Texas Rep. Jim Pitts Seeks Changes to Reduce Negative Impact on Prepaid REPs from Maximum POLR Rate Price Cap

Texas State Representative Jim Pitts has asked the PUCT to review the current rule prohibiting electric offers to prepaid residential customers in excess of the Provider of Last Resort charge, stating that this rule negatively impacts prepaid providers who hedge.

Per Subst. R. §25.478(a)(5), and pursuant to the Public Utility Regulatory Act (PURA) §39.107(g), "a REP that requires prepayment for metered residential electric service may not charge an amount for electric service that is higher than the price charged by the POLR in the applicable transmission and distribution service territory."

The maximum POLR rate for residential service is determined under a formula which reflects, "the sum over the billing period of the actual hourly MCPEs for the customer multiplied by the level of kWh used multiplied by 120%," plus a 6¢/kWh customer charge, plus nonbypassable charges (including transmission and distribution. ERCOT fees, etc.).

"[T]remendous growth of the wind industry in Texas, coupled with unusually mild weather (and thus decreased demand for power), has resulted in the previously unimagined scenario where on several occasions the MCPE was actually negative - that is, electric generators have been paying to put their power onto the grid. For example, this was noticed during the mild spring and summer of 2010, and the negative MCPE consequently resulted in POLR rates that were abnormally low as well," Pitts noted.

"Providers pre-buy power at a fixed rate to limit the risk of huge price swings, such as the February 2011 winter storm which caused a $3,000 MWH cost for providers that did not pre-pay, as well as the August 2011 summer heat wave where the average MCPE price for electricity was nearly 23 cents per kilowatt hour," Pitts continued. "Buying power in advance benefits the market as whole, because it tends to limit volatility and allows the generators to forecast the necessary output and plan accordingly."

However, Pitts said that in instances where the POLR rate is "artificially" depressed (reflecting the effects of negative MCPEs), "it is practically impossible for a pre-paid provider to sell at the minimum POLR rate." Prepaid REPs are negatively impacted particularly in instances in which they have hedged power supplies at prices which were originally under the POLR rate, but which are transformed into above-market rates due to periods in which negative MCPEs lower the POLR rate.

"One such company that has been affected by the negative MCPE is Apollo Power & Light, which is based in Dallas, Texas and serves several thousand postpaid, commercial and prepaid customers across the state of Texas," Pitts said, reporting that Apollo has made forward purchases in the past to hedge its prepaid load. However, "[w]hen the [MCPE] price of power drops, so does the POLR rate, which could place providers, such as Apollo, in jeopardy and directly affect millions of Texans who must prebuy power in today's current economic environment."

Pitts asked that the Commission, "look into how to not punish REP's for being prudent in purchasing electricity in advance and to correct the issue of POLR when the MCPE goes negative."

Pitts did not provide any data on how much of a spread has occurred between POLR rates in these instances of negative MCPEs and the prices at which REPs had hedged.

As noted above, prepaid residential pricing is governed by PURA §39.107(g) which states, "Metered electric service sold to residential customers on a prepaid basis may not be sold at a price that is higher than the price charged by the provider of last resort."

Accordingly, the Commission must work within this confine should it believe any changes are warranted. The PUCT does retain jurisdiction over the determination of POLR pricing. However, while clearly within the power of the Commission, Pitts never suggested a change in the maximum POLR rate to resolve his concerns (and no doubt any increase in the maximum POLR rate would be opposed by consumer groups). Rather, Pitts, while not discussing specifics, suggested, "allowing utilities [REPs] to set a market price that hedges against the volatility of the real-time time pricing model in ERCOT without violating the rule [§39.107(g)]."

While the term "sold" under §39.107(g) could be interpreted to address some of Pitts' concerns, such an interpretation would only reasonably work for fixed products, while the vast majority of prepaid providers offer variable products. Specifically, under the current implementation of §39.107(g) and associated rule, it appears the current month's prepaid rate is tested against the contemporary POLR rate, which may be lower than the POLR rate which was in effect when the customer contract was signed.

If the prepaid service were a term agreement for a fixed priced, an argument could be made that the "metered electric service sold" to the customer was sold at the point of contract execution, and thus, the only pricing comparison should be between the fixed rate in the prepaid contract, and the maximum POLR rate in effect at the time that such contract was executed. Such an interpretation: (1) would allow REPs to hedge supplies to meet the price agreed to in the fixed price contract; (2) recognizes that the retail rate in this contract was less than the POLR rate at the time the customer committed to buy the power; and (3) would not penalize the REP for prudently hedging in cases where the maximum POLR rate decreases during the term of the contract, by allowing the REP to charge its original rate which was below the prior maximum POLR rate.

As noted, this model would not reflect the reality that the vast majority of prepaid products are not fixed contracts. Matters believes this more lenient interpretation of "sold" cannot reasonably be applied to variable contracts since the customer makes no term commitment under such contracts.

The PUCT yesterday did assign Docket 39969 for a rulemaking to amend Subst. R. §25.43, relating to Provider Of Last Resort (POLR), §25.478, relating to credit requirements and deposits, and §25.498, relating to prepaid service, which cover the applicable substantive rules implicated by Pitts' request.