Local Business

The Number of Customers Opting Out Could Negatively Affect OCPA’s Operations

California State Auditor Report February 2023

One of the more important measures a CCA must monitor is its participation rate. According to state law, a CCA must inform customers in member communities at least twice before they are automatically enrolled that they have the right to opt out of the CCA without penalty. The proportion of eligible customers who receive service from the CCA is expressed as its participation rate.

In the months since OCPA began providing commercial service in April 2022, more customers than expected have opted out. A January 2020 community choice energy feasibility study and technical assessment (feasibility study) prepared for the city of Irvine assumed a residential participation rate of 95 percent and a commercial participation rate of 90 percent. OCPA’s budget model for fiscal year 2022–23 makes the same assumptions. According to an implementation plan that OCPA’s board approved in December 2020 and amended in December 2021, these anticipated participation rates of 90 to 95 percent were based on reported opt‐out rates for other California CCAs.

However, as Figure 5 shows, OCPA’s residential customer participation rate had dropped to 77 percent as of January 2023—only a few months after it began to provide this service. The participation rate for commercial service, which launched in April 2022, was 88 percent as of January 2023. Not only are OCPA’s participation rates already lower than it projected, they are also below the participation rates of other California CCAs.

According to the feasibility study, recent CCAs’ participation rates have ranged from 90 to 97 percent of potential customers. In addition, other CCAs’ experiences indicate that more customers may opt out as time goes on. For example, communities added more recently to Marin Clean Energy (MCE), the first CCA in California, have higher participation rates than communities that joined MCE in the past. In a June 2018 presentation, MCE indicated that the average participation rate for the communities that joined MCE before 2018 was slightly more than 83 percent, whereas communities that began receiving service in 2018 had average participation rates of nearly 91 percent.

Low participation rates reduce OCPA’s total revenues and can affect its net income.

OCPA’s CFO asserted that, if other factors remain the same, changes in OCPA’s participation rates have a proportional relationship to its revenue and the amount it spends on energy. Therefore, lower participation rates reduce OCPA’s operating revenue and, to a slightly lesser degree, its energy costs. OCPA does not have an estimate of the reduction in its fiscal year 2022–23 revenue that is specifically attributable to the lower‐than‐anticipated participation rate. However, we estimate, based on the $302 million in annual revenue OCPA originally projected, that the difference between its projected participation rates and its current participation rates could reduce its expected gross revenue by more than $22 million in fiscal year 2022–23 alone.

Although there are other factors that our estimate does not account for, and which could increase or decrease this amount, OCPA’s CFO confirmed that our method for estimating the reduction was not unreasonable. The CFO also stated that customer opt‐outs have a minimal impact on the financial bottom line because OCPA can reduce the amount of power it procures going forward to account for a lower number of customer accounts and can sell excess power.

After we shared our estimate with the CFO, she provided an estimate that the majority of the reduction in OCPA’s gross revenue would be offset by a reduction in its total cost of energy and that OCPA’s net income would be reduced by approximately $1.4 million. However, notwithstanding potential additional cost savings that we did not quantify but that could result from the reduction in the number of customers OCPA must serve, a $1.4 million reduction represents 30 percent of OCPA’s budgeted net income for fiscal year 2022–23. Thus, these customer opt‐outs may have a significant impact on OCPA’s financial bottom line. Further, even though the CFO stated that OCPA will always be able to sell its excess power and may be able to sell that power for more than it paid, she acknowledged that there is no guarantee that OCPA will be able to sell the power for as much as it paid.

Low participation rates may also affect the economies of scale that OCPA needs to ensure that it can provide power for the lowest price possible. One reason is that participation rates affect the amount of fixed, nonenergy costs that OCPA passes on to each customer. OCPA’s fiscal year 2022–23 budget notes that if it experiences higher‐than‐assumed opt‐out rates, its fixed costs will be spread over a smaller amount of power sold.

In other words, prices would increase for the remaining customers because each of them would have to pay a greater portion of the fixed costs. In addition, research has found some evidence that CCAs that sell more electricity enjoy lower per‐unit energy costs.

Similarly, OCPA’s own website explains that as power demand increases, OCPA will be able to negotiate more competitive rates and bring in more revenue. To the extent it is successful in doing so, it may be able to offer its customers lower rates. OCPA staff disagreed that the opt‐out rate is a key consideration for power suppliers when negotiating energy prices, and the CFO indicated that she believes that when negotiating prices power suppliers are more concerned with other factors, such as OPCA’s liquidity and whether OCPA has an investment‐grade credit rating. Although credit rating agencies have not yet evaluated OCPA’s creditworthiness, the published ratings of some other California CCAs cite those CCAs’ participation rates as key credit risks.

Although a low participation rate among its current member communities hinders OCPA’s goals of increasing both renewable energy use and local control of energy production, OCPA can likely absorb a significant opt‐out rate because of its relative size. When measured by the number of customer accounts, OCPA is more than twice as large as many CCAs currently operating in the State. Nevertheless, a CCA feasibility study commissioned by the city of Irvine that preceded OCPA’s formation characterized an 80 percent participation rate for a CCA as a “worst‐case scenario.” Even though the study stated that a CCA could achieve its financial objectives with that participation rate, it is notable that OCPA’s residential participation rate has fallen below this level at such an early stage, and the low rate indicates significant concerns about OCPA’s operations among its potential customers.

