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

Geoffrey Gay receives Glink Private Practice Local Government Attorney Award

CHICAGO -- In a ceremony held September 13 at the Chicago Hilton in Chicago, Illinois, the International Municipal Lawyers Association (IMLA) awarded the Marvin J. Glink Private Practice Local Government Attorney Award at the 76th Annual Conference to Geoffrey Gay of Austin, Texas.


Award recipient Geoffrey Gay

This award was established to honor the memory of a longtime IMLA member, Marvin J. Glink. It recognizes a private practitioner who, as part of a private practice, represents a local government and who exhibits those qualities that made Marvin Glink one of the truly remarkable lawyers working on behalf of public clients. In addition to the traditional qualities of excellence in the practice of law, the award seeks to recognize a practitioner who has provided outstanding service to the public, and who possesses an exemplary reputation in the legal community, the highest of ethical standards, and who is devoted to mentoring young lawyers and educating lawyers in local government law.

Geoffrey is the Principal and Chair of the Energy and Utility Practice Group for Lloyd Gosselink Rochelle and Townsend. He is an active local government practitioner and serves as the General Counsel for the Texas Coalition for Affordable Power, the Atmos Cities Steering Committee and the Oncor Cities Steering Committee. His nominator stated, “Geoff is an unbelievably effective negotiator and creative strategist. His efforts have saved Texas cities millions of dollars annually. In addition, Geoff and his firm go the extra mile to provide the assistance necessary to help city officials become more persuasive advocates for the interests of cities and the public.”

Founded in 1935, the International Municipal Lawyers Association (IMLA) is a nonprofit, nonpartisan organization consisting of approximately 3000 local governments and attorneys throughout the United States and Canada. IMLA provides a wide range of services and programs to its membership, including comprehensive educational programs, legal research, professional publications and legal advocacy on behalf of its members in the United States Supreme Court, as well as federal and state appellate courts.

Independent Market Monitor Issues 2010 State Of The Market Report

In August, the Independent Market Monitor (“IMM”) – a position intended to be a wholesale market watchdog and created by law in 2005 – issued its annual State of the Market Report for 2010. This year’s report was unusual in that it addressed the final year of operations under the old, zonal market design. Thus, the report highlighted inefficiencies and other issues with that market design that will not recur in future years, since in late 2010 the market transitioned to a nodal system.

The 2010 State of the Market Report contains comparative
 data on wholesale market prices for each of ERCOT's four
zones, and ERCOT as a whole. As this table illustrates, prices
increased in all zones from 2009 to 2010. Note the extraordinary
prices of 2008 -- they resulted from very high natural gas prices
and congestion on the grid, resulting in especially high prices
in the North, South, and Houston zones.

However, the report is notable for its conclusion that wholesale energy prices increased on average in 2010, going from $34.03 per MWh in 2009 to $39.40 per MWh on a load-weighted average basis. The report attributes a 16% increase in natural gas prices for much of this increase.

Despite this general price increase, the IMM again argues that wholesale prices in ERCOT are too low, and have been sufficient to support new investment in power plants in only one the last four years. That year was 2008, a year in which, as the report admits, ERCOT suffered from high prices resulting from inefficient congestion management between the North, South, and Houston zones. The experience of that summer, in which prices neared $4,000 per MWh at times and caused the default of a number of Retail Electric Providers (“REPs”) should in no way be viewed as any kind of “success” for the market.

Additionally, the report again concludes that the ERCOT wholesale market performed competitively in 2010, with no evidence that generators were withholding power or engaging in similar manipulative behavior.

-- Chris Brewster

Fed Report: ERCOT Could Use More Authority to Protect Against Blackouts

A joint federal report is the latest to examine
the February rolling outages in Texas.

Although previously rare in Texas, rolling blackouts have now occurred twice since the state deregulated its electricity markets. The most recent outage occurred on Feb. 2, when 1.3 million customers suddenly lost power. Not surprisingly, questions have been raised.

