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Texas Senate Committee Report Recommends "Competitive Threshold" Be Established For Large Municipal Electric Utilities

Committee Report Recommends End Of State Power Program (GLO Sale Of Electricity From Selected Retail Provider)

Committee Report Says Capacity Markets "Certainly" Prop Up, "Older, More Inefficient," Power Plants At "Inordinately Burdensome" Cost

December 6, 2018

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Copyright 2010-17
Reporting by Paul Ring •

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The Texas Senate Committee On Business & Commerce has released an Interim Report to the 86th Legislature, addressing competition in municipal utilities and cooperatives, the State Power Program, and resource adequacy

Competition at Munis and Co-ops

The Interim Report recommends that, "To advance the accountability and transparency of Texas' largest municipal utilities who operate under the direct control of their city governments, a competitive threshold should be established in PURA for those municipal utilities reaching a service threshold of 200,000 customers or more. These customers should have a mechanism for appeal to the PUC for review of their bundled (fuel cost, transmission and distribution, and retail) rates."

The report noted that, within the public power segment, nearly 24% of the total number of meters served by all municipal utilities are concentrated and served by either CPS Energy (owned by the City of San Antonio) or Austin Energy (owned by the City of Austin). CPS serves approximately 810,000 meters, while Austin Energy serves over 484,000 meters. The next largest municipal utility is Lubbock Power and Light serving approximately 103,475 meters, followed by Garland Energy with 69,262 meters. Of note, Lubbock Power & Light has initiated a proceeding at the Public Utility Commission, Docket #47576, to investigate unbundling their municipal utility and going into competition within the ERCOT market. Lubbock may become the first MOU to opt-in to competition since deregulation in 1999.

The Interim Reports says that, "a clear line exists between consumer populations served by Austin Energy and CPS, which will grow exponentially over the coming years."

The Interim Report reaches the following conclusions regarding munis and co-ops:

• "The Committee finds that city governments owning large scale utilities have a discernable incentive to pass as much utility revenue through to city coffers as possible. These revenues can be used to fund policy initiatives completely outside the scope of the efficient operation of the utility or the affordability of the electricity they supply. Furthermore, a municipal utility's ratepayers are not always voters who are able object to rate increases through the local election process. The argument that city officials are accountable to their consumers through the electoral system is not true to the extent that it is for cooperatives who's consumers do elect their governing boards," the report said

• "As a result, those large municipal utilities under the direct governance of a city act as a tremendous revenue generator that is not subject to normal municipal appropriation processes. The Committee finds that this presents an inherent conflict of interest for a municipal government with access to the unlimited resources of an unregulated utility providing essential services to the public," the report said

• The Interim Report included an aggregate comparison of competitive and municipally owned utility (MOU) rates, and found, "On a system average basis MOUs have outperformed the competitive market 12 of the last 15 years since deregulation was adopted in 2003 (See Figure 2). However, this trend began to reverse in 2014 when natural gas prices began a slow decline in value below $4 per MMBtu."

• "Commercial and industrial consumers [at MOUs] shown in Figure 3, on average experienced higher electric rates for 5 of the last 15 years. City governments who ultimately govern municipal utilities, can impose affordability metrics differently depending on rate classes. Great effort is made by these governments to ensure residential rates will be cheaper than those of the commercial and industrial classes, by how much depends on the city," the report said

• "As noted in Figure 4 residential rates have consistently been lower for consumers in MOU service territories since 2003. The discrepancy observed between the rate classes reflects a public policy preference of the governing municipal leadership from deregulation to now. The following charts from Austin Energy bear out the rate disparity between residential and business rates that correlates to the statewide average," the report said

• "The Committee finds that electric cooperatives are the best means of serving a segment of Texans that private markets may not be interested in serving, with the caveat that this too may change over time as populations shift and industry follows," the report said

• "When evaluating the costs and benefits of public power and electric cooperatives to the consumers of Texas the comparisons to competitive regions become more ambiguous. The Committee found that electric utilities in the State of Texas are not equal when trying to compare their competitiveness with the context of ERCOT, or outside markets. The populations, economic diversity, and territories they serve determine the appropriate application of competitive forces," the report said

• The Interim Report included an aggregate comparison of competitive and co-op rates, and found, "When looking at cooperatives in the residential rate tier they track very closely with the competitive markets. However, the commercial and industrial rates appear to average 9% higher in coop [sic] territories than is seen in the rest of ERCOT for 3 of the last 10 years."

