Battered by huge wildfire liabilities, the spread of community choice aggregation and rapid growth in distributed generation, California's big three investor-owned utilities face an increasingly uncertain future. Many believe they will abandon, or be pushed out of, their traditional roles and become "wires-only" utilities — in other words, rather than generating and selling electricity, they would transmit and distribute power from multiple generating entities and provide related customer services, such as energy efficiency, energy storage, electric vehicle charging infrastructure and interconnecting distributed generation customers.
Facing liabilities related to 2017 and 2018 wildfires in its Northern California service territory that could exceed $30 billion, Pacific Gas and Electric Co., or PG&E, is being forced out of its traditional role as an energy supplier. PG&E and its corporate parent, PG&E Corp., filed for Chapter 11 bankruptcy protection in January and the court is considering various proposals to break up the state's largest utility. Sempra Energy subsidiary San Diego Gas & Electric Co., meanwhile, wants to embrace the future and is asking state legislators to allow it to exit the energy supply business so it can focus exclusively on transmission and distribution services.
Edison International subsidiary Southern California Edison Co., in contrast, intends to stay the course, arguing that only traditional large utilities can ensure reliable electric service in a time of proliferating alternative energy suppliers, including upstart community choice aggregators, or CCAs, which are run by local governments but lack the resources, experience and authority, according to SCE officials, to coordinate their efforts across the larger interconnected grid.
These questions are especially pressing in California, which has the most ambitious clean-energy goals in the nation. Many of those goals rely upon the major utilities, which have signed large power-supply contracts with renewable power generators. How those goals will be reached in an era of transformation for utility business models is uncertain, California Public Utilities Commission President Michael Picker said during a March 28 PUC meeting.
"I think there are a lot of other bigger questions … both from the perspective of bankruptcy, and the general disaggregation in the provision of energy supply and the seeming march of the regulated entities towards transmission and distribution companies as opposed to generation companies," Picker said.
The PUC's Choice Action Plan warns that if utilities abandon the market for energy procurement and non-utility service providers falter, customers could again be subjected to service disruptions on the scale of the 2000-2001 energy crisis, when flawed deregulation led to rolling blackouts and skyrocketing power prices pushed the utilities toward insolvency. "Without a coherent and comprehensive plan, the current policies in place may drift California to an unintended outcome and breakdown in services like the Energy Crisis," stated the plan, released in December 2018.
Pressures for change
The pressures for change can be seen in the growing number of customers defecting from conventional electric utility service to CCAs. The California Community Choice Association, or CalCCA, represents 19 operational CCA programs in California serving more than 3.8 million customer accounts. The largest CCA, the Clean Power Alliance, launched service to its first customers in February in Southern California Edison's service territory and is extending energy supply service to 29 cities in unincorporated parts of Los Angeles and Ventura Counties. The Alliance will serve nearly one million homeowners unless they choose to opt out and stick with SCE.
Distributed solar is also having a big impact on utility business models. At the end of 2018, a state database reported more than 834,000 solar photovoltaic projects have been installed for customers of investor-owned utilities, or IOUs. The state has passed building standards that will require rooftop solar on all new homes starting in 2020, which would add about 80,000 solar systems per year at the current construction pace.
But nothing threatens the IOUs more than the wildfires that have devastated much of Northern California and pushed PG&E into bankruptcy. In a March 22 presentation, S&P Global Ratings Director Gabe Grosberg said PG&E's financial stress has caused significant deterioration in the credit quality of power suppliers who have long-term contracts with the utility. SCE and SDG&E are not immune from wildfire risks, either. Climate change is making massive wildfires more common across the state, Grosberg said, pointing to major fires in SCE's service area in 2017 and 2018. The resulting financial pressures are making it nearly impossible for the utilities to procure affordable power.
There is movement in the state legislature to produce comprehensive legislation that may address credit risks from wildfires, Grosberg said. "However, we may ultimately downgrade California's investor owned electric utilities in the coming months by one or more notches if we conclude there is a lack of clear evidence to suggest that concrete steps are not being taken during this relatively short term to strengthen California's regulatory construct for investor owned electric utilities," he concluded.
PG&E has asked the bankruptcy court to confirm that it has exclusive jurisdiction to reject power purchase agreements the utility has signed with power providers, a move independent power producers say would discourage future clean-power investments. The utility has listed 387 agreements totaling $42 billion in power purchases.
In addition, PG&E owns 7,693 MW of operating generation capacity, the future ownership of which the court will decide. That is more capacity than SCE and SDG&E combined.
