HomeMy WebLinkAboutStaff Report 4.B 12/15/2014 Attachment 8 Sonoma Attachment 8
'lean Power
Local. Renewable.Ours.
50 Old Courthouse Square,Suite 605
Santa Rosa,CA 95404
Response to questions on Sonoma Clean Power
August 27, 2014
On August 4, 2014, David Keller, Andy Ferguson, Andrew Packard and Greg
Reisinger submitted a set of detailed Questions about Sonoma Clean Power to
Mayor Glass of Petaluma. The questions are reprinted here, along with responses
in red from Sonoma Clean Power staff and counsel.
1) Experience and Risk Management:
a. Noting that senior management at SCP has had no previous experience
managing a utility company, does SCP have the in-house structure and
competency to survive in a difficult and competitive utility business
environment over the long term?
Two of SCP's key employees have direct utility experience. Kelly Foley, our
General Counsel, has 15 years of total experience at Pacific Gas and Electric
Company (PG&E) and Sempra Energy (parent company of San Diego Gas &
Electric and Southern California Gas). While at these two California utilities,
she served in the Law Department as a regulatory attorney. Over her 15
years, Ms. Foley worked on nearly all aspects of the utility business,
including procurement, transmission, rate design, and compliance. Her work
included managerial oversight of multi-billion dollar rate cases.
Nathanael Miksis, SCP's Director of Power Services, has deep wholesale
power market experience at the New England Independent System
Operator, PG&E and as a consultant to the Interstate Renewable Energy
Council (IREC). While at IREC, Mr. Miksis recently completed work as an
expert witness testifying in west-wide utility rate cases.
SCP also employs third party consultants on a least cost/best fit basis.•These
consultants have considerable utility or utility related experience.
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Our concerns center on the following:
b. What is SCPs business plan, and more concisely, its specific risk strategy?
How is this strategy demonstrated in SCP's contract portfolio currently, and
can we have independent experts review and comment on it?
SCP recently released the attached draft Resource Plan. The Resource Plan
will be deeply vetted in a variety of forums throughout the remainder of
2014. SCP has also adopted the attached policies, many of which directly or
indirectly address risk management. Finally, the Joint Powers Agreement
(JPA) that governs SCP, as well as California law, makes clear that unless a
participant expressly agrees in writing to such liability, the debts and
obligations of SCP are not the debts and obligations of the cities
participating in SCP or SCP's customers.
SCP staff is available to receive input on any of these items, and any
member of the public can provide input to SCP's Board and/or committees.
A thorough review of risks and liabilities was undertaken in 2013 prior to the
City of Santa Rosa voting to allow its citizens to participate, and SCP staff
encourage Petaluma's attorney to contact the City of Santa Rosa's Attorney
to discuss the results of that work.
c. An inherent risk in utility rate management is balancing what are initially
favorably priced long-term contracts against more expensive short-term
contracts that allow the utility agency to respond to volatile market
conditions. The portfolio must be balanced while SCP guards against
uncompetitive utility rate increases for its ratepayers. While some market
changes are foreseeable, others are not. A few examples of the types of
market changes that SCP might encounter are listed below. What specific
SCP risk strategy takes into account market fluctuations caused by such
things as...?
i. A significant percentage of the customer base switching to renewable
energy generation (like rooftop solar) that leads to decreased
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customers, decreased revenue, and increasing numbers of local
suppliers who may be paid a premium for the energy they supply.
SCP has a robust Net Energy Metering (NEM) program that is
competitive with PG&E's program. The NEM program creates very
little cost shift to non-NEM SCP customers. Estimates of the cost shift
range between $400,000 to $600,000 annually, and is proportional to
the cost shift under PG&E's existing NEM program. Compared to SCP's
annual revenues in excess of $90 million, the NEM impact is minimal,
and is also consistent with current utility practice by PG&E.
Nevertheless, should an unexpectedly large number of SCP customers
begin producing their own power under NEM, SCP reserves the right
to reconsider the NEM program. To avoid stranding customer
investments in NEM systems, this reconsideration would most likely
be forward looking, with grandfathering for existing NEM customers.
