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Texas News and Analysis
October 2002
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Background
As many states pulled back from
energy deregulation in the aftermath of the California energy crisis and the Enron
bankruptcy, Texas charged ahead with a unique and controversial plan for electric
competition. The state's restructuring plan has switched all eligible customers from their
traditional utilities to a retail electric provider and initiated a system that allows
providers to switch customers with ongoing payment problems to a more expensive provider
of last resort.Texas
enacted its retail competition law in 1999 with the aim of providing electric supplier
choice for most residents by 2002. The law requires investor-owned utilities controlling
more than 20 percent of generation capacity in a power region to unbundle into three
components: 1) retail electric provider, certified by the Texas Public Utility Commission
(PUC), 2) power generation company, and 3) transmission and distribution company, fully
regulated by the PUC. This unbundling means that even customers who did not choose a
competitive retail provider when competition started on January 1, 2002 were automatically
switched to the "affiliated retail electric provider" of their former utility.
(In Texas, energy suppliers are routinely referred to as retail electric providers, or
REPs. An affilated electric provider is the company spun off of a traditional
electric utility.)
Residential and small commercial
customers of the affiliate provider receive a standard rate offer, or what the PUC has
labeled the "price to beat." This rate is designed to give the affiliate's
customers a discount while allowing competing providers to offer lower rates. The initial
price-to-beat rate included a rate reduction of at least six percent and remains in effect
until 2007. However, rates can be adjusted up to twice yearly for wholesale fuel price
increases. There is currently no mechanism for downward adjustments when fuel charges
decrease.
The providers affiliated with
traditional utilities cannot offer rates lower than the price to beat until they lose at
least 40 percent of their customers to competing providers. |
In hindsight, we should have given deregulation a longer trial period before we plunged in.
Erle Nye, TXU Corporation, referring to a
deregulation pilot program, June 2002
We underestimated
the magnitude of the task involved in the switching process.
State Representative Steve Wolens, one of the authors of the
1999 Texas deregulation law, June 2002Deregulation is a clear case of overpromising. This is reminiscent
of what we were told years ago about nuclear power, that it would be 'too cheap to meter.'
Reggie James, Director, Southwest Office of Consumers
Union, June 2002
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.
Barbara Alexander, Consumer Protection Analyst,
September 2002
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As of October 2002, the following issues are of importance to Texas consumers:
Choice status
Electric competition is currently
limited to five utility territories: 1) TXU Electric (with 2.7 million residential
customers in Dallas/Fort Worth and north Texas); 2) Reliant Energy/Houston Light and Power
(with 1.7 million residential customers in and around Houston); 3) Texas/New Mexico
Power/First Choice Power (200,000 residential customers in west and in southeast Texas; 4)
AEP-West Texas Utilities (limited choice in this area), and 5) AEP-CPL Retail Energy in
the Corpus Christi and south Texas areas. Implementation of the restructuring law has been
delayed in parts of east Texas because competition has not yet developed in these areas
outside of the ERCO grid (see below). Similarly, the Texas Panhandle and El Paso areas
were excluded from electric competition until 2007 because they are not connected to the
ERCOT transmission grid that serves the rest of the state. Rural electric cooperatives and
municipal utilities were allowed to decide whether they wanted to participate in retail
competition, and none has, so far. As of September 2002, 245,472 of the 4,879,338 residential customers
eligible for choice (about five percent) had enrolled with new providers. |
The switching process
In most states, deregulated or
not, traditional investor-owned utilities do the job of switching customers. In most
deregulated states, an electric provider (or supplier) sends in the paperwork that
authorizes the switch, and the utility makes the change. In Texas, the Electric
Reliability Council of Texas (ERCOT), the power grid operator for most of the state,
manages a database of all electric customers and processes all customer switch orders for
all utilities. After being notified by a customer, an electric provider must contact
ERCOT, which mails a verification notice to the customer and then notifies the
current utility that its customer wants to switch service.
Under the traditional utility
system, a new customer received service within 24 to 48 hours after requesting it. Under
the new, more complicated system, the process can take up to between 30 and 45 days,
including timing for a final meter read. Customers who are moving from one place to
another must make sure that they have service well before they move.
