant long-term obligations, which makes dropping CCA membership prohibitively expensive. Accordingly, CCA membership represents a permanent commitment that is likely to continue for as long as the CCA exists.
For example, as of March 31, 2015 Marin Clean Energy had outstanding non-cancelable power purchase commitments of approximately $886.5 million for energy and related services through October 31, 2041.[xiv] This equates to more than $52 million for each of MCE’s 17 members, which include the Contra Costa cities of El Cerrito, Richmond and San Pablo.[xv]
As of June 30, 2015, Sonoma Clean Power had non-cancelable power purchase related commitments of approximately $505.3 million for energy that has not yet been provided under power purchase agreements that continue to December 31, 2026.[xvi] This equates to more than $56 million for each of SCP’s 9 member agencies.[xvii]
CCAs are vulnerable to changing market conditions. Energy procurement is risky, complex, costly and long-term. Because withdrawal from CCA membership is cost-prohibitive, a city’s decision to join binds future City Councils – and future generations of taxpayers.
3. Regulatory Risk
The California Public Utilities Commission (CPUC) regulates all electricity utilities, including CCAs. A single CPUC decision can have enormous impact on energy providers.
For example, recently the CPUC decided to increase the Power Charge Indifference Adjustment (PCIA) exit fee that CCA customers pay.[xviii] Effective January 1, 2016, this fee costs Marin Clean Energy’s residential customers $13 each month, nearly double last year’s rate of $6.70. As a result, this year Marin Clean Energy customers will pay more than $36 million in PCIA fees, up from $19.3 million in 2015.
California’s energy market and regulatory climate are complex, dynamic and unpredictable. Regulatory decisions have huge impact. While lobbying by CCAs can mitigate risk, regulatory outcomes are uncertain.
4. Interagency Conflict
CCA organizers prefer to have many members in order to procure energy at cheaper prices. But large groups bring a variety of viewpoints, competing interests and inevitable conflict.
In CCAs, organizational power is held by the largest agencies because voting is weighted based on the electricity demands for each member jurisdiction. For example, in Sonoma Clean Power, the City of Santa Rosa has 43 voting shares, while the smaller city of Sonoma has 3 voting shares.[xix] Smaller cities lack leverage and are less able to influence CCA decisions.
Cities and counties must realistically evaluate the pros and cons membership before joining. The smaller the agency, the greater the risks of CCA membership.
5. Political Risk
The tension between environmentalists and labor groups pose challenges to elected officials navigating the CCA political landscape. From San Diego to San Francisco, environmental and labor groups have battled over the adverse impact of CCAs on union jobs at utility companies and the use of renewable energy credits (RECs) by CCAs to game the system by relabeling fossil-fuel power as “renewable.”[xx]
Renewable energy is heavily subsidized by government. As a result of the state’s extensive energy policies and subsidies, Californians pay some of the highest electricity rates in the nation.[xxi] Subsidies affect decisions and distort the market by incentivizing some sources at the expense of others.[xxii] Using subsidies allows government to pick marketplace winners and losers.[xxiii]
Without subsidies, renewable energy sources could not survive because they are not cost-effective. Reliance on subsidized renewables creates risk, uncertainty, and makes energy markets vulnerable to losses or even collapse should subsidies end.
For example, the 30% federal investment tax (ITC) credit has boosted the market for rooftop solar.[xxiv] This tax credit will be reduced to 26% in 2020, 22% in 2021, and 10% in 2022. The reduction or elimination of these tax credits will negatively impact the solar industry. Likewise, the reduction or elimination of renewable energy subsidies would negatively impact CCAs.
Even after decades of energy subsidies, conventional energy sources continue to serve as the backbone of the economy, providing the cost-efficient, reliable energy necessary to fuel businesses and households.
Renewable energy cannot survive without taxpayer subsidies. CCAs exist for the purpose of expanding use of renewables. Were renewable energy subsidies to be reduced or eliminated, CCAs could not survive. Energy subsidies are a creation of government, thus subject to shifting political currents. The viability of CCAs could hinge on the outcome of a single election, placing taxpayers at risk.
6. Added Budget Pressures
CCA proponents like to say their programs are not taxpayer subsidized, but this is inaccurate. Member agencies must front the startup costs and assume responsibility for CCA operations and debt.
