OUR MISSION: To provide our customers with high-quality, efficient and reliable water, power and sewer services in a manner that values environmental and community interests and sustains the resources entrusted to our care.
525 Golden Gate Avenue, 13th Floor
San Francisco, CA 94102
T 415.554.3155
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TTY 415.554.3488
DATE:
April 1, 2023
TO: Com
missioner Newsha Ajami, President
Commissioner Sophie Maxwell, Vice President
Commissioner Tim Paulson
Commissioner Anthony Rivera
Commissioner Kate Stacy
THROU
GH: Dennis Herrera, General Manager
Barbara Hale, Assistant General Manager, Power
Ramon Abueg, Deputy Assistant General Manager, Power Operations FRO
M: Sunita Jones, Acting Manager, Wholesale and Retail Services, Power Karina Leung, Manager, Risk Management and Business Analysis, Power Kevane Wong, Risk Management and Business Analysis, Power SUBJE
CT: Annual Power Risk Management Update – 2022
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Table of Contents
1. Executive Summary ............................................................................................................... 3
2. Enterprise Risk Management (ERM) ...................................................................................... 4
3. Risk Management 2022 Highlights ......................................................................................... 4
3.1 COVID-19 Pandemic ................................................................................................... 5
3.2 Diversity, Equity, and Inclusion .................................................................................... 5
3.3 Customer Interconnection and Expansion .................................................................... 5
3.3.1 Fair and Affordable Access to PG&E’s Distribution Grid ....................................... 6
3.3.2 Investment in Transmission and Distribution ......................................................... 7
3.3.3 Acquisition of PG&E Electric Infrastructure Serving San Francisco ....................... 7
3.4 Supply Risk Management ............................................................................................ 8
3.4.1 Integrated Resource Planning (IRP) ..................................................................... 8
3.4.2 Portfolio Management ........................................................................................... 9
3.4.3 Resource Adequacy (RA) ....................................................................................10
3.5 CleanPowerSF’s Financial Security Requirement .......................................................11
3.6 CleanPowerSF and the Power Charge Indifference Adjustment ................................. 12
3.7 Hetch Hetchy Power and CleanPowerSF Cost of Service and Rate Study .................12
4. Risk Management Activities – Emphasis for 2023 ................................................................. 13
4.1 Customer Interconnection and Expansion ................................................................... 13
4.2 Portfolio Management ................................................................................................. 13
4.3 Hetch Hetchy Power and CleanPowerSF Rate Study .................................................14
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1. Executive Summary
This report summarizes the Power Enterprise’s key risk management activities over the past calendar year (2022) and covers both the Hetch Hetchy Power and CleanPowerSF business programs. This report is Power Enterprise’s seventh annual update to the Commission.
Hetch Hetchy Power is the City’s full-service electric utility and CleanPowerSF is San Francisco’s Community Choice Aggregation (CCA) program. Together, these retail electric service programs provide over 70% of the electricity consumed in San Francisco.
• 1 million MWh annual sales (150 MW)
• Over 5,400 customer accounts and
growing
• Ownership in 385 MW hydro generation,
9 MW solar, 3 MW biogas
• Default product 100% Greenhouse Gas
(GHG)-free
• “Premium” 100% California RPS
renewable
• 160+ miles of transmission and
distribution lines, 7 substations
• 1 69 authorized positions
• 3 million MWh annual sales (550 MW)
• Over 384,000 customer accounts,
relatively stable
• Diverse portfolio of short, medium, and
long-term power, storage, and resource
adequacy contracts
• Default ”Green” product at least 50% RPS
renewable and nearly 100% GHG-free
• “SuperGreen” and “SuperGreen Saver”
100% California RPS renewable
• 64 authorized positions
Hetch Hetchy Power and CleanPowerSF services benefit from shared risk management approaches and platforms. The Power Enterprise’s key updates for 2022 include the following:
1. Providing support to customers who had been financially impacted by the COVID-19 crisis
2. A continued focus on racial equity imperatives through Power workgroups and active engagement in PUC-wide racial equity groups
3. Managing risks in customer interconnection and expansion through a. Fighting for fair and affordable access to PG&E’s distribution grid b. Ongoing investment in, and development of, city-owned infrastructure such as the Bay Corridor Transmission and Distribution (BCTD) project c. Continued actions towards the goal of acquiring PG&E’s electric assets in San Francisco
4. Improving supply management tools and processes to ensure reliable, green, and cost- effective supply
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a. Completion of CleanPowerSF’s biennial Integrated Resource Plan (IRP) in November 2022 and commencing with Hetch Hetchy’s IRP update in advance of its next five-year deadline in November 2023
b. Advancing portfolio management tools and procurement processes for both Hetch Hetchy Power and CleanPowerSF, particularly in a volatile market environment with elevated energy prices
c. Compliance with Resource Adequacy programs with an eye on upcoming regulatory changes in 2023 and 2024
5. Ongoing participation in CPUC proceedings to ensure the level of the Financial Security Requirement is reasonable
6. Anticipating and planning for changes in Power Charge Indifference Adjustment (PCIA) rates
7. Completion of Hetch Hetchy Power and CleanPowerSF Cost of Service and Rate Studies to provide financial stability and affordability Protecting and growing our customer base and providing reliable and affordable electric service are critical to meet our business plans’ goals and objectives. In 2023 Power is continuing to focus on the efforts mentioned above and identify additional risk mitigation strategies.
