You may have heard about the increasing popularity of City and Town run Municipal Aggregations for electricity supply in Massachusetts. Through these programs, Cities and Towns aggregate all of their electricity customers and put them out to bid to licensed suppliers in the State. They then select the winning bidder and provide that rate (often with a 100% Green Option at a higher price) to all electric users in the area. Customers must "opt-out" or they will automatically be enrolled in the program.
What does this mean for you as a residential or business electricity user that is in a City or Town that has completed, or is considering, a municipal aggregation program? The purpose of this short write up is to break down the pros and cons of Municipal aggregation.
The Pros
• Pricing Stability
Massachusetts Utility rates are unpredictable and often are only known 3 months in advance. This can make it extremely difficult to run a business when energy is often the 3rd largest cost. In addition, Utility rates during the winter tend to be about 50% higher than they are the rest of the year. For many companies, this can be a cash flow nightmare. A municipal aggregation will provide a fixed price typically between 12 and 24 months which reduces the monthly volatility
• Flexibility
In Massachusetts, customers can opt out of a municipal aggregation at the time the notice is sent, or at any point during the aggregation. By the same token, they can also re-enroll with the program at any time. This flexibility allows customers to use the aggregation price when beneficial, and consider a competitive supplier when the price in the open market may be lower.
• No Holdover Rates
One of the most difficult things for Residential and Small Commercial customers shopping for electricity supply contracts is remembering to renew the contract itself. This leads to the customer being placed on a holdover or market based rate where suppliers typically charge a heavy premium. Ever had your 2 year cable TV contract expire and get your next bill that is double what it was the month before? This is what can happen with holdover rates. Since the Municipal Aggregations are opt-out, you will automatically be moved to the next fixed price at the expiration of the current contract unless you tell them otherwise.
• Green Options
Almost all Municipal Aggregations allow customers to choose if they want to purchase a percentage of their electricity from Renewable Resources. There is usually about a $0.01/kWh charge to purchase renewable energy and you have to read the fine print to determine exactly what you are getting.
The Cons
• Large Risk Premiums for Suppliers
The flexibility provided to customers in Municipal Aggregations results in higher risk premiums included in the pricing by suppliers. Since they don’t have firm commitments from customers for the entire duration of the contract, they have to estimate what their attrition will be throughout the term and what impact it will have on their costs.
• Subject to Market Timing
Whenever a Municipal Aggregation enters into a fixed price contract for the City or Town, they are purchasing that electricity at a fixed point in time. If the market falls off significantly 6 months into a 24 month contract, customers will be stuck paying above market rates for the remainder of the term. While customers do have the flexibility to switch, many residential and small commercial customers choose not to pursue this option. The reason that Utilities such as National Grid and Eversource only provide rates 3-6 months in advance is because they are not attempting to “time” the market. On the other hand, Municipal Aggregations are essentially timing the market which can lead to very different results.
• Fees and Incentives
Typically a consultant will work with a City or Town to assist in the negotiating of the Municipal Aggregation contract. These fees are disclosed to the City/Town and are transparent on all of the websites which is a good thing. For the most part, a fee of $0.001/kWh is the industry standard price for their services. However, since these consultants have to do substantial work to get these aggregations off the ground and obtain pricing from suppliers for every single energy user in town, there is a financial incentive to advise Cities and Towns to go with longer term pricing to maximize the profitability of the aggregation to the consultant. A consultant has to do the same amount of upfront work if the aggregation selects a 12 month price versus a 30 month price.
• Missing the "Opt-Out" Notice
For many residential and business customers keeping track of ever piece of mail can be a challenge. Since these aggregations are "Opt-Out' rather than "Opt-In" if you miss the notification you are going to be on with the aggregation for at least a month. This can often lead to consequences if you have already selected a competitive supplier outside of the aggregation and are in the middle of an agreement. Although you can re-enroll with your current supplier, it can lead to potential costs for lost months from the supplier.
Neutral Points
• Law of Averages
In any aggregation, there are always going to be winners and losers. Customers with better load profiles are going to end up subsidizing customers with poor load profiles. This results in some customers paying more than they would get as a stand-alone business, while others reap the benefits. A case could easily be made that those with better load profiles can and will opt out of the aggregation but based on experience that is not always the case.
Summary
Overall, I believe Municipal Aggregations are here to stay in Massachusetts and will expand to other states that are not already participating. The allure for cities and towns to try to provide additional value for residents and businesses will keep them afloat. A well-executed Municipal Aggregation program can provide significant benefits to residents and businesses, but they are not without risk. High risk premiums priced in by suppliers to deal with the free mobility of customers and City and Town officials trying to time the market can leave these residents and businesses in an above market contract for a long period of time.
About Pursuit Energy Solutions
Pursuit Energy Solutions provides Electricity and Natural Gas consulting services for customers in Massachusetts and New England. Our goal is to work with clients to develop long term purchasing strategies that match their unique needs. We work with New England’s premiere electricity and Natural Gas suppliers and provide a robust bid process for all customers. In addition, our 100% transparent free structure provides peace of mind for our clients that they know exactly how much Pursuit charges for our services. In a business that has thrived for years on undisclosed fees and misaligned incentives, we strive to shine light on the bid process.