Should CCAs accept a slice of Diablo Canyon power?

The northern California community choice aggregators (CCAs) are considering a offer from PG&E to allocate to each CCA a proportionate share of parts of its portfolio, including the Diablo Canyon nuclear generation station. Many CCA boards are hearing from anti-nuclear activists to deny this offer, both for moral reasons and the belief that such a rejection will somehow pressure PG&E financially. The first set of concern is beyond my professional expertise, but their reasoning on the economic and regulatory issues is incorrect.

  • CCAs buy a substantial portion of their generation (the majority for many of them) from the California Independent System Operator (CAISO) energy markets. PG&E schedules Diablo Canyon into those CAISO markets and under the current CAISO tariffs, nuclear generation is a “must take” resource that the CAISO can’t turn back. So the entire output of Diablo Canyon is scheduled into the CAISO market (without any bidding process), PG&E is paid the market clearing price (MCP) for that Diablo power, and the CCAs buy that mix of nuclear power at the MCP. There is no discretion for either the CAISO or the CCAs in taking excess power from Diablo. There is no “lifeline” for Diablo that the CCAs have any control over under current legal and regulatory parameters.
  • CCAs already pay for a proportionate share of Diablo Canyon equal to the CCAs share of overall load. That payment is broken into two parts (and maybe a third): 1) the purchase of energy from the CAISO at the MCP and 2) the stranded capital and operating costs above the MCP in the PCIA. (CCAs also may be paying for a share of the resource adequacy, but I haven’t thought through that one.) Thus, if the CCAs receive credit for the energy that they are already paying for, the energy portion essentially comes as “free”. In addition, because CCAs currently pay for the remaining share of Diablo costs, but get no energy credit for that in the PCIA calculation, then that credit is in the PCIA is also “free”. In addition, the CCAs gain credit for Diablo’s GHG-free generation (as recognized in the Air Resources Board GHG allowance program) as LSE’s for no extra cost, or for “free.” The bottom line is when the CCAs gain credit for products that they are already paying for, receipt of those products is for “free.”
  • Accepting this deal will not solve ALL of the CCAs problems, but that’s a false goal. That was never the intent. It does however give the CCAs a respite to get through the period until Diablo retires. One needs to recognize that this provides some of the needed relief.
  • Finally, there’s never any certainty over any large deal. Uncertainty should not freeze decision making. The uncertainty about the PCIA going forward is equally large and perhaps offsetting. The risks should be identified, discussed, considered and addressed to the extent possible. But that’s different than simply nixing the deal without addressing the other large risk. Naively believing that Diablo can be closed in short order (especially with the COVID crisis) is not a true risk management strategy.

From these points, we can come to these conclusions:

  1. Whether the CCAs accept or reject the nuclear offer has NO impact on PG&E’s revenue stream. The decisions that the CCAs face are entirely about whether the CCAs can lower their costs and gain some additional GHG reduction credits that they are already paying for (in other words, reduce their subsidies of bundled customers.) Nothing that the CCAs decide will affect the closure date of Diablo. If the CCAs reject the allocations, it will simply be business as usual to the full closures in 2025. Any other interpretation doesn’t reflect the current regulatory environment at the CPUC which are unlikely to change (and even that is unknown) until enough commissioners’ five-year terms roll over.
  2. The system can only be changed by legislative and regulatory action. That means that the CCAs must make the most prudent financial decisions within the current context rather than making a purely symbolic gesture that is financially adverse and will do nothing to change the BAU practice. A wise decision would consider what is the true impact of the action on
  3. Finally, early closure of Diablo will NOT remove the invested capital cost from PG&E’s ratebase, which is what drives the PCIA. After the plant is closed, activists will ALSO have to show that the INVESTMENT in the plant was imprudent and should not have been allowed. Given the long history on decisions and settlements in Diablo investment costs and the inclusion of recovery of Diablo costs in both AB1890 and AB1X at the beginning and end of the energy crisis, that is an impossible task. Only a constitutional amendment through the initiative process could possibly lead to such an action, and even that would have to survive a court challenge that probably would push past 2024.

I want to finish with what I think is a very important point that has been overlooked by the activists: The effort to close Diablo Canyon has won. Activists might not like the timeline of that victory, but it is a victory nevertheless that looked unachievable prior to 2016. It’s worthwhile considering whether the added effort for what will be for a variety of reasons little gain is an important question to answer.

Note that Diablo Canyon is already scheduled for closure in 2024 and 2025. A proceeding to either reopen A.16-08-006 or to open a new rulemaking or application would probably take close to a year, so the proceeding probably wouldn’t open until almost 2021. The actual proceeding would take up to a year, so now we’re to 2022 before an actual decision. PG&E would have to take up to a year to plan the closure at that point, which then takes us to 2023. So at best the plant closes a year earlier than currently scheduled. In addition, PG&E still receives the full payments for its investments and there’s likely no capital additions avoided by the early closure, so the cost savings would be minimal.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s