Background
The 1999 Texas electric restructuring statuteⁱ calls for the implementation of retail electric competition for all customers beginning January 1, 2002. Under the Texas approach, customers obtain electricity service from "retail electric providers," or REPs. A REP has the sole retail relationship with its customers and obtains the necessary transmission and distribution services, at wholesale, from the former public utilities. The REP is responsible for all of the necessary contacts with customers, as well as billing and collection for the total electricity service. As of January 1, 2002, customers in most Texas utility territories were switched to the "affiliate" REP -- the retail REP formed by the former local electric utility to provide electric services to customers under the "Price to Beat."

The affiliate REP must provide service to all customers who are transferred to this service under the Price to Beat rate, which is at least six percent less than the rates in effect in 1999. ⁱⁱ   In effect, the affiliate REP provides Default Service under a rate reduction scheme that resembles that in most states. However, customers who are transferred to the affiliate REP have left their "utility" and entered the competitive market, albeit at a rate that is regulated for a transition period. The Price to Beat remains in effect until January 1, 2007 (five years) or until at least 40 percent of the residential load served by the former electric utility is being served by a non-affiliate REP. Unlike the rate caps in effect in Pennsylvania and several other states, the Price to Beat rate is subject to adjustment, based on the cost of fuel, at least twice per year.

A unique aspect of the Texas restructuring model is the role played by the Electric Reliability Council of Texas, or ERCOT. The wholesale power market in most of Texas is under the control of the Texas PUC and not subject to the jurisdiction of the FERC. As a result of this anomaly, Texas is truly a "world unto itself" for electric regulation. ERCOT plays a crucial role in retail competition, as well as its paramount role in assuring reliability of service and proper pricing of transmission service in the wholesale market. ERCOT sought to provide the retail customer database for all REPs and supplant the role typically played by the local distribution utility in most states to implement customer access to competitive providers.

Under the Texas approach, a customer selects a REP, which then submits a switch order to ERCOT. ERCOT implements that switch by informing the customer of the impending transfer via postcard and allows the customer 10 days to cancel without penalty. ERCOT also electronically informs the new REP of the customer’s premise, usage and meter information, which ERCOT obtains from the distribution company. Finally, ERCOT informs the old REP of the customer’s "drop" of service. ERCOT has constructed a database that assigns every retail electric customer a unique identifier so that customers can be properly matched with their REP of choice (or their local affiliate REP if they do not choose).

One of the most closely watched aspects of the Texas version of retail electric choice was the operation of the ERCOT switch procedures, which were tested in a pilot program that began in July 2001. A certain percentage of customers of each utility were allowed to select a competitive REP. While residential customers showed a reasonable level of interest in this program, particularly in utility areas that received marketing attention from several REPs that offered service below current rates, there was significant delay and controversy in the operation of the ERCOT database and switching program. Most of the switches that occurred in the early months were manually handled, and the automated switch process was not operating at full speed until late in 2001. Most customers who selected a REP were not switched in time to receive more than one bill during the pilot period and before the need to decide whether to move to full-scale competition on January 1, 2002.ⁱⁱⁱ

While there was some debate as to whether the Texas Public Utility Commission (PUC) should have recommended a delay in the January 1 implementation, the PUC did recommend that the full-scale competition program and the switch of all customers to the affiliate REP occur on January 1, 2002.^iv

Prices and Supplier Activity
The number of competitive providers that participated in the pilot program varied by utility service territory, but was modest at best. Furthermore, one of the larger participants, Shell, dropped out of the retail market, and its customers had to go back to the utility or select another REP. As of January 2002, eight REPs were marketing in the TXU Energy (Dallas area) and Reliant Energy (Houston area) service territories, but only two or three REPs were marketing in Texas-New Mexico Power, West Texas Utilities, and Central Power and Light areas. According to the PUC’s report to the Texas Legislature’s Restructuring Oversight Committee on February 5, 2002,^v the range of savings (compared to the Price to Beat) varied among the REPs, depending on a customer’s usage profile. For example, several REPs in the Reliant service territory were offering higher prices (Green Mountain Energy, for 100 percent renewable power), but most offered savings in the 2-10 percent range for an average bill. In almost all cases, customers who used significantly below the average usage level of 1,000 kWh (i.e., at 500 kWh) would experience rate increases from all REPs because of the effect of the REP rate structure.^vi The PUC reported that approximately 150,000 customers had switched to competitive providers as of mid-February 2002.

