Rate Impact: If Energy Future Holdings Collapses, what then for consumers?

The potential collapse by EFH

  raises questions for consumers.

Energy Future Holdings, the parent company of TXU Energy, made a bad bet in 2007 — and now the state’s largest electric company may be teetering close to bankruptcy. If Energy Future Holdings goes under, will the lights go out? Will prices go up?

The short answers are “no” and “maybe.” Barring extreme circumstances, individual customers should not lose power. Reading the tea leaves as to prices is a bit more difficult, although under certain circumstances increases are certainly possible. The collapse of Energy Future Holdings also raises a potential new dilemma for the Public Utility Commission. But more on that later.

How likely is an EFH failure? According to the International Herald Tribune, a growing number of analysts and bond investors are expressing skepticism about the company’s long-term chances. As one expert told the newspaper: “The game may not be over just yet, but the prospects don’t look so good.” At the root of EFH’s difficulties is the acquisition of TXU Corporation back in 2007. Investors used $45 billion for that transaction — most of it borrowed — and now that debt has become crushing. Warren Buffet, who invested $2 billion in the deal, has called it a “major unforced error.”

But even if Energy Future Holdings fails, its power plants should continue operating without interruption. That’s why the lights should stay on. The company’s regulated transmission and distribution utility (Oncor) also would continue functioning and customers of EFH’s retail electric affiliate (TXU Energy) would get switched to another company, if necessary. All this points to uninterrupted electric service, no matter what happens to EFH.

Whether a bankruptcy would impact prices is a murkier question. For instance, what happens if EFH comes hat-in-hand to the Texas Legislature seeking a bailout? What if another company buys all of EFH’s power plants and then — by virtue of its larger position in the market — gains an ability to unilaterally influence prices? Also, default electric service in Texas is very expensive. If home customers get switched to a default provider because of a bankruptcy, they would end up paying more for power — at least temporarily.

And here’s another odd dilemma. Under the Texas electric deregulation law, when a retail electric company suddenly exits the market, its customers automatically get switched to default service. As noted above, TXU Energy is the retail electric company for Energy Future Holdings. But TXU Energy also has been selected to serve as the default provider for north Texas. This means that an EFH bankruptcy could lead both to the failure of one of the state’s largest retail electric providers, plus the company that provides backup service. This has never before occurred in Texas history and almost certainly would leave regulators scrambling.

The good news is that such an outcome is highly unlikely. TXU Energy shouldn’t disappear overnight, even if its parent company goes under. A more likely scenario would have EFH selling off TXU Energy’s business, either as a whole or in parts. That means that home customers currently getting served by TXU Energy would not get dumped to default service, but rather have their contracts honored by a third party.

Besides TXU Energy, other companies selected by the Public Utility Commission to provide default service include Reliant Energy Retail Services, WTU Retail Energy, First Choice Power and Constellation New Energy. You can find out more about default service (it’s technically known as “Provider of Last Resort” service) at this link on the PUC website. You can read more about the 2007 TXU buyout in a report from the Texas Coalition for Affordable Power. Here’s a link to the appropriate chapter. And just below I’ve included a bit of information about TCAP, which produces original policy research about the Texas market.

-- R.A. Dyer

Who is the Texas Coalition for Affordable Power?

TCAP is a coalition of more than 160 cities and other political subdivisions that purchase electricity in the deregulated market for their own governmental use. Because high energy costs can impact municipal budgets and the ability to fund essential services, TCAP, as part of its mission, actively promotes affordable energy policies. High energy prices also place a burden on local businesses and home consumers.

LG attorneys help negotiate El Paso rate cut

The electric utility that serves the city of El Paso has agreed to a $15 million annual rate decrease after it was determined through a financial review that its revenues were excessive.

The settlement comes at no cost to El Paso ratepayers, and will result in lower rates for both businesses and residential customers. It also represents a rare victory for electric consumers in such cases, which more typically lead to rate hikes. Lloyd Gosselink attorneys Geoffrey Gay and Georgia Crump were among those representing the city during the negotiations.

Residents in El Paso will get a rare rate cut.

Public Utility Commission spokesman Terry Hadley told the online Texas Energy Report that it's been 15 years since a similar rate case resulted in a big drop in customer bills. When combined with a related reduction in the fuel portion of the bill, a typical residential customer should see a reduction of about $4 per month.

"I'm thrilled! This is a victory for people and small businesses of El Paso," said El Paso City Councilmember Cortney Niland, on her Twitter account.

El Paso is located outside the area of the state with electric deregulation, and the company that serves its residents — the El Paso Electric Company — remains rate regulated. In October the city called upon El Paso Electric to justify its rates. The company responded by filing paperwork in which it requested a $26 million rate increase. But under the deal approved April 17, the company instead must submit to a $15 million rate cut, effective in May.

For residential customers, the settlement will result in rate savings of about $1.5 million annually — but in the form of a credit to summer electric bills. For business customers, the rate cute will amount to savings of about $13.5 million annually. The cost of reviewing the case will be borne by the company only, and not by its customers. El Paso Electric also has committed to provide an additional $2.2 million towards an economic development incentive program.

The company’s rates have typically been somewhat high in comparison to rates charged in other areas of Texas exempt from electric deregulation, and often higher than rates in deregulated areas. The general trend statewide is that average electricity prices in areas exempt from deregulation typically are lower than average prices in deregulated areas.

The last time El Paso Electric cut its rates was in 1998.

