The city of Chicago will be asking voters to allow it to negotiate electricity rates on their behalf, a path hundreds of towns in Illinois have already taken in order to receive lower priced electricity from suppliers other than ComEd.
If voters greenlight the idea Nov. 6, the city’s negotiations would affect electricity rates for about 1 million Chicagoans and be worth about $300 million per year in revenue to the supplier. It would be the largest such deal attempted in the U.S.
Mayor Rahm Emanuel’s administration will be under pressure to deliver the kind of savings that suburbs and towns have garnered. But some experts say deep discounts might be difficult to come by, as there are few suppliers capable of handling a deal the size of Chicago’s.
“It’s just so large,” said Julien Dumoulin-Smith, director of U.S. electric utilities for UBS Investment Research. “By making it too large you restrict it to the few suppliers who can handle a deal that large,” which could drive up the prices they are willing to offer.
A spokeswoman for Emanuel said the mayor is committed to achieving savings for Chicago ratepayers.
The annual revenue at stake is triple that paid to the company holding the unpopular parking meter contract and affects far more people. A smooth process could pave the way for tens of millions of dollars in savings for Chicagoans along with a “greener” electricity supply mix the city could use in bolstering its environmentally friendly reputation.
Sources close to the deal say the city wants to move quickly. The window for residents to see the most savings is closing fast as ComEd’s rates are expected to drop in June and stay low until at least 2015. Any delays would quickly eat into the overall savings.
“The biggest savings will be between now and 2013. If they miss even one month, that more than offsets any small unit price differentials,” said Daniel Verbanac, president of Integrys Energy Services.
Chicago follows a movement that began in 2011 shortly after legislators enacted a law allowing municipalities to aggregate on behalf of their residents. So far 248 communities have switched away from legacy utilities Ameren Illinois and ComEd, a unit of Chicago-based Exelon Corp., and an additional 221 communities will vote in November on whether to allow aggregation.
Towns are purchasing electricity from suppliers such as FirstEnergy, Constellation and Integrys Energy Services, in some cases at half ComEd’s prices, while ComEd continues to deliver the electricity, bill customers and deal with outages. ComEd makes its money delivering electricity, not supplying it, and passes through the cost of its electricity to consumers at the same price it pays to procure it. Several electricity suppliers who plan to vie for the contract say the added risk they are taking with such a large contract could affect the rates they are willing to offer.
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The process of vetting prospective electric suppliers began last week. On Thursday the city of Chicago emailed about 150 electricity suppliers to let them know it will issue a request for qualifications sometime this week, the first step aimed at weeding out companies that might not have a sufficient track record or capacity to handle such a massive undertaking.
Sources say the city probably will be most interested in suppliers that have a record of quickly signing up residents. More than 40,000 people per day would need to be switched by a deadline that precedes their next billing date in order to finish the process within a month’s time. Miss that deadline, and those residents can’t be moved for another month, an issue that would put the city in the uncomfortable position of having some of its residents saving money while others are forced to wait a month.
FirstEnergy, which already provides electricity for about 100 communities in the ComEd service territory that have aggregated — or about 600,000 customers — along with 400 in Ohio, said it thinks it could handle the Chicago contract, which would represent about 10 percent of its generation. The company is the nation’s largest supplier to aggregation communities.
“We’ve done this hundreds of times and we’re really flexible in terms of what we can provide to a community,” said Diane Francis, a spokeswoman for FirstEnergy.
A review of Illinois communities that have chosen electricity suppliers show vast discrepancies in the time it takes a community to sign up residents under a new supplier. Some communities that passed referendums in March have yet to sign up residents, while others signed on residents within weeks.
To complicate matters, Chicagoans change addresses at a much higher rate than people in other communities, all of whom must be tracked and given the option to rejoin the aggregation program.
Potential electricity suppliers and environmental groups are awaiting word on what the city is seeking to gain from the electricity deal beyond just cheap rates.
“We’re sort of anxiously waiting to see what the city’s thoughts are,” said David Fein, vice president of state government affairs for Constellation, a subsidiary of Exelon. “Will there be one single supplier or multiple suppliers? What kinds of contract term are they interested in? Will there be an energy-efficiency component?”
About three-quarters of communities that have aggregated so far have opted for two-year contracts. But contracts can range from months to years, and some municipalities have forced suppliers to guarantee their rates to be below that of ComEd for the length of a contract or to match ComEd’s rates or bow out. Such guarantees would add risk to suppliers who would have to prepare for worst-case scenarios in which they might be locked into a contract that costs them money or are forced to suddenly lose a significant portion of their customers overnight.
Already the amount of money electricity suppliers are making on such deals is shrinking. At a price of $50 per megawatt-hour, suppliers might earn $2 to $3 per megawatt-hour in profit, according to an analysis of the Illinois aggregation market by UBS, a financial services and banking group, whereas in earlier deals it wasn’t unheard of for some suppliers to earn $10 to $15 per megawatt-hour.
Environmental groups also are looking to benefit from the deal. They want to see Chicago use the deal to move toward cleaner power sources.
The same environmental coalition that garnered the mayor’s support in closing the Fisk and Crawford coal fired power plants is asking that a small percentage of Chicago electricity bills be used to fund rooftop solar installations and energy-efficiency programs. They also want a power supply mix that doesn’t include coal.
So far the city has not released any details about any potential “green” component of the electricity deal.
“Mayor Emanuel is committed to investing a portion of the savings into cleaner energy or improved energy efficiency. The mayor supports the referendum and, if it passes in November, the competitive bidding process will present a number of ideas that will allow for increased renewable energy sources and cleaner energy,” said Kathleen Strand, a spokeswoman for the mayor’s office.
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