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factor. Thus, each affiliated REP was free to game the process and select the ten-day period that best maximized its opportunities for inflating the Price to Beat rate. The Public Utility Commission reports that the market price of natural gas is the single most important driver of generation costs. Assuming that this is the case, one would expect that the Price to Beat fuel factors set for the affiliated REP would be similar to regulated fuel factors set for the same utility if both rates are based upon the same natural gas price. However, as demonstrated by the table below, the Price to Beat fuel factor for each of the affiliated REPs is significantly higher than the regulated fuel factor set for its affiliated utility even when the same (or similar) natural gas price is used. Comparison Between Regulated and Price to Beat Fuel Factors Using., Similar Natural Gas Prices2 Regulated Natural Gas Price to Natural Gas Percentage Fuel Factor Price in Beat Fuel Price in PTB Increase (cents/kWh) Regulated Rate Factor PTB Rate Over ($/MMBtu) (cents/kWh) ($/MMBtu) Regulated Factor Reliant 2.60 3.77 3.27 4.02 26% TXU 2.40 3.83 2.89 3.63 20°/~ CPL 2.90 3.82 3.89 3.80 35% WTU 3.30 3.68 4.64 3.80 41% The huge disparity between the regulated and competitive fuel factors is explained because affiliated REPs have applied the percentage increase in the natural gas price to 100 percent of the incurred fuel costs. The affiliated REPs are doing this even though the REPs' fuel mix may be comprised of coal, lignite, nuclear, and natural gas. As a result, relatively stable coal and nuclear fuel costs are escalated at the same rate that gas costs are escalated. Cities consultants' analysis in the fuel factor cases confirmed that it is exceedingly unreasonable to simply assume that the energy prices paid by affiliated REPs and other market participants move in lock-step with increases in natural gas prices. The assumption that the costs of purchased energy used to serve retail customers will vary with the price of natural gas is based on the false premise that REPs serving Price to Beat market can rely solely upon spot or short term contracts for purchased power. In fact, the Public Utility Commission's analysis of the issue seems to discount that presumption. The Commission points to the fact that, unlike California, Texas utilities were not required to divest their generation and then to buy power on the volatile spot market. The Commission contends that utilities are able to enter into long-term power contracts and thus can presumably lock in low prices. Nevertheless, a system has been instituted that sets the Price to Beat rate as if 100 percent Because the natural gas prices underlying TNMP-First Choice's regulated fuel factors were confidential, a price comparison cannot be made for TNMP-First Choice. However, a similar trend of unwarranted price escalation between the regulated and Price to Beat fuel factors charged by TNMP-First Choice has been observed by __Ceities served by this provider. 1813\O0~nac~ano030113grog 1 3