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ELECTRIC CONSUMER

AGGREGATION OPTIONS:

An Introductory Guide for Non-Profits, Local

Governments, and Community Leaders

Caroline Sahley

May 2001

IN COLUMBUS: IN CLEVELAND:

7870 Olentangy River Road 2012 West 25th Street

Suite 209 Suite 917

Columbus, Ohio 43235 Cleveland, Ohio 44113

Voice: 614-985-6131 Voice: 216-861-4491

Fax: 614-888-9716 Fax: 216-861-4492

Toll-free: 1-866-GREENOH

[email protected]

www.GreenEnergyOhio.org


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Acknowledgements

Green Energy Ohio would like to recognize the Benjamin S.

Gerson Family Foundation and the Gerson-Margolis Foundation

for making this report possible through their generous support.

GEO would also like to thank David Rinebolt of the Ohio

Partners for Affordable Energy and Jason Gifford of Green

Mountain Energy Company for reviewing earlier drafts of this

publication. Green Energy Ohio is solely responsible for its

contents.


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Electric Consumer Aggregation Options:

An Introductory Guide for Non-Profits, Local Governments

and Community Leaders

1 CONSUMER CHOICE AND ELECTRICITY . . . . . . . . . 6

1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . 6

1.2 Aggregation and the Small Consumer . . . . . . . . 9

1.3 Ohios Aggregation Provisions and Definitions . . 12

1.4 Study Objectives . . . . . . . . . . . . . . . . . . . 13

2 AGGREGATION MODELS AND STRATEGIES . . . . . . . . 14

2.1 Types of Aggregation Pools . . . . . . . . . . . . . 14

a) Governmental Aggregation (15)

b) Affinity Aggregation (16)

c) Internet-based Aggregators (17)

d) State/Public Entities as Aggregators (17)

e) Institutional and Governmental Aggregation(18)

f) Green Power Aggregation (18)

2.2 Key Issues in Forming an Aggregation Pool

. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

a) Forming a Buying Pool (22)

b) Assessing the Load Profile (22)

c) Issuing a Request for Proposals (24)

d) Negotiating the Terms of a Contract (24)

2.3 Aggregation and Residential Customers . . . . . 25

3 GOVERNMENTAL AGGREGATION: COMMUNITY CHOICE

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

3.1 Benefits of Community Choice . . . . . . . . . . 26


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Elect ri c Consumer Aggregat ion Opt ions

3.2 A Slow Start to Community Choice: The Cape Light

Compact: . . . . . . . . . . . . . . . . . . . . . . . . . 29

3.3 The Northeast Ohio Public Energy Council

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

3.4 Conclusions: Local Governments as Aggregators

. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

4 AFFINITY AGGREGATION . . . . . . . . . . . . . . . . . 37

4.1 Introduction: Aggregation by Non-Profits . 37

4.2 PowerOptions: The Massachusetts Non-Profit

Energy Purchasers Consortium . . . . . . . . . . 38

4.3 Trade Associations . . . . . . . . . . . . . . . . . . 41

4.4 Residential Aggregation . . . . . . . . . . . . . . 43

4.5 Conclusions . . . . . . . . . . . . . . . . . . . . . . 44

5 CONSUMER AGGREGATION: A MODEL FOR LOW-INCOMEPOPULATIONS? . . . . . . . . . . . . . . . . . . . . . . 46

5.1 Introduction . . . . . . . . . . . . . . . . . . . . . 46

5.2 Serving Low-income Groups . . . . . . . . . . . . 47

5.3 Consumer Cooperatives: Reaching Out to

Low-Income Households . . . . . . . . . . . . . . . . . 50

a. Boston Oil Consumers Alliance (51)

b. Connecticut Energy Co-op (51)c. New Hampshire Consumer Utility Cooperative

(52)

5.4 Community Action Agencies . . . . . . . . . . . . 53

5.5 Aggregation by the Public Sector: Ohios Energy

Assistance Program . . . . . . . . . . . . . . . . . 57


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5.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . 57

6 AGGREGATION AND GREEN POWER . . . . . . . . . . . . 60

6.1 Aggregation: The Key to Developing a Market forGreen Power? . . . . . . . . . . . . . . . . . . . . . 60

6.2 Green Power Aggregation: The Role of Co-ops . 61

6.3 Governmental Aggregation and Green Power

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

6.4 Affinity Aggregation: The Role of Environmental and

Faith-based Groups in Aggregating Green Power 64

6.5 Concluding Remarks . . . . . . . . . . . . . . . . . 66

7 SUMMARY CONCLUSIONS . . . . . . . . . . . . . . . . . . . 68

8 APPENDICES . . . . . . . . . . . . . . . . . . . . . . . . . . 72

APPENDIX A: Ohio communities that voted on

governmental aggregation, November 2000 . . . . . 72

APPENDIX B: Communities included in the Northeast

Ohio Public Energy Council (NOPEC) . . . . . . . . . . 74


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6

1

CONSUMER CHOICE AND ELECTRICITY

1.1 Introduction

Introducing competition into the retail electricity market will

lead to lower prices and better service. Large, bureaucratic utilities

will become more competitive, not only in their pricing, but in their

customer services. Utilities will spin off retail companies that are

more attuned to the needs of their customer base, developing an

identifiable, brand name through an expanded range of services,

lower prices, or environmentally friendly generation. A new

generation of power marketers will emerge to meet consumer

demand, increasing market efficiencies. In the long run, competition

will ultimately drive down prices, benefitting both residential and

business consumers.

These are the assumptions driving the current trend toward

electricity deregulation across the nation - assumptions that are now

being sorely tested. The notion that competition will naturally result in

lower prices and better service is being challenged, and growing

evidence suggests that deregulation is not a panacea to remedy the

electric industrys ills.

The pioneering case of California, once upheld as a model to

follow, is now touted as an example of how deregulation can go

wrong. In the summer of 2000, electricity rates skyrocketed more


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1 Consumer Choice and Elect r ici t y

1

The 2001 power shortage in California is due in part to growing demand for

electricity coupled with the slow growth of in-state generation. Transmission

constraints make importing power difficult and low hydro levels in the Pacific

Northwest contributed to power shortages. More significantly, long-term, fixed price

wholesale contracts are not permitted, requiring suppliers to buy electricity on the

Power Exchange. This makes them vulnerable to price fluctuations and spot pricing.

2

California Public Utilities Commission data, December 1999, cited in Nancy Rader and

Scott Hempling, Promoting Competitive Electricity Markets Through Community

Purchasing: The Role of Municipal Aggregation, American Public Power Association,

January 2000.

3

As of January 2001, 568,492 consumers are being served by an alternative supplier.

Pennsylvania Electric Shopping Statistics, PA Office of the Consumer Advocate,

January 2001.

7

than 100% in San Diego, leaving consumers reeling. A severe power

crunch in early 2001 brought rolling blackouts to California consumers

1

.Californias electricity market, moreover, ended up not being very

competitive, with only 2% of residential consumers switching suppliers

in the first twenty months of competition2. Most of those who

switched did so out of a desire to purchase green power, not because

they were lured by many competing offers of cheaper power. Even in

Pennsylvania, where the market is more competitive, only 500,000

consumers statewide have changed suppliers3.

The case of California may offer many useful lessons for

policymakers and regulators in other states as they set deregulation

policies. Many of the problems faced in California could have been

prevented, and with more deft policymaking can be avoided in other

states. However, the main question that the case of California raises

still remains unanswered: Is deregulation necessarily good for

consumers? How will residential consumers fare? Will it deliver on its


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4

In a regulated, monopoly market, utilities planned to recover stranded costs with a

fixed number of customers over a long period of time. Stranded cost recovery

accelerates the collection of these costs. However, the key question this raises is

whether this cost should be born by ratepayers - or shareholders.

