POTENTIAL LIABILITIES

GENERAL LIABILITY

The current plan calls for the use of revenue bonds, with repayment of the bonds from the revenue collected. Further, it is understood that there will be no general liability against the county, the cities or participating members - assuming that suppliers are willing to take that risk.

CLASS ACTION SUITS

The creation of a system with two suppliers and two user groups using a single common distribution system will create potential legal problems when there is a failure by one of the suppliers to provide adequate power for all of its users - causing brownouts or rolling blackouts.

Which will be the party that caused the problem?

Inherently, each of the two suppliers must provide an adequate supply of power to meet not only the normal requirements but also the Peak Power requirements - which occur in late afternoon and early evening in the summer time.

Neither solar power, which will not be effective as the sun goes down, nor wind power, which can not be counted upon if the wind temporarily fails, can be counted upon to provide this peak power demand.

Accordingly, it must be provided by thermal or hydro plants which must be on a spinning reserve standby basis to provide the peak power.

The physical implication of this is that the CCA will have to have thermal or hydro power plants on-line with a capacity that duplicates any solar and wind power.

This duplicate power can be either self produced or be purchased by any number of contracting methods, generally referred to as spot power or long term power contracts.

Long term contracts are favored by most suppliers for they are guaranteed to get their money back through the contracted long term sales. Of course that works both ways, the customers are committed to the purchase - or pay anyway. In addition, the customers are assured of an adequate supply even if there is a shortage in the overall industry.

To the extent that there is an existing excess power generating capacity in the local or regional area power suppliers will be willing to sell their power as spot power ( with only a very short term or non-existing contract) at a reduced price since obtaining some income is better than receiving none.

However, when there is a shortage of power supply the price of spot power increases dramatically. (Remember the Enron spot power price fixing debacle). Alternatively, if spot power is just not available, this may cause forced brownouts or rolling blackouts if the power supplier (either PG&E or the CCA) had relied upon its availability.

Then who was at fault for the inconvenience of the system failure - PG&E or the CCA?

If you look at motives, PG&E has no motive to rely upon lower cost spot power, they just add the cost of long term contracts for firm power to the rate base.

Alternatively, locally elected or appointed CCA officials will likely by working hard to keep costs down and will be tempted to rely on spot power to a larger extent than they should.

As a result, the general perception of the public is likely to be that the power shortage was caused by the either the less mature power systems of the CCA (with solar that did not produce late in the day and/or wind power that failed due to a lack of wind) or with too much reliance on the availability of lower cost spot power.

Accordingly, class action suits by PG&E customers suing the CCA and its customers for damages should be expected.

There is one way to avoid this problem. That is for the CCA to mandate that all of its customers install TIME-OF-DAY meters so that when a power failure occurred they could add up all of their customers usage and show that it was less that their metered supply system at the time of the shortage.

Fortunately, PG&E has a program to install Smart Meters, which will have a time of day metering capability, for all of its customers. Click here to link to their program and see their schedule for such installations. Presumably, most of these will be accomplished before the transition to the new CCA takes place. However, the CCA should assure themselves that all of its customers do have such meters installed and are being monitored for time of day billing purposes before they are allowed to automatically Opt In.

BUY-IN BUY-OUT

It must be recognized that the creation of a whole new power supply system involves the expenditure of substantial sums of money. As an example, conventional thermal power plants cost on the order of $1000 per kilowatt of capacity, and solar electric systems cost on the order of $7,000 per KW capacity. Since the average residence consumes approximately 2 kilowatt hours per hour during the peak summer demand period that means that there has to be a new power plant investment of several thousand dollars per residence - unless the CCA is unwisely depending upon spot power purchasing for the peak power demand period.

While most of PG&E's facility costs have previously been written off by past rate payers monthly bills, they purchase a substantial amount of power based on long term contracts.

These long term contracts were entered into in order to assure firm power availability to its existing customers, and they have every legal right to a Buy-Out re-imbursment for their related costs if massive numbers of their customers leave their system to join the CCA.

Equally, several thousand dollars will be invested for each new CCA customer, with reliance for its repayment upon future customer billings. Accordingly, if a CCA customer decides in the future that he would like to return to PG&E, the CCA will require that he Buy-Out the remaining unpaid investment that they have made on his behalf - unless another customer can be found to assume that burden. (Or will there be a Futures Market for CCA memberships?)

Note that it makes no difference whether or not the CCA owned the power generation facility themselves or entered into a long range contract for purchase of the power.

While these general principles are obvious, the CCA and the PUC have worked out formulas for repaying these Buy-Out costs over a period of time as part of each users monthly bill - with the details of whether or not the unused power can be sold elsewhere buried in comparisons of costs from various sources - assuming that the power can be sold if other users are willing to pay a higher price, but not be sold if excess power availability drives the cost of spot power down.

While these formulas make it look like the amount of Buy-Out is small, the amounts appear small only because they are extended over a substantial period of time. The total amount of the Buy-Out, plus interest, has to remain the same unless it is absorbed by a new customer - or absorbed by the remaining CCA customers.