2. Enterprise Risk Management (ERM)
Both Hetch Hetchy Power and CleanPowerSF have leveraged the ERM framework to manage risk since 2014 and 2016, respectively. The ERM framework provides a strategic, comprehensive approach to assess, prioritize, monitor, and mitigate business risks. Under this framework, risks are organized by functional area to facilitate operational focus and accountability within Power Enterprise and across the SFPUC.
As discussed in detail below, our focus in 2022 was on supporting customers who had been financially impacted by the COVID-19 crisis and addressing increased racial tension and structural racial inequities, while continuing to mitigate risks posed by PG&E, improving programs to ensure cost-effective supply, and rolling out CleanPowerSF and Hetch Hetchy Power rates based on our own costs of service and financial risks.
3. Risk Management 2022 Highlights
In 2022, the Power Enterprise continued to manage risk with a focus on protecting and growing our customer base and continuing to provide reliable and affordable services to our customers.
The following six work areas were of particular note in 2022:
1. COVID-19 Pandemic
2. Racial Equity
3. Customer Interconnection and Expansion
4. Supply Risk Management
5. CleanPowerSF Financial Security Requirement and the Power Charge Indifference Adjustment rates
6. Hetch Hetchy Power and CleanPowerSF Cost of Service and Rate Studies
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3.1 COVID-19 Pandemic
From March 2020 through March 2022, Hetch Hetchy Power offered 30% bill discounts to residential customers who experienced a loss of income related to COVID-19 or the shelter in place order and faced difficulties in paying their bills through the Emergency Residential Customer Assistance Program. While this program has come to a close, the standard Customer Assistance Program has been altered per SFPUC Resolution 22-0044 to allow an easier application process for customers moving forward. Per SFPUC Resolution 22-0157, Hetch Hetchy Power has extended the moratorium on residential shutoffs for non-payment of power bills until July 2023. To assist CleanPowerSF customers, this resolution also extended the return of residential customers to PG&E for non-payment of bills from June 2022 through July 1, 2023.
In November 2021, the SFPUC applied for federal funding administered by the California Department of Community Services and Development. This funding was automatically applied to customer bills for debt incurred during the COVID-19 pandemic period defined as March 4, 2020 through June 15, 2021. The program has provided $1.3 million in debt relief for Hetch Hetchy Power customers and $3.7 million for CleanPowerSF customers. A second round of funding from the California Department of Community Services and Development extending COVID-19 pandemic period through December 31, 2021 for residential accounts provided $0.1 million in debt relief for Hetch Hetchy Power customers and $1.2 million for CleanPowerSF customers.
3.2 Diversity, Equity, and Inclusion
Diversity, equity, and inclusion is a core value at the SFPUC and within the Power Enterprise.
Addressing racial inequity is both a moral imperative and a risk management activity, as it is key to ensuring the success and engagement of our workforce now and in the future. Racism, sexism, and lack of fairness in the workplace can lead to losing valued, qualified staff and workplace churn; loss of institutional knowledge, skills, and investments in training and onboarding; low staff moral; lower-quality decision making given narrower perspectives; lawsuits; as well as reputational risk for the SFPUC. Inequity in our work environment and in the delivery of our services can worsen health outcomes and wage inequity in San Francisco.
