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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 
renewable energy, announced the completion of the country's largest-ever 
energy aggregation contract encompassing more than 400,000 Ohio electricity 
customers. The ground-breaking, six-year agreement was struck with the 
Northeast Ohio Public Energy Council (NOPEC), a public electricity buying 
group which represents households across eight Ohio counties. Under the terms 
of the contract, Green Mountain Energy Company will begin serving residential 
customers across the NOPEC area with cleaner and renewable energy beginning 
Sept. 1, 2001.  

Analysis: This announcement came out two weeks ago, but it draws attention to 
a growing trend for energy aggregation in the state of Ohio. Although full 
competition began in the state on Jan. 1, Ohio is maintaining a "market 
development period" that will last for the next three to five years. During 
this period, residential customers will continue to receive a 5-percent 
reduction in the generation cost of their electric bill and hopefully take 
the time to make educated choices about where their power supply originates. 
However, what many Ohioans may not fully understand is that the many cities 
in the state actively engage in load aggregation, a program that empowers the 
cities to select power suppliers for their residents (unless the residents 
clearly opt out of the aggregation). 

According to the Consumers Counsel of the State of Ohio, which recently 
issued an assessment report on deregulation in the state, an estimated 
152,000 residential customers in FirstEnergy territories have switched to new 
suppliers. About 500 AEP, Cinergy and Dayton Power & Light residential 
customers have switched. (Note that these figures do not include many new 
aggregation contracts). In addition, 36 electric suppliers have been 
certified with the Public Utilities Commission of Ohio (PUCO) to provide 
electric generation services to Ohio's residential consumers. Of these, just 
two currently have offers on the table and are soliciting new customers. 
Consequently, the report concluded that Ohio does not yet represent a strong 
competitive market, and that the true benefits from competition won't 
materialize in the state for three to five years (after the market 
development period and rate reductions have expired). However, as municipal 
aggregation unfolds in Ohio, new suppliers (such as Green Mountain Energy) 
are finding new competitive opportunities, which could serve to jumpstart the 
market in the state. 

Although few Ohio residents are consciously making the choice to switch to a 
new power supplier, they might find that their service has been switched over 
to a new provider just the same. Ohio's restructuring law permits aggregation 
of electricity consumers by any entity that becomes certified with the PUCO. 
Aggregation is the process by which consumers pool together their load and 
form an energy buying group. In theory, aggregation is supposed to reduce a 
power supplier's costs as the supplier is serving a group rather than having 
to acquire customers on an individual basis, which is an extremely costly 
proposition. These reduced costs typically are passed on to the consumers in 
the aggregated group, which makes buying power by bulk an attractive idea for 
many energy customers. Aggregation is not a new concept and has been used by 
various buying groups across the country. What makes aggregation noteworthy 
in Ohio is that an unusually large number of cities across the northern part 
of the state have now become energy brokers for their residents, intending to 
secure lower rates by engaging in aggregated sales contracts with power 
suppliers. In addition, Ohio is unique because many of its cities are 
automatically putting their residents into an aggregation program unless the 
residents take the formal effort to step out of the program.  

Residents within a city in Ohio must approve energy aggregation through a 
referendum. In March 2000, the city of Parma, Ohio, became the first city to 
vote in favor of an aggregation plan. In fact, residents of Parma 
overwhelming passed the measure, giving the city government the authority to 
serve as a power broker. Since that time, a large number of cities throughout 
Ohio have followed suit. According to a report in The Toledo Blade, 136 
cities, villages, townships and counties across the state have voted on 
aggregation ordinances, and according to the paper the ordinances have passed 
overwhelmingly in all areas. The most current data available from PUCO 
indicates that 23 cities have filed applications to become energy 
aggregators, and that 19 cities*including Cleveland and Toledo*have been 
formally certified to buy power on behalf of their residents. (Note that 
NOPEC, which has secured the contract with Green Mountain Energy, counts for 
one certification although the group represents more than 100 
municipalities.) 

These cities, serving as the aggregating agents, negotiate offers with power 
suppliers and purchase energy services on behalf of the buying group (in 
Ohio, this means any resident of a particular city that has been approved as 
an aggregator). The most-often identified driver behind the move toward 
aggregation is the anticipated savings that a city believes it will be able 
to secure for its residents. For instance, the Toledo City Council reportedly 
sold its residents on the idea of aggregation by predicting that savings in 
the range of 8 to 10 percent could be achieved. The incumbent utility serving 
the Toledo area is Toledo Edison (a subsidiary of FirstEnergy, which 
reportedly has the highest rates in the state). Naturally, Toledo residents 
embraced the aggregation plan with great enthusiasm. The city of Toledo is 
still negotiating contracts with power suppliers, but at this point has not 
received an acceptable bid. Under Toledo's aggregation plan, the city has 
established that it will "competitively bid and negotiate a contract with a 
competitive retail electric supplier to provide firm, all-requirements 
service to the members of the aggregation program. The contract will be for 
fixed-priced service to each class of customers at a rate that is lower than 
the standard offer from Toledo Edison." 

