Consortium representatives review electric aggregation

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[April 21, 2016]  LINCOLN - At a prior Lincoln City Council meeting held on April 4th, Steve Smith of Farnsworth Group and Mark Pruitt of Illinois Community Choice Aggregation Network (ICCAN) addressed the council on how electric aggregation works. The two men gave a review of the aggregation decisions made by the city of Lincoln since 2012 and discussed how to move forward in the future.

History of the Logan County Consortium

In 2011/12, the city of Lincoln became involved in an electric aggregation consortium with Atlanta, Emden, Logan County, Mount Pulaski, New Holland, and a collection of other communities not located in Logan County.

At that time, there were ten aldermen on the city council and five wards in the city. Since that time, there have been a number of changes in city government, including the reduction of city wards from five to four. The reduction of wards also reduced the number of aldermen by two. Additionally, changes made in five of the remaining eight seats on the council. As a result, five of the eight aldermen sitting on the council today were not on the council in 2012: Michelle Bauer, Rick Hoefle, Todd Mourning, Steve Parrott and Tracy Welch. Aldermen on the council in 2012 include Jeff Hoinacki, Kathy Horn, and Jonie Tibbs. Also in 2012, now Lincoln's mayor, Marty Neitzel was a sitting alderman.

The evening began with Steve Smith presenting a resume from himself and Pruitt, explaining their extensive experience with public utilities in general and electricity specifically. Smith recounted working on a number of projects in Logan County including assisting the Development Partnership in 2011 to introduce electric aggregation to Logan County.

He also explained Pruitt’s extensive experience buying and selling electricity as a commodity. Pruitt has worked extensively with the University of Illinois, as the Illinois Power Agency, which was a state agency; then went to work with ICCAN.

Pruitt then took over the discussion walking through the history, and the aggregation process, to help those who are now on the council understand what happened in 2012 and then in 2014 when the aggregation process was up for renewal.

Using a 21-page handout, Pruitt offered visual assistance to help explain the aggregation process and factors impacting the cost of electricity.

On page four of the handout, Pruitt showed a copy of a typical Ameren Illinois utility bill for a Lincoln resident. Pruitt walked through the different areas of the bill and pointed out that the only portion of the bill that is impacted by electric aggregation is the Electric Supply portion (shown with a blue outline). In the box, the first line of the bill is the actual electric rate and is the only portion of the bill that can be determined through aggregation. However, it was also noted that the second line the Purchased Electric Adjustment (PEA) also has a bearing on the final price of the electricity purchased by the consumer.

Pruitt explained that municipalities may choose aggregation for their constituents, and they do so with the goal of saving those constituents dollars on their total bill by achieving a lower electric rate than what consumers can get through Ameren Illinois. He also explained that though the municipality may choose an electric supplier with a lower rate, consumers are not forced to purchase from that chosen supplier. Consumer options include staying with Ameren by “opting out” of the aggregation process, or they may choose to shop for their own rate.

It should also be noted that consumers need to analyze their bill and determine if the rate ends up truly being cheaper for their particular household. For example, Ameren has price incentives for all-electric households that can make Ameren the best value, even when the city chooses an electric supplier whose base rate is less than Ameren’s.

The 2012 aggregation process

Pruitt moved on to discuss the process in 2012. At that time, the Development Partnership and Farnsworth brought the idea of aggregation to the County and all the municipalities in Logan County. They discussed the value of aggregation and the value of forming a consortium. Pruitt noted on more than one occasion during the evening that forming the consortium did not get the group a volume discount on electricity.

So, why form a consortium? Electric suppliers are looking to signup a large volume of customers at one time. When it came time to take bids for the electric agreements, the number of suppliers interested in bidding was large because they were going to be getting a big share of the local business. Had any one of the cities involved gone out for bid on its own, the number of companies interested in bidding would have been far fewer.

In 2012, when the consortium represented by Pruitt went out for bids five companies submitted bids. Of the five Integrys Energy Services had the best price of $0.03965 per kilowatt hour. The consortium chose to add a stipulation that 25 percent of the electricity provided come from renewable energy sources. That increased the rate to $0.041.

Farnsworth Group and ICCAN collected $1,875 for their services. That amount was added to the kilowatt rate and came to another $0.000275. Therefore, Lincoln residents had the opportunity to purchase electricity at just over $0.04 per kilowatt hour, while the Ameren rate was more than $0.05 per kilowatt hour. This came to total savings citywide for residents of about $60,000.

Pruitt said this started out as a very good deal for Lincoln residents, but it didn’t stay that way. The city signed on to aggregation to take effect in September of 2012. Through June of 2013, the savings to consumers was right on track, but then something happened that impacted the amount that would have been charged by Ameren.