To further put this potential risk in perspective, a tripling of the 7,000
existing NEM customers in Sonoma County is unlikely to create a
problem for SCP or its non-NEM customers.
ii. Extensive adoption of energy efficiency measures by SCPs customers
(in response to a possible carbon tax, for example) that leads to a
similar reduction in revenue (comparable to what water agencies face
when water reduction measures are adopted by customers)
SCP robustly supports adoption of energy efficiency (EE) measures. In
fact, SCP encourages SCP customers to avail themselves of EE
programs whether offered by SCP, PG&E or another agency.
Fortunately, based on historic data, load reductions related to EE
programming are predictable within identified bandwidths, allowing
SCP to adequately forecast EE impacts. To address forecasted
revenue impacts related to EE reductions in consumption, or any
other impact to energy demand, SCP's procurement policies leave
sufficiently open procurement positions to provide the needed market
flexibility.
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Moreover, a reduction in SCP's total revenues due to a very successful
EE program would be considered a huge success rather than a threat
to SCP. This is a key difference between the PG&E and SCP business
model. This situation also does not generate much rate risk. Because
over 90% of SCP's costs scale linearly with the volume of power sold,
a reduction in total sales does not produce a significant increase in
unit cost (i.e. $ per kWh).
iii. A reduction in renewable energy costs due to out of area very large
scale solar and wind power generation that could allow PG&E to price
renewable energy at a level below SCP's local and non-local contract
costs.
As discussed in the draft Resource Plan, SCP seeks a balanced
resource portfolio consistent with the goals and objectives stated in
the JPA. Well priced, large scale renewable energy is available to SCP
just as it is or will be available to PG&E. Evidence of this is the recent
agreement between SCP and Recurrent Energy to build 30MW of a
100MW Central Valley solar project. Investor owned utilities were
bidding on the same or similar projects yet SCP secured a power
purchase agreement at a very competitive price.
To balance out this purchase of remote, utility scale renewable power,
SCP just released a standard offer Feed in Tariff (ProFIT), to procure
wholesale renewable energy from small, local projects. SCP's ProFIT
pricing is higher than remote utility scale pricing, but the pricing is
considerably below other similar programs in California. In the short
time since ProFIT was launched, SCP is receiving very good
responses.
Ultimately, however, SCP's Board would need to determine whether
or not SCP should procure local energy to a degree that such
procurement caused SCP's rates to no longer be competitive.
Balancing locality and cost competitiveness is a key focus of the
Resource Plan, and the Resource Plan will be widely publicly vetted
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prior to ultimate adoption by SCP's Board. The Resource Plan will also
be periodically updated, providing for further oversight and input from
the community.
iv. PG&E adoption of grid technology that could allow for local customers
to gain credits by investing in non-local projects through virtual net
metering
Programs such as virtual net metering are also available to SCP
customers, and are much more broadly supported by SCP than by
PG&E. SCP is currently considering virtual net metering and other
community renewable models.
2) Independent Oversight of Operations
a. While SCP has nominal democratic oversight through its Board, we note that
participant entity board members will not likely have the requisite expertise
regarding utility management activities and financial operations. Noting that
SCP has engaged an independent CPA, we ask for clarification about
whether that agency has a background in auditing public utilities?
As the term is defined in California law, SCP is neither a public nor a private
utility. PG&E continues to provide the majority of utility services, including
transmission and distribution of electric energy, metering, billing, and
payment collection. SCP procures energy and offers energy related
programming. SCP is lightly regulated by the California Public Utilities
Commission (CPUC), but the majority of SCP's processes, including rate
setting, are overseen by SCP's Board. Accordingly, SCP's accounting is
nothing at all like utility accounting and certainly does not involve the
complexities inherent in cost of service based, monopoly ratemaking.
SCP is, first and foremost, a public agency, directly accountable to our
constituents/customers. For this reason, SCP's accounting is structured in a
manner similar to other California public agencies. SCP contracts with the
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Sonoma County Auditor-Controller-Treasurer-Tax Collector for treasury and
audit services, and utilizes an accounting firm and a separate auditing firm,
both of which serve a vast number of public agencies, primarily in the North
Bay area.
