TODAY’S STUDY: Is The Rise Of Customer Choice A Crisis?
California Customer Choice; An Evsaluation of Regulatory Framework Options for an Evolving Electricity Market Michael Colvin, Diane I. Fellman, and Raisa Ledesma Rodriguez, with Alison LaBonte and Rohimah Moly, May 1, 2018 (California Public Utilities Commission)
External changes driven by an uptake of distributed energy resources, the growth of non-utility load serving entities, and policy measures taken to mitigate climate change have provided customers more options to choose how and from whom they obtain electric services. While these changes create greater choices for customers, they also pose regulatory challenges.
Following a May 19, 2017 en banc hearing with the California Energy Commission on customer choice, the CPUC formed the California Customer Choice Project. Its mission is to aid the CPUC in making strategic, timely and informed decisions regarding California’s current electricity market transformation. Specifically, the California Customer Choice Project has been charged with analyzing a fundamental question:
How does the increased customer choice occurring in the electric sector impact California’s ability to achieve its policy objectives of affordability, decarbonization, and reliability?
Recognizing that these policy objectives are interwoven with one another and that there is no simple answer or obvious path, the Project approached the question by:
1. Reviewing California’s history with customer choice;
2. Identifying California’s energy policy goals through Core Principles and Key Questions;
3. Defining customer choice;
4. Evaluating representative national and global regulatory models that enable high penetration of customer choice: New York, Illinois, Texas and Great Britain; and
5. Leveraging lessons learned from California’s history and other markets to make observations and findings on what is necessary to achieve the state’s energy policy goals.
This draft paper sets the stage for a conversation among California energy policy decision makers and stakeholders about the need to develop a plan to address the current shift in the evolving electricity market and the next steps in managing this transition. The paper provides a holistic and strategically agnostic view of the interdependent attributes related to customer choice.
Part I is an Introduction containing the problem statement and an overview of the key issues. Part II discusses the current status of California. Part III presents the Core Principles of affordability, decarbonization and reliability along with the Key Questions for considering customer choice. This section defines what is choice and what it is not. Part IV evaluates New York, Illinois, Texas and Great Britain’s regulatory frameworks and identifies findings for further consideration. Part V draws from the analysis of California’s history and other markets to make observations and identify considerations for California decision makers. The appendices following the paper provide more detailed background information and analysis.
Notably, Appendix I provides a detailed history of competition and customer choice in California. The state was the first electricity market in the nation to consider full retail choice as well as the first to abandon the effort. California’s flawed plan offered lessons for other jurisdictions contemplating retail competition and market-based approaches to deliver energy services. Today, this history and these other markets provide insights based on two decades of experience to inform the assessment of California’s current electricity market and to develop a pathway forward. The paper presents findings from the different electricity markets to draw upon when deliberating policy and regulatory changes…
Part V: Observations & Future Considerations
California needs a clear long-term vision for its regulatory framework to address the state’s system requirements and policy goals beyond short-term fixes to stabilize immediate issues. The purpose of the paper is to serve as a catalyst to acknowledge vulnerabilities and to address them thoughtfully and strategically. New rules will need to be formulated by the CPUC under current law and--in certain instances—legislative guidance may be necessary. This paper serves as a call to action for the Legislature, our agency partners, the CAISO, stakeholders and communities to join in the conversation and develop a plan to protect against another crisis.
Affordability: Customers Need Information, Protection and Guaranteed Service Affordability: Customers Need Information, Protection and Guaranteed Service
Customer engagement and price transparency are critical to keep rates low in competitive markets. In New York and Great Britain, low customer engagement in switching retail suppliers has led to significant market inefficiencies and higher costs for inactive consumers.
Educational campaigns for consumers and regularly updated data on prices are needed to support customer engagement and market transparency. California’s IOUs have a statewide energy education platform focused on customer engagement with demand-side management programs and bill reduction opportunities, and it has other resources to help customers understand the cost of rooftop solar energy. The state provides cost calculators on websites for rooftop solar, including GoSolarCalifornia.com.
New York, Texas, and Great Britain, like California, rely on a state-focused independent system operator. However, Illinois benefits from its participation in MISO, a multi-state power market. Illinois attributes the broader grid and being part of MISO to its ability to balance its goals to increase renewable penetration and keep rates affordable.
It is unclear if California could have similar wholesale price benefits like Illinois because it utilizes a state system operator rather than a regional transmission operator. As part of implementing SB 350, California is considering how its electric grid operations could be expanded on a regional basis across the western states. The benefits and implications of regionalization on California bill affordability are still under consideration.
Texas does not have a uniform subsidy for low-income customers. The other markets examined in this paper administer low-income programs either through retail suppliers (Great Britain), utility programs (New York), or discounted distribution rates (Illinois).
It is critical that low-income programs continue with expanded customer choice offerings. California offers up to 35% discount on rates to residential customers through the CARE program, and other discounts such as the FERA program. California also offers unique programs for low-income customers such as the Energy Savings Assistance Program. Recently, California has included more efforts specifically toward “disadvantaged communities”, to ensure that the benefits of transportation electrification and distributed energy resources also reach those communities.