Ohio law stipulates that a city can select either an opt-in or an opt-out 
approach to aggregation. Under the opt-in approach, energy customers must 
provide written notice to their city that they wish to be included in the 
aggregation program. The opt-out approach requires that customers must 
formally notify their city that they do not wish to be included in the 
aggregation. There are large promotional and administrative costs for the 
cities associated with the opt-in approach. In addition, many potential power 
suppliers made it clear that they would not bid on power contracts unless the 
cities used an opt-out approach. Consequently, every city that has been 
certified in Ohio to become an energy aggregator is using the opt-out 
approach. This in and of itself makes Ohio extremely unique. Only one other 
state (Massachusetts) uses an opt-out approach to aggregation, but it does 
not match the size and scope of the Ohio program.  

The opt-out policy of the Ohio aggregation program has sparked a great deal 
of debate. Proponents argue that residents will secure significant benefits 
from the aggregation process (namely, lower rates). For instance, in a power 
supply Memorandum of Understanding that the city of Alliance, Ohio, has 
established with Shell Energy, savings in the range of 3 to 6 percent off of 
the incumbent's (Ohio Edison) residential rates are expected. In addition, 
proponents contend that municipalities electing to become an energy broker 
are providing an added service to their residents, which is part of a larger 
trend of cities aggregating such services as water service, garbage 
collection and sewage service. Regarding the issue of the opt-out approach, 
proponents of municipal aggregation say that residents are given multiple 
opportunities to notify the city that they do not want to participate in the 
aggregation. A resident has the option of continuing to receive service from 
the incumbent utility (as long as they formally notify the city of this 
decision).  

Opponents, on the other hand, argue that municipal aggregation amounts to 
nothing more than customer slamming, since being assigned by the city to a 
new power supplier may be an involuntary act for those that did not 
consciously opt in for aggregation. Also, opponents take issue with 
aggregation because, under the guise of "customer choice," customers still 
find themselves tied to the city aggregator (unless they opt out), which may 
preclude other power suppliers from entering that particular market. In fact, 
as evidence of the policies related to the opt-out approach, opponents might 
point to a stipulation under the City of Toledo's Aggregation Plan (in a 
filing with the PUCO). Toledo's policy asserts that a 30-day opt-out period 
will be offered "every two years during which customers can leave the City's 
aggregated pool without paying a switching fee." The underlying result of 
this is that customers can only opt out of aggregation during a small window 
period every two years, or incur undisclosed switching fees. 

In addition, opponents say that on average customers tend to switch power 
suppliers at the low rate of 15 to 20 percent, even when they find themselves 
paying higher bills or are offered a better supply contract. Thus, the vast 
majority of customers might end up remaining with a city aggregator simply 
due to inertia or a lack of understanding about their available options. 
Those who question the value of municipal aggregation also suspect that 
cities might earn a financial gain from serving as an energy broker or attach 
extra hidden fees to customers to compensate for administrative costs or 
consultant fees.  

There is also the possibility that the city will not be able to secure lower 
rates than those already in place with the incumbent utility. Analysts have 
raised the question of what would happen if a city secures a contract with a 
power supplier, and then for whatever reason the power supplier cannot 
fulfill its obligation to provide the power (such as in a bankruptcy 
situation)? Would the incumbent utility be required to resume service for the 
aggregated customers? In other words, who becomes the provider of last resort 
under a municipally aggregated model? Based on the city of Alliance 
aggregation model, if the power supplier defaults on its service, the 
aggregated customers are entitled to return to the incumbent utility under a 
"standard offer service." While this offers a safety net for the customer, it 
puts a potential burden on the incumbent utility with regard to its load 
planning and the difficulty in scheduling for a group of customers that may 
or may not return to its service. 

Yet, also from the incumbent utility's perspective, proponents of aggregation 
say that utilities are often required to meet established targets related to 
the percentage of their customer base that switches to a new energy provider. 
Such is the case with Ohio utilities, such as FirstEnergy, which will be 
penalized unless they meet their targets. Consequently, an incumbent utility 
often will have a divided reaction to aggregation. On one hand, the incumbent 
is potentially losing a core of its customer base, but on the other hand it 
recognizes that aggregation may offer one mechanism for meeting its switching 
targets. Also, unregulated affiliates of the incumbent utilities often end up 
being the ones bidding on the power supply contracts with the cities. This is 
in fact the case with an unregulated affiliate of FirstEnergy, which 
reportedly has made power supply bids with several Ohio cities that are 
aggregating. 

In summary, Ohio remains a test bed for the practice of municipal 
aggregation. There is little doubt that, at least in the northern half of the 
state, city governments are actively promoting themselves as energy brokers 
and remain confident that they can secure lower energy rates for their 
residents. It will be interesting to see if Ohio's aggregated cities can in 
fact achieve the goals they have established, and how Ohio residents react 
when they begin receiving power from the city-chosen supplier.  

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 
fact that Sierra Pacific Resources' pending acquisition of Portland General 
from Enron had been "scrapped." I based my statement on previous comments 
from Enron's Jeffrey Skilling, indicating only a 5-percent probability that 
Sierra Pacific's purchase of Portland General will be closed. 

Yesterday, I received the following statement from Sierra Pacific Resources, 
outlining their position related to the pending acquisition, which they 
requested that I distribute with today's column: 

"It's going to be very difficult for Sierra Pacific Resources to satisfy the 
requirements of the Securities and Exchange Commission in the company's 
current financial condition. But the company is continuing to pursue its 
obligation to complete the acquisition of Portland General Electric." 
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