Message-ID: <9485082.1075859841904.JavaMail.evans@thyme> Date: Thu, 5 Apr 2001 06:03:00 -0700 (PDT) From: issuealert@scientech.com Subject: Aggregation Takes Off in Ohio Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: "SCIENTECH IssueAlert" X-To: X-cc: X-bcc: X-Folder: \Mark_Haedicke_Jun2001\Notes Folders\Notes inbox X-Origin: Haedicke-M X-FileName: mhaedic.nsf Today's IssueAlert Sponsors:=20 [IMAGE] Southeastern Electric Exchange=20 2001 Utility Odyssey: Engineering & Operation/Accounting, Customer Billing and Finance Conference= =20 and Trade Show The Doral Resort Miami, FL =20 Featured speakers include Wall Street Analysts Ed Tirello and Dan Ford and= =20 SEE Company Utility Executives Donald Hintz, Entergy Corp., Dennis Wraase,= =20 Pepco, and Bill Coley, Duke Power=20 For full details: www.theexchange.org=20 Which e-commerce energy provider had over 600,000 customers in nine states = =20 at the end of 2000 and expects to become the largest unregulated electrici= ty=20 and gas marketer in the U.S. in the first half of 2001? 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Visit our website= =20 at www.ConsultRCI.com for a detailed description of these valuable maps and= =20 complete ordering instructions.=20 [IMAGE] IssueAlert for April 5, 2001 Aggregation Takes Off in Ohio by Will McNamara, Director, Electric Industry Analysis with additional contributions from Bob Bellemare, Vice President, Utility Services Green Mountain Energy Company, featuring the leading brand of cleaner and= =20 renewable energy, announced the completion of the country's largest-ever=20 energy aggregation contract encompassing more than 400,000 Ohio electricity= =20 customers. The ground-breaking, six-year agreement was struck with the=20 Northeast Ohio Public Energy Council (NOPEC), a public electricity buying= =20 group which represents households across eight Ohio counties. Under the ter= ms=20 of the contract, Green Mountain Energy Company will begin serving residenti= al=20 customers across the NOPEC area with cleaner and renewable energy beginning= =20 Sept. 1, 2001. =20 Analysis: This announcement came out two weeks ago, but it draws attention = to=20 a growing trend for energy aggregation in the state of Ohio. Although full= =20 competition began in the state on Jan. 1, Ohio is maintaining a "market=20 development period" that will last for the next three to five years. During= =20 this period, residential customers will continue to receive a 5-percent=20 reduction in the generation cost of their electric bill and hopefully take= =20 the time to make educated choices about where their power supply originates= .=20 However, what many Ohioans may not fully understand is that the many cities= =20 in the state actively engage in load aggregation, a program that empowers t= he=20 cities to select power suppliers for their residents (unless the residents= =20 clearly opt out of the aggregation).=20 According to the Consumers Counsel of the State of Ohio, which recently=20 issued an assessment report on deregulation in the state, an estimated=20 152,000 residential customers in FirstEnergy territories have switched to n= ew=20 suppliers. About 500 AEP, Cinergy and Dayton Power & Light residential=20 customers have switched. (Note that these figures do not include many new= =20 aggregation contracts). In addition, 36 electric suppliers have been=20 certified with the Public Utilities Commission of Ohio (PUCO) to provide=20 electric generation services to Ohio's residential consumers. Of these, jus= t=20 two currently have offers on the table and are soliciting new customers.=20 Consequently, the report concluded that Ohio does not yet represent a stron= g=20 competitive market, and that the true benefits from competition won't=20 materialize in the state for three to five years (after the market=20 development period and rate reductions have expired). However, as municipal= =20 aggregation unfolds in Ohio, new suppliers (such as Green Mountain Energy)= =20 are finding new competitive opportunities, which could serve to jumpstart t= he=20 market in the state.=20 Although few Ohio residents are consciously making the choice to switch to = a=20 new power supplier, they might find that their service has been switched ov= er=20 to a new provider just the same. Ohio's restructuring law permits aggregati= on=20 of electricity consumers by any entity that becomes certified with the PUCO= .=20 Aggregation is the process by which consumers pool together their load and= =20 form an energy buying group. In theory, aggregation is supposed to reduce a= =20 power supplier's costs as the supplier is serving a group rather than havin= g=20 to acquire customers on an individual basis, which is an extremely costly= =20 proposition. These reduced costs typically are passed on to the consumers i= n=20 the aggregated group, which makes buying power by bulk an attractive idea f= or=20 many energy customers. Aggregation is not a new concept and has been used b= y=20 various buying groups across the country. What makes aggregation noteworthy= =20 in Ohio is that an unusually large number of cities across the northern par= t=20 of the state have now become energy brokers for their