For instance, why did so many of the state’s power plants fail? During the most difficult point of the crisis, approximately one-third of the total generating fleet within ERCOT was unavailable. And did the blackouts expose problems in the wholesale energy market, where prices spiked dramatically?

A new report by the combined staff of two federal organizations attempts to answer some of those questions, while also making recommendations for reform. Released in August, the report finds no evidence of market manipulation during the blackouts and concluded that gas curtailments played little if any role. But the federal staffers also found that the ERCOT organization could use additional tools to protect against blackouts.

The organizations behind the two-inch-thick document are the Federal Energy Regulatory Commission and the North American Electric Reliability Corporation — FERC and NERC for short. Their report joins other expert examinations of the February blackouts, including those from the Texas independent market monitor, from a federal grid reliability organization, and from a private consultant from Oregon.

Among the key findings of the latest report:

•  By communicating with generators and requesting them to come online earlier, ERCOT could have more promptly exposed mechanical issues experienced by generators. This could have prevented some of the failures.
• The typical design of generating facilities in the southwestern United States may have contributed to large number of units shutting down. Unlike generation facilities in the colder climates, southern generating units were built so that many of their auxiliary systems are exposed to the ambient air. Frozen sensing lines, frozen equipment, frozen water lines, frozen valves, blade icing, low temperature limits, and transmission loss caused the loss of 22,805 MW of generation.
• Although natural gas is an important fuel source for the state’s fleet of electric generators, natural gas curtailments did not appear to play a major role in the outages.
• FERC and NERC found no evidence of market manipulation during the event. This conclusion was similar to earlier findings by the state’s independent market monitor.

FERC and NERC also issued recommendations:

• ERCOT should consider rule revisions to allow it to reject scheduled outages by generating units.
• ERCOT should increase its extreme-weather requirements for generation reserves. ERCOT also should have the ability to direct generating units to initiate operational warming prior to forecasted cold weather.
• ERCOT should have the ability to verify a generators’ preparedness for cold weather, including the units’ operating limits and potential fuel needs.
• Generators should take steps to ensure they are prepared for severe cold weather events, including designing temperature parameters for existing units, using heat tracing equipment to inspect the units, and maintaining the unit’s thermal insulation. States in the Southwest should examine whether they need rules to compel generators to submit winterization plans.
• State legislatures should adopt minimum uniform standards for the winterization of natural gas production and processing facilities. Regulatory authorities also should determine whether critical natural gas facilities should be exempted from rolling blackouts.

The NERC and FERC staff compiled their data by conducting site visits with various entities involved in the outages. Staffers also toured facilities and conducted interviews with operations personnel and company executives. You can read their report here.

-- Daniel Gonzales and R.A. Dyer

Mothballed Plants to Ease Blackout Worries

ERCOT is taking steps to help gaurd against blackouts during the ongoing heat wave.Responding to record high electricity demand and the scorching heat, the state’s grid operator this week arranged for four mothballed generating units to temporarily come back online to guard against blackouts.

Operated by NRG Energy and Garland Power & Light, the old gas-fired units will be available through October. The Electric Reliability Council of Texas, the organization that manages the grid, said the gas plant operators will be paid to defray their fixed costs and fuel expenses.

“We don’t know if, or how much, these units will be needed, but if needed, the cost will be minor when divided by the 23 million consumers in the region and when compared to the much higher costs and problems from statewide rolling blackouts which these units will help avoid,” said ERCOT CEO Trip Doggett.

PUC Chairman Nelson has called for ERCOT to consider all options to protect grid reliability.Besides improving reliability, the move also could ease pressure in the state’s wholesale spot market for energy, where prices have spiked during the heat wave to $3,000 per megawatt/hour. That equates to about $30 per kilowatt/hour — or more than 600 times the lowest electric rates in the state’s retail market.

