State of the State: New Option for Electricity if Customers Understand & Trust 'New Middleman'
Two government employees ate lunch at Joe’s Place in rural Fulton County nearly two years ago. Their conversation spurred what is now the first-of-its kind option for Illinois electricity customers, a direct result of the state’s recently deregulated power industry.
A nonprofit electric cooperative that started in downstate Greenville wants to offer choice and potential savings to customers now served by Ameren Illinois utilities. But New Illinois Cooperative Energy, called NICE, is unlike other cooperatives in that it does not supply power. It simply creates a pool of customers and connects them to a designated power supplier.
The partnership is so new that it is debatable how or whether to regulate it and whether it will actually save customers money.
It’s a matter of which comes first, the chicken or the egg?
“Until we get the customers, we can’t buy the power. Until we buy the power, we can’t get the price,” says Alan Libbra, president of NICE’s parent company, Greenville-based Southwestern Electric Cooperative. “We’re not going to cut your bill in half, I can guarantee that.”
NICE has a target price in mind, according to Kerry Sloan, president of the co-op and chief executive officer of the parent company. But he won’t reveal that price because it could change week by week, month by month.
“It would be misleading to people,” he says. “We don’t play that way.”
Customers would start receiving electricity early next year, but the option isn’t available to consumers who already get power from municipally owned utilities or from other electric cooperatives.
It’ll take a risk to sign up. The new cooperative is a nonprofit entering a gray area of state regulations. It is partnering with a power supplier that must follow state rules, but NICE so far is exempt from such oversight. It’s up to consumers to do their homework.
Industry insiders say they hope NICE’s plan works and that, at least, it shows a demand for competition in the retail electric market that has been dominated by two utilities, Commonwealth Edison in the northern part of the state and Ameren Illinois downstate.
After a 10-year electricity rate freeze expired in 2007, lawmakers revamped the way Ameren and ComEd buy their power loads. Most customers saw their bills increase, particularly residents who heated their homes only with electricity. State Sen. David Koehler, a Peoria Democrat, recalls an all-electric high-rise building for seniors that saw its bill skyrocket from $20,000 a month to $44,000.
Koehler was part of the lunch at Joe’s Place more than a year and a half ago. The other diner was Joe Berardi. They pondered the effect of the expired rate freeze and saw a door open for competition.
“We just talked about maybe we should take an approach of doing something like a not-for-profit, much like a credit union, where you’d have members as owners of this thing and that you could try to pass on savings,” Koehler says, “and get electricity on the wholesale market and make it available to residential [customers].”
They established NICE as a nonprofit corporation, the only way Koehler says he would join the effort. They needed a partner with enough credit to buy lots of power, so they became a wholly owned subsidiary of the Southwestern Electric Cooperative Inc., or SWECI. They set out to find an energy supplier and landed on Integrys Energy Services based in Green Bay, Wis. It is a subsidiary of the former Peoples Energy Corp. of Chicago and WPS?Resources Corp. of Wisconsin.
Integrys is an “alternative electric supplier,” basically offering a choice to ComEd customers. Integrys differs from the handful of other alternative suppliers in Illinois because of its new kind of partnership with NICE.
The cooperative goes out and finds the customers, and Integrys becomes the sole power supplier to those members.
“We think we can get a bunch of people to join forces together to buy their power cheaper than what they can individually,” Sloan says.
Because NICE’s contract with Integrys allows the supplier to buy power on a month-to-month basis, the price will ebb and flow with the marketplace. Under the contract, Integrys has more freedom to buy when the price dips, compared with the state-regulated utilities that procure power for an entire year at one time.
The contract also allows Integrys to collect a fixed fee per customer, so it will earn the same amount regardless of whether the price of electricity is high or low that month. “It’s a very, very low fee compared to what anyone else charges,”?Sloan says, adding the fee amount is proprietary.
He is quick to point out, however, that NICE cannot guarantee savings.
Customers probably will save money in some months but not others, but the co-op also is offering such other benefits as discounted prescription drugs.
Buying medications in bulk, however, differs from buying electricity, which is a more volatile commodity.