The Power Enterprise has
designated a racial equity lead as well as staff who participate in PUC-wide racial equity groups. We’ve also set up a Power-specific racial equity workgroup, which meets monthly with about 35 participants and has staff-led subcommittees focused on the San Francisco Office of Racial Equity (ORE) Racial Equity Action Plan, external equity, learning opportunities, and creating a space for Black, Indigenous, and people of color (BIPOC) staff to connect and provide feedback on this effort. A Power racial equity implementation plan showing deliverables, timelines, persons responsible, and progress is regularly updated and shared with staff.
Key accomplishments this year include improving our outreach and recruitment from more div
erse academic institutions, and compiling Diversity, Equity, Inclusion, and Belonging (DEIB)- focused interview questions for candidates.
3.3 Customer Interconnection and Expansion
Under the Federal Power Act and PG&E’s Wholesale Distribution Tariff (WDT or Tariff) on file with the Federal Energy Regulatory Commission (FERC), the City has the right to access PG&E’s distribution grid to serve its Hetch Hetchy Power customers. PG&E’s implementation of the WDT terms and its latest request to FERC to increase rates and change terms of the WDT
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pose significant challenges for the Power Enterprise in affordably and reliably serving, maintaining, and growing its customer base. These challenges will result in further loss of benefits to the City, loss of revenues to Power Enterprise, and impacts to City projects including increased equipment costs, delays, and site construction challenges associated with oversized and complex equipment configurations.
3.3.1 Fair and Affordable Access to PG&E’s Distribution Grid In 2015, the Agreement between PG&E and the City that provided for the rates and terms for distribution interconnection and services expired.1 Since the City’s transition to the WDT in 2015, PG&E has continuously violated the terms of the Tariff and sought to impose additional requirements not required under the terms of our Service Agreements or the WDT. PG&E’s implementation of its WDT continues to be a substantial risk for the City’s ability to provide electric service to our customers.
In October of 2020, PG&E filed proposed revisions to its WDT. The proposed revisions are extremely detrimental to entities that must take service under this tariff. The new WDT (“WDT3”) imposes a change in billing methodology, a substantial rate increase, and new non-rate terms. 2 These changes, if adopted by FERC, could result in the conversion of many of the City’s General Fund interconnection points to PG&E retail service, thereby exposing them to substantial electricity bill increases, if the City does not invest in new oversized infrastructure.
This additional PG&E-required infrastructure investment is not needed for reliability or safety and in many cases cannot be sited due to space restrictions. Another provision of the WDT3 disallows all grid connections on PG&E’s downtown ‘network’ grid, effectively terminating City service to any customers located in the City center, including City Hall and the SFPUC headquarters building, if they alter any aspect of their current service.
A limited number of issues have reached partial settlement, primarily those related to rate design, but significant non-rate issues remain and were set for hearing at FERC on March 9, 2023. While litigation efforts proceed through the FERC process, staff continues to meet with PG&E on a weekly basis to facilitate our grid connections on a project-by-project basis. Senior Management also continues to engage with PG&E in efforts to resolve these issues. These efforts have resulted in limited success thus far
3. To the contrary, PG&E’s behavior has become
increasingly less cooperative, and it appears they are less willing to seek a solution that enables the City to provide timely, affordable service consistent with the City’s rights under federal law.
1 PG&E had, pursuant to a contract effective as of March 14, 1945 (as amended, 1945 Agreement), delivered the power from our Hetch Hetchy generating system to SFPUC customers. The 1945 Agreement was followed with an agreement entered into December 21, 1987 (as amended, 1987 Agreement). When the 1987 Agreement expired in 2015, and given the passage of federal open access laws and regulations in the intervening years, the City has accessed distribution interconnection services from PG&E as a tariffed service. That tariff structure includes service agreements between PG&E and the wholesale customer utility (like us) to tailor the tariff. 2 FERC rules allow for new tariffs to be implemented, subject to refund, while the legality and reasonableness of the new tariff is being contested.
3 The City and PG&E reached an agreement to allow for a limited set of Affordable Housing Projects to move forward with appropriately sized electrical equipment. The agreement was approved by the San Francisco Board of Supervisors on November 30, 2021. We expect that approximately one- third of the upcoming Affordable Housing projects will be eligible for service under this agreement.
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Power Enterprise staff also prepares quarterly reports for the Board of Supervisors describing the on-going disputes with PG&E and the impacts on the City. These reports are required by Board Resolution No. 227-18, and the next report will be issued in April 2023.4
3.3.2 Investment in Transmission and Distribution
Investing in City-owned transmission and distribution infrastructure is another strategy that allows for local City control of the delivery of power to our customers, thereby reducing our reliance on PG&E’s grid and the associated challenges and costs described above. One of the major initiatives is the development and construction of the Bay Corridor Transmission and Distribution Project (BCTD). BCTD will provide medium-voltage power delivery to a limited number of the City’s Hetch Hetchy Power customers safely and reliably, gaining autonomy from PG&E.
