HomeMy WebLinkAbout2019-11-12; City Council; Resolution 2019-229RESOLUTION NO. 2019-229
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD
ACCEPTING THE PEER REVIEW OF NORTH SAN DIEGO COUNTY CITIES
COMMUNITY CHOICE ENERGY TECHNICAL FEASIBILITY STUDY AND
AUTHORIZING THE CITY MANAGER TO NEGOTIATE, EXECUTE AND
FUND A COST REIMBURSEMENT FOR MEMBER AGENCY SUPPORT
AGREEMENT ALLOWING FOR THE CITY OF CARLSBAD'S
PARTICIPATION IN FUNDING THE FISCAL YEAR 2019-20 INITIAL
BUDGET OF THE CLEAN ENERGY ALLIANCE JOINT POWERS AUTHORITY
IN THE AMOUNT OF $150,000
WHEREAS, Community Choice Energy is a mechanism that allows local governments to
purchase and supply electrical power to customers within their jurisdictions as an alternative to
the service provided by an investor-owned utility; and
WHEREAS, the terms 'Community Choice Energy' (CCE) and 'Community Choice
Aggregation' (CCA) are used interchangeably; and
WHEREAS, on April 16, 2019, the Carlsbad City Council received the final North San Diego
County Cities Community Choice Energy Technical Feasibility Study (Study), dated March 28,
2019;and
WHEREAS, the Study determined that a CCA program is both technically and financially
feasible, and could provide environmental and economic benefits to residents and businesses in
the City of Carlsbad; and
WHEREAS, on August 20, 2019, the Carlsbad City Council directed staff to obtain a peer
review analysis of the Study; and
WHEREAS, the city engaged Pacific Energy Advisors, Inc., to provide a Peer Review of the
Study; and
WHEREAS, Pacific Energy Advisors' Peer Review of the Study, dated November 4, 2019,
did not discover any fatal flaws that would jeopardize anticipated feasibility of the CCA program;
and
WHEREAS, on October 8, 2019, the Carlsbad City Council adopted Resolution No. 2019-
197 approving and authorizing the execution of the Joint Exercise of Powers Agreement creating
the Clean Energy Alliance, a CCA Joint Powers Authority; and
WHEREAS, on October 15, 2019, the Carlsbad City Council approved Ordinance No. CS-
362 authorizing the implementation of a CCA program in Carlsbad; and
WHEREAS, on November 5, 2019, the Clean Energy Alliance (CEA) Joint Powers Authority
Board of Directors reviewed CEA's draft fiscal year 2019-20 Initial Budget, which estimates initial
costs to be $450,000; and
Nov. 12, 2019 Item #13 Page 5 of 13
WHEREAS, Section 7.3.2 ofthe CEA Joint Powers Agreement provides that initial costs are
to be shared equally among the Member Agencies, subject to reimbursement from future CEA
program revenues; and
WHEREAS, on November 5, 2019, the CEA Board of Directors passed a minute motion to
request advances in the amount of $150,000 from each Member Agency to fund initial costs in
the amount of $450,000, to be repaid from future CEA program revenues.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Carlsbad, California,
as follows:
1. That the above recitations are true and correct.
2. That the City Council accepts the Peer Review of North San Diego County Cities
Community Choice Energy Technical Feasibility Study, dated November 4, 2019
(Attachment A).
3. That the City Manager is authorized to negotiate and execute a Cost
Reimbursement for Member Agency Support Agreement allowing for the City of
Carlsbad's participation in funding the fiscal year 2019-20 initial budget of the
Clean Energy Alliance Joint Powers Authority (Attachment B) in the amount of
$150,000.
4. That the deputy city manager of administrative services is authorized to transfer
from the City Council Contingency Fund an amount of $150,000 for the City of
Carlsbad portion of the fiscal year 2019-20 initial budget of the Clean Energy
Alliance Joint Powers Authority.
PASSED, APPROVED AND ADOPTED at a Regular Meeting ofthe City Council ofthe City of
Carlsbad on the 12th day of November 2019, by the following vote, to wit:
AYES: Hall, Blackburn, Bhat-Patel, Schumacher.
NAYS: None.
