- The unique operational structure of community choice aggregators (CCAs) provides both credit challenges and opportunities.
- We have public ratings on five of California's 25 CCAs that have adopted this developing business model. The CCAs we rate exhibit low customer outmigration, favorable customer economic indicators that support ratemaking flexibility, and the absence of direct debt and favorable liquidity.
- Some CCAs have experienced financial distress when faced with the challenges of retaining customers, remaining competitive relative to the incumbent investor-owned utility, and managing volatile price and volume movements of their power supply arrangements.
Community choice aggregators (CCAs) operate as not-for-profit joint power authorities, but also have attributes of wholesale joint action agencies with direct retail customers. CCAs remain dependent on the distribution, transmission, and billing systems of the incumbent investor-owned utility.
S&P Global Ratings applies its "U.S Municipal Retail Electric and Gas Utilities" criteria when assigning ratings to CCAs. Although many CCAs have little or no direct debt obligations, some have sought a credit opinion to obtain an independent and comparative assessment of their operational and financial profiles, and to establish credit and collateral posting thresholds when entering into power supply arrangements.
Risk Management, Culture, And Oversight
Key governance strengths are highlighted among publicly rated CCAs in their regularly updated integrated resource plans, risk management plans, and financial policies and procedures.
The ratings on these five CCAs (all rated A/Stable) are not necessarily representative of all CCAs in California and elsewhere because of what we believe to be self-selection among those who request ratings given their generally sound credit fundamentals. Many CCAs we do not rate might, but not necessarily, exhibit weaker credit characteristics.
The ability (and relative ease) for customers to transfer service is a key aspect of our analysis, especially in circumstances where CCAs have executed long-term power purchase commitments. If a CCA lost a significant number of customers due to unfavorable rate competitiveness or other issues, it could be in an over-procured position, necessitating the liquidation of surplus supply at potentially disadvantageous market prices. Furthermore, customer departures could lead to cash flow uncertainty from short- and long-term revenue disruptions. However, CCAs we rate generally have high customer retention rates, ranging from 86%-96% (chart 3), which we believe provides credit stability. Although historical retention rates among rated CCAs, along with other factors, support ratings within the 'A' category, we could lower ratings if migration accelerated.
Member city departures
Member cities are not required to permanently participate in their CCAs, resulting in the potential for significant financial and operational pressure if an aggregator lost a significant portion of its load. However, mitigating member city departures is typically achieved through credit-protective contracts that can insulate CCAs' operations. For example, the contracts with member cities typically impose substantial financial disincentives to withdraw. The contracts require making the CCA whole for any remaining commitments under purchase power agreements (PPAs) signed on behalf of the members upon departure. Commitments owed by the departing member typically take into consideration projected market revenues the CCA could derive from selling the surplus power in wholesale markets while reallocating fixed costs from these contracts among remaining member cities. In general, S&P Global Ratings believes the risk of member exit is remote relative to individual customer opt-out given these contractual protections.
S&P Global Ratings has observed strong cooperation between CCA management teams and boards of directors. These bilaterally supportive relationships underpin our ratings, as discord between these teams could cause both operational and financial risks. Finally, rated CCAs have exhibited strong member cohesion, which allows them to remain internally strategically aligned. However, the risk of customer opt-out and member exit represents a material structural difference from most other rated retail electric utilities. This could represent a governance risk, in our view.
The potential for customer or member city departures can be complicated by CCAs' power portfolio composition compared with energy demand. CCAs that successfully procure a large portion of their power supply under fixed-price, long-term contracts can benefit from price certainty. However, if a CCA is in an over-procured position, from member or customer departures or, less likely, from overreach, surplus is sold into the market to recover costs. Our analysis considers how the CCA manages the cost of purchased power with other risks that could lead to financial pressure if the original cost exceeds market prices.
Conversely, a CCA in an under-procured position must purchase power on the open market, which could be particularly impactful for nascent CCAs that have recently added new members but have not procured mid- and long-term PPAs for the additional load requirements. While this strategy allows for flexibility, it could lead to a financial burden when energy prices are elevated or when market prices are volatile. In addition, CCAs with shorter-duration power contracts will regularly have to renegotiate with providers, leading to protracted market exposure. Notably, East Bay Community Energy purchased more than 44% of its energy in 2020 from short-term, day-ahead, and spot-market purchases without a financial hiccup. However, it plans to reduce this exposure to about 25% of annual purchases.
CCAs can mitigate these market exposures by maintaining significant levels of liquidity drawn upon in lieu of rate increases in the event of a pricing disparity. This is largely a short-term solution but bridges the gap if necessary. CCAs rated by S&P Global Ratings all held more than 150 days' unrestricted liquidity in 2021 (chart 4), which we generally view as very strong under our criteria.
