Ken Silverstein EnergyBiz Insider Editor-in-Chief

Aggregation -- as it is known -- attempts to create economies of scale so that the participants in the buying pool receive a lesser price than they would get if they shopped the market by themselves. It's an effective tool for residential, commercial and industrial buyers and is used in those states that have deregulated their retail electric markets. While residential buyers are often represented by the jurisdictions in which they live, business customers must rely on energy experts -- those who combine the loads of similar entities and discuss the contractual terms and conditions with electricity providers.

"We have found we can drive margins down," says John Bick, partner at Priority Power Management in Dallas. "Oftentimes, the difference between the low-cost supplier and the next low-cost supplier is less than one percent. Then you have to look at which company is providing the best terms and conditions. We have not seen a market where aggregation would not provide those benefits." Priority Power performs such services in 22 states.

Forming buyers' pools is not a new concept. Businesses with relatively few employees have combined to get better insurance rates. It's relatively new, however, to the energy sector and particularly for those businesses that do not have an in-house energy buyer. Aggregators say they can top the mandated rate cuts, which are oftentimes called "standard prices."

With internal energy expenditures often a large part of company overhead, businesses are pushing state legislatures nationally to allow alternative suppliers to bid for their business. It's Economics 101: Competition brings lower prices and better services. While about half the states have implemented some form of deregulation, the ones with active aggregators vying for business are located primarily in the Northeast and Texas.

In the case of Priority Power, it says it has 800 customers. About 20 percent of those make up 80 percent of the volume of electricity it purchases. When it goes to the market to buy power for them, it can break those customers into several groups that range from those with similar load profiles to those whose contracts are expiring.

The process appears to work: The Chemical Council of New Jersey began aggregating its more than 40 members in 1999. Today, it's the largest industrial aggregation unit in the country and boasts that it is saving each one of its members 15-20 percent each year. "By combining our buying power of nearly 260 megawatts of peak electricity load, (our members) have saved nearly $20 million on energy costs and have a higher level of budget certainty," says Hal Bozarth, executive director of the council.

Experience Required

Aggregation can also be effective at the residential level. When such consumers join a cooperative or municipal aggregation program, those entities get the right to buy power on behalf of their citizens. The hope is the sheer number of people participating will attract bidders that are able to compete with the rates provided by incumbent utilities.

Massachusetts was the first state to permit towns and cities to buy power on behalf of their citizens. Those jurisdictions actually become the default providers unless an individual chooses to "opt out" of such an arrangement. Ohio, meantime, also allows local governments to buy electricity on behalf of their residents. That state requires city councils to approve such buying pools, with many requiring consumers to "opt-in" to these aggregation units. About 25 percent of consumers eligible to participate in community choice programs have done so.

"Of the twenty-four states in the United States that have adopted electric choice, Ohio's experience has been among the best," says Alan Schriber, chair of the Ohio Public Utilities Commission, in an interview with American Local Power News. "While it is difficult to argue that electric choice has been pervasive anywhere, under the circumstances, Ohio's program has so far been a success."

To be sure, aggregation can only be a success if the pros doing the buying act as independent agents and if the incumbent utilities allow open access to their wires as well as act in good faith to facilitate buying pools. At the same time, the price of natural gas has risen to the point that aggregators are having difficulty matching the mandatory price cuts that incumbents are forced to give to smaller users. Industrials, however, are different animals and can benefit by exercising their buying power.

Not all customers are created equal in the eyes of utilities. Office buildings, for instance, use most of their power during the weekday and during the work week. Hotels, by comparison, use power all day every day. If those entities are allowed to pool their purchasing power, aggregators say that it would be smart to shop the hotels separately from the office buildings. That's because their "load profile" is more attractive to sellers.

Beyond the simple rules of aggregation, using an experienced and independent energy consultant is a must. In a recent interview with UtiliPoint's IssueAlert, Mark Burlingame says that buyers must ensure that their aggregators are not acting as sales agents for specific providers. The international retail electric marketing professional also says that aggregators who do not have the knowledge or expertise can rarely provide savings or favorable contractual terms and conditions.

Clearly, aggregation has promise. Good Energy, an aggregator with offices in New York and Texas, says that all members of an aggregation pool could benefit from the lower prices made possible by the leveraging of buying power. It points to the Texas Real Investment Co., which owns 3 million square feet in the state. After a detailed analysis in which it evaluated the firm's 26 properties, the aggregator says that it arranged an electricity supply package that produced annual savings of about $1.2 million.

"Our main objective was to lock-in substantial savings" for the real estate firm, says Max Hoover, president of Good Energy. That includes protecting it from price fluctuations and ensuring it would not be penalized by the electricity supplier if the business "used substantially more or less power than it used in the past."

At a time of high energy prices, some consumers are fighting back by pooling their buying power. Aggregation is the tool in states that have deregulated their retail electric markets. And while buyers must exercise caution, many residential, commercial and industrial entities are taking advantage of the concept.

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