Spot market prices do not directly impact home utility bills but can indirectly impact them over time. Doggett said the NRG and Garland units will not displace operational units already bidding into the spot market. Nonetheless, it’s likely the added capacity will ease pricing pressure, especially as other units go down for unplanned maintenance.

In a letter last week, PUC Chairman Donna Nelson called upon ERCOT to take action to reduce the possibility of blackouts. “Look at all available options,” she wrote.

Ray Schwertner, Garland Power & Electric’s Utility Director, said his organization stood ready to help. “As a member of ERCOT, we want to be responsive to their needs, as well as the needs of the citizens of Texas,” he said.

PUC punts on rule opposed by consumers

One-way Ratemaking would lead to One-Way Rate Hikes

The Texas Public Utility Commission has pressed the pause button on new rules that would have made it much easier for electric utilities to hike rates.

A favorite of utility lobbyists, the proposed rules would have opened the door to quick hikes associated with the poles and wires that connect the transmission system to individual homes and businesses. Consumer groups have been united in their opposition.

Some Commission watchers had predicted the rules would get the go-ahead this month. But then in an unexpected change of course, the Commissioners on Dec. 16th instead indicated they would wait for direction from the Texas Legislature, which convenes in January.



Commissioner Anderson

In explaining the decision, Public Utility Commissioner Kenneth Anderson said he had talked with several legislators who indicated they “wanted to take a crack” at considering the rule. “We should set this aside until June, to give the Legislature time to look at it,” he said.

Numerous interested parties — including the office of the Texas Attorney General — have argued at the PUC that the agency lacks the statutory authority to enact the rules. And while Commission Anderson stated he had not heard much opposition, multiple consumer groups nonetheless have warned that the rules would lead to rate hikes — even during periods when electric utilities don’t need extra money because overall profits are on the rise, or when the utilities’ overall expenditures are going down.

The rules are technically known as the “Distribution Cost Recovery Factor” (or “DCRF”) rules, although the electric utility industry euphemistically refers to them as “streamlined” ratemaking. Consumers call it “one-way” ratemaking because under the rules, rate adjustments likely will flow only in one direction: up.

Consumers also note that the alleged benefits of the regulatory gimmick have never been demonstrated. For instance the office of the Attorney General Greg Abbott, who has sided with Texas consumers in the case, notes in a regulatory filing that advocates of the rule have failed to produce any analysis showing it creates litigation savings.

-- R.A. Dyer

Will the the state's $640 million electricity market overhaul bankrupt businesses?

Will some electric providers go belly-up after ERCOT switches over to a complicated new system in December? It’s a possibility says Austin-based energy expert Chris Brewster.

Speaking this week during the Gulf Coast Power Association’s fall conference, Brewster, a principal at the Lloyd Gosselink law firm, noted that some retail electric providers may have a difficult time managing around the risks of the new market design known as “nodal.” The new system, which will dramatically change how the state’s wholesale electricity spot market operates, goes live on December 1.

Chris Brewster

If some REPs don’t default outright, they may attempt to push unexpected costs down onto their customers, said Brewster. He predicted the reaction to the new nodal system may be similar to what occurred in 2008, when several mismanaged REPs attempted to pass unexpected transmission costs onto customers even though they had fixed-rate contracts. Brewster noted that several components of the new nodal system, including the so called “day-ahead market,” do not have analogous counterparts under the state’s current zonal system.

Brewster represents consumer interests at ERCOT, also known as the Electric Reliability Council of Texas. The organization plays a key role in the Texas electricity market, as it has responsibility both for managing congestion on transmission lines and for overseeing some wholesale power transactions.

With the new nodal system, ERCOT will change how it performs both functions. Under the existing system, ERCOT oversees the electricity market it in four broad zones of the state. With the new nodal system, ERCOT will manage it at thousands of separate geographical points, or nodes.

Although supported by large generation companies, independent reports have shown that nodal systems in other states have not lowered electricity prices or eliminated the manipulation of electricity markets. Moreover, the nodal transition in Texas is years behind schedule and so far over budget that it will cost more than twice as much as a similar system in California. It's now budgetted to cost around $640 million, after initial cost estimates of less than $100 million.

