CCA Remains a Bad Deal

Community Choice Aggregation, or CCA, has had a number of wins over the past year.  I have written about CCA before, including a description of how it works.  Recently, Sonoma Clean Power in Northern California announced that it has signed contracts with Constellation Energy for a primary energy supply and with Calpine for a 10-year contract for local carbon-free geothermal power.  CCA advocates celebrate that with the Calpine deal, Sonoma is the first CCA to focus on local energy, a long-term goal for CCA supporters.

I believe that in most cases, CCA is a bad deal for consumers, just like municipal power.  CCA is similar to municipal power in that local government, rather than a private utility, controls energy purchasing decisions.  This is a generally bad deal for consumers because the fallout from bad decisions is much more significant.  Utilities have a challenging job which involves making big investments and signing long-term contracts for power under uncertainty of fuel prices and technology risks.  With a well regulated investor owned utility, when the utility screws up, the investors pay.  For example, in 1988 PG&E made big mistakes with its investment in Diablo Canyon nuclear plant.  Diablo Canyon had seismic and design problems which led to some parts of the plant having to be rebuilt three times.  PG&E's regulator ruled that $2 billion in cost overruns for Diablo Canyon were imprudently incurred, and thus had to be borne by PG&E equity holders rather than consumer ratepayers.  These costs wiped out PG&E's entire 1988 earnings.

In contrast, with municipal power or CCA, the risks of investments and long-term contracts are borne by the local government, and thus by local taxpayers.  For example, when SMUD made an imprudent investment of its own in the Rancho Seco nuclear plant, which was prematurely shut down, the utility nearly went bankrupt.  Sacramento taxpayers paid the cost for this mistake.

Municipal power and CCA enable the use of tax-exempt municipal debt to fund energy investments.  Such low cost debt should lead to lower power prices.  But the lower prices come at a steep cost in terms of risk for the local consumers.  Moreover, there is not clear evidence that municipal power or CCA actually do offer consistently lower power prices than investor owned utilities.  With more risk and comparable prices, municipal power and CCA are a bad deal for consumers.

CCA does have one clear positive aspect: it is a threat that can provoke a utility to listen to customers.  For example, San Francisco's stalled CCA program, CleanPowerSF, planned to offer customers a 100% green power option.  In response, PG&E announced a 100% green power option of its own.  Ultimately, CleanPowerSF has not been able to deliver on its goals of clean, cost-competitive, local power.  The only benefit it has provided is prodding PG&E into offering better services, like the 100% green power option.  It is frustrating that the PG&E monopoly would not offer a service customer wanted until it faced competition from CCA, but now that it does offer the option, it is surely a better deal than what CCA could offer.

A better alternative to both CCA and monopolistic distribution utilities?  The answer lies with Texas' deregulated market for retail power marketers.  When I tried soliciting options for a hypothetical house in Dallas (zip code 75001), I was presented with 344 competitive offers.  75 of them offered 100% renewable power.

Community Choice Aggregation is a Red Herring Disruptor

This is part 4 of a series on disruption of electric utilities.

Disruption of Electric Utilities

1.  Background on Utilities

2.  Why Utilities have Avoided Disruption Thus Far – Reliability

3.  Why Utilities have Avoided Disruption Thus Far – Financial Metrics

4.  Community Choice Aggregation is a Red Herring Disruptor

5.  Distributed Solar is the Real Threat - Trends

6.  Distributed Solar is the Real Threat - The Difficult Position of Utilities

7.  A Survival Strategy for Utilities

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Community Choice Aggregation (CCA) is program which allows cities and counties to purchase electricity on behalf of community members.  The benefit of CCA is that it enables communities to pool their citizens’ purchasing power to buy electricity.  A distribution utility continues to own the wires and deliver the electricity, but the CCA is responsible for procuring the wholesale electricity.  CCA also lets communities make decisions about how much wholesale renewable power to purchase, and what energy efficiency programs to subsidize.  Starting in 1997, CCA programs have been instituted in Cape Cod, Northeastern Ohio and Marin County, California.  Now the movement is moving to larger cities, most notably San Francisco and Chicago.  CCA is an innovation in the electric utility market that supporters may see as disruptive to electric utilities.  However, I would argue that by applying the theory of disruptive innovation, CCA is a sustaining innovation relative to conventional utility service.  CCA proponents may think of CCA as a low end or new market disruption relative to utilities, but in reality it is neither.

