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08-B CAPP endorsing certain legislative changes AGENDA INFORMATION SHEET DESCRIPTION: A Resolution Endorsing CAPP's 2007 Legislative Agenda. PURPOSE: The City of Paris is a member of Cities Aggregation Power Project, Inc. ("CAPP"). The CAPP Board of Directors has voted to authorize certain legislative efforts on behalf of its members during the 80th Texas Legislative Session. CAPP will capitalize on the presence its members established in the last two legislative sessions to apprise legislators of CAPP Cities' perspective on electric issues and to recommend legislative action. BACKGROUND: Together with its sister aggregation group, the South Texas Aggregation Project ("STAP"), CAPP is one of the largest electric aggregation groups in Texas. CAPP and STAP have more than 140 member cities. CAPP has served as a vehicle to increase cities' ability to navigate the deregulated market and bargain for the best rates and contract terms. CAPP members enjoy the benefits of favorable contractual terms and negotiated commodity rate that has produced savings for its members for the past five years averaging 20 percent compared to what members would have paid according to the Price to Beat rates. As an active market participant, CAPP is in the unique position to identify problems that have developed in the deregulated marketplace. In order to ensure the Texas retail electric market is a truly competitive market with low prices throughout Texas, CAPP has created a legislative agenda that aims to encourage competition by limiting market power, eliminating cost shifting, and creating competitive options for all customers. Several changes should be made to the deregulation statute (SB 7) to better protect cities' budgets, enhance cities' ability to protect their citizens, and increase competition among retail providers. The following changes are proposed by the CAPP Board: · To institute limits upon the ownership and control of generation within functional markets (ERCOT zones) and require further Commission action to mitigate market control. This change will address market power concerns and promote greater competition. This objective is a principal component of the comprehensive electric legislative package filed by Chairman Fraser and Chairman King (SB 483 and HB 1190). · To authorize "opt-out" aggregation Projects that will permit cities and towns with populations less than 50,000 to aggregate the load of all of their residents that have not specifically asked to be excluded from the aggregation project. Currently, the statute permits citizen aggregation projects, but requires all customers to affirmatively "opt-in" to the aggregation group. This has created a significant disincentive to create citizen aggregation projects. Changing citizen aggregation from opt-in to opt-out will enhance the opportunities for rural residential customers to benefit from deregulation and benefit the entire state by increasing competition (SB 1401 and HB 3498). · To ensure that a modest amount (15 percent of installed capacity) of low-cost baseload generation capacity is made available for sale to competitive Retail ....._".. ...4."1" 1""....."..~ ...... Electric Providers at their variable cost plus ten percent. Texas municipalities and customers currently pay generators prices for "baseload" electric energy needs that are inflated well beyond their actual costs because the power is priced as if it were produced by high-priced natural gas-fueled plants even though it is actually produced at a much lower cost by lignite, coal and nuclear plants (HB 3348). · To declare the current "uniform pncmg system" in the balancing energy market unreasonable and direct the Public Utility Commission to adopt rules that will provide for a pricing system that does not produce windfall profits for generators and needlessly inflate energy cost to Texas businesses and consumers (HB 3349). · To remove unnecessary administrative obstacles in the Local Government Code that prevent cities from taking full advantage of electric competition. CAPP recognizes the importance of diversifying its energy portfolio and is investigating opportunities to add long term power contracts to ensure more price stability, but current provisions of the Local Government Code may make the contracting process unnecessarily cumbersome (SB 787 and HB 1749). RECOMMENDED ACTION: The staff of the City of Paris recommends that the City Council adopt the attached resolution. STAFF CONTACT: City Manager Ernie Clark and Financial Director Gene Anderson. COUNCIL DATE: To be presented to City Council on Monday, March 26,2007. ADDITIONAL MATERIAL: Copies of CAPP Policy Issues for 80th Legislative Session. T- -- DRAFT F:ATIORNEY\RESWORKICURRENT\CAPP Endorsing Legislative Changes March 15, 2007 RESOLUTION NO. A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PARIS, TEXAS; ENDORSING CERTAIN LEGISLATIVE CHANGES TO ENHANCE THE COMPETITIVE ELECTRIC MARKET SUPPORTED BY CITIES AGGREGATION POWER PROJECT, INC. (CAPP); MAKING OTHER FINDINGS AND PROVISIONS RELATED TO THE SUBJECT; AND PROVIDING AN EFFECTIVE DATE. WHEREAS, the City of Paris, Texas, (City) has historically been active in the process of regulation of electric utilities; and, WHEREAS, the City is a member of Cities Aggregation Power Project, Inc. (CAPP) and, as such, made a decision to join with more than 95 other cities to switch its municipal electric accounts from its incumbent provider to a retail electric provider; and, WHEREAS, CAPP's experience with the deregulated market and contracts with several different retail electric providers has indicated that the Texas electric retail market has failed to develop into a truly competitive market as envisioned by the Texas Legislature in part because congestion zones within the ERCOT market have allowed certain market players to control enough generation capacity within a given zone to exercise market power to the detriment of customers and non-affiliated retail electric provides; and, WHEREAS, retail electric price competition has not successfully reached residential customers in Texas communities with populations less than 50,000; and, WHEREAS, Texas municipalities and customers currently pay generators prices for "base load" electric energy needs that are inflated well beyond their actual