Approve a short-term Revolving Credit Agreement with Valley Clean Energy Alliance in an amount not-to-exceed $5 million, and authorize the Interim County Administrator or designee to execute an Intercreditor and Subordination Agreement with River City Bank to subordinate the County's Revolving Credit Agreement to loans or lines of credit provided to Valley Clean Energy by River City Bank. (No general fund impact) (Haynes)

1. Approve a short-term Revolving Credit Agreement with Valley Clean Energy Alliance (VCE) in an amount not-to-exceed $5 million; and
    
2. Authorize the Interim County Administrator or designee to execute an Intercreditor and Subordination Agreement with River City Bank to subordinate the County's Revolving Credit Agreement to loans or lines of credit provided to VCE by River City Bank.

Sustainable Environment

The Valley Clean Energy Alliance (VCE), like other Community Choice Aggregation (CCA) agencies throughout the State, has been negatively impacted over the last several years due to volatility in the energy sector resulting from COVID-19, sharp increases in power market costs, and increases in Power Charge Indifference Adjustment (PCIA) charges from PG&E.

California's investor-owned utilities (IOU), such as PG&E, use the PCIA to recover above-market costs associated with long-term power contracts that were entered into many years ago. The PCIA is charged to Community Choice Aggregators such as VCE in order to spread the cost of these contracts to customers who were formerly served by the IOUs. In 2021-22, the PCIA charged by PG&E increased by approximately 46% over the prior year. In addition, the extreme heat events that occurred in August and September 2020 increased average forward power market prices by approximately 57% due to speculation on the potential repeat events occurring in the future.

These factors resulted in significant impacts to VCE's fiscal position over the last several years. To mitigate this impact, VCE has taken a number of actions, including drawing down reserves, scaling back near-term acquisition of renewable energy credits and power purchase agreements, and implementing an accelerated 5% increase on generation rates beginning in November 2021.

Fortunately, on February 10th the California Public Utilities Commission (CPUC) approved a 57% reduction in the PCIA and a 33% increase in customer rates for calendar year 2022. Since VCE's customer rates are currently tied to PG&E rates, the anticipated customer rate increase will allow VCE to generate additional revenue, while the decrease in PCIA will reduce VCE costs. The estimated result of these rate changes substantially improves VCE's fiscal outlook for calendar 2022. However, despite this improvement, VCE is still projecting short-term fiscal strain beginning in March 2022.

Revolving Credit Agreement
To bridge the short-term cash flow need described above, VCE requested a loan of up to $10 million from Yolo County. The loan would be used to fund operations and maintain cash reserves at the policy minimum of 30 days of operating expenditures. County staff met with VCE staff on several occasions to discuss the loan request, review financial projections, and explore alternatives. In addition to the loan request from the County, VCE has worked with SMUD to gain access to a $2.5 million cash reserve that is held by SMUD to be used for short-term support of power purchases and operations. VCE has also been in discussions with River City Bank on extension of their credit line for 2022. River City Bank recently extended a $7 million line of credit to the end of February 2022 and is currently finalizing the 2022 credit line extension.  VCE does not intend to use credit lines in the long-term as it moves towards establishing an investment grade credit rating.

In light of VCE's projected cash flow needs, the availability of other financing options, and the County's lending capacity, staff recommend providing a not-to-exceed $5 million line of credit to VCE through a Revolving Credit Agreement (Attachment A). Such a loan should be adequate to cover VCE's short-term financing needs without imposing adverse impacts to the County. Under the terms of the short-term Revolving Credit Agreement, VCE would be able to draw upon the line of credit based on cash flow needs, subject to a maximum draw of one per month. Amounts borrowed would accrue simple interest at a variable rate equal to the Yolo County Treasury Pool Quarterly Earnings Rate plus 1.50% (1.99% as of December 31, 2021), and all principal and interest would be due on or before December 31, 2022. Security for the loan is made through a pledge of VCE's net revenues consisting of electric utility customer charges and a covenant to set rates sufficient to repay the loan and accrued interest by the due date.

If approved, the line of credit will be funded by the Demeter fund, which currently has an available balance of approximately $5.35 million. The Demeter fund is an endowment fund maintained by the County that accumulates funding each year from the deallocation of Tobacco Settlement revenues, with the intent of providing the County with an annual stream of revenue beginning in 2043. As such, the Demeter fund does not currently fund any operating expenses, and has been used by the County to make loans in the past. Any lack of repayment should it occur may jeopardize the endowment strategy. 

Staff from the Department of Financial Services and County Administrator's Office have worked closely with Valley Clean Energy to determine the recommended action. County Counsel's Office has assisted with drafting and reviewing the Revolving Credit Agreement and Subordination Agreement. Staff's recommendation of a $5 million line of credit was presented to and supported by the Debt Committee on January 20, 2022.