Municipal electric and natural gas aggregation — a win-win for municipalities and residents
Municipal aggregation is the process by which a municipality combines (or “aggregates”) the retail electric and/or natural gas load of its residential and small commercial constituents and negotiates a rate with a competitive energy supplier to provide the customers’ electric and/or natural gas supply. The municipality does not acquire or sell electricity or natural gas to its residents; rather, it merely contracts with a competitive supplier to provide service on its residents’ behalf. The municipality’s residents benefit because the larger, aggregated load permits the municipality to negotiate a rate with the competitive supplier that is lower than the traditional utility’s current standard service rate for individual customers. Municipalities can benefit, apart from providing a valuable service to their constituents, by negotiating with the supplier to cover the cost of the aggregation program and/or provide civic grants, while still saving their constituents money.
Municipal aggregation and selection of a competitive provider of electric and natural gas supply has been possible in Ohio for more than a decade; however, recent events in each industry make the time ripe for municipalities to implement aggregation programs.
Natural Gas Aggregation
Under current industry regulations, consumers can select a competitive natural gas supplier, but those who don’t do so continue to take their traditional utility’s (e.g., Columbia Gas, Dominion East Ohio, Vectren) default service, also known as the standard service rate. This rate currently is set through a competitive wholesale auction process overseen by the Public Utilities Commission of Ohio (PUCO), and has been cost effective. However, in recent cases, the PUCO has signaled its intention eventually to eliminate the utility’s default service for commercial customers, in which case default service customers would randomly be assigned to a competitive natural gas supplier. The rates charged upon assignment would not be set through negotiations with the customer or the PUCO-sanctioned competitive auction process, but would be set at the discretion of the competitive supplier. Proposals also have been made to the PUCO for the eventual elimination of the utility default service for residential customers.
Early on, municipal electric aggregation found its most success in Northeastern Ohio, attributable largely to comparatively higher electric rates in the FirstEnergy service territory. Today, approximately 75 percent of residential customers and 80 percent of commercial customers in FirstEnergy’s territory have switched to a competitive supplier. Ohio’s remaining electric utilities (e.g., AEP Ohio, DP&L and Duke Energy) lag behind FirstEnergy in the number of customers taking alternative electric supply.
Currently, only approximately 25 percent of AEP Ohio, 40 percent of DP&L, and 50 percent of Duke residential customers have switched. However, more recent increases in these utilities’ standard service rates, coupled with the PUCO’s pro-competitive policies, have led to an influx of competitive suppliers and offerings, making alternative supply options very attractive. Significantly, proposals also have been offered in a pending PUCO investigation, as in the natural gas industry, eventually to eliminate the electric utilities’ default service and randomly assign default customers to competitive suppliers at their discretionary rates.
The Risk and the Opportunity
The risk of municipal inaction is obvious: constituents, if they choose to obtain electric and/or natural gas supply from a competitive supplier, would be required to obtain service for their individual accounts. While individual contracts are likely to provide a benefit over the utility’s standard service rate, constituents nevertheless would forego the even lower prices that municipally-aggregated service could provide. Of course, this assumes that residential customers are inclined to enter into such individual contracts. Statistics provided by the PUCO show otherwise, considering that, as of September 2013, the vast majority of Ohioans (more than 71 percent) who have an alternative electric supplier belong to a governmental aggregation program. Because residential consumers are less likely to enter the competitive energy market on their own, those consumers in municipalities that have not aggregated would be susceptible to being randomly assigned to less favorable competitive supply contracts if the PUCO continues down the path to eliminating utilities’ default service.
The convergence of higher standard service rates, the influx of competitive suppliers, and the first steps taken to eliminate the utilities’ standard service, present a unique opportunity for municipalities to assist their residents in obtaining very competitive energy rates in the current energy environment, and particularly in the AEP Ohio, DP&L and Duke electric service territories. Residents, usually unfamiliar with, and hesitant to learn, the nuances of competitive electric and/or natural gas supply, would benefit by having the municipality take the lead in negotiating lower energy rates on their behalf; and, as stated previously, municipalities could benefit by negotiating with the supplier to cover the cost of the aggregation program and/or provide civic grants.
The Statutory Process
The process to form an “opt-out” municipal aggregation program is fairly straightforward and governed by state law. Under an opt-out aggregation program, all eligible customers within the municipality’s boundaries are automatically included in the program unless they affirmatively opt out. Ohio law requires that:
- the municipality authorize the opt-out aggregation by ordinance;
- the opt-out aggregation program be approved by a majority of voters in a primary or general election;
- the municipality adopt a plan under which the aggregation program is operated and governed;
- the plan be aired in two public hearings;
- eligible customers be provided the rates, terms and conditions for the electric supply;
- eligible customers be given the opportunity to opt out of the program prior to enrollment, usually by returning a form provided with the materials describing the program’s rates, terms and conditions;
- customers be given a second opportunity to rescind their enrollment, after mandatory notice from the utility that their service is about to be switched to the competitive supplier; and
- customers may opt out of the program at least every three years without an early termination fee, or may leave the program at any time without a fee if the municipality requires the competitive supplier to waive an early termination fee in the contract it enters
The Devil in the Details: Selecting a Supplier and Negotiating a Contract
Ohio’s aggregation law is geared toward protecting residential and small commercial customers in their individual contacts with competitive suppliers; however, it leaves the decision of how to select a supplier and the terms and conditions of the supplier’s contract to the municipality. It is in these areas that municipalities could benefit most from experienced counsel to protect the municipality’s own interests and those of it constituents.
Although it may be tempting, and expedient, to entertain solicitations from individual suppliers, a thoughtfully considered request for proposals (RFP) should be developed and submitted to all competitive providers operating in the traditional utility’s service area. The RFP process provides the municipality with the ability to attract bids from a large and diverse group of suppliers to ensure it obtains the most competitive bids possible. Moreover, it provides the opportunity for the municipality to be proactive by explaining the type of product it is seeking (e.g., fixed rate, variable rate, percent-off default rate, renewable (green) energy, etc.), as well as the provisions it will require as a part of its agreement with the supplier (e.g., indemnification, supplier default, financial security for supplier performance, no early termination fees, supplier-provided civic grants, and payment of aggregation program costs, including legal fees, etc.).
Competitive suppliers may present the municipality with a form contract to consider. However, these contracts are negotiable and, even in cases in which the RFP has required agreement to certain contractual provisions, negotiations almost certainly must be undertaken with the competitive supplier to ensure that the intended provisions are enforceable under the final contract language. In this vein, the negotiator’s goal is to ensure the benefits of the aggregation program during its initial two- or three-year term, and also to ensure the viability of the program into the future to continue to provide benefits to the municipality and its residents in successive aggregation terms.
The Process Works
Basic concepts of economies of scale and bulk buying power (think Sam’s Club) leave little doubt that municipal aggregation can provide communities with significant savings. A real-life example demonstrates the success of governmental aggregation programs in Ohio: the Northeast Ohio Public Energy Council (NOPEC) is the largest governmental aggregation group in the nation. It is comprised of approximately 130 communities with roughly 500,000 electric customers and 275,000 natural gas customers. Since its inception in 2001, NOPEC has saved its customers more than $200 million on electric and natural gas supply, and expects the savings to top $300 million by the end of its current aggregation program.
Municipal aggregation in Ohio works. By selecting a supplier through a competitive bid process and carefully negotiating a contract with the supplier selected, a municipality can obtain revenues to support the cost to operate the aggregation program and/or civic causes, while providing constituents considerable savings on their energy bills. That’s a win-win.