Myth Of The Month: How Can CCA Rates Be Lower Than Investor Owned Utilities?
By Nick Chaset, CEO
As EBCE rolled out service to 500,000 residential and 50,000 commercial, industrial, and public customers, some wondered how it was possible that we could offer lower rates than PG&E.
Surely PG&E’s great size means it can offer economies of scale? Surely after 100 years of service PG&E would have streamlined operations and found every efficiency gain?
Yet it’s true — EBCE’s Bright Choice product is pegged at 1.5 percent below PG&E’s standard rate. In 2019 alone, EBCE expects to deliver nearly $8 million in bill savings to customers.
To understand how that’s possible we need to first explain the difference between EBCE, a community-owned energy provider, and PG&E, an investor-owned utility.
STRUCTURAL ADVANTAGES OF PUBLIC OWNERSHIP
The American Public Power Association (APPA) reports (PDF) that public power customers have paid lower rates on average than investor-owned utilities for decades. As of 2014, overall rates were 6.9 percent higher for IOUs, mostly due to residential rates that were 14 percent higher.
A big part of the benefit is that public power can finance projects with tax-exempt municipal bonds, which cost around 4-5 percent, depending on the length and the financial rating of the borrower. The rate of return for California IOUs, which is set by the state utility commission, has been around 11 percent recently, although they are requesting much higher returns to cover the risk of catastrophic wildfires.
Municipal bonds are more commonly bought by individual investors (PDF) as a low-risk, low-return option. In 2012, 70 percent of municipal bonds were sold to individuals, and almost half of the interest paid to individuals went to households with incomes of less than $250,000. Nearly 60 percent of this household tax-exempt interest is earned by taxpayers older than 65 years. All in all, municipal bonds can save public utilities 25 percent over the 30-year life of a project compared to corporate bond rates. As EBCE continues to contract for new clean energy projects, we expect to start utilizing tax-exempt municipal financing to further lower our cost energy and be even less expensive as compared to PG&E.
EBCE is governed by twelve local elected officials who represent each of our member communities. These mayors, councilmembers and supervisors are elected every four years and are directly accountable to their constituents through the ballot box. This is significant in the context of EBCE because it focuses our organization of delivering the lowest cost of service energy possible, while also meeting our environmental and community commitments. If EBCE does not deliver, customers can not only opt out of EBCE service, but they can take action to replace EBCE Board Members through their local elections.
By comparison, PG&E is governed by a Board of Directors who are appointed by shareholders not customers. These Board Members have a legal obligation to ensure that PG&E operates in a manner to maximize shareholder value. This emphasis on shareholders demotes critical customer considerations, like energy costs, to secondary status. This is not to say that PG&E is not concerned or focused on ensuring affordable rates, I believe they are. Rather, it’s a feature of the investor owned utility model. The company, and its Board, must first deliver on its shareholders’ priorities.
In contrast, EBCE and our Board are directly accountability to our customers, which ensures that EBCE focuses on delivering on community priorities above all else.
REINVESTING IN OUR COMMUNITY
For fiscal year 2020 (starting July 1) we anticipate total energy operating costs of $397 million — almost entirely for energy and resource adequacy contracts — plus total overhead operating costs of $19 million and total interest payments of $1.2 million. (Our financials are here (PDF), toward the end of the long board document.)
Meanwhile, total revenue and other sources are forecast at $485,146,000, leaving EBCE a positive net position of about $68 million dollars.
While some of this will be absorbed by our rapidly growing operations and contributions to reserves, the balance can be directed to programs that return benefits to EBCE customers and communities.
For example, the Local Development program will have an FY 2020 budget of $6 million, which will pay for incentives for building electrification, electric vehicle charging stations, Community Investment Grants (like those recently awarded), and higher net metering rates to encourage low income and municipal customers to go solar.
The budget can also cover the higher cost of developing wind and solar generation projects in Alameda County — helping create local jobs and economic development. The Local Development Capital Set Aside budget is designed to let EBCE pay for expected above-market energy costs from local projects like the Oakland Clean Energy Initiative (in Jack London Square) and Summit Wind (near Livermore).
In short, EBCE is designed to be a lean, clean, power procurement machine, delivering greener and cheaper power that puts our community first. We return the savings to our customers in the form of bill savings and community investments, guided by their very own elected officials.