Deregulation benefit in doubt with Reliant fuel factor request, critics say

By Ann de Rouffignac
OGJ Online Staff

HOUSTON, July 18 -- Reliant HL&P customers who were hoping for an electricity rate reduction in January could be in for a rude surprise.

Hearings beginning today in Austin will help determine whether rates at the utility unit of Reliant Energy Inc., Houston, will be lowered next January as expected under Texas' landmark electricity deregulation legislation.

Reliant's case is the first to be heard in anticipation of the opening of the Texas retail electricity market in January 2002. Other Texas utilities' cases will be heard subsequently by the Texas Public Utility Commission. Whatever the PUC determines will also help set the price Reliant competitors charge customers when full competition begins in January.

The 1999 deregulation law was passed with the supposition in January 2002 rates charged by incumbent Reliant HL&P would decrease 6%, adjusted for fuel and purchased power costs, compared to 1999 rates. Consumers who decided to stay with the utility rather than choosing a competitor were to receive these discounted rates called the "price-to-beat" for 5 years.

But filings by various parties call into question whether rates will fall and suggest they will actually be higher. Natural gas prices will play the key role in that determination. Numerous industrial companies and municipalities have protested Reliant HL&P's plan. Consumer advocates also complained Reliant Energy is asking for too high a fuel factor as part of the price-to-beat.

"I don't believe consumers will see a 6% reduction in rates," said Janee Briesemeister, senior policy analyst with Consumers Union in Austin.

On July 18 and 19, the State Office of Administrative Hearings is hearing testimony concerning Reliant's request for a fuel factor based on gas prices of $4.66/Mmbtu, much higher than present prices of about $3/MMbtu. An administrative law judge will make recommendations to the PUC, which will make the final decision, setting the price to beat before the market opens in January.

If Reliant wins it case, consumer rates will be 18% higher in January than in 1999. The utility asked that the price to beat be set at 9.47¢/kw-hr in the winter for a 1,000 kw-hr/month residential customer, up from 7.99¢/kw-hr rates in effect in January 1999.

Most of the difference can be attributed to the fuel factor used in accounting for natural gas burned to produce power and also for power purchases. Gas prices escalated to historic highs in December 2000, but they also tend to be volatile. Once set, the fuel factor will stay the same for 5 years, unless a utility asks to change it.

Price-to-beat crucial
The price-to-beat is crucial to the entire deregulation experiment in Texas. If set too high, consumers will get next to no benefit up front from opening the market, raising questions about why deregulation was pursued in the first place.

"All they [competitors] have to do is charge a little less than the inflated price-to-beat," said consumer advocate Briesemeister. "They all make a killing."

In a 2,000-page document filed in April at the PUC, Reliant HL&P's overriding concern was to insure the fuel factor and resulting price-to-beat was high enough so competition will work.

"We think it's kind of odd that you promote competition by increasing prices to consumers," said Thomas Brocato, assistant public counsel at the Office of Public Utility Counsel (OPUC).

Participants in the Texas market use a term called 'headroom' to describe the difference between a utility's and a competitive supplier's costs and the price-to-beat. The higher the price-to-beat or conversely the lower the costs, the more headroom, improving the likelihood of a successful competitive market. Reliant maintained the price-to-beat must be adjusted up in order to maintain enough headroom.

"We are asking that the fuel factor be set at a level to insure adequate headroom," said Debra Eno, manager of regulatory affairs at Reliant. "We're an advocate for a competitive market. There needs to be sufficient headroom so others can compete."

Brocato argued the price-to-beat was intended to provide consumers a safe harbor in the beginning years of competition.

"At a minimum, consumers were supposed to receive a rate decrease of 6%," he said. "The legislature did not intend the price-to-beat as a means to achieve a competitive market."

Preventing another California
If the price-to-beat is set too low, there is no room under that price for competitors to offer electricity to retail customers so competition dies on the vine. Also, if the price-to-beat is set too low it could threaten the financial integrity of the incumbent utility's retail affiliate, should the price of gas or purchased power exceed the price-to-beat.

Wholesale power costs that exceeded what California utilities were permitted to charge their customers forced California's Pacific Gas & Electric Co. to file for bankruptcy protection and Southern California Edison Co. to the brink of bankruptcy. In Texas, officials tried to avoid that situation by allowing the price-to-beat to be adjusted for fuel costs twice a year.

Only an affiliated utility retailer such as a Reliant HL&P or TXU Energy Services Inc. can apply to adjust the fuel factor. The utility retailer must demonstrate to the PUC the existing fuel factor no longer reflects the market price of natural gas and purchased energy needed to serve retail customers.

The adjustment to the fuel factor is calculated based on the New York Mercantile Exchange's average of the closing forward 12-month Henry Hub contract each business day for 10-days prior to the request. The average forward price for each business day is then averaged to determine a 10-day rolling price. If these averages vary 4% from the existing fuel factor, then it is changed.

Consumer advocates said the law explicitly permits the fuel factor to be raised but contains no mechanism for lowering it.

"There is no provision for the commission or any other party to come in to adjust it downward," said Clarence Johnson, director, regulatory analysis, for OPUC. "This is extremely dangerous because the fuel factor is no longer reconcilable."

Briesemeister said consumers' only hope is a working competitive market. "Only if competitors undercut them a lot could there be a chance to force them to seek a lower fuel component of the price to beat," she said. "And that's a big if."