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07-G Senate Bill 7AGENDA INFORMATION SHEET PROJECT: Consider a resolution endorsing legislative changes proposed by the member cities of Cities Aggregation Power Project (CAPP). BACKGROUND: The City of Paris is a member of Cities Aggregation Power Project, Inc. ("CAPP"). Together with the South Texas Aggregation Project (" STAP"), CAPP is one of the largest electric aggregation groups in Texas. CAPP and STAP have approximately 120 member cities, representing 13,000 municipal accounts. Total electric consumption of the two groups is around 1.2 billion kWh annually. CAPP has served as a vehicle to increase cities' abilities to navigate the newly deregulated market and bargain for the best rates and contract terms. CAPP members enjoy the benefits of favorable contractual terms and a negotiated commodity rate that produces approximately 15 percent average savings compared to the current Price to Beat rates. Despite these double-digit savings, CAPP members have encountered obstacles, both cost and non-cost related, that have significantly decreased benefits promised with the restructuring of the Texas electric market. Major problems that have plagued cities and their citizens over the past year include: Delays in switching CAPP accounts to new providers Erroneous, duplicative, sporadic, or simply missed bills Declines in service quality Price increases for residential customers Market power abuses DESCRIPTION: The CAPP Board of Directors has voted to authorize certain legislative efforts on behalf of its members during the 78th Texas Legislative Session. CAPP's goal is to apprise legislators of CAPP Cities' perspective on issues arising as the result of the electric deregulation process and to recommend legislative action to address failures of the retail market. Several changes should be made to the deregulation statute to better protect cities' budgets, enhance cities' ability to protect their citizens, and increase competition among retail providers. The following changes will be proposed by the CAPP Board: To institute limits upon the ownership 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. To correct a discrepancy between the Public Utility Regulatory Act and the Local Government Code so that a political subdivision aggregator may control aggregation projects created to benefit citizens. This change will remove a significant disincentive for cities that are interested in bargaining for cheaper power for citizens. To authorize Opt-Out Aggregation Projects that will allow political subdivisions to aggregate the load of all of their residents that have not specifically elected to be excluded from the aggregation project. This change should remove a further disincentive to citizen aggregation projects and enhance opportunities for residential customers to benefit from deregulation. To reform the Price to Beat adjustment process to 1) require the affiliated REP to provide evidence that its proposed cost increase is justified; 2) allow cities and/or the Public Utility Commission to initiate an action to reduce inflated Price to Beat rates; and 3) authorize rate case reimbursement for municipal rate case expenses incurred in Price to Beat rate cases. This change should enhance efforts to protect price to beat customers from unnecessary increases and provide for greater restraint on the market price of electricity. To delay deregulation of metering services. Confusion among market participants and problems in the exchange of information between ERCOT, retail electric providers and transmission and distribution companies has led to switching, billing, and service quality problems. Deregulation of metering services would add further complexity to a confused situation and increase the problems being experienced by CAPP members. COSTS: There is no cost to the City of Paris incident to the CAPP proposals. RECOMMENDED ACTION: Legal counsel for CAPP has prepared a white paper for your review that discusses problems with deregulation and recommends changes to the statute. Upon consideration of that report, the CAPP Board, made up exclusively of City representatives, requests that the City Council pass the attached resolution endorsing CAPP's legislative agenda. The City Staff recommends passage. STAFF CONTACT: Larry W. Schenk, City Attorney; Gene Anderson, Finance Director; Michael E. Malone, City Manager SCHEDULE: Consider approval of the proposed resolution at City Council's February 10, 2003, regular Council Meeting. ADDITIONAL MATERIALS: See attached proposed resolution and accompanying CAPP generated white paper entitled "Report Regarding Cities' Experiences in the Deregulated Electric Retail Market." DRAFT F:kAttorneykALICEhO. ESWORK\CURRENT\CAPP Legislative Res.wpd February 5, 2003 RESOLUTION NO. A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PARIS, PARIS, TEXAS, ENDORSING CERTAIN LEGISLATIVE CHANGES TO S.B. 7 SUPPORTED BY CITIES AGGREGATION POWER PROJECT, INC., MAKING OTHER FINDINGS AND PROVISIONS RELATED TO THE SUBJECT AND PROVIDING AN EFFECTIVE DATE. WHEREAS, the City of Paris, Paris, Texas, 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 switch its municipal electric accounts from its incumbent provider to a retail electric provider prior to January 1, 2002; and, WHEREAS, the City's experience with electric deregulation during 2002 has been frustrating because of: (1) increased complexity and inefficiencies regarding service quality; (2) numerous account switchover and billing problems; (3) loss of budget and financial accountability regarding electric cost; (4) additional resources needed to manage and reconcile invoices for electricity; (5) current statutory restrictions make aggregation on behalf of citizens impractical; (6) the small number of bidders and narrowness of distinction between bids; and, WHEREAS, the City endorses efforts to modify the electric deregulation legislation to improve competition and reduce costs to the City and its residents; NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF PARIS, PARIS, TEXAS: Section 1. That the findings set out in the preamble to this resolution are hereby in all things approved. Section 2. That Legislative reforms regarding market power, citizen