Public Power’s Value Proposition
Originally published April 26, 2013
Five years ago, residents in many Illinois cities and townships were paying high prices for power. They were customers of Commonwealth Edison and Ameren, two investor-owned utilities that were locked into long-term supply contracts.
The high rates coupled with an amendment to the state’s deregulation law opened the door to utility customer choice. The environment was ripe for competition. Third-party power suppliers began approaching communities to offer a lower price for energy than customers were paying to their IOU.
Cities and towns put referenda on their ballots, asking whether residents wanted them to negotiate with a third-party supplier to obtain the best price for energy. Under such an arrangement—known as municipal aggregation—utility customers would be billed by their IOU, but the energy portion of that bill would reflect the price negotiated with a third-party supplier.
Under Illinois laws, municipalities that own and operate an electric distribution system were exempted from aggregation. But in fact, aggregation is nothing new for these municipalities, said Doc Mueller, senior vice president of government affairs at the Illinois Municipal Electric Agency (IMEA).
“Municipal utilities have been aggregating their load for decades, whether they built their own generation or negotiated contracts with power suppliers,” he said.
Mark Curran, the electric director of Naperville’s public utilities department, said it is simply a natural duty for municipal utilities. “As a municipal utility, we aggregate for our customers.” The city’s power purchase contract with IMEA is comparable to the third-party power contracts secured by other cities, he said.
There’s something else, too. Municipal utilities don’t think short term; they take the long view, said Mueller. In contrast, contracts under the state’s current aggregation program range from one to three years.
Illinois municipal utilities have provided information to their customers on aggregation—whom it affects and how.
When Sangamon County formed a committee to examine aggregation, Springfield, the county seat (and the state capital), received queries from the media and a few utility customers, said Eric Hobbie, chief utilities engineer for Springfield City Water, Light & Power.
“The first customers we heard from were those who had been solicited by alternative suppliers,” he said. The electric utility explained that alternative power suppliers were available to customers of investor-owned utilities, but not to Springfield’s municipal utility customers.
“We answered questions by email, we issued a press release and we also used Facebook and Twitter to reach our customers,” said Hobbie.
At a workshop on electric rates held by the city of Naperville, the city manager discussed aggregation issues. The city’s customer service personnel and other staff are prepared to answer customers’ questions.
The city of Princeton developed a question-and-answer sheet that is used by staff to address customer concerns, said Jason Bird, the city’s electrical superintendent. “We get a handful of calls when aggregators send out mailings,” he said. “After a few days, the calls drop off.” The municipal utility also provides information to its customers in bill stuffers.
Public power utilities haven’t received a lot of questions from their customers. But when they do, one question dominates: ‘Why are customers in other communities paying less than I am?’
That question is borne of confusion about what makes up a customer’s utility bill. “We explain that the rate they’re referring to is just the energy component, not the total utility bill,” said Hobbie. “That bill also includes costs for transmission, distribution and load losses.”
Naperville’s Curran said the utility has received similar queries. “A customer will ask: If a customer in another city pays 6 cents per kilowatt-hour, why do we have to pay 8.6 cents?”
“When you look at the total bundled cost,” said IMEA’s Mueller, “we are comparable at worst, even with the municipal aggregation deals. We won’t always be the lowest, but we won’t be the highest either.”
Springfield’s City Water, Light & Power calculates its cost of energy every month. “Our base energy cost is currently lower than what the aggregators are offering,” said Hobbie.
“Most of the aggregators are in the 4.5 cents-per-kilowatt-hour range for energy, while our energy component is about 4.1 cents.” That component accounts for roughly 40 percent of a customer’s utility bill, he added.
Princeton’s Bird notes that a community of comparable size that uses an aggregator has a delivered cost a little more than 11 cents/kWh, with energy accounting for 6.23 cents. Residential customers in Princeton who use more than 700 kWh a month pay 9.2 cents/kWh. The energy component accounts for approximately 57 percent of a customer’s bill.
“Commercial and industrial customers care more about reliability and accountability than cost,” said Bird. “But on the residential side, cost is the biggest factor.”
Naperville’s residential customers pay 5.1 cents/kWh for energy, said the utility’s Curran. Energy and capital cost charges account for roughly 25 percent of a customer’s bill. Customers in a comparably sized community nearby have a three-year contract with an aggregator that is charging 5.2 cents/kWh for energy.
The website Pluginillinois.org provides a list of the energy prices offered by various suppliers.
For the city of Princeton, municipal aggregation has had one impact. “It’s prompted us to think about remaining at the top of our game,” said Bird. “It’s made us realize that we must continue providing reliable, low-cost power.”
Aggregation also has given Princeton the opportunity to talk with its customers, to remind them that if there’s a problem, the utility can be anywhere in the city in 10 minutes.
The only drawback of municipal aggregation is the misunderstanding that it has engendered with respect to a utility bill’s components, said Springfield’s Hobbie. “That’s the hurdle we have to overcome. We’re trying to get our customers to understand the energy component.”
At monthly meetings, City Water, Light & Power employees learn how to explain the elements of a customer’s utility bill. “They’re our ambassadors,” said Hobbie. “They attend social events, where they can answer questions and dispel rumors.”
“When we look only at the price of electricity, we’re doing ourselves a disservice,” said Springfield’s Hobbie. Reliability, on the other hand, is a major issue. “I’m concerned about the impact on the grid when we try to cut a tenth of a cent off rates.”
And, said IMEA’s Mueller, the service provided by municipal utilities is one thing that distinguishes them from investor-owned utilities. “Our level of reliability and our ability to recover from storms is much greater than that of IOUs.
A much higher level of reliability and price certainty is folded into the cost of electricity supplied by municipal utilities, said Mueller. Those utilities need to constantly communicate the value of public power to their customers.
“For decades, we’ve maintained a cost and reliability advantage over our colleagues in the industry,” said Mueller. “That’s because of our total focus on environmental sensitivity, stable prices and high reliability.”
Springfield’s City Water, Light & Power has impressive reliability statistics, said Hobbie. “Our outages last less than one-third as long, and happen half as often, as those of Illinois IOUs.” One reason, he said, is the utility’s history of investing in infrastructure.
To get the word out, utility representatives talk about the value proposition at meetings of community action groups and clubs. “Once an audience is engaged, people understand,” said Hobbie.
Princeton doesn’t receive many calls from its customers, said Bird. “But we remind every customer who calls about the benefits we offer.”
Municipal aggregation may lose some of its appeal in a year or two. That’s because ComEd’s long-term contracts expire in mid-2013. Beyond then, the utility is expected to offer lower prices, perhaps competing with third-party aggregators.
The prospect of lower prices from the state’s IOUs is reflected in the length of the contracts offered by third-party aggregators. “In early 2012, they offered two- or even three-year deals,” said Naperville’s Curran. Now, contracts are more likely to run for a shorter period—18 months to one year.
“The days of 30-40 percent savings are over,” said Torsten Clausen, executive director of the Illinois Commerce Commission’s Office of Retail Market Development. “There’s no doubt that the big delta between current wholesale market prices and what’s embedded in the utility rate will shrink.”
For municipal utilities, however, aggregation will remain a long-term policy, said Curran. The city’s supply contract with IMEA will minimize price volatility for the long term, he added.
IMEA’s Mueller offers this advice to municipal utilities in Illinois: “Reach out to your customers. Don’t take them for granted. You have a great asset in your system, so don’t chase short-term decreases in energy costs.”
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