REMARKS OF BLOSSOM A. PERETZ
DIRECTOR
NEW JERSEY DIVISION OF RATEPAYER ADVOCATE

New Rules of the New Jersey Power Game
For Customers, Suppliers & Utilities

Hilton - Newark Airport
June 28, 1999

Saving Money Through Municipal
Load Aggregation

Good afternoon. My name is Blossom Peretz and I am the Director of the Division of Ratepayer Advocate. Thank you for giving me the opportunity to speak about an issue that will change the way in which communities and residents think about their utility services.

The Division of the Ratepayer Advocate represents and protects the interests of energy consumers in New Jersey, including residential, small business, and industrial customers. This is an unorthodox mix of constituents for a traditional utility consumer advocate, but it reflects the fact that no consumer group is isolated from the economic well-being of the entire community. This is especially true in the new competitive environment for energy services.

The recent passage of the Electric Discount and Energy Competition Act ( the "Act" ) on February 9, 1999 was a momentous occasion and marked the start of a new world where energy suppliers will "court" New Jersey energy customers in order to serve them. This means all New Jersey energy customers, most likely for the first time in their lives, are given the opportunity to choose an energy supplier based on factors like price and quality of service. As the Ratepayer Advocate, I am excited by the possibilities that this new Act opens up for all ratepayers.

I am here today to discuss how through aggregation all consumers, and in particular governmental entities will be able to benefit from lower energy costs and improved service offerings which are becoming available through deregulation and competition in the gas and electric industries. So what I would like to do is highlight a few of the most important issues that will help your efforts to cut your energy rates.

I recognize that the immediate concern of most consumers is reducing utility bills. I’d like to admit that, when my office first began working on electric restructuring issues three years ago, our primary concern was high rates. After all, New Jersey’s electric rates were reported 9th highest in the nation. Our goal was to achieve at least a 5% to 10% rate reduction for all classes of electric consumers and I am happy to report that we were successful in this effort.

I spoke of "shopping" for energy. As the utility industries are deregulated, consumers will be able to pick a new electric or gas service provider for generating electricity or for supply of gas, or continue to stay with the incumbent utility. In the case of electric competition, about one-quarter to one-third of the bill will be affected, because only the generation portion is open to competition. The traditional utility will continue to be in charge of delivering the electricity or gas to the business or home.

Since we began working on electric deregulation issues three years ago, our office has had the opportunity to review the stranded cost and rate unbundling filings of the four electric utilities now operating in New Jersey. In addition to the immediate rate decrease mentioned earlier, we focused on the more long term and critical issues of restructuring -- insuring a competitive marketplace with the opportunity for third party marketers to compete effectively with utilities in offering power and energy services. And insuring that New Jersey customers -- including municipalities and counties have real choices among a number of suppliers.

In the near term, mandated reductions may protect electricity consumers from high rates. In the long term, only a competitive market structure will provide the assurance of lower energy rates. The Ratepayer Advocate specifically believes that governmental aggregation provides the greatest opportunity to achieve additional long-term rate reductions for county and municipal needs, businesses and residential customers.

First, what do I mean by aggregation?

Aggregation means consolidating or pooling numerous individual purchases of gas and electricity into a single very large purchase, and thereby being able to purchase energy on favorable terms through the highly competitive markets. Aggregation is one facet of energy deregulation and basically permits someone other than the existing utility to perform the function of buying power at wholesale and redistributing it at retail: the power to buy power at competitive rates.

Government Aggregation can occur in various ways. On the simplest level, the municipalities or the county can separately or together simply consolidate all of its own gas and electric accounts such as the street lights and the municipal or county buildings into a single account, stated on a single bill, craft a Request for Proposal ("RFP") and shop the wholesale market for the best available "total energy" deal. In so doing, it can look not only to the cost of power, but to the range of related services being offered by the power provider. What are the competing power suppliers offering in terms of conservation related services? What about load management programs? Are they willing to offer creative pricing and financing models?

Units of local government can band together -- counties, cities, towns, school districts; sewer and water districts; municipal hospitals -- and procure their energy related needs on a cooperative basis.

The municipality (or group of municipalities) or a county (or group of counties) can act as a facilitator for all, or a number of, its constituents. Under this model, the municipality or county puts out an RFP to purchase energy on behalf of committed or anticipated participants in the pool. In addition to the overriding general contract with the government entity each individual energy consumer will enter into an energy supply agreement leaving the governmental entity free from financial risk and day-to-day administrative tasks. An analogy for this sort of pooling occurs, for example, when voluntary organizations such as the Knights of Columbus, or the New Jersey Bar Association offer insurance coverage to their members through a preferred provider.

It must be remembered that aggregation, at whatever level, will only involve the energy portion of energy purchases, and that control over poles, wires and mains and rates for transmission and distribution service will remain with the local gas or electric utility, furnishing service under tariffs approved by the Board of Public Utilities.

