Cross-posted from Special to The Enterprise  By Gerry Braun and Richard McCann
October 19, 2014

Last year, the Davis City Council funded work to evaluate the city’s long-term electricity service options. The matter was tabled as the June election drew near.

Then this summer, the city commissioned a resident satisfaction survey that, among other questions, asked if the city should form a municipal utility and purchase PG&E’s distribution system. A total of 46.5 percent of respondents said yes, 34.5 percent said no and 19 percent were undecided. This result suggests it is time to resume serious public discussion of Davis’ energy future, based on relevant factual information and insights.

In this article, the first of a planned series by local energy professionals, we briefly summarize electricity service options available to Davis and comment on questions raised by council members, advisory group members and other stakeholders. We are familiar with studies commissioned by the city, but our primary reference is to our direct knowledge and other independent sources.

Our only pre-judgment is that the city’s energy choices will be increasingly consequential and therefore deserve informed and thoughtful attention by city leaders and citizens.

Municipalization as one option

Various options exist for a local government to take an active role in providing local energy service. The city’s consultants identified municipalization of the local electricity distribution grid as the city’s best option. Municipalization involves setting up a publicly owned utility (POU) to take charge of power planning and retail power service.

The utility can take the form of either a city agency or one of several choices for an independent utility. For example, Roseville’s electric utility is a city department; Sacramento’s is an independent special district.

Publicly owned utilities collectively supply approximately 25 percent of electricity in California and own more than 40 percent of the high-voltage electricity transmission capacity in and out of the state.

Forming a publicly owned utility allows a local government to perform the same functions as a for-profit utility but at a smaller and — many would argue — more manageable level. Local governments may run the utility directly or may subcontract specialized functions. POUs are governed by city councils or elected boards, and not by the California Public Utility Commission, making them more directly accountable to voters impacted by the utility.

Community Choice Aggregation (CCA) as another Option

Another option is called community choice aggregation (CCA). It involves taking responsibility for power procurement, but not power delivery, which would continue to be provided by the incumbent for-profit utility. CCA implementation is governed by state law and administered by the CPUC.

There are CCA entities in three California counties — Marin, Sonoma and San Francisco. Marin’s CCA also serves the city of Richmond, in Contra Costa County. San Francisco’s CCA has been formally established but has not yet started operation. Several other California cities have voted to form or investigate formation of CCAs, including Lancaster and Santa Cruz.

Comparisons

Both POUs and CCAs offer market access to smaller local firms that deliver distributed generation, storage, renewable energy and demand-side (efficiency, conservation and demand response) technologies and practices.

In December 2013, the city’s consultants concluded that a Davis POU would best meet the City Council’s goals related to local control and cost and reliability of service. This conclusion was based on comparing current costs and rates for existing public and for-profit utilities and estimating the specific cost of acquiring existing PG&E infrastructure. Advisers pointed to the need for a bottom-up business plan that would account for annual costs specific to Davis’ unique customer base and energy usage profiles and patterns.

City Council members recognized that operating a POU would involve the same costs and risks faced by existing POUs as well those to be encountered prior to start-up. Incumbent for-profit utilities wage costly, no-holds-barred, political and electoral campaigns to prevent the formation of CCAs and POUs. Elected officials are often targeted. When the municipalization campaigns are successful, settlements of related disputes may or may not cover the costs incurred by the local jurisdictions.

CCA customers can “opt out” and assert their right to return to service by the for-profit utility. This is a serious concern, because the for-profit utility has considerable means and motivation to recapture its lost customers. The opt-out rate for Marin Clean Energy is 23 percent; Sonoma Clean Power’s opt-out rate, initially 7 percent, is projected to level out below 20 percent.

A CCA also has limited flexibility to respond to price competition, primarily because CCAs only collect revenues for electricity procurement services; the incumbent utility still performs such functions as electricity delivery, metering and billing. CCAs thus collect no revenues for these other functions and, as a result, are lightly staffed.

Also, they initially must purchase electricity from the same generation market that is being tapped by their for-profit competitor. Even so, the Marin and Sonoma CCAs are below PG&E’s residential prices.

POUs are better equipped than CCAs for price competition. But their operations require a range of professional and organizational skill sets that do not arise spontaneously. While organizational capacity is maturing, the POU must invest in staff development or outsource critical functions. While mature POUs generally offer service at significantly lower prices than for-profit regional utilities, related savings would not be immediately realized by a new, stand-alone POU.

Other options

Other options might be considered as well, such as leasing local power lines from PG&E or working collaboratively to set up small-scale local grids able to exchange power with the regional utility, as has been proposed for the Hunters Point area of San Francisco. Not all of these choices are mutually exclusive, and some may attract partners from other municipalities or companies.

Conclusions

As energy professionals and Davis residents, we are concerned that the costs and risks of doing nothing to change Davis’ approach to electricity supply may outweigh the costs and risks of taking action. We are daily reminded of the profound and transformational implications of new smart and clean technologies for business as usual. Fully realizing the economic and environmental benefits of smarter, more decentralized electricity systems may require decentralizing the management and financing of these systems.

Likewise, cities like Davis that have adopted climate action plans may need greater control over energy planning and operations to allow them the flexibility to implement the envisioned changes, for example, to dramatically expand local production of electricity for local consumption.

Given the need to set examples of workable solutions to the problem of managing climate change worldwide, we feel a sense of urgency in reopening broad public discussion of Davis’s energy future. The next article in this series will outline the ongoing and future changes in the electricity sector that create opportunities and options for Davis.

We look forward to contributing to a vigorous, technically and economically well-informed debate about the options.

— Gerry Braun founded and manages the Integrated Resources Network, an outlet for integrated technical and economic analysis of decentralized energy issues. Richard McCann is a co-founder and principal with M.CUBED, a policy analysis consultancy specializing in energy, climate change, environmental and water issues.