From: Eric Woychik[SMTP:100670.365@CompuServe.COM] Sent: Saturday, July 13, 1996 5:36 PM Subject: Team B, Aggregation text INITIAL DRAFT ON AGGREGATION BY UCAN 12 July 1996 6.0 Aggregation of Customer Loads to Access Generation Markets (B) The collection or aggregation of electricity customer loads will be of critical importance in the new marketplace. Aggregation, which occurred in a different form under the vertically integrated electric utility, is intended to provide benefits to most all consumers. The question is how can this be achieved? 6.0.1 Consumer Benefits from Aggregation As the CPUC has stated in its December 1996 Order: In the absence of well understood and easily exercised consumer options the genus of competition is thwarted. (Order at page 4) Aggregation is a means for small, medium, and even large customers to exercise consumer options. Accordingly, the benefits of aggregation will be determined largely as follows: - Lower costs for power and a greater variety of diverse products and services that increase the value of using electricity to consumers. Also, the benefits of competition in wholesale power markets can be extended to smaller customers. - Transaction costs for aggregation can be more easily absorbed when the benefits of competition are available, especially when the scope of differentiated products and services is increased. - Consumers benefits will depend on the involvement of aggregators, which in turn depends on (1) the attractiveness of a market to consumers and providers and (2) the relative market power of participants in a market. Thus, providers will be discouraged from participating in small consumer markets if they perceive the potential value to be shared is too limited to allow for profitable operations. - Aggregators will seek to increase value by offering differentiated products such as a portfolio of supply, energy efficiency , and management services. - Consumers will obtain benefits from aggregation if they have sufficient market power in comparison to the transaction costs to serve them. The extent to which this will occur depends on five primary competitive forces: the threat of substitute products; the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, and the rivalry among firms. The greater the strength and balance of these forces within a market, the greater the price and other benefits that will accrue to small consumers. - To ensure that most consumers have an effective opportunity to significantly benefit from "consumer choice", it will be necessary to: (1) increase the value of benefits to both consumers and providers, (2) to increase consumer market power vis-a-vis providers and other consumers, and (3) lower the transaction costs to provide consumer choice. 6.0.2 Potential Barriers to Effective Aggregation The creation of adequate value for a consumer is a necessary, but not a sufficient, condition to interest a consumer in the use of aggregation to gain the benefits of the competitive market. The second condition needed is that the consumer be willing to participate in such a market. There seem to be three distinct reasons for this situation. (1) They are simply not interested in making a market decision; (2) After considering to some degree the potential exchange, they conclude that the status quo is good enough albeit not necessarily the best possible deal that they could get; and (3) There are costs and risks, some hidden, that act as customer market barriers to committing to a potentially beneficial market transaction. The line between the first two reasons may appear thin. But the natures of the two factors are qualitatively distinct. The second reason for foregoing a benefit has been termed "satisficing." Simply, consumers of all kinds, particularly when small benefits are involved, may not care about making the best economic deal. Some consumers often exhibit the characteristics of price insensitive or inelastic customers. They are: (1) unlikely to care about small savings for a relatively small cost; (2) unlikely to be willing to consciously risk bearing more costs for a limited benefit; (3) unwilling to spend a lot of time or effort on a potentially small benefit; and (4) as a result, have great difficultly understanding the value or existence of potential substitutes or difficultly in really comparing options. The potential customer market barriers in this category are similar to those commonly recognized as barriers to small consumers' interest in cost-effective energy efficiency investments. The prominent factors are: - High information and transaction costs to research, to assess and verify the provider's claims, and to judge the uncertainties involved; and - Irreducible but hidden indirect costs such as the risk of and regret for having made the wrong choice (i.e., having spent time and effort to receive no value or to lose value due to the decision made). - Consumers may face significant costs and/or efforts (relative to the potential benefits) to switch providers. 6.1 Types of Aggregation 6.1.1.1 Aggregation of Energy The aggregation of demands for energy, which includes what was previously differentiated by regulation into"energy" and "capacity", is considered essential. This will include the procurement of basic power from competitive spot, forward, and bilateral markets. Aggregators will be required to schedule and purchase power through a schedule coordinator who can interface directly with the ISO and the PX. 6.1.1.3 Aggregation of Ancillary Services The procurement of ancillary services by aggregators, through schedule coordinators, will be required. Ancillary services will include spinning reserve, non-spinning reserve, automatic generation control, voltage requirements, black-start capability, and option energy. Aggregators will, necessarily, also procure balancing services -- to reconcile actual versus expected demands and loads -- in real-time from the ISO. 6.1.1.3 Aggregation of Metering Services Metering services are expected to be differentiated in many ways, from the stock, vanilla service of basic interval metering to all manner of more sophisticated metering using two-way communications. Even existing time-of-use meters may be used to register the amount of daily peak, mid-peak, and off-peak power that is consumed. 