costs because of the power is priced as if it were produced by high-priced natural gas-fueled plants even though it is actually produced at a much lower cost by lignite, coal, and nuclear plants; and, WHEREAS, power generators are receiving windfall profits and energy costs for Texas businesses and consumers are needlessly inflated because of a mechanism known as the "uniform-price auction," which pays every generator the highest price ERCOT is required to accept to meet demand regardless of what portion of the purchase required that price; and, WHEREAS, CAPP recognizes the importance of diversifying its energy portfolio and is investigating opportunities to add long term power contracts to ensure more price stability, but current provisions ofthe Local Government Code may make the contracting process unnecessarily cumbersome; and, WHEREAS, the City endorses efforts proposed by CAPP to modify the electric deregulation legislation to enhance competition, implement the original intent of SB 7 and reduce costs to the City and its residents; NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF PARIS, TEXAS: Section 1. That the findings set out in the preamble to this resolution are hereby in all things approved. Section 2. That the following legislative reforms endorsed by CAPP to limit market power, create effective citizen aggregation, be supported by the City: · Limit the ownership and control of generation within functional markets (ERCOT zones) and require further Commission action to mitigate market control (SB 483 and DB 1190). · Authorize citizen aggregation projects that will permit cities and towns with populations less than 50,000 to aggregate the load of all of their residents that have not specifically asked to be excluded from the aggregation project to enhance the opportunities for rural residential customers to benefit from the deregulation and benefit the entire state by increasing competition (SB 1401 and DB 3498). · Ensure that a modest amount (15 percent of installed capacity) of low-cost baseload generation capacity is made available for sale to Competitive Retail Electric Providers at their variable cost plus ten percent (DB 3348). · Declare the current "uniform pricing system" in the balancing energy market unreasonable and direct the Public Utility Commission to adopt rules that will provide for a pricing system that does not produce windfall profits for generators and needlessly inflate energy cost to Texas Businesses and consumers (DB 3349). · Remove unnecessary administrative obstacles in the Local Government Code that prevent cities from taking full advantage of electric competition (SB 787 and DB 1749). Section 3. That a copy of the resolution shall be sent to the elected lawmakers representing the City's interests in the Texas House and Senate and to the Chairman and legal counsel ofCAPP. Section 4. That this resolution shall be effective from and after its date of passage. PRESENTED AND PASSED this 26th day of March, 2007, by a vote of_ayes and _ nays at a regular meeting of the City Council of the City of Paris, Texas. Richard Manning, Mayor ATTEST: Janice Ellis, City Clerk APPROVED AS TO FORM: Kent McIlyar, City Attorney Important Policy Issue for 80th Legislative Session: Texas Municipalities Urge Reform of Uniform-Price Energy Auction That Produces Unwarranted Windfall Profits for Generators Imagine that you are the owner of a barbeque restaurant in Austin. You ask your supplier to purchase three cords of special fire wood. Your supplier reports that one rancher has one cord for $120 while another rancher could part with a cord for $140. But the only other rancher willing to supply the last cord charges $500. Then your supplier tells you that because he has to pay $500 to the third rancher, a quirk in the state law requires him to also pay the first two ranchers $500 even though they were willing to take less originally. Crazy? That is exactly what is happening in the ERCOT deregulated wholesale market in Texas. And it is costing Texans. Under the mechanism known as the "unifonn-price auction," every generator is paid at the highest price ERCOT was required to accept to meet demand regardless of what portion of the purchase required that price. In other words, if power generators A, Band C bid an average price of $81 per MWh for 90 percent of the. energy demand, but generator D demanded $285 per MWh for the final 10 percent of the order, all four bidders would be paid $285, even though generators A, B, and C all offered much lower prices. CAPP members urge action to reform this unfair system that produces windfall profits for generators and needlessly inflates energy cost to Texas businesses and consumers. *Cities Aggregation Power Project (CAPP) is a political subdivision corporation and registered aggregator for its almost 100 member cities and utility districts, all of whom are located in the areas of Texas that are open to retail electric competition. CAPP's members are concerned about the effect of rising energy costs on their own budgets as commercial consumers, but are also troubled by the prospect that Texas's increasingly expensive electric rates may compel large energy consumers to locate their businesses in other states or countries, taking with them needed jobs, tax revenue, and the potential for further economic development. r' -. ,-.. Important Policy Issue for 80th Legislative Session: Texas Cities Seek Savings in Electric Bills for Their Citizens With Opt-out Aggregation Over the past five years, more than 90 Texas municipalities have saved money on their electric bills by combining their electric needs for volume discounts in the electric market. The $80 million dollars saved by these municipalities is a direct result of a provision in the state's deregulation legislation allowing Texas municipalities to join together and aggregate their electric purchases. Unfortunately, the same opportunity for savings through aggregation is not easily available to citizens. Cities' aggregation has been limited to the energy used to power city-operated facilities such as water pumps and traffic lights. Current law specifies that the city can pool the power needs of its citizens and purchase power on their behalf only if each citizen affirmatively chooses to be part of the aggregation group (known as opt-in