Benefits and Risks
(from Maine Townsman, January 2000)
by Stephen M. Gauthier, Maine PowerOptions
Restructuring offers the potential for consumers to join together and save.
With March 1, 2000 fast approaching, electricity consumers statewide are awaiting the savings that restructuring may offer. While most consumers may opt for the "Standard offer service" or default price, others may choose to enhance their attractiveness to competitive energy providers by joining with other organizations and aggregating or grouping their electricity usage into a larger buying block.
The concept of aggregation is not exclusive to electricity, as organizations have been banding together for the purposes of purchasing price-sensitive goods and services for years. Often, organizations form "buying groups" or Consortiums and bid out or negotiate for the purposes of achieving better pricing, increases in quality, and access to greater services.
Types of Aggregations
Aggregations can generally be classified into two primary models or types although various hybrids of the two models exist. These two types of aggregations are Endorsement and Committed-Participation.
An Endorsement occurs when a supplier is chosen as a "provider of choice" for a particular group with no real commitment from the members. In the case of an endorsement, usually the organizers of the group allow the supplier direct access to the group members for the purpose of marketing their product. In most cases, that is the extent of the benefit and assistance the supplier receives and it is up to that supplier to create their own relationships and inroads with each of the organizations. These types of relationships are often much weaker than a guaranteed commitment and offer less value to the prospective members.
A Committed-Participation aggregation occurs when members pre-commit to purchase energy from a supplier selected by the aggregation members. In this model, the group compiles its historical electricity usage (load data) and issues an RFP (request for proposal) to suppliers to bid on the group’s load. Ultimately, this activity results in a contract with a supplier for ‘firm power’ that is binding on both parties (the supplier and the aggregation members). In a "committed-participation aggregation, members usually commit to purchasing energy from the awarded supplier prior to knowing the details of the supply offer. In some instances, members can withdraw if a minimum threshold is not achieved (such as besting the "standard offer-price).
A hybrid of the "endorsement" and "committed participation" models offers the services of the committed participation model without the pre-commitment. In this model, the load data is compiled, the RFP issued, and a master agreement is reached with a supplier outlining the supplier’s responsibility to those members choosing to participate. It is then the option of each member of the aggregation to enter into a supply agreement with the winning vendor. While the supplier-community generally values an up-front commitment, they are still receiving the other benefits present in the "committed participation" model and will rarely squander the opportunity to bid on a large group of users.
Benefits of Aggregations
Aggregations may offer savings to participants as a result of combining each member’s electricity load into a larger buying block. Obviously, for the aggregation to be effective, it must offer potential-suppliers benefits that result in lower energy costs for the members. These benefits include:
Predictability of Load: By properly compiling load data, the aggregation provides suppliers with greater predictability. With greater predictability, the supplier can better manage their energy purchases. Another contributing factor to load predictability is the consistency (flatness) in which the load is used by the members. The flatter the load, the lower the price. The more the load consumption fluctuates, the higher the price is likely to be. Aggregations that can balance their load profile with members of different usage patterns can help flatten their overall load-shape.
• Size of Load: More is better. Larger blocks of power are easier for suppliers to acquire and move.
• Reduced costs of marketing: An aggregation offers potential suppliers the opportunity to serve a large volume of customers at a fraction of the cost of marketing to them individually.
• Additional services: By serving the aggregation’s electricity needs, the supplier has a unique opportunity to offer additional services to the members including demand management.