You can read more details of Brewster’s comments in an article by Elizabeth Souder, of the Dallas Morning News.

-- R.A. Dyer

Over-budget Nodal System In the News

In December Texas is expected to shift over from its already complicated system for managing the wholesale electricity market to one that’s even more complicated. If the new system works the way it’s supposed to work, computers will spit out distinct prices for wholesale energy sold at thousands of separate locations all across the state. These prices eventually will trickle down into home electric bills.

When this new “nodal” system for managing the electric grid goes live, it will be one of the most expensive and complex of its kind ever created in America.

Copelin

What’s unclear, however, is whether consumers will ever benefit.

Two of the state's largest daily newspapers explore that question and others in articles over the Labor Day weekend about the proposed nodal system. The articles outline the troubling implementation delays, the cost overruns and the lax oversight.

Patel

Industry supporters say the new system will bring new efficiencies to the wholesale electricity market. But Geoffrey Gay, a Lloyd Gosselink attorney who represents cities in utility issues, told the Austin American-Statesman it also could open the door to a new sort of market manipulation. "The guys who can deal with the complexity are not you and me . … It's companies with computer models,” Gay told Statesman reporter Laylan Copelin.

Another troubling issue is the price tag. When first proposed, the nodal system was supposed cost less than $100 million. But as Purva Patel of the Houston Chronicle notes, it’s now expected to exceed $500 million. Texas consumers will end up footing that bill.

Eventful Week for the Power Grid: nuke shutdown, price spikes, new usage record

The South Texas Project: "human error" apparently caused the partial shutdown of the nuclear reactor on Friday.

It’s been an eventful few days for the Texas power grid. Since last week, prices have spiked in the wholesale electricity market, one of the units of a major nuclear plant tripped off due to “human error,” and Texans broke another record for energy usage. Given the comparatively high electric prices already paid by Texans and concerns over continuing problems with the deregulated market, the developments merit examination.

Here they are, in no particular order:

*On Monday, wholesale electricity that more typically sells for less than $30 per megawatt-hour spiked to more than $2,000. That’s an increase of more than 7,000 percent. Prices also spiked several times to the $1,000 level. A price spike for $2,200 is especially startling, given that the regulatory cap is set at $2,250. That is, the wholesale prices legally could not have gone much higher. In most other jurisdictions the caps are set no higher than $1,000 per megawatt hour.

*According to the organization that manages the power grid, the Electric Reliabiilty Council of Texas, a new record for statewide power use was set on Monday. It was the fourth new usage record in as many weeks. ERCOT reported that the new record was broken at about 4 p.m., when demand spiked to 65,715 megawatts. The usage spike came just as the spot market price was spiking to $2,200 — probably not a coincidence.

*Unit 1 of the South Texas Project apparently tripped off on Friday. The event, first reported in a trade journal SNL Power Daily, was apparently caused by human error. “The NRC said in its Aug. 23 event report that the unit experienced an automatic reactor trip that was caused by an inadvertent turbine signal initiated during testing,” reported SNL's Jay Hodgkins, citing the U.S. Nuclear Regulatory Commission. The publication reported that power was restored by Monday. It’s unclear whether the outage contributed to the price spikes, although that seems likely.

*In response to the loss of a major unit on Friday, ERCOT activated the first stage of its emergency response procedure to prevent blackouts. That means that some industrial consumers that previously agreed to have interruptible service lost their power. It was the third time this year that ERCOT has gone to that stage of its emergency response procedures. The major unit that went down was probably the nuke (as referenced in the SNL Energy article) although ERCOT won’t say for sure. That's because such a disclosure would violate ERCOT's rules for competitive information.

The developments are unsettling, especially given that wholesale prices tend to trickle down to residential consumers. A dysfunctional wholesale market can lead to higher home lighting bills. Already Texans pay more than consumers in Oklahoma, Louisiana and Arkansas. Prices also remain higher than the national average. Prior to deregulation, Texans paid below the national average.