During 2015 informational CCA workshops hosted by Contra Costa County, it was estimated that CCA startup costs range from $1.5 to $3 million (excluding staff time costs of participating agencies).[xxv] Most of these costs are for a technical study performed by consultants. Participating agencies would fund these costs unless some other funding source were available.
In CCA communities, organizations are pressured to purchase electricity from the CCA, even when the local utility company is cheaper. This cumulative effect increases costs to consumers and taxpayers.
Business owners and public officials for school districts, cities and special districts are forced to choose between minimizing energy costs, and paying more for CCA energy to maintain political good graces with clean energy constituencies. Increased overhead costs are passed along to consumers in the form of higher prices, and to taxpayers in the form of reduced government services and/or higher taxes and fees.
When purchasing decisions are made based on politics instead of good sense, consumers and taxpayers lose.
7. JPAs Increase Public Debt -- Off the Radar
Most CCAs are formed by Joint Powers Agreements among public agencies. Many Joint Powers Agencies (JPAs) have jurisdiction in Contra Costa County, though no one knows the precise number. There is no centralized reporting requirement for JPAs because they are accountable to their government agency members.
Most JPAs are invisible to the public. JPA governing boards meet without active public participation or press coverage. Public accountability and oversight is not possible for agencies that few people even know exist. A recent example of this lack of oversight is LA Works, a Southern California JPA that stiffed their retirees.
The primary reason JPAs are formed is to enter into contracts and incur debt without voter approval. When public agencies reach their debt limits, they can create JPAs to do additional borrowing.
During the past 15 years, California JPAs issued over $148 billion in debt, second only to that issued by the state.[xxvi] Member agencies – that is, taxpayers – are responsible for repaying this debt, on top of the nearly $943 billion in debt issued by other agencies for this same period.
There is no public oversight of JPA debt. While school bonds must have public oversight committees, JPAs lack accountability mechanisms. In a 2015 report the California Task Force on Bond Accountability acknowledged the lack of JPA oversight and accountability.[xxvii]
CCAs operate without adequate oversight, virtually invisible to the public. Creating Joint Powers Agencies (JPAs), such as CCAs, costs taxpayers money. JPAs employ staff, set up offices and, most importantly, make decisions -- such as issue debt -- for which taxpayers are responsible but have no knowledge or say. JPA governing board members are not directly elected by voters, which contributes to their relative obscurity and lack of transparency.
8. Lack of Energy Industry Experience
While CCAs are new, electricity utilities are not. Investor-owned utility companies like PG&E have decades of experience in procuring low-cost, reliable electricity. By comparison, CCAs are relatively inexperienced, which further compounds other risks.
The Association of Bay Area Governments suspended its Electrical Aggregation Program in 2001, characterizing the short-lived, multi-agency program a “risky venture” due to market and regulatory uncertainty.[xxviii]
Less than two years ago, the City of Hercules sold its Hercules Municipal Utility following what was dubbed “a decade-long, multimillion-dollar misadventure.”[xxix] Overstated growth projections, unrealized profits and heavy debt contributed to the electricity utility’s failure, leading to its sale to PG&E in 2014 amid a firestorm of public outrage.
The Northern California Power Agency (NCPA) is a Joint Powers Agency established in 1968 to sell power from its geothermal and hydroelectric facilities. Its 15 member agencies include the Port of Oakland, BART, the cities of Alameda, Palo Alto and Santa Clara, in addition to agencies in northern California. NCPA’s finances are strained due to heavy debt service requirements for over $835 million in long-term debt.[xxx]
Utility companies adapt to the changing marketplace. For example, utilities like PG&E are beginning to offer consumers renewable energy options. As this trend continues, interest in CCAs is likely to fade.
Community Choice is a concept in its infancy that faces many challenges. It remains to be seen whether CCAs are just a passing fad. To justify their costs and risks to taxpayers, CCAs must serve a long-term, compelling public purpose that only local government can provide; CCAs fail this test.
Local elected officials serving on CCA governing boards lack the knowledge and expertise necessary for long-term success in the high-risk energy industry.
