Introduction
In 2022, one out of every six households in the United States were behind on their utility payments. California has three of the top ten cities in the country with the highest average cost of monthly utility bills. Californians want clean, affordable, and reliable electrical energy, yet we rely on investor-owned utility providers for most of our energy services. What if there is an alternative to receiving energy from a corporation? There are local programs that focus on renewable sources of energy at modest rates. These innovative programs are called Community Choice Aggregators (“CCAs”).
Multiple state legislatures have made guidelines for cities to implement CCA programs. Under California’s Public Utilities Code section 331.1, CCAs are entities created by a county or municipality’s governing board. The board elects to combine the energy needs of its residents, business, and facilities in a distribution program. Pursuant to Assembly Bill 117, a CCA facilitates the sale of energy on behalf of a ratepayer. This new municipally-governed entity is made up of “local representatives from environmental justice, organized labor, and education advocacy groups.” For example, in California, San José’s CCA, San José Clean Energy (“SJCE”), builds and sources energy from SJCE projects (solar, battery storage, and wind energy), or contracts with companies that produce renewable energy, and adds energy to the grid to be delivered over Pacific Gas and Electric power lines and infrastructure.
Credit: UCAR | Flickr
CCA programs are designed to give autonomy to local communities over the sources of their electricity. In addition, CCAs promote increased usage of renewable energy, equitable distribution for all customers, and economic interests for those involved. CalCCA reports that over 11,000 watts of energy produced from renewable energy sources have been signed by CCA programs thus far. Currently, California CCAs utilize solar, wind, geothermal, and biogas sources of energy. Sierra Club Senior Campaign Representative, Drew O’Bryan, stated that, “Each CCA with a 100% renewables commitment adds pressure for the utility to accelerate the timeline of its transition.” Moreover, CCAs are committed to sourcing long term renewable energy in hopes of shifting the energy industry away from the traditional natural gas model. CCAs not only provide renewable energy options, but push private utilities to implement renewable energy policies for state and national climate action goals.
The CCA and IOU Relationship:
Investor owned energy utilities (“IOUs”) have illuminated and powered the lives of California citizens for nearly a century. California IOUs include Pacific Gas and Electric, Southern California Edison, and Southern California Gas Company (“SoCalGas”). These companies have dominated the energy industry in the private sector. Pacific Gas and Electric Co. (“PG&E”) is one of the most recognizable private utilities in the San Francisco Bay Area.
Unlike IOUs, CCAs are not for profit and are publicly-owned energy utilities. CCA mission statements promote community reinvestment stemming from excess revenue. CCA creation keeps more money circulating in local communities instead of flowing into shareholder pockets. In addition, the California Public Utilities Commission delineates the code of conduct for IOUs partnerships with CCAs. While municipalities utilizing CCAs can still use IOUs as part of their service, the California Public Utilities Commission has delineated requirements for IOUs’ fair market conduct. IOUs cannot undermine public interest in CCAs through their longer standing place in cities, with concerted marketing ploys.
For these reasons, California cities are pushing for the alternative use of CCAs for electricity procurement, distribution, and transmission. CCA creation would loosen IOUs stronghold in the energy industry without necessarily eliminating IOU involvement; IOUs can still be used for delivery, metering, and repair services. Yet whether the competition between private versus public utility providers in the energy industry is favorable for ratepayers in the long run is not without considerable debate.
Community Choice Aggregation Benefits and Disadvantages
Like much of government decision-making, the implementation methods of CCAs are political. Promoters of the CCA model promote the dire need to reinvent the energy industry with renewable sources. Across the country, and especially in California, sustainability efforts slowly garner more and more support from a mixture of grave natural disasters and the realization that the high cost of renewables is a misnomer. Additionally, CCAs are not replacing IOUs as the monopolistic model of energy, instead they simply create competition that will, hopefully, spur companies into aligning their interests with the interests of communities.