-- R.A. Dyer

Of debt and ring-fencing: EFH in Default

Souder

This just in: The Dallas Morning News reports that the debt rating for Oncor’s parent company, Energy Future Holdings, has been downgraded by all three debt rating agencies. Reporter Elizabeth Souder notes in a blog post that EFH has offered to exchange old notes maturing in 2017 for new notes maturing in 2020 — but that the company is paying debt holders less than 80 cents on the dollar.

“In response to these exchange offers, two agencies, Moody's and Standard and Poor's, downgraded the Company to default because EFH didn't pay the entire loans back,” explained Souder. “Both agencies said the default ratings are temporary. Another agency, Fitch Ratings, cut its rating to CCC from B-.”

You can find a link to her blog post here.

In response to the downgrades, Oncor issued a press release “reiterating its separateness” from EFH’s shaky debt situation. EFH is the majority owner of Oncor, which is the regulated transmission and distribution company that serves the Dallas-Fort Worth area. It appears the press release was intended to dispel fears that EFH’s deteriorating financial situation could threaten Oncor and its ratepayers.

Under the terms of Energy Future Holdings’ 2007 buyout of TXU, there were legally binding “ring-fencing” agreements put in place that are intended to separate and protect Oncor’s ratepayers from the risk created by EFH’s massive debt. As a consequence, EFH’s debt cannot be transferred to Oncor, nor can Oncor have any obligation to support that debt, according to the press release. It also notes that Oncor and its assets are legally separate from EFH, and that EFH’s debt holders cannot initiate any bankruptcy, reorganization, insolvency, liquidation or any like proceeding against Oncor.

The situation merits close attention. Citing the massive amount of debt involved, consumer groups previously have questioned whether EFH’s buyout of the state’s largest electric company was in the public interest. Questions also have been raised about whether “holes” in the ring fence have led to higher-than-necessary rates for Oncor’s ratepayers.

You can check out a copy of the Oncor press release here.

PUC sets new energy efficiency rules

State programs intended to increase energy efficiency — but which also stand to increase consumer bills — will operate under new rules as a result of recent action by the Texas Public Utility Commission.

The PUC last year began the process of revamping its rules for its ongoing Energy Efficiency Implementation Program. Under this program, utilities are required to spend money to encourage energy efficiency at the consumer level. For instance, the program provides funding to encourage the marketing of energy-saving appliances. The rules also establish utility goals for reducing overall energy demand and utilities that meet or exceed their goals become eligible for performance bonuses. But the Energy Efficiency Implementation Program can end up increasing electricity bills because both the cost of administering the program and the cost of the bonuses are recoverable by the utility in rates passed on to the consumer.

Rule changes initially proposed by Commission staff and supported by utilities and environmental groups raised the energy efficiency goals dramatically, with a corresponding increase in the program cost cap and available bonuses. The Steering Committee of Cities Served by Oncor, a coalition of municipalities represented by the Lloyd Gosselink law firm, urged the Commission to consider the cost effectiveness of those proposed changes — and the PUC commissioners echoed those concerns.

The rules ultimately adopted by the PUC commissioners on July 30 attempt to strike a balance between the interest of promoting energy efficiency and the interests of ratepayers. For instance, the Commission agreed that the proposed goals will be raised in the future, although they will be raised at a much lower rate than originally proposed. The performance bonus also will remain at current levels, although the administrative cost cap has been raised to account for the raised goals.

Additionally, the Commission imposed a cost cap for both residential and non-residential customers. For the 2011 and 2012 program years the cost cap will be $1.30 per month for residential customers, or .0001 cents per kilowatt/hour — whichever is higher. The cap increases again in 2013. The Commission also instituted cost protections relating to the method by which the cost cap and the bonuses are calculated. For example, under the new rules the cost of the bonuses are to be included in the cost cap for utilities.