Given the ability for customers to opt out, rate competitiveness and affordability are important considerations in our credit rating analysis. The cities that CCAs serve generally exhibit above-average income metrics, which we believe provides enhanced rate-setting flexibility and the capacity to incorporate operating cost increases into retail rates. However, CCAs also have to consider rate-structure competitiveness relative to the rates offered by the service territory's investor-owned utility (IOU). Rates that approximate or exceed those of the IOU could constrain a CCA's ratemaking flexibility because it could trigger customer defections.
|Weighted-Average Median Household Effective Buying Income Compared With U.S. Average (%)|
|Central Coast Community Energy||122|
|East Bay Community Energy||153|
|Marin Clean Energy||135|
|Silicon Valley Clean Energy||197|
|Sonoma Clean Power||123|
|Source: Economic Data Systems.|
Affordability And Social Capital
To the extent that incumbent IOUs' electric bills are pressuring ratepayers' pockets, the same will be true for CCAs who set rates at or near IOU levels. Although rates have generally remained competitive, CCAs nevertheless exhibit rates that are meaningfully above state averages. High rates can translate into affordability concerns, which in turn represents an elevated social risk.
S&P Global Ratings has observed two distinct rate-setting approaches for CCAs: discount focused or cost-of-service model. The first practice prioritizes setting rates at a discount to the those of the incumbent IOU. This can help ensure customer rates remain competitive with the incumbent IOU, but could result in financial challenges for the CCA if rates are insufficient to cover expenses. In turn, both coverage and liquidity metrics could suffer.
The second approach is a cost-of service model, where the CCA independently sets rates to ensure it achieves financial targets, with competitive positioning as a secondary consideration. Although this approach can help achieve reliable cost recovery, it could lead to customer outmigration if rates are viewed as uncompetitive.
However, among the CCAs we rate, regardless of their rate-setting priorities, we observe sound coverage of the imputed fixed costs we associate with renewable and conventional energy supply contracts. Furthermore, we do not observe meaningful differentiation between these rate-setting approaches, but will continue monitoring the evolution of each approach in the longer term.
|Fixed Charge Coverage (x)* (Three-Year Average)|
|Central Coast Community Energy||1.58|
|East Bay Community Energy||1.25|
|Marin Clean Energy||1.28|
|Silicon Valley Clean Energy||1.26|
|Sonoma Clean Power||1.11|
|Source: Audited financial statements. *Fixed charge coverage is S&P Global Ratings’ internally adjusted coverage ratio that treats a portion of power purchases as debt service rather than as an operating expense because these payments funds suppliers’ recovery of capital investments in generation dedicated to the public power utility.|
Finally, CCAs face an additional external rate-setting pressure: the Power Charge Indifference Adjustment (PCIA).
The PCIA is a legislatively created vehicle. It provides for the incumbent IOU's recovery of those portions of pre-existing generation investments and energy-procurement costs that market sales of energy surpluses created by customer migrations to CCAs do not financially support. The PCIA shields the IOU's non-CCA customers from the cost shifting that might otherwise occur due to the migration of retail customers to CCAs. Ultimately, this cost is not in the CCAs' control and diminishes the margin between CCA and IOU rates.
S&P Global Ratings has generally observed that CCAs procure renewable resources at a greater pace and volume than mandated by California's renewable portfolio standard (RPS). The standard dictates that electric utilities in the state must procure 60% of their portfolios from eligible renewables by 2030 and 100% from carbon-free resources by 2045; several interim targets are identified, including a requirement to procure 65% of RPS energy under long-term contracts (defined as 10 years or longer). The portfolios of the five CCAs we rate ranged from 31% to 61% RPS-eligible as of 2020. We believe CCAs are generally well positioned to comply with current and potential future regulatory requirements to decarbonize, while also providing a tangible benefit for environmentally conscious consumers.
|Power Fuel Source In 2021 (%)|
|East Bay Community Energy||Central Coast Community Energy||Marin Clean Energy||Silicon Valley Clean Energy||Sonoma Clean Power||California|
|Product||Bright Choice||3CE Choice||Light Green||Green Start||CleanStart|
|Greenhouse gas emissions intensity (pounds of carbon dioxide emissions/megawatt-hour)||591||151||77||7||80||466|
|Source: California Energy Commission. *Includes biomass and waste, geothermal, eligible hydroelectric, solar, and wind.|
CCAs generally prioritize renewable, clean, reliable energy, generally supporting a favorable view of environmental regulation and compliance under our operational management assessment. The accelerated procurement and strict renewable standards might pose additional short-term cost pressures, but can also reduce regulatory risks as utilities undertake decarbonization strategies.