Starting in May 2002, the Commission began issuing monthly Report Cards on Retail Competition. As of June 2002,^vii the PUC reported that there were eight alternatives to the Affiliate REP in two market territories and two to four alternatives in the other three service territories. There was only one renewable energy product available in four of the five market areas, and the number of products offered by REPs had decreased since earlier in the year. The Commission found that many products were being offered at higher prices, compared to April, but calculated that $277 million in annual savings would be realized, compared to the Price to Beat rates, if all residential customers moved to the lowest cost offer in their area.

Yet this savings level pales in comparison to the $1 billion saved statewide when the Price to Beat rates were instituted with the onset of retail competition in January 2002. The PUC report indicates that a total of 300,000 switch requests for all customers have either been completed or are in process, with over 260,000 completed as of June 17, 2002. This represents a 20 percent switch in MWh sold in the five market areas. These switch statistics do not distinguish between residential and non-residential customers.

One of the most aggressive marketers was New Power Energy, which offered two plans: "Basic Service Plan" (which shows a savings of 12 percent for users over 1,000 kWh per month in the Reliant territory) and "Texas Super Saver" (which shows a slightly lower level of savings at all usage categories, but locks in rates for a longer fixed period). This company, which was owned in part by Enron and AOL-Time Warner, first announced that it would acquired by Centrica, a U.K.-based energy company that also markets energy under the names of Energy America and Direct Energy. However, Centrica pulled out of the deal when it was unable to obtain a certificate from Enron’s bankruptcy court that would remove it from any liability from Enron’s debts or activities. New Power was widely assumed to be moving to bankruptcy itself when it abruptly announced that its 80,000 Texas customers would be transferred to Reliant Energy (north Texas) and TXU Energy (Houston area). The Texas PUC approved the transfer and waived all applicable customer notices required by its consumer protection rules.^viii

The reliance on ERCOT to handle all customer switches has led to glitches and delays that remain the subject of criticism and concern. Customers seeking to initiate new services have been particularly hard hit because of reported delays of weeks, even at existing locations. As a result, landlords are being requested to leave the power on between tenants, and the initiation of new customer accounts in most areas is being handled manually. There are still reports that customers who selected a new REP in November had not been switched in February.

Consumer Protection Programs and Policies
Texas has adopted extensive consumer protection regulations^ix that are applicable to REPs, all of whom must be licensed by the PUC. The following information is contained in a Texas PUC brochure that summarizes customer rights:

All Retail Electric Providers (REPs) must adhere to Public Utility Commission of Texas (PUC) rules and regulations designed to protect you against fraudulent, unfair, misleading, discriminatory or anti-competitive practices. These protections include:

• Non-Discrimination: In addition to standard discrimination prohibitions, a REP may not deny service or discriminate in the marketing of electric service based on a customer’s income level, location in an economically distressed area, or qualification for low-income or energy efficiency services.

• Slamming and Cramming: Slamming is switching your electric service provider without your permission. Cramming is adding charges to your electric bill for optional services without your permission. Both slamming and cramming are illegal.

• Dispute Resolution: REPs must promptly investigate customer complaints and customers have the right to make complaints about a REP to the PUC.

• Privacy of Information: No REP can release any customer-specific information to another REP or any other companies without your permission.

In addition, all REPs must follow a new set of customer protections, by providing:

• The Electricity Facts Label: This gives a REP’s pricing information, contract terms, sources of generation and levels of emissions in a standardized format so that you can compare REP offers. The pricing information for the particular REP will provide an average price per kWh in a cents per kWh format for a residential customer usage level of 500, 1,000, and 1,500 kWh.

• A Terms of Service document: This is your contract. It informs you of a REP’s contract terms and conditions.
  

• A "Your Rights as a Customer" disclosure: This informs you of your standard customer protections as mandated by the PUC.
  
• Non-English language materials: All REPs must make customer information available in Spanish. Additionally, a REP must make all materials available in the language(s) in which they market electric service.

Your REP will be responsible for functions such as billing and customer service. The Public Utility Commission of Texas (PUC) has established rules requiring REPs to provide you with a bill format that is standardized and easy to read. Additionally:

• You will receive a monthly bill via U.S. Mail.

• You have the choice of receiving your bill electronically, if both you and your REP agree.
  
• Your bill will include the "average price you paid for electric service this month" listed in cents per kilowatt-hour. This will allow you to compare your existing price to that of competing REPs.
  
• Your bill will include a toll-free phone number you can call during business hours with questions or complaints.
  
• Your bill will include a toll-free number you can call 24 hours a day, seven days a week, to report power outages and concerns about safety of the electric power system.