ABSENT: None.
f. ~' lkc12//fi,nez Pepvl ~ ENGLESO~, City Clerk / C /-J 1J
(SEAL) de,J('
Nov. 12, 2019 Item #13 Page 6 of 13
eventual operating outcomes for the prospective CCA program could be somewhat better than reflected
in the Study {based on current market conditions, which are subject to change). Overall cost of service
projections for the prospective CCA program were noted as consistent with ranges observed for other
CCA organizations. During its review, PEA observed that certain, relatively recent changes related to
California's legislative and regulatory landscape may require further consideration as the Partners
continue evaluating CCA as an alternative to traditional electric services provided by SDG&E. These items
include Senate Bill 350's1 long-term Renewables Portfolio Standard {RPS) contracting requirement, and
California Public Utilities Commission {CPUC) Ruling 17-09-020's2 multi-year local resource adequacy {RA)
procurement requirement. While neither item materially alters PEA's impressions regarding CCA program
viability, it is important for the Partners to be aware of resultant impacts to the resource planning
obligations that pertain to CCA organizations, as neither topic was addressed in the Study. Additional
detail related to each of these topics is provided in greater detail below under the "Other Considerations"
section.
While the Partners were provided with four distinct governance options, this Review focuses on the Base
Case scenario, which assumed that all of the Partners would proceed with the formation of a single Joint
Powers Authority {the members of which would be the Partners' respective communities) that would
administer the CCA Program -this CCA governance structure has been successfully deployed in numerous
regions throughout California. Key aspects of PEA's Review were intended to address: 1) the
appropriateness of key assumptions upon which the Study was based; 2) the reasonableness of noted
operating projections relative to the experience of similar CCA organizations; 3) the identification of any
noteworthy inconsistencies between key elements of the Study and observations derived from PEA's
direct experience launching and supporting numerous California CCAs; and 4) descriptions of any recent
developments, including market-related and/or policy-related changes, that could materially alter
expected operating results relative to projections reflected in the Study.
Assessment of Key Considerations
Rates
In forecasting generation and delivery rates charged by SDG&E, the Study calculated the delivery
component using SDG&E's General Rate Case filing for 2019-2021 as a starting point, with an annual
escalation rate of 2% that was generally based on inflationary expectations. The forecast for SDG&E's
generation rate was based on an assumed resource mix that was comprised of market purchases and
long-term renewable energy contracts. While the cost of market purchases is expected to increase over
time, the Study suggests that costs associated with long-term renewable contracts are expected to
decrease, resulting in a net 1% annual growth rate {in SDG&E's anticipated generation rates) starting in
2020. Overall, both projected delivery and generation rates seem reasonable in consideration of the base
year forecast and related escalation rates during the 10-year study period.
1 SB 350 399.13.8{b): A retail seller may enter into a combination of long-and short-term contracts for electricity
and associated renewable energy credits. Beginning January 1, 2021, at least 65 percent of the procurement a retail
seller counts toward the renewables portfolio standard requirement of each compliance period shall be from its
contracts of 10 years or more in duration or in its ownership or ownership agreements for eligible renewable energy
resources.
2 CPUC R.17-09-020 states that as of the 2020 compliance year, local requirements are set three years ahead and
updated each year. Local requirements are further broken down into sub-local areas.
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Nov. 12, 2019 Item #13 Page 8 of 13
Financing Costs
The Study envisioned pre-launch financing costs of $2 million in 2020 (consisting primarily of start-up
costs), and $14 million in 2021 for working capital. Based upon PEA's observations related to the
experiences of currently operational CCAs, projected financing costs reflected in the Study seem
reasonable and in alignment with our expectations. Further, the assumption to pay off debt within three
years of service commencement are also in line with the experiences of other CCAs. As CCAs have become
more prevalent and successful operational track records continue to build (note that two CCAs now have
investment grade credit ratings), obtaining necessary funding via bank loans or other sources should not
be an issue. In fact, PEA has observed that one or more financial institutions has now created a clean
energy division that caters to this growing market segment.
Power Supply Cost and Operating Expense Assumptions
PEA reviewed the Study's price forecasts for the following energy products, each of which was included
in projected power supply costs, the largest component of a CCA program's operating budget:
• Power purchased within the California Independent System Operator (CAISO) market;
• Renewable energy purchased under long-term power supply contracts;
• Renewable energy/renewable energy credits purchased under short-term power supply
contracts;
• Greenhouse gas (GHG) free energy supply; and
• Resource adequacy capacity
On an overall basis, projected power supply costs were reasonable and tended to be conservative relative
to similar projections prepared by PEA (see Table 1 below). The Study's assumptions related to market
prices, long-term renewable energy prices, and short-term renewable energy prices were generally
higher compared to similar forecasts prepared by PEA. GHG-free and RA prices were generally lower than
those projected by PEA. After netting the offsetting impacts of these differences, there is a non-
substantive impact to overall power cost estimates.
When verifying the appropriateness of such costs, PEA benchmarked the Study's "Power Supply Costs as
a Percentage of Revenues" against similar ratios for PEA's CCA clientele operating within Southern
California. The comparative results indicated that over the 10-year period spanning the 2021-2030
calendar years, power supply costs reflected in the Study represented 86% of projected revenues, a figure
that falls well within the range of 83% -93% which was observed for other CCA programs.