As a result, more stakeholders are calling for PG&E to exit its role as a dominant electricity supplier. A group of community choice agencies has asked the California PUC to take PG&E out of the retail energy procurement business completely so the utility can focus its full attention on transmission and distribution.
Some proposals would go even further. Executive Director Craig Lewis of the Clean Coalition, a group that promotes distributed energy resources, proposed that PG&E sell its transmission assets and focus on operating its distribution network with an emphasis on connecting distributed generation, energy storage and demand response. And San Francisco is exploring the possibility of purchasing the utility's electric distribution lines that serve the city and county. Through its community choice aggregator, CleanPowerSF, San Francisco has been taking over power procurement for PG&E's retail customers since the CCA was launched in 2016.
PG&E is open to consideration of proposals to make the company wires only, but has stated that the legislature would have to amend the Public Utilities Code to relieve the utility of the responsibility of being an electricity provider of last resort. At any rate, as the company moves through bankruptcy reorganization, the court, rather than company officials or policymakers, will likely dictate its future role and corporate structure.
SDG&E wants out
In far Southern California, recognizing the accelerating changes in the energy market, SDG&E sees a more promising future in investments in energy delivery infrastructure including energy storage, electric vehicle charging and the integration of new technologies, such as microgrids, than in its traditional role of generating, procuring and selling power to customers.
This strategic shift is largely due to the city of San Diego's February 2019 announcement that it will pursue a CCA model wherein the city and other local governments will pool customers in order to purchase bulk electricity or develop power projects on behalf of residents and businesses in their communities.
"As energy procurement in California becomes increasingly decentralized, we see a future in which SDG&E focuses primarily on the safe and reliable transmission and distribution of energy to our customers," SDG&E Communications Manager Joe Britton said in a statement.
SDG&E's exit as a power supplier of last resort would be a positive business move, said Moody's analyst Natividad Martel, assuming that the utility is able to recover the value of stranded assets. SDG&E and the other California IOUs do not make money from selling power to their customers; they make money by earning a return on investments in building capital-intensive infrastructure to deliver energy.
With CCAs spreading rapidly, SDG&E has proposed state legislation in which centralized planning and procurement of electricity would take place at the state level to fill gaps that aggregators and municipal utilities do not reach, like rural unincorporated areas. SDG&E submitted the proposal in November 2018 to Sen. Ben Hueso, D-San Diego, who chairs the Senate Energy, Utilities and Communications Committee.
The last holdout
Southern California Edison, meanwhile, believes that continued reliance on IOUs for central energy procurement is preferable to creating a new state agency and is vital to the maintenance of a reliable grid that can meet the state's renewable, clean air and greenhouse gas reduction goals. Creating a new state agency to develop reliable generation resources is too risky and could take many years, the Southern California utility said.
"The wild card is Southern California Edison," former Public Utilities Commissioner Mike Florio said. "They like being in the driver's seat, but if they are abandoned by other utilities, I don't know that they can stem the tide by themselves."
CCAs will continue efforts to get utilities out of the power supply business, not only to remove utilities as competitors, but to prevent regulators from imposing new exit charges that departing customers must pay to cover utilities' stranded costs. The CCAs see these charges as barriers to their efforts to offer cheaper energy prices than the utilities provide, effectively subsidizing out-of-market power purchase agreements and utility-owned plants.
In CalCCA's view, IOUs should become neutral, open-access platforms to distribute public power and back up distributed energy resources.
The customer-driven revolution taking place in California will radically change the structure of the investor-owned utility industry. Characteristic of revolutions is fundamental, rapid and radical change that is self-perpetuating, making it unlikely the revolutionaries will accept reassembling the power supply monopolies — even if the lights go out.
Legislators and regulators, meanwhile, are also considering proposals to put utility energy procurement in the hands of a central authority. The California Assembly Utilities and Energy Committee, for example, is considering Assembly Bill 56, which would establish a "clean electricity authority" to procure electricity that utilities, CCAs and other load servers do not provide.
As always, California is a source of groundbreaking trends and cacophonous dissenting voices. During a March 19 CPUC hearing, Sen. Scott Wiener, D-San Francisco, grilled Picker about what the senator called the Commission's resistance to change. Wiener said he opposed giving the commission a greater role in regulating CCAs, charging that the PUC has been hostile toward CCAs and distributed energy resources.
"I believe that the agency is attempting to double down on this hyper-centralized, monopoly model that has not worked well for California," Wiener said.