5

Robert Wallace, Power Play, The American Prospect, no 42, January-February,

1999.

8

promise of lower cost power or will it provide limited savings and

weakened consumer protection?

Critics of deregulation contend that residential consumers gain

few if any benefits from competition. While large commercial and

industrial customers are attractive to retail electricity suppliers and

can use their purchasing power to negotiate lower rates, residential

consumers may find that their bargaining power is limited. Fewer

retailers are interested in competing for their business, and consumers

are quickly finding that policymakers have tended to overestimatepotential savings to residential customers. Consumers are being left

with empty promises and nearly imperceptible savings.

The ability of small consumers to benefit from deregulation

was also dealt a hard blow by the large scale award of stranded costs

to utilities. Stranded costs -) multi-billion dollar debts largely incurred

through investments and cost overruns on nuclear power plants -) are

theoretically unrecoverable in a competitive market4. Regulators

across the country are awarding utilities billions in stranded costs, to

be paid by consumers, regardless of their choice of electric supplier.

Stranded costs are estimated at nearly $30 billion in California, and

$12 billion in Massachusetts.5 In Ohio, the stranded cost award to First

Energy alone is $8.8 billion.


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9

In this uncertain context, consumer advocates have beenpromoting a wide range of policies designed to help residential

consumers. Rate freezes, mandated rate cuts, renewable portfolio

standards, low-income programs, and systems benefit charges are

merely a few of the policy tools that legislators have at their disposal

to protect consumers. Increasingly, legislators are looking closely at a

combination of these policies to extend the benefits of deregulation to

small scale consumers. These palliative measures offer some degree of

consumer protection.

One policy that has generated intense interest among consumer

advocates is aggregation. Aggregating the demand of large numbers

of consumers for bulk purchasing is not a new idea. Energy purchasing

cooperatives have bought gas and oil in bulk with proven benefits to

consumers, while business associations have a long history of procuring

goods and services for their members. Extending that model to

electricity is one way that consumers might be able to improve their

savings potential.

1.2 Aggregation and the Small Consumer

Whether electricity deregulation will ultimately be good forconsumers is still open to debate. Our national experiment in

deregulation is just beginning, and retail electricity markets in

deregulated states are still far from mature. It is difficult to predict at

this early stage whether in the near future electricity suppliers will


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6

Dave Rinebolt, Will Residential Customers Benefit from Restructuring, Deregulation

and Retail Competition?, Midwest Energy Research Center, 1999.

10

develop a range of services in response to consumer needs, and

whether competition will stimulate new suppliers to enter markets,providing for meaningful consumer choice in terms of products. At

minimum, consumers are released from the monopoly power of the

incumbent utility. The ability to switch away from an unsatisfactory

supplier is not an insignificant benefit for both large and small

consumers.

On balance, there is cause for concern. Competition creates

some dangers, particularly for residential consumers. The impact ofderegulation will vary among different consumer classes. Large

industrial consumers may be first in line to buy the cheaper power,

leaving residential consumers to fend for themselves in an open

market.

Part of the problem is that the market for residential

consumers is not often very competitive. The lack of a dynamic

market for residential consumers is due to a variety of converging

factors. Residential consumers are not seeing significant savings, and

are not switching suppliers in large numbers. Consumer inertia further

exacerbates this problem, as few consumers are willing to invest the

time in sorting through a variety of offers and compare suppliers,

especially given the relatively small savings possible. The Midwest

Energy Research Center suggests that 10% savings are needed to

induce significant switching.6 Actual savings are often lower.


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7

Jack Lyne, Power Deregulation: A Bumpy Road Begins the Free-Market Ride, Site

Selection, August/September 1998.

8

Barry Ingber, An Oil Co-ops Experience Marketing Green Electricity, paper

presented at EPRI Green Power Conference, 1999.

11

Conversely, from the suppliers point of view, the residential

consumer market may not be very attractive. The cost of marketingfor individual consumers is high, making residential consumers an

unattractive market segment. Some suppliers, including Enron in

California, found the residential market to be unprofitable as a result

of the high per-transaction costs. The CEO of Enron, Ken Lay, has

warned suppliers to expect losses on every small customer served.7

Aggregation, therefore, does not simply depend on volume

purchases to get the generation price of power down. By developinglarge purchasing pools, it improves market efficiencies by lowering the

administrative and marketing costs to retail electric suppliers of

reaching the residential market. In fact, some have gone so far as to

argue that suppliers perceive aggregators not as buyers but as

marketing subcontractors.8

The potential benefits of aggregation as a public policy tool,

therefore, extend beyond bringing savings to residential and small

business consumers. It can in fact stimulate the residential market, by

making it more attractive to retail electric suppliers.

1.3 Ohios Aggregation Provisions and Definitions


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12

Ohios electric restructuring legislation was passed in 1999.

Three types of aggregation are allowed under this legislation. First,the Ohio law permits governments, including municipalities, townships

and counties to act as aggregators. Secondly, voluntary aggregation

or aggregation by private entities is permitted. Third, the statute

specifies that low-income customers enrolled in benefits programs can

be bid out as an aggregated pool by the Ohio Department of

Development.

Both governmental and non-governmental aggregators arerequired to be certified by the Public Utilities Commission of Ohio

(PUCO). The PUCO sets out the following definitions:

Aggregation: Combining the electric load of multiple retail

customers through an agreement with the customers or

formation of a governmental aggregation pursuant to Section

4928.20 of the Revised Code for the purpose of purchasing

retail electric generation service on an aggregated basis.

Aggregator: a person who contracts with customers to combine

the customers electric load for the purpose of purchasing retail

electric generation service on an aggregated basis. The term

does not include a governmental aggregator.

Governmental Aggregator: The legislative authority of a

municipal corporation, the board of township trustees of a

township, or a board of county commissioners of a county, that

aggregates the citizens of a municipal corporation, township,

or unincorporated areas of a county in accordance with Section


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9

Competitive Retail Electric Service Provider Certification Applications and Filing

Instructions, Public Utility Commission of Ohio, 2000.

13

4928.20 of the Revised Code for the purpose of purchasing

retail electric generation service on an aggregated basis.

9

1.4 Study Objectives

This study aims to outline the options and models of

aggregation available in Ohio to aggregate consumer demand for

electricity purchases. It provides a preliminary assessment of some of

the benefits and potential obstacles to different aggregation models.

Where available, representative case studies have been used to

illustrate these strategies.

A particular focus of this study is identifying prospects and

options for aggregating low-income groups, a particularly challenging

target group to aggregate. In addition, this report highlightsstrategies for green power purchases.

It is important to note that aggregation of residential

consumers is a new and largely untested tool in the electricity

market. It is still too soon for conclusive answers to the key question

of whether this is an effective strategy for residential consumers. This

study aims to highlight the potential obstacles to, and benefits of,

aggregation as suggested by these early experiences.


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14

2

AGGREGATION MODELS AND STRATEGIES

2.1 Types of Aggregation Pools

Aggregating consumer loads into larger purchasing pools can be

achieved in a variety of ways, differing in terms of type of entity

managing the aggregation as well as in member composition. The

organization acting as aggregator can span the range of non-profits,

municipalities, for-profit energy brokers, and state entities. The case

studies that follow highlight a wide range of organizations that have

initiated aggregation processes, including business associations,

consumer cooperatives, and non-profit organizations. These

organizations exist for the purpose of benefit of their members, and

may wish to provide electricity purchasing as an additional benefit to

their members.

The membership composition of aggregation pools, similarly,

can differ widely. Members of purchasing pools can be selected on the

basis of geography, customer market segment, or affinity grouping.

Common target groups include commercial and industrial customers,

residential consumers, low-income households, and institutional

customers, such as hospitals and universities. Although the vast

majority of aggregation pools are formed with the objective of

securing the lowest rate of electricity possible, a growing number of

aggregations are forming for the specific purpose of procuring

renewably generated green power.