Similarly, PEA reviewed the following additional (non-power supply) operational cost components, or
"other operating expenses":
• Fees related to billing and data management services;
• SDG&E fees;
• Technical Consulting and Legal fees;
• Staffing costs; and
• General and Administrative expenses
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Nov. 12, 2019 Item #13 Page 9 of 13
Similar to PEA's assessment of projected power supply costs, anticipated other operating expenses were
also found to be reasonable (see Table 1 below). After performing a similar benchmarking exercise for
"Other Operating Expenses as a Percentage of Revenues" (net of energy costs and debt service payments),
PEA determined that these projected cost estimates were also within reasonable ranges. In particular,
the Study indicated an estimated average ratio of 5% (representing other operating expenses, divided by
revenues), which is also in line with PEA's expectations for this component of a CCA program's operating
budget.
Table 1: Summary of Power Supply Cost Forecasts and Ratios
2021-2030 Period Averages EESStudy PEA Notes
All-in Power Supply Cost ($/MWh) $72.61 $70.15 PEA forecast based on most recent forward cuNes
Power Supply Cost/Revenue 86% 83%-93% PEA forecasted range based on similar CCAs
Operating Expense/Revenue 5% 5% PEA forecast based on similar CCAs
Other Considerations: Potential Impacts to Resource Planning and Procurement Activities
During PEA's review of the Study, there were several additional items that, while not critically important
in determining program feasibility, will need to be addressed as the Partners continue evaluating CCA
formation. There are also various ongoing efforts related to the disposition of utility power resources,
including renewable energy and carbon-free supply. Such processes may result in allocations of such
resources to CCAs, which could beneficially impact resource planning and procurement efforts. These
items are further described below.
SB 350 Long-term RPS Requirement
SB 350 requires all load serving entities to have at least 65% of their Renewables Portfolio Standard
("RPS") procurement mandate secured via contracts of ten years or longer during each compliance period
starting on January 1, 2021. The Study does not mention this requirement, but compliance with this
element of SB 350 should be included in portfolio planning.
According to the Study, the Base Case assumes an average long-term renewable energy price of
$42/MWh, and an average short-term renewable energy price of $62/MWh. The Study assumes the
exclusive procurement of short-term renewable energy for the first three years of program operation with
the layering of increasing proportions of long-term renewable energy over time, growing from 10% in year
4, to 20% in year 5, and 25% in years 6 through 20. Relative to assumptions reflected in the Study, the
phasing of long-term renewable energy purchases will need to occur more quickly and significantly under
the requirements of SB 350, but current pricing trends within renewable energy markets suggest that
longer-term purchases can be more cost effective (when compared to short-term purchases), reducing
overall energy supply costs for the Partners if current market conditions continue to persist. Regarding
long-term renewable energy contracting, there is some risk related to the ability of a CCA to secure such
contracts in time to meet pertinent compliance deadlines. However, the multi-year compliance periods
reflected in SB 350 (i.e., Compliance Period 4, which begins January 1, 2021 and continues through
December 31, 2024; Compliance Period 5, which begins January 1, 2025 and continues through December
31, 2027; and Compliance Period 6, which beings January 1, 2028 and continues through December 31,
2030) are intended to promote some flexibility in achieving these long-term contracting obligations and
should ease challenges of the CCA Program in meeting this compliance obligation during initial operations.
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Nov. 12, 2019 Item #13 Page 10 of 13
Further, any concerns related to creditworthiness of the CCA (during early-stage operations) when
pursuing long-term renewable energy contracts can be effectively addressed through the implementation
of various contracting/structural strategies, including lock-box structures, credit assurances, and
demonstration of agreed upon debt-to-income ratios by the CCA program, amongst others.
R.17-09-020 Multi-year Local RA Requirement
CPUC Ruling 17-09-020 is a relatively recent requirement, which obligates the advance procurement of
local RA in three-year compliance cycles. PEA understands that this requirement was not addressed in
the Study, so the Partners should be aware of this obligation. Based on current conditions within
California's RA market, securing requisite supply in multi-year cycles has become increasingly challenging
and typically requires considerable coordination within the procurement function. As a mitigating factor,
there currently is a compliance waiver option for local RA (for non-compliant LSEs that can demonstrate
commercially reasonable attempts to procure, even though such efforts were unsuccessful). An effort is
underway, spearheaded by the California Community Choice Association, to expand the waiver program
for system and flexible RA as well. Finally, because the local RA requirement is effective on January 1st of
the year in which a new CCA commences service, the Partners should consider an earlier 2021 launch date
if economically feasible.