In addition, SCP has customers who are free to leave and choose PG&E as
their service provider, meaning that they are not "ratepayers" in the
traditional use of the word.
3) Preventing Conflicts of Interest
a. Noting that JPAs like SCP must comply with all public meeting laws and
public record keeping laws (i.e. the Brown Act, etc), we hold that there are
still regulatory and disclosure advantages offered by the PUC model that do
not apply to CCAs. In light of this, what specific measures or policies prevent
ex-parte discussions and decisions from being made by SCP executives, its
Board members, and its committee members outside of the public eye?
As stated earlier, SCP is lightly regulated and therefore must comply with
some CPUC regulations. SCP does not, however, have a specific ex-parte
rule, but the Brown Act is a much stricter standard than the CPUC's ex-parte
rules. Ex-parte rules only apply to a limited number of adjudicatory
circumstances, while the Brown Act applies to all decisions made by SCP's
Board and committees. In fact, a number of CPUC advocates have
suggested that, to improve public accountability, the CPUC enforce a Brown
Act/Bagley-Keene Act style requirement on the investor owned utilities
subject to CPUC jurisdiction.
b. What safeguards does SCP offer to ensure that all contracts with private
parties including contracts for business consulting, financial services,
employment services, etc are concluded on a transparent, competitive basis
and in accord with the public interest?
SCP's CEO has limited authority to execute contracts (see attached Policies).
All contracts in excess of the CEO's authority are reviewed by the SCP
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Board, or, in the case of market sensitive power pricing information, by a
Board Ad Hoc. In addition to SCP Board review, for contracts in excess of
$250,000, the SCP Business Operations Committee (BOC) conducts a public
review subject to the Brown Act. For contracts that impact rates, the
Ratepayer Advisory Committee also conducts a review.
c. Please provide a list of all of SCP's contracts with firms such as listed in
paragraph b above with an explanation of the business nature of the
relationships and copies of the contracts for review by Petaluma's counsel
and officials.
SCP staff respectfully request a more specific scope to your question. We
have entered into dozens of contracts over the past 18 months, and the
scope of this universal request would take a large amount of staff time away
from our core business activities. If there is a specific type or types of
agreements that are of interest, we would appreciate knowing that.
d. We note that SCP reserves the right to establish private companies. We fear
this could open the door to opportunities for conflict of interest or other
questionable ethical or legal arrangements. This leads us to ask what part of
JPA law permits such companies to be formed? Under what circumstances
does SCP envision such companies being formed? What policies/safeguards
ensure that such companies are operated transparently and in the public
interest? Does SCP envision such companies being closely held or operated
at arm's length? How will SCP ensure that such companies are operated with
transparent and independent oversight? Since all SCP funds are ratepayer
and public funds, how are they to be accounted for and protected in any
private corporations or entities established by SCP?
Section 2.4.8 of the JPA authorizes SCP "to form subsidiary or independent
corporations or entities." Nevertheless, SCP does not have the authority
under California law to form entities that would not be subject to the Brown
Act, thus any such organization would be subject to the same public
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accountability as SCP, and would have to be formed subject to public
process. Furthermore, at this time and in the foreseeable future, SCP has no
intention of taking any action pursuant to Section 2.4.8 of the JPA.
The rationale for including this provision in the JPA was to maximize the
potential benefit associated with community solar by exploring the
possibility of ensuring SCP customers benefitted from some portion of the
federal tax credit for renewable power. However, due to limitations of the
federal tax law, SCP staff has subsequently found that there is no obvious
path to achieving that goal through the use of subsidiary organizations.
e. We hold that business consultants should not also be vendors, as this
constitutes an inherent conflict of interest. Please advise whether any of
your consultants or their affiliates are also vendors. Please explain the scope
of your relationship with Recurrent Energy and any other consultants.
Recurrent Energy is the seller of renewable energy under a power purchase
agreement. Recurrent Energy is not an SCP consultant. SCP does not have
any dual consultant/vendor relationships.