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2 Aggregati on Models and St rat egies

15

Aggregation models can be loosely grouped into five categories.

There is no one model that is simpler, easier or right for a given

target group or objective. Each has its own unique advantages and

disadvantages. Although more extensive case studies follow in

subsequent chapters, some basic models are outlined below.

a) Governmental Aggregation

Governmental aggregation, also known as community choice,

allows local governments to purchase electricity on behalf of their

residents. Community choice legislation was pioneered in

Massachusetts, where it was championed by a local government

official. Bipartisan support helped Ohio become the second state to

explicitly include a governmental aggregation provision in its

deregulation legislation of 1999.

There are many advantages to aggregation by localgovernment. Local government officials are directly accountable to

their constituents, and are open to public scrutiny. Their actions are

not driven by the profit motive; rather, their responsibility is to seek

the best service for their community. Organizational capacity is also

an important issue to consider. Municipalities and counties are

experienced at handling large scale service provision and are equipped

with the resources and legal skill to implement a large scale

aggregation.

Governmental aggregation differs from municipal utilities and

rural electric cooperatives that assume responsibility for distribution


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10See Appendix A for complete list of communities voting on community aggregation.

16

and transmission. The role played by municipal aggregators is limited

largely to negotiating the purchase of electricity.

In November 2000, more than 100 communities in Ohio voted

to allow their local government to purchase electricity on their

behalf10.

b) Affinity Aggregation

Affinity aggregation is so called because it draws its members

from a group that has similar characteristics and interests. Rather

than being defined geographically, as in governmental aggregation, its

membership is comprised of a group sharing a commonality, such as a

manufacturers organization, farmers, retired persons or

environmentalists in a green power pool. In many cases, affinity

aggregations are formed on the basis of an existing organization,

with a clearly defined and extensive membership base.

The recent effort of the Ohio Farm Bureau to aggregate

residential and commercial farm interests provides a good example of

how existing organizations can become the basis for a successful

aggregation. Non-profit organizations, including cooperatives, trade

associations, or 501(c) 3 organizations can expand their range of

services to include electricity procurement, or an organization can be

created specifically for this purpose.

Most successful experiences of this type include trade

associations which aggregate commercial customers. Business


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17

associations often already aggregate the members demand to receive

lower rates for services, such as health and property insurance, credit

card processing, and other services, and as such are well poised to act

as electricity aggregators. However, a growing number of

cooperatives and other entities are targeting residential consumers.

c) Internet-based Aggregators

In Pennsylvania, several internet-based aggregation programs

have emerged which solicit interested consumers over the internet

within a certain service area. When enough consumers have signed up

to form a pool, bids are accepted for that pool. The supplier that

offers the best price supplies the electricity to those consumers in the

pool.

These aggregation pools are unlike those described earlier in

that they are not based on any type of natural affinity or existing

group. The customers are not members of a certain organization, and

do not necessarily share any key characteristics in common (apart

from computer literacy). Commercial aggregators assume the risk of

forming an aggregation pool, and assume the marketing cost of

forming such a pool.

d) State/Public Entities as Aggregators

One of the interesting elements of the Ohio legislation is that itexpressly authorizes the Ohio Department of Development to

aggregate consumers that benefit from low-income energy assistance

programs. Beneficiaries of the Universal Service Fund assistance

programs will be pooled and bid out to electric suppliers. Although low-


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18

income customers might be assumed to be an unattractive pool for a

supplier to bid on, the fact that the State pays for part of the cost of

the electricity provides a partial guarantee on payment. This factor,

and the sheer size of the aggregated load, is likely to attract bids.

e) Institutional and Governmental Aggregation

Companies, local governments, and other institutional

organizations with multiple sites may aggregate their own loads, and

bargain for electricity jointly. This model differs conceptually from

those outlined above, as in this case, the aggregator is not acting as

an intermediary in the process. For example, a company or

institutional entity with multiple facilities could aggregate its own load,

and purchase electricity under a single contract, rather than through

multiple contracts. To do so, an energy consultant/agent might be

hired to facilitate the process and negotiate the contract. One

instance of this is the City of Santa Monica which aggregated the

electricity load of its municipal buildings to purchase electricity

generated by renewable sources.

f) Green Power Aggregation

It is important to note that consumers can come together to

bargain not only for cheaper power, but also for cleaner power. While

aggregation is most often promoted as a strategy to gain access to

the least expensive power possible, it may also have an important roleto play in building a market for renewable energy.

Green power aggregation is not a distinct model of

aggregation; in fact, any of the models listed above could be used to


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11

In California and Pennsylvania, the most successful states for green power,

approximately 2% have switched to green power. Blair Sweezey and Lori Bird, Green

Power Marketing in the United States: A Status Report, Fifth Edition; National

Renewable Energy Laboratory, August 2000, pg. 7-8.

19

purchase green power. However, the use of aggregation as a tool to

advance a social or public good, such as seeking environmental

benefits, is an intriguing possibility and merits special consideration.

Green power is defined as electricity that is both renewably

generated - that is to say, its supply is replenished at the same rate at

which it is consumed - and is also environmentally benign. Green

power is still in short supply in the United States, and is generally more

costly than conventionally generated sources of electricity.

Green power aggregation can accelerate the development of

the green power market in three key ways. First, because aggregation

can reduce the price of green power, it can make renewable products

attractive to a wider range of consumers. Green power programs on

average capture approximately 1% or less of the market11. An

expanding customer base will be key to stimulating investments in

large scale renewable generating facilities. Secondly, the existence of

large purchasing pools actively procuring green power provides a

concrete demonstration of market demand that can entice green

power marketers to enter a state, or encourage existing marketers to

develop a green product. Third, large scale purchasing pools, such as

governmental aggregations, provide a significant, long-term, and

stable source of demand for green power. This is more difficult to

achieve through individual household sign-ups.


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12

Kay Guinane, Group Buying Power: Meaningful Choices for Energy Consumers,

Environmental Action Foundation, May 1997, pg. 9.

20

2.2 Key Issues in Forming an Aggregation Pool

By pooling the demand of small consumers, aggregation

strengthens the balance of power between producers and consumers.

The clearest manifestation of greater consumer power is the ability to

bargain for better rates for electricity. However, this is only one of

the potential benefits of bargaining jointly. The use of skilled

professionals in procuring power for many households increases the

ability of consumers to negotiate favorable terms of a contract -) of

which rates and prices are but one component.

As our case studies will show, one of the keys to a successful

aggregation pool is the expertise in negotiating favorable overall terms

of a contract, including length, fees, and guaranteed service. As

Guinane points out:

In a retail competition scenario, how can the individual,small customer bargain for energy services on an equal

footing with an array of utility companies, marketers,

and holding company subsidiaries? What resources and

options do the parties bring to the table? The small

customer is limited in terms of time, information,

expertise, and option. The so-called bilateral

contracts that would result from such a bargaining

process are not likely to fulfill the basic requirements of

a true contract: meeting of the minds, mutuality and

consideration12.


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13 Kay Guinane, op. cit.

14 Nancy Rader and Scott Hempling, op cit.

21

It is essential to understand that aggregation not only enables

individuals to obtain cheaper power, but provides them with access to

a skilled intermediary to represent them in the market.

Forming an aggregated group can be a fairly complex process.

An aggregator performs a variety of roles, many of which require a

high degree of technical and legal expertise. Few organizations or

small companies have staff with a thorough understanding load

profiling, power procurement and pricing issues. For these reasons,

most governmental and nonprofit aggregators hire a consultant or

agent to perform these essential functions.

