CCA BUSINESS MODEL HAS EVOLVED AND STRENGTHENED AS ELECTRIC INDUSTRY TRANSITION PROCEEDS
As PG&E was approaching its second bankruptcy in 2019 and California was accelerating the pace of transition to cleaner energy, California's Community Choice Aggregator (CCA) program began to expand. CCAs are local government entities that procure electricity for their service area. For the majority of CCAs, each consist of several cities jointly operating a CCA program. Now in 2024, there are 25 CCAs serving over 14 million people in 200 cities throughout California. Within a relatively short time since 2002 when Assembly Bill 117 was passed to allow for creation of CCAs, the CCA business model has both strengthened financially and has guided the transition to community-led electric service. Yet there remain some creditworthiness assessments that have been slow to follow the strengthened position and there are some improvements that can be instituted to better protect CCAs from challenges from fundamental power market changes.
This once untested business model in California has evolved into not only the CCA being the community-directed clean energy purchaser, but they have now established local climate protection strategies from energy efficiency programs; rooftop solar incentives; EV policy and charging station siting; to now joint CCA action to use economies of scale to build or contract for economic and reliable clean sources of electricity. The reputation of CCA services has been strengthening as evidenced by the legislative support and expansion across California.
The California CCA program is an opt-out model meaning electricity customers in a CCA must participate in the CCA service but can opt out which only a handful of customers have chosen to do. Opt-out is a potential risk to the CCA operating revenues but from publicly available data, only 1~3% of customers on average across the 25 CCAs have chosen to opt out and return to the investor-owned utility that previously served them. Most of the opt outs were within the first 60 days. Now opting out means going back to the higher priced IOU, as most CCAs have been able to maintain their electricity prices to be lower than the investor-owned utility. More certainty in CCA competitiveness has been a result of a phase-down of legacy unrecovered costs and worsening economics of investor-owned utilities from wildfire mitigation and other regulatory requirements.
The opt-out provision that relates to cities that choose to opt out of their CCA program is not as straightforward a risk. For example, each of the CCAs have exit policies to mitigate such departures. Peninsula Clean Energy (PCE) for example, states in its authorizing ordinance: “withdrawal or involuntary termination," and “may remain liable including, but are not limited to, losses from the resale of power contracted for by the Authority to serve the Party’s load”.
The main risk that has weighed down CCA credit ratings besides the opt-out risk cited by rating agencies, has been the risk of the burden of power purchase agreement (PPA) contract risk and wholesale energy market price volatility. The power market risk is a managed risk.
CCA’s improving financial liquidity; access to external liquidity; community support; limited to no debt; improving risk management function; and reputational strengths are all positive factors. For example, Peninsula Clean Energy (PCE) had 318 days cash on hand in FY 2023 while Redding, a city distribution system had 147 days, or Glendale, California had 355 days.
The next CCA step to mitigating PPA risk is the diversification of power supply being accomplished through long-term electricity pre-payment agreements and plans for owned generation.
But, of course, California being California, the continued acceleration to net zero and the tendency of the state to test untested strategies remain present, and as changes evolve, associated risks need to be continuously assessed and proactively managed.
Dan Aschenbach, MFS Managing Partner, MFS Associates
Namsoo Lee, Managing Partner, MFS Associates