Three small towns cut costs in half by shopping for power, but major trouble lies ahead without regional grid management.
Nothing was certain back in 1995, when three small towns in North Carolina decided to shop for cheaper electric rates. Editorials appeared in local newspapers, expressing reservations, but the town leaders pushed forward. In the municipalities of Stantonsburg, Lucama, and Black Creek, the local officials and the town boards continued to believe it could be done. They acknowledged the work that lay ahead but felt it was essential - for their citizens and their local economies - to search for relief from some of the highest electric rates in the nation.
Most industry observers mistakenly believe that North Carolina has low electric rates throughout the state. That assumption is false, however. Residents in some parts of the state pay rates as high as 11 cents and 12 cents per kilowatt-hour. That was the case in Black Creek, Lucama, and Stantonsburg, before their mayors and town leaders decided to take action. They had seen the hardship that high power bills could impose on local citizens. Elderly residents living on fixed incomes and in mobile homes were often afraid to turn on the air conditioners for fear of high power bills. Young families struggling to get by faced monthly power bills that consistently ranged from $300 to $400.
The three towns, which lay close in proximity, aggregated their electric loads and came together to work for a common goal. As the consultant for the towns, I worked with them in obtaining and evaluating bids from prospective electric power suppliers and then putting things in motion. In an article I wrote earlier for (see "Aggregating Municipal Loads: The Future is Today," Oct. 1, 1995, p. 26), I explained their unique situation - how they fell within a small group of just a few North Carolina towns that did not have a binding contract with an electric utility and thus could shop for cheaper power at the wholesale level under the terms of the Energy Policy Act of 1992. Today, almost five years and many meetings later, the dream of lower rates is more than just a vision. For these three towns, the dream is a reality. Though the road has been long, everyone involved agrees that the wait was well worth it. With their new supplier, the towns have saved over $2 million on electricity since February 1998.
Many things have happened since 1995 to make this a success story. Let me briefly outline what we did to demonstrate the many steps involved in such a project.
Small Towns Carry Clout
When we discovered that the aggregated load of the municipalities was high enough to warrant attention in the open market, we knew we were on the right track. We solicited and received five estimates from potential power suppliers offering lower rates than what the towns then paid. After failed attempts in negotiating a new contract with the then-current supplier for the three towns - the much larger city of Wilson - the town boards signed an energy services agreement with the power marketer Duke/Louis-Dreyfus (DLD). In fact, this selection was interesting in its own right. Duke/Louis-Dreyfus was partly owned by Duke Power Co. (now Duke Energy), which served western North Carolina (and still does), while the three towns were located within the control area of Carolina Power & Light Co. (CP&L), which serves most of the eastern section of the state.
Shortly after DLD got started on the project, we ran into a major problem. After determining that we could not arrange for transmission service through the towns' power supplier, the city of Wilson, the towns requested to tap into a nearby 115-kilovolt line owned by the control area utility, CP&L. To our great dismay, we initially were denied access to that line. Town officials did not give up, however. After months of waiting for the completion of a system impact study and a facilities-based study, the towns finally were allowed to hook up to the 115-kV line, not at their requested point but further down the line, and build a substation.
A Reason to Celebrate
During this whole process, the news began to spread that these three small towns were attempting to play in competitive wholesale power markets. In April 1996, a Congressional staffer called me to request that the towns tell their story to the U.S. House of Representatives, Committee on Commerce, Subcommittee on Energy and Power, which was then headed by Rep. Dan Schaefer. It was an honor to travel with town officials to Washington as they testified before the subcommittee in May 1996.
In early 1997, DLD officials and I contacted area power suppliers to obtain power quotes for the towns. After a relatively short process, the towns chose North Carolina Power as their new supplier, the trade name of Virginia Electric & Power Co. (VEPCO), which also does business as Virginia Power.
At last, the towns energized their new substation in February 1998. To celebrate, they put up banners in all three towns, declaring a "New Era in Energy," and organized a party at an elementary school in Black Creek - complete with barbecue, speeches, and a school chorus singing patriotic songs. To symbolize the change in electric suppliers, VEPCO and town representatives flipped the switch on a huge switch plate to signal the changeover. The result was a 60 percent cut in wholesale cost of power, which represented a 50 percent cut in overall costs when the amortization of the substation was included.
Meanwhile, another nearby town, Sharpsburg, N.C., had also decided to obtain competitive power supplier bids, in hopes of lowering its electric costs. After fruitless negotiations with the town of Rocky Mount, its local power supplier, Sharpsburg decided to evaluate the proposals from prospective energy suppliers. It eventually chose VEPCO as the winning bidder. And, as was the case with the first three towns, Sharpsburg also had to build a substation, which came online in January 1999. Several months later, Sharpsburg threw its own party. Sharpsburg cut its wholesale cost of power by approximately 35 percent, enabling the town to pass on savings of, so far, 17 percent to its citizens.