One of the most significant questions facing an aggregation

pool is what role it will play in the electric purchasing process. Private

aggregators can act directly as intermediaries between consumers and

sellers of power, by purchasing and reselling the power, and assuming

billing and other functions. Or, more commonly, aggregators act

merely as broker, responsible for negotiating a match between

consumers and sellers of power. This is an importance distinction to

make, and the term aggregator is often used to refer to both of these

very different functions. Guinane13 draws a distinction between these

roles of aggregators as acting either as brokers or marketers, while

Rader and Hempling14 distinguish between aggregators as buying

agents or retail sellers. Regardless of the terminology, the key

distinction is whether the aggregator purchases power and resells it to

its members, or simply negotiates a contract, but does not take title


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22

to the power. The latter option is most often used for its simplicity

and low risk.

The basic steps to a successful aggregation are to a) form the

buying pool, b) assess the load profile of the group, c) draft a request

for proposals that allows electric suppliers to bid on the group, and d)

negotiate the terms and conditions of a contract.

a) Forming a Buying Pool

The initial step of identifying potential customers and forming

a buying group is made easier if the aggregator can build on the basis

of natural buying alliances, sometimes known as affinity groups.

Trade association or other groups with a large membership that share

certain characteristics provide a natural target group. It is more

difficult, requiring considerable marketing, to initiate a group without

such a basis.

b) Assessing the Load Profile

Once the aggregation pool is formed, most likely, an agent or

consultant will be hired to assess the load profile of the group, draft

an RFP, and negotiate the final contract. Analyzing the load profile of

the aggregated group is important prior to drafting the RFP. Suppliers

will be more willing to bid on a group if they can anticipate with a high

degree of certainty what the load size and demand pattern is likely tobe. The logic of economies of scale dictates that a pooled load size

may be enough to obtain lower prices, as the supplier gains multiple

customers with no associated marketing costs and low per-transaction

costs. However, equally or more significant to the economies of scale


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15

Anne Millen Porter, The Power Buy: What You Need to Know Part II, Purchasing

Online: The Magazine of Total Supply Chain Management, June 5 th 1998.

http://www.manufacturing.net/magazine/purchasing

16

Christine Strobel, Bulking Up, Energy Buyers Guide, 1997.

http://www.energysource.com/ebg/ebgx.html.

23

are load profiles. Aggregation pools may get better rates if they offer

a flat load profile -) one that is fairly consistent both seasonally or

intra-day -) or better yet, if they can demonstrate lower loads at peak

times. A supplier will consider not only the demand for power, but a

flatter load profile and higher load factor (ratio of consumption to

peak demand). A skilled consultant can not only assess the load profile

of a given group, but can help form a buying pool with a more

attractive load profile.

The importance of load issues to the competitiveness of an

aggregation pool can hardly be exaggerated. The president of

Westwood Energy Group, a private aggregator, argues that the key

factor is when a buying group uses power, rather than obtaining flat

load profile or large volume purchases. A group with a flat load profile

or a large scale group that uses lots of power during weekdays and

peak times will be less attractive than a group that uses lots of power

in off-peak times, such as in the winter and during evenings. 15

A key question that emerges at this stage is if those joining the

pool are bound contractually to purchase electricity through the group,

prior to the contract having been negotiated. Suppliers are less likely

to bid on an aggregation pool that has an uncertain load, with no

guarantee that all members will subscribe16. This introduces a larger

degree of uncertainty when determining demand and load profiles,


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17 Porter, op. cit.

24

leaving suppliers with little alternative but to estimate worst case

scenarios17. On the other hand, aggregators may find members

hesitant to commit to purchasing power if the contract terms -)

including price -) have not been determined in advance.

c) Issuing a Request for Proposals

Drafting a Request for Proposals, or Request for Quotes, which

invites electric suppliers to bid on the aggregated group, is the next

step. Including in the RFP the terms and conditions that the

aggregator is seeking can reduce the number of proposals, but will

ensure better matches. Often, the terms and conditions of a contract

are the deciding factor in choosing a supplier.

d) Negotiating the Terms of a Contract

Although most of the key expectations and requirements of

the purchasing group will have been spelled out in the Request for

Proposals, aggregators or their agents will need to consider the terms

that govern the contract. Issues such as a fixed or floating price,

length of contract, cancellation options, collection policies, additional

costs if the load is less or more than projected, are just a few of the

key issues that need to be specified.


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25

2.3 Conclusion: Aggregation and Residential Customers

Aggregation has been promoted as a policy tool to extend the

benefits of deregulation into the low-income, residential and small

commercial market segments. Aggregation, moreover, may help

stimulate the competitive retail electricity market by lowering the

costs to electric suppliers of reaching small scale consumers.

Forming an aggregation pool, however, is a complex process,

requiring technical and legal expertise in energy procurement issues.

Aggregating a small group becomes economically viable only when the

savings obtained are greater than the cost of contracting skilled

consultants.

Larger aggregation pools can be formed geographically,

through governmental aggregation or geographically defined co-ops, or

can be drawn from the membership of existing organizations. The

following sections will review case studies of different models of

consumer aggregation.


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26

3

GOVERNMENTAL AGGREGATION:COMMUNITY CHOICE

3.1 Benefits of Community Choice

Consumer advocates in Ohio championed the cause of

community choice -) the right of local government to act as

aggregator of a communitys electricity demand. Modeled on a

provision of the Massachusetts deregulation legislation, governmental

aggregation received surprisingly strong bipartisan support in the Ohio

legislature and was included in Ohios law.

What distinguishes community choice from more tepid efforts

to encourage governmental aggregation in states such as Michigan is

the ability of local governments to assume the right to aggregate all

residents, if approved by referendum or general vote. One of the

challenges of forming any kind of aggregation pool is the time and

cost it takes to enroll participants in the group. Signing participants

one at a time, known as opt-in aggregation, naturally results in only a

small percentage of the prospective target group joining. Low

switching due to customer inertia is a proven obstacle to forming

aggregation pools, as is cost.

Consumer advocates in Ohio, led by Ohio Citizen Action, pushed

for opt-out aggregation, which empowers local governments to


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20

Blossom Peretz, Community Choice Means Competition, Not Slamming, American

Local Power Project, 1998.

21 Nancy Rader and Scott Hempling. op. cit.

28

opt-in enables the municipality to form a reasonably

predictable pool of customers, which is attractive to

suppliers 20

governmental aggregation is more likely to include a mix of

commercial, residential and government users, resulting in

a balanced load profile.

Local governments have no profit incentive to sign a deal

that doesnt benefit consumers.

Governmental aggregation does not exclude low-income

groups or other market segments that are unattractive to

suppliers, but instead blends them with other consumer

segments21.

The process of setting up a governmental aggregation in Ohio

has four basic steps. First, a city, township or county passes an

ordinance or resolution to aggregate. Second, for an opt-out

aggregation model, the voters must approve the measure by

referendum. Third, the local governments must develop a plan and

hold two public meetings on the plan. Fourth, the aggregating

municipality must seek certification from the PUCO.

Despite the potential benefits of governmental aggregation, to

date, only Ohio and Massachusetts have opt-out governmental

aggregation. Matthew Patrick, a councilman in Massachusetts who

pioneered the concept of community choice, argues that cities and

towns are, by law and tradition, natural aggregators for their


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3 Governmenta l Aggregat ion: Communit y Choice

22 Patrick op. cit.

23

Participating towns include Barnstable, Bourne, Brewseter, Chatham, Dennis,

Eastham, Galmouth, Harwich, Mashpee, Orelans, Provincetown, Sandwich, Truro,

Wellfleet, Yarmouth, Barnstable County, Aquinnah, Chilmark, Edgartown, Oak Bluff,

Tisbury, West Tisbury, and Dukes County.

29

community22. Patricks pioneering efforts to set up the first

intergovernmental aggregation program, however, have encountered

a variety of legal and market obstacles to completing their electricity

purchases. The Cape Light Compact was established in 1997 after two

years of study. Yet, by December 2000, electricity had not yet been

delivered under a Cape Light Compact negotiated contract.

