A new type of public power is growing in California, and raising alarms

Wildflowers bloom below a solar panel array on land leased at the Chevron refinery in Richmond, Calif. on Wednesday, April 18, 2018. The MCE Solar One site, a joint project of Marin Clean Energy and sPower, contains nearly 36,000 solar panels on a 60-acre site which can generate renewal energy for up to 3,900 customers annually. less Wildflowers bloom below a solar panel array on land leased at the Chevron refinery in Richmond, Calif. on Wednesday, April 18, 2018. The MCE Solar One site, a joint project of Marin Clean Energy and sPower, ... more Photo: Paul Chinn / The Chronicle Buy photo Photo: Paul Chinn / The Chronicle Image 1 of / 5 Caption Close A new type of public power is growing in California, and raising alarms 1 / 5 Back to Gallery

Eight years ago, Marin County created a new kind of public power agency in California — over the strenuous objections of Pacific Gas and Electric Co.

The county and most of its cities started buying electricity together on behalf of their residents, a role traditionally filled by utility companies. PG&E considered the move so alarming that it threatened to stop delivering electricity to the county, until state regulators warned the company to back off.

Today, the system that Marin and its cities used, known as community choice aggregation, has spread across the state, serving 12 percent of the state’s electricity demand and growing fast. Local governments have embraced it as a way exert more control over their electricity supply and set their own rates while using a higher mix of renewable power than the traditional utilities provide.

Fourteen community choice systems are up and running, and another three — including one in the East Bay — will serve their first customers in June.

The system is helping transform California’s electricity market, and raising a few alarms along the way.

California’s top utility regulator argued this month that the state should plan what it would do were one of the new agencies to collapse, a possibility that community choice advocates consider remote. Utilities, regulators and the new agencies are still grappling with how community choice customers should compensate the utilities for long-term power purchase contracts the companies signed but may no longer need, now that someone else is supplying those people with electricity.

Photo: Todd Trumbull

And in San Diego, a coalition that includes a newly formed branch of San Diego Gas & Electric Co.’s corporate parent is pushing back against efforts to create a community choice agency there, arguing that the financial uncertainties are too great.

“It’s all about the numbers and the risk to taxpayers,” said Haney Hong, president of the San Diego County Taxpayers Association and co-chairman of the Clear the Air Coalition. “You can expect a taxpayers association to be naturally skeptical of government getting into this market.”

To community choice backers, those fears are misplaced.

Marin’s program received a favorable review and rating this month from Moody’s Investors Service, the first time the service had ever rated a community choice agency.

Moody’s cited Marin Clean Energy’s “established track record” and financial performance, giving it a Baa2 rating. With 470,000 customers spread over four counties (Marin, Contra Costa, Napa and Solano), the agency boasts $385 million in annual revenue and has signed $1.8 billion in long-term renewable power purchase contracts.

“In Marin’s case, we think the business model is working,” said Moody’s Senior Vice President Daniel Aschenbach.

Backers also say the systems are achieving one of their primary goals: bringing renewable power to their customers and supporting the market for more.

Dawn Weisz, Marin Clean Energy’s CEO, has been with the program since its inception. “Not only are we exceeding state mandates for renewable energy, we’re raising the bar for the utilities,” she said.

California is not the only state with community choice agencies, nor was it the first. Both Massachusetts and Ohio had similar programs in place before Marin formed its agency.

In the Golden State, the system was born in response to one crisis, only to be used for another.

The California law authorizing such programs was passed in 2002, in the wake of the electricity crisis that had plunged PG&E into bankruptcy and sent blackouts rolling across the state. Shaken city officials wanted more control over their energy supplies and the prices their residents paid.

Community choice allows local governments to band together in something like a buyer’s club for electricity, purchasing in bulk from operators of power plants, wind farms, hydroelectric dams and solar facilities. Each community choice program’s governing board sets its own electricity rates.