The ERCOT system has also led to billing backlogs. ERCOT's chief
executive admitted in June that as many as 300,000 bills had been lost or delivered late
because of computer errors. Most of these were for people who had moved, rather than those
who had changed electric providers. Part of the problem is the path that the billing
process must follow before a statement reaches the customer: The transmission and
distribution company reads the meter and sends the usage data to ERCOT, which sends it on
to the electric provider, which then bills the customer.
ERCOT has announced that it will upgrade its computer systems by
this fall to deal with the billing and switching logjams. Until those systems are
bug-free, the agency continues to rely heavily on "manual workarounds" -- ERCOT
staff send customer data, usually in the form of spreadsheets, to the distribution
companies and ask them to verify it.
To meet its obligations, ERCOT has vastly increased its staffing
levels. One hundred new employees have been recruited over the past 10 months, another 100
will be employed over the next year, and the agency expects to have a staff of around 400
by the end of 2003.
Not surprisingly, ERCOT has also requested a hefty increase in
its funding. Currently funded by an average 22-cent monthly fee on residential electric
bills, ERCOT has asked the PUC to allow it to increase the fee to 33 cents per residential
customer, based on average usage.
The agency's enormously increased spending has not escaped the
notice of consumer advocates. The Texas Legal Services Center (TLSC) and the Texas Office
of Public Utility Counsel, an independent state agency that represents the interests of
residential and small business customers, have both criticized ERCOT for what they say are
excessive expenditures on advertising, promotional goods, printing, corporate events and
sponsorships. In June, the agency agreed to a settlement that will redirect $5.2 million
into projects designed to correct technical defects. ERCOT also agreed to hire an internal
auditor, answerable to its board of directors, and to limit spending on promotion, parties
and marketing.
Provider of last resort
The most controversial feature of the Texas restructuring plan is
provider-of-last-resort (POLR) service. Until this provision was revamped in the summer of
2002, residential customers dropped by their electric provider due to chronic payment
problems were transferred to another provider that charged more expensive rates. Before
the provider-of-last-resort rule was changed, ERCOT then transferred those customers to a
POLR. The providers of last resort demand immediate payments of new deposits and could
disconnect customers, following traditional utility procedures, when deposits or utility
payments were not received on time.
The main criticism of the POLR
was that it demandrd higher payments from people who can least afford them. Another
concern was that the system gives retail energy providers no incentive to retain these
customers and work with them to avoid disconnections. According to Barbara Alexander, a
nationally known expert on energy consumer protection, this kind of system encourages
providers to simply cancel customer contracts, probably at a higher rate than traditional
utilities have. They thus rid themselves of payment-troubled customers and increase their
profits.
Concerned about the higher rates
charged by the POLR, the Office of the Public Utility Counsel and the Texas Legal Services
Center filed a suit against the PUC on January 2002, alleging that the POLR rates
"unfairly discriminate against low-income customers" and fail to provide
customers with access to an affordable rate package as required by the restructuring
legislation.
In response to these criticisms,
PUC commissioners held workshops to discuss alternative structures for POLR rates,
incentives for retail electric providers to provide POLR service, and standardized terms
and conditions of POLR service. In August, the Commission ruled that customers terminated
for non-payment by competitive retailers must be transferred to an affiliated provider at
the price-to-beat rather than the much higher POLR rate. Once they are switched, these
customers can be disconnected after a 10-day notice if they do not make payment
arrangements.
Under the new rule, the POLR
will serve as a temporary safety net for customers whose supplier leaves the Texas market
without transferring its customers to another competitor. Customers switched to a POLR
before the new rule was adopted have until the end of December to choose another supplier.
If they don't, they will automatically be signed on by the POLR's competitive affiliate.
The idea is that these customers will thus be guaranteed service while they shop around
for another supplier.
The only customers now subject to POLR transfer are those dropped
by a supplier that pulls out and those who voluntarily select the high-priced service.
Many of these will be customers who have already been credit-screened and are thus
considered desirable customers, so it is not entirely clear why, or even if, they should
be subject to the higher POLR rates. When New Power, an Enron subsidiary, declared
bankruptcy in the summer of 2002, its Texas customers were simply transferred to the
affiliate provider in their areas and continue to pay rates below the price-to-beat.
According to Randy Chapman, director of the Texas Legal Services Center, there is nothing
to prevent POLR providers from making rate distinctions among the customers it acquires if
and when suppliers drop them -- that is, the POLR could offer competitive rates to
customers with good credit and charge the higher POLR rates to customers with poor credit.
