Texas' large reserve margin to cost customers billions as state does stranded-cost true-ups

POWER - 03/03/2004

While the Texas retail market has been seen as the poster child for a successful transition to competition, the bloom may be coming off the rose there as regulators prepare to pass through billions of dollars to consumers as a result of excess generation in the state.

Texas' restructuring legislation calls for stranded-cost true-up mechanisms to be calculated this year for each utility, and a key factor in that calculation is the value of generation, explained an official with the Public Utility Commission. A few years ago, customers were projected to receive rebates and in fact the state's largest utility reached an agreement capping the refunds it would give to customers. With the amount of capacity added in the last several years, however, generation is losing value and customers will see higher costs as a result.

The true-up proceedings, which will look at book value of plants versus market value, were known and anticipated, but when customers see higher costs as a result of competition they can get negative ideas about it, officials acknowledged at the Retail Power Markets Summit in Orlando, Fla.

"These will be nasty, nasty, nasty proceedings" involving "billions of dollars in stranded costs," said Brian Lloyd, the PUC's director of retail market oversight. The exact amount of stranded costs for each company will be determined in the coming year, and some might not be resolved until early 2005, Lloyd said at the conference, sponsored by the Center for Business Intelligence.

Texas officials often point to the state's enormous reserve margin, somewhere around 40%, as providing supply security, but the true-up proceedings will show the cost of having such a large reserve, Lloyd said.

The cases will take up a large chunk of the PUC's time in the next year or so, and officials are considering measures to ease the blow to customers, Lloyd said. One option is to adjust the price to beat, which includes a fixed transmission and distribution portion and a fuel factor that is adjustable. If the T&D portion jumps significantly as a result of a true-up, the PUC may allow a company to lower the fuel factor, depending on the level of gas prices at the time, Lloyd said.

The charges will be billed to utilities and competitive retail providers, so even those customers that switched suppliers are likely to see higher costs unless they worked out an arrangement with their competitive supplier, said Lloyd. Many retail marketers interviewed at the conference said they would pass the costs straight to customers, because reaching an arrangement with them beforehand would have involved higher costs spread out over a long term and too much guesswork on what the costs would be. "We prefer a straight pass-through" and "our customers knew about it and they anticipate it," said Dean Elkins, director of industrial marketing for Calpine Power America, the retail marketing arm of Calpine.

The one company that will not have to go through the process is TXU, because the PUC approved a settlement with the company in June 2002. TXU subsidiaries include the state's largest generator, electricity retailer, and transmission and distribution utility. Under the settlement, TXU's stranded costs were set at zero, and TXU was ordered to refund to customers a total of $350-million in calendar year 2002 and 2003 through an "excess mitigation credit" on the T&D portion of TXU subsidiary Oncor Electric Delivery's bills. The $350-million amount reflected resolution of stranded-cost mitigation, reconciliation of approximately $8.5-billion of fuel costs covering July 1998 through 2001, and an anticipated unrecovered fuel balance at the end of 2001.

The company's goal in reaching the settlement was to create certainty for investors and customers and "we made the right decision," because TXU will avoid the cost of going through the proceedings, a spokesman for the company said. At the time the settlement was reached, economic models had a wide range of stranded-cost exposure for the company, ranging from billions in refunds to billions in costs, the spokesman said. And since then, the state Supreme Court has ruled that there can be no "negative stranded costs" or refunds, and that solidifies the view that the settlement is a benefit to TXU customers and investors, he said.

Meanwhile, the PUC is in the midst of its first true-up case, which involves TNP Enterprises' Texas-New Mexico Power transmission and distribution subsidiary and its retail marketing arm, First Choice Power.

The TNP case is considered to be one of the simpler cases the PUC will face, largely because TNP clearly established its stranded costs by selling its only power plant--the 305-MW, lignite-fired TNP One facility in Robertson County--to Sempra Energy in October 2002 for $120-million.

In its initial filing on the matter, TNP said the net book value of the plant on Dec. 31, 2001, was $425-million, and that with other adjustments for the utility's fuel balance and capacity auction true-up, its true-up balance is $373-million.