Texas Electric Dereg Subject of PBS Report

Inside E Street, a Public Broadcasting System program featured on more than 200 TV stations nationwide, has begun airing a new segment. It’s main focus: electric deregulation in Texas.

PBS cites data showing electric prices in

deregulated Texas consistently above national average.

“Over the past ten years, the average retail price of Texas electricity has consistent exceeded the national average,” noted Inside E Street host Lark McCarthy, citing federal data. The veteran newscaster also identified new challenges for residential consumers.

Texas is among about 15 states with deregulated retail electricity markets. The intent is that electric companies compete in these markets and free-market forces keep a lid on prices and improve service. But as experts on the PBS report noted, technological and economic barriers unique to electric power can make deregulation a difficult proposition.

Geoffrey Gay

For instance, electricity — unlike other commodities — cannot be stored. This means that under deregulation consumers can become captive to volatile price swings. And because electricity is essential to the public welfare, dips in reliability or increases in price can cause serious hardships.

“The focus of the original deregulation effort was to get lower prices — and that has not worked well,” said Geoffrey Gay, general counsel for the Texas Coalition for Affordable Power. Interviewed for the PBS segment, the Lloyd Gosselink principal also noted that comparison shopping under Texas deregulation can be difficult. “I’ve been dealing with utility business for 33-plus years, and I have found personally the options available very confusing,” he said.

TCAP and other consumer organizations have advocated for the creation of standard-offer products to make apples-to-apples shopping easier. Under the proposal, retail electric providers would offer products with standardized terms and conditions along with their other electricity deals. These deals would be listed at the state-sponsored powertochoose website. But under heavy industry lobbying, lawmakers have yet to embrace the reform.

“For many folks, especially for the elderly and the poor, going to the powertochoose website (to shop for electricity) can be an incredibly intimidating process,” said Gay.

You can click here to watch the entire Inside E Street segment.To learn more about standard-offer products, go here.

The Texas Coalition for Affordable Power

Questions and answers about a leading electric consumer organization

When it comes to electric deregulation, the Texas Coalition for Affordable Power enjoys a unique vantage point. The more than 160 cities and other political subdivisions that make up TCAP purchase in excess of 1.3 billion kilowatt/hours of power each year for their own governmental use. As such, it is one of the largest organizations of energy consumers in the state.

High energy costs can impact municipal budgets and the ability to fund essential services. An increase by even a single penny in electric rates can cost cities millions of dollars. TCAP members understand this first-hand. High energy prices also places a burden on local businesses and home consumers.

That’s why TCAP, as part of its mission, proactively promotes affordable energy policies. TCAP monitors federal, state and local initiatives that may affect the price and availability of energy. The organization represents consumer interests at the Electric Reliability Council of Texas, the Public Utility Commission and before state legislative panels. TCAP’s original policy research has been cited nationally and internationally and has won praise from key lawmakers and staff.

TCAP was originally two separate non-profit corporations — the Cities Aggregation Power Project and the South Texas Aggregation Project — organizations formed in 2001 for the specific purpose of purchasing power in the then-newly deregulated market. TCAP also is the parent organization of Recharge Texas, and supports its online newsletter, the Recharge Ratepayer Report. In 2012, TCAP released Deregulated Electricity in Texas: A History of Retail Competition — The First 10 Years. In 2011, TCAP released The Story of ERCOT: The Grid Operator, Power Market & Prices under Texas Electric Deregulation.

Also in 2011 TCAP named Randolph Moravec, Ph.D., as its first executive director. The former finance director for the Town of Addison served previously on the TCAP board as its organization’s secretary, and also served as vice chairman for the Cities Aggregation Power Project. Dr. Moravec received his Ph.D. in public affairs from the University of Texas-Arlington in 2011.

Price supports for deregulated electric companies?

Last year was hot. We have to go all the way back to 1789, searching through the tree ring records, to find evidence of a drier summer. And because power plants depend upon water in order to operate properly, the high heat wreaked havoc on the transmission grid. As lake levels dropped, our risk of blackouts increased.

Next week a key committee in the Texas Senate will hold a public hearing on reliability issues and the drought. There will be plenty of expert testimony, public comments, white board charts and maybe a few reporters. A representative from ERCOT, the operator of the Texas power grid, will make a presentation. The chairwoman of the Texas Public Utility Commission also will address the senators.

If the drought is putting system reliability at risk, then what should be done about it? Some have proposed artificial price supports for wholesale energy. That is, some believe that without bigger profit margins for big electric companies, those companies won’t have sufficient financial incentives to build needed generation plants. But consumer groups are discouraging efforts to intentionally increase prices — especially when there’s no clear pay-off in terms of reliability. Any money used to enrich these deregulated generation companies ultimately comes from the pockets of ratepayers. But generation companies offer no guarantees that they’ll resolve or even address the state’s reliability concerns.

It’s a tough issue to be sure, and one that’s begun to attract welcome attention from the media. Both the Texas Observer and National Public Radio’s Impact Texas recently have weighed in, with both outlets noting that Texans are at risk for paying higher electricity prices. Reports in the Texas Tribune and the San Antonio Express-News also help to frame the debate. The hearing, to be conducted by the Committee on Business and Commerce, begins at 10 a.m. on Tuesday, January 10^th. You can find a link to the Business and Commerce Committee website here. Separately, the House State Affairs Committee also is expected to consider these issues during a meeting on Feb. 9th. Both hearings will be conducted in Austin.

-- R.A. Dyer