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Public Power Pool is a non-profit corporation created by local governments in Texas to cooperatively deal with the complex new decisions that electric deregulation forces power consumers to make. Known as P3, Public Power Pool allows local governments, though a process called aggregation, to save millions of dollars by leveraging their collective purchasing power, and sharing the cost of sophisticated procurement techniques. In short, P3 members incur less procurement costs, and obtain better rates and contracts with less risk, than if they procured electric power on their own.
Association Power, or AP, was born from the results produced by P3, which, by law, is limited to having only local governments as members. As word of the success of P3 spread, there was demand to create a corporation to aggregate private sector customers – and that corporation is Association Power.
The staff of AP has a proven track record of success that differentiates it from the competition. The staff of AP is the same professional team that provides aggregation services to the members of P3. P3 saved millions for its members in the pilot program to test deregulation in Texas, and has contracts in place to save its members millions. AP membership is a long-term solution to energy procurement needs. AP members are part of large collective effort structured to consistently manage market risk and identify the lowest possible electric rates.
It is important to understand that electricity is a unique commodity. Unlike paper or machine parts, there is no way to effectively store electricity. This means that it must be used as soon as it is created. Since there is no way to accurately predict the exact amount of electricity that will be needed at any moment in time, it is a highly volatile commodity. Understanding the volatility of electric prices and the risk that this creates for sellers is fundamental to understanding the benefits of joining AP.
Electric bills consist of two different charges. These charges are for the wires over which the electricity is being sent (the transmission and distribution – T&D rates) and for electricity itself (the commodity piece). While these charges were part of electric bills prior to deregulation, they are now separated because the commodity piece is subject to negotiation. Savings can be achieved by negotiating lower prices for the commodity piece.
Before 1999, electricity was a regulated monopoly, with the Public Utility Commission of Texas responsible for setting the rates that would ultimately be charged to the consumer. With the enactment of Senate Bill 7 in 1999, the Texas electric market and the role of the Public Utility Commission in that market changed dramatically.
Market Restructuring
The Texas Legislature fundamentally altered the Texas electric market when it passed SB 7 in 1999. It required that investor-owned utilities, such as TXU, Reliant, Texas New Mexico Power and Central Power & Light, restructure into three separate business entities. No longer could one company own generation assets (the wires over which electricity is transmitted) and provide service to customers. These companies had to break-up into separate entities through a process called unbundling. Investor-owned utilities spun generation assets into one company, placed their T&D facilities (wires) in another company, and put their retail electric operations in a third company. Municipal electric companies and cooperatives are exempt from competition unless they affirmatively opt-in to the deregulated market place. To date, no municipalities or co-ops have done so.
This fundamental change in market structure created a competitive market place that, while still in its infancy, appears to be vibrant and healthy. Consumers can now choose from whom they want to buy electricity and can purchase different types of electricity, such as “green” power, which is generated using environmentally friendly technology such as wind. Traditional retailers of electricity, such as TXU Energy Services, must now compete with independent companies such as AES NewEnergy. These companies compete on price as well as terms of service.
To protect consumers while the deregulated market develops, the Legislature created what was known as “the price-to-beat.” The price-to-beat is a legislatively mandated rate that retailers with an established customer base in Texas—TXU, Reliant, Texas New Mexico Power, and Central Power & Light—must offer to all of their customers for a set period of time. This price is set at 6% less than 1999 rates, adjusted for changes in fuel costs. The price-to-beat will remain in effect until 2007 and established utilities cannot offer any other rate to their customers who use less than 1 megawatt until early 2005, or they lose 40% of their customer base in any rate class.
One final change brought about by the restructuring of the Texas market involves the role of the Public Utility Commission of Texas (PUC). Before deregulation went into effect on January 1, 2002, the PUC set T&D rates as well as the price for the commodity piece. Now, the PUC regulates only the wires charges and competitors are free to charge different amounts for electricity.
The Birth of Public Power Pool
The sweeping change wrought by SB 7 also had an impact on local governments. Under Texas law, with limited exceptions, local governments are required to procure goods and services through an open and competitive process. One of the exceptions was if the commodity or service being procured was available from only one source. Electricity had previously been such a “sole source” commodity. Now that the electric market is deregulated, electricity is no longer a sole source good and local governments have to procure it through either a competitive process or another statutorily authorized alternative.
One of the provisions of SB 7 allowed local governments to create a non-profit corporation to assist them with the procurement of electricity. Donald Lee, as Executive Director of the Texas Conference of Urban Counties, worked with the Legislature to place this provision in SB 7 as a way for local governments to purchase electricity cooperatively to obtain lower prices.
In September of 2000, four counties—Dallas, Harris, Jefferson, and Tarrant—incorporated the Texas CUC Aggregation Project, Inc. or TCAP, now doing business as Public Power Pool (P3). Donald Lee was selected to serve as the Executive Director of P3, and set about aggregating the load of member counties.
Aggregation occurs when two or more users of electricity combine their electric loads to present them to suppliers as one load. This produces two main benefits—volume discounts and reduced risk for the supplier. The volume discount is similar to discounts that can be realized through volume purchasing of other commodities. The other benefit of aggregation, reduced supplier risk, results from combining the electric loads of different facilities, such as an office building and an industrial facility. The idea behind combining different types of facilities is the creation of a flat load profile. A load profile is a graphic representation of how and when a facility uses electricity. The flatter the load profile, the more constant the electric use and the lower the risk to the electric supplier.