The prospect of losing entire member communities presents an even more significantand pressing problem.

In response to concerns about OCPA’s operations, including its transparency and accountability, in August 2022, the Orange County board of supervisors requested an audit of OCPA. Audit reports of OCPA’s operational performance and business processes were published in December 2022. They identified issues with OCPA’s contracting practices and oversight, its communications regarding customer rates, and other potential governance and transparency issues.

Following the release of those audit reports, the board of supervisors voted to withdraw from OCPA, reversing its plan to have OCPA provide power to the county’s unincorporated areas. Although the decision did not apply to individual member communities of the CCA, it foreshadowed additional concerns for OCPA.

Later on the same day of Orange County’s vote, the Huntington Beach city council directed city staff to explore options to withdraw as well. If OCPA is unable to adequately address its member communities’ concerns about transparency and accountability, its ability to retain or add the customers necessary to realize its goals may be limited, and it would risk dissolution or customer losses of a magnitude that could pose a threat to its ability to offer competitive rates for electricity.

Some OCPA Practices Lack Proper Board Oversight and Could Contribute to Negative Public Perception

In part due to insufficient oversight by its board, OCPA’s staff repeatedly circumvented key elements of its contracting policies. As a result, OCPA cannot demonstrate that it acted in its customers’ best interest when it executed $1.8 million in marketing and financial services contracts. We also reviewed other areas in which OCPA is in compliance with the legal requirements we evaluated but could nonetheless improve its processes for sharing information with its member communities and its customers.

OCPA Has Engaged in Contracting Processes That Were Neither Competitive Nor Sufficiently Accountable

Shortly after it was formed, OCPA established procurement policies that it later circumvented and violated. In January 2021, OCPA’s board adopted two administrative policies: its procurement policy, which established its procurement practices, and its delegated contract authority policy (contract delegation policy), which established the parameters of its CEO’s authority to execute, amend, and alter contracts. According to the policies, both are intended to facilitate efficient business operations. As Table 1 illustrates, these policies establish requirements for the solicitation, evaluation, and board approval of contracts, which vary depending on the value of those contracts. In fiscal year 2021–22, contract services were OCPA’s second‐largest category of expenditures.

We identified several instances in which OCPA’s execution and amendment of a series of contracts for marketing services violated its policies and skirted its board’s oversight. First, OCPA could not demonstrate that it evaluated the proposals it received for those services, as its policy requires. In March 2021, OCPA issued a request for qualifications (RFQ)—as required by its procurement policy for the purchase of goods and services totaling more than $125,000 in any given contract year or term—for marketing and communications services. According to its CFO, OCPA received seven proposals in response to the RFQ. Under the OCPA policies summarized in Table 1, each of these proposals should have been evaluated according to a set of criteria and a scoring system. According to the CEO, he and another OCPA staff member—who were the only two employees at the time—evaluated the proposals before making a selection. Nearly a year later, the CEO asserted to the board that OCPA had reviewed and ranked these seven proposals.

However, the CEO could not provide any documentation of this review nor the proposals’ relative ranks. Without this documentation, it is not clear what factors OCPA evaluated when making its selection, and it cannot demonstrate its rationale for selecting the winning proposal.

After selecting the winning proposal, OCPA circumvented requirements of its procurement policy by splitting the proposal it selected, meaning that it entered into multiple contracts for services contained in a single proposal.

According to its procurement policy, OCPA cannot split purchases into more than one purchase in order to avoid its competitive procurement requirements. Although OCPA executed three separate contracts for marketing and communications services, the related response to its RFQ was a single proposal from an entity that intended to use two subcontractors.

By executing three separate contracts, OCPA also avoided the policy requirement described in Table 1 that it obtain its board’s approval for all contracts of more than $125,000 before their final execution. As Figure 6 shows, by executing a separate contract with each of the three entities—instead of a single contract with the lead contractor who would oversee the two subcontractors, as the proposal described—OCPA reduced the value of the individual contracts to a level that did not require several key oversight mechanisms that would have applied had it executed a single contract for the same services.

When we asked the CEO to explain why OCPA executed a separate contract with each entity, he contended that the contracts were not split. He stated that the RFQ provided OCPA with the authority to award individual contracts for separate scopes of work and services and that doing so was warranted given the distinct scope of services provided by each company. Although OCPA’s RFQ did include such a statement, the effect of OCPA’s awarding separate contracts in this way was to bypass the requirements established in its policy that prohibit the splitting of purchases and require the board’s approval for contracts of more than $125,000.

These measures were designed to provide transparency and accountability, and they would have been necessary had OCPA entered into a single agreement for an equivalent total amount with the lead contractor (Contractor 1) as the contractor proposed. When we asked the CEO why he executed three contracts at this exact threshold, he explained that the amounts were reasonable in his judgment, given the equal work that was needed, and that one contractor was not performing a smaller, specialized task as a traditional subcontractor would.

However, we question whether it was a coincidence that the value of the work to be done by each of these contractors was just below the threshold in OCPA’s policy for disclosure to the board. Further, we were unable to identify any administrative cost savings resulting from splitting this proposal, reinforcing the appearance that doing so was for the purpose of evading the requirement for obtaining the board’s approval.

To read the full report go to: https://www.auditor.ca.gov/pdfs/reports/2022-120.pdf