Today, the economies of all four of these towns are growing again. Stantonsburg, Black Creek, and Sharpsburg all now have housing developments under construction. In Black Creek, a major new employer has come into town - an event due in large part to lower electricity rates, at least according to the mayor. Large tracts of land with rail access and now, low electric rates, are available to manufacturers seeking building sites.
Cause for Concern - And Hope
What made these projects go?
The key factors were a desire to get the job done and the will not to bend to pressure. Duke Energy's assistance early in the game was critical, as was VEPCO's support in sticking with the towns, even though the towns lack a large-volume industrial or commercial user, and their total combined load is only in the range of about 10-15 megawatts. As a consultant, I cannot say enough about the support we have received from VEPCO. Simply put, they have earned my respect.
Not all the news is rosy, however, though recent events have added hope for the future.
I applaud the Federal Energy Regulatory Commission's recent Order 2000, but I am greatly disappointed that it did not mandate the joining of an RTO. Without an RTO that includes eastern North Carolina, I see storm clouds on the horizon for these towns and their citizens.
In our case, without regional grid management, the three towns enjoy network transmission service, but lack the capability for dynamic signaling to manage loads minute-by-minute. So far, none of the towns has incurred charges for ancillary service from CP&L. The Tri-Towns' contract with VEPCO absolves them from all risk associated with imbalance penalties. Under its contract, Sharpsburg shares the imbalance risk with VEPCO. Fortunately, VEPCO has done an outstanding job of staying within the safe harbor band in the Open Access Transmission Tariff, or OATT. That OATT ordinarily would impose charges if variations in load exceed 1.5 percent, but allows an exemption if variations never exceed 2 MW. Our contract with VEPCO will terminate in 2.5 years; after that, we might encounter trouble in finding another supplier if we still do not have the dynamic signal.
As a consultant in the wholesale power markets, it has been my observation that OATTs handle the job of buying transmission service, but long-term service is still difficult when imbalance penalties are stringent. If promoting competition is the goal of the electric industry, we must remember that metering and managing risk, such as imbalance penalties, are keys to long-term success.
In the case of these North Carolina towns, the local control area utility is Carolina Power & Light, which is not a member of any regional transmission organization (RTO). In my opinion, this lack of membership in an RTO hinders development of a fully competitive power market in eastern North Carolina. One of my top priorities for these towns is to somehow convince the state's utilities of the need to level the playing field and expand the list of potential suppliers by joining an RTO.
Luckily, that challenge may now prove feasible. In recent documents filed at the FERC in connection with its proposed merger with Florida Progress Corp., CP&L has committed to joining an RTO within 90 days of the close of its merger. This news can only improve prospects for Black Creek, Lucama, Stantonsburg, and now Sharpsburg.
Other towns and governmental entities across the nation should be able to do the same thing these four towns did as customer choice begins to spread. The keys to successful aggregation include much more than simply achieving critical mass through size. Another important aspect is that municipalities should strive to increase their load factors (a measure of the load's energy use relative to its peak use). Mixing and matching energy loads is much the same as designing a portfolio. Instead of maximizing return for a given level of risk as in portfolio management, however, aggregation is maximizing load factors for a given level of risk.
Take, for example, aggregating public schools. One potential partner that comes to mind is movie theaters, which typically operate at night when the schools are closed. In such a case, a public school system with a 40 percent load factor could combine with a movie theater with a 35 percent load factor to produce a combined load factor of 50 percent or more.
Another major aspect of municipal aggregation is involvement in writing the rules for competition. To be specific, although municipalities may not like to get involved in legislative or regulatory activities, they must do so in order to ensure that the playing field is level. Municipal employees whose job activities historically have not included electric work may not consider a seemingly small issue like metering and billing to be important. These small issues can, however, mushroom into major headaches that can stop municipal aggregation.
Before Congress in 1996, the town manager in Stantonsburg told of an elderly couple in his town that had to make a decision as to whether to buy medicine or pay their power bill. Now, thanks to the efforts of the town manager and board of Stantonsburg, the average residential customer on its system is saving close to $500 per year.
Aggregation continues to offer a ray of hope for municipalities and other groups saddled with high electric costs; however, they must be given the opportunity to pursue competitive power bids. If that is done, then perhaps the storybook endings in four North Carolina towns can happen in other places throughout the nation.
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