Follow by Email

Thursday, January 31, 2019

PG&E's Bankruptcy and CCA

The bankruptcy of utility giant Pacific Gas & Electric should be understood in the context of decades of
More Zilla, less God
 regulatory bailouts and giveaways suffered by California ratepayers, which taken together already exceed the book value of the utility. Todays "emergency" is more of the same routine. Moreover, its cause, and its solution, should be viewed in context not of climate change (as Washington Post recently did), but of electricity industry restructuring, starting in the late 1990s.
The bankruptcy of Pacific Gas & Electric was not caused by climate change. While this notion is catchy and trending, California has been in a drought for half a century: PG&E's power transmission and gas transportation systems have been causing explosions and fires in more recent years, because its corporate leadership has neglected what should be the core of its business (wires), failing to conduct standard simple activity of trimming trees around power lines, and maintaining their pipes. Why? Because it was distracted by an irresistible opportunity to take advantage of political conditions to capture regulators, and build a new and illegal retail electricity monopoly: a strategy that backfired with bankruptcy after successfully subverting competition in 2001, and today backfires with another bankruptcy after having failed to subvert Community Choice Aggregation (CCA).
PG&E's fox needs removing the CPUC's energy henhouse. Hopefully, California's new Governor will take the lesson from Gray Davis, who was recalled for mismanaging the state's energy crisis by giving in to, and simply bailing out, the utilities in 2003, and make a point of finding opportunity in this crisis. The opportunity would be to get rid of the cause of this bankruptcy and the 2001 bankruptcy, for which the California Public Utilities Commission approved a $9B ratepayer bankruptcy at that time. 
The cause of PG&E's distraction was politicization of its corporate leadership, based on an opportunity to subvert the legislature and corrupt state regulators. Since California's bipartisan legislature deregulated its electricity industry in 1997 and opened the state to competition in 1998, PG&E's brass, having won an equally large bailout of "uncompetitive assets" for endorsing the end of its power monopoly, nevertheless became obsessed with blocking competition, first by new suppliers entering the market, which they successfully blocked, causing a diaspora of would-be suppliers out of competing for customers. Having driven the Enrons and Reliants of the world into selling their power into  spot markets servicing utility "default service" customers, i.e. customers still "owned" by PG&E, PG&E has had a consistent strategy of rebuilding an economic, if not legal, monopoly over retail service. 
Customer ownership has been the strategic football of deregulation from the start. Subverting retail competition also resulted in the manipulation of spot markets, causing the energy crisis and the bankruptcy. At the time, one Nation writer called in an "Energy War." And, once the legislature found a new path out of the energy crisis by creating Community Choice Aggregation (Assembly Bill 117) in 2002, PG&E regarded municipalities, again, as mere competitors to body-block.  Building up to 2010, PG&E spent hundreds of millions of dollars on lobbying, lawsuits and astroturf campaigns to block early CCAs, starting in the Central Valley where it successfully killed the first CCA, and attempting to block Bay Area CCA startups, building up to Proposition 16 in 2010, which failed despite $46M in PG&E campaign spending.
Moreover, the attorneys and board of PG&E learned they could use the state regulators of a permanently weakened CPUC to subvert competition for electric supply, and made the CPUC its handmaiden. PG&E won approvals to resume monopoly-like activities as if CCA didn't exist, such as building new power plants that it would own, self-dealing and gas-for-power swaps with merchant generators, long-term power contract procurement undertaken with rubber stamp approval of contracts that are not even reviewed by commissioners, and multi-billion dollar regulatory reallocations of generation costs to transmission charges in the 2010 General Rate Case. In many of these decisions, CPUC regulators admitted that they were acting in violation of longstanding CPUC policy, and promised not to allow it again. This is widely known as bad parenting. The CPUC was training its corporate dog, Pavlovian style, that it could win by failing. Every high-cost contract would erect a new barrier to CCA. 

Today, PG&E plays victim, claiming that its renewable energy contracts have lowered the cost of renewables for CCAs, who have an unfair advantage now that renewables prices are lower. This is Mickey Mouse economics: PG&E didn't lower the price of renewables; China did. Moreover, CPUC regulators acknowledged that PG&E's contracts were extremely high at the time it approved them, and repeated this acknowledgement when it approved massive increases on the PCIA charge to CCA customers to pay the resulting premium. PG&E is no victim. It is a repeat offender. 