Let me address the following questions regarding government aggregation:

(1) Will it work?
(2) Is it necessary?
(3) What type of government aggregation programs are permitted?
(4) Is the modified opt out model a form of "slamming"? and
(5) Is it worth the trouble?

Will government aggregation work?

Municipal or county aggregation will work if two conditions are met. First, that there are energy providers out there willing and able to compete against the local utility or if the local utility is willing to offer competitive rates in the new marketplace. Secondly, that competitors are provided a level playing field so that the new entrants to the market have a reasonable chance to go head-to-head with the local utility. I am confident that if we can meet the second condition, the first condition will take care of itself.

The Division of Ratepayer Advocate is committed to insuring that the restructured energy marketplace creates the conditions needed for genuine effective competition, not illusory competition. For competition to work, the utilities cannot use their continuing monopolies over the poles, wires, pipes and mains used to deliver gas and electricity to gain an unfair advantage in the sales of energy flowing through those poles, wires, pipes and mains. First, this means that they cannot give their own gas and power marketing affiliates preferential access to the distribution systems, or system or customer information. In the language of deregulation we want to see structural unbundling of generation from transmission and distribution. Secondly, it means that the utilities cannot try to shift costs they incur for the benefit of their competitive activities to customers of their monopoly services. Thirdly, it means that the new "unbundled" pricing structure, and particularly the "stranded cost" component of this structure, must be such as to allow efficiently managed competitors a fair opportunity to earn a profit.

The Division of Ratepayer Advocate believes that to create the truly level playing field needed to insure fair competition, competitive utility functions should, to the maximum extent possible, be legally separated from continuing monopoly functions. We have also been active in our negotiations to limit stranded cost recovery to the bare minimum needed to preserve the financial integrity of utilities. The promise of competition is lower rates for all customers.

If we are successful, and if we build this truly level playing field, I am confident there will be competition. We’ve seen this in industry after industry, and have seen some very encouraging signs in those areas of the energy industry which have been opened to market competition.

Is government aggregation necessary?

My next question is whether government aggregation is necessary. In other words, if private competition is so wonderful and efficient and if competitors are out there, why should local government become involved at all? First, when dealing with the county or municipality’s own electric costs, activism in terms of consolidating accounts and soliciting a single total energy solicitation is the only way to maximize the benefits of competition. As regards to the need for counties or municipalities to aggregate for small residential customers, my answer is that while there will be no shortage of competitors out there in the wholesale markets, or seeking the business of large retail users, the costs of going after small retail customers might prove to be prohibitive, particularly given the natural inertia, caution, and confusion of small customers. Municipal or county aggregation can, at once, significantly reduce the start-up marketing costs to the new entrants, and provide the necessary push and comfort level needed to spur small customers to break old habits. Caveat: The municipality can only aggregate the electric or gas load of residential ratepayers - but cannot include energy related services.

What types of government aggregation programs are permitted?

My third question involves the form or forms of government aggregation, which itself involves a number of questions. First, what services should be aggregated? I am of the view that both natural gas and electricity needs of an aggregation pool can be purchased together consistent with the growing tendency around the country for suppliers to offer "one-stop energy shopping." Notwithstanding the current Act, energy related services should also be offered to consumers for a truly "bundled" aggregation package, services which cannot presently be aggregated by the municipality for residential ratepayers.

However regarding the form of government aggregation: on what basis can residential customers become part of the purchase pool? There are two separate models for this under the Act: 1) opt-in government aggregation; and 2) the "modified" opt-out.

"Opt-in" and "modified opt-out" refer to different means by which customers can indicate their intent to join government aggregation groups.

Generally, "opt-in" government aggregation requires customers to affirmatively elect to be a part of the aggregation pool at the start of the program, usually by mailing a written notification or consent form back to the government aggregator expressing their intent to be a part of the aggregation. New Jersey’s opt-in aggregation follows this form. Opt-in aggregation groups can include residential, commercial, not for profit and industrial members of a community.

The second government aggregation program permitted by the Act, "modified opt-out," requires residents to provide written notification to the municipality only if they wish to be excluded, i.e. to "opt-out," of the aggregated group being formed by the municipality. The Act’s modified version of "opt-out," however, allows consumers to opt-out of the aggregation program at the outset of the program but ultimately requires the government aggregator to obtain a written commitment from each consumer to participate in the government aggregation at the tail end. This extra step of obtaining customer signatures requires the municipality or supplier to incur additional expense and time to complete the aggregation process. The Act only authorizes government aggregators to use the modified opt-out method for residential customers. However, business customers can be part of the aggregated group that includes the residential customers only if these business customers expressly "opt-in" to the group, again at the tail end. Moreover, the supply contract requires review by both the Board of Public Utilities and the Ratepayer Advocate.

