Is Aggregation Right for Cities?
A Thought Paper by TCAP
What does it mean to be a member of an aggregation? Merriam-Webster dictionary defines aggregation as “the collection of units or parts into a mass or whole”. This definition applies well to TCAP. As a TCAP member you have joined a group of over 160 political subdivisions in Texas that band together to procure energy for its members usage in a manner much more efficient and superior than that achievable by individual entities. These benefits include pricing, unique market opportunities, superior contracting terms, advocacy on market, service, or billing issues and much more.
Everyone wants to achieve the lowest price, but, based on current market dynamics, that can be a difficult goal to achieve. TCAP routinely warns members that energy purchasing is about much more than price alone. It is important that all components of pricing are identified as well as pricing options being understood and included in any price comparison when comparing bids.
Unique Market Opportunities
TCAP’s size and unique customer base allow it to take advantage of market opportunities that many other entities or individual cities cannot. Years ago, TCAP separated the procurement of power in the wholesale market and the procurement of REP services to achieve the best package for its members. Now TCAP has identified new market opportunities to realize even better savings in the current market and is working with members to determine interest at this time.
Obtaining superior contracting terms is an area where TCAP aggregation provides a substantial benefit to its members. TCAP has the expertise to know what areas of a contract the end-user should be cautious of and TCAP’s aggregated size gives it the market power to negotiate better terms and conditions for its members.
Bandwidth is the range of usage the contract rate applies within. Typically, the wider the bandwidth the higher the price. Cities often pay more for unlimited bandwidth that may not be necessary. TCAP’s aggregated load allows it to purchase at a price using a reasonable bandwidth but negotiated by TCAP to be imposed only on the aggregated zonal load. A small percentage bandwidth on a large aggregated load provides protection to all members. TCAP has been using this approach for over a decade and has never suffered a bandwidth penalty.
Adds & Deletes
With a large aggregated load, TCAP has unlimited adds and deletes except for new accounts over 1,000 kW of peak demand, which will be at a current market price. For accounts between 250 kW and 1,000 kW peak demand members have the opportunity of choosing the lower of the contract price or market price, which, to our knowledge is unique to TCAP and gives members the ability to capture the lower price option for these new accounts.
TCAP approaches congestion costs in a unique manner. TCAP includes the costs in the energy price by zone, but allows for a true up at the end of each quarter based on actual costs. If actual costs are more, TCAP pays the difference. If actual costs are less, TCAP is refunded the difference. This approach has resulted in millions of dollars of refunds to TCAP members since 2011.
Unlike many retail contracts TCAP has seen in the market, TCAP’s contract has creditworthiness checks and measures on both the Seller and Buyer. Since cities are typically high credit rated entities, they should demand similar credit standards on their Sellers to mitigate potential credit risks.
Default & Early Termination
Buyers should be on the lookout for contract language that only imposes damages from buyer to seller, but not from seller to buyer. TCAP’s negotiating leverage allows for a wholesale supply contract that includes a balanced damages provision which works both ways. This removes the incentive for either party to default or early terminate.
Change in Law/Material Changes Clauses
These clauses are found in most retail energy contracts and allow the Seller to increase the price to Buyer if regulatory or market changes result in increased costs to the Seller. TCAP’s unique approach in our wholesale supply contact allows for this provision to work both ways and if these costs decrease, the Seller will refund the amount associated with the cost reduction to TCAP.
Broker Fees or Aggregation Fees
Brokers often hide their fees in the energy prices presented to the Buyer. TCAP has seen instances where these broker fees, once uncovered, were up to 4 and 5 times more than TCAP’s low aggregation fee. Broker fees may include some level of customer support but often times it is just to procure the contract. It varies wildly by Broker. TCAP’s large aggregated load allows it to maintain avery competitive aggregation fee to its members. The TCAP aggregation fee is approved annually by its member elected Board, is always one of the lowest in the market, is fully disclosed to members, and provides for a wealth of customer services to the member including representation in dealing with REP billing issues, market issues at the state regulatory levels, and many other services. TCAP experts are available to assist members with energy issues at all times, typically at no additional charge to the member.
The electric industry is complex and value to the customer cannot be determined by a simple glance at pricing. In addition, due to rapidly changing spot prices in the wholesale markets, most REPs will only hold a bid price for 24 hours. For this and other reasons, the procurement of electricity is exempt from state purchasing laws. Despite these facts, many cities believe the RFP process is the best way to get the lowest price (see contracting above). Many brokers will convince cities that they will bring back several of the lowest bids for a city to review and the city can simply choose the cheapest one. As previously discussed, it is really not that simple. In addition, it is important to note that brokers will only show bids from REPs they have a brokering agreement with, which is how the broker receives their income. TCAP has also seen instances where brokers pick and choose what bids to show council and they may not be the lowest bids. TCAP’s has seen our low bid responses be excluded by brokers under the guise of “the response does not meet the standards” in order for the broker to make sure the contract goes to a party they have a brokering agreement with.
These are just a few of the benefits of being a TCAP aggregation group member. There are many additional benefits to being a member of TCAP.
We are happy to come your way and discuss them at your convenience.