CCA is not low end disruption

In November 2012, Chicago became the largest city to adopt community choice aggregation.  In choosing CCA, Chicago described the primary benefit of CCA to be lower wholesale electricity prices due to group purchasing of wholesale electricity.   If CCA provided a benefit from group purchasing, it might be considered a low end disruption relative to utilities, but unfortunately it does not truly offer this benefit.  The Chicago CCA is competing against an incumbent utility, Commonwealth Edison (ComEd).  ComEd is the fourth largest utility in the country, providing electricity service to 3.6 million customers, and therefore has much more buying power than the Chicago CCA.   Group buying will not enable CCA to have a lower cost structure relative to a utility.  Moreover, the investor owned utility framework shields the municipal government sponsoring CCA from cost overruns.  While municipalities are able to issue tax free debt that an investor owned utilities cannot, the benefit of this cheaper debt comes at the cost of increased risk and a reduction in scale economies.  If a power investment made by a CCA turns sour, the local taxpayers rather than private investors are on the hook for absorbing losses.

It appears consumers in Chicago viewed the successes of other CCAs and learned the wrong lesson.  While retail rates in these CCAs have often been lower than those of the incumbent utility, the group buying business model is not the cause of lower prices.  Instead, the reason that CCAs have looked attractive recently is that many utilities sign long-term power purchase contracts to reduce price volatility to consumers.  In the past 5 years shale gas commercialization and an economic recession have led to decreases in electricity prices.  Therefore, long-term utility contracts cause utilities to pay above market rates for electricity, making new CCA contracts relatively attractive.  In contrast, during an era of rising prices, a CCA would not be an attractive option because any long-term contracts of the incumbent utility would be below market cost.  Indeed, it appears that in the case of Chicago, the effects of long-term contracts will be over shortly.  ComEd had a number of long-term contracts that expired in June of 2013, and the electricity prices of ComEd decreased.  In the long-term, it is likely that the Chicago CCA will be unable to maintain prices lower than those of ComEd, and many other Illinois CCAs are already projected to have prices above the ComEd prices.   CCAs in the past have had relatively lower rates, but long-term pricing advantage is an illusion.

CCA is not new market disruption

Some supporters of CCAs may argue that CCA is a new market disruption because it fulfills a different customer need than a traditional utility, but in reality CCA only fulfills distinct experiences of the same need.  By offering more local, renewable power, CCA could target the following hypothetical consumer demand: “I want all my power to come from renewable resources.”  However, CCA proponents need to realize that the primary customer need is still reliable power.  Consumers only interact with their CCA when they get a monthly utility bill.  Otherwise, they will expect the same reliable electricity service in their homes.  Clean energy is an experience of using and living with electricity service.  The experiences provided by clean energy include a lack of guilt from environmental damage, or health improvements when a dirty power plant is shut down.  Likewise, local power is an experience of electricity consumption rather than a job itself.  Local power provides customers with pride in the product being offered, and satisfaction that the reliable power is leading to local jobs and investment.  The problem with targeting experiences rather than an actual customer need is that experiences can and will be replicated by utilities.

For example, the CCA in Marin California has a policy to procure energy from projects that are as close as possible to Northern California.   PG&E, the incumbent utility with whom Marin is competing, saw that local is an experience desired by Northern California electricity customers.  PG&E proceeded to use the local experience to fight the creation of a bigger CCA in San Francisco.  In September 2012, local chapter of the International Brotherhood of Electrical Workers, which represents PG&E workers, began a campaign to publicize the negative local impacts of CCA, including increased prices that would damage the local economy.   The union campaign included robo-calls, mailers, and advertising, all aimed at convincing customers to opt out of the city program.   By mobilizing local union workers in its marketing campaign, the anti-CCA campaign sought to reclaim a local experience for the incumbent utility electricity.  Other utilities faced with CCA encroachment will likely pursue similar local campaigns.

CleanPowerSF might be low-carbon, but it
is not disruptive; Source: sfwater.org

The other benefit offered by the San Francisco CCA is the choice of energy plans that offer a higher percentage of green power.  In response, PG&E introduced its own green plan option, allowing customers to pay more for more renewable energy content.   PG&E’s 100% green energy price to consumers is expected to be at a lower rate than that of the 100% option offered by the San Francisco CCA.  Questions about cost and administration led the mayor of San Francisco to delay program implementation last month.  CCAs face a challenge in that customers are not able to distinguish the difference between clean and dirty electrons as they use electricity.  Green is an experience of the electricity job, but it is an experience that can be matched by incumbent electric utilities whenever consumers demonstrate that they value it.

Ultimately, CCAs are targeting the same customer need as an electric utility, and are thus a sustaining innovation.  While they may look more attractive in an era of falling electricity prices, they will eventually lose the ability to compete on price.  Moreover, any valued experiences of CCA such as local or clean energy content will be matched by incumbent utilities.  CCAs may benefit consumers by encouraging utilities to better deliver the experiences that accompany reliable electric power, but they will not themselves disrupt the electric utility industry.