In Ohio, local government officials moved rapidly to pursue an

inter-governmental consortium to purchase electricity, with over 100

municipalities placing aggregation on the ballot prior to the advent of

competition. These two case studies are considered below.

3.2 A Slow Start to Community Choice: The Cape Light

Compact

The Cape Light Compact is the first governmental aggregation

program in the nation. It demonstrates an ambitious attempt to form

a multi-city aggregation, comprising 21 towns and two counties in

Massachusetts. 23 The Compact represents approximately 180,000

consumers, including residential, commercial, industrial and


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26 For more information on PowerOptions, see section 4.2.

31

with potential suppliers began shortly thereafter, and Select Energy

was chosen as the supplier to the Compact members. This process hit

an unanticipated obstacle when the Massachusetts Municipal

Association claimed that they had an existing agreement with Select

Energy that gave them exclusive rights to serve cities and towns in

Massachusetts. As contract negotiations became deadlocked, several

municipalities joined a private aggregator (PowerOptions) to supply

their buildings with power.26 Cape Light Compact members remained

on the standard offer, receiving their electricity from Commonwealth

Electric.

The contract negotiated with Select Energy addressed the

fundamental market obstacle presented by the low standard offer.

The contract spelled out a gradual phasing-in of customers to the Cape

contract, starting with large accounts in December 2000, and including

municipal and medium commercial accounts in 2001. Residential

consumers would be brought into the pool in 2002.

As contract negotiations with Massachusetts Municipal

Association progressed, a more intractable problem emerged to throw

the Cape Light Compact once again off its plans. Increasing prices in

the wholesale power market led Select Energy to invoke a clause in the

contract which allows it to defer service provision until supply prices

normalize. If this provision is triggered, the Compact would also have

the right to search for another supplier. At the time of this writing, it

is unclear if the deal will go ahead. The latest string of difficulties

encountered by the Cape Light Compact illustrates that deregulation

does not automatically create a robust competitive market.


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27See Appendix B for a complete list of all NOPEC communities.

32

3.3 The Northeast Ohio Public Energy Council

The Massachusetts legislation which enshrined the principle of

community choice was pursued by consumer advocates in Ohio. Ohio

Citizen Action brought Matt Patrick, the Executive Director of the

Cape Light Compact, to Ohio to testify before legislative hearings.

Gaining the support of the Ohio Consumers Counsel, the measure

received strong bipartisan support in the legislature, and was includedin the final bill.

Many Cleveland area mayors immediately began to set the

wheels in motion. Parma was the first city to get voter approval to

aggregate in March 2000. More than one hundred municipalities

followed, placing the issue on the ballot on November 7, 2000. The

concept of aggregation was overwhelmingly approved, with 132 of 136

communities voting in favor. Some local governments were eager to

sign up early to receive a block of low cost, MSG (Market Support

Generation) power that First Energy was making available to suppliers,

as negotiated under its transition plan. Cities also began the second

step of the process: applying to the PUCO for the certification

necessary to become aggregators.

Discussions also began, led by City of Brookpark Mayor Coyne,

to create a multi-city aggregation, joining many of the communities

that had passed referendums27. The Northeast Ohio Public Energy


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28

NOPEC has also successfully lobbied the Ohio legislature to amend a law that governs

gas aggregation. The House-passed version would have limited the aggregations to

only 50,000 customers, thus denying NOPEC the right to represent its entire 400,000

customer base.

29

Many suppliers had difficulty meeting transmission requirements. In addition,

shopping credits in First Energy territory have been set near the wholesale price,

making it difficult for suppliers to be competitive. It is likely that at least some of

these bids were dependent upon the availability of Market Support Generation

power, most of which was bought by the city of Parmas aggregation.

33

Council of Governments, or NOPEC, was created as the legal entity

that would act as aggregator.28

In early 2001, NOPEC received nine bids, of which two were

deemed responsive and of sufficient interest to pursue29. In the spring

of 2001, NOPEC signed a ground-breaking agreement with Green

Mountain Energy Company. NOPEC signed a six-year contract on

behalf of 94 communities spread over eight counties in Northeast

Ohio, representing an estimated 400,000 consumers. This agreement

is notable both for its size -) the first large scale community choice

aggregation -) and for the fact that Green Mountain Energy Company

is a leading supplier of cleaner and renewable energy.

The agreement calls not only for 2% renewable energy

immediately, but includes a commitment to install wind and solar

facilities in Ohio. The key components of the agreement include:

! 98% of electricity supply will come from natural gas-fired

facilities or other general sources of equal or lesser

emissions characteristics


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30

Personal communication, Jason Gifford, Green Mountain Energy Company, March

2001.

34

! 2% will be generated by qualified renewable energy

facilities

! service delivery commences September 2001

! commitment to build new wind facilities in Ohio

(approximately 10 megawatts)

! commitment to install solar facilities (approximately

100kW)

! minimum savings estimated at 1% for 2001-2001, and 1.5%

for 2005-2006

! estimated $10 million in savings over the life of the

contract30

It appears that NOPECs efforts to aggregate will be free from

the unexpected obstacles that thwarted the Cape Light Compact. Ohio

has emerged as a national leader in governmental aggregation, and

provides an important testing ground both for multi-county purchasing

pools and the use of aggregation to spur the development of green

power. Although the initial percentage of green power might appear

rather limited, 2% renewable generation of a large load representing

400,000 customers is not insignificant. In conjuction with natural gas

generation, the electricity product being sold has very low emissions,

particularly in comparison to the regional average.

Perhaps most importantly, the pioneering case of NOPEC

reveals that cleaner sources of electricity can be competitive in a

deregulated market. The aggregation pool enabled Green Mountain

Energy Company to extend its reach beyond the small green power


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31 For more on green power aggregation, see Chapter Six.

35

market of environmentally aware individuals, to the larger community.

Large scale aggregation, moreover, can give suppliers the long term,

stable demand needed to encourage investment in new renewable

energy facilities.31

3.4 Conclusions: Local Governments as Aggregators

Community aggregation as a concept has the potential toprovide substantial savings to segments of the community unlikely to

benefit much from electricity deregulation. Community choice,

moreover, is inclusive in its approach, blending residential demand

with commercial and industrial consumers. Local governments also

have the essential advantage of having the organizational capacity to

become aggregators. Their experience with RFPs, negotiating service

contracts, and in-house legal resources make them well-suited to

becoming an aggregator -) a claim that cannot be made for many

other types of groups. The lack of profit motive, moreover, ensures

that contract negotiations are driven by what is best for the

community.

In practice, however, obstacles to governmental aggregation

exist. Only two states have passed opt-out aggregation -) an essential

provision for effective community aggregation. The first two efforts

at governmental aggregation, moreover, reveal that the lack of a

dynamic competitive market results in few bids or savings


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36

opportunities. Market constraints, created in part by low standard

offer power, allow few suppliers to competitively bid even on large

aggregation pools. As competitive markets mature, a greater range of

savings opportunities are likely to become available.


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37

4

AFFINITY AGGREGATION

4.1 Introduction: Aggregation by Non-Profits

Although community choice aggregation has generated a lot of

interest in Ohio, it is important to recognize that communities are not

the only entities that can aggregate consumers for electricity

purchases. In fact, most examples of aggregation conducted in the

U.S. to date have been initiated by a wide variety of organizations,

trade associations and non-profits. This is due in large part to the fact

that few states have included effective community choice provisions in

their deregulation legislation. Yet, this is not the only explanation.

Non-profits, and for-profit private aggregators, may have other

advantages and unique characteristics that enable them to become

effective aggregators.

Most existing case studies of affinity aggregation have been

pioneered by the institutional and business sector. Trade associations

and other affinity groupings have either become licensed aggregators

themselves, or partnered with for-profit aggregators.