The Texas consumer protection rules prohibit any REP, including the affiliate REP, from physically disconnecting a customer for nonpayment. All REPs must notify customers of impending contract termination and offer level or average payment plans. The affiliate REP (offering the Price to Beat) is required to also offer deferred payment plans (current bill plus some portion of the overdue amount) for overdue balances as well. Customers who are terminated are then automatically sent to the Provider of Last Resort, the only REP that does have the authority to physically disconnect service for nonpayment. The customer’s overdue balance owed to any non-POLR REP is not transferred, but the customer remains liable for the unpaid debt, and the REP can seek repayment through lawful debt collection programs and report the customer’s nonpayment to a credit reporting agency.

Texas offers all customers the right to be listed on the Do-Not-Call list for a nominal fee, and 150,000 electric customers have registered for this list to prevent REPs from telemarketing them.^x  However, registered REPs do have access to a mass marketing list of all residential and small commercial electric customers that contains the customers' names, account numbers, usage profiles, and addresses and telephone numbers. Customers were informed that they had to register for the Do Not Call List to avoid telemarketing.

The PUC has jurisdiction over all REPs and has the necessary enforcement tools for a competitive market (i.e., the power to seek suspension or revocation of a license, assess penalties, and conduct investigations with access to the necessary books and records). The PUC also receives, investigates and resolves customer complaints concerning REPs, particularly claims of slamming, cramming, deceptive marketing, or other violations of the consumer protection rules. However, the PUC’s customer complaint division has been under public scrutiny and heightened criticism due to the backlog of customer complaints, most of which have to do with telephone service. Consumer representatives fear that the Commission has not allocated sufficient resources to complaint handling and enforcement of consumer protection rules for the burgeoning competitive market.

Consumer Education
A professionally designed and implemented consumer education program accompanied the introduction of the Texas electric restructuring program. The budget for this program is $18 million for three years, with a potential extension for a fourth year. This program has resulted in a campaign theme (Texas Electric Choice: The Power is Yours. Use It), a website, brochures and fact sheets, presentations and speeches and, beginning this spring and summer, multi-media advertisements on radio and TV designed to raise awareness and customer understanding of how to shop for electricity. The PUC is seeking a contractor to evaluate the effectiveness of this consumer education campaign, particularly its success in increasing awareness, propensity to act (shop), and real knowledge. Survey results will track information for low-income, elderly, and other vulnerable constituencies. This information will be not available until later in 2002. The Commission has worked closely with a Customer Education Working Group in the design and implementation of its consumer education program.

Unfortunately, the consumer education program’s advice concerning the role and pricing of POLR service cannot "fix" the adverse impact of this service. The Commission’s brochure concerning POLR advises customers that they can avoid this service by paying their bills on time and establishing a good credit history.^xi

Provider of Last Resort
Customers who do not qualify for the Price to Beat rate or who are terminated by the REP for failure to pay or maintain service conditions are not physically disconnected. Instead, they are transferred to the Provider of Last Resort service. This service is supposed to be provided by an entity selected by the Commission according to a bidding procedure designed to replicate the competitive market. The PUC issued final rules that govern the bidding process for this service and sought bids according to a Request for Proposals in mid-2001.

Pursuant to the Commission's rule, the POLR service provides a basic, standard retail service package to any customer no longer served by the customer's REP or whose REP defaults in its obligations to the distribution utility or other license conditions. The POLR service is viewed as a safety net service, but it is also available to any requesting customer. POLR rates distinguish between three customer classes: residential, small commercial, and large commercial customers above 1 MW. The POLR price is a firm, non-discountable, seasonally differentiated rate that must be fully hedged or fixed for the time period of the bid, established as a minimum of one year. The POLR service does not include any competitive service offerings, innovative rate structures, or options other than basic, standard rates and service options. The POLR provider has an obligation to serve, but may deny service based on the same criteria applicable to utilities under the PUC's pre-restructuring consumer protection rules. There are no minimum service terms or fees associated with this service, except that a customer who chooses a levelized or budget payment plan (which the POLR provider must offer) may be required to agree to a six-month term of service. Only the POLR provider may disconnect service for nonpayment.

Although customers who are "dropped" by a REP are automatically transferred to the POLR, such customers can seek to return to the Price to Beat service at any time, after they pay any deposit or other credit requirements imposed by the affiliate REP. Such customers can also seek service from any REP in the competitive market. Customers are not required to pay the "old" REP’s unpaid debt to leave a REP and choose another or return to Price to Beat rates under the affiliate REP.