4) ]PA Legal Structure and Financial Responsibility
a. With respect to Joint Power Authority law and SCP: We note that there are
roughly two thousand JPAs in California used by governments for a wide
variety of purposes. JPA legislation (The "Joint Exercise of Powers Act"
SECTION 6500-6536) and subsequent court cases offer Petaluma a
reference for legislation and precedent about JPAs, their strengths, and their
weaknesses. We recommend that legal counsel reviews JPA law with respect
to the following questions, and that any divergence between JPA law and
SCP's practices be brought to light. Questions may include:
i. JPA law concerning financial management of JPA funds, investments,
and operations (In particular, see the "Joint Exercise of Powers Act"
Section 6505.5.)
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SCP is in full compliance with California Government Code Section 6505.5.
As also reflected in Section 4.9.3 of the SCP JPA, SCP contracts with the
Sonoma County Auditor-Controller-Treasurer-Tax Collector for treasury and
audit services. SCP also contracts with an accounting firm and, as specified
in the SCP WA, contracts with a separate auditing firm. Both the accounting
and auditing firm serve a number of public agencies, primarily in the North
Bay area.
ii. JPA law regarding shielding of individual participants from the
financial liabilities of the JPAs, (we note that JPA law appears to
provide this protection by designating the JPA as a separate legal
entity) per Section 6507, although this must be confirmed by counsel.
Also, note that per Section 6508 exceptions to liability shield may
exist in certain cases, such as eminent domain compensation
lawsuits.
Section 3.3 of the JPA prohibits SCP from making its debts, liabilities
or obligations of SCP the debts, liabilities or obligations of individual
SCP participants. A participant can, through express written consent,
assume SCP's debts, liabilities or obligations, but under no other
mechanism can this occur.
Additional protection is also found in Section 366.2(c)(12)(B) of the
California Public Utilities Code, which references a similar provision in
the California Government Code Section 6508.1.
iii. Confirmation that WA law shields participants' liability for the $100K
bond required for CCAs that SCP has established.
See response to 4.a.ii.
iv. What are the potential consequences/damage to the WA's
functioning, and more specifically to a participating entity's financial
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liability, if a participant entity withdraws from SCP (with resulting
power contracts that don't balance with demand).
SCP must ensure that sufficient energy has been procured to meet
the expected usage of SCP customers. Energy procurement supply
and price volatility is mitigated by procuring for longer periods. For
this reason, once a jurisdiction becomes an SCP participant, SCP must
procure energy for the new customers in that jurisdiction. Should the
new participant subsequently elect to withdraw from SCP, the
participant is liable for the possible costs (mostly procurement
related) enumerated in Section 7.3 of the SCP JPA. Section 7.3 does,
however, provide for a "waiting period" that allows a participant to
depart with no liability after a period of time, to be determined by
SCP upon receiving notice of intent to withdraw. Note that this
provision does not preclude a municipality from switching providers
for all of its accounts, nor does it impact any of the residential or
commercial customers located within the municipality, who are free to
choose a provider as they wish. This provision only applies to the
situation in which a participating city wishes to prevent the residents
and businesses in their city limits from making their own choice of
power provider and force all customers back to PG&E.
b. Does the "no recourse" clause used by SCP in all vendor contracts truly offer
a second tier of protection for participants, is it accepted by vendors, and
does it not disadvantage SCP in the market?
The clause inserted into our supply contracts is redundant with California
law governing JPAs, which already provides protection of the Members and
Participants against the debts of the JPA itself. As such, suppliers are
comfortable with the clause, and it has not produced any loss of
competitiveness for SCP. Whether this provides additional protection or not,
the language was originally required by the cities that joined SCP in 2013.
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c. Does SCP use private financing? If so, we ask for clarification whether this
runs counter to WA law Section 6505.5. cited above which appears to
require public financing for JPA operations?
SCP uses private financing. SCP's use of private financing does not run
contrary to Government Code Section 6505.5. Pursuant to Section 2.4.7 of
the SCP JPA, SCP is authorized to borrow from private lending sources.
Nothing in the Government Code runs contrary to Section 2.4.7 of the SCP
JPA.
d. Is this financing, if any, part of an open bidding process? What independent
auditing oversees such operations?
A formal request for proposals (RFP) was not issued, but a number of
financial institutions were approached prior to securing lending from First
Community Bank (FCB). FCB was selected as the least cost/best fit option.
e. Is there a bidding process for selecting a financial institution to hold SCP
deposits of public funds?