Does the nominal increase in renewable energy use promised by CCAs justify their risks? Unequivocally, no.
Local government doesn’t belong in the electricity business. It is reckless for government to gamble on risky ventures for which it is ill-prepared and unqualified. “Green” energy companies, consultants, activists and lobbyists all stand to gain politically and financially from the proliferation of CCAs. Public agencies, including Contra Costa County, rely on some of these same sources for advice on CCAs -- a clear conflict of interest.
Today’s cities and counties struggle to provide essential services, including basic public safety and human services. Throwing precious tax dollars into a CCA money pit won’t help the environment, but will burden future generations with additional unwanted debt.
[i] Links to California Community Choice Aggregators operational as of February 2016: Marin Clean Energy, http://www.mcecleanenergy.org/; Sonoma Clean Power, http://sonomacleanpower.org/; Lancaster Choice Energy (City of Lancaster), http://www.lancasterchoiceenergy.com/index.php. SF Power is expected to launch in 2016, http://sfwater.org/index.aspx?page=748.
[ii] Joint Powers Agencies are discussed at length in the 2007 publication issued by the California State Legislature entitled, “Governments Working Together: A Citizen’s Guide to Joint Powers Agreements.” Link: http://www.calafco.org/docs/Senate_LG_JPA_Report.pdf
[iii] California Assembly Bill 117 allows local agencies to establish Community Choice programs. It was signed into law on September 24, 2002. Link: http://www.leginfo.ca.gov/pub/01-02/bill/asm/ab_0101-0150/ab_117_bill_20020924_chaptered.pdf
[iv] A list of California electricity utilities is available at: http://energyalmanac.ca.gov/electricity/utilities.html.
[v] The relationship of renewables to traditional energy sources was discussed in a December 9, 2012 article in the Los Angeles Times. Link: http://articles.latimes.com/2012/dec/09/local/la-me-unreliable-power-20121210.
[vi] The U.S. Energy Information Administration website lists all U.S. electricity generation by energy source at the following link: https://www.eia.gov/tools/faqs/faq.cfm?id=427&t=3
[vii] Pacific Gas & Electric power content available at: http://pge.com/includes/docs/pdfs/myhome/myaccount/explanationofbill/billinserts/11.15_PowerContent.pdf.
[viii] California Energy Commission website explains power content labeling and renewable energy standards at the following link: http://www.energy.ca.gov/sb1305/power_content_label.html.
[ix] The California Energy Commission Energy Almanac provides data for the state’s electrical energy production, by resource type at the following link: http://energyalmanac.ca.gov/electricity/electricity_generation.html.
[x] “Critics: Marin Clean Energy not so clean and green” published in the Marin Independent Journal, July 11, 2015. Link: http://www.marinij.com/article/NO/20150711/NEWS/150719957.
[xi] An IBEW 1245 press release entitled, “California Labor Unites Behind Truth In Energy Measure,” dated July 9, 2015, discusses CleanPowerSF’s misleading clean energy claims. It is available at the following link: https://ibew1245.com/2015/07/09/press-release-statewide-labor-unites-behind-truth-in-energy-measure/.
[xii] Eligible renewable energy sources as defined in California are identified on the California Energy Commission website at the following link: http://www.energy.ca.gov/sb1305/power_content_label.html#resources.
[xiii] See the Federal Energy Regulatory Commission’s November 2015 publication entitled, “Energy Primer: A Handbook of Energy Market Basics” available at the following link: https://www.ferc.gov/market-oversight/guide/energy-primer.pdf.
[xiv] See page 17 of Marin Clean Energy’s 2014/2015 Comprehensive Annual Financial Report at the following link: http://www.mcecleanenergy.org/wp-content/uploads/MCE-Audited-Financial-Statements-2015-2014.pdf.
[xv] A complete list of Marin Clean Energy’s members is available at the following link: http://www.mcecleanenergy.org/board-of-directors/.
[xvi] See page 20 of Sonoma Clean Power’s 2015 Comprehensive Annual Financial Report at the following link: https://sonomacleanpower.org/wp-content/uploads/2015/01/08b-2015-and-2014-Final-Audited-Financials.pdf.