Power Enterprise has identified key customers to serve through BCTD. BCTD was energized in January 2023 and has begun serving customers.
3.3.3 Acquisition of PG&E Electric Infrastructure Serving San Francisco On January 29, 2019, PG&E filed for bankruptcy and reorganization. PG&E was facing multibillion-dollar claims related to catastrophic wildfires that devastated communities in Northern California over the last few years. While PG&E emerged from bankruptcy in July 2020, their financial health continues to be precarious. PG&E continues to propose financial solutions that could be potentially harmful to its ratepayers (such as its proposed $7.5 billion securitization and recent application to sells shares of its non-nuclear assets through a new subsidiary), while it ignores cash offers from San Francisco and other public entities to purchase assets.
At the request of Mayor Breed and the Board of Supervisors 5, Power Enterprise issued a report
in May 2019 on Electric Service Options.6 The report discussed the long-standing disputes and difficulties interconnecting Power Enterprise Hetch Hetchy Power customers under the current WDT and recommended further evaluation of acquiring PG&E’s electric grid in San Francisco.
Consistent with the recommendations in the May 2019 report, the City provided a formal Indication of Interest to purchase PG&E’s electric assets in San Francisco, first in September of 2019 (during PG&E’s bankruptcy) and reiterated in August of 2020 (after PG&E’s emergence from bankruptcy). PG&E has declined these offers and refused to discuss them further, stating that the purchase price offered is too low and that its assets are not for sale, in spite of the potential for the asset purchase to strengthen PG&E’s financial position and management focus.
We view the dependence on the PG&E-controlled distribution grid as the biggest risk to the City’s ability to continue to provide clean, reliable, and affordable electricity to our Hetch Hetchy Power and CleanPowerSF customers. To address this risk, Power Enterprise continues to take active steps towards acquiring PG&E’s electric infrastructure assets to serve San Francisco.
On July 27, 2021, the City submitted a petition to the California Public Utilities Commission (California PUC) requesting a formal determination of the value of PG&E’s electric assets in San
4 The reports are available in the Document Library — Our City. Our Power. (publicpowersf.org) (accessed 3/21/2023).
5 See San Francisco Board of Supervisors Resolution 174-19, r0174-19.pdf (sfbos.org) (accessed Mar ch 29, 2023).
6 Available at SFPUC Preliminary Public Power Options Report | SFPUC (accessed March 29, 2023).
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Francisco. This petition serves as the initial step in what will likely be a lengthy process to acquire PG&E’s local electric infrastructure to complete the City’s transition to full public power.
On June 24, 2022, the Assigned Commissioner issued a scoping memo and ruling outlining the scope of issues to be addressed and the proceeding schedule.
As requested by the California PUC, the City, PG&E, and the California Coalition of Utility Employees (CUE) filed a round of briefs beginning in August 2023 to address the scope of the California PUC’s review of the acquisition under Public Utilities Code Section 851, which requires that the California PUC approve sales of utility assets, in the event the City condemns PG&E’s assets in San Francisco.
To prevent the petition from moving forward, PG&E filed two motions to dismiss or stay the petition, one of which argues that the City must complete an Environmental Impact Review under the California Environmental Quality Act (CEQA) process prior to valuation. These motions are still pending before the Commission.
At this stage in the proceeding, PG&E and the City filed briefs on the standards for just compensation on January 17, 2023. The City’s opening testimony is due on April 10, 2023, and PG&E’s opening testimony is due September 15, 2023. Based on the current schedule, a proposed decision is expected post-2023.
The purchase of PG&E’s electric grid would include essentially all of PG&E’s electric transmission and distribution assets located within the City and County of San Francisco. As part of the transfer of assets, certain PG&E facilities outside of San Francisco’s boundaries will need to be physically separated from the facilities that will be owned by the City. The portion of the project requiring new construction or modifications to existing facilities (whether they be PG&E-owned or City-owned) would primarily be in the southern portion of San Francisco and along the San Francisco-San Mateo County border (including the northern portions of Brisbane and Daly City). The San Francisco Planning Department is currently conducting a public process for environmental review of the City’s potential acquisition of PG&E’s assets under the California Environmental Quality Act (CEQA). The physical changes associated with the project (e.g., physical separation of San Francisco’s purchased assets from PG&E's electric grid outside of San Francisco) will be identified and studied for CEQA.