aggregation) . As experience has shown, that is an unrealistic expectation. Consumers will not sign up for aggregation until they know how much they will save. And no Retail Electric Provider can tell how much money will be saved unless/until it has a reliable estimate of the number of customers who will be part of the aggregation gr<;mp. Opt-out aggregation for citizens has worked in other states and will work to bring savings to Texans. To provide Texas consumers the same savings that their municipal governments have secured for themselves, CAPP* urges the Legislature to amend current law to allow ratepayers to aggregate their demand and gain negotiating power for electric rates, unless they choose to opt-out of the aggregation program. That action still will permit every citizen freedom of choice whether to participate and will fulfill the promise of citizen aggregation as originally envisioned by the legislation. *Cities Aggregation Power Project (CAPP) is a political subdivision corporation and registered aggregator for its almost 100 member cities and utility districts, all of whom are located in the areas of Texas that are open to retail electric competition. CAPP's members are concerned about the effect of rising energy costs on their own budgets as commercial consumers, but are also troubled by the prospect that Texas's increasingly expensive electric rates may compel large energy consumers to locate their businesses in other states or countries, taking with them needed jobs, tax revenue, and the potential for further economic development. Important Policy Issue for 80th Legislative Session: Texans Need Relief from Excessive Market Power in the State's Wholesale Market Contrary to the original objectives and expectations of passage of Senate Bill 7 in 1999, the deregulation of electric energy rates in Texas has not produced the benefits envisioned for either the wholesale or retail markets. And while the reasons that prices have increased dramatically since S.B. 7's inception are numerous and interconnected, one of the primary contributors is the concentration of ownership of power generation in ERCOT's wholesale market. Some generators-known as pivotal suppliers-control so much capacity that the market must accept at least part of their offers to meet demand, no matter the price. Thus, they can virtually dictate prices most of the year. Certain generators are even more dominant within the smaller zones that make up the ERCOT market. Under some circumstances, each smaller zone can in effect become its own market, and companies with large amounts of generation in particular zones can have increased influence over those smaller markets. .CAPP* members are deeply concerned that such concentration of power has damaged the market's ability to create competitive pricing, which in turn has resulted in higher prices for city governments, local businesses and Texas consumers. The problem is particularly acute in areas where generators control so much capacity - either because they own it themselves or have contracted for capacity from other generators -that their dominance approaches a monopoly. CAPP members urge the legislature to focus on this serious problem that undennines the objectives of deregulation and to enact measures to prohibit a generator from owning more than 20 percent of ERCOT's system's total capacity or the capacity located within each zone ofERCOT. *Cities Aggregation Power Project (CAPP) is a political subdivision corporation and registered aggregator for its almost 100 member cities and utility districts, all of whom are located in the areas of Texas that are open to retail electric competition. CAPP's members are concerned about the effect of rising energy costs on their own budgets as commercial consumers, but are also troubled by the prospect that Texas's increasingly expensive electric rates may compel large energy consumers to locate their businesses in other states or countries, taking with them needed jobs, tax revenue, and the potential for further economic development. '!". '.- Important Policy Issue for 80th Legislative Session: Texas Needs Reform in Unfair, Artificial Pricing of Baseload Electric Energy Texas municipalities and industry currently pay generators prices for routine, or "baseload" electric energy needs, that are inflated well beyond their actual costs. The reason? Such power is priced as if it were produced by high-priced natural gas-fueled plants, when it is actually produced at a much lower cost by lignite, coal al1d nuclear plants. The state's inflated prices for baseload energy have become a serious issue with leaders of Texas industry, who will likely build future manufacturing plal1ts elsewhere. To make these inflated prices even more unfair, this artificially high-priced energy is produced by baseload plants that consumers will be paying for in the form of so-called "stranded costs" for years. Municipalities across Texas whose budgets are held hostage to these falsely-inflated prices, along with business leaders, urge the legislature to reform this unexpected and negative result of deregulation. CAPP* proposes legislation that will require owners of low-cost baseload generation capacity to sell IS percent of that capacity to Retail Electric Providers at their variable cost plus ten percent (and not a price that is benchmarked to natural gas power production). This refonn will still provide fair prices to generators. More importantly, it will restore much-needed fairness to Texas consumers who will be paying unjustified "stranded costs" payments to utilities for years, and will help return Texas to a competitive position in economic development. *Cities Aggregation Power Project (CAPP) is a political subdivision corporation and registered aggregator for its almost 100 member cities and utility districts, all of whom are located in the areas of Texas that are open to retail electric competition. CAPP's members are concerned about the effect of rising energy costs on their own budgets as commercial consumers, but are also troubled by the prospect that Texas's increasingly expensive electric rates may compel large energy consumers to locate their businesses in other states or countries, taking with them needed jobs. tax revenue, and the potential for further economic development. r..-...........-.."..-"....-....