See response to 4.d.
f. We understand that SCP funds are deposited with First Community Bank.
Please explain how this deposit arrangement was established and why it was
undertaken in lieu of using the services of Sonoma County's own
Treasurer/Controller?
SCP reviewed options for deposit and account management and received
advice that keeping deposits at FCB would be less expensive because loan
costs would be lowered.
g. Please provide a copy of any financial or legal agreements between SCP and
First Community Bank and other private financial institutions of any type.
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FCB agreements are attached. SCP does not have agreements with any
other private financial institutions.
h. We recommend a review of SCP's Business Operations Meetings minutes by
Petaluma's city staff to help determine answers to the aforementioned
questions.
The meeting minutes of the SCP Business Operations Committee are
attached.
5) We ask SCP to help Petaluma determine whether and how have other
participating cities addressed the issues raised here.
SCP would be pleased to introduce Petaluma city staff to their counterparts in
other cities. The discussion with counterparts will likely prove useful because
the counterparts asked questions similar to the questions raised in this letter.
In brief, all cities asked some critical questions before deciding to participate,
but some spent considerable time and resources in their review. The two cities
which were most thorough in their analysis were Santa Rosa and Cotati.
6) We request more clarification about of the formal mechanism for public input
and complaints, redress, and appeals about rates and other consumer issues at
SCP. Stronger protections for grievances may be needed.
SCP is strictly subject to the Brown Act. SCP's Board oversees all of SCP's
activities. In addition, SCP has a Ratepayer Advisor Committee (RAC) that
serves as a watchdog for its customers, and a Business Operations Committee
(BOC) that oversees business related issues. The RAC is a "belt-and-
suspenders" approach to protection for two reasons: (1) SCP does not have any
captured customers, because customers may leave at any time, and (2) SCP
does not, unlike PG&E have the motive to produce profits. Any member of the
public, including SCP's customers, can actively participate in all Board, RAC and
BOC meetings. SCP also periodically holds public workshops on areas of interest
throughout Sonoma County.
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SCP staffs a call center that is open Monday through Friday, 7am to 7pm, and
also provides a web based customer service portal.
SCP ratesetting is generally performed annually, with at least two months
notice to the public. All other major SCP activities are brought before the Board,
and the RAC and BOC as appropriate, with noticing and public right to be heard
provided in accord with the Brown Act.
7) In light of the questions raised regarding whether SCP can adequately manage
risks in an extremely difficult utility business environment, we want to know
why SCP doesn't join the Northern California Power Agency?
a. That agency has a long history and a high level of expertise in creating
balanced contract portfolios, it successfully incentivizes renewable energy; it
buys renewable energy as directed by its individual members; and it has
historically clear regulatory, financial, and public input mechanisms.
b. We request that SCP provide copies of any previous correspondence
between SCP or predecessor public agencies (including, but not limited to,
SCWA, or the County of Sonoma Supervisors, staff, any of its departments,
or their consultants or representatives) and NCPA or its representatives,
regarding the possibility or feasibility of SCPA (in its current or previous
forms) joining NCPA
c. Would joining the NCPA offer advantages for renewable energy and other
contracts through economies of scale? (i.e. scale of purchases, common
renewable energy projects, etc)?
d. Does SCP see specific advantages in remaining apart from the NCPA? What
are those advantages?
e. Why would joining the NCPA adversely affect SCP's mission or operations?
In response to all of the above number 7 questions:
NCPA is a respected and noteworthy organization. During SCP's formation, SCP
did contact NCPA but at the time NCPA was not interested in partnering with
SCP.
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Notably, NCPA serves municipal utility customers and, as discussed in the
response to question 2.a, SCP is neither a public (i.e. municipal), nor a private,
utility. NCPA's members own and operate utility distribution systems, provide
metering and billing, and are generally much more electrically integrated than
CCAs. For this reason, SCP does not fit the model of NCPA membership and
NCPA was understandably not interested in engaging with SCP.
SCP understands, however, that NCPA may now be interested in exploring
partnership possibilities now that SCP has proven its financial viability. SCP is
following up on this and will explore all least cost/best fit options.
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