This chapter outlines several models of affinity aggregation,

from the successful Power Options in Massachusetts, that represents

the loads of non-profit institutions, including hospitals and universities,

to Chambers of Commerce that assist business members, andorganizations like the Farm Bureau that assist with residential

electricity purchases.


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38

4.2 : PowerOptions: The Massachusetts Non-Profit

Energy Purchasers Consortium

PowerOptions provides an extraordinarily successful model of

non-profit organization that aggregates the demand of institutional,

rather than residential, consumers. PowerOptions is one of the largest

examples of aggregation in the country, with a combined load of over

400 megawatts of power.

The PowerOptions program was launched in 1996 to enable

non-profit organizations in Massachusetts to form an energy

purchasing coalition. By July 2000, more than 400 PowerOptions

members had signed contracts totaling over 400 megawatts of

electricity. The successful aggregation model was named as one of 25

finalists in the 1998 Innovations in American Government Awards

competition sponsored by Harvard University and the Ford Foundation.PowerOptions is also being licensed for replication in other states, and

is currently being expanded into Maine.

PowerOptions is a 501(c)3 subsidiary of the Massachusetts

Health and Educational Facilities Authority (HEFA), an independent

public authority that issues tax exempt bonds to finance capital

projects for non-profit institutions. PowerOptions was launched in

1996, well in advance of the 1998 deregulation of the states electricutilities. One reason that the PowerOptions program has been so

successful in enlisting a wide base of support within the non-profit

sector is that HEFA was already widely known and had established

itself as a credible organization. Using its extensive networks with


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4 Affinity Aggregation

39

large non-profits, such as hospitals, schools and universities,

PowerOptions was able to ensure a core base of electricity users with

high levels of electricity demand, essential to forming an aggregation

collective large enough to be of interest to utilities and power

marketers. HEFAs existing clients had major purchasing power, and

as a result, HEFA was well positioned to form an attractive

aggregation pool. PowerOptions acts as an aggregator for both

electricity and gas purchases.

The institutions that comprised the PowerOptions purchasing

pool, moreover, had complementary load profiles. Hospitals are fairly

consistent with their daily and yearly load profiles, demonstrating a

slight peak in the dead of winter and in mid-summer, which coincides

with the winter and summer breaks of schools and universities. Taken

as a whole, the load profile of the PowerOptions customers was

relatively steady and balanced.

Finally, the larger non-profit institutions that comprised thecore of PowerOptions are particularly desirable customers for an

electric supplier. Hospitals, museums, and universities are not only

large power consumers, but are financially secure and reliable

customers.

Requests for proposals were issued, and in 1997, a remarkable

27 electricity suppliers bid for PowerOptions customers. The size and

profile of the PowerOptions pool proved indeed to be attractive tosuppliers, and PowerOptions began the task of negotiating a contract

favorable to its member organizations. In the end, PowerOptions

struck a hard bargain with PECO Energy Co. of Pennsylvania. Included


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32 Interview, Angela OConner, Power Options Operations Manager, September 2000.

40

in the deal was a fixed price over the life of the contract, short term

(two year) options, uninterruptible power, and discounts for

employees of participating non-profits. More significantly, PECO

reimbursed PowerOptions for a significant proportion of its start up

costs -) which were approaching $1 million.

PowerOptions acts as a broker between its members and PECO.

It does not assume ownership of the electricity. PowerOptions

members sign contracts directly with PECO -) and are entitled to all

the benefits negotiated by PowerOptions. Members are under no

obligation to sign the PECO contract and purchase their electricity

through the collective, if they deem it not to be in their best interest.

Not surprisingly, the majority of PowerOptions members have signed

on. The terms and conditions that have been negotiated, in particular

the short term contract, are attractive to most organizations and

institutions. In addition, the savings are estimated at 6-13% below the

standard offer32.

Why has PowerOptions been so successful in its efforts to

increase the benefits of electric competition to the non-profit sector?

This case study shows clearly that in terms of aggregation, bigger is

indeed better. The sheer size and scale -) nearly 7% of the states

electricity consumption -) of the PowerOptions purchasing group

enabled it to increase its negotiating power with electric suppliers.

However, size alone is not enough. Skill, legal expertise and

persistence in negotiating terms of the contract also plays a criticalrole. PowerOptions invested a substantial amount up front to hire

attorneys and consultants to help negotiate a solid contract. The new


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33

Jack Lynne, Power Deregulation: A Bumpy Road Begins the Free-Market Ride, Site

Selection Magazine, August-September 1998.

41

organization had extraordinary up-front expenditures to draft an RFP

and RFQ, and negotiate the supply contract. According to

PowerOptions Operations Manager Angela OConner, this was crucial to

the success of the program. The negotiated deal had to include terms

and conditions that would be better than those that could be

negotiated by even large institutions, such as members Harvard and

Boston College. Without a good contract, larger institutions -) whose

presence makes the aggregated group attractive to electric suppliers -

) will likely leave the group to put together their own deals.

4.3 Trade Associations

Trade associations have traditionally been involved with many

types of bulk purchasing strategies. Chambers of Commerce and other

business groups have pooled health insurance and other services for

the benefit of their members. The existing membership provides a

natural base for forming a cohesive aggregation pool.

Business associations across the country are jumping into

electricity aggregation. The California Manufacturers Association, for

example, obtained an 8% average discount for its 1,000 members. 33

The California Retail Association signed an agreement with New

Energy Ventures, a commercial load aggregator that will act as broker


42/75


34 Strober op. cit. pg 3.

35 Select Energy Newsletter, Eye on Energy, #4, June 12, 1998.

42

on an estimated $2 billion on electricity34. Aggregated business groups

are such an attractive and potentially profitable market segment that

some electric suppliers are actively encouraging business associations

to aggregate. Select Energy, for example, has developed The Power

of Association -) an energy related member benefit program. Under

this program, Select Energy offers a customized package of energy

products and services tailored to the members of business

associations35.

Business associations provide the clearest examples of private

aggregation in practice. Many business associations have successfully

aggregated their members, and have proven their ability to obtain

reductions in retail electricity rates for their members. The question

that remains is whether aggregation is as suited as a strategy for

residential consumers.

Business associations have many advantages over residential

aggregations. In addition to the obvious advantage of representing asignificant combined load, trade associations provide an existing

framework that may already be experienced as a buying group. It is

also worth pointing out that energy prices rank high among the

concerns of businesses. Even modest reductions in electricity costs can

result in a substantial difference to the bottom line of commercial and

industrial customers. As a result, business associations may feel

obligated to address electricity purchasing concerns. Other types of


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36 Quoted in, Electricity Choice Begins Now. Buckeye Farm News, January 2001. Pg. 6.

43

affinity groups comprising individuals and households are less likely to

get involved in energy aggregation.

4.4 Residential Aggregation

Few examples of affinity aggregation exist that target

residential users. One example is the Ohio Farm Bureau that has in

excess of 200,000 members throughout the state of Ohio. As part of

the range of services it offers to its members, the Farm Bureau has a

Self-Help Energy Program for natural gas purchasing that has

approximately 7,000 subscribers. Moving into electricity aggregation

was the natural next step. According to the Director of Energy

Services for the Ohio Farm Bureau, Close to two decades of

experience has shown us that members support using cooperative

efforts to reduce their natural gas energy costs. It just makes sense to

carry that experience over to group purchasing of electricity.36

The Ohio Farm Bureau has registered with the Public Utilities

Commission of Ohio as a licensed aggregator for farm, residential and

small business members. The first step in early 2001 will be to conduct

a load profile of the potential group. Interested Farm Bureau members

have been asked to release their electricity use records to enable a

load profile to be developed.


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37 The case of energy purchasing cooperatives is covered in the following chapter.