[xvii] A complete list of Sonoma Clean Power’s members is available at the following link:
[xviii] “Customers of clean energy programs hit with fee increase,” San Francisco Chronicle, December 17, 2015. Link: http://www.sfgate.com/bayarea/article/Customers-of-clean-energy-programs-hit-with-fee-6705978.php.
[xix] See Exhibit B, page 20 of Sonoma Clean Power’s Joint Powers Agreement dated July 25, 2013, available at the following link: https://sonomacleanpower.org/wp-content/uploads/2015/01/SCPA-Second-Amended-Joint-Powers-Agreement-Approved-7-25-13.pdf.
[xx] “The Brewing Rift Over Community Choice Aggregation,” Voice of San Diego, August 14, 2014 available at the following link: http://www.voiceofsandiego.org/2014/08/14/the-brewing-rift-over-community-choice-aggregation/. An IBEW 1245 press release entitled, “Truth-in-Advertising Measure Would Require SF’s Community Choice Aggregation Program to Inform Consumers How Much Power is Truly Green,” dated June 1, 2015, is available at the following link: https://ibew1245.com/2015/06/01/press-release-truth-in-advertising-measure-would-require-sfs-community-choice-aggregation-program-to-inform-consumers-how-much-power-is-truly-green/. “Critic of Marin Clean Energy presents his case to Marin Coalition,” Marin Independent Journal, May 7, 2014 is available at the following link: http://www.marinij.com/article/ZZ/20140507/NEWS/140508753.
[xxi] Columnist Dan Walter’s article entitled “Electrical Power Tripping,” Sacramento Bee, October 3, 2015 available at the following link: http://www.sacbee.com/news/politics-government/dan-walters/article37438068.html.
[xxii] “Solar is in, biomass energy is out—and farmers are struggling to dispose of woody waste,” Los Angeles Times, December 31, 2015 available at the following link: http://www.latimes.com/business/la-fi-biomass-closing-20160101-story.html.
[xxiii] “Without Government Backing, Solar Power Can’t Compete,” Daily Caller, November 19, 2015 is available at the following link: http://dailycaller.com/2015/11/19/without-government-backing-solar-power-cant-compete/.
[xxiv] California Energy Commission, “Tracking Progress,” December 22, 2015 available at the following link: http://www.energy.ca.gov/renewables/tracking_progress/documents/renewable.pdf.
[xxv] Workshop presenters verbally estimated CCA start-up costs at $1.5 to $3 million. See the Contra Costa County Board Order “Authorization to Commit Staff Resources to Conduct Outreach on Community Choice Aggregation,” dated October 13, 2015, which references estimates start-up costs at $1.5 million, at the following link: http://www.cccounty.us/DocumentCenter/View/38819. See also PowerPoint slides from workshop presentations made by Contra Costa County, Alameda County and Marin Clean Energy at the following link: http://www.cccounty.us/cce.
[xxvi] Source: California State Treasurer’s Office.
[xxvii] Page 15, California State Treasurer’s Office, Task Force on Bond Accountability report dated December 23, 2015 states: “Review and Oversight: Some public agencies utilize external parties to monitor transactions, test compliance, and evaluate performance of bond programs. Proposition 39 specifically requires the creation of a citizens’ bond oversight committee. The ability of an external party to review and monitor the agency is naturally a
function of the funding, authority, and information it receives from its chartering agency. But the responsibility to properly manage the bond funds remains the fiduciary responsibility of the elected and appointed officials. Citizens’ oversight groups are absent in certain market sectors, specifically bonds issued by joint powers authorities, lease financings, and Mello-Roos and assessment district bonds among others.” The Task Force’s complete report is available at the following link: http://www.treasurer.ca.gov/tfba/final_report.pdf.
[xxviii] See ABAG website at the following link: http://abag.ca.gov/services/power/electric.html.
[xxix] “Hercules: Sale of municipal utility ends multimillion-dollar fiasco,” Contra Costa Times, April 16, 2014. Link:
[xxx] Page 27, Northern California Power Agency, Reports on Audit of Combined Financial Statements and Supplementary Information for the Years Ended June 30, 2015 and 2014, available at the following link: http://www.ncpa.com/wp-content/uploads/2015/12/NCPA-FY2015-Financials.pdf.