Economic Analysis Finds Major Flaws with City’s CCA Report

Project could expose San Diego to massive financial risks and offer few of the benefits claimed in report.

SAN DIEGO (September 21, 2017) – Leading business economist Dr. Lynn Reaser released an independent analysis today of the City of San Diego’s feasibility study for a government-controlled energy program that determined the city’s study is flawed, lacks critical information, and reaches a conclusion not supported by the facts.

​“The feasibility study’s finding that a CCA (Community Choice Aggregator) would be ‘feasible’ is at best a weak endorsement, especially in light of the number of risks regarding both its benefits and costs,” Dr. Reaser’s analysis says. “Our analysis finds that even this conclusion of feasibility cannot be supported on the basis of the 803-page study.”

“Given the sizeable financial risks associated with the many uncertainties involved in a CCA, the city should wait, or work with the local utility on potential alternatives that avoid incurring such serious financial jeopardy."

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Photo property of Chris Hunkeler

Dr. Reaser is the Chief Economist of Point Loma Nazarene University’s Fermanian Business and Economic Institute (FBEI). Under her direction, FBEI conducted an independent analytical review of the feasibility study for the implementation of a CCA policy. Dr. Reaser was asked by Sempra Services to conduct the analysis, which was funded by Sempra Services in order to provide additional information on the potential adopotion of a CCA in San Diego. The evaluation finds a number of flaws in the study’s conclusions, including:

• No credible evidence is given to support the claim that a CCA would reduce consumer rates.
• Potential economic benefits of a CCA are overstated, including the number of jobs produced.
• The study concludes that a CCA is financially feasible but indicates that only two out of 11 potential scenarios have a positive financial outcome. Potential negative outcomes range from a loss of $47 million to a loss of $2.8 billion for the city and its taxpayers.
• The study’s claims that a CCA would reduce GHGs are unfounded. Under its Climate Action Plan, the city’s goal is to receive 100% of its energy from renewable sources by 2035. Accomplishing this goal is the most important motivation for a CCA, yet the study’s base case for a CCA only achieves a 51% renewable energy supply by 2035.
• There is little rationale to indicate that a CCA will generate additional renewable energy supplies, meaning the city would purchase existing renewable energy from other regions. This would not reduce greenhouse gas emmissions.
• The study indicates that a new CCA could face several years of initial financial losses. These losses could make securing investment capital difficult. Without capital to finance the construction of wind farms and other new renewable energy sources, the city would have to tax residents or borrow money, leading to a potential negative impact to the city’s credit rating.

FLAW: Costs are Unknown
The California Public Utilities Commission (CPUC) is revising formulas used to make utilities whole – for long-term renewable energy contracts – when residents or businesses leave a utility for a CCA. This is a cost incurred by a CCA. The size of this “exit fee” could significantly magnify the worst-case financial outcome, a $2.8 billion loss, citied in the study. It’s also important to note that the CPUC is not simply resetting or calculating exit fees, something it does annually because market prices change. In addition to resetting exit fees, the CPUC is revising the methodology used to determine those fees.

“The strong likelihood that PCIA could be adjusted up…should be of major concern to the city…Much larger PCIA increases could expose the city to alarmingly high financial liability,” the analysis says. In Northern California, customers who left Pacific Gas & Electric (PG&E) have been hit by exit fees that have soared 400% in the past five years.
 
Dr. Reaser’s analysis makes several additional points about unknown costs and risks, including: “The study shows the large start-up costs in terms of infrastructure requirements as well as the need to establish a skilled team to interact in the energy market. The learning curve could be steep. Annual operating costs are estimated at $792 million.”
 
“The FBEI report concludes that a CCA poses large risks to the City, which could jeopardize its financial stability and its ability to meet other funding priorities. This risk is particularly problematic in that the CCA is unlikely to achieve its objectives in terms of renewable energy, rate savings for customers, or economic benefits,” the analysis says.
 
FLAW: CCA Rates Higher than Utility
On rates, the study makes several points, including: “The study shows that the CCA rates necessary to cover expenses would initially be higher than those available from SDG&E. It then assumes that SDG&E rates will rise by about 3 percent over the rest of the 10-year period through 2035 while assuming that CCA rates would remain flat or even decline. The SDG&E projections have no sound basis and the assumption that the two competing utility entities would face different pricing in the same energy commodity market is without merit.”
 
FLAW: Job Creation Overstated
On jobs, the study makes several points, including: “The study’s economic impact analysis presents the total effects of building a 10-MW solar facility. The study then finds that such a solar system is not feasible for the City, but models it anyway. Only 11 jobs are produced, although one of them would earn an annual salary of $2.3 million despite working just half time!”
 
FLAW: Emissions Reductions Overstated
On the production of more green energy, the study makes several points, including: “The CCA is unlikely to add to new renewable energy supplies at least until after a number of years when it might generate positive returns. Without long-term contracts necessary to develop new wind or solar facilities, the CCA would simply purchase from existing supplies. It would thus take a greater share of the nation’s existing renewable energy supply, but have no effect on greenhouse gas (GHG) emissions.”
 
FLAW: Lack of Transparency
The FBEI analysis makes clear that because the study’s authors refused to share the full set of data and spreadsheets they used to produce the feasibility report, the FBEI analysis was restricted to only the text and tables published in the city-commissioned study.

Click here to read Dr. Reaser’s analysis.

About Dr. Lynn Reaser
Dr. Reaser is the Chief Economist at the Fermanian Business & Economic Institute at Point Loma Nazarene University and the Chair of the Treasurer’s Council of Economic Advisors, where she advises State Treasurer John Chiang on issues impacting California’s economic climate. She currently serves as the Chair of the National Association for Business Economics Foundation and has previously served as the Chair of the California State Controller’s Council of Economic Advisors.