The utility company continues to own the power lines and grid infrastructure to supply that electricity, and community choice customers still pay the utility to maintain the grid and supply natural gas. The utility also handles billing. Residents of cities and counties that create community choice programs have the option of sticking with the utility for all services, including buying electricity.

While the desire for local control drove California’s community choice legislation, cities soon came to see the idea as a way to fight global warming.

Many local governments in the 1990s and 2000s began adopting goals for cutting their greenhouse gas emissions and looking for ways to hit those targets. Marin County, for example, considered installing solar panels on public buildings and upgrading the efficiency of the buildings themselves, Weisz said. But officials concluded that buying more renewable energy through community choice would work better.

Such an agency “really stood head and shoulders over the other options,” Weisz said.

Marin Clean Energy paved the way for others. Sonoma Clean Power followed in 2014, Lancaster Choice Energy in 2015, and both CleanPowerSF and Peninsula Clean Energy (San Mateo County) in 2016.

Creation of the agencies has only accelerated since then. In Alameda County, East Bay Community Energy will start serving government and commercial customers next month.

The utilities have had to adjust, and the process has at times been jarring. When PG&E decided in 2016 to retire California’s last nuclear power plant, Diablo Canyon, one of the reasons the company gave was the rapid spread of community choice agencies. With so many customers getting their electricity elsewhere, the plant’s prodigious output soon will no longer be needed, according to the company.

PG&E expects that this year, 27 percent of the electricity requirements within its service area will be served by community choice programs. Southern California Edison, for comparison, expects 3 percent of the requirements in its territory this year will be served by the programs, a figure the company forecasts will jump to 20 percent in 2019.

The utilities say that while they respect the right of Californians to pick another electricity supplier, they also have to protect their other customers. Current rates and charges, they say, do not adequately spread out the costs of maintaining the grid and paying for long-term power purchase agreements the companies signed before community choice agencies started nibbling away at their businesses.

“California law is clear: Cost shifts between customer groups are not permitted” when communities form their own system, Edison said, in response to a question from The Chronicle. “If no changes are made to the way costs and benefits of existing long-term contracts are allocated between remaining utility and (community program) customers, the inequitable shifting of costs will continue to grow in violation of the law.”

The California Public Utilities Commission is studying the issue. The commission this month also released a draft report on California’s rapidly changing electricity market — including the growth of community choice — and raised the question of how the state would respond if a choice program ran into financial trouble. Would the utility suddenly be forced to buy extra electricity to cover the agency’s customers?

In Illinois, community choice programs grew rapidly from 2011 to 2013, largely because they could offer lower rates than the state’s traditional utilities. But in 2014, the utilities were able to cut their rates and undercut the community agencies. Many of the programs returned their customers to the utility companies.

California community choice advocates consider that outcome unlikely here, since the state’s community agencies and utilities alike focus on long-term power purchase contracts, rather than short-term contracts more prone to price fluctuations.

“Any business can fail — look at PG&E,” said Beth Vaughan, executive director of the CalCCA lobbying group. “But I don’t see any evidence of that happening here. ... Local governments by nature are somewhat conservative. They’re not going to be taking huge risks.”

Moody’s Aschenbach said there’s always a risk that community choice customers could switch back to the utility, which would cut the agency’s revenue and leave it with more electricity supplies under contract than needed. But he, too, doubts that will happen, even if the utilities commission increases the charges that community choice customers pay to the utilities. Marin Clean Energy’s basic level of service, called Light Green, provides 50 percent renewable power and currently costs 2 to 5 percent less than PG&E.

Should a community choice program lose a significant number of customers, Aschenbach said, it has the ability to create a departure charge that would help cover the cost of excess electricity supplies.

“There’s a product they’re offering that customers want, which is clean energy,” he said. “Even with a little higher cost, we don’t think that will cause customers to read their bills and say ‘I want to leave.’”

David R. Baker is a San Francisco Chronicle staff writer. Email: dbaker@sfchronicle.com Twitter: @DavidBakerSF