38 Guinane op. cit.

44

Case studies of successful residential aggregation efforts are

somewhat limited.37 Most affinity groups of a sufficient scale to

tackle the task of aggregating its members are comprised of a

statewide membership. Non-geographic based aggregation groups that

span the service territories of several distribution companies will face

additional complications, including more complex metering and billing

processes. Non-geographic aggregation, simply put, is less efficient.38

4.5 Conclusions

The potential roles of civic associations or other non-profits in

aggregating consumers are multifaceted. Non-profits are not trying to

squeeze out a profit from the narrow margins created by aggregated

purchasing, and are able to pass on more savings to customers. The

potential for non-profits to obtain grant funding to secure start-up

costs, moreover, is an advantage unique to the sector. The

membership base and outreach abilities of non-profits are an asset to

an aggregator in forming an initial pool of consumers.

Certain classes of customers are more likely to be included in a

private aggregation pool. Commercial and industrial consumers,

through the representative organizations, are more likely to negotiate

jointly for electricity. The civic organizations that represent individuals

are more likely to include a narrow fraction of a customer class.


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45

Affinity groups are likely to represent a specific and narrow target

group, such as retired persons, environmentalists or farmers.

Governmental aggregation is able to extend benefits to all members of

a community, including low-income groups, residential consumers and

businesses.

Another type of private aggregation group, the energy

purchasing cooperative, is gaining popularity on the East Coast. These

co-ops often have a particular focus on providing services to low-

income households. The issues facing aggregating low-income

populations are highlighted in the following section.


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46

5

CONSUMER AGGREGATION: A MODEL FOR

LOW-INCOME POPULATIONS?

5.1 Introduction

At its core, aggregation is about increasing the market power

of small scale consumers. The California experience, with soaring

electricity prices and rolling blackouts, has awakened fears over the

effect of deregulation on ordinary consumers. Low-income households,

especially in cold weather states, are particularly vulnerable to even

modest rate increases as a disproportionately high percentage of their

income is spent on energy. Strategies to maximize potential energy

savings -) or to mitigate the impacts of potential rate increases -) are

essential to protect low-income communities in a potentially volatile

deregulated environment.

Will aggregation emerge as the solution for improving service

and lowering rates for low-income communities? The answer to this

question is not yet clear. There are few mature case studies to point

to at this time, although pilot programs are being initiated in many

states. However, previous aggregation efforts with natural gas or

heating oil provide a preliminary indication of the opportunities anddifficulties of aggregating low-income consumers. Bulk purchases of

other energy products have demonstrated some successes in providing

lower cost services to economically vulnerable populations.


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41

Pam Marshall and Roger Colton, Aggregating Low-income Customers: Can Market-

Based Solutions Fix Market-Based Problems? Energy CENTS Coalition, June 1998. pg.

54.

48

Given the possibility of higher cost, lower service provision in

low-income neighborhoods, does aggregation make sense as a strategy

to mitigate these risks? Aggregation can counter the threat of

redlining, by enticing suppliers with large aggregated groups and low

per household transaction costs. Aggregation may actually stimulate

the market by attracting suppliers to service territories where they

are unlikely to target otherwise.

Several compelling counter-arguments can be made. Some

analysts believe that purchasing pools comprised solely of low-income

households undermines the ability of low-income households to benefit

from large, diverse aggregation groups, with attractive load profiles

and customer composition. Marshall and Colton argue,

Separating low-income customers from any larger

aggregated pool, therefore is a disservice to low-income

households. Fragmenting low-income customers into a

stand alone subset of electric customers is exactly

contrary to the ability of low-income customers toexercise the maximum amount of negotiating power in

a competitive electricity market.41

Perhaps the greatest problem is that this approach fails to address the

key issues facing low-income customers -) poor load profiles and

payment histories. Colton quotes the National Conference of State

Legislatures as stating even if customers with similarly unattractive

load profiles combine their accounts, they will simply become one large


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50

(Low-income Home Energy Assistance Program) eligible households.

These strategies are reviewed below.

5.3 Consumer Cooperatives: Reaching Out to

Low-Income Households

A growing movement in the Northeast has centered on the

creation of cooperatives to act as aggregators for not only electricity

purchases, but a wider range of energy services. Throughout the

Northeast, energy co-ops are being established to provide a consumer-

owned response to the potentially consumer-unfriendly deregulated

electricity market. Their concern with social justice and economic

fairness makes them one of the few types of organizations that have

demonstrated an interest in aggregating residential consumers and

low-income groups. This value-driven focus, moreover, reveals severalcase studies featuring the unlikely combination of low-income

customers and green power programs.

Purchasing cooperatives acting as aggregators, it is important

to note, differ in substance from Rural Electric Cooperatives that act

as electricity suppliers. Most Rural Electric Co-ops are similar to

municipal utilities in that they own electric distribution systems and

are engaged in electricity distribution. A purchasing cooperative, incontrast, generally acts as an intermediary in the electricity purchasing

process and is not involved in distribution of power.


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5 Consumer Aggregat ion: A Model for Low-Income Consumers?

43

Barry Ingber, An Oil Co-ops Experience in Marketing Green Electricity, EPRI Green

Power Conference, May 1999.

51

The formation of consumer-owned co-ops as aggregators may

be a growing trend. Efforts to establish energy purchasing co-ops can

be seen in New Hampshire, Massachusetts, Connecticut and Vermont.

Drawing on experiences of bulk purchases of oil and gas,

comprehensive energy co-ops are becoming more common. In many

cases, existing energy cooperatives are moving into electricity

aggregation.

a. Bost on Oil Consumers Al l iance

The Boston Oil Consumers Alliance (BOCA), was established in1981 as a response to rising home heating oil prices, and other fuels.

BOCA served to aggregate consumer demand for home heating oil,

and has obtained rates nearly 30% below market rates. 43 BOCA later

expanded to provide energy efficiency services.

Drawing on its experiences as an aggregator, BOCA in 1999

expanded into the electricity market, and included a focus on green

power. As with many other energy cooperatives, BOCA sought toprovide integrated energy services, including energy efficiency,

education, electricity and other fuels. As a cooperative, BOCAs

strategy is guided by strong moral principles, and aims to provide not

only savings, but also a true green alternative.

b. Connect icut Energy Co-op

In Connecticut, an energy cooperative was established for the

primary purpose of aggregating residential electric consumers. The


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44 The New Co-ops, Rural Electrification Magazine. No date.

52

Co-op was able to offer electricity at 5.25 cents per kWh, beating the

standard offer in the Connecticut Light and Power service territory.Members receive the additional benefit of services from the ICE

program: Innovation, Conservation and Efficiency. In addition, the

Connecticut Energy Cooperative offers fuel oil, propane, natural gas

and telecommunication services. Similar to BOCA, the Cooperative

offers two electricity products, Ecowatt, a certified green product,

and Valuewatt, a low-cost product.44

c. New Hampshir e Consumer Ut i l i t y Cooperat iveAn example of a statewide cooperative, stimulated by grant

funding, was found in New Hampshire. In anticipation of full

electricity deregulation, the Institute for Cooperative Community

Development situated within the New Hampshire College proposed the

creation of a statewide purchasing cooperative. The Institute received

a grant of $100,000 as seed funding, and their program was designed

to draw from the membership of three existing organizations; The

New Hampshire Credit Union Consumers Cooperative, Consumers

Utility Cooperative and the Northern Forest Energy Cooperative.

In addition, the newly created New Hampshire Consumers

Utility Cooperative would partner with a local community action

agency to include low-income families in the purchasing pool. This

strategy of linking community action agencies to aggregators may in

fact be one of the most promising strategies.


