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Muni Aggregation's Next Step: Developing Generation With Captive Customers

July 6, 2016

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Copyright 2010-16 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

The dangers of opt-out municipal aggregation to workably competitive retail electric markets become more apparent as municipal aggregations move to take the next step, transitioning from mere brokers (though ones with a huge competitive advantage in their opt-out authority) to generation developers -- ones that use essentially captive customers to finance power projects that retail suppliers would need to take on risk to develop

Such grand aims are apparent with an adopted amendment to the Massachusetts long-term contract bill (Amendment #3 to S.2372) which, in its design, would essentially enable municipal aggregations to compel customers, absent an opt-out, to pay for new generation developed by the municipality. Call it stealth municipalization

The amendment itself is more limited, to be fair; but the process envisioned by the amendment, if adopted broadly, is a stepping stone to essentially allowing municipal aggregations to develop generation on the backs of customers with a large status quo bias, and limited opportunity to opt-out.

Specifically, Amendment #3 would create a pilot program for municipalities to enter "community empowerment contracts". Only municipalities located in the county of Barnstable, Dukes County, or Nantucket would be authorized to enter community empowerment contracts during the pilot

Municipalities need not have implemented a municipal electric supply aggregation to enter a community empowerment contract; however, we see the two policies being used in tandem in the future.

Amendment #3 provides that, "A municipality may, on behalf of the electricity customers within the municipality, enter into a community empowerment contract with a company that proposes to construct a renewable energy project."

"The electricity customers within a municipality shall be required to participate in a community empowerment contract; provided, however, that a customer may opt not to participate in a contract if the customer provides notice to an administrator designated by the municipality within 90 days after the vote authorizing a contract or, in the case of a residential user receiving a low-income electric rate, at any time," the amendment states [emphasis added]

"A residential or small commercial customer that establishes service in the municipality after a proposed contract shall have 90 days to opt not to participate. No customer shall be a participant in a contract if that customer uses more than 5 per cent of the total annual electricity usage of the electricity customers located within a single municipality that is a party to the contract or, in the case of a contract with a group of municipalities, 5 per cent of the total annual electricity usage of the electricity customers located in the group of municipalities that are parties to the contract," the amendment states

"A large commercial customer within a municipality may become a participant unless otherwise prohibited and, upon electing to become a participant, shall remain a participant for the remainder of the community empowerment contract as long as the large commercial customer continues to be located within the municipality," the amendment states. A large commercial customer would be defined by the definition in the existing EDC tariffs.

The amendment requires that any such contracts use a contract for differences model, with energy sold into the market, and costs/benefits credited to all participating customers.

Notably, these costs/credits would not appear in any municipal aggregation rate (if one so exists), but would appear as a line item on distribution bills.

The amendment charges the DPU with establishing standards by which the utilities would reflect any charges/credit under the community empowerment contracts as a separate line-item on bills

Still, despite not being reflected in the generation rate, the community empowerment contracts create potential bypassable benefits that would accrue to only those customers who have not opted out. Although not provided for in the amendment, if community empowerment contracts are later blended with municipal aggregations (such that only aggregation customers are part of the empowerment contracts), it creates an unlevel playing field, where aggregations can more aggressively seek to develop generation for hedging and price benefits for customers (thereby undercutting individual offers from competing retail suppliers), free from the risk of unrecovered costs due to the aggregations' "sticky" customer base (while customers have a nominal opt-out right, experience with opt-out aggregations has shown that this right is rarely used, not because of satisfaction with aggregation service, but because of status quo bias and unfamiliarity with the aggregation)

The amendment provides that a community empowerment contract shall be in addition to, and aside from, an electricity supply contract that a customer may have at the time of the contract or that that the customer may later seek to establish. A municipality that enters into a community empowerment contract under this subsection shall not be considered a wholesale or retail electricity supplier. A community empowerment contract shall not require participants to change their choice of electricity supplier regardless of whether the supplier is a competitive supplier or a basic service supplier.

The community empowerment contract model is not present in the passed House version of the bill, and will need to be addressed in conference.

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