PUC Texas ruling may thwart retail electricity competition

Texas regulators may have dealt a blow to electric competition scheduled to begin in the state in 2002 with an obscure ruling on natural gas prices. Critics charge the natural gas price escalator used to estimate future prices is too low. The forecast price of natural gas is critical to the health of competitive market in the first few years of competition. The lower the forecast for natural gas prices; the higher the calculation of stranded costs, benefiting incumbent utilities.


Ann de Rouffignac
OGJOnline


Texas regulators may have dealt a blow to electric competition scheduled to begin in the state in 2002 with an obscure ruling on natural gas prices. Critics charge the natural gas price escalator used to estimate future prices is too low.

The escalator is incorporated into mathematical models used to estimate the uneconomic costs of utility assets that cannot compete in an open market. These so-called stranded costs mostly apply to nuclear power plants whose cost of generation is high compared to natural gas plants.

The forecast price of natural gas is critical to the health of competitive market in the first few years of competition. The lower the forecast for natural gas prices, the higher the calculation of stranded costs, benefiting incumbent utilities once competition begins.

Under Texas deregulation legislation, utilities will be able to recover stranded costs with a mandatory charge on transmission to all customers in their service territories.

Critics allege that the escalator chosen results in a natural gas price that is lower than that forecasted by the Energy Information Administration and other main stream energy organizations. For 2002, the PUC forecasts the price of gas will be $3.32/MMbtu. Sources close to the proceedings estimate that the PUC�s escalator results in gas prices about 20�/mcf lower than consensus forecasts.

Stranded costs are sensitive to gas prices, say industry experts. Competitors to the incumbent utilities and their affiliates will benefit most from high gas prices and low stranded costs.

"For every 10�/mcf increase in gas prices, stranded costs go down about $300 million. And that�s in Reliant�s territory alone,� says Vanus Priestley, manager of regulatory and governmental affairs for New Energy Texas.

Crimping competition
By estimating the price of gas will stay lower than most expect, critics say the PUC is making it more difficult for new entrants to the retail electricity industry to compete with existing utilities.

�It�s tough if they overestimate stranded costs that will go on to the wires charges. That gives us costs that are not real,� says Priestley. �It looks like we�re not competitive.�

Competitors like New Energy Texas, a unit of AES Corp., must be able to offer electricity at a low enough price compared to the existing utilities to attract customers. Utilities will have a set �price-to-beat� approved by the commission that consumers could still choose if they don�t want to switch electricity providers.

Competitors must be able to make a profit from selling electricity at a price lower than this price-to-beat and still clear their own costs of purchased power, the cost of doing business, wires charges, and stranded costs.

Even if the gas price escalator is wrong for future years, the commission reasoned that in 2004 the entire process used to estimate stranded costs and gas prices will be adjusted with the real data.

The commission said estimates of stranded costs in each of the utilities cases are not final valuations but are instead subject to �true-up� in 2004.

New Energy and other competitors testified the gas price and stranded costs estimates must be right from the start. Competition begins in 2002. Two years is a long time to try to compete when the cost structure is wrong, Priestley says.

�If they overestimate the stranded costs, we will lose customers for the first 2 years of competition,� says Priestley. �It won�t do any good to true it up after 2 years. This could really cripple the market.�

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