Municipal Aggregation of Electricity

We know there are Winners – but are there also Losers?

We’ve all heard about how much municipal aggregation is saving residential and small business customers in communities surrounding Chicago. The twenty first-round municipalities (i.e., April 2011 ballot initiative) have reported savings of approximately 25% versus ComEd’s “price-to-compare.” And the savings for the current-round municipalities are even more impressive, especially if you use ComEd’s high winter rates (8.32¢/kWh) for comparison. Forty plus percent savings from October 2012 through June 2013 are being heralded by those putting these deals together.

Obviously, with savings at any level, residents and small businesses in the communities that have passed referenda are winners in this process. So are there losers? What about those who didn’t take the plunge into municipal aggregation? And what about “small commercial” customers who don’t qualify for aggregation due to their size? Could the environment be compromised by these cheap energy prices?

Losers

There are several groups of losers who are subsidizing the winnings of those 30% in ComEd’s service territory who are actively participating in municipal aggregation.

Purchased Electricity Adjustment

The electricity ComEd is selling residents was purchased through long-term contracts about four years ago. Since that time, the market price of electricity has declined. Also, with many residents leaving ComEd’s electricity supply for cheaper third party supply through either aggregation or other means, ComEd has to sell this purchased power back into a lower-priced market. Buying high and selling low is a surefire way to lose money, but ComEd doesn’t make or lose money on selling electricity – instead, the remaining ComEd supply customers are picking up the tab through the Purchase Electricity Adjustment, PEA, charge on their bills. ComEd projects that the PEA will be a 0.5¢/kWh surcharge on all electricity they sell to their customers. Those on third party supply don’t pay this charge and, as more customers switch to third party supply, the remaining ComEd customers will have to pay more (through the PEA) as a greater volume of electricity has to be sold at a loss.

“Small Commercial” Customers

Between the first and second wave of aggregation, the ComEd’s Tariff guiding the municipal aggregation (Rate GAP) process was modified. Originally, small commercial customers were defined as those using a maximum electrical demand of 100 kW. When the rules were revisited, it was noted that a greater number of commercial customers in this group had migrated to third party on their own. With these new data in hand, the ICC felt that municipalities did not have to get involved in this active free market. Therefore, it limited the definition of small commercial customers who can participate in the municipal aggregation rates to those who use 15,000 kWh/year or less. This had the effect of reducing the size of this market segment to 5% of its original value and preventing commercial customers using between 15,001 kWh/year and 100 kW in demand from partaking in the lower electricity rate process.

Efficiency and Demand Response

In the law that governs municipal aggregation, there is a clause that states each municipality pursuing aggregation has to address energy efficiency and demand response as part of their Plan of Governance. The hope was that community administrators would use the electricity cost savings from seeking third party supply to help residents use less electricity going forward. Well it didn’t happen: almost none of the aggregated municipalities have done anything to address these issues. Any student of economics will tell you that a lower price increases consumption. Thus, without any municipal effort to curtail electricity usage to counteract the increased consumption from the reduced rates, in the end, the effect on the environment from aggregation will be a negative one.

What to do now? Communities have a few options

As communities investigate their options, they need to be mindful of the fact that ComEd’s prices are going to drop in June 2013, when their expensive electricity contracts expire. Unfortunately, within the aggregation framework, the next ballot opportunity for an aggregation referendum will be November 2012. That means that cheaper electricity supply probably won’t arrive until February/March 2013. So the fall in ComEd’s rates in June 2013 won’t leave many months of savings for newly aggregated municipalities. If you go through the calculations, other third party options will yield more savings than a November 2012 aggregation initiative, while still leaving the opportunity to return to ComEd in June 2013 if necessary. And as these two efforts are not mutually exclusive, municipalities can pursue both options (i.e., third party now and aggregation on the November ballot), which will result in the greatest savings for residents.

Commercial Customers are the Big Losers

The big losers are the commercial customers that fall between 15,000 kWh/year and 100 kW in demand and don’t take advantage of third party supply. Not only will they be paying ComEd’s higher rates and subsidizing those who leave ComEd through the PEA, but also there is no hope of municipal aggregation coming to their rescue as they cannot be included in the process. For these customers organized opt-in programs are the best bet.

Energy Efficiency, Demand Response and Mother Nature

As usual, the environment is the last thing considered in most electricity supply discussions. There are some opt-in programs, however, that address energy efficiency (as our legislators had hoped) which has the added customer benefit of lowering expense from energy consumption along with benefiting the environment. As communities move forward with aggregation, they should put together plans that include efficiency and demand response efforts. With the projected drop in ComEd’s price post-June 2013, this may be the only opportunity to use these huge savings to do the right thing for Mother Nature.