3.4 Supply Risk Management
The evolving energy market and uncertain regulatory requirements in California present an ongoing challenge for both the Hetch Hetchy Power and CleanPowerSF portfolios. This section provides an update on how staff are strategically managing these portfolio risks through iterative long term planning to meet policy goals, regulatory requirements, and resource needs; and procurement and management practices.
3.4.1 Integrated Resource Planning (IRP)
An Integrated Resource Plan (IRP) is a formal process undertaken by a utility to determine future resource procurement needs for meeting forecasted annual peak and energy demand, with an adequate reserve to provide for system reliability and integrity. IRPs are also used to assess the ability of a utility to meet its environmental and policy goals.
IRP helps Power Enterprise make informed and prudent decisions regarding the City’s long- term supply needs and capital investments to meet the City’s objectives while addressing any risks and uncertainties.
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Hetch Hetchy Power
Under the requirements of Public Utilities Code section 9621, Hetch Hetchy Power is required to prepare an IRP once every five years. The Commission approved Hetch Hetchy Power’s last IRP on November 13, 2018 by Resolution 18-0187. The IRP concluded that Hetch Hetchy Power had sufficient resources to meet its expected energy demand through the 2041 planning horizon, would continue to meet all state-required targets, and continue to provide its customers with 100% GHG-free energy. This IRP was then submitted to the California Energy Commission, which found that the IRP was consistent with the requirements of Public Utilities Code section 9621 in that it addressed the various elements (e.g. reliability, achievement of state energy goals, energy efficiency) required to be evaluated and included in a Publicly Owned Utility’s IRP.
Hetch Hetchy Power has begun the process of updating and revising its IRP in advance of the five-year deadline (November 2023) for submitting the next required IRP to the Commission and the California Energy Commission. This IRP will extend the planning horizon through 2045. Based on the current IRP, it is expected that Hetch Hetchy Power will continue to meet its demand obligations through 2045 with 100% GHG-free energy with the major uncertainty being forecasted load growth from municipal functions and as Hetch Hetchy Power identifies new customer opportunities. Although only required to prepare an IRP once every five years, staff continues to review and modify the plan as necessary based on Power Enterprise’s on-going planning and budgeting processes.
CleanPowerSF
The California PUC requires load serving entities under its jurisdiction, including CleanPowerSF, to submit IRPs every two years. CleanPowerSF submitted its 2022 IRP to the Commission and the California PUC on November 1st, 2022.7 The IRP process allowed CleanPowerSF to select a preferred resource portfolio that best balanced its core program goals of affordability; achieving 100% renewable energy by 2025; and developing local clean energy generation and jobs. CleanPowerSF modeled four portfolios in its IRP analysis and determined that the 90% Time Coincident Portfolio was the most cost-effective path to achieving the City’s goal of a 100% GHG-free and California-eligible Renewable Portfolio Standard (RPS) electricity supply by 2025, exceeding the state’s clean energy goal for the electric sector by 20 years. In the 90% Time Coincident Portfolio, renewable generation coincides with customer usage for at least 90% of all hours during the year. The selected portfolio includes investments in 80.6 MW of new solar and 75 MW of battery storage in the nine Bay Area counties, reflecting approximately $600-700 million in local renewable energy investments.
3.4.2 Portfolio Management
As discussed at the Commission Regular Meeting of January 24, 2023, wholesale energy market prices are higher than expected for all market participants, including other municipal utilities in California. Such increases reflect global energy shortages caused by trade disruptions and Russia’s invasion of Ukraine in Feb. 2022. New energy facilities have not come online as expected due to supply chain delays and interconnection requirements. High natural gas prices in global markets spurred LNG (Liquefied Natural Gas) exports from US. In 2021, the U.S. exported 30% more LNG compared with 2020. In 2022 U.S. tied Qatar as the #1 LNG exporter.
LNG demand from EU competes with domestic demand, increasing natural gas and electricity
7 The SFPUC Commission approved CleanPowerSF’s IRP on October 24, 2022 by Resolution No. 22- 0184.
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prices. Energy supplies and prices have also been impacted by extreme weather in the United States.
The SFPUC is experiencing significant increases in the energy product and related CAISO settlement charges from the CAISO, causing the pass-through payments that APX (as SFPUC’s Scheduling Coordinator provider) makes on our behalf to be higher than anticipated.
