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 for power 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 might be 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 providers.

"Aggregation gives the small customers the power to negotiate terms and secure prices the same as a large industrial," says Brian Letbetter, regional director for Direct Energy in Houston. "Customers are looking at their bottom line and trying to get the best deals for their company."

Texas is perhaps the furthest along of any of the states that have deregulated their retail markets. According to Letbetter, 80-90 percent of the commercial and industrial customers there have chosen to buy power from a competitive supplier. With time, the open market there has functioned better. At the onset of deregulation, natural gas prices stood at $2 per million BTUs but they have risen to as high as $15 per million BTUs, motivating commercial and industrial customers to look for cheaper deals.

About 70 percent of the business customers that could benefit from deregulation have used aggregation, says Letbetter. And when they do, they often send out multi-page request for proposals. The prices that come back are dependent on a number of factors that include how much electricity load they bring to the market and what the shape of that load looks like, or when the power is consumed.

In the case of the school board association, it brings 4,000 meters to the table. Altogether, the schools involved use more than 500-gigawatt hours. The aggregator, which must have advanced knowledge of energy markets, will negotiate all terms and conditions. The size of the school board's profile means that its power can be purchased on wholesale markets that typically sell to other utilities and large industrials.

Larger industrial customers don't need aggregators because they often have in-house experts who know how to procure power at the best possible prices. The smaller business customers that do pool their resources have similar "load shapes." Such customers may be comprised of cities, schools or hotels -- any business or entity that uses most of its power during the same points in time. Hotels, for example, are busiest on nights and weekends.

Volatile Markets

Research suggests that if given the opportunity to compare prices and buy from alternative suppliers, eligible entities would implement the strategy. Still, many smaller and mid-sized companies are unfamiliar with how those buyers' pools work, which has delayed their emergence in areas where markets are now open.

Forming buyers' pools is not new. Businesses with relatively few employees have long combined to get better health insurance rates. But it's relatively uncommon in the electricity sector. With high energy costs, however, business customers are always looking for an edge. Competition, henceforth, brings lower prices and better services. Aggregators exist in all states that have deregulated and particularly in Texas, Ohio, and the New England states.

Many states with retail electric competition allow whole communities to set up customer aggregation programs. 1st Rochdale Cooperative in greater New York City, for example, has enrolled a number of residential and commercial customers, all on a voluntary basis. Meanwhile, the Cape Light Compact, which started serving the residents of Cape Cod and Martha's Vineyard in Massachusetts in March 2002, serves a large chunk of the 193,000 customers there.

Pennsylvania, furthermore, allows cities and towns to aggregate but requires citizens to proactively enroll. Also, about 190 jurisdictions in Ohio have voted to allow their municipalities to aggregate, mostly in FirstEnergy's territory. "In today's variable natural gas market, our locked-in rate offers price protection just as a fixed-rate mortgage mitigates risk in an unpredictable housing market," says Jeff Hazel, service director for the city of Celina, Ohio. The fixed one-year price ensures participating customers a natural gas supply at competitive rates, he adds.

Without a doubt, aggregation has some risks. Logic holds that those with the most bargaining power -- the biggest electricity profiles -- are the ones with the most negotiating strength. But 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.

"We have found we can drive down margins," 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."

During periods of modest energy prices, consumers may get complacent. But during times of high volatility, they are motivated to act. Aggregation is a known commodity in other industries. And it is fast becoming recognized in the electricity sector.

For far more extensive news on the energy/power visit:  http://www.energycentral.com .

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