The PUC intended to award the POLR service based on competitive bids. However, the competitive bidding process failed to obtain enough acceptable bids. Finally, on July 27, 2001, the Commission appointed Assurance Energy, an affiliate of TXU Energy, as POLR for residential and small business customers in portions of the service territories of Reliant HL&P, Central Power & Light, and Entergy Gulf States, and negotiated contracts with Entergy Solutions to serve customers in northeast Texas (SWEPCO) and with First Choice Power to serve customers in the western portion of TXU's turf. Rates were established for the first six months of 2002, but the contrast among the POLR rates, the current utility rates, and the forthcoming Price to Beat (six percent less than current rates) were stark. Assurance Energy's contract reflected POLR rates for residential customers at 14.9-15.9 cents per kWh (inclusive of generation and distribution charges) in the summer and 11.9-12.9 cents per kWh in the non-summer months, plus a $10 monthly customer service charge. As a result, the POLR charges an average of $164 and $134, respectively, for a customer using 1,000 kWh for POLR service. However, a residential customer of Reliant HL&P paid only $110 for 1,000 kWh in July 2001. This represents a 50 percent rate increase for a customer who must use POLR service because the REP has cancelled the contract or stopped providing service for any reason. POLR customers served by other appointed POLR providers in other service territories are likely to pay even higher rates. compared to Price to Beat customers.

The PUC later signed contracts with StarEn Power (an affiliate of Reliant) to provide POLR services for the TXU customers in the Dallas-Fort Worth area and First Choice Power (an affiliate of TNMP) to provide POLR services to the TXU west service area other than Dallas-Fort Worth. These contracts also approve extremely high electric rates compared to current or projected Price to Beat Rates.

In addition to the higher rates for electricity, the contracts contain a number of additional fees and charges that result in higher bills for affected customers, such as an account initiation fee (amounting to a switch fee for being changed to POLR service), and requirements for deposits or prepayment for service that must be paid within 10 days of initiating service for customers with poor or no credit history. This poses a barrier to service that will likely apply to customers sent to the POLR because of failure to meet the REP's bill payment requirements. The POLR can seek to disconnect service for nonpayment of these deposit or prepayment requirements.

The initial POLR rates negotiated and approved by the PUC were highly criticized by consumer organizations and several legislators who were members of the Restructuring Oversight Committee. In addition, the Office of Public Advocate filed appeals of the Commission's POLR orders, alleging procedural and due process defects in how the contracts were negotiated and approved. Furthermore, the drop in price for natural gas (a key determinant of electric rates in Texas) also suggested that the POLR rates were too high. As a result, the PUC re-negotiated the POLR contracts, and the final rates, while still 20-30 percent higher than the Price to Beat in all cases, are lower than the original POLR rates:

Comparing 2001, Price to Beat, and POLR Residential Rates:^xii

These rates do not include the separate fees charged by most POLRs for new account initiation, deposits, or separate fees for certain collection activities, such as issuing a disconnection notice or conducting a premise visit.

Consumer organizations are concerned with more than the POLR price, however. They fear that REPs, including the affiliated REP, will cancel customer contracts at a much higher frequency than traditional utilities used the disconnection tool, in order to rid themselves of credit-risky and payment-troubled customers, thereby making it easier for the affiliated REP to provide the Price to Beat rates and still make a profit. As is typical of utilities in most states, Texas utilities have issued a vast number of residential disconnection notices each month, but disconnected a very low percentage of those "eligible" for disconnection under the consumer protection rules. Furthermore, Texas utilities actually disconnected residential customers at significantly different rates, according to statistics gathered by the Texas Legal Services Center.

Consumer advocates argue that any REP, including the affiliated REP, will have no incentive to retain customers and work with them to avoid termination of service, because there is no risk to the REP in canceling customer contracts and transferring the payment problem and the increased collection costs associated with such customers to the POLR. Will payment-troubled customers be able to obtain lower priced service from alternative REPs, or will the electric version of the "phone sharks" appear, promising these customers a lower rate than the POLR, but a much higher rate than the Price to Beat service? Customers can seek to transfer to the Price to Beat service from the affiliate REP, but will they understand this right and be able to do so with the credit requirements imposed by the new REP? Will they understand the penalty incurred by moving to POLR service (in the form of much higher prices) before the bill becomes unaffordable and disconnection inevitable? These are the questions troubling both the consumer representatives and the PUC as they move into retail competition.