Decarbonization: Statewide Mandates and Programs Drive Carbon Emissions Reductions
Climate and environmental policies are significant elements of the energy sector transformation across all markets, except Texas. There is some form of renewable portfolio standard in New York and Illinois (and formerly in Great Britain) to support renewable generation, as well as net energy metering or feedin-tariffs to incentivize solar PV. These mechanisms were tailored to meet the needs of current market designs.
Re-examining current programs to align with changing market structures is critical. There may be an expectation that mandates and incentives advancing technologies in the electric sector will continue indefinitely. With California’s success to date, scrutiny needs to occur regarding whether to continue the programs once cost parity is achieved with conventional forms of service. Greater choice options based on statewide programs create unnecessary costs and, in some cases, stifle innovation by rewarding technologies that have become commercially viable and blocking new market entrants.
Decarbonization efforts have been less targeted to disadvantaged communities in California, which have fewer CCAs, Direct Access options and distributed energy resources. Whether these benefits are provided by utilities or other entities, California does not intend to allow its more vulnerable populations to be left behind.
Reliability: Operating the Grid Safely while Ensuring Reliable and Resilient Service Requires Oversight
Approaches to providing reliable service vary by state. New York, Texas and Great Britain rely on wholesale energy markets and bilateral contracts to meet demand. Independent system operators meet reliability requirements set by the state and regional transmission organizations. New York and Great Britain also run capacity markets, and Texas adds incentives on energy prices to meet target reserve margins. In each of these markets, retail service providers compete for individual or aggregated customers with regulatory oversight.
Statewide oversight can guarantee that reliability and safety requirements are rigorously met. Regardless of who serves as the primary LSE, the lights must stay on while adhering to high safety standards. As CCAs or other competitive providers become a larger portion of the electricity market, the quandary becomes who is responsible to ensure that these requirements are met for all of California’s citizens.
If a central buyer has the responsibility to maintain reserves for reliability and the liability for the safe delivery of electric service, there must be adequate compensation. This is not to suggest that the utilities are to be given unfettered ability to invest and recover costs.
Rather, this precept is based on the state’s need to balance citizen interest in selecting alternate sources of electric service with its responsibility make sure the lights are kept on. If each LSE holds a fragmented responsibility, then sufficient enforcement tools must be in place to ensure everyone complies with the standards.
Illinois has centralized, state procurement and planning in a multi-state grid that facilitates meeting energy demand and reliability. California has historically had centralized state procurement planning for IOUs, but not on a statewide basis. As LSEs become more diverse, a centralized procurement process may help ensure that reliability requirements are met since all LSEs have the same legal obligations to comply with many of California’s energy policy mandates, including resource adequacy and the RPS.
Question 1: How do these choice models ensure consumer protections?
All markets ensure consumer protections through laws and/or regulations that apply to all LSEs marketing to customers.
Standardized consumer protection materials for market participants interacting with energy customers is necessary for consumers to be well-informed about the options they have available and for market participants to compete on a level playing field. The CPUC currently plays a role in adjudicating customer complaints when IOUs and customers cannot resolve billing disputes; however we do not currently have similar authority over other LSEs.
Question 2: How do these choice models support development and incorporation of innovations driven by customer demand?
All markets rely on customer demand to drive innovation. In New York and Great Britain, utilities and DER market participants, or utilities alone, support innovation through ratepayer funded stipends and competitions. In Texas and Illinois, utilities are not viewed as a source for innovation; instead retail service providers are expected to develop and implement new technologies and services.
California prides itself on its advanced technologies. Over the past two decades, the Commission has established programs to encourage the growth of utility scale renewables, rooftop solar, storage and distributed generation. Going forward, California may consider whether market forces should take the place of mandates and how innovation programs should be funded.
Question 3: Do these choice models ensure universal electric service?
All markets have a designated Provider of Last Resort or a process to assign a supplier of last resort. Utilities serve as providers of last resort in New York and Illinois. In Texas and Great Britain, there is a process to assign customers to a retail service provider or multiple suppliers.
Defining and designating Provider of Last Resort responsibilities is critical if a mass transition of customers becomes necessary. Electricity is a fundamental service and everyone in California should have the right to receive it. In California, the responsibility for the obligation to serve falls on the incumbent utility. In other jurisdictions that have expanded choice, the Provider of Last Resort is an essential function and providers are fully compensated.
The uncertainties of today’s market will need to be ameliorated by establishing an approach that keeps ratepayers on IOU default service indifferent to load migration while avoiding unfairly imposed costs. What if the CCAs failed to meet their requirements and the IOUs had to quickly fill the gap as the provider of last resort? Are there adequate customers remaining on IOU retail service for fair and equitable allocation of costs? Other jurisdictions have implemented different plans and structures to address this issue, which California decision-makers may wish to explore as more LSEs enter the market and customers leave their incumbent utility.
Question 4: How do these choice models leverage investment necessary to finance the evolution of the electric grid?