P3 hired PACE Global Energy Services to serve as its consultant for the procurement of electricity. PACE, based in Alexandria, Virginia, is an international consulting firm that specializes in helping its members procure power in deregulated markets. PACE has experience in every deregulated energy market in the world. PACE provides P3 and its members with an independent, professional source for information about the operation of deregulated markets. The presence of PACE means that P3 members do not have to rely on utility companies to provide pricing models. PACE provides P3 members with hard data on the impact of different offers, meaning that P3 can objectively evaluate different offers from suppliers.
Another key feature of P3 is that its members gave it the authority to execute a contract for electricity on their behalf without the governing body seeing the contract before they were bound to it. This was a fundamental shift in procurement processes for the members of P3. To make members comfortable with this change, P3 provides trigger points. The trigger point is the minimum savings that had to be met before P3 can execute a contract. P3’s success rests in part on the fact that it has the authority to sign a contract for its members, meaning that retailers can make an offer to P3 and P3 can accept or reject that offer in hours. This minimizes the risk to retailers and means that they can offer exceptionally competitive prices.
Another issue facing P3 and its membership was a concern that members might end up subsidizing the savings of other members because of differences in load profiles. To avoid this pitfall, P3 and PACE developed a specialized methodology to insure that each member received the full benefits of their own load profile.
Membership in P3 grew steadily throughout the rest of 2000 and early 2001. In April 2001, P3 executed a contract with AES NewEnergy to provide electricity for 950 accounts during the pilot period called for by SB 7. The contract term began in September and ran through the end of the year. The prices that P3 negotiated for its members were more than 10% less than the rates they would have paid if they had remained with their current provider. P3 was the only political subdivision corporation to successfully place accounts in the pilot project.
In September 2001, P3 released a request for proposals (“RFP”) to provide electricity to 46 of its members, including the City of Dallas, Harris County Hospital District, Galveston ISD, and Webb County. The electric usage of these 46 members accounted for approximately 2.5% of the deregulated, non-residential Texas market. Initial responses were received and P3 created a short list of four suppliers with whom it would conduct further negotiations based on a quantitative analysis of the responses received. Suppliers in the Texas market later told P3 that the RFP, which P3 produced, was the most professional RFP they have seen in the market, and the data about electric usage which P3 provided was the most accurate of any aggregator in the state. This is important because the more accurate the data, the easier it is for suppliers to estimate their risks and offer competitive prices.
After extensive negotiations, P3 signed two contracts on behalf of its members. These contracts were signed with TXU Energy Services and Reliant Energy Solutions. As a result of its unique competitive process, members will save over $38 million on electricity versus their 2001 costs at the same levels of consumption. P3 not only negotiated lower rates for its members, but it also secured terms and conditions which were more favorable then those generally available in the market place.
The Creation of Association Power, LLC
Throughout the procurement process, P3 received phone calls from private entities that were interested in procuring power using the same tools and techniques that produced such positive results for local governments. However, by law, P3 is precluded from accepting private businesses as members. Therefore, the staff of P3 created Association Power, LLC.
AP uses the same techniques and methodologies that helped the members of P3 secure contracts that saved them millions on their electric bills. AP members will be presented with an estimated amount of savings before AP releases an RFP to the market for electric services. Once AP members have elected not to opt out of the procurement process, an RFP will be released to the market. AP staff will then negotiate on behalf of the membership to finalize a contract for electricity at the lowest rates possible and under the best terms and conditions possible.
AP uses a unique process which produces exceptional results on a consistent basis. Unlike other aggregators, AP is independent of retail electric providers (REPs). This independence is due to the role played by PACE and a commitment by AP to run a fair and open procurement process. The REPs in the market know that the staff of AP is committed to a level playing field for all market players, which means all interested parties can truly compete. This encourages REPs to offer competitive prices. AP expresses to all suppliers that no REP will have an unfair advantage in trying to win AP’s accounts.
Another feature that separates AP from other aggregators is the level of communication with its members. AP informs members in advance of what their total electric bill should be under the contract, including all fees owed to AP. This means that members are not surprised when they see their actual bills since they know in advance what they should be paying based on the total usage. By providing a trigger point and estimated market savings, AP also educates its members on what they should expect.
Because the staff of Association Power has worked with school districts in the public sector, AP understands the unique needs of schools and can offer maximum flexibility in billing options. AP is committed to making sure that each school receives the full benefit of its own load profile and any steps it has taken to improve its energy efficiency. These benefits will not be reduced when a school joins AP since AP assigns a price to each account. Those schools with more efficient electric usage will enjoy greater savings since they will use even less power. In addition, the pooling methodology developed by PACE and AP means that accounts with similar load factors and efficiency profiles will be grouped together to create an attractive block in the retail market.
AP also understands the importance of making sure that schools have sufficient bandwidth in their electric usage. In the contracts that the staff of AP negotiated previously, the minimum bandwidth was +/- 20%. This bandwidth was based not on a single account, but on all of the accounts within a block, meaning that even if one account exceeded its bandwidth, as long as all other existing accounts of the group stayed within its bandwidth, then there would be no impact to the pricing structure. This is another example of how AP has the expertise to help school districts meet their unique needs.
AP is a long-term program that uses a proven process to produce results for its members. Not only does AP provide a sophisticated procurement process, but it also provides on-going professional support for its members. As a member of AP, you have a team of dedicated and proven professionals working for you to help manage your electric needs in the future.
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