Greenhouse Gas (GHG) Free Allocation Work in Progress
On October 11, 2018 the CPUC issued Decision (D.)18-10-019 modifying the Power Charge Indifference
Adjustment {PCIA) Methodology and opening a second phase of this proceeding to enable parties to
further develop proposals for portfolio optimization and cost reduction for future consideration by the
Commission. On February 1, 2019, the Commission issued the Phase 2 Scoping Memo R.17-06-26, which
directed the parties to convene three working groups to further develop PCIA-related proposals for
consideration by the Commission. One of the working groups, Working Group 3 (WG 3) is focused on
portfolio optimization and is tasked with answering the question of 11what are the structures, processes,
and rules governing portfolio optimization that the Commission should consider in addressing excess
resources in utility portfolios?"
One of the excess resources unde_r consideration focuses on a proposal to allocate the investor-owned
utilities' {IOU) GHG-free portfolios, which consists of large hydro and nuclear generating facilities. The
draft proposal would allocate on a voluntary basis to eligible load serving entities (LSEs) their
proportionate share of GHG-free resources based on their respective load (meaning, energy required to
serve customers) relative to total load within the incumbent IOU's service territory. The impacts to
participating LSEs, including the CCA Program would be the reduction of GHG-free energy costs due to the
allocation, and potential price reductions (due to lower demand) for any additional market purchases
(e.g., some LSEs may have already procured GHG-free energy and want to monetize their allocations,
thereby flooding the market with supply).
Resource Adequacy Allocation Work in Progress
Also a part of WG 3's PCIA portfolio optimization efforts, the allocation of local, system, and flex RA is
being considered. Allocation will be based on an LSE's forecasted monthly, peak-load share as a
percentage of peak load reflected within the incumbent IOU's service territory at large. The draft proposal
contemplates a mandatory allocation for local RA, and a voluntary allocation for system and flex RA. This
would give new CCAs a head start on procurement and access to an RA market within which scarcity of
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Nov. 12, 2019 Item #13 Page 11 of 13
supply is becoming increasingly common (potential risk mitigating options including a waiver are listed
above).
Renewable Energy Allocation Work in Progress
The other resource category being considered for allocation within WG 3 is the renewable energy
associated with RPS contracts of the IOUs. As discussed, the RPS allocation share would be based on an
LSE's annual load share as a percentage of the relevant IOU service area. The draft proposal would allow
LSEs to decide whether they wish to accept all or a portion of their respective allocation. The potential
benefit to newly launching LSEs like the CCA Program would be the opportunity to be allocated some RPS-
eligible long-term energy from the beginning, and especially important if the CCA launch date is closer to
the end of a compliance period. As stated above, the CCA Program's expected launch date in early 2021
should provide ample time to meet applicable compliance obligations focused on renewable energy
procurement.
Conclusion
The Study provided a comprehensive analysis of the items that should be considered in assessing the
feasibility of a newly forming CCA. The energy supply costs and operating expenses used in developing
the proforma were reasonable, as were the projected SDG&E generation and distribution rates used to
determine feasibility.
Two key items to consider for further assessment and/or inclusion are compliance with SB 350's long-
term RPS compliance requirements, and CPUC R.17-09-020's multi-year local RA requirements. The
inclusion of the former should help reduce energy procurement costs due to the inclusion of lower-priced
long-term contracts, while the inclusion of the latter would likely increase energy procurement costs from
the expected increase in market prices The overall impact of the two items may marginally alter
anticipated power supply costs, but such changes are not expected to undermine the Study's findings with
regard to program feasibility.
Some other items to consider are the various efforts that are under way .from the PCIA Phase 2
proceedings with respect to the allocation of GHG-free energy, local, system and flex RA, and RPS
attributes. The allocation of all three energy products would greatly assist all newly forming CCAs to meet
their GHG-free, RPS, and RA compliance requirements. The allocation of GHG-free energy would also
reduce energy supply costs both through the structure of the allocation, and the potential decrease in
pricing due to reduced demand from LSEs.
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Nov. 12, 2019 Item #13 Page 12 of 13
INITIAL BUDGET
Staffing/Consultants
Legal Services
Professional Services
CCA Bond
CalCCA Membership & Dues
Graphic Design Services/Marketing
TOTAL PROJECTED BUDGET
Clean Energy Alliance
DRAFT FY 2019/2020 Initial Budget
FY 19/20 NOTES
$ 50,000.00 FY 19/20 Partial Year, Part Time CEO and Administrative Support
130,000.00 General Counsel & Special Counsel
115,000.00 Website Development; Technical Support
147,000.00 Required to be pa id by March 2020
1,500.00 Affliliate Membership 19/20
$6,500 Logo/Mailers
$450,000.00
Costs could be funded through traditional bank financing and/or deferred
fees/partner support
Attachment B
Nov. 12, 2019 Item #13 Page 13 of 13