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

ERCOT Stakeholders Address High Prices in "Load Pockets," irresolvable problems

Ten months after implementation, ERCOT continues to grapple with unforeseen difficulties arising from the nodal market. As you may already be aware, the nodal market began operation in December of 2010. Previously, ERCOT was operating under what is known as a “zonal market,” a less-complex form of wholesale market. The nodal market differs from the old zonal market in the way that it instructs generators to produce electricity. In the nodal system, ERCOT dispatches generation considering both the lowest total cost and the greatest relief of bottlenecks within the transmission system. The goal is to deploy the lowest-cost combination of generators that the capacity of the grid will allow.

The ERCOT stakeholder process is currently struggling with how to resolve situations in which ERCOT’s systems cannot calculate the most efficient way to relieve certain transmission bottlenecks. Early in the year, ERCOT identified that this is a particular problem in the Lower Rio Grande Valley. Due to constraints unique to this geographic area, the Lower Rio Grande Valley is plagued by persistent transmission congestion, while it has a high population and little power generation to serve it. Such an area is known as a “load pocket,” and load pockets have posed problems for other nodal system operators in the more established wholesale markets of the Northeast.

You can read more about ERCOT
in the special report from the
Texas Coalition for Affordable Power.

The problem is that, in a nodal system, load pockets can produce very high wholesale prices. The reason has to do with a special concept known as “shadow pricing.” The “shadow price” is the price of relieving the transmission bottleneck in an area. Relieving that congestion can be complicated, however. Due to the physics involved in the flow of electricity, not all power plants can relieve bottlenecks equally. In order to relieve transmission constraints, ERCOT must sometimes dispatch more generation than the actual amount by which the relevant transmission line is overloaded. The shadow price reflects the cost of deploying that additional generation to relieve the constraint. Because of shadow pricing, wholesale prices can actually exceed the highest priced offer in the market.

You will recall that ERCOT has a standard offer cap of $3,000/MWh. However, as noted above, shadow prices resulting from bottlenecks can greatly exceed the standard offer cap. As a result, ERCOT has in place another cap, called the “Shadow Price Cap,” which had been set at $5,000/MWh. When there is congestion on the grid, it is the shadow price cap that acts to limit wholesale prices.

Early this fall, ERCOT stakeholders agreed that certain bottlenecks are “irresolvable.” While the constraint in the Lower Rio Grande Valley is the only confirmed irresolvable constraint, there has been talk that there may be others in the market. In order to address this situation, ERCOT stakeholders worked through a holistic solution to impose a lower shadow price cap for irresolvable constraints. The purpose is to provide additional protections to consumers in a load pocket who would otherwise risk exposure to prolonged high prices. That solution uses a complex formula that in current market conditions would result in a shadow price cap at $2,000/MWh. In a further complexity, if a hypothetical peaking power plant in the area earns $95,000 per MW cumulatively in a given year, the shadow price cap would drop to $500/MWh. At the beginning of the following calendar year, the price would raise back up to $2,000/MWh until the hypothetical peaking power plant again earned $95,000 cumulatively over the year. The idea behind dropping the price to $500/MWh is that there is no benefit to increased payments to generators for congestion caused by constraints that are irresolvable, once generators are permitted to earn a reasonable margin.

In the past month, the South Texas Electric Cooperative (“STEC”) detailed their concerns about this solution to the ERCOT Board. While STEC agreed with a lower shadow price cap for irresolvable constraints, they expressed concern with raising the shadow price cap each year back up to $2,000/MWh. As discussed above, there is no benefit to a higher shadow price cap for irresolvable constraints because higher prices can do nothing to incentivize a solution to a problem that is not able to be solved. In other words, there is no adequate market solution for irresolvable constraints and a higher shadow price cap does not provide any benefit to consumers in these situations.

The Technical Advisory Committee (“TAC”) considered STEC’s concerns at two separate meetings. While TAC adjusted some small parts of the holistic solution, it largely left the solution intact, including the return to a $2,000/MWh shadow price cap each year even if the cap had dropped to $500/MWh the previous year. We voted against the holistic solution, because STEC’s proposed modification offered a greater level of protection for consumers in a region where regular market forces and the state of the grid have proven insufficient to meet consumers’ demand. The Board met on October 18, 2011, but declined to consider the holistic solution as recommended by TAC. STEC’s appeal of TAC’s decision will be heard before the Board in December of this year.

-- Chris Brewster

Mr. Brewster is an attorney at Lloyd Goseelink who represents cities at ERCOT. You can find out more about ERCOT and the deregulated market in The Story of ERCOT, by the Texas Coalition for Afforbable Power and the Steering Committee of Cities Served by Oncor. The link can be found here. 

Electricity

Texas Market Still Not Matching Pre-Dereg Levels

Here’s the good news. The most recent federal data from the United States Energy Information Administration shows that residential electricity prices in Texas have dipped below the national average. That means Texans are saving on their electric bills, at least in comparison to the rest of the nation.

Now, comes the bad news: relative to the rest of the nation, Texans received a better deal before we deregulated our electricity markets.

According to the federal data, Texans so far this year have paid electricity rates that are 2.59 percent below the national average. But in 1999, the year the state legislature adopted the retail electric deregulation law, we Texans got an even better deal — paying 7.48 percent less than the national average. The same was true in 1998, when we paid 7.38 percent less; and in 1997, when we paid 7.24 percent less.

In fact, during the entire decade prior to the adoption of the deregulation law, Texans paid residential electricity rates that were 6.4 percent lower than the national average. In the decade since deregulation took effect, Texans paid 8.72 higher than the national average.

Some may note that in Texas there exists areas both with and without deregulation, and that the state’s higher-than-necessary average prices shouldn’t be blamed on deregulation, but rather on prices paid by those living outside deregulation. According to this argument, inflated prices paid by Texans living outside deregulation have skewed calculations for average prices overall.

But here again, the federal data shows this assertion to be incorrect. Data from the US EIA shows that Texans living in areas outside deregulation paid consistently less than the national average for residential service and consistently less than Texans subject to deregulation. This is true for every year in which data exists to make a comparison. You can check out the graph, above, showing the pricing data for the years 2002-2009.

A recent analysis by the Texas Coalition for Affordable Power shows that all these high prices don’t come without consequences. The total estimated cost to the Texas consumer economy from these long years of above-the-national-average electricity prices exceeds $15 billion.

-- R.A. Dyer