Texas electricity retailers to file in September

Texas consumers will have 15-20 choices among electricity providers when competition begins in 2002, if the retail market shapes up as legislators and regulators expect. Yet experts who have reviewed market conditions are not so sure how many electricity retailers will actually be attracted to Texas. Prices may be attractive for the first 2 years, but experts worry that after 2004 uncertainty over new estimates for stranded costs could discourage new entrants.

Aug 23rd, 2000


Ann de Rouffignac
OGJ Online

Texas consumers will have many choices among electricity providers when competition begins in 2002, if the retail market shapes up like legislators and regulators expect.

�We are planning on as many as 15-20 [retail electric providers] coming in to get statewide certification,� Pat Wood III, chairman of the Public Utility Commission of Texas told the Electric Utility Restructuring Legislative Oversight Committee at a Houston hearing. �We want to make sure when they [consumers] open up a phone book they will have more than one choice.�

Interest in the Texas market will become clearer beginning in September when retailers file applications with the PUC. A few companies have already participated in PUC hearings on proposed rules governing retail sales.

Yet experts who have reviewed market conditions are not so sure how many electricity retailers will actually be attracted to Texas, especially in light of the outcome in Pennsylvania and California. Retail choice is limited to just a few suppliers in Pennsylvania and nearly nonexistent in California, even though both markets have been completely deregulated.

In Texas, prices may be attractive to retailers for the first 2 years, but experts worry that after 2004 uncertainty over new estimates for stranded costs could discourage new entrants.

The number of retailers that actually offer service in a given area of Texas will be dependent on the price they can charge compared to the so-called "price-to-beat"�or what utilities will charge customers who do not switch suppliers.

Loading costs
Retailers' prices will depend, in part, on costs loaded into charges that will be passed through to all customers. These charges will include stranded costs of noncompetitive electric plants, utility transmission and distribution costs, and a system benefit fund to support very low income customers.

It will also depend on the guaranteed price incumbent utilities must offer customers for the first 5 years of deregulation. That price will be 6% below rates as of Dec. 31, 2001, excluding fuel adjustments.

The higher these charges and the lower the price-to-beat, the less �headroom� the retailer will have to buy power, pay for transmission, and account for other business expenses.

If retailers become squeezed between fixed charges set by the PUC that have to be passed on to customers and the price-to-beat, experts say market participation by new competitors could be limited. The PUC has been reviewing proposed rules and massive utility filings concerning what should be included in the non-by-passable charges. Most cases are contested and have not been decided yet.

Once competition begins, people will �wake up� and switch electricity providers, if they see a 10-15% difference in their bills, Wood said at the hearing.

�We want sufficient headroom for competitors to come in,� Wood said. �And we have headroom that we were not even planning on because of lower stranded costs.�

Wood and other experts say rising natural gas prices have all but wiped out stranded costs for the first 2 years of competition. Escalating natural gas prices could make nuclear generation competitive with gas-fired generation. That could have the effect of reducing how much utilities will recover as compensation for investment in plants that are not considered competitive.

Generation flood
But stranded costs will be recalculated in 2004 using market data rather than estimates. The new calculation will include revisiting the value of power plants based on data from a capacity auction of power starting in November 2001. Each utility is required to auction 15% of its generating capacity for a period of 24 months.

Combined with a near flood of new generation coming online in 2001, the timing of the capacity auction could have the effect of driving down the value of the plants and therefore driving up the value of the stranded costs. About 10,000 Mw of gas-fired generation will come online in Texas by the summer of 2001. With a total market of about 70,000 Mw that means an increase of 15% in 1 year.

�In a flooded market, the value of that capacity will be extremely low,� says Scott Norwood, principal with GDS Associates. �They can use these results of the capacity auction for the final true up of the stranded costs.� The higher the value of stranded costs, the higher the fixed charges that will have to be passed on to consumers.

Norwood suggests that even if the market is not flooded with new electric generation, the capacity auction will hold little interest for electricity retailers.

�It will be nonfirm capacity for a short term,� he says. �The capacity auction thing is not finalized yet, but is shaping up to be worthless short-term capacity.� Under terms of the proposed auction, utilities would not be required to supply the power if a plant is out of service.

Making retail electricity competition work has proved to be more difficult in practice than in theory. In Pennsylvania, the state Texas patterned itself after, many companies have withdrawn from the market leaving the field of choice mostly restricted to a few utility affiliates.

The market was open for consumer choice in January 1999. DTE Edison America, the retail arm of DTE Energy, withdrew from the Pennsylvania market in March of this year citing poor economics. With just a $2-3/month discount in most Pennsylvania utilities' territories, there is not much incentive for consumers to switch.

�There are not a lot [of retailers] out there anymore,� says Jason Rumble, sales manager for Power Choice, a unit of Potomac Electric Power Co., Washington, DC. �Most left with their tail between their legs.�

Statewide numbers in Pennsylvania bear that out. During a pilot program prior to the market's opening, 2 million customers expressed interest in shopping around for electricity, said Grace Cunningham, spokesperson for the Pennsylvania office of Consumer Advocate.

But as of July 1, 2000 only 528,000 residential, commercial, and industrial customers out of about 5.4 million customers switched electricity suppliers.

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