Renewable procurement, however, has its own set of challenges, including reliable and economical storage technology. Utilities with a high proportion of intermittent resources might be left in a short position and forced to procure energy on the spot market. Although many utilities in California (CCAs and retail electric utilities alike) are actively procuring or seeking procurement of battery storage, this technology is costly and has yet to fully rectify intermittency issues, as demonstrated by California's rolling blackouts and conservation directives. To mitigate the risk that renewable requirements could outpace advancements in storage and battery technology renewable requirements, many CCAs have procured firm (that is, non-intermittent) renewable and/or carbon-free resources such as biomass, geothermal, and hydropower. Nevertheless, we believe that CCAs are typically more exposed to intermittency than other California utilities and, therefore, more dependent on market purchases, which could lead to greater volatility in their operational costs during the hours when renewable resources are dormant.
|Firm Versus Non-Firm Power As A % Of Total Energy (2021)|
|Central Coast Community Energy||East Bay Community Energy||Marin Clean Energy||Silicon Valley Clean Energy||Sonoma Clean Power||California|
|Source: California Energy Commission. *Not including firming capacity and/or energy storage facilities.|
CCAs rated by S&P Global Ratings do not presently own or assume any ownership liability in generation, transmission, or distribution assets. As a result, unlike other rated retail electric utilities in the state, CCAs do not face direct financial risks from wildfires and the state's strict liability standard, which holds utilities liable for wildfires caused by their assets, regardless of fault. Even so, should asset owners face wildfire-related expenses, they would likely pass through a proportionate share of their costs to the CCA, which could pressure financial performance or rate affordability.
Case Study: Distressed CCA
Western Community Energy (WCE), which we do not rate, opened its doors at an inopportune time. The Riverside County-based CCA began serving its first electric customers in April 2020--around the same time as the onset of COVID-19 and the implementation of statewide shutdowns. The utility, already facing financial challenges due to delinquent customer bills, experienced $12 million in unbudgeted power expenses following an August 2020 heatwave. The agency had insufficient cash flows and reserves to cover mounting obligations and, ultimately, it became the first (and, to date only) CCA to file for Chapter 9 bankruptcy. WCE has since deregistered as an electric utility, and its 113,000 customers returned to Southern California Edison.
We believe WCE's failure was a culmination of risks, including contract shortcomings, uncommitted lines of credit, minimal reserves, and poor risk management. These factors were exacerbated by poor timing; WCE was formed amid a global pandemic and dramatically elevated market prices. However, we also believe many of these factors can be mitigated (and have largely been mitigated among CCAs we rate.). Furthermore, the CCAs rated by S&P Global Ratings, unlike WCE, exhibit strong income levels and are therefore much less prone to the types of delinquencies WCE faced.
The key takeaway from WCE's failure is that, without a comprehensive risk mitigation approach, a CCA's operations are exposed to many risks that together could be catastrophic. We do not view this bankruptcy as necessarily representative of a broader trend. Rather, S&P Global Ratings will continue to evaluate each CCA's credit fundamentals under our criteria. We do not believe WCE's failure served as a death-knell for the CCA construct; however, it did bring into sharper focus the potential pitfalls these utilities can encounter.
Retail electric consumers' ability to purchase electricity from CCAs, also referred to as municipal aggregators, is gaining traction across the U.S. First authorized in Massachusetts in 1997, nine more states have enacted enabling legislation to form CCAs. The authorizing legislation is usually similar, focusing on reducing the cost of electricity and the carbon footprint while establishing local efficiency and conservation programs.
CCAs enable municipalities to secure an alternative electric power supply for residents from the incumbent IOU. Typically, all customers within a municipality that elects to join a CCA are automatically enrolled as customers but can opt out without penalty prior to starting or within the first 60 days of service, although the CCA generally levies a fee for opting out after service begins. IOUs may elect to charge customers a fee upon their return, as well as imposing restrictions on customers' ability to transfer back to the CCA at a later date. A key factor distinguishing CCAs from other public power retail electric utilities is customers' ability to readily revert to the incumbent utility with few, if any, hurdles. In California, CCAs compete with PG&E Corp., San Diego Gas & Electric, and Southern California Edison but cannot compete with publicly owned power utilities. According to California Community Choice Association, there are currently 25 CCAs serving more than 11 million customers across California cities and counties, and still growing.
Although CCAs typically have limited or no direct debt obligations, many obtain an issuer credit rating to provide an independent and comparative opinion of their operational and financial profiles, and to establish credit and collateral posting thresholds when entering into power supply arrangements.
This report does not constitute a rating action.
|Primary Credit Analyst:||Doug Snider, Centennial + 1 (303) 721 4709;|
|Secondary Contacts:||David N Bodek, New York + 1 (212) 438 7969;|
|Tiffany Tribbitt, New York + 1 (212) 438 8218;|
|Nora G Wittstruck, New York + (212) 438-8589;|
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