Is the modified opt out model a form of "slamming?"

Absolutely not.

"Slamming" is the name given to a practice which has sometimes occurred in the long distance telecommunications market where long-distance providers (or telemarketers acting on their behalf) will change customer’s long distance provider without the customer’s consent.

Slamming is --

* unauthorized and non-consensual : neither the customer, nor its duly authorized representative has consented to the change.

* deceptive: it usually involves a fraudulent misrepresentation that the customer has consented to the change, when, in fact, the customer has not. Moreover, the customer is given no advance notice of the intended change or invitation to opt out.

* anti-consumer: slamming is done to achieve personal gain at the expense of unwitting victims.

By contrast, aggregation under the modified opt out model is

* authorized and consensual: the decision to institute an aggregation program on the modified opt out model will be made by duly authorized and elected representatives acting under state law. Their actions are consensual in the sense that all actions by elected officials are made with the "consent" of the electorate. Moreover, before the program is in effect , the government aggregator must obtain a signed contract from each customer in the aggregation.

* open and honest: the officials making these decisions will do so openly, with appropriate opportunity for public comment and input. The ultimate choice of provider (which could well include the incumbent utility, or its affiliate) will be subject to Ratepayer Advocate review and Board approval.

* pro-consumer: the choice of provider and terms of services under municipal or county aggregation programs will be made, not by private entities or individuals trying to profiteer off consumers, but by the legal representatives of the consumers acting for the consumers’ benefit.

Will politics or patronage improperly influence the choice of providers under county or municipal aggregation?

Some have expressed concern in this regard that appropriate safeguards should be implemented to preclude this possibility. Pursuant to the Act, the process must be open and conducted in accordance with the Local Public Contracts Law and the ultimate decision should be based on clearly defined criteria through a competitively bid RFP, and subject to Ratepayer Advocate review and Board approval and challenge for modified opt-out. In addition, participants in the bidding process are precluded from making gifts, giving favors, or otherwise seeking to influence the process inappropriately under the Act.

Is government aggregation worth the trouble?

The fifth question is, how much trouble will this government aggregation cause, and will it be worth the trouble to the governing body?

First, once the templates are created, aggregation need not be overly difficult or risky, particularly since the more technical aspects of aggregation can and should be handled by qualified technical experts. Regarding whether it will be worth this amount of trouble, although we must be realistic about the expected cost savings, I definitely think so. High energy costs are a burden to all ratepayers. Moreover, as I noted, the current relationship between ratepayers and the local utilities results from franchise agreements entered into many decades ago permitting utilities to use public streets and rights-of-way.

Putting together a solicitation for both the county or municipality’s own energy service needs, together with those of participating constituents, will, if nothing else, get the attention of the local utilities and its unregulated affiliates. Even if the end result is to have the local utility, as it were, bidding against itself to provide better service, the community still comes out ahead. In Monroe Township, 86 percent of the township’s 12,500 chose to participate in a pilot program to aggregate retail electric load. The experience of municipal aggregation in Peterborough, New Hampshire suggests that there will also be significant interest from major power marketers. Cost savings were about 15%, which is higher than what I would anticipate here. Nevertheless, just recently the 20 towns of Barnstable County, Massachusetts have announced that four power suppliers have underbid that state’s "standard offer" in response to an RFP to provide power and energy services to 180,000 customers. The Pennsylvania Energy consortium is aggregating 242 school districts, 42 municipalities and 29 other non-profits. It expects to save its members $15 million this year.

Even if the aggregation merely represents the accounts of local government bodies, genuine cost savings will still be available. The city of Philadelphia was able to reduce its energy costs by over $5 million per year, primarily by parlaying competitive opportunities available to large customers in the area of fuel substitution and self-generation into large cost savings. In California, the Association of Bay Area Governments put out an RFP for 104 local governments in the San Francisco area to provide up to 30 megawatts of firm power for one year. The Rhode Island League of Cities and Towns is forming a similar purchase pool on behalf of its members. Moreover, aggregation, and the competitive options that come with competition might eventually offer qualitative benefits in addition to mere commodity cost savings, such as in conservation, high quality lighting, load management, and even fuel switching for municipalities and various billing options or better customer services for the constituents.

Conclusion

Municipalities and counties will need assistance in aggregating loads. Drafting solicitations, evaluating bids, and negotiating contracts requires expertise. Municipalities and counties may want to hire expert consultants and other legal advice. Our office is also there to assist and make this specialized know-how readily available to municipalities by sharing our own expertise.

Being a smart consumer in the age of electric deregulation and telecommunications information and technology advances requires outreach for new information and new opportunities.

Smart consumers will be developing plans right now for investment in the new energy and telecommunications competitive environments.

I leave you today with this message:

"Never be afraid to try something new. Remember, amateurs built the ark,
Professionals built the Titanic"

 

Thank you.

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