CleanPowerSF’s CAISO charges have increased 197%, and Hetchy Power’s 67%, from 2021 to 2022.
During this period of high prices and significant market volatility, both Hetchy Power and CleanPowerSF have put a particular focus on the risks to their operations posed by this challenging market environment. This has included a greater emphasis on monitoring and internal reporting of natural gas market activities, scenario modelling to identify risk outcomes, reevaluating financial risk contingency cushions in key financial models, and looking at adjustments that will need to be implemented to the power rates we charge in order to ensure that we fully cover our costs.
Considering the changes in the energy market, and evolving regulatory environment, the need to continue the enhancement of our portfolio management tools and procedures continued to be critical in 2022 to support clean, reliable, and affordable power supply operations.
3.4.3 Resource Adequacy (RA)
The Resource Adequacy (RA) compliance program is intended to ensure there is sufficient electric generating capacity available to the California Independent System Operator (CAISO) to meet demand at all times. The RA program requires Load Serving Entities (LSEs), such as Hetch Hetchy Power and CleanPowerSF, to secure sufficient RA capacity resources to meet forecasted monthly peak demand plus a 15% planning reserve margin (PRM) to account for unexpected outages, higher than anticipated demand, and other contingencies.
There are currently three RA products that Hetch Hetchy Power and CleanPowerSF must procure to meet the RA program requirements: (1) System RA, ensuring sufficient capacity at the CAISO system-wide level; (2) Local RA, ensuring sufficient capacity within smaller transmission-constrained geographic areas throughout PG&E’s planning area in northern and central California; and (3) Flexible RA, ensuring sufficient ramping capacity to address short periods of high demand or quickly dropping demand.
Entities serving electric load in CAISO territory must comply with the RA compliance program requirements. However, the California PUC and other Local Regulatory Authorities (LRAs) have the authority to regulate their jurisdictional LSEs with their own RA requirements, as long as they meet CAISO’s minimum standards. CleanPowerSF is a California PUC-jurisdictional LSE, while Hetch Hetchy Power is not. Therefore, CleanPowerSF must comply with the California PUC RA compliance requirements, while Hetch Hetchy Power must only comply with CAISO’s RA compliance requirements.
Unlike other ISO markets (such as ISO-NE, PJM), CAISO’s RA “market” is transacted bi- laterally among various market participants including LSEs, generators, brokers, power marketers, and other market participants. As a result, the RA capacity market in California lacks transparency and a number of factors including: a) increasing number of LSEs providing power service to customers in the CAISO, b) concentration of RA capacity resources in the control of California’s largest investor-owned utilities, c) retirement of existing capacity, d) increasing competition for capacity from out-of-state, and e) a great deal of regulatory uncertainty, has resulted in an extremely high RA capacity price, price volatility, and persistent supply uncertainty.
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CleanPowerSF must comply with the requirements of the California PUC RA program, which has experienced major changes in the last few years and will continue to experience major changes going forward. First, the PRM, which was set at15% since the inception of the program, has increased to 16% in 2023 and a minimum of 17% in 2024. The California PUC is considering the potential for an even higher PRM (up to 20%) for 2024. This increase could be finalized in a decision expected in June of this year. A higher PRM means that LSEs (including CleanPowerSF) will face a higher RA obligation, and therefore incur more costs, for the same forecasted load.
In addition, the California PUC is in the process of developing a new framework that will significantly alter the RA program. While many details remain to be finalized, the most significant change will be a switch to a Slice-of-Day (SOD) framework. As mentioned above, the current California PUC RA programs require LSEs to secure sufficient RA capacity to meet the forecasted peak demand for each month, plus a PRM. In a SOD framework, LSEs will need to procure sufficient RA capacity on an hourly basis to meet the forecasted demand for the “worst day” of each month, plus a PRM. The “worst day” definition can change but will initially be set as the day of the month which corresponds to the CAISO system peak gross load. Thus, each resource will have 24-hourly capacity attribute that will be used to meet the LSEs 24-hourly RA compliance obligations.
Power Enterprise employs the following mitigation strategies to address the risks identified above:
• Monitoring and intervening in RA proceedings at the California PUC and relevant CAISO initiatives that affect the structure of the RA program and compliance obligations for CleanPowerSF and Hetch Hetchy Power.