aggregation and price- to-beat fuel factors endorsed by CAPP are hereby approved and supported by the City Council of the City of Paris. Section 3. That a copy of this 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 of CAPP. PASSED AND APPROVED this 10th day of February, 2003, by a vote of__ __ nays at a regular meeting of the City Council of the City of Paris, Texas. ayes and ATTEST: Michael J. Pfiester, Mayor Mattie Cunningham, City Clerk APPROVED AS TO FORM: Larry W. Schenk, City Attorney REPORT REGARDING CITIES' EXPERIENCES IN THE DEREGULATED ELECTRIC RETAIL MARKET Prepared by Cities Aggregation Power Project, Inc. January 13, 2003 1813\00~raacLrnmo020809gmg Executive Summary Texas cities are in a unique position to provide meaningful feedback regarding the successes and failures of the Texas deregulated electric retail market. Many of the cities that prepared th~s repor~ are members of two of the largest electric aggregation groups, Cities Aggregation Power Project (CAPP) and South Texas Aggregation Project (STAP). Together these two political subdivision corporations have approximately 120 member cities whose total electric consumption is estimated at 1.2 billion kWh annually based on approximately 13,000 municipal accounts. The member cities, listed in Attachment A, have become active, eager customers in the electric retail market as well as continuing their traditional regulatory role in scrutinizing the rates to be charged their citizens. CAPP and STAP cities have met with obstacles, both cost related and non-cost related, that have significantly decreased projected benefits promised with the restructuring of the electric market.~ Amplifying some of the critical points raised by the 2003 Scope of Competition Report produced by the Public Ut'dity Commission, from Cities' perspective, competition thus far has been marked by less than auspicious beginnings. Confusion regarding service issues has reigned over the past year. Restructuring necessary to achieve deregulation has led to economic waste, created baffling reams of new roles to control complex relationships, and resulted in numerous inefficiencies. Customer complaints filed with the Public Utility Commission have increased by more than 300 percent over the past year. While CAPP and STAP cities have endeavored to make deregulation a success, they are not pleased with the result. Customer service has declined, and market participants are more interested in passing responsibility to others than in seeking solutions. Preparing requests for proposals is difficult because of inadequacies in the information supplied by T&D companies. Price volatility frustrates the ability to analyze and compare competing bids. Invoicing from providers has been problematic with delays, inaccuracies, and incomprehensible adjustments. Municipalities have had to spend substantial resources in comprehending and reconciling bills. Deregulation in Texas has severed all connection between prices and costs. Transmission and distribution rates set by the Public Utility Commission were based upon estimates rather than historic costs. Many of the anticipated generation plants which in large measure formed the basis of the current transmission rates have been cancelled or postponed. The competitive component of electric pricing has been turned over to traders who set electric prices largely on dally fluctuations of the natural gas and other energy markets. With few exceptions, retail competition is but a rivalry among a handful of entities that are a~iates of incumbent utilities. In short, prices to consumers exceed what they would have been had the electric regulation continued. The municipalities involved with CAPP and STAP aggregate only political subdivision electric accoums, not citizen electric accounts. Statutory constraints and Public Utility Commission interpretations make municipal aggregation of the electric load of citizens unattractive to local officials from both political and practical perspectives. Issues addressed in this report lead CAPP and STAP cities to the conclusion that legislative changes are necessary if deregulation is going to produce a competitive retail market with savings that are greater than the prices would have been if the retail market had remained regulated. · Processes that have caused delays and failures in switching some or all of city accounts, resulting in the loss of anticipated savings, should be clearly delineated and streamlined. Customer service failures must be rectified to ensure the safety of citizens and the efficient management of city resources. · Unjustified increases in costs to end-use customers should be eliminated to help stabilize market prices and to increase potential savings and headroom. · The manipulation of Price to Beat fuel factors that has lead to the dramatic and unwarranted increases in residential rates must be remedied. · Market power protections need to be strengthened so that abuses are prevented in functional markets as well as theoretical ones. · Competitive metering, scheduled to be introduced in 2004, should be delayed or eliminated completely. Removing the metering function from the distribution companies and opening the market to a myriad of new parties to initiate reading and recording metered usage w'dl only serve to bring further confusion to a market that is still attempting to find stability. 