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Retail Supplier: Competitive Market Yields 30% Gross Margin Vs. Utility, But Municipal Aggregators Only Passing 1-2% Savings On To Customers

Municipal Aggregator Cites "Concern" With Expansion of Direct Access, Worried Low-Income Customer Rates Would Rise

May 22, 2017

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Copyright 2010-17 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

Electricity community choice aggregations (CCA) in California are only passing 1-2% in savings on to their customers even as the competitive wholesale market produces gross margin of 30% versus the utility rate, Ron Perry, CEO of Commercial Energy, told a California en banc hearing on retail electric choice.

Perry said that due to the "brutal" competition in the direct access (retail) market, electric service providers share a far greater amount of savings with their customers than CCAs, with ESPs typically sharing about half of the margin with customers.

CCAs, "are succeeding today because they have one competitor, a regulated utility that is priced well-above the current market. Because the market yields a 30% gross margin, to the CCA and to the ESP, they [the CCA] can guarantee savings of 1-2% of the posted price, and keep the difference of 10-20% to fund their coffers," Perry said

In contrast, due to the "brutal" competition for direct access customers, in order to earn an electricity customer, Perry said that Commercial Energy typically splits the gross profit from the wholesale market with the client, with direct access businesses seeing all-in savings, including the impact of the power charge indifference adjustment (PCIA), of 10%.

"Compared to the 1% savings of CCAs, the [direct access] competitive market puts much more of the savings in the client's pocketbook," Perry said.

"Because ESPs function in a more competitive market, we cannot keep that kind of gross margin, we have to return it to our customers," Perry said

However, Geof Syphers, Chief Executive Officer of CCA Sonoma Clean Energy, said that the municipalities within CCAs have elected to invest in policies concerning greenhouse gases, renewables, local investment, and low-income programs, and those do cost money.

"We felt that that was an investment that was in the social benefit of the state of California," Syphers said

"So the hard part is, if we invite in a competitor that doesn't follow the public policies that we adopted, or doesn't have to -- it's not a criticism, it's just an acknowledgment -- that is a very unequal type of competition. And so my fear, is that leads to costs going up for low-income folks and small business, and that's a hard problem to solve because having another exit fee that flows to CCAs is not something I would really recommend at this point, we have a complicated enough system as it is," Syphers said

"My concern is about the expansion of direct access, because of the impact on ratepayers, in a sense taking away larger, more lucrative customers," Syphers said

"As we bring competition while protecting the public against direct access cherry picking of large commercial customers, we do ensure that all residential, and particularly low-income residential, have access to the benefits of the competitive market, and that's an important distinction in community choice," Syphers said

"We actually don't mind that a handful of electric suppliers have grumbled about us, it just means that their margins are getting smaller and the ratepayers are benefiting," Syphers said

Perry encouraged the PUC to increase pricing transparency for the utilities as well as CCAs.

"If customers can't see the future price, they can't make an informed choice," Perry said

"We recommend that the utilities and the CCAs show their average forward price, and the embedded volatility of that price, over a five-year time horizon. This allows customers to make five-year business decisions rather than the critiqued one-to-two year that direct access has historically been. It's because we can only see one to two years. The same process should be used to forecast indifference costs," as well, Perry said

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