The PUC has asked for bids to supply POLR service in the utility
territories where competition is allowed. Reliant, the only bidder in the POLR auction,
will provide POLR service in all parts of Texas subject to competition, except in their
home territory of greater Houston. There, the PUC plans to assign a POLR by holding
a lottery with prices set of 125 percent of the price-to-beat. Only incumbent utilities
can serve as POLRs, so AEP, Texas New Mexico Power, and TXU will be entered in that
lottery.
Rates
The Texas deregulation law mandated
a six percent rate cut when competition began on January 1, 2002. After the law was
passed, the PUC adopted a "fuel factor" rule, which allows the incumbent
utilities to request rate increases when the price of natural gas goes up by at least four
percent and then remains steady for at least ten days. Such spikes occurred several times
in the first half of 2002. TXU, the state's largest utility, requested a six percent rate
increase in May. In August, the PUC approved a five percent increase for the company and
similar increases for the other large state utilities, effectively negating the rate cuts
provided for by deregulation.
The PUC has decided to review the four
percent fuel factor rule, to explore whether to "stretch" the 10-day period, and
to decide whether natural gas wholesale prices alone should be used to calculate an
increase in electric prices. The process will be part of a formal rulemaking process, with
a decision expected in December 2002.
| Texas Average Annual Price per kWh by
Residential Sector |
| |
1997 |
1998 |
1999 |
2000 |
2001 |
2002* |
| Residential |
5.4 |
5.7 |
5.7 |
5.8 |
6.3 |
7.5 |
Sources: U.S.
Department of Energy, Energy Information Administration
*averge through June |
Natural gas
Although there are no unbundling
programs for residential and small-volume commercial customers, several communities in
Texas have acted to provide their residents with gas cost advantages. Texas is somewhat
unique in that the Railroad Commission of Texas (RRC) has jurisdiction over intrastate
transportation city gate sales for resale and retail rates outside of city limits, but
individual communities and municipalities regulate retail natural gas service within their
boundaries. As a result, some communities are forming innovative arrangements with their
natural gas providers.
Other resources
Alexander, Barbara.
Default Service: Can Residential and Low
Income Customers Be Protected When the Experiment Goes Awry?,
April 2002. This paper was originally published in April 2001 and updated in
October 2001. This version reflects the most recent information available for state
activities with respect to Default Service through 2001 and early 2002. However, readers
are cautioned that the states described in this paper routinely consider changes to state
restructuring policies that have a significant impact on the nature, price, and purpose of
Default Service.
Alexander, Barbara. Default Service: Can Residential and
Low Income Customers Be Protected When the Experiment Goes Awry? , April 2001, and an Update to the April paper issued in October 2001. These papers summarize and make
some preliminary conclusions about the development of a default or provider of last resort
service for residential and small commercial customers as part of the move to retail
electric competition. Both papers highlight the status of default rates and impacts of
restructuring-related developments on residential and low-income consumers in the states
of California, Massachusetts, New York, Pennsylvania, and Texas.
Consumers Union. Tall Tales of Texas: Electricity
Deregulation – cute as a possum or plum ugly? This
PowerPoint presentation – presented to the National Association of State Utility
Consumer Advocates on June 17, 2002 – looks at the Texas market structure. It
provides a general overview of the residential market, debunks the myths surrounding
Texas’ deregulation, and criticizes the Public Utilities Commission for not delaying
the market opening based on the failed results of the six-month pilot program among other
issues.
Consumers Union, Austin. New Electricity Market Offers Consumers
Fine Print and Frustration, March 2002. This six-page
report offres consumers information on the suppliers and rates available since
deregulation began in some areas of Texas on January 1. The report helps consumers
decipher company offers and it analyzes the fine print in electric supplier offers.
National Center for Appropriate Technology. The Transition to Retail Competition in Energy Markets:
How Have Residential Consumers Fared?, September
2002. A study of the impacts of electric and natural gas markets restructuring on
low- and moderate-income consumers in five states including Texas. While Texas has
adopted exemplary consumer education and protection programs as part of its electric
restructuring program, its initial model for Default Service pricing was especially
harmful and discriminatory to low- and moderate-income consumers, the study notes.
However, the state PUC recently adopted a change in this policy, which puts the Texas
program more in line with other states’ Default Service policies
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