1813\O0~lac~Imo030113grog 3 The Transition to Competition Has Been Marked By Failed or Delayed Switching and Billing, Resulting in New and Difficult Budgeting Burdens on Cities. One of the pervasive problems with the retail market has been the tardiness in switching customers to their new provider and the inability of the customer to receive the full benefit of the contract signed with the new provider. Despite several months of lead-time prior to the start of competition, numerous CAPP and STAP accounts were not timely transferred to their provider of choice. Switching Delays Resulted in the Loss of Anticipated Savings. · In December 2001, the City of Nacogdoches submitted 130 points of delivery for transition to a new PEP. After three months of not receiving any bill for electric service, Nacogdoches received the first bills from the new REP on April 15, 2002. However, the initial billing statement included only 63 of the 130 accounts submitted. It took four more months before all of Nacogdoches' accounts were finally switched to the provider the City had requested in December 2001. · The City of Aransas Pass only recently received final bills for two accounts that were supposed to be transferred in January. · Some City of Plano accounts were not transferred until October and November of last year. · Fifteen accounts for the City of Denison, 18 City of Plano accounts, 31 City of Alice accounts, and 60 City of Grand Prairie accounts have yet to be switched to their selected provider, more than one year at~er competition began. · From a budgeting standpoint, Cities have been forced to estimate usage and accrue projected expenses for large accounts. · The City of Allen was building a new natatorium at the end of 2001, and its new account information was included with the accounts that were transferred to a new provider in December 2001. The first billing for the natatorium was not received by the City until July 2002. The City was billed for August and September usage, but has not yet received a bill for October and November. More concerning from a budgeting perspective, the City has yet to receive a single bill for its newly constructed Central Fire Station (completed at the end of 2001). The facility has been estimated to use 1.5 million kWh per year, but no bills have been issued confirming this projection. · It took almost six months for accounts for the new police and courts facility to be switched from the contractor to the City of Euless. 1 g 13\O0~na¢~ano030113grog 4 Missing, Erroneous, and Duplicative Bills Made It Difficult for City Representatives to Track Electric Usage and Document Electric Expenses. Even when accounts were switched, CAPP and STAP members experienced months of incorrect, sporadic, or simply missed billings. The process of converting the billings from the incumbent provider to the REP has been described by the City of Euless as "impossible to follow." The City of Paris' characterization of the process as "a nightmare" is similarly succinct. The readings have not been consistent, bills were received from both the incumbent and the new providers and beginning balances appeared without explanation. Euless was finally forced to adopt the position of paying only currem charges since there was no way for city staff to independently document, substantiate, or reconcile the adjustments applied by the incumbent provider and the REP. Examples of the billing problems encountered by other CAPP and STAP cities include: · The City of Alice did not receive a single bill until March, 2002. · One hundred accounts of the City of Lewisville were not billed for September 2002 and were double billed the next month without explanation. During that same time period, three large Lewisville accounts were billed at almost five times their usual amount for no discemable reason. ·League City and the City of Friendswood failed to receive a single bill until June 2002. · At, er nine months of missing bills, the City of Sherman was presented with a 500 page bill for service on more than 150 accounts through September, 2002. · In November, the City of Allen simultaneously received six monthly bills for one account that should have been billed once per month for June 2002 to November 2002. · The City of Merkel received one bill for seven months of streetllghting service. · The City of Denison was incorrectly billed for the City of Denison Housing Authority accounts, resulting in more than $3,000 of erroneous payments. · The City of Commerce was overbilled by $44,700 because account information was changed during the switchover to show 474 streeflights, instead of the five lights that were actually on the account. ·The City of Killeen recently received a bill for $322,401.94 on an account that should be approximately $2,000. · The City of Alice was billed $6,678.30 for an account that should have been $6.98. 1813\00XmaeXmmo030113grog 5 · The City of Comanche has not received a single bill for its street lighting accounts for the entire year. Even in situations where a city elected not to switch providers, it was not immune to the missing and inaccurate billings that have frustrated so many other customers. Sulphur Springs remained with its incumbent provider. Nevertheless, starting in January 2002, the City failed to receive regular monthly billings and was often billed for two to three months of usage in one bill. The problems have been aRributed to faulty service transfers through ERCOT, incorrectly determined and applied tariffs, and incorrect billings. Regardless of the reason, Cities have been forced for the first time to allocate significant time and resources to audit utility bills to ensure that accounts are not double-billed and that usage is accurately represented. Improper Readings and Rate Charges Were Applied to Hundreds of City Accounts. CAPP and STAP cities also noted several instances where the T&D utility applied improper charges. CAPP and STAP consultants identified more than 810 questionable accounts and found incorrect T&D rate assignments, improper meter readings, and improper demand readings. Problems related by CAPP and STAP cities include: · The City of Allen discovered an incorrect demand charge on a Park Lighting account that resulted in a total bill that was more than ten furies the expected billing. · The City of Denison recovered an overcharge of $38,000 for one account and awaits correct readings on other questionable accounts. · Because Oncor assigned the wrong rate schedule to four street lighting accounts, the City of Arlington was overbilled $1.3 million. While CAPP and STAP cities benefited from qualified consultants that were able to dedicate sufficient time and attention to discovering the erroneous billings, most small and medium sized cities do not have the specialized staff necessary to locate and challenge inaccurate billings across city accounts. 