Understanding the PEA

Pruitt explained the concept of the “Purchased Electricity Adjustment” factor for Ameren.

PEA is a balancing factor that allows Ameren to add costs or take away cost to the default rate customers based on the actual costs Ameren incurs for delivery of electricity. Pruitt noted, “The PEA is a reality in life, and it can be fairly significant.”

Pruitt went on to say Ameren publishes its rates so that consumers can shop, but he said that rate is adjusted monthly based on the estimated amount of electricity it will deliver. He said that if Ameren takes in too much money in this process, then the PEA becomes a credit back to its customers. So, in determining the true cost of the electricity, the default rate has to be combined with the PEA to get the true cost of electricity.

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Pruitt showed a slide that explained how this had affected the cost of Ameren delivered electricity. He noted that the bars at the bottom of the chart represented the credits Ameren had to give customers based on the PEA. He noted that these credits peaked in September of 2013. By comparison, the net cost of Ameren electricity dropped to such a point that those who were on electric aggregation were, in essence, losing savings on their monthly bill by being with Integrys.

In another slide, Pruitt showed that the PEA credits stayed high through the summer of 2015, then began to drop. By the spring of 2015, the credits were quite low. This could have indicated that it would have been good to enter into aggregation in 2015, but Pruitt explained there was an additional factor playing into the situation, and that factor led him to advise the city not to enter into a new aggregation contract.

A disastrous MISO auction in 2015

Pruitt said that there is a capacity auction by Midwest Independent System Operator (MISO) that manages the Midwest market and is tasked to assure there is enough electricity available for the market. Pruitt noted in a slide that this portion of Illinois is in Zone 4. At the auction that would impact the June 2015 to May 2016 year, the Zone 4 auction amount went to a staggering $150 per megawatt day, while in all the other areas of the Midwest the auction rate was less than $5 a day.

Pruitt went on to explain that this extremely high auction figure caught the attention of many, and multiple complaints were filed with the Federal Energy Regulatory Commission (FERC). Complaints ranged from accusations of market manipulation to complaints that the auction rules did not have sufficient safeguards to prevent certain bidders from having power over the market. The accusations pointed fingers at an electric retailer called Dynergy.

As a result, Pruitt said that the FERC launched an investigation of the auction, and it is anticipated that there will be refunds to electric consumers. He noted a quote for Illinois Attorney General Lisa Madigan, and Tyson Slocum, director of Public Citizen’s Energy Program. Slocum said, “If FERC follows the logic of its New Year’s Eve ruling, and regardless of whether the commission finds Dynergy manipulated the market, then Illinois consumers will be in line for tens of millions of dollars in refunds.” Madigan stated, “It is great news that FERC has acknowledged downstate electric customers deserve relief from an inflated and absurd pricing process. I am pleased with FERC’s decision to fix the auction rules, but FERC still needs to order refunds to consumers of the outrageously high prices.”

Pruitt said he believes these refunds will come, and for that reason, he recommended that the Logan County Consortium stay with Ameren and wait for the final result of the FERC decisions. He said that refunds could be about $28 for the average customer.

Looking at how to move forward

Now, with the annual MISO auction on the horizon, and Ameren set to release its default rate, Pruitt said this could be a good time to get back into an aggregation program. His intention is to monitor the outcome of these factors, look at the energy market and make a recommendation to the Consortium.

He said moving forward, the Consortium will have the option to maintain an “opt-out” program wherein residents will automatically be enrolled in the aggregation program and will have to “opt-out” to stay with Ameren. Or the Consortium can go with the Opt-in” program where it will announce the aggregation program, name the company it recommends and Consortium residents will need to say they choose to be part of the aggregation program.

Finally, Pruitt said that participating in an aggregation program is always going to carry risks because the market can and will change. He said that entering into a three-year agreement, in his opinion is not the best option right now. He would prefer to see the Consortium go with a year-to-year program so that it does not tie consumers to an aggregated rate that ends up costing them savings.

Smith returned to the speakers table to close the presentation, saying that he, representing Farnsworth; and Pruitt representing ICCAN, have appreciated the opportunity to work for the Consortium and hope to continue the relationship.

The floor was then opened for questions from the aldermen. Todd Mourning asked if the price of oil had an impact on the cost of electricity. Smith said the short answer was “no.” Pruitt expanded, saying that the cost of electricity is more often driven by the price of natural gas.

There were no further questions from the council.

[Nila Smith]

Complete copy of presentation by Mark Pruitt pdf

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