Why is Community Choice Aggregation So Promising?

Community Choice Aggregation (CCA) allows local governments to buy or build power facilities on behalf of their residents. California's CCA law (AB 117) is fairly new, passed in 2002. Similar laws exist in a few other states such as Ohio, Massachusetts and New Jersey. CCA has been very successful in Ohio and Massachusetts but is still getting off the ground in New Jersey and California.

CCA is a middle ground solution between full investor-owned utility control of the electricity system and full publicly-owned utility control. For example, PG&E and Southern California Edison are the two largest investor-owned utilities in the state of California (and two of the biggest in the country). In their service territories, they control generation, transmission and distribution. They also bill customers. Conversely, in areas such as Los Angeles and Sacramento, publicly-owned utilities (LA Dept. of Water & Power and Sacramento Municipal Utility District) control the entire system.

CCA was created explicitly as a middle ground between these two models. It's a much less radical approach to local control of energy than full publicly-owned utility control, which requires condemning investor-owned utility transmission lines, distribution lines and generation. This process can lead, as it did in Sacramento, to legal battles up to twenty years. Instead, local governments implementing CCA assume control of generation facilities only and leave transmission, distribution and customer billing with the investor-owned utility.

By implementing CCA, local governments can join forces with other local governments and buy or build power supplies for their residents. This in itself is a benefit because it provides more local control and more choice. Residents can choose to remain with the investor-owned utility service or go with the CCA. Residents must affirmatively opt out of the new CCA or they will by default be served by the new CCA.

While local control is a benefit in itself, CCA also offers the promise of substantial cost savings for residents. The state's thirty-nine publicly-owned utilities enjoy, on average, 25% lower rates than customers with investor-owned utility service. This is generally the case because publicly-owned utilities have access to very low interest rates. Also, some publicly-owned utilities such as Los Angeles and Anaheim, have substantial amounts of generally lower cost coal in their portfolios. We also see cost savings, however, in other publicly-owned utilities that don't have a lot of coal, such as Sacramento. By financing energy projects with low-cost public money, savings can be passed on to customers. Also, publicly-owned utilities don't have to make a profit, don't have to pay taxes and don't have to pay exorbitant salaries for executives (PG&E's CEO made $12 million in 2007). All of these cost savings can be passed on to customers.

Local control and cost savings are definite "pros" in favor of Community Choice. Where environmental groups like mine see great promise is the ability of local governments to go far beyond the state's goals for renewable electricity if they choose to do so. By providing communities with a choice, communities can pursue far higher levels of renewables than the currently mandated requirement of 20% by 2010 (a requirement that also applies to CCAs). These communities can show their "green" credentials — possibly saving the environment and money because of the financial benefits mentioned above.

By investing in local renewable energy projects such as wind, large-scale solar, geothermal and biomass, local governments that pursue CCA can provide low-cost financing as a major benefit and can help make their region more self-sufficient. Communities that pursue high levels of renewables will be setting the stage for "electrification" of transportation, which is the most promising long-term option for weaning transportation from petroleum. Those communities that have some foresight, recognizing the major financial problems that are already starting to manifest in light of oil price and supply problems will have a head start on those communities that are less attuned to the long-term trends in energy prices.

There are some potential downsides to CCA. It's still untested in California, though it has been successful in Ohio and Massachusetts under very similar laws. Many communities are at various stages of implementation, with 13 cities and counties in the Fresno region the furthest along. Marin County, Los Angeles County, San Francisco, Chula Vista and Santa Barbara are at some point in the process, as well as about twenty other cities and counties around California. Marin County is aiming for 51 percent renewables by 2017 and 100 percent at a later date.

For CCA to make financial sense, communities will probably have to own their own generation facilities. This is known as the "asset-based" or "ownership" model. Only by owning facilities will local governments be able to realize the many financial advantages described above. Major capital projects of any sort have risks, so CCA is certainly not without risk. By spreading risk between a number of local government partners, however, risk can be diminished for each member government. Also, the Public Utilities Commission recently made it clear that member governments are only financially and legally liable for the CCA's risks if they choose to be. This protection is similar to a corporate or LLC protection for an individual member. These business structures allow an individual to invest in a corporation or LLC without being personally liable for the business structure's losses should they occur.

Competition may also be fierce for renewable energy projects as the investor-owned utilities, publicly-owned utilities and CCAs compete for the best projects. If CCAs focus on local renewable energy projects, however, which may have been overlooked by the larger parties, such competition can be minimized. Also, financing of some renewable energy projects has been a major hurdle for completion — particularly with large-scale solar projects. CCAs can overcome this hurdle because they are the financiers as well as the project owners. By providing financing for desired renewable energy projects, CCAs can bring online projects that may otherwise have had difficulty getting financed for a variety of reasons.

Many uncertainties regarding CCA can be resolved by a feasibility study. This is the first step in implementing CCA, but it does not obligate a local government to take any further steps. As such, it should be viewed as a relatively low cost means of assessing the merits of CCA for the region at issue.

CCA has a great deal of promise as well as some significant risks. But in the current energy price environment, the risk of doing nothing may well outweigh the risks associated with CCA and other community energy solutions. Natural gas prices are up more than 500% over the last ten years, rising from about $2 per million btus to over $13. Southern California Edison's CEO recently stated on an investor conference call that Edison planned to double rates over the next five years. Edison also just applied for a 30% increase in rates for most residential customers. PG&E will soon follow suit as these utilities try to pass on the surging costs of natural gas and other expenditures. For communities looking to alleviate price increases and pursue a far-sighted long-term energy plan, CCA may be a great option.

Tam Hunt is Energy Program Director and Attorney for the Community Environmental Council in Santa Barbara. See www.cecsb.org for our regional energy blueprint. He is also a Lecturer in renewable energy law and policy at the Bren School of Environmental Science & Management at UC Santa Barbara.