1813\00~nac~nmo030113~ng 6 Deregulation Created Unanticipated Budgetary Problems. The chaotic billing problems experienced this year made it nearly impossible for cities to comply with budgetary and auditing requirements. Cities operate under a mandate of financial accountability and most undergo significant audit oversight to ensure that the costs incurred in a fiscal year are expensed against that fiscal year. The delays in billing and receipt of crediting/adjustments experienced this past year have complicated the financial accountability issue. Many cities were unable to determine with reasonable certainty the actual cost and amount of electricity used in 2002, making it difficult to establish budget figures for the 2002- 2003 fiscal year. The City of The Colony reports that some of its large accounts had yet to receive a single bill before the city's budget was required to be finalized. Many cities were forced to rely upon incomplete data to project 2003 electricity expense, oi~en missing information for high consumption months. The delayed billings, in some cases up to six months in arrears, made "closing the books" on FY2002 difficult and will probably result in significant FY2002 expenses for electricity that may end up being paid with FY2003 funds. The City of Sherman conveys that the failure to receive complete billings for its accounts through September, 2002, has presented some external audit issues related to the accrual of some portion of utility payments to ensure that twelve months of activity are reflected on the City's financial statements. Many market participants are quick to put these problems behind us, attributing them to the typical star~-up glitches inherent in a new market. While it may be that some of the initial problems will be solved, Cities believe that endemic billing and account transfer problems will repeat themselves each time a new provider is selected because of the multiple steps through which each account transfer must pass before it is completed. Such problems, and their attendant costs, diminish the anticipated benefit of lower competitive prices in the restructure market. Customer Service Quality Has Degraded Under Deregulation Resulting in Unacceptable Delays For Cities and Residents. Cities are reporting that service quality problems have multiplied since the start of competition. In particular, the time necessary to complete new service connections has increased without explanation. Service connections that used to be processed with a couple of phone calls and performed within 24 hours prior to deregulation now take weeks. The City of Weslaco described the lengthy process as taking at least six different steps necessitating the continuous involvement of city representatives to go back and forth between the T&D service provider and the REP. Even after proper procedures are followed, Weslaco and other cities report that the some or all of the request may be rejected by ERCOT for minor technical problems caused by the T&D service provider or the REP. The increased time and aggravation involved with establishing new accounts is especially problematic for Cities t~Ang to protect the public by installing traffic signals and street lights, run airports, and increase emergency response services. 1813\O0~nac~uno030113grog 7 Service Request Delays Are Pervasive Across the State. · The City of Piano repo~s that it took six to eight weeks and intervention by city representatives for new service connections to be established for two traffic signals. In addition, it took nearly three weeks for Oncor to finalize a service disconnection request by Piano. The City also experienced problems in having service turned off to traffic signal risers in cases where repairs are necessary to correct damage to the riser from an accident. In the past, the City was able to contact its local utility representative and power would be cut off immediately. After deregulation, the City has been forced to schedule an appointment and wait 10 - 15 days before power is disconnected and the riser repaired. Piano has also observed the degradation of service restoration after storms. Power outages affecting several major intersections have ranged from 20 minutes to 8 hours. · Grand Prairie experienced a one-month delay in processing of a service disconnection request. The failure of the T&D service provider to timely remove service drops at locations that were to be demolished could have resulted in serious injury to workers.. · Despite providing Oncor with at least two weeks notice regarding the removal of a service drop, an employee of the City of Waxahachie was almost electrocuted because the request was not processed in a timely manner. · The City of Pads relates that the continuing confusion on behalf of the T&D service provider and the REP regarding the new account process has delayed service to its new accounts. · Similar problems delayed new service at the City of Euless' new park maintenance facility for approximately three weeks. · Permanent electrical power was delayed for more than five months at five new projects undertaken by the City of Alton during the last year. As of the end of November, three of the five projects, totaling more than $2.5 million, were uncompleted and unusable because the projects were still awaiting the installation of permanent electrical power. Service Installations Fail to be Completed in a Timely Manner. Service installation requests have become bogged down even at the most basic levels. While clearly a TDSP function, the City of Waxahachie reports having received ambiguous responses from market participants regarding who can install and inspect power for new subdivisions, in easements, and in the city's right of way. Nor is the delay in receiving permanent power exclusive to city accounts. Some residents of Waxahachie's housing units waited more than a month for permanent power installation. While the installation was delayed, an electrician put in temporary service as a necessary, albeit unsafe, stop-gap measure. A potentially dangerous situation was also presented when the City of Euless' T&D service provider terminated power to an emergency siren because of "missing paperwork." The City 1813\00Xmac~amo030113~ng g was never informed of the termination and only discovered that the siren was without power during a routine test of the warning system. Utility Employees Are Ignoring Or Misdirecting Customers. Deregulation has also been marked by a general lack of responsiveness to customer