residents, intending = to=20 secure lower rates by engaging in aggregated sales contracts with power=20 suppliers. In addition, Ohio is unique because many of its cities are=20 automatically putting their residents into an aggregation program unless th= e=20 residents take the formal effort to step out of the program. =20 Residents within a city in Ohio must approve energy aggregation through a= =20 referendum. In March 2000, the city of Parma, Ohio, became the first city t= o=20 vote in favor of an aggregation plan. In fact, residents of Parma=20 overwhelming passed the measure, giving the city government the authority t= o=20 serve as a power broker. Since that time, a large number of cities througho= ut=20 Ohio have followed suit. According to a report in The Toledo Blade, 136=20 cities, villages, townships and counties across the state have voted on=20 aggregation ordinances, and according to the paper the ordinances have pass= ed=20 overwhelmingly in all areas. The most current data available from PUCO=20 indicates that 23 cities have filed applications to become energy=20 aggregators, and that 19 cities=01*including Cleveland and Toledo=01*have b= een=20 formally certified to buy power on behalf of their residents. (Note that=20 NOPEC, which has secured the contract with Green Mountain Energy, counts fo= r=20 one certification although the group represents more than 100=20 municipalities.)=20 These cities, serving as the aggregating agents, negotiate offers with powe= r=20 suppliers and purchase energy services on behalf of the buying group (in=20 Ohio, this means any resident of a particular city that has been approved a= s=20 an aggregator). The most-often identified driver behind the move toward=20 aggregation is the anticipated savings that a city believes it will be able= =20 to secure for its residents. For instance, the Toledo City Council reported= ly=20 sold its residents on the idea of aggregation by predicting that savings in= =20 the range of 8 to 10 percent could be achieved. The incumbent utility servi= ng=20 the Toledo area is Toledo Edison (a subsidiary of FirstEnergy, which=20 reportedly has the highest rates in the state). Naturally, Toledo residents= =20 embraced the aggregation plan with great enthusiasm. The city of Toledo is= =20 still negotiating contracts with power suppliers, but at this point has not= =20 received an acceptable bid. Under Toledo's aggregation plan, the city has= =20 established that it will "competitively bid and negotiate a contract with a= =20 competitive retail electric supplier to provide firm, all-requirements=20 service to the members of the aggregation program. The contract will be for= =20 fixed-priced service to each class of customers at a rate that is lower tha= n=20 the standard offer from Toledo Edison."=20 Ohio law stipulates that a city can select either an opt-in or an opt-out= =20 approach to aggregation. Under the opt-in approach, energy customers must= =20 provide written notice to their city that they wish to be included in the= =20 aggregation program. The opt-out approach requires that customers must=20 formally notify their city that they do not wish to be included in the=20 aggregation. There are large promotional and administrative costs for the= =20 cities associated with the opt-in approach. In addition, many potential pow= er=20 suppliers made it clear that they would not bid on power contracts unless t= he=20 cities used an opt-out approach. Consequently, every city that has been=20 certified in Ohio to become an energy aggregator is using the opt-out=20 approach. This in and of itself makes Ohio extremely unique. Only one other= =20 state (Massachusetts) uses an opt-out approach to aggregation, but it does= =20 not match the size and scope of the Ohio program. =20 The opt-out policy of the Ohio aggregation program has sparked a great deal= =20 of debate. Proponents argue that residents will secure significant benefits= =20 from the aggregation process (namely, lower rates). For instance, in a powe= r=20 supply Memorandum of Understanding that the city of Alliance, Ohio, has=20 established with Shell Energy, savings in the range of 3 to 6 percent off o= f=20 the incumbent's (Ohio Edison) residential rates are expected. In addition,= =20 proponents contend that municipalities electing to become an energy broker= =20 are providing an added service to their residents, which is part of a large= r=20 trend of cities aggregating such services as water service, garbage=20 collection and sewage service. Regarding the issue of the opt-out approach,= =20 proponents of municipal aggregation say that residents are given multiple= =20 opportunities to notify the city that they do not want to participate in th= e=20 aggregation. A resident has the option of continuing to receive service fro= m=20 the incumbent utility (as long as they formally notify the city of this=20 decision). =20 Opponents, on the other hand, argue that municipal aggregation amounts to= =20 nothing more than customer slamming, since being assigned by the city to a= =20 new power supplier may be an involuntary act for those that did not=20 consciously opt in for aggregation. Also, opponents take issue with=20 aggregation because, under the guise of "customer choice," customers still= =20 find themselves tied to the city aggregator (unless they opt out), which ma= y=20 preclude other power suppliers from entering that particular market. In fac= t,=20 as evidence of the policies related to the opt-out approach, opponents migh= t=20 point to a stipulation under the City of Toledo's Aggregation Plan (in a=20 filing with the PUCO). Toledo's policy asserts that a 30-day opt-out period= =20 will be offered "every two years during which customers can leave the City'= s=20 aggregated pool without paying a switching fee." The underlying result of= =20 this is that customers can only opt out of aggregation during a small windo= w=20 period every two years, or incur undisclosed switching fees.