While the Commission refused to renegotiate the POLR contracts or review the POLR rule prior to January 2002, at least one Commissioner promised the Legislative Oversight Committee that a review of the POLR rule and potential changes would be done early in 2002. A workshop was held to review potential alternatives to the structure of the POLR service and the POLR selection process on February 26, 2002. In June 2002, the PUC published a formal proposal to change the POLR rule.^xiii  These changes would require any REP that terminates a residential customer's service to transfer that customer to the affiliate REP at the Price to Beat rates, thus avoiding any transfer to a higher priced POLR service for residential customers. Furthermore, under this approach, the affiliate REP would be able to physically disconnect such customers.

The POLR concept would be retained for service to non-residential customers and to any customer, including a residential customer, whose supplier defaults or a customer who does not choose an energy provider. This proposal, which was universally endorsed by consumer groups, was accompanied by a proposal to allow any REP to disconnect a customer for nonpayment beginning in 2005, unless the Commission determined that such a policy change would be "injurious to the market or would result in unlawful disconnections of residential and small commercial customers." The consumer organizations roundly criticized this provision and urged the Commission to approve the POLR rule changes without expanding a REP's ability to seek physical disconnection of service for unregulated prices.

On August 23, 2002, the PUC adopted an amendment to the POLR rule that will switch defaulting residential customers to the affiliate REP at the Price to Beat, thus ending the transfer of nonpaying customers to the higher priced POLR. Furthermore, the Commission delayed any decision about the right of all REPs to disconnect for nonpayment until completion of a PSC staff report in June 2004. Unfortunately, this change was also accompanied by separate actions to raise Price to Beat Rates by five to six percent, as allowed by the fuel cost provisions of the Texas restructuring rules.

Universal Service Programs
As part of the electric restructuring legislation, low-income electric customers (defined as those with household income at or below 125 percent of federal poverty guidelines) are eligible for a rate discount of 10 percent (or more, depending on available funding), which must be provided by all REPs.^xiv Texas is also attempting to use automatic enrollment procedures to reach eligible customers. All recipients of Food Stamps, TANF, and Medicaid or Low Income Medicare will be automatically enrolled in the low-income electric discount under the LITE-UP TEXAS program. Automatic enrollment is being accomplished through an electronic data transfer from the Texas Department of Human Services to ERCOT, the keeper of the customer database. However, there have been reports that the transfer is encountering problems in enrolling eligible customers promptly,^xv and low-income advocates have called for expedited enrollment procedures and urged all REPs to solicit eligibility and enrollment directly from customers. Low-income customers who are not already enrolled in the underlying financial assistance programs may self-certify their income eligibility by filling out an income calculation worksheet.

In the summer of 2002, the PUC significantly expanded the amount of the discount, from 10 to 17 percent, on the grounds that there was sufficient funding available for this purpose.^xvi  As a result, the "value" of the discount significantly increased, a fact that will prove important if the Commission acts to increase Price to Beat rates due to fuel factor filings by most utilities in mid-2002. As of June 2002, approximately 470,000 customers were receiving the low-income discount, and $7.3 million in discounts had been provided.^xvii

Preliminary Observations and Conclusions
The Texas version of retail electric competition is unlikely to provide much in the way of precedents for other states, although it is widely regarded in the media as the focal point for discussion of the "right" way to restructure. The Texas jurisdiction over the wholesale market, the role of ERCOT, and the role of the REP as the sole point of contact with retail customers have not been replicated elsewhere. Nonetheless, the importance of the Texas model cannot be dismissed.

From the perspective of low-income customer representatives, the new rate discount and the protections associated with the Price to Beat rates are welcome. They provide a safe haven at least for the transition period. The major concern for residential consumer advocates is the proposed right of all REPs to disconnect customers for nonpayment, which will be decided after June 2004.

It might have been expected that the sudden collapse and bankruptcy of Enron, headquartered in Houston and one of the foremost champions of retail electric competition in Texas, would have repercussions. However, except for the January resignation of the PUC's Chairman, Max Yzaguirre, due to his failure to report certain connections with Enron, there has been little impact. In part this is due to the lack of activity by Enron in the retail sale of electricity in Texas (and elsewhere) and in part to the broad support for retail competition in Texas among state policymakers, legislators, and utility leaders.

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i Senate Bill 7, amending the Public Utility Regulatory Act (PURA), ''39.101, et seq.

ii The PUC set the Price to Beat rates in December 2001 and reflected a greater than 6% rate decrease for most utilities to reflect recent price drops in natural gas. For example, the average cents per kWh for Reliant Energy was reduced 17%, from 10.40 cents to 8.62 cents per kWh. This rate is all inclusive of distribution, transmission and energy charges. Overall, rates were reduced from an average of 8.5 cents per kWh in effect in late 1999 to 8 cents per kWh on 1/1/02.