Jon Casadont, senior vice president and general counsel for Chicago-based BlueStar Energy Services, says: “In our mind, it’s really not about volume. It’s about timing.”
BlueStar is an alternative electric supplier, so it competes with Integrys but not NICE. Casadont says while BlueStar hopes NICE can be successful in competing with Ameren Illinois, NICE’s plan to aggregate customers may not be the key to saving money for consumers. The key could be the way it procures power.
“Really, at the end of the day, the market always sets the price,”?Casadont says. “And it’s whether you can take advantage of dips in the market. Again, nobody’s smarter than the market.”
And that is just one model of procuring power. A similar strategy already has been used in the industrial market, where companies have more predictable power needs.
“They have what is called a known load profile, which is not to say it won’t work on the residential side,”?Casadont says. “It’s just something different. It’s not inherently good or inherently bad. It’s just a model of trying to give people some alternative.”
Beth Bosch, spokeswoman for the state’s nonpartisan Illinois Commerce Commission, describes NICE as the new middleman. Similar partnerships have been formed in Texas and in other industries, but the partnership between NICE and its supplier is so new to Illinois that the state is still figuring out how the cooperative fits within the deregulated market for residential customers.
While the commission doesn’t regulate the electricity rates for alternative electric suppliers, it does serve to protect customers from losing their power if NICE goes belly up.
The concern is ensuring that the co-op has the financial and technical capabilities to live up to its promises. In the meantime, it’s buyer beware.
“It’s a deregulated industry for electricity, so customers will be solicited,”?Bosch says. “They have been for telephone [service], and now customers are getting solicited for natural gas. The key is you want to be sure that the deal you get with them is a good deal for you, not just a switch. You have to examine the contract to make sure you know what’s in it.”
Members would sign a five-year contract with Integrys and could break away early for a $75 fee.?Service would be canceled at no charge if a resident moved.
Customers would receive their bills from Integrys and would see two charges: one for the kilowatt hours of energy used and one for a delivery charge to Ameren.?That’s because regardless of which company buys or sells the power, it’s still delivered on Ameren’s power lines.
“We don’t make any money at all on electricity, no matter who supplies it, period,” says Leigh Morris, Ameren Illinois spokesman.?“Ever.”
In fact, he says Ameren encourages customers to explore their options and that competition is good.
NICE does hope to tap into disgruntled Ameren customers who are experiencing another delivery rate increase this year.
According to Libbra, the cooperative needs 7,000 customers to start up. It also is targeting such potential customers as labor unions and chambers of commerce in central Illinois. The founders hope eventually to offer natural gas and to expand statewide, but they’re operating on a shoestring budget with only one paid employee. The rest are volunteers, consultants and attorneys.
“We have to walk before we can run,”?Sloan says. He adds that he’s OK with being called a middleman, “but we’re a middleman that’s making no money.”
Because it’s a nonprofit, NICE needs only to recover its costs and to reserve some cash in the bank. Any excess would go back to members.
“We won’t take a dime more than we need,” Libbra says, adding he’s a farmer who is passionate about offering choice, not a board member of a for-profit entity.
Guy Morgan is chief executive officer of BlueStar. He says his company simply wants NICE to clearly define its role so customers don’t get the wrong impression when they hear the word “nonprofit.”
“That presents an image of this altruistic entity doing essentially charitable work,”?he says. “And one certainly has the right to question whether that’s true in this case or not.”
He says his concern is that if NICE customers are misled and get a bad taste in their mouths, then that makes it harder for companies such as BlueStar to enter the market.
So far, everything seems above board, adds Casadont.
The question is whether consumers solicited by NICE will understand their options. Yet it will be hard for them to do their homework without a precedent and a price to go on.
The new cooperative is a nonprofit entering a gray area of state regulations. It is partnering with a power supplier that must follow state rules, but [it] so far is exempt from such oversight.
The concern is ensuring that the co-op has the financial and technical capabilities to live up to its promises. In the meantime, it's buyer beware.
Bethany Jaeger can be reached at email@example.com.
Illinois Issues, November 2008