"Community Choice Means Competition, Not Slamming"

The New Jersey Ratepayer Advocate, a leading Proponent of Community Choice, Says "Opt-Out" Municipal Aggregation is Essential for Consumers, and Refutes a Common Utility Criticism of Community Choice.


Only two years ago, many electric deregulation observers believed that each individual consumer would enter the marketplace and select a competitive supplier. Many stakeholders in the debate agree now that consumers -- especially residential and small business consumers -- will have to aggregate in order to gain benefits.

As you all know, all (New Jersey) Ratepayers will soon be able to choose their electricity supplier. You also know that the largest customers -- the large industrial and commercial energy consumers -- have had this option for some time. These industrial customers have had this option because they possess sufficient market power to demand favorable terms of service and price, and to choose among suppliers. In a competitive market, the energy marketers will target these customers first, since they are the most lucrative.

Now, the (New Jersey) Board of Public Utilities is shaping deregulation in New Jersey, promising a five percent reduction on rates for all electric energy customers. That's the benefit we're promised. Rate reductions certainly have great benefit -- but that's what I call a band-aid approach. I am concerned that residential consumers will not see more than that five to ten percent reduction in rates for the forseeable future if we fail to establish an effective structure that encourages competition where both utilities and competitors will vigorously vie for New Jersey residential customers. I see local government aggregation -- if properly structured --as a primary way of drawing both utilities and competitors to the residential marketplace.

It is becoming evident from restructuring activities around the country that different options are emerging for government entities that wish to aggregate their electricity buying power with their residents, including, for instance, community groups, private, county, regional, national organizations, and municipal aggregation. I hope that there will be many forms of private consumer aggregation. But what local governments offer are forums that are publicly accountable, non-distriminatory, non-profit, subject to open meeting and ethics laws, and oriented toward advancing economic development and the public interest. You can't beat that. Local governments are responsible for the health, safety, and welfare of your citizenry, and they do it well.

Restructuring legislation will determine the procedures for aggregation. One issue legislation will have to address is whether municipalities can form an energy buying group that combines municipal electric needs with residential electric load. We believe that aggregtion groups will be most effective and achieve the greatest price reductions when they combine the electric needs of different types of customers. Such groups are more efficient for an electric utility or marketer to serve, because the combined needs of businesses, towns and residents means the utility can predict and provide a relatively steady flow of electricity. It's called a balanced load curve, and that's what you want in an aggregate.

A group made of entirely residential customers would be relatively unattractive for Suppliers, because it presents an unbalanced load curve and does not require a steady supply of electricity at all hours. Residential customers turn on home appliances and lights in the morning. Demand goes down during the day and back up again in the early evening. The (New Jersey) Ratepayer Advocate believes that suppliers will only compete for New Jersey's residential consumers if aggregated groups can include the municipal load with residential customers and those commercial customers who choose to participate.

Another major issue legislation will have to address is whether residential customers must affirmatively choose to be included in the municipal aggregated group -- opt in -- or whether municipal residents will be included unless they choose to opt-out.

The "opt-in" model envisions building an energy buying group through intense community outreach and a grass-roots campaign on behalf of the municipality, knocking on residents' doors and asking each person to sign up. No customer can be included in the opt-in aggregate unless he affirmatively signs up.

The "opt-out" model of municipal aggregation would allow the municipality to form an energy buying group on behalf of its residents. The difference is that instead of going to each individual to ask them to sign up, the community could do it through a public town hall meeting and a public education campaign. Residents would be notified about the process, informed about the steps, and given the option to "opt-out" of the aggregate if they so chose.

The "opt-out" model directly addresses this key problem of uncertain pool size. By obtaining the consent of the residents to aggregate them automatically, the municipality achieves the critical advantage of assembling a large and relatively certain aggregate of customers. Negotiations with potential suppliers become easier for both parties, since the supplier is assured a reasonably predictable pool of customers, and can therefore offer more attractive terms for price and service, while the municipality is spared the extraordinary burden of getting each and every resident to sign on the dotted line before the contract is negotiated. Any resident who does not want to be part of the aggregate can easily withdraw.