• Coordinating with industry trade associations to ensure that RA regulations support an efficient, cost-effective, and generally well-functioning RA capacity market. • Addressing the risk of supply availability through long-term forward procurement for RA capacity.
3.5 CleanPowerSF’s Financial Security Requirement
CleanPowerSF must post a Financial Security Requirement (FSR) to ensure that PG&E’s existing retail customers are not financially affected if CleanPowerSF were to suddenly fail and all of it customers returned to PG&E. In simple terms, the level of the FSR is calculated as PG&E’s incremental cost of procuring energy at market prices to meet this sudden influx of returning customers and the customer service cost of returning these customers to PG&E.
These costs are then offset by the increased revenues that PG&E would be receiving from these former CleanPowerSF customers. Because PG&E’s current rates are higher than the combined cost of current market prices and the cost of switching customers, the overall FSR calculation for CleanPowerSF is negative (i.e. less than $0) in which case CleanPowerSF must only meet the minimum FSR requirement of $147,000. CleanPowerSF meets its FSR requirement through a Letter of Credit.
The California PUC is currently re-evaluating both the level of the FSR, as well as who should be the “provider of last resort or POLR” if a CCA should fail in a Rulemaking (R.21-03-011). It is expected that the level of the FSR will be increased to a minimum of $500,000 to one million dollars which are well within CleanPowerSF’s financial capacity. More troubling, is a proposal in this proceeding from PG&E that would require an FSR equal to three months of CleanPowerSF’s total energy procurement costs which could require an FSR of several hundred million dollars. Other proposed changes in the proceeding could also change the level
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of the FSR. Although the likelihood of the California PUC adopting PG&E’s proposal appears low, CleanPowerSF continues its on-going participation in the Rulemaking to ensure the level of the FSR is reasonable.
3.6 CleanPowerSF and the Power Charge Indifference Adjustment The Power Charge Indifference Adjustment (PCIA) is a surcharge that customers taking generation supply from CleanPowerSF or any other third-party generation supplier must pay to PG&E. The fee is intended to recover the unavoidable “above market” costs of the power supply procured by PG&E on behalf of the customers prior to them switching from PG&E’s generation supply service. To deliver a service that is competitive with PG&E’s retail service, CleanPowerSF’s cost of generation supply plus the PCIA rate must be lower than PG&E’s retail service rates. Given our interest in preserving competitive rates, the higher the PCIA, the less revenue CleanPowerSF has available to procure energy.
The PCIA rate is directly linked to the market prices of energy, resource adequacy, and renewable energy because PCIA rates are calculated based on the difference between the forecasted cost of PG&E’s 2022 generation portfolio and the forecasted market value of PG&E’s generation portfolio in 2022, and trued-up given the 2021 year-end balance in PG&E’s PCIA account. Due to the fact that PCIA rates are set on a forecast basis and then trued-up, the PCIA rate can increase or decrease in a volatile manner. In March 2022, the PCIA rate decreased around 60% for CleanPowerSF.
CleanPowerSF must anticipate and plan for these changes in PCIA rates as part of its on-going risk management activities. This risk management includes monitoring energy prices for their effect on PCIA rates and incorporating forecasted PCIA rates into its planning. CleanPowerSF also continues to participate in the on-going California PUC rulemaking (R.17-06-026) and yearly Energy Resource Recovery Account proceedings that develop PCIA rates and consider modifications to the PCIA methodology. It appears that continuing increases in the PCIA may peak in 2023 and that, absent other changes, it should decline around 2025 when the cost of PG&E’s Diablo Canyon Nuclear Power Plant would be removed from the PCIA calculation based on either the plant’s retirement or changes in how the plant’s costs are calculated and assigned if the operation of the plant is extended.
3.7 Hetch Hetchy Power and CleanPowerSF Cost of Service and Rate Study
As required by San Francisco Charter Section 8B.125, a cost of service and rates study was completed for Hetch Hetchy Power and CleanPowerSF in spring 2022. This was the first rate study for CleanPowerSF, and only the third for Hetch Hetchy. The rate study analyzed the total revenues needed to operate the programs and comply with adopted financial policies, performed a detailed cost allocation to customer classes, and proposed rates that recover these costs. In May 2022, the Commission approved FY23-24 rates for CleanPowerSF, and Hetch Hetchy Power rates for two fiscal years. While the rate study itself recommended five years of rates, the shorter time period used for adoption reflects the significant uncertainty in power market prices and resulting expenditures. Each year, Hetch Hetchy Power and CleanPowerSF can re-assess what rate modifications are needed with more up-to-date information, allowing adjustments if financial conditions worsen.