All markets rely on a mix of ratepayer funding and private investment to finance the evolution of the grid. New York, Texas and Great Britain use market-based approaches to incentivize new generation and energy procurement (as these markets do not have centralized procurement). The Illinois model, which buys down investment risk through centralized energy procurement, is significantly different from all the other states studied.
Over time California energy policy will require significant new investment in generation. The success of the California RPS program relied largely on the larger utilities to invest in projects by raising low-cost capital in financial markets, and then recovering costs through sales of electricity. This method of financing capital projects may be in jeopardy as more and more customers leave the IOUs. There is a question whether the necessary capital investment needed to decarbonize the electric sector to meet the state’s 2030 goals and beyond can be financed and, if so, delivered on time if the state transitions away from a few larger buyers to many small buyers.
Question 5: How do these choice models consider the transition of utility obligations?
Every market has a different approach to the transition of utility obligations. In some markets, utilities are system operators and do not participate in retail financial and commercial activities (reserved for retail service providers). In others, they continue to provide bundled service.
It is important to provide certainty by clearly defining roles and responsibilities for IOUs and other market participants. While the traditional vertically-integrated utility model no longer exists in California, the IOUs have made strides in transforming themselves to accommodate greater customer choice. California has opened certain portions of the utility business to competition to lower prices and to benefit ratepayers. Going forward, there are essential services that remain properly with the IOUs. Every option for expansion of choice, in California and in other jurisdictions, relies on statewide, regulated utilities to provide the backbone delivery service.
Illinois and Texas have clearly designated which aspects of the electric bill are generation and transmission and distribution. Re-examining existing cost allocation methodologies for generation and distribution rates may help the state with the transition of utility obligations.
As part of the implementation of AB 1890, the CPUC separated out the major aspects of the utility electric bill, including generation, transmission and distribution, and public purpose programs as major categories. These general categories are still in place today. It may be appropriate to re-examine if billrelated elements are in the correct category to ensure bill integrity and to promote the level of transparency achieved in other markets.
Question 6: Do these choice models have competitively neutral rules among market participants?
In all markets except Texas, some form of community choice aggregation exists, and customers must opt-out from these services. Unlike California, CCAs in New York and Illinois do not compete with utility service because they procure energy through alternative retail energy suppliers.
Since the CCA procurement model in California is different than the other markets, California may need to develop its own rules to ensure competitive neutrality. The CPUC certifies CCAs plans, and there may be a need for additional monitoring to ensure continued compliance with the certification plans. Since California CCAs are different than in other markets examined, best practices may not directly transfer. It may be appropriate to “stress test” the existing rules to promote competitive neutrality under a high penetration CCA scenario to understand the impacts to both participating and non-participating customers.
In New York, Texas and Great Britain’s retail markets, regulators have promulgated a standard set of business practices to apply to retail service providers. New York has also set forth business practices for utilities and DER market participants. In Texas, pro forma tariffs ensure that all market participants can access a large market share. Standard tariffs can help ensure competitive neutral rules to access the grid.
Creating standards and/or guidelines that apply to all market participants selling energy to consumers ensures consistent application of consumer protection rules and business practices. California has established standards and processes for third parties to interconnect to the grid at the transmission and distribution level, as appropriate. There may need to be new standards and guidelines created for the new market participants to ensure a competitively neutral market landscape.
Question 7: Can customers determine their level of participation and are they informed to participate at their desired level?
For the most part, customers in all markets can determine their level of participation.177 Individual customers who enroll in a retail service plan may default into standard rates when the initial contract expires. In CCA regions in New York and Illinois, customers are automatically enrolled in their CCA and the chosen retail plan, but customers may opt out and select their own retail service provider.
Choice policies can cause customers to be unwitting participants. By either creating default enrollment in new programs or designing rate structures that result in cross-subsidization among rate classes, customers who are not realizing the benefits of a particular choice can be subject to its impacts without actually making a choice.
Currently in California, CCA customers can “opt-out” from becoming a customer during the formation. Since the IOUs typically provide the billing services, the role of the CCA as service provider may be cloaked to the ratepayer. The other markets with community choice aggregation have utilized a similar structure. While there are mandatory customer contacts prior to the transfer from the IOU, many customers may not understand the ramifications.
All markets have some sort of price comparison website where customers can look at different retail service options available to them.
A state-administered neutral website, or certification of third-party websites, for customers to compare energy service options builds price transparency and facilitates customer engagement. For California, this information may be based on the Power Content Label178. As described above, there may be additional opportunities to leverage ongoing customer engagement efforts with this type of information.
Question 8: How do these choice models impact and benefit local communities?
Community energy models are emerging trends in New York and Great Britain. New York promotes REV as a source of job creation unlike other market models. Meanwhile, Illinois and Texas focus on price benefits for their customers.
CCAs have argued that having local control will yield lower rates, a greener grid, better service, more technological innovation, greater distributed resources such as BTM and more rapid response to customers’ needs. Metrics need to be established to ensure that the statewide goals are met as well.
Another key element is how the disadvantaged communities will be serviced in the absence of mandated programs with costs allocated across a broad band of customers…