There is some precedent for choosing the "opt-out" model as one that can work successfully. For example, municipalities provide essential emergency services such as fire, police and ambulance, as well as other essential services such as trash collection, water and sewer service and, of course, your local cable service. Where these services are not provided by the municipality, they are contracted for by the municipality on behalf of all the residents in the community. The best rates for solid waste collection can best be achieved through putting out an RFP (Request for Proposals) on behalf of all residents. No one wants to individually negotiate with his/her solid waste collector. You assume the municipality has done that job on your behalf.

And it is exciting to look at Massachusetts, which had adopted an opt-out provision in the portion of electric restructuring legislation that authorizes municipal aggregation. In Barnstable County, Massachusetts, 13 of the 15 towns have signed an intramunicipal agreement to purchase energy for all customers' needs -- municipal, residential and commercial. A Request for Qualifications has been issued to 400 energy suppliers, and I am told there has been significant interest by the suppliers who have received the RFQ.

I am convinced that aggregation cannot work if it requires consumers to assertively opt-in to the aggregated group. First, a municipality will be hamstrung in negotiating with marketers if it is unable to offer up front the approximate size of the energy buying group. Many consumers may choose not to affirmatively choose during the early years of deregulation. It's instructive to realize that, 10 years after the deregulation of the long distance phone industry, 60% of all customers remain with AT&T. Some never bothered to investigate alternatives. Because some consumers don't understand the new electric supply choices or because of apathy, it is incumbent for the municipality to seek the benefits on behalf of its residents.

All of this is a round about way of saying that we are hoping that (New Jersey's) energy restructuring legislation will give each local government unit the ability to decide for its constituents whether to choose the opt-in or opt-out model. While we favor opt-out we don't presume to tell you what's best for your constituents.

Some commercial and industrial customers have expressed opposition to being aggregated with residential customers by a municipality. But the "opt-out" model does not preclude anyone who chooses out. Municipal aggregation with "opt-out" in no way usurps customers' rights to contract for their own services.

Some critics have said that the "opt-out" model is akin to "slamming," a term you may have heard used in the long distance telephone market. "Slamming" refers to the practice of switching someone's long distance company without their knowledge or consent, usually by trickery but sometimes by forgery. This comparison is a true red herring. "Slamming" is a fraudulent business practice used by fly-by-night scam artists to rip off the unwary. It has no connection to the process of aggregating potential electric customers by a municipality dedicated to the health, safety and welfare of its constituents. Moreover, requiring a "wet signature" is no guarantee against fraud. Based on our conversation with Commission staff in several states, the option of allowing customers to switch telephone providers based on a customer signature is frequently misused by providers who may forge customer names or obtain signatures of unauthorized household members. The wet signature requirement will only deter competition and will not insure against fraud.

Municipal aggregation will not only attract more competitors to the retail market, it can save towns, residents, and small business money. Municipalities should be at the forefront of aggregation efforts, due to their inherent suitability for acting on behalf of residential utility customers. While we at the (New Jersey) Ratepayer Advocate Office want you to have the ability to choose that methodology that will provide most benefits for your residents, we nevertheless vote for opt-out. Remember Opt-out is still voluntary because any citizen that does not wish to participate can choose to leave the aggregator who has won the bid.

My office strongly believes that it is the elected and appointed officials of local government who will be able to ensure that their residents and small commercial businesses are beneficiaries of electric competition by providing them with the ability to capture lower energy rates. With that type of premise, it won't surprise you to hear I think the local municipal officials potentially play a big role in electric restructuring...that you bring a lot of value to the table. As a matter of fact, I believe that the future role of local government is the single most important issue in the restructuring debate. The ability for consumers to shape the marketplace and standards to their benefit exists primarily at the local level.

Copyright (c) 1998 by the American Local Power Project