The rules will go into effect December 1.

-- Eileen McPhee

Energy Efficiency at the PUC

Energy efficiency was the topic of the day at the Public Utility Commission during a workshop held in Austin on June 30. The agency is considering changes to the state’s energy efficiency program, which requires transmission and distribution utilities to provide customers with incentives to be more energy efficient.

Here’s a bit of background on the issue: the state’s transmission and distribution utilities do not administer energy efficiency programs for free, but rather are permitted to recover the costs from ratepayers. Additionally, utilities that exceed their demand reduction goals are eligible to receive a bonus. The bonuses awarded to utilities can range anywhere from $5 million to $10 million.

Oncor, a transmission and distribution utility, offered a presentation on the estimated cost of meeting the proposed demand reduction goals. Frontier Associates and Good Company, both consulting firms, gave presentations on the benefits of meeting demand reduction goals and the cost effectiveness of Texas’ energy efficiency program. Representatives from the State Energy Conservation Office and the Texas Department of Housing and Community Affairs reported on federal money being spent within the state on energy efficiency measures, such as weatherization. Finally, the Retail Electric Provider Coalition offered a presentation on the potential cost impact of the proposed amendments to consumers.

Written comments have been previously filed in this project and can be found here. The Commission is expected to make a decision on the rules in July or early August.

 -- Eileen McPhee

New Report: Deregulated Generation Companies Profit During Recession

Electric deregulation was supposed to benefit consumers — that was the promise during the 1990s when several states adopted the market system. But according to a new report, some of the biggest winners last year were the major generation companies.

Released by the American Public Power Association, the May 2010 study finds that generation companies operating under deregulation in the Northeast earned healthy profits in 2009 — despite facing the nation’s worst economic crisis since the Great Depression.

The APPA report also concluded that generation companies under deregulation made much more money than generation companies still subject to regulation. Given the relatively high earnings, it's not surprising that deregulated generation companies oppose any return to regulation. One company warned that if “market deregulation is reversed or discontinued, our business prospects and financial condition could be materially adversely affected.”

Texas implemented electric retail competition in 2002 after authorizing electric deregulation in 1999. Since 2002, rates have remained consistently above the national average Prior to adoption of the deregulation law, rates in Texas were consistently below the national average. Rates in Texas also have increased by a far greater extent than they have in neighboring regulated states such as Louisiana and Oklahoma.

The APPA is a trade group associated with public electric companies such as municipally owned utilities. You can read the organization’s full report here.

CREZ Update: Lines could impact 12 counties

A transmission line project proposed just this week for the Amarillo area is already stirring controversy, according to a news story in the Amarillo Globe-News. Writer Kevin Welch  reports in the newspaper's June 17th edition on the application by Sharyland Utilities to build lines from southern Carson County to southeast Deaf Smith County.  The utility has proposed the route shown above, although that route could change as more landowners express their views at the Texas Public Utility Commission.

"In all the cases we've been involved in, in none of them have the commissioners chosen the preferred route," Lloyd Gosselink attorney Georgia Crump told the newspaper. "They're trying to weigh all the criteria. It's not a science, it's an art." Among Crump's clients is a property owner with lines passing north of Palo Duro Canyon State Park.

Sharyland's application was among three filed by utilities this week for major transmission projects. The lines included in the applications will transmit power from wind generators in West Texas and the Panhandle, and are associated with the state's Competitive Renewable Energy Zone program, or  "CREZ" for short.

The transmission lines proposed by Sharyland could impact property owners in Armstrong, Carson, Deaf Smith, Oldham, Potter and Randall counties. Separately, Oncor filed an application for lines that could impact landowners in Tarrant, Wise and Parker Counties. A third company filed an application for a transmission project near Abilene, with lines that could impact Kent, Dickens and Scurry counties.

With the filings this week, a procedural clock begins at the PUC under which the agency has 180 days to conduct hearings, consider testimony and render decisions.