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Frequently Asked Questions About
Opt-Out Municipal Aggregation
The need to have municipal aggregation begins with its relationship
to deregulation of the electricity industry. Let’s start the discussion
with that.
What is electricity deregulation?
Generally, electricity deregulation refers to a state deciding that
customers should be allowed to choose an electricity supplier by letting
competition enter a market where only a regulated utility monopoly existed
before. It is felt that the market forces of supply, demand, and competition
will help to keep electricity costs low, and stimulate innovative new
products and services that didn’t exist under regulation. Massachusetts
began this process in 1997.
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Is restructuring
the same as deregulation?
To understand this, it is important to know a little
about the three major parts of the electricity supplychain: generation,
transmission, and distribution.
- Generation refers to which technology is used
to make the electricity, and what fuel is consumed in the process
(e.g. coal, nuclear, oil, hydro, wind, solar).
- Transmission refers to the high voltage power
lines that carry the electricity away from the generation plant closer
to where it is used. It ends up at a local "substation"
where the voltage is lowered and it can safely "distributed"
to us through the relatively low voltage wires that leave the substation.
- Distribution refers to the low voltage wires
we see hanging from the poles in our streets that run to our homes
and buildings.
It is crucial to know that only the first of these, generation,
is deregulated in that theoretically, customers can now choose the supplier
who makes them the best deal.
The other components of the supply chain-- transmission
and distribution--remain the same as they always were, i.e. regulated
utilities, handled by the same entities just as they always have been.
If someone switches to a new generation service (i.e. an electricity
supplier), they will still call the local utility (now called the electric
company) to report service issues and outages, just as they always have.
Deregulation is thus something of a misnomer, since only
part of the overall system is truly deregulated. Most now prefer to
call it electric industry restructuring.
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So if there
is supposed to be a choice of suppliers, why can’t we find any
besides our existing utility?
What has been found in every state where restructuring has been tried,
including Massachusetts, is that competition only appears for large
commercial and industrial customers. This is because electricity suppliers
who try to recruit individual homeowners and small businesses quickly
learn that the marketing expense is much too high per customer to make
it worth their while, and they abandon the effort.
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Where does municipal
aggregation come in?
In order to stimulate competition, Massachusetts has allowed municipalities
to pool their citizens into purchasing blocks through a process known
as "opt-out" aggregation so as to get a better deal for electricity.
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What exactly
is municipal aggregation?
Aggregation in general refers to many customers joining together to
form a buying group. Municipal aggregation refers specifically to the
situation where a municipality organizes the pooling of its citizens
to become the buying group. The municipality (or a group of them) then
seeks out offers on behalf of its constituents to get a better price,
terms and services than would be available to an individual.
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Why is aggregation
effective?
The effects of aggregation on the market are twofold.
First, by offering an electricity supplier the opportunity
to sell to a single large customer (much like the large industrial customers
mentioned earlier who get the good deals), suppliers know they can make
a profit without burning it all up in marketing expense, so they will
enter the market and compete against other suppliers to acquire these
lucrative customers.
Second, it allows the consumer to counterbalance the weight
of a big supplier with pooled purchasing power and knowledge. Thus aggregation
bolsters both supply and demand.
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What is the "opt-out"
part?
If a municipality has to go out and recruit citizens to join the buying
group (i.e. getting them to "opt-in" to the program), then
just like when a business tries to do it, it is prohibitively expensive
in time and money. Where aggregation can be successful is when it is
allowed to be done another way using the so-called "opt-out"
approach. This allows the city to publicly declare its intention to
become an aggregating entity for its citizens through hearings and mailings,
and all citizens are then included in the buying group unless they respond
to the mailings or otherwise tell the municipality they wish to "opt-out"
of the program.
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Isn’t that like slamming?
This is the main argument offered by opponents of opt-out aggregation,
so we are very sensitive about this. The brief answer is No…
Noo... Noooo!
Municipal opt-out aggregation is nothing like slamming. We apologize
for raising our voice like this; it is just that this subject gets us
so riled up.
First of all, slamming is the term applied to what a few long-distance
phone service telemarketers did way back when they were calling us all
the time to get us to switch to their service. It turned out that sometimes--illegally--
a customer would get switched without the service first getting the
customer’s permission. This understandably caused some consternation
among certain customers, particularly the ones who were stuck with a
bloated "switching fee" that was often associated with the
maneuver.
Opt-out aggregation, on the other hand, first and foremost, will only
be done when it is made legal. And not just technically legal in the
smoky back room sense, but legal with ample public debate, as we are
engaged in now. This is the entire point of what we are about here--to
make opt-out aggregation legal and a positive force in the lives of
citizens.
Beyond passage of the enabling state legislation, the steps to a municipality
engaging in opt-out aggregation will include the following:
- Open public discussion between citizens
and their local governments, in which anyone can take part.
- Passage of an ordinance by the elected
officials of each municipality that wants to participate.
- Approval of the aggregation proposal(s) by the Massachusetts
Department of Telecommunications and Energy.
- Mailed notification to all citizens,
offering them the opportunity to opt-out.
Given this, please remind us again of the parallels with
slamming? Obviously, there aren’t any.
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Are there examples of successful municipal aggregation?
There are two main examples:
- The Cape Light Compact (21 towns on Cape Cod and Martha’s
Vineyard; 175,000 customers). website: http://www.capelightcompact.org/home.ccml
- NOPEC (112 northern Ohio municipalities; over 400,000
customers). website: http://www.nopecinfo.org/index.html
Both are opt-out of course. We know of no significant
failed attempts at opt-out aggregation. For the opt-in approach however,
there are many examples where it was tried because opt-out was not allowed.
None of these were successful, and overall, there are no successful
examples of opt-in aggregation of which we are aware. In some of these
regions (most notably California), citizens have begun pushing harder
again for opt-out legislation. We see no need to reinvent this particular
wheel.
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What kinds of cost savings have the successes
you mentioned produced?
By 2005, the Cape Light Compact had saved its members $5 million. In
2005, NOPEC saved the people in its 116 member communities $46 million.
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Well, this sounds pretty
good, but if aggregation were allowed, wouldn’t that mean that
my town would have to go into the electricity business?
Don’t worry; Marlborough’s government will not have to become
a National Grid substitute. For instance, both the Compact and NOPEC
are overseen by a board of local citizens whose main job initially was
to figure out what they want, get it into a Request for Proposal, and
solicit bids from competitive suppliers; they then oversee the execution
of the contract. So far, things have gone just fine, which is more than
can be said for regions which over the same period of time had deregulation,
but no opt-out aggregation. Like California.
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