=20 In addition, opponents say that on average customers tend to switch power= =20 suppliers at the low rate of 15 to 20 percent, even when they find themselv= es=20 paying higher bills or are offered a better supply contract. Thus, the vast= =20 majority of customers might end up remaining with a city aggregator simply= =20 due to inertia or a lack of understanding about their available options.=20 Those who question the value of municipal aggregation also suspect that=20 cities might earn a financial gain from serving as an energy broker or atta= ch=20 extra hidden fees to customers to compensate for administrative costs or=20 consultant fees. =20 There is also the possibility that the city will not be able to secure lowe= r=20 rates than those already in place with the incumbent utility. Analysts have= =20 raised the question of what would happen if a city secures a contract with = a=20 power supplier, and then for whatever reason the power supplier cannot=20 fulfill its obligation to provide the power (such as in a bankruptcy=20 situation)? Would the incumbent utility be required to resume service for t= he=20 aggregated customers? In other words, who becomes the provider of last reso= rt=20 under a municipally aggregated model? Based on the city of Alliance=20 aggregation model, if the power supplier defaults on its service, the=20 aggregated customers are entitled to return to the incumbent utility under = a=20 "standard offer service." While this offers a safety net for the customer, = it=20 puts a potential burden on the incumbent utility with regard to its load=20 planning and the difficulty in scheduling for a group of customers that may= =20 or may not return to its service.=20 Yet, also from the incumbent utility's perspective, proponents of aggregati= on=20 say that utilities are often required to meet established targets related t= o=20 the percentage of their customer base that switches to a new energy provide= r.=20 Such is the case with Ohio utilities, such as FirstEnergy, which will be=20 penalized unless they meet their targets. Consequently, an incumbent utilit= y=20 often will have a divided reaction to aggregation. On one hand, the incumbe= nt=20 is potentially losing a core of its customer base, but on the other hand it= =20 recognizes that aggregation may offer one mechanism for meeting its switchi= ng=20 targets. Also, unregulated affiliates of the incumbent utilities often end = up=20 being the ones bidding on the power supply contracts with the cities. This = is=20 in fact the case with an unregulated affiliate of FirstEnergy, which=20 reportedly has made power supply bids with several Ohio cities that are=20 aggregating.=20 In summary, Ohio remains a test bed for the practice of municipal=20 aggregation. There is little doubt that, at least in the northern half of t= he=20 state, city governments are actively promoting themselves as energy brokers= =20 and remain confident that they can secure lower energy rates for their=20 residents. It will be interesting to see if Ohio's aggregated cities can in= =20 fact achieve the goals they have established, and how Ohio residents react= =20 when they begin receiving power from the city-chosen supplier. =20 An archive list of previous IssueAlerts is available at www.ConsultRCI.com Note from Will McNamara: In the April 4 IssueAlert, I made reference to the= =20 fact that Sierra Pacific Resources' pending acquisition of Portland General= =20 from Enron had been "scrapped." I based my statement on previous comments= =20 from Enron's Jeffrey Skilling, indicating only a 5-percent probability that= =20 Sierra Pacific's purchase of Portland General will be closed.=20 Yesterday, I received the following statement from Sierra Pacific Resources= ,=20 outlining their position related to the pending acquisition, which they=20 requested that I distribute with today's column:=20 "It's going to be very difficult for Sierra Pacific Resources to satisfy th= e=20 requirements of the Securities and Exchange Commission in the company's=20 current financial condition. But the company is continuing to pursue its=20 obligation to complete the acquisition of Portland General Electric."=20 Reach thousands of utility analysts and decision makers every day. Your=20 company can schedule a sponsorship of IssueAlert by contacting Nancy Spring= =20 via e-mail or calling (505)244-7613. 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