requests and abdication of responsibility. A representative from the City of Killean described the situation, noting, "The ability to get quick mm-around service to the customer, and that can be the City or the resident, is non-existent. There are just too many wickets to pass through, and too many check points for service to be speedy." For example, after a power outage in Plano, Oncor informed customers that called its power outage number to contact the City. Oncor also failed to timely act to remove downed power lines after a thunderstorm in Plano and let damaged electric poles languish for weeks before replacing/repairing the poles. The City of Merkel also repons that it took more than two and a half hours for AEP to respond to a downed power line. Many cities convey similar experiences with uninformed wires company representatives who appear oblivious to their responsibility to handle outages and uncertain as to who is responsible for service connections and disconnections. Street Lighting Problems Increase Under Deregulation. Numerous CAPP and STAP cities have indicated that customer service problems exist particular to Cities' street lighting service. Problems encountered by Cities include: · The City of Alton reports that its T&D service provider, PEP, now charges cities for the installation of street lighting. Prior to deregulation, PEP did not charge Alton for street light installation. The change in policy has had negative impacts upon city budgeting processes. · The City of Waxahachie recounts that new installations and repairs for street lighting are generally delayed by three weeks to one month. · T&D service providers have also informed Cities that the utility company is no longer responsible for trimming tree limbs that grow around the street lighting. · The City of Allen indicates that it experienced a frustrating three-month delay in receiving a meter from Oncor for a street lighting project along a major thoroughfare. Even though the poles were placed under City contract and all associated work was completed, the street lighting was delayed as Oncor challenged the validity of addresses, the inspection process, and "missing" account numbers. After persistent accusations that the City was to blame, it was discovered that minor typographical errors in Oncor's system prevented the required account match. 1813\O0~aacXnnno030113grog 9 Even after service has been installed, the City of Pads reports that it is now impossible to match up accounts with previous year billings. In years past, Pads' street lighting bill detailed the specific number and type of street lights being billed. Under deregulation, the City's bill simply states "street lights" with no explanation as to which lights are being billed. · As of December 2002, approximately one-fifth of the City of Duncanville's street lighting accounts have not been switched. · The City of Piano has experienced difficulty in preparing budgets for new City projects that require street lighting because of Oncor's new street lighting policies. Instead of a standard street lighting charge like it had prior to deregulation, Oncor now provides a $1,000 credit for each street light and bills the city for any labor and equipment costs exceeding the credited mount. Not only has the change made it difficult for budgeting purposes, it has also resulted in unexpected charges of more than $10,000 or more per installed light. Costs to Customers Increase And Will Likely Continue To Climb Under Deregulation. Why Are Costs Increasing? Deregulation in Texas was premised upon the assumption, albeit false, that historically low and stable natural gas prices would continue to result in the generation of low-cost electricity that would become the market price. To a certain extent, the price of natural gas does set the market price of electricity in the deregulated market, but that price has been anything but low and stable during the last two years. Within the last year, the price of natural gas has been three times what it was when SB7 was passed. Ironically, much of the increase in the price of natural gas can be attributed to a national trend toward electric deregulation that has stimulated an enormous demand for natural gas as new combustion turbine generators have been planned and constructed. It is a fundamental tenet of economic theory that when demand exceeds supply, prices will rise. As gas prices rise to address the increased demand of new electricity generators, the impact is being felt by Texas customers. Everyone is wary of repeating California's failed experiment with competition that brought only high prices and large debts. The Public Utility Commission has undertaken great effort to distinguish Texas' entry into deregulation from California's attempt at deregulation. The Public Utility Commission is correct in its position that California's attempts at deregulation were doomed by its inadequate supplies of electricity. For the time being, Texas is not burdened by this problem, having projected a surplus of generation capacity for the next several years. This means that Texas, unlike California, is unlikely to experience price gouging in the face of a capacity shortage. However, the perceived surplus in capacity may create a different economic perversity that will impact ratepayers' pocketbooks. As the major utilities spin off generation 1813\O0~na~uno030113gtng 10 assets and issue stock in a new company, stock issuance prices may be depressed because of investors' perceptions of a glutted market. Depressed prices suggest the existence of stranded costs, which will be assigned to ratepayers in the form of non-bypassable charges beginning in 2004. Electric Prices In The Competitive Market Sever Ail Links Between Costs and Prices. In addition to the problems described above, the pricing of electricity in the competitive market place is based on the commodity trading format developed for the natural gas market, not the price of power generated in Texas. As a result of the Public Utility Commission's decision to tie electric prices to natural gas prices, the accumulated knowledge of decades of wholesale electric power transactions has no relevance to the electric restructuring model in Texas. Because there is no market