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Move to ERCOT, Retail Choice Seen as Producing Savings for Sharyland-SPP Customers

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January 14, 2011

A transition from the Southwest Power Pool to ERCOT for customers of Sharyland Utilities currently in SPP would result in reduced rates for both residential and commercial and industrial customers, an analysis prepared by GDS Associates, Inc. concludes (PUCT Docket 39070).

As only noted in Matters (6/7), the study of a potential move to ERCOT was required as part of the acquisition of Cap Rock Energy by Sharyland. What were formerly the Cap Rock Stanton and Lone Wolf Divisions are located in the SPP region, while the remainder of Cap Rock is in ERCOT.

If Sharyland residential customers in the SPP with 1,000 kWh of monthly consumption had the opportunity to utilize ERCOT REPs in the period November 2009 through October 2010, they would have saved between $170 (based on average REP pricing) and $434 (based on the lowest REP offers), GDS Associated found. That equates to savings of 13% to 23% annually.

The average residential Sharyland rate from period November 2009 through October 2010 was 11.02¢, versus an average REP rate of 9.6¢/kWh, and low REP rate of 7.4¢/kWh. REP pricing was based on the Oncor service area, ERCOT West zone, which is the closest area to Sharyland-SPP.

Commercial customer rates, when comparing an average of indicative offers from three REPs for the North and West zones, were 20% lower than historic Sharyland-SPP rates; and industrial customers would have saved between 24% and 40% in the same period.

Sharyland does not own generation, and serves the SPP load on power purchase agreements. An analysis of the 2009 market potential prices in the most likely scenario of serving Sharyland-SPP customers from incrementally priced supplies from Southwestern Public Service (SPS), "indicates that a move to ERCOT's market-based solution to [Sharyland] power supply needs would result in lower costs," GDS said.

For 2009, serving the Sharyland-SPP load from incrementally priced SPS supplies was estimated at a cost of $45 million, versus costs for ERCOT West supplies of $32 million. Similar savings were estimated from ERCOT West supply through 2019, up to $20 million.

"Although there is a potential for market volatility, the average energy prices under any of the ERCOT market solutions are significantly lower than the estimated SPS incremental rate. Adding in the cost of SPP transmission service will only worsen this situation and considering SPP does not have market rules in place for implementation of its Day 2 market and no retail market opportunity in the foreseeable future, a move to ERCOT with experience in nodal price congestion management and market-based ancillary services appears to be advantageous," the study concludes.

GDS Associates notes that, should a move to ERCOT for the Sharyland-SPP regions be followed by the introduction of retail choice, it is likely that the PUCT would appoint a default REP for those customers that do not select a REP, since there will be no natural affiliated REP to serve such customers. A similar procedure was utilized when customer choice was adopted for Sharyland's McAllen Division in 2002. "Several REPs might be interested in serving this default service function for the Sharyland areas," GDS noted.

Sharyland is required to file with the PUCT, by July 13, 2011, a proposal regarding whether to move its customers that are ultimately located in ERCOT to retail competition. This later report will examine additional retail market issues and mechanics.

Other findings from GDS include that the net impact on ERCOT and SPP wholesale transmission rates is relatively minor under most of the options analyzed for moving Sharyland-SPP to ERCOT, and that moving the Sharyland-SPP load into ERCOT would defer (or avoid) the need for $42 million in investment for transmission upgrades in the SPP-SPS zone. Moving the Sharyland-SPP load to ERCOT does not appear to have a negative impact on the system reliability of either the SPP or ERCOT systems.

Additionally, adding the Sharyland-SPP load to the ERCOT West zone would be beneficial given its excessive generation and congestion.

GDS reported that a partial transition of certain Sharyland-SPP load and transmission assets to ERCOT would not be beneficial, as it would require the continued purchase of supplies for load remaining in SPP, and would cost more than the preferred option of a full transition.

GDS evaluated several options for moving the Sharyland-SPP load and associated transmission assets to ERCOT, and found that a scenario labeled ERCOT-6 to be most beneficial.

Under Option ERCOT-6, Sharyland would purchase the SPS Hobbs-Midland and Borden-Grassland transmission lines and would disconnect the lines from the SPP ties (at Grassland and Hobbs), and synchronize the lines to the ERCOT grid. The portion of the Hobbs line located in New Mexico would be de-energized so as to avoid FERC jurisdictional issues.

The cost for purchasing these lines is $14.49 million according to the most recent SPS Net Book Value for these assets.

GDS characterized Option ERCOT-6 as having lower interconnection costs, with the added benefit of integrating the two SPS transmission lines into the ERCOT system for future transmission needs, reliability and wind collection benefits.

Option ERCOT-6 carries the lowest overall cost to ERCOT and SPP combined. However, ERCOT consumers would pay $26.8 million under ERCOT-6 versus only $9.1 million under a similar scenario, ERCOT-7, but SPS consumers would pay $104.2 million less under ERCOT-6 compared to ERCOT-7, due to added transmission in SPP required under ERCOT-7.

The only reliability mitigation plans required under ERCOT-6 are the addition of capacitor banks at Midkiff, St. Lawrence, Stiles, Grady, Gardendale and Vealmoor in ERCOT.

Sharyland asked that the PUCT issue an order regarding a potential transition to ERCOT by May 13, 2011 to provide enough lead time, and in light of the expiration of its current SPP supply agreement on December 31, 2013. Sharyland's execution of a new power supply arrangement in SPP could erect a barrier to moving to ERCOT, Sharyland noted.

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