Conversely, detractors from CCAs focus on the theoretical volatility of renewable energy prices. Ultimately, the implementation of CCAs is dependent on availability. While California is environmentally focused, other states throughout the country would be beholden to their local governments for creation of these bodies, amenable energy providers, and IOUs. In addition, CCA business models can affect state-wide energy rates and have the potential to strain the electricity grid from the nonrenewables to renewables shift.
Credit: Mark Muhlhaus
Community Choice Aggregation as a Problematic Business Model
A CCA is responsible for cleaner energy generation adherent to more competitive rates. Rate competition, however, affects the California energy market as a whole. For example, the energy industry in the Bay Area was run by one corporation, PG&E, for energy supply, resource procurement, transmission, distribution over century-only infrastructure, and retail. As CCAs expand into the jurisdictional territories of IOUs, more customers opt into CCA services for retailed energy products. Yet these CCA products include alternative, out-sourced renewable energy instead of the traditional energy service bundles purchased by CCAs from IOUs. As a result, IOUs are faced with few customers, but excess power. To make up for the increased and unused energy loads, IOUs are forced to charge customers at higher rates, including their energy bundles sold to CCAs. This interdependent, yet competitive, relationship between CCAs and IOUs adjusts rates higher for both utility providers.
The purpose of providing competitively lower rates than IOUs for similar products is to allow the CCA to maintain what it claims to be: a choice. Under CPUC section 366.2, CCA customers must retain the right to “opt out” of the local program. In turn, higher rates could lead customers to fall back on the IOU’s services, potentially stressing the balance of the electricity grid when customers jump between renewable and nonrenewable energy sources. This competitive rate balance triggers the application of constitutional tax law.
For instance, it was determined in Zolly v. City of Oakland that CCA rates not formally designated as taxes trigger the application of California’s tax laws Proposition 13, 218, and 26. Under Cal. Const., art. XIII (C), § 1(e), a “tax” is any charge imposed or made mandatory by a city. Under Cal. Const., art. XIII (C), § 1, if rates are deemed taxes, governments are required to obtain voter approval for the new charge. Utility rates are “taxes” if they are imposed on customers or if they are not reasonably related to the value of the services purchased, according to Jacks v. City of Santa Barbara.
It is unlikely that such utility charges are imposed on customers if they retain the ability to “opt out” of the program. On the other hand, a court would be left to consider the reasonable relationship between the value and service for each CCA program. A reasonable relationship could be determined by analyzing costs, sources, and reliability of the service, and whether the fee structure is similar to that of competing services, as suggested in Zolly v. City of Oakland. The competitive relationship between CCAs and IOUs maintains lower rates for now. Although the California legislature nor case law has yet to narrowly address CCA rate tax issues, it is likely higher rates or rates above the competing IOUs, will trigger tax law consequences.
Each CCA program will likely need to closely maintain its rate structure and business model to prevent tax law triggers and lawsuits seeking to enforce the CPUC. As summarized by FitchRatings, “CCAs have the independent ability to adjust rates to recover costs, but maintaining competitive rates is of paramount importance given their competitive business model.” Thus, ratepayers are likely to be affected by how IOUs and CCAs share past, present, and futures costs. CCAs, as evolving additions to the renewable energy domain, have yet to perfect the affordable and renewable energy balance of their business models.
Conclusion
California CCA laws can serve as a model for the United States to reinvent the energy industry with a focus on clean and affordable electrical energy. The CCA business models are not without fault. There are remaining concerns and questions on the impact of CCAs on customer rates, grid impact, and the future of existing IOUs in the renewable energy landscape. Yet CCAs as a public utility uniquely combat shareholder profit and control over the fundamental public need for electricity. The future holds for more renewables and local autonomy over affordable energy solutions. Through case law and legislation, the CCA business model will evolve to address future tax and rate issues. Once again, the law has yet to catch up with innovation.
*The views expressed in this article do not represent the views of Santa Clara University.