State Power Program

The Texas General Land Office (GLO) is authorized by PURA to sell electricity to, "public retail customers that are military installations of the United States, agencies of this state, institutions of higher education, or public school districts." Surplus power, "may be sold to public retail customers that are political subdivisions of [Texas] or to a United States Department of Veterans Affairs facility." This program is known as the State Power Program.

Because the GLO does not own electric generation facilities, it contracts with a retail electric provider (REP) to leverage the GLO’s natural gas holdings into electricity, which is sold to the authorized customers listed above. The current REP administrating the State Power Program is Cavallo Energy Texas, a subsidiary of Calpine Corporation.

Moreover, because the State Power Program is administered by the GLO, it is not subject to the Public Utility Commission tax assessment, nor is it subject to the Gross Receipts Tax, imposed under Chapter 192 of the Tax Code. This represents a 2% reduction in overhead from the GLO administered program.

The report stated, "Additionally, having a governmental entity competing with private companies creates an inequity where schools that have chosen to choose a new REP are paying the Public Utility Commission tax assessment and the Gross Receipts Tax that currently are funneled back into support the State Power Program, while those remaining with the State Power Program are not. "

The Interim Report recommends that, "The State of Texas should not be in the business of competing against private markets. Extenuating circumstances dictating a deviation from this policy can always be justified for a time, but a return to open markets free of government interventions should always a be a goal that guides state policy."

"As such, the Committee recommends that the State Power Program (SPP) administered by the General Land Office of Texas be phased out over time dependent on the conditions and terms of contracts already entered into by the state and its counterparties," the Interim Report recommends

"Furthermore, to hold the children of Texas harmless as the result of any policy decision made in regards to the SPP, the Committee recommends that all schools be exempted from paying the Gross Receipts Tax when contracting for retail power within the ERCOT areas of Texas," the Interim Report recommends

Resource Adequacy

The Interim Report does not include specific recommendations on resource adequacy, but makes the following conclusions:

• "Most other systems in the United States employ some form of a 'capacity market', where generators are paid a capacity payment to stay in operation. The payment level in these markets is the source of heavy litigation between consumer groups and generators every time a modification to a rate tariff is needed. In the end, whether the direct subsidy actually incents new generation be built is the subject of heated debate. It certainly has the effect of propping up older, more inefficient power plants and technology at a cost to consumers that become inordinately burdensome. Of note, the Committee put the question of whether a capacity market is needed to Amanda Frazier representing Vistra Energy, the largest baseload generator in the State of Texas. Ms. Frazier said that 'we are committed to this market and we believe that if this market is allowed to work it will work over time.'"

• "Conversely, in the energy only market ancillary services remain the primary means by which ERCOT structurally regulates system reliability, and the costs of those services are continually uplifted to load. Since the real-time price of power is the only market signal that determines when and how generation, regardless of its capabilities, should run, ERCOT is constantly trying to manage the market with ancillary service contracts and programs just to keep the lights on. All of which have costs for reliability maintenance that are always borne by the consumer, and not by the source of the reliability problem. As these ancillary service and transmission costs continue to grow to ever greater numbers this will become a concern for policy makers"

The only recommendation from the Interim Report on resource adequacy is that, "The State of Texas needs a reliable source of power. The market grows in complexity by the day with the introduction of new and innovative technologies. The industry may not be best suited to adapt our market to incorporate the numerous disruptions that they face. The Legislature needs to continue to actively monitor and engage in public dialogue about the regulations necessary to ensure our electric services are maintained and enhanced. The PUC should continue to provide a space where ideas can be debated about how to achieve the goal of providing reliable and cost effective resources for Texas consumers."

Link To Report

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