Is Choosing Not to Decide Still a Choice?

02/24/2023 legislation, retail energy

4 Minutes

Opt-out municipal aggregation is on the rise, but what does that mean for retail energy choice?

Community Choice Aggregation, also known as municipal aggregation, provides energy customers in designated localities an alternative to investor-owned utilities through programs that authorize local governments to procure power from an alternative retail supplier while still receiving transmission and distribution service from their existing utility. As discussed by the advocacy group Lean Energy, this model offers a “hybrid” approach that exists between the investor-owned utility, which often functions as a monopoly, and a municipal or member coop utility. By divorcing generation and distribution, CCAs can provide flexibility, green energy options, and lower bills for consumers.

CCAs are not dissimilar from other energy choice models: they simply introduce the municipality as a middleman between consumers and alternative suppliers. Rather than each end consumer choosing a provider or a particular generation source, the CCA evaluates suppliers and offers and makes the decision for all its participants. Although municipalities make the final decisions regarding contracts on behalf of many CCAs, they do take community input into account during the procurement process. This not only gives constituents some control over the process but also offers a marketing opportunity for suppliers that are competing for CCA contracts.

Although regulations vary based on state and local laws, there is some basic continuity in the process for municipalities to develop and implement aggregation proposals. In most states, cities and towns that wish to develop a CCA must seek approval from the utility regulator (i.e., the PUC) and must file all documents pertaining to the aggregation, including the proposal, procurement RFP, and all consumer-facing materials.

From the point of view of municipalities and consumers, CCAs have a number of benefits, both environmental and economic. Many CCAs have the explicit policy goal of procuring energy from renewable sources. According to data from the U.S. Department of Energy, CCAs were delivered nearly 9 billion kWh of green power to over 2.5 million customers in 2017. In addition to providing greener or renewable energy, CCAs also tend to result in lower consumer bills, which has long been one of the appeals of introducing competition into the retail energy market. This makes CCAs popular with many consumer advocacy groups. Since CCAs have the potential to grow the renewable energy sector, they can mean an increase in job creation nationwide as wind, solar, and other renewable projects expand.

Municipal aggregation usually goes along with deregulated markets, which generally means states that are somewhat friendly to competitive retail suppliers. It also means that CCAs tend not to be popular with most utilities. CCAs may expand knowledge of and interest in competitive electricity markets across rate classes. In New Hampshire, for example, about 90% of the large commercial and industrial ratepayers currently use a retail supplier other than their utility company, while less than 30% of residential customers take advantage of their access to the competitive energy marketplace. On the other hand, in states like Massachusetts and New York, the rise of municipal aggregation is occurring alongside greater scrutiny of suppliers and the retail energy market. With these dual trends in motion, retail suppliers may find that competing for CCA contracts will be an important part of their business operations.

When a CCA program is implemented, municipalities purchase energy on behalf of all the participants. This means that suppliers compete for contracts on the level of municipal aggregator rather than for individual contracts, with a typical contract length of two to three years. While this is a benefit for suppliers that enter into contracts with CCAs, in large municipalities the result could be the removal of a significant number of shopping customers from the market. This was the case in Boston, which enrolled 200,000 residents in the first few months of its CCA.

Although Community Choice Aggregation is not a new concept — Massachusetts and Ohio were early adopters in the late 1990s — an increasing number of municipalities are opting to implement CCAs both to lower energy costs for residents and to work towards greener energy mixes that comply with the initiatives in their states. This includes cities in states where the legal authorization for CCAs has been on the books for some time, such as Boston, which implemented its CCA in 2020, Columbus, Ohio, which began enrolling residents in 2021, and San Diego, which plans to begin enrolling customers in 2021.

Other states with deregulated energy markets are also developing frameworks for municipal aggregation: New Hampshire and Maryland are the two most recent states to pass legislation that will permit municipal aggregation. It is likely that as more states pass legislation relating to climate change and green energy, municipal aggregation will also appear on legislative and regulatory dockets.

How Municipal Aggregation Works

CCAs procure energy from alternative suppliers through a competitive process. Many municipalities are currently prioritizing green energy mixes to qualify for funding initiatives or as part of compliance requirements.
In a CCA model, utilities continue to provide transmission and distribution services.
End consumers of a CCA may be residential customers, commercial customers, or the municipality itself. Participation in a CCA is voluntary: most states require municipalities to clearly outline the steps for customers to opt-out of the CCA.

How Should Suppliers Respond?

In light of these trends, there are several things that suppliers might consider doing.

1. Examine the business case for competing to serve a CCA, if you don’t currently do so.

2. If CCAs aren’t right for you, consider your market risk – are cities which are considering aggregation the site of a large number of your customers?

3. If you want to retain customers in a pending aggregation, make sure to provide education about why your product remains advantageous.

4. Participate in aggregation working groups at the PUCs to ensure that non-CCA suppliers are at as small a competitive disadvantage as possible.

P.R. Quinlan provides tracking on community choice aggregation through our regulatory and legislative reporting service, the Strategic Update. Contact us for more information.

Kathryn Caliva is a regulatory and legislative affairs analyst at P.R. Quinlan. She can be reached via email.