6.1.1.4 Aggregation of Billing and other Services [What goes here?] 6.1.2 Typical Aggregation Groups 6.1.2.1 Affinity Groups 6.1.2.3 Municipalities 6.1.2.3 Targeted Customers to Optimize Load Profiles 6.1.2.4 Utility Distribution Company as Default Aggregator 6.1.3 Aggregation Models The CPUC's December 1996 decision suggests that the UDC will act as the default aggregator. This is intended to provide for a means of "automatic aggregation" for consumers who choose not to choose. A number of alternatives to the UDC as default provider have been discussed. 6.1.3.1 Alternate 1: The UDC as Default Aggregator Pros: There are four primary justifications that are generally used to justify the continued aggregation of customers within a prescribed geographic area into some form of a franchise. (1) Competitive forces will be inadequate to protect some small consumers from cost-shifting or to ensure that these consumers get a fair share of the overall benefits in less regulated markets. The franchise concept of aggregating small consumers would seek to prevent market discrimination between consumers. (2) The distribution of any benefits resulting from economies of scale or potential increased competition in energy services markets should be determined by "political" decision, not market forces, to avoid inequity due to differences in market power among customers, particularly for small consumers. (3) There are some collective benefits (e.g., environmental, energy efficiency) that will be lost because voluntary decisions by individual consumers, even if aggregated, will not provide these collective goods. (4) A franchise formed by automatic aggregation will reduce the transaction costs (e.g., metering and marketing costs) incurred to promote potential competition resulting in more benefits that can be distributed among all consumers. Based on these arguments, it appears that PG&E and SCE seek to retail automatic aggregation of default customers within their respective franchise territories. SDG&E appears, however to have a different viewpoint. Cons: Consumer groups such as UCAN and TURN have raised two potential concerns with the UDC as the default aggregator: (1) Will the UDC as the default aggregator inhibit the development of more competitive energy services markets? and, (2) Will individual consumer choices be limited more than is necessary or appropriate as a result making the UDC the default aggregator? 6.1.3.2 Alternate 2: Local Government Provides Default Aggregation The primary forms for the automatic aggregation of customers within a given area that are currently available or proposed include the following: (1) formation of a traditional municipal utility under existing statutes; (2) formation of a "municipal lite" utility that owns very little of the existing distribution system, but is eligible to pursue wholesale power purchases under the Federal Energy Regulatory Commission (FERC) open-access transmission rules and policies; and (3) formation of new entities authorized by new state legislation that designates local governmental units to automatically aggregate customers within their existing jurisdictions, but which may or may not exercise the same authority as traditional utilities and may own no distribution system or any substantial assets at all. In addition, the extension of the current joint action agency concept to any of the entities above could provide additional benefits to consumers. Pros: The primary benefits of municipal aggregation which have been discussed are (1) reduced transaction costs to create a municipal utility and to acquire the existing distribution system and (2) the direct use of open-access transmission powers and decisions of the FERC to gain access to the wholesale power market. The local governmental aggregation proposals attempt to reduce the cost of maintaining the franchise concept, through a municipal utility type entity or a local governmental entity that will only act as a purchaser or broker of wholesale power or other services for automatically aggregated customers. The new proposals seek to expand the options for the franchise concept, not to limit them. Thus, the proposals uniformly recognize the right of a municipality to create or continue a traditional municipal utility or to pursue the "muni lite" concept under existing statutes. Cons: The "muni lite" concept raises a threshold legal issue: how much equipment must an entity own to qualify as a municipal utility under existing statutory definitions to be able to operate under FERC open access rules? This legal issue is currently being raised before the FERC in a number of cases involving the efforts of various communities to gain access to the wholesale power market. The "muni lite" issues raised above are present in other California community efforts to gain access to the wholesale power market without having to bear the cost of acquiring the entire existing distribution system. Culver City, the City of San Carlos, and more than a dozen cities in San Mateo County are actively pursuing the "muni lite" option. Similar efforts are underway or being seriously considered in various communities across the United States: Albuquerque and Las Cruces, New Mexico; Brook Park and Toledo, Ohio; Broken Bow, Oklahoma; Bennington, Vermont; Westbrook and Jay, Maine; and Romeo, Michigan. The "muni lite" issues raised above are present in other California community efforts to gain access to the wholesale power market without having to bear the cost of acquiring the entire existing distribution system. Culver City, the City of San Carlos, and more than a dozen cities in San Mateo County are actively pursuing