The pattern is clear, from 2004-5 during the CCA proceeding, which focused on the conflicts of interest of PG&E and the utilities in "cooperating" with CCA as required by the CCA law, while also having to maximize returns to Wall Street investors. All in all, CPUC dropped the ball. All of these monopolistic activities increased PG&E's desire to control retail energy, and made it neglect its core business of maintaining the wires and pipelines. Northern California has paid the price. 
It is indeed Groundhog day, 18 years later, and nothing has changed. So if Gavin Newsom is smart and wants to be re-elected, he will make it a point to avoid repeating Gray Davis' mistakes, by using this opportunity get PG&E out of the power business entirely, and to refocus it on its core mission: the grid. Moreover, he will move to strengthen the role of CCAs as the dominant retail power providers that they already are in California. Bailout or no bailout, this should be the "win" for California. Otherwise bailing out PG&E yet again will be merely another repeat-rinse, and California is likely to have another Republican governor in a few years.
For CCAs, CCA activists, and CCA suppliers, however, the question is, what will happen to the economics of CCA if yet another ratepayer bailout is approved by the CPUC? CCA has already been hit hard by CPUC approvals of extremely high cost PG&E power contracts (admitting at the time that they were too high, but approving them anyway), then increasing surcharges on CCAs to pay for them: the dreaded PCIA charge. We just got done paying for the last bankruptcy. All of these shrink the power portion of the bill and thus depress the competitiveness of retail supply.    
One question is how they are bailed out. This will have different impacts, obviously, but either way the overall trend is the same: competition shifting from energy rates to net utility bills: from energy to capacity. The worst case question is, assuming they are bailed out at customer expense, what is the net impact on markets and CCA. Or Assuming they are rescued, is there a different future?
Questions about impacts of the bankruptcy tend to focus on the bailout outcome, but in some ways the competitive landscape outcome is the same either way, based on the fact that bailouts have formed so much of the PG&E bill for the past two decades. One key question is will PG&E's insanely expensive power purchase agreements with renewable generators be invalidated by the bankruptcy, decreasing the extant and oppressive PCIA charge that Jerry Brown's CPUC imposed on CCAs? This is a big one, and would be appropriate, because it is the only upside we see other than getting PG&E out of the power business. However, it is not controlled by state regulators. This is a question of FERC jurisdiction vs. the bankruptcy court: and FERC recently said it can protect the holders of PG&E's high cost contracts: so don't count on it. 
All in all, the question is, if there is a bailout and a new bailout surcharge, will CCAs fold, or will they adapt? On that question, rest assured: CCAs are proven resilient public agencies, so they will adapt. There are over 1500 CCAs out there across the nation with a 20 year history, with few terminations in constantly fluctuating market conditions. CCAs in California have an unusually high level of control and resources that they have only begun to use. 
In some ways, the question is not whether CCAs will go away, but how this second crisis will influence CCA procurement activities and how it will impact California's energy markets. PG&E will either collect bailout costs from customers for the next decade or longer, or will not. Either way there will be strong pressure to get them out of the generation business entirely, and PG&E itself has made statements about some sort of "restructuring." Based on the last bankruptcy, a large surcharge will be added to already oppressive PCIA charge increases of recent years. But considering the likelihood of PG&E's days as a energy generating and procuring company will mean a drop in natural gas sales and a shift of wholesale energy markets to CCAs. Moreover, CCAs should use this opportunity to win more support from the state in their new role, such as backstopping Solar Bonds to invest in California renewables and energy efficiency.
When considering impacts of another bailout, it is important to remember that surcharges are volumetric charges on delivered grid power. Therefore, there are nonlinear benefits from PG&E's ever increasing "surchargization" of the power bill (in which paying a bill will be primarily to pay for surcharges, not energy). The more of the bill is a volumetric surcharge and not cost of energy, the better will look the economics of distributed energy resources that reduce the customer's use of grid power.  Increasing T&D charges will encourage CCAs to undertake a stronger adoption of a customer-ownership-of-energy model, promising an increasing turn to Community Solar, Cooperatives, Community Microgrids, and financed efficiency projects. A "CCA 2.0" focus on consumer electronics such as home area networks and IP thermostats, targeted V2B electric vehicle sharing, and generally the integration of residential and small and medium sized business customer investment in storage, onsite PV, boiler heat capture and other kilowatt-scale distributed power with onsite IP and system level networks, will prove more cost effective, being exempt (as non-consumed grid power) from volumetric surcharges, than surcharge-encumbered conventional supply with Renewable Energy Certificates, which otherwise (stupidly) remains the dominant CCA model.  
How will the utilities focus their strategy? 
PG&E is a very poorly trained dog that is fond of dragging its bottom on the Persian carpet. They have learned that they can win through over-procurement and above-cost procurement, ratepayer bailouts, and surcharge increases on departing customers. They appear to be considering an exit from the power business, speaking of "restructuring." The state and CCAs should support this move. Either way, they will seek to increase transmission and distribution charges. PG&E will continue to consolidate its position as a wires company, and a big part of this will be to get the CPUC to authorize a huge new investment and thus rate increases. One way or another it will seek increases, whether to repay a bailout or to make new customer rate-basing of  their transmission infrastructure, or both
How the CCAs will focus
--Turn away from increasingly expensive business model of conventional power with Renewable Energy Certificates, and toward resources that reduce consumption
--Move from in the current approach of in-state RECs and long-term PPAS with regional renewable developers to customer-owned, behind-meter, integrated Distributed Energy Resources
--Take an increasingly flexible approach to grid power procurement, shifting program emphasis towards a long-term focus on integrated DER and onsite integrated renewables development: Solar plus storage, EVs, in-city PV, and other technologies
--Deliver demand response and dispatch, load reform and peak shaving, avoided capacity charges, and lower non-supply savings to the cost of power.  
--Move into non-rate customer savings through focus on load management, and marginalization of procurement as the competitive part of the business model.
Market advice
From an investment point of view, PG&E's bankruptcy underscores the need for CCAs to get operational control over their power. Unconsumed energy cannot be surcharged. Whether a bailout follows or not, this is yet another hint for Community-scaled integrated DER to CCAs in California. Smart investors and CCA suppliers should focus on iDERs integration rather than traditional renewable PPAs, specifically automation, microgrids and flexible storage integrated with onsite renewable power generation and conservation technologies. Expansion of CCA service to heating systems and dynamic EV chargers are also highly recommended. Moreover, more innovative CCA service entities are needed that are responsible for both power and development of iDERs.

No comments:

Follow Paul Fenn Blog

Blog Archive