California officials grappling with the fallout from devastating wildfires and the fate of embattled utility Pacific Gas & Electric will soon have to answer another weighty question: Should the state’s utilities get out of the business of buying and selling electricity?
And, if so, what should be the default electricity provider for customers who opt out of community-choice aggregation (CCA) programs?
In San Diego, the community-choice energy movement that has flourished in Northern California is ready to take root. In response, regional utility San Diego Gas & Electric is looking to quit the electricity procurement business entirely, and effectively become a poles and wires company.
Last October, Mayor Kevin Faulconer announced that San Diego intended to become the nation’s largest city to launch a CCA program. Under such programs, the CCA takes over responsibility for procuring electricity, while the incumbent utility continues to operate the transmission and distribution system and handle customer billing.
This month, the San Diego City Council is expected to vote on whether to authorize the city’s chief sustainability officer, Cody Hooven, to negotiate a joint powers agreement with other jurisdictions to create a CCA. That agreement would come back to the city council in the fall for final approval.
Already, the cities of Carlsbad, Chula Vista, Del Mar, Encinitas, La Mesa and Oceanside have expressed interest in joining a greater San Diego CCA. Hooven told the city council’s Environment Committee in January that implementation documents for the CCA would need to be submitted to the California Public Utilities Commission by the end of 2019.
If San Diego and its neighbors do form a CCA, SDG&E would see a substantial share of the electric load it is responsible for delivering vanish within a few years. According to SDG&E, San Diego alone uses approximately 40 percent of the electricity the utility procures.
Add to this the large industrial and commercial customers that already source their electricity through “direct access” programs, as well as the many customers who generate their own power via rooftop solar systems, and SDG&E could be left without much load to serve. California regulators have estimated that more than 85 percent of California’s retail electricity load could be served by entities other than the state’s investor-owned utilities by the mid-2020s.
SDG&E’s exit strategy
In a November 2018 letter to state Senator Ben Hueso (D-San Diego), Eugene Mitchell, SDG&E’s VP for legislative and external affairs, wrote that “signing contracts that are 10 and 20 years in length while the cities are discussing the possibility of joining together to buy their energy from a CCA provider will be tricky to say the least and thus we are looking at what the best options are for the near future.”
The utility is looking for an exit strategy.
In the letter, Mitchell urged Sen. Hueso, or another San Diego-area state lawmaker, to introduce “legislation that would allow us to begin planning a glide path out the energy procurement space.” SDG&E floated draft legislation to do just that, as reported by the Voice of San Diego’s Ry Rivard.
The SDG&E proposal calls for the establishment, by March 1, 2019, of an Energy Procurement Task Force comprising representatives from the California Public Utilities Commission, California Energy Commission and California Independent System Operator.
The task force would be charged with determining how the utilities’ current job of buying and selling electricity could be taken over by a “state-level electricity procurement entity.” If authorized by the state legislature, the procurement entity would be established by January 1, 2023, and would become the state’s default electricity provider by July 1, 2025.
The draft bill makes clear that SDG&E, or other utilities deciding to cede procurement to the state-level entity, would expect “full cost recovery” for legacy power-purchase agreements (PPAs) and to be “fully compensated” for utility-owned generation assets.
Future revenue growth
The timing of SDG&E’s procurement proposal, coming before a CCA proposal is even finalized in San Diego and amid PG&E’s bankruptcy tumult, raises questions.
Is SDG&E simply ready to cut loose a part of its business that’s not a profit center, procurement, to focus on others — such as investments in EV charging infrastructure, energy storage and microgrids — that will drive future revenue growth and profits?
After all, SDG&E doesn’t make money for its shareholders by selling electricity to customers. The utility makes money off the guaranteed return on investments made in infrastructure needed to deliver electricity to customers.
“Given that in California the investor-owned utilities do not make money based on how much energy a customer uses, we do not believe this change would materially impact earnings,” SDG&E spokesperson Joe Britton wrote in an email.
“Looking ahead,” he added, “SDG&E also sees significant opportunities for our company through investments in the integration of technologies like energy storage which will help deliver renewable energy to meet our customers’ needs.”
Becoming a poles-and-wires company
Scott Anders, director of the Energy Policy Initiatives Center (EPIC) at the University of San Diego School of Law, said longtime lawmakers and regulators in Sacramento will likely respond to SDG&E’s procurement proposal with some trepidation.
“There is definitely, in California, a stain from the 2000 electricity crisis that still is in people’s minds,” Anders said in an interview. “So, the idea of moving to a [poles] and wires company as part of a full deregulation or as part of having the state do it, it harkens back to the energy crisis.”