index for electricity, traders must use a proxy like the natural gas market. Price quotes based upon natural gas prices are only available for 24 to 48 hours, severely restricting or eliminating the ability to shop an "apples to apples" price comparison. In short, Texas' model of deregulation thus far has severed all links between actual production costs and prices paid by retail customers (at the expense of the customer). Nowhere is the dichotomy more apparent than in the EPCOT marketplace. Generators associated with Reliant and AEP have removed power plants from service because, they claimed, excess generation capacity in ERCOT caused wholesale power prices to be so low that it was infeasible to continue operating these plants. Simultaneous with the generators' announcement, the affiliated REPs received approval from the Public Utility Commission to increase Price to Beat rates on the basis that rising gas prices threatened their ability to compete against the Price to Beat. The retail market has been forced into a gas spot market pricing scenario, while the REPs' affiliated generation companies take advantage of significant non-gas generating assets, portfolio gas purchasing strategies, stranded costs recovery and limited competitive generation. Whether it is a power shortage in California or a power surplus in Texas, electric industry restructuring does not address a key fact - that deregulation does not necessarily result in competition and lower prices for end use customers. If true retail competition does not develop, rates will not fall. Meanwhile, during a tune when all market indicators point to low wholesale prices, customers face rising retail prices. 1813\00~ac~uno030113grog 11 The Price To Beat Is Not Protecting Customers And Few Competitive Options Exist To Escape the High Price To Beat Rates. The Price to Beat Was Intended to Serve as a Safe Harbor During the Early Years of Competition. When SB7 was adopted, it was with the belief that all customer classes must benefit fi.om competition. Concerned that the primary beneficiaries of deregulation would be those using large amounts of power, the legislature ordered a six-percent rate reduction for residential and small commercial customers and challenged competitors to beat the regulated rate. Typically, residential customers are the most commonly discussed group of customers affected by the Price to Beat rate. However, because the Price to Beat rate is available to all customers with 1000 kW demand or less, most municipal accounts are eligible for the Price to Beat rate also. The Price to Beat rate is a regulated rate intended to be a safe harbor for residential and small commercial customers for a 5-year period during the transition to competition. The Safe Harbor Is Flooded. Unfortunately, adjustments made to the Price to Beat over the past year have effectively eliminated the six-percent rate reduction guaranteed by the Price to Beat statute and flooded the safe harbor for residential and small commercial customers. While the statute mandates a six- percent reduction off of 1999 bundled rates, it provided the Public Utility Commission with some discretion in setting the fuel factor that adjusts the Price to Beat rate. PURA § 39.202(b) required the Public Utility Commission to determine the fuel factor for each utility as of December 31, 2001. Market participants viewed the Price to Beat fuel factor as the only tool to meaningfully affect the level of the Price to Beat rate. Seizing the opportunity to maximize their earnings, the affiliated REPs requested Public Utility Commission approval for fuel factors that were inflated with non-fuel related costs. REPs that desired to compete against the Price to Beat rate for customers also took an active role in the proceedings before the Public Utility Commission, arguing that the fuel factors must be high in order to encourage REPs to enter the market and "benefit" competition. Cities protested the inflated fuel factors because the costs were inconsistent with the statute, Public Utility Commission practice and longstanding precedent. The inflated factors were approved over the Cities' objections. Tying the Price to Beat Rate to Changes in the Spot Natural Gas Market Gives Afffiiated REPs A Windfall at the Expense of Residential Customers. The affiliated REPs filed for fuel factor increases last summer to raise their overall Price to Beat rates by five to eight percent. PURA § 39.202(/) permits the affiliated REP to request an adjustment to the Price to Beat fuel factor if the REP can demonstrate that its existing fuel factor inadequately reflects significant changes in the price of natural gas and purchased energy used to serve Price to Beat customers. Despite the statutory mandate, increases to the Price to Beat fuel factors were approved without any evidence that current fuel factors were inadequate to recover the natural gas prices realized by affliated REPs. Instead, attention was focused exclusively on NYMEX prices over a ten-day period in comparison to the gas price assumed in the existing fuel 18 t 3\00~maa~mo030113grog 12 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 of the power used to serve Price to Beat customers was purchased at spot market prices at their peak pricing periods. The institution of the inflated fuel factors has resulted in a $600 million statewide electric rate increase for residential and small commercial customers. Cities' attempts to establish that the REPs and affiliated generating companies were over-earning under the current Price to Beat rate and that the requested increases bore no relationship to actual costs were dismissed by the Public Utility Commission as irrelevant. Adjustments Made to the Price to Beat Rate in 2002 Mean That Customers Are Paying More Under Competition Than Would Have Been Paid in the Regulated Rates. In its 2003 Scope of Competition Report, the Public Utility Commission reports that on the first day of competition residential customers received double-digit decreases from regulated rates charged on December 31, 2001. While the claim is not technically incorrect, it leads to the misleading conclusion that the decreases were attributable to the advent of competition. Basing such a conclusion on