The rates studies successfully addressed major financial risks faced by both programs. For the first time, both Hetch Hetchy and CleanPowerSF rates are independent from PG&E rates, instead based on our agency’s own cost of providing service. Our own cost of service rates
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address our own financial risks – for instance, setting power supply budgets with margins to cover market volatility in CleanPowerSF or reduced hydropower generation and increased market exposure in Hetch Hetchy. And without the pressure to constantly change rates to follow PG&E up-and-down throughout the year, both customers and the Power Enterprise benefit from predictable rate changes and revenues.
For Hetch Hetchy Power, this rate study also recommended the Commission phased out historic rates that do not cover costs, such as the “GUSE” or “General Fund” subsidized rate.
While the phase-out will take time, the end result will be rates that are more legally defensible, fair to customers, and easier to administer. Moreover, this change corrects structural imbalances that have limited Hetch Hetchy Power’s ability to adequately fund its capital program and build reserves. With sufficient rate revenue, future Hetch Hetchy Power budget processes will be able to move past the austerity of recent years, and instead support strategic planning for the future of Hetch Hetchy Power.
The rates were successfully implemented only with significant effort from Power, Finance, Customer Service, and Information Technology This was a major project performed under time pressure. In light of time constraints and a significant scope, certain rate proposals were delayed from the July 2022 effective date and will be rolled out during subsequent fiscal years.
For example, changes to time-of-use periods and the compensation structure for net energy metering are needed but require additional analysis and customer engagement that is not possible at this time. This decision allowed the rates study to focus on delivering the prioritized changes effectively, but also meant that rates will continue to require focused resources and attention to ensure the programs can meet the expectations for modern power utilities.
4. Risk Management Activities – Emphasis for 2023
In 2023, the Power Enterprise will continue its efforts as outlined above with focus on:
4.1 Customer Interconnection and Expansion
The Power Enterprise will continue to negotiate with PG&E and litigate at the FERC to ensure fair and open access to PG&E’s distribution grid under the WDT.
Staff will continue to meet regularly with PG&E in order to move individual projects forward and Power Enterprise will continue to evaluate opportunities for larger strategic investments in distribution and transmission infrastructure that will allow us to maintain and, possibly, expand our direct customer base while we pursue other options to remove our reliance on PG&E for local distribution services.
In order to ensure safe, reliable, and affordable service to our customers, the City’s efforts in acquiring PG&E’s distribution assets in the City will continue to be a focus in 2023.
4.2 Portfolio Management
Power staff will continue the implementation and enhancement of Hetch Hetchy Power and CleanPowerSF portfolio management tool and designed hedging strategies. These new tools and approaches will improve Power Enterprise’s ability to perform robust and timely analyses for effective decision making.
To serve the CleanPowerSF customer load as outlined in the 2022 IRP, RPS long term procurement requirements, RA requirements, and other regulatory requirements, operations
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staff will continue to work on soliciting and negotiating Power Purchase Agreements for new combined solar and energy storage facilities, wind facilities, and Energy Storage Service Agreements with stand-alone 4-hour and long-duration energy storage facilities.
Given the continued uncertainty in RA supply and compliance requirements, Power staff will engage in regulatory proceedings and work with trade associations in 2023 to ensure the Power Enterprise is able to meet its obligations effectively and at reasonable cost.
4.3 Hetch Hetchy Power and CleanPowerSF Rate Study
As described in the prior section, certain rate changes were not included in the rates approved in May 2022 and continue through 2023 and subsequent years. Changes planned to be implemented in Fiscal Year 2023-24 include a review of the CleanPowerSF surplus compensation rate for net energy metering, a review of the rate structure for the Hetch Hetchy Power premium tariff, and the cleanup of various legacy rates charged to customers in Moccasin. Other updates, including time-of-use rates, net energy metering rates, and peak day pricing and other demand management programs, are expected to be addressed in subsequent years following a schedule developed by the Financial Planning group and reviewed and approved by Power Enterprise. These analyses will support further rate proposals which will ensure the Power Enterprise offers competitive products and services that customers increasingly expect. While the proposed schedule takes into consideration staff availability and need, it is possible that delays in certain rate structures could negatively impact the Power Enterprises’ customers by failing to offer expected programs or options. We will continue to monitor customer feedback and competitor’s rate offerings to ensure that Power Enterprise is not missing opportunities.