the "muni lite" option. Similar efforts are underway or being seriously considered in various communities across the United States: Albuquerque and Las Cruces, New Mexico; Brook Park and Toledo, Ohio; Broken Bow, Oklahoma; Bennington, Vermont; Westbrook and Jay, Maine; and Romeo, Michigan. This legal controversy is an issues in the City of Palm Spring's request that Southern California Edison (SCE) provide network transmission services for the delivery of wholesale power. A number of other communities are testing the potential to use the "muni-lite" approach. There are several other reasons to wonder whether pursuing the "muni lite" concept under existing statutes will be anymore effective than traditional municipalization efforts: (1) The cost and resources to establish the "muni lite" concept under existing statutes may be costly with no certainty of success in the long run. (2) A key issue in access to the wholesale power market is timing. Because of "surplus" capacity and the creation of a new or expanded power market, it is reasonable to believe that those who can get into the new market first will have the best opportunity to maximize benefits. Thus, even if the "muni lite" efforts are successful, the timing of that success in terms of ultimate benefits is likely to be very important. Other parties such as existing utilities, investor-owned or municipal, could be the prime beneficiaries of an extended conflict over the "muni lite" concept at the same time that the wholesale power market is being opened to increased competition. 6.1.3.2.1 Variation 1 on Alternative 2: The Massachusetts Model Legislation has been proposed in Massachusetts to allow local municipal governments to establish Consumer Service Districts (CSDs). These CSDs could be created by a two-thirds vote of the existing municipal governing body (e.g., a Common Council). All customers within a municipal government's jurisdiction would be automatically aggregated as a customer under the CSD. The CSDs are authorized to negotiate wholesale power supply contracts. In doing so, a CSD may join with neighboring (i.e., adjacent) CSDs by means of a joint contract to increase negotiating power with potential suppliers. A distinguishing feature of the CSD legislation is that a CSD will only act as an aggregator whose primary responsibility would be to conduct a competition among potential suppliers to serve the aggregated customers. The CSD would not act like a traditional municipal utility by establishing rates and rules for service nor would it perform normal billing and other administrative functions. Rather, these traditional regulatory and utility functions would be assured as part of the contract required of the winner for the "biddable franchise." Under the Massachusetts CSD proposal, the municipality responsible for the CSD would receive a monthly franchise fee from the supplier which won the "biddable franchise." 6.1.3.2.2 Variation 2 on Alternative 2: The TURN Community Access Proposal Toward Utility Rate Normalization (TURN) has proposed a local governmental aggregation mechanism. The TURN proposal is premised on the existence of local governmental entities to automatically aggregate all customers within their jurisdiction, and the use of bidding or private negotiations with potential bulk power and other energy service providers to capture benefits for these aggregated customers. Under the TURN proposal (which is still being formulated as to certain specific details), a municipality, county, water district or other local body would be authorized under state law to automatically aggregate all customers within their jurisdiction to form a municipal aggregation unit. The local entity would also be responsible as the provider of last resort for aggregated consumers. The TURN proposal does not yet specify how the local governmental unit can create a municipal aggregation entity. But, it would appear that some form of representative decision-making such as at least a majority vote of the local governmental body and/or citizens within a proposed entity would be required. Individual consumers would have a one-time opportunity to opt out of the new entity but would face return requirements (which are still being developed). An individual consumer could choose to stay with its existing provider, find another provider, or go with the municipal aggregation entity. Pros: The TURN approach aims to discourage "cherry picking" of consumers which could characterize the actions of private providers in markets. TURN's proposed municipal aggregation entity could operate more like a traditional municipal utility in terms of setting rates and establishing policy on items such as service rules, IRP and DSM as well as performing billing and administrative functions. The TURN proposal would not necessarily require the entity to own a distribution system or any other assets. The ability of a local governmental aggregation entity to automatically aggregate existing customers of investor-owned utilities (and acting as the provider of last resort) could help overcome the incumbent advantage by increasing the potential number of buyers in the wholesale power market. Cons: There are at least two concerns raised by local governmental aggregation models. First, it does not attempt to increase the market attractiveness or market power of individual small consumers, to increase the strength of competition in energy services markets, or to increase the potential share of potential benefits created in such markets that could be captured by the individual small consumer. Thus, absent proactive efforts to develop more competitive markets in which individual small consumers have more market attractiveness and market power, directly or indirectly, the franchise model will become a self-fulfilling prophecy like the proposed core aggregation of consumers within an existing utility provider under a performance-based regulation scheme. The second concern is that the local governmental aggregation model may inhibit the development of more competitive energy services markets by limiting the opportunities for alternative providers. To the extent that any franchise model limits the potential market power of marketers or aggregators vis-a-vis suppliers or the size of the market for new or expanded product and service offerings, potential benefits for all consumers could be lost. Finally, muni aggregation may only transfer the incumbent advantage problems faced by private providers from the existing utility to the local aggregation entity. 