What to Look for In Aggregation
Aggregations and their sponsors (aggregators) are likely to vary in the way they manage the aggregation and in what benefits they offer to prospective members. When choosing an aggregation, it is advantageous to evaluate it by asking the following questions:
• Management or Sponsorship: Who is the sponsor or managing entity behind the aggregation? Has your organization worked with the sponsor before? Does the sponsor have the resources to not only bring the group together to do a deal, but also make resources available to oversee the performance of the supplier and address concerns that members may have in the future? It is relatively easy to facilitate a supply arrangement, but ensuring the Supplier performs consistently throughout the term of the agreement requires greater skill and commitment. In addition, prospective members should verify that the sponsor is licensed, as the MPUC requires that aggregators be licensed and meet financial and professional requirements. The MPUC website has a list of all suppliers and aggregators licensed to provide services in Maine. http://janus.state.me.us/mpuc/Electric%20Supplier/licensees.htm
• Logic of the Aggregation: An often-overlooked question when selecting an aggregation is whether the members actually have a reason to work together. Working together as an aggregation or consortium requires a degree of member affinity. Historically, consortiums in which members have little affinity tend to dissolve. Examples of difficult aggregations might include those with members from vastly different geographic regions or members with conflicting business missions.
• Load characteristics: As outlined previously, aggregations lacking sufficient membership size, load shape, or load predictability are viewed by suppliers as less desirable. Although market conditions may ultimately influence the desirability of the aggregation, aggregations in which the overall load size is small and/or the members use power at similar times tend to be less attractive to suppliers. For example, while it may be logical for municipalities to join together to buy their electricity, that aggregation is even more advantageous if entities such as hospitals and educational facilities also participate thus balancing the load characteristics and adding load size.
• Membership characteristics: Another value that suppliers look for in an aggregation is the non-load characteristics of its members. Suppliers will attempt to determine the average size of the individual members as well as their overall creditworthiness. At the end of the day, a supplier wants to know they’ll be paid, and that the membership will remain stable. Aggregations in which some of the members are apt to default on payments or are likely to move out of the group (e.g. a business failure or relocation) will be viewed by prospective suppliers as less-desirable. When joining an aggregation, determine the likelihood of members either going out of business, moving away, or defaulting on payments. In addition, look at the composition of the aggregation. Is it composed of a few large members that constitute the majority of the group’s load? If one or two members represent the majority of the load, their departure could essentially dissolve the aggregation.
Other Factors to Consider
Some other factors to consider in choosing an Aggregation include:
• Length of term: What type of time-commitment must each member make? Particularly in a newly restructured market such as Maine’s, prospective members must consider the length of time they will be committed to a deal (e.g. # of years). In a market as new as Maine’s, a commitment longer than two to four years would be unwise.
• Commitment trigger: Another question to ask is " At what point in the membership process am I actually committed to a supply deal?" Many aggregations require members to commit if the price is lower than a pre-determined benchmark such as the "standard offer". While this type of commitment may seem risk free, by accepting this condition you are eliminating any other options that might available at the time that supply contract would go into effect. For example, if the aggregation beats the standard offer, you would be locked in even if another aggregation obtains an even lower price. While it is perfectly reasonable for an aggregation to require a firm commitment from its members at some point, it is best to be able to evaluate other options that might be available at the time the supply contract would go into effect and prior to making a final commitment.
• Participation costs: Finally, what are the costs to become a member and participate in a supply offering? Whatever costs are assessed to members, they must be weighed against the supply offering in order for prospective members to make an informed business-decision. In addition to a straight membership fee, there may be ongoing fees throughout the term of the supply contract. If there is an additional fee levied over the actual supply cost (such as an "adder" to each kWh used), it is important for that "adder" to be factored into the decision to participate in the supply offering. Offerings in which the aggregation "shares" the savings vs. charging an up-front or ongoing fee may require additional scrutiny, as it may be difficult to determine the extent of those savings and how they are "shared".
Aggregations offer members an additional opportunity for savings under restructuring. Remember, however, to understand the dynamics of the aggregation and the terms and conditions of membership before committing.
Maine PowerOptions is a non-profit, voluntary aggregation sponsored by the Maine Health and Higher Educational Facilities Authority and the Maine Municipal Bond Bank. Maine PowerOptions is available to all non-profit organizations in Maine including health and higher educational facilities, municipalities, sewer and water districts, and school systems. Eligible organizations can join Maine PowerOptions for a nominal fee with no requirement to commit prior to evaluating the negotiated supply offering. For more information, contact Stephen M. Gauthier at 1-877-852-3332 or visit our website at www.mainepoweroptions.org