California’s community choice aggregators are experiencing what Moody’s Investors Service called a “trifecta of power procurement challenges” that has bankrupted one.
Locally run CCAs are public agencies that sell power to customers within an existing investor-owned utility's territory. The IOUs deliver the power through their existing lines.
The first California CCA agency was created in 2010. They are a method to offer communities alternative methods of purchasing power to the private utilities and also to encourage the use of greener methods of producing power, said Gayle Podurgiel, a Moody’s Investors Service analyst.
Western Community Energy declared Chapter 9 bankruptcy June 11, simultaneously filing a notice of deregistration with the California Public Utilities Commission. WCE’s customers in southern California's Riverside County were transferred back to investor-owned utility Southern California Edison for their electric power provision over a two-week transition period.
“The decision to deregister was taken in consultation with the PUC and SCE as it became apparent that WCE would not have sufficient financial resources to continue to purchase power for its customers going into July,” according to a statement released by Western at the time of the filing. “In particular, WCE was impacted by the decision of energy generators to terminate contracts to provide electricity going into the summer months.”
Lower hydroelectric generation, a greater reliance on intermittent resources and the growing likelihood of extreme weather events due to climate change were listed as the trio of procurement challenges faced by CCAs, Moody’s Investors Service said in an Oct. 6 report.
Moody’s has not downgraded any of the four CCAs it rates. It rates CleanPowerSan Francisco A2 with a stable outlook, and assigns Baa2 ratings and stable outlooks to Peninsula Clean Energy, Silicon Valley Clean Energy and Marin Clean Energy. The Moody's rating on Marin is unsolicited.
The first CCAs were developed by local governments in northern California to reduce their dependence on investor-owned utility PG&E, which has tarnished its reputation through missteps like a
More recently, poor maintenance of PG&E transmission lines sparked several deadly wildfires, triggering liabilities that sent it back
Another motivation driving CCA creation is renewable energy; local leaders wanted a way to move faster.
“They were formed to achieve faster renewable penetration for these particular areas than the incumbent investor-owned utilities,” Podurgiel said.
Customers pay the community choice aggregator for the electricity itself, but still pay the investor-owned utility for delivering that power through its lines to their business or residence.
WCE’s decision to file for bankruptcy protection raises questions again as to how special revenues could be treated in bankruptcy, though Moody’s analysts said in an interview that Western’s bankruptcy filing isn’t likely to have the same broad market implications that have occurred in the
The deregistration process is the best solution that ensures little to no impact to WCE customers, which is the top priority of WCE and Southern California Edison, said Todd Rigby, WCE’s chairman, in a statement at the time of filing.
WCE launched in April 2020, the most tumultuous month of the pandemic in terms of shutdowns and lockdowns. The state also experienced what WCE said were “unprecedented heat events that caused spikes in energy costs” in combination with costs associated with the public health crisis.
WCE was forced to purchase energy at market prices that fluctuated daily and were high due to anticipated demand as temperatures were expected to soar over 100 degrees in June when Western’s board made the decision to file for bankruptcy relief, according to the statement.
California CCAs have a relatively short history as wholesale power procurers and their heavy reliance on third-party power purchases to meet customer demand heightens the agencies’ challenges, but some CCAs are more protected from the inherent challenges than others, according to Moody’s analysts.
“We do not rate Western and would not have rated it, because it was just established,” said Lori Trevino, a Moody’s analyst. “We need years of audited statements before we will rate a CCA.
“I think that applies to all of the rating agencies, that they wouldn’t rate an early stage CCA,” Trevino said.
CCAs that have been around longer are better positioned to mitigate credit risk from wholesale power market exposure, according to Moody’s.
“CCAs forming now or forming in recent months are not as well-positioned as CCAs that were operating in the 2016-17 time period,” Podurgiel said. “That is because the change in prices in the market. Previously CCAs were able to charge rates at the same or lower than the investor-owned electric companies and capture margin, but because power prices have declined, the margins that CCAs are able to capture is smaller.”
For instance, SMUD has a reserve to purchase power when its own hydroelectric production falls short, Podurgiel said.
Full municipal electric agencies like the Los Angeles Department of Water and Power and Sacramento Municipal Utility District are rated higher than the CCAs. LADWP holds an Aa2 rating for its electric side and SMUD has an Aa3 rating from Moody’s.
“I think the newly formed CCAs that don’t have a lot of years of operating history or experience with California’s markets or a liquidity position to fall back on are more at risk,” Podurgiel said. “The DWPs and SMUDs have lots of experience, so they understand California electric markets well.
“The California energy market is getting tighter, prices have risen and scarcity has increased,” she said.
The nascent Western Community Energy went bankrupt without any bond liabilities. But more established CCAs have begun issuing debt.
In October, the California Community Choice Financing Authority sold $1.2 billion in clean energy project revenue bonds in a deal split between $1.08 billion of term rate and $150,000 of SIFMA index rate bonds.
“That is the first prepaid electric deal,” Podurgiel said.
The structure is akin to the familiar natural gas prepaid energy purchase bond deals, she said.
The ratings for the CCCFA deal are not based on the CCAs that will be receiving the energy.
As with natural gas prepays, the CCCFA deal's rating is dependent on the bank counterparty, Podurgiel said.
In the case, of the CCCFA deal, the A1 rating was based on Morgan Stanley's rating, according to the Moody's. The CCCFA deal rating is tied to the guarantor, not the counterparty.
The CCCFA deal — green bonds certified by Kestrel Verifiers —procures energy for the East Bay Community Energy Authority and the Silicon Valley Energy Authority, according to the bond documents.
Fitch Ratings highlighted the risk of increased costs for all public power utilities because of drought and its impact on hydropower and wildfires in an Oct. 26 report. It said it does not expect credit quality to be affected, but that utilities with already high operating cost burdens may see negative credit pressures.
Hydroelectric generation is expected to be 49% lower this year than last year, according to the U.S. Energy Administration, forcing utilities to purchase natural gas to meet power demands, according to Fitch.
"Gas prices recently reached a seven-year high. Northern California utilities rely heavily on hydroelectric generation sources and are the most affected by higher purchased power costs," Fitch analysts wrote.