that claim is inaccurate because rates charged on December 31, 2001, included a fuel component that reflected a surcharge that expired December 31~ as well as unusually high natural gas prices that peaked in the summer of 2001. The rates instituted on January 1, 2002, simply reduced the outdated natural gas prices to reflect then-current lower natural gas prices and eliminated the expired fuel surcharge. Contrary to the claim of double-digit decreases, the table below shows that the institution of inaccurate, inflated Price to Beat fuel factors have ensured that customers of the affiliated REPs will be paying rates that are higher than they would have been under regulation. There is no corresponding provision for municipalities, citizens, or the Public Utility Commission to propose decreases in Price to Beat rates to reflect declines in fuel costs. Increase in the Price to Beat Rate as Compared to the Regulated Rate Usin~ Similar Natural Gas Prices Regulated Regulated Total PTB Base PTB Fuel PTB Base Rate Fuel Factor Rate Factor Total Increase Reliant 6.47 2.6 9.07 6.08 3.27 9.35 3% TXU 6.05 2.4 8.45 5.76 2.89 8.65 2% CPL 5.89 2.9 8.79 5.61 3.89 9.50 8% WTU 5.43 3.3 8.73 5.09 4.64 9.73 11% An Inflated Price to Beat Rate Does Not Portend a Competitive Market. An inflated fuel factor increases potential profit for both affiliated and non-affiliated REPs, but it is important not to confuse benefits to competitors with benefits to Price to Beat customers. An inflated Price to Beat rate will artificially increase headroom and may accelerate the erosion of the affiliated REP's market share for residential and small commercial service. Although potential competitors might benefit from inflated Price to Beat rates, it is not apparent that ratepayers will be better off if they pay higher prices today in order to effectuate a competitive market. The goal to be achieved by enacting SB7 is not simply to deregulate the retail electric market, but to do so in a manner that ensures that customers enjoy real savings. It 1813\O0~na¢~m-aoO3Oll3gmg 14 makes no sense to assume that the Legislature intended that the rate reductions become apparent only after inflating the Price to Beat to include costs not contemplated by the statute or the Public Utility Commission's fuel roles. The end resuk of this exercise is that Texas will lose its competitive advantage over other states with regard to energy costs. The artificial inflation of costs to consumers will not only cost Texas consumers more for energy, but will also cost Texas jobs and economic growth. It is not likely that competition will force affiliated REPs to lower Price to Beat fuel factors if natural gas prices decline. Aggressive competition based on price is unlikely to be a profitable strategy when competitors are few and market demand is relatively unresponsive to price. All REPs stand to gain if prices are held at levels higher than cost. Raising the Price to Beat simply means that all other price offerings in the allegedly competitive marketplace will also rise because the objective of the handful of bidders for any given load is the same objective as a "Price Is Right" gameshow contestant - to get as close to the actual retail price without going over. With the exception of a few areas in Texas, residential and small commercial customers have virtually no REPs willing to offer prices lower than the Price to Beat. For example, even though customers formerly served by TXU have the option of receiving service from ten different providers, only one provider was offering rates in December, 2002 that were lower than the Price to Beat. The lone price competitor, Reliant's affiliated REP, offers a relatively modest five percent rate reduction, which equals about four dollars in savings each month for the average residential customer. The price discounts, if any, in other service territories generally range between one and five percent of the Price to Beat rate. In WTU's service area, no provider offered a rate in December, 2002 that was lower than the Price to Beat rate. In Texas, small customers have been indifferent, at best, to switching oppormhities. Indeed, the absence of any true customer switching in Texas suggests that customers do not yet see any substantial benefit from competition. The fact that customers are paying rates higher than they would have been under regulation is troubling when there are so few REPs that are willing to provide service to residential and small commercial customers. While REPs must perceive an opportunity to earn profits in order for robust competition to develop, it does a grave disservice to the residential and small commercial customers of Texas to increase regulated rates beyond a level supported by evidence and statutory guidelines simply to declare the residential market competitive. As was demonstrated in the southeastern and northwestern portions of Texas, REPs may be unable to undercut the regulated Price to Beat rate for particular customer classes. If that is the case, it is for the Legislature, and not the Public Utility Commission or market participants, to decide whether residential and commercial ratepayers will subsidize the for-profit REPs. 1813\OOhnac~mo030113grog 1 5 As Functional Markets Develop Within ERCOT Zones, Market Power Concerns Become More Apparent. CAPP and STAP Cities' primary long-term concern is that the retail market power in Texas is not sufficiemly diffused among enough players to create a truly competitive market. The absence of numerous strong market players means that competitive forces cannot keep prices in check and unregulated monopolies will develop. The June bankruptcy filing of New Power, Inc., a residential REP created by Enron, reinforced the view that marketing to small accounts is developing only among a very few REPs. Prior to declaring bankruptcy and abandoning the Texas retail market, New Power, Inc. was the most successful residential REP not affiliated with an incumbent utility. After its departure, few independent REPs remain to compete for customers based on price. Few Competitive Offers Exist, Even for Desirable Load. The limited number of competitive options available is evident to CAPP and STAP. In theory, the aggregated city load represented