A few weeks ago, SaveOnEnergy.com warned customers that opt-out municipal aggregations -- in which customers are switched to an electricity supplier chosen by their city or town -- do not produce the lowest electric rates for customers, and can lock customers into higher rates.
In most states, cities and towns don't have the right to choose your electric provider any more than they are authorized choose your phone company or car insurance provider, but opt-out municipal aggregations are legal in places such as Ohio, Massachusetts, New Jersey, and Illinois. They are especially growing in popularity in Illinois, particularly at ComEd around Chicago, and one of the reasons is because it's a great deal for municipalities who can "skim" savings offered by electric suppliers for themselves, rather than passing the full savings onto customers.
Back in October SaveOnEnergy.com debunked the myths behind opt-out municipal aggregations, showing that they have no inherent cost advantage, and that customers can get the lowest energy rates by making electric companies compete for them individually with customized offers, rather than taking a blended "off the shelf" rate offered under a municipal aggregation. Unfortunately, the problems with opt-out municipal aggregations are deeper, and there are even more reasons that the rates from municipal aggregations are higher than the rates customers can receive through competitive suppliers.
It is important to remember that with municipal aggregations, from a practical standpoint, it is the city who is the customer of the electric supplier. The city, and not individual electric customers, negotiates with the suppliers, and ultimately chooses the winning supplier. This means that electric suppliers spend all their efforts in trying to make the city happy in order to win the aggregation, and the city's interests may not always align with what's best for customers.
Because electric suppliers are so heavily focused on winning a city's aggregation, they offer various incentives and other bonuses to the city itself rather than the individual electric customers -- but these incentives are funded by skimming savings off of the rate offered to customers.
A common tactic used by electric suppliers in order to win a municipal aggregation is to offer the city a direct monetary grant -- such as $500,000 -- as part of their bid, or by offering to fund some other pet project of the city, such as a new building or fire truck. Where does this money come from? The savings the supplier would normally pass onto the customer.
Under this process, the winning municipal aggregation supplier might offer customers only 6% savings versus the utility's electric rate, but it may, on the side, provide a direct grant of $500,000 to the city as part of winning the bid. But if the supplier didn't have to fund the grant to win the aggregation contract, it could pass on that extra money to customers through lower electric rates, perhaps raising the savings to 15%.
Indeed, the Illinois Daily Herald detailed this issue, as the village North Aurora confronted various aggregation proposals.
The Daily Herald noted that the village board, "discussed an option where, for slightly less savings, the village would have received grants back from the energy providers."
As reported by the Daily Herald, Trustee Vince Mancini asked if the Illinois attorney general had issued any rulings about the legality of accepting such grants.
"There is a smell to it," Mancini said.
Regardless of legality, it's simply bad public policy and essentially denies customers the full savings that they could be receiving on their electric bill, instead funneling that money into the city's coffers. Customers who are promised savings under opt-out municipal aggregations need to shop around to find out if aggregation grants have eaten into the total savings otherwise available in the market, and to check if lower rates are offered by competing suppliers.