Community Choice Aggregation Declares Bankruptcy, Citing Imminent Insolvency

May 27, 2021

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Copyright 2010-21 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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Western Community Energy (WCE or the Authority), a community choice aggregation in California, has filed a Chapter 9 bankruptcy petition in federal court, stating that, without restructuring, WCE will be insolvent no later than May 30, 2021, and will not be able to pay its obligations

Western Community Energy (WCE) is a joint powers authority, consisting of the Cities of Eastvale, Hemet, Jurupa Valley, Norco, Perris, and Wildomar

WCE said in a court filing that, without the protections afforded by Chapter 9 of the Bankruptcy Code, the Authority will be unable to purchase power

Estimated liabilities were listed as $50,000,001 - $100 million

Estimated assets were listed as $10,000,001 - $50 million

"WCE has an overall Fiscal Year 2021 budget of $125 million. WCE operates in a format where all revenues are deposited into a lockbox and WCE can access those funds on the 20th of each month to pay creditors. As of May 19, 2021, WCE had $34 thousand in its operating bank account and $5.4 million in its lockbox account, the bulk of which was committed to payments to energy providers. WCE is currently in default of more than $12 million in payment obligations to Southern California Edison (SCE) and another $5 million in payment obligations to other vendors. This does not include the sums due to its lender for advances of $4 million and letters of credit in excess of $6 million. WCE has over $10 million in anticipated expenses by the end of May and is unable to cover its anticipated costs. WCE’s projected cash flows show deficits that reach individual monthly totals of up to $40 million over the next two years, and even then, only after raising customer rates by 15% to 30% in each of those years," a WCE Staff report to the Authority's board said

In a press release, WCE said that, "Several external contributing factors have impacted WCE’s financial situation since the program was implemented at the beginning of the COVID-19 Pandemic in April 2020."

"In August 2020, California experienced an unprecedented heat event, which resulted in substantially higher power needs and a spike in the cost of energy. Although WCE had secured 90% of its electricity needs for the summer of 2020, the heat storm exhausted the projected supplies prematurely. An additional $12 million in energy costs were incurred throughout the 2020 summer season due to the unanticipated warm weather. Additionally, a tightening of the requirements of the State of California for Resource Adequacy (RA) created a shortage in the market, significantly increasing the cost of regulatory compliance," WCE said

"Additionally, the Governor of California issued an order during the COVID-19 Pandemic, implemented by the California Public Utilities Commission, mandating that no customers could be disconnected due to non-payment of their utility bills. Over the last year, delinquencies average ten times higher than pre-Pandemic industry standards and have cost WCE millions of dollars in added cost burden," WCE said

"The ongoing impacts of COVID-19 severely limited the organization’s options moving forward and forced [the Chapter 9 filing]," said Todd Rigby, Chairperson of WCE. "Chapter 9 protection gives us the opportunity to restructure the organization and reorganize our finances. We look forward to working with our legislators, the Governor, and other parties to identify a pathway forward for WCE."

"In starting [sic] in December 2020 and continuing through January 2021, WCE began the process of re-evaluating its financial proforma in the hope of seeking additional financing from its lender to cover some of the losses in 2020 and allow it to move forward. However, in February 2021, the lender indicated that it would no longer allow WCE to draw under its existing line of credit until rate adjustments were made, putting further pressure on WCE’s cash flow. In February 2021, a freeze hit Texas that had substantial repercussions on the electrical grid and energy prices and even had effects on the California energy market prices during the weather events. This event has led to growing concern in the California market about summer energy prices in the event of a destabilizing heat event, particularly given that CAISO raised the real time market cap on energy prices from $1,000 to $2,000. This increase substantially increases risk and exposure to price spikes in a heat event," a WCE Staff report to the board said

"WCE further determined that it needed to hire its own professional staff so WCE could stop relying almost exclusively on recommendations from consultants. The reliance on consultants appeared to be a significant problem, particularly considering the decision not to purchase sufficient energy in advance for the summer 2021, which became apparent only after WCE staff conducted additional review of available power contracts," the Staff report said

"As the lack of adequate energy supplies for the summer of 2021 became clear, WCE initiated plans to cover the shortage. At the time that WCE was moving to make these purchases in April 2021, the market for energy for the summer of 2021 was becoming increasing volatile (in part due to the concerns of a Texas-like crisis and spike in energy prices) and the revised proforma that was completed in March now had pricing expectations that were 25% below escalating market prices. Instead of the $90 per MWh called for in the proforma, the costs had risen to $125. This increased the cash flow requirements of WCE from an infusion of $25 million to over $40 million to make it through another year of operations. Given the volatility in summer prices, additional cash flow in excess of $40 million could easily be required to respond to heat events," the Staff report said

"The final hit to WCE came in May 2021 with the release of the final Treasury Department guidelines on the use of COVID-19 American Rescue Plan funds. While the actual legislation enacted by Congress seemed to indicate that ARPA funds could be used to assist WCE, any final decision on their actual use was dependent on the language in these guidelines. Preliminary decisions with WCE members indicated that several of our members were amenable to using a portion of their ARPA allocation. Unfortunately, these guidelines tightened the requirements for COVID-19 relief funding, significantly limiting the portion of the contributions / loans from member entities that could be financed with these funds. At the same time, WCE’s lender indicated that it would not provide any bridge funding to get WCE through the financial crisis unless WCE member agencies agreed to provide $25 million in financing and a guarantee of repayment of the bridge funding. At a time when many local governments are still recovering from the COVID-19 pandemic, obtaining this funding in time to keep WCE financially viable simply became untenable. As of the time of this Board meeting, no WCE member agency has formally committed to provide funds to WCE, either through COVID-19 relief or other sources," the Staff report said

"Customers of WCE will not experience any service disruptions as a result of today’s actions and WCE will continue to keep customers updated as more information becomes available," WCE said

Case 6:21-bk-12821-SY

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