by CAPP and STAP should be extremely attractive to the competitive market. Municipal load is characterized by substantial, consistent usage, including desirable off-peak usage. Strong load diversity exists. In addition, considerable opportunities were available for expanded services. Yet even with all of these desirable characteristics, CAPP received only four bids in response to its Request for Proposal for 2003 service that was sent to 13 potential providers. Of the four bids - all submitted by REPs that were affiliated in some way with incumbent providers - only two bidders submitted proposals to meet all of the requirements of CAPP's request. The price differential for the energy portion of the potential supply agreement bids was amazingly slim. All of the bids were for prices higher than had been agreed to in the power contract for 2002. Initially, there was a 12.5 percent differential in indicative bids. As negotiations continued, energy prices rose 6 percent. The price differential between bidders then narrowed to 6 percent. CAPP's experience indicates that the REPs are all focusing on the same pricing parameters emanating from daily weather patterns and natural gas futures. Whether the customer is an aggregator seeking service for diversified load or a small commercial customer, it is clear that there are few creative or attractive price offerings in the current market. If retail service offers continue along this path, then restructuring has simply given customers a choice among pre-existing, unregulated monopolies. The Statute Inadequately Addresses Market Power Control Within ERCOT Zones. While the original deregulation legislation contains some protection against market power by mandating that no entity control more than 20 percent of generation within a market, that intent has been frustrated by the development of functional markets inconsistent with the theoretical market envisioned by SB7. Prior to January 1, 2002, the relevant market was thought to be ERCOT. However, in reality, ERCOT rules and practice have created multiple zones with additional charges for power flowing between zones during periods of transmission congestion. Each zone has, in practice, become a distinct market, particularly in times of congestion. As a result, one affiliate of an incumbent utility has significant market dominance in several zones. 1813\O0~mao~mo030113grog 16 Competitive markets will not develop in the existing environment. The Legislature needs to strengthen the market power protections so that protection applies to functional markets as well as theoretical ones. Competitive Metering Will Bring Additional Confusion to the Market. The billing problems experienced throughout EKCOT in 2002 are due in part to the implementation of a radically new market design in a very short amount of time. The Retail Pilot Project, which was to be implemented in the second half of 2001, was designed to test and refine new market systems on approximately five percent of market participants prior to a full- scale market rollout in January 2002. The proposed pilot program was already an extremely short-term test of the market, consisting of only six months (many other jurisdictions opted for one to two year pilot programs), however, delays in implementation of the pilot program resulted in an even shorter test period. Although the pilot program provided clear signals that the systems necessary to support full scale implementation of customer choice were not ready in late 2001, the decision was made to proceed with customer choice in January 2002. Prior to deregulation, distribution utilities read their own customer's meters and used this data within their own companies to generate billings to customers. In the deregulated market, the distribution service providers still read the meters to collect the customer's usage information; however, they now provide that information to EKCOT who, in turn, provides it to the appropriate Retail Electric Provider (REP) for a customer. This new approach to procuring metered usage information, which involves more parties and more data transfers, is one of the major reasons why customer billings have not gone out on a timely basis. Additionally, ERCOT created workaround processes designed to speed up the transfer of this data to the REPS, by allowing the distribution companies to send data directly to REPs. The workaround processes have resulted in problems where two REPS may receive usage data for the same customer; one REP, who receives the data from ERCOT, and another REP, who receives the data from the distribution company. This results in customers receiving bills from two separate companies for the same usage. The billing problems that have existed since the start of deregulation in 2002 have resulted in numerous cases of incorrect customer bills being sent to customers by REPs. CAPP and STAP cities are addressing this problem by utilizing customer metered usage data obtained from the distribution company to check against the REP bills. CAPP and STAP have discovered the distribution company who reads a customer's meter (and has been working with usage data for many years) has been the one ~:eliable source a customer has for accurate usage data. Removing the metering function from the distribution companies and allowing a myriad of new parties to initiate reading and recording metered usage will only serve to bring further confusion to a market that has very little stability to date. 1813\O0~nac~nmo030113grog 17 Customers desperately need some assurance that current market operations will improve and stabilize. The infusion of competitive metering in 2004 on a limited basis and in September 2005 to the overall market will bring further confusion and instability to the Texas electric market. Diverting ERCOT and PUC resources to deal with competitive metering issues will further delay achieving the stability and confidence in ERCOT systems and processes sorely needed by Texas electric customers. It is imperative that competitive metering be delayed until such time as ERCOT and the REPs serving customers in Texas have resolved the current electric market problems to the point that customers are receiving timely, accurate billings. 1813\O0~aac~mo030113gmg lg