WCE becomes first black eye for California's CCA community following bankruptcy collapse

Following a decision last month to file for Chapter 9 Bankruptcy with the Federal Bankruptcy Court for the Central District of California, Western Community Energy (WCE) has now filed a Notice of Deregistration with the California PUC, making it the first CCA in the state to collapse.

The organization is citing several issues, largely related to COVID-19 as factors that led to its "fiscal emergency," and ultimate deregistration, as declared by the Board.

"The ongoing impacts of COVID-19 severely limited the organization's options moving forward and forced this action," WCE Chairperson Todd Rigby said.

For starters, the CCA was launched in a difficult time, right as the COVID-19 pandemic was ravaging California in April of last year. During this period, due to an order issued by California Governor Gavin Newsom, WCE could not disconnect customers due to non-payments. According to the CCA, this led to a rate of delinquencies that was 10 times higher than "pre-pandemic industry standards" that "cost WCE millions of dollars in added cost burden."

Additionally, WCE placed significant blame on the "unprecedented heat event" that struck California last August, leaving many without power for hours and spiking the cost of energy.

"Although WCE had secured 90 percent of its electricity needs for the summer of 2020, the heat storm exhausted the projected supplies prematurely," a spokesperson said. "An additional USD 12m in energy costs were incurred throughout the 2020 summer season due to the unanticipated warm weather."

California's tightening requirements for Resource Adequacy during the summer was also blamed for creating a shortage in the market and significantly increasing the cost of regulatory compliance.

WCE hired bankruptcy law firm Weiland Golden Goodrich LLP as its legal representation for the bankruptcy proceeding. The firm initially estimated that the legal process would take around six months as WCE communicated to its customers that they would not experience any service disruptions. However, just last week, the company's Board unanimously approved a second resolution to file a Notice of Deregulation with the California PUC when it "became apparent that WCE would not have sufficient power for its customers going into July." As a result, all remaining WCE customers are currently being transitioned to utility Southern California Edison (SCE), a process that will continue over the next week.

"The deregistration process is the best solution that ensures little to no impact to WCE customers," Rigby said. "We are working closely with SCE on an orderly and efficient transfer, and both organizations are committed to making certain that there will be minimal impacts and no service disruptions to customers.”

In a statement, WCE's PR team shed some additional light on the dramatic decision to deregister.

"WCE, in particular, was impacted by the decision of the energy generators to terminate contracts to provide electricity going into the summer months," the statement reads. "Without this energy, WCE was forced to purchase energy at market prices that fluctuate daily and are currently high due to anticipated demand as temperatures swell over 100 degrees in the next few weeks."

The problems do not end there for the beleaguered organization; under existing CPUC rules, SCE can seek additional recovery fees from WCE for the utility's ballooning administrative costs because of its influx of new customers. This process will also likely increase costs for WCE's previous customers as they shift back to a regulated utility. A WCE statement claims that the organization is working to "secure assistance from the State of California to minimize" these additional costs.

The bankruptcy filing is the first major black eye on California's CCA model, one that has led to multiple GW of renewable energy origination and have contributed significantly to the rise of battery storage capacity in the state. In a very brief statement, CalCCA, the body that represents CCAs at the state legislature and regulatory agencies comprised of a voting membership of operating CCA programs in the state, said that they were aware of WCE's bankruptcy filing and would continue to closely monitor the situation. Other than that, the statement simply points to the other 23 CCA programs in the state and iterates that no other CCA has filed for bankruptcy protection.

"CalCCA is not aware of other CCA programs that are in financial distress or facing bankruptcy," the statement reads.

Meanwhile Fitch Ratings said that this turn of events highlights some of the credit weaknesses inherent in the CCA business model.

"Most CCAs, including WCE, have no long-term debt, but working capital requirements in support of energy procurement and hedging activities can be significant," an assessment released by Fitch read. "Without the benefit of cash reserves built up over years of operation, WCE was unable to buffer the impact of increased pressure on cash flow resulting from both high-power costs and rising delinquencies attributable to the COVID-19 pandemic, economic hardships, and an inability to disconnect customers for nonpayment. CCAs do not benefit from broad access to bank facilities and capital markets like most municipally owned electric utilities."