Municipal Aggregation in Illinois – Great Success, But Unique Challenges.

Chairman Doug Scott Illinois Commerce Commission

Chairman Doug Scott

Sponsored and written by Chairman Doug Scott, Illinois Commerce Commission

Unlike many FRI member states, Illinois is a restructured state. Like Texas, Georgia, and others, a significant portion of Illinois’s electric supply load is served by retail electric suppliers (RESs). But in a situation somewhat unique to Illinois, most residential and small commercial customer load has shifted to retail suppliers through municipal aggregation.

What is municipal aggregation? It begins with the legal authority (granted initially via Public Act 96-0176) for Illinois municipalities to aggregate residential and small commercial retail electrical loads located within their jurisdiction and solicit bids for the purchase of electricity and related services. The governmental entity must first submit a referendum for approval to its residents prior to the adoption of an ordinance for the aggregation of its electric load. The entity then negotiates a supply contract on behalf of its residents, sometimes joining with other cities for increased leverage and reduced administrative costs.

Municipal aggregation referenda initially appeared on ballots two years ago, with less than 20 communities passing referenda. Those communities attained rates of around 5.5¢/kwh for 2-3 years, superior to both the incumbent utility rate and standard offers from RESs. That demonstrated success created a tidal wave of aggregation: through the end of 2012, over 450 communities had passed referenda approving aggregation, with the vast majority negotiating electric supply contracts at well below incumbent utility and RES offer rates.

This has resulted in tremendous savings for Illinois ratepayers. A November 2012 ICC analysis projected customer savings of hundreds of millions of dollars through May 2013, and that analysis excluded Chicago (which contains over 20% of Illinoisans) and others that had not yet negotiated a deal. Due largely to municipal aggregation, we estimate that up to 90% of Illinois residential and small commercial customers will switch to a RES by the end of 2013. Just two years ago, that number was at less than 10%.

Here at the ICC, we are delighted by the success of municipal aggregation. Part of our core duty is to ensure “the provision of reliable energy services at the least possible cost to the citizens of the State.” If Illinois ratepayers receive the same reliable product at a significantly reduced supply charge, our families and small businesses are better off. But this phenomenon also brings some new and unique challenges, some which I’ll describe below.

First, we have observed new forms of “slamming” – that is, switching customers to a RES through deception. A customer may receive a phone call to “participate in the city’s new electric choice program,” which the customer assumes is opting into the aggregation offer (although opt-in is generally not necessary). The sales agent asks the customer for account information, and switches the customer’s supply service to a different RES at a less generous rate. The customer never knows that the call was actually a sales solicitation and never benefits from the municipality’s negotiated rate. This is very troubling. And as it often goes unreported, we struggle to grasp the scale of this problem.

Second, the massive and unexpected customer switching produced by aggregation has created tensions with policies that assumed more stable and measured switching rates. For instance, in 2010 the ICC approved a set of long-term contracts between wind generators and electric utilities funded through the state’s renewable energy standard supply surcharge. But with so many customers switching from incumbent utilities, there isn’t enough money coming in to meet those long-term contract obligations. An October 2012 article from Grist explains this challenge in more detail. Environmental advocates introduced legislation to “fix” this problem, but haven’t generated enough momentum for its passage.

Third, the expiration of this first round of contracts will create many new challenges and opportunities. We’re still not sure how suppliers were able to offer rates as low as 4 cents per kwh, and we doubt it’s sustainable. As rate increases sought by a public utility and approved by a PUC are often very poorly received, what happens when unsustainably low contracts expire and a city’s political leadership is considered accountable for an increase in electric supply rates? Does the developing market benefit from the city’s effort to engage and educate them? We’re also looking forward to seeing what suppliers offer to municipalities as current headroom disappears. Do more municipalities solicit bids seeking efficiency-related services? Is there a greater push for “green” products? Whatever happens will offer us a rich tapestry of data points for understanding the development of the Illinois retail electric market.

In sum, municipal aggregation has been a great success in Illinois. It has leveraged the combined buying power of a municipality’s residents to negotiate rates far lower than what individual customers could attain. But by taking this alternate path toward robust market participation, Illinois is posed with different set of governing dynamics and very unique challenges in the years ahead. We look forward to meeting them.