Illinois cities and towns engaged in opt-out municipal aggregation -- under which the city switches every customer's electric supplier to the city-chosen supplier unless the customer opts out -- are increasingly seeing rates rise above the local utility's electric rate, even as savings are still available in the market for customers individually shopping for a lower electric rate.
Crain's reports that the recent developments of aggregation electric rates rising above the utility's electric rate, "call into question the promise of municipal power purchasing."
As first noted in June by SaveOnEnergy.com®, a few towns are sending their aggregation customers back to ComEd, while Crain's notes that, "others are signing deals at prices higher than ComEd's rate."
Opt-out municipal aggregations are a result of the competition introduced into Illinois' energy market, under which customers can choose an alternative supplier for their electricity or natural gas instead of buying supply from their local utility. Under a quirk in the state law, local municipalities were given the right to switch all of the customers within their boundaries away from the local utility, like ComEd, to an alternative energy supplier chosen by the city, even if the customer doesn't affirmatively consent to the change.
But aggregations often cannot offer the lowest electric rates for several reasons.
First, because aggregations pool all customers together, there are cross-subsidies among customers with different usage patterns and load types. Electric suppliers can't optimize custom deals for customers in the aggregation, because the rate is a "one size fits all" product.
Additionally, aggregations are increasingly facing "migration risk," and are having to cover that risk with premiums built into their electric rates.
Migration risk is the risk to the aggregation's electric supplier that a customer may decide to leave in the middle of the contract, because the customer finds a lower rate from someone else.
Unlike when a customer individually shops for an electric supplier, and makes an affirmative choice among competing providers, migration risk for aggregations is much higher -- because most customers did not choose to be a part of the aggregation; they were automatically included. Therefore, when aggregation customers start seeing higher electric rates on their bill, they are quick to leave the aggregation to take control of their energy costs by shopping individually for a lower electric rate.
As the aggregation's electric rate rises, it only increases the migration risk in a vicious cycle, because more and more customers are prompted to start looking for savings from other energy suppliers.