6.1.3.2.3 Variation 3 on Alternative 2: Aggregation Only Option Both the Massachusetts and TURN proposals address issues concerning how a local governmental aggregation entity would be regulated or responsible for setting rates and operating the franchise. An alternative to utility franchise-type aggregation models is one that focuses on allowing all customers within a local governmental body's jurisdiction to be involuntarily aggregated solely for the purpose of allowing many individual customers to act like one large customer in negotiating for power supply or energy services at the wholesale level. The entity formed would have no other authority or responsibilities. The League of California Cities has proposed a slight variation on this model. The League proposal would allow local governments to become an aggregator to negotiate the purchase of electricity with electricity suppliers. However, the local government could decide whether an individual consumer would be allowed an option to purchase directly from electricity suppliers. (This should be contrasted to TURN's proposal that allows a consumer the automatic right to opt out.) Simply, "consumer choice" would be a matter subject to local control. (League of California Cities, 1995.) The aggregation only model would still require state legislation to authorize a municipal entity to involuntarily aggregate customers. It also raises a set of issues that would need to be resolved about how any aggregate benefits gained in the wholesale supply market would be distributed to customers. TURN has proposed that the core aggregation system for natural gas in California could provide an example of how to resolve these questions. Simply, customers in the aggregated entity would be credited with the cost of power acquired rather than the cost of power from the incumbent supplier. The aggregation entity would be able to include a brokering or marketing fee to cover the cost of its services. Other costs would be treated as they are now. Pros: The aggregation only model could allow customers to be aggregated with a minimum of transaction costs in order to allow them to participate in the wholesale power supply and energy services markets. Yet, competitive bidding of or negotiations by the aggregated entity is seen as a means to both improve the competitiveness of the wholesale market as well as a potential source of benefits to aggregated consumers. Cons: Permitting the local option to allow some consumers "direct access" would appear to shift many of the current issues surrounding restructuring to the local level, where there is no reason to think that they will be easier to resolve. Furthermore, the issue of ownership of the local distribution system raises a legal issue concerning whether a "taking" of the incumbent utility's assets has occurred if the right to supply and the ownership of the distribution system are separated. 6.1.3.3 Alternative 3: Preliminary Proposal of UCAN UCAN seeks to help develop a viable set of competitive retail aggregators that provide power and related services. Existing utilities could join other private aggregators to offer their services as aggregators through affiliates, subject to a clear set of hurdles that establish the lack of retail market power. To provide small and medium consumers with access to the benefits of choice in a competitive wholesale market, a competitive group of aggregators is viewed as necessary. In this competitive market, aggregators will sell electricity and its related services to consumers. Consumers would be able to shop among competing retailers who seek to aggregate consumer loads, purchase power, and possibly provide special metering and enhanced services on a performance basis. Utility affiliates as private aggregators who enter the competitive market may be required to show they exceed specific market standards, including a demonstration of lack of monopoly power. For subsidiaries of utilities, the requirement may be to show a lack of market power that derived from previous regulatory advantages. In addition, UCAN believes that competitive Aggregators may be required to adhere to specific consumer protection standards. Pros: Remove the need for the UDC as default aggregator and provide the existing utilities with the proper incentives to compete. This will increase the presence of aggregators who will be available to serve all consumers, including small and medium consumers. This approach shifts the role of the utility from UDC default provider to one of many private aggregators. Otherwise, regulated, cost-of-service, UDC aggregators would likely undercut the development of private aggregators by offering power and ancillary services at cost. Thus, a cost-of-service cap would be imposed on their sale of aggregated services, under cutting by other private aggregators. Furthermore, utilities as unregulated private firms could more easily expand their scope of services and thereby lower their overall transaction costs when dealing with small and medium power consumers. Cons: The potential is for the unregulated, utility-based private aggregator to gain advantage in the marketplace, such as through greater information access, and exert undue market power. Thus, while other private aggregators would be competitors, unregulated utility-based private aggregators may dominate the market to the disadvantage of certain consumers. .