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53

5.4 Community Action Agencies

Community Action Agencies play a leading role nationally in

energy service provision in impoverished communities, and play a key

role in the implementation of federal energy assistance programs

(LIHEAP). Community Action Agencies have an extensive history of

deep engagement with low-income communities, as well as providing

energy assistance programs. Are Community Action Agencies well

suited to take this one step further and become electricity

aggregators?

Some analysts have considered whether community action

agencies have the necessary organizational capacities to become

aggregators and have found them wanting. A report by the Maryland

Energy Administration and the Office of the Peoples Counsel argues

that:

...it has become increasingly clear throughout the

country that aggregating for electric purchases is no

simple endeavor. Several layers of expertise are

required... it is becoming increasingly evident that the

low-income program administrators do not have the

in-house resources to provide such expertise. Moreover,

they do not have the resources to procure the necessary

expertise to successfully aggregate.


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45 Colton 2000, op cite

46

The Maryland Energy Administration and Office of the Peoples Counsel offer a third

solution. The report recommends that a systems benefit charge fund legal,

technical, marketing and other staff to assist with low-income and other residential

aggregation efforts.Maryland Energy Administration and Office of Peoples Counsel,

Public Benefi t s and Electr ic Market Restr uct uri ng in t he St at e of Maryland.,

undated.

54

The Minnesota state LIHEAP office assessed the capacity of

local community action agencies, and concluded that they had neither

the expertise nor the resources to aggregate45.

The complexities of forming an aggregated pool may make it

difficult for a CAA to aggregate on the basis of its existing resources.

Yet, as the Maryland report implies, with additional resources, it is

possible for CAAs to procure the expertise required, by forming

partnerships with licensed aggregators, or hiring the necessary skilled

staff.46

The federally funded Low-Income Home Energy Assistance

Program (LIHEAP) supports innovative initiatives through the

Residential Energy Assistance Challenge Option Program (REACH). In

1999, REACH funded two pilot aggregation programs in partnership

with community action agencies, which may help answer important

questions about their ability to successfully aggregate.

The Connecticut Association for Community Action (CAFCA) is

an umbrella organization for 12 community action agencies across the

state. As one component of a three year, $1.5 million REACH grant,

CAFCA will develop a home energy aggregation pilot that will arrange


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47 REACH grant awards FY 99, see LIHRSP c learinghouse website,

www.ncat.org/liheap/.

55

for bulk purchases of electricity, natural gas and heating oil. Residents

signing up for LIHEAP benefits are eligible to join the purchasing pool.

The pilot program is open to 15,000 residents.

The second grant supports the State of North Carolinas Office

of Economic Opportunity to strengthen its partnership with 31

Community Action Agencies. The $1,000,000 grant will create:

...a permanent mechanism, a non-profit aggregator,

through which the States low-income households

can compete effectively in a competitive energymarketplace. Project partners will establish a Public

Interest Energy Services Company which will

aggregate the buying power of low-income customers

in order to increase their individual energy market

power, allowing individual low-income households

opportunities for self-sufficiency.47

The link with the non-profit agencies will provide the necessary link to

the community, through their outreach and organizing capacities.

Similarly in Vermont, an energy consumer co-op is being

established through the REACH program. Community Action Agencies

are able to offer membership in the ComsumerCo as a benefit to their

members. A major goal of the ConsumerCo project is to include a

significant proportion of LIHEAP customers. In addition, the

ConsumerCo expects to rapidly expand into other energy services,

noting that sale of electricity alone is neither a viable economic


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48

Vermont Reach Project: Development of a Consumer Energy Cooperative, Vermont

Energy Investment Corporation, March 1999.

49

Pam Marshall and Roger Colton, op. cite. 1988. pg. 55.

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option, nor is it likely to create the opportunity to signficantly provide

lower bills to members.48

This strategy enables consumers from multiple community

action agencies to aggregate, a more efficient proposition than each

CAA initiating their own bidding process. Another alternative,

proposed by low-income advocates Pam Marshall and Roger Colton, is

to have the state LIHEAP agency to act as statewide aggregator. They

argue:

...the State LIHEAP administrative agency should

aggregate all LIHEAP households rather than individual

LIHEAP providers aggregating only their local LIHEAP

households....The combination of lower costs associated

with enrolling a larger number of LIHEAP households,

with administering universal service funds, and with

negotiating one supply contract for all LIHEAP households

will make a combined LIHEAP pool more attractive than

pools aggregated by individual LIHEAP providers49.


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5.5 Aggregation by the Public Sector: Ohios Energy

Assistance Program

Drawing from successful experiences in aggregating LIHEAP

customers for gas purchases, Ohios deregulation legislation mandates

that the Ohio Department of Development aggregate and bid out low-

income electricity users eligible for Percentage of Income Payment

Plan (PIPP) assistance. This state-led program is a bold effort to

aggregate Ohios 200,000 low-income PIPP households into one large

purchasing pool.

Through the PIPP program, the state of Ohio guarantees a

portion of low-income consumers electricity bill. As such, the

proposed statewide aggregation will attract the interest of electric

suppliers not only due to its size, but because the state guarantees

part of the payments. This mitigates the potential risk of redliningof low-income aggregations.

5.6 Conclusions

The role of aggregation in meeting the energy needs of low-

income groups is as yet unclear. A series of pilot projects is being

implemented nationally that will help determine the effectiveness of

pooling the electric demand of low-income consumers. Although


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electricity aggregation strategies are still in the incipient stage, there

is a proven history of aggregation of gas, oil, and other fuels.

Low-income households could benefit not only from aggregation

as a strategy to secure lower energy prices, but also require

comprehensive energy management assistance. Efforts to reduce

overall energy costs to economically vulnerable households must not

focus narrowly on price, but should also include assistance to lower

energy usage. Most assistance efforts highlighted in this chapter

combine bulk purchasing with energy efficiency and other services.

The modest price reductions that could be achieved through

aggregation are on their own insufficient to substantially lessen the

vulnerability of impoverished households.

Cooperatives are emerging as a viable model for low-income

aggregation. Their non-profit and value-driven basis leads them to

actively seek out low-income households, unlike commercial

aggregators, and offers a means by which this demand can becombined with other customer segments. These efforts are often able

to obtain grant funding in the early and costly start-up years. More

significantly, they are forming productive partnerships with community

action agencies and state energy offices.

The State of Ohio is implementing a bold and aggressive

program designed to aggregate the states PIPP customers. The Office

of Community Services, with the resources and organizational capacityto skillfully aggregate, offers a statewide, large scale approach to low-

income aggregation.


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It is clear that low-income populations are at high risk in a

competitive market if left unassisted. Aggregation seems to provide a

supplemental strategy for reducing the energy burden on poor

households. This will be useful as one of several energy assistance

strategies when used in conjunction with other services, including

efficiency and weatherization. Low-income aggregation should be

seen as simply one more energy assistance tool.


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6

AGGREGATION AND GREEN POWER

6.1 Aggregation: The Key to Developing a Market for

Green Power?

Aggregation offers promise for stimulating demand for green

power, and kick-starting a more vibrant green power market. This

option comes none too soon. The market for green power has grown

slowly, and with recession looming, faces an uncertain future.

Although most customers in California and Pennsylvania that switched

actually did so to purchase green power, on average, green power

represents 1-2% of the market. The market for green power has failed

to emerge as dynamically as many analysts had predicted and green

power providers had hoped.

Large scale aggregation can play a vital role in developing a

green power market by creating stable and long term demand for

renewables. Contracts with large aggregation pools can provide

suppliers with the stable revenue stream that is necessary to

encourage capital investment in new renewable generation.

Aggregation for green power purchases faces numerous

challenges, however. The lack of widespread public awareness of the

environmental impacts of electricity generation makes green power a

tough sell to the general public. The relative lack of supply further

constrains possibilities of aggregators obtaining several (if any)


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6 Aggregat ion f or Green Power

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a greg at ion electric consumer

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