Anders’ EPIC colleague, staff lawyer Joseph Kaatz, wondered why SDG&E, and not PG&E, would be first of the state's big utilities seeking to jettison procurement.
“PG&E has been dealing with CCAs for much longer, with potentially even bigger load-shedding, and they aren’t asking someone to come in and take over their portfolio,” he said.
The difference may be that PG&E didn’t face losing so many customers all at once. Anders noted that with the potential loss of so much customer load, SDG&E could see higher costs to procure electricity for the customers who remain.
He also suggested the move could be part of a long-term strategy by SDG&E’s parent company, Sempra Energy. Last March, Sempra completed its $9.45-billion acquisition of Energy Future Holdings Corp. (EFH). The prize for Sempra was EFH’s 80 percent stake in Oncor, the largest transmission and distribution electric utility in Texas.
When reached for comment, SDG&E’s Joe Britton explained the utility’s strategy.
“SDG&E recognizes that the energy market in California is changing quickly and that we must evolve as well,” he said.
“As energy procurement in California becomes increasingly decentralized,” he added, “we see a future in which SDG&E focuses primarily on the safe and reliable transmission and distribution of energy to our customers.”
“We also see the value in centralized planning and procurement at the state level to fill gaps from that decentralized market and ensure California is able to meet its increasingly ambitious clean energy and greenhouse gas reduction goals. As the state moves toward a new procurement model, the right rules need to be in place,” he said.
Franchise agreement negotiation looms
Another layer to the story is the pending negotiation between San Diego and SDG&E over renewal of the 50-year franchise agreement stipulating the terms and fees under which the utility is authorized to operate its electricity and natural gas distribution systems in the city’s right-of-way. The current agreement expires in 2020.
The experts GTM talked to agree the franchise agreement is a much bigger deal to SDG&E — and a much bigger potential threat — than community-choice aggregation.
“After 50 years, their franchise fee to use the public right-of-way is up. That’s a game-changing opportunity,” said Nicole Capretz in an interview. Capretz, the founder and executive director of the nonprofit Climate Action Campaign, is an ardent supporter of community-choice energy and was deeply involved in the development of San Diego’s 2015 Climate Action Plan, which calls for 100 percent renewable electricity citywide by 2035.
“I think there is going to even be consideration of: ‘Well, wait a minute, should we go beyond community choice? Should we be looking at full municipalization? Should we look at the distribution lines?” she said.
In the wake of PG&E’s bankruptcy filing, San Francisco Supervisor Hillary Ronen introduced legislation that would prepare the way for the City and County of San Francisco to buy PG&E’s distribution assets in the city and for San Francisco to develop its own municipal utility.
At a minimum, the negotiations over the franchise agreement renewal in San Diego give city officials leverage to extract concessions.
EPIC’s Joseph Kaatz recalled that the City of Chula Vista succeeded in forcing SDG&E to underground overheard transmission lines at the city’s bayfront when it renewed its franchise agreement with the utility in 2004.
Capretz believes the City of San Diego should be prepared to ask SDG&E for similar public-interest improvements.
“If SDG&E is going to remain the distributor of the power, are they willing to partner with cities to do microgrids to create a truly energy-resilient system for climate chaos in California?” she asked.
San Diego knows it has leverage — and is using it. According to Capretz, San Diego requested that SDG&E disclose the value of its electricity distribution system in the city and refused SDG&E’s request to commit to a timeline to wrap up negotiations.
“The franchise fee is a way bigger deal to them than community choice,” she said. “It’s worth billions of dollars to them. They can’t operate without it. At the end of the day, that’s what they care about.”
SDG&E’s path forward
What’s next for SDG&E’s electricity procurement proposal?
GTM asked the utility if it had received a response from Sen. Hueso — or any other San Diego-area lawmaker — regarding its draft legislation.
“Nothing has been confirmed,” said Joe Britton. “We continue to work with the legislature to identify the best path forward for introducing our draft bill.”
For now, SDG&E appears to be pursuing the proposal solo. Britton confirmed SDG&E has approached the state’s other investor-owned electric utilities, PG&E and Southern California Edison, to discuss creating a state-level electricity procurement entity.
"But, ultimately, it will be up to each of the IOUs to evaluate whether they are best suited to serve in a commodity-purchaser role for their territory and to plot their course accordingly," he said.
“The proposed bill would allow for each IOU to decide whether or not to exit procurement," he added. "In the case of SDG&E, we believe our best course is to move out of procurement and focus on the safe and reliable delivery of energy to our customers.”