REPs Differ on Whether Higher ERCOT Offer Cap Amounts to Change in Law Permitting Change in Fixed Rate Contracts

Retail electric providers offered differing interpretations regarding whether a change in the ERCOT System Wide Offer Cap would amount to a change in law allowing REPs to modify fixed price contracts with small volume customers.

Subst. R. §25.475 allows retail electric providers to change rates in fixed-rate products for retail customers due to, "changes resulting from federal, state or local laws that impose new or modified fees or costs on a REP that are beyond the REP's control," and the Public Utility Commission of Texas had asked if this provision would be implicated if the Commission adopted a pending proposal to increase the SWOC to $4,500 effective August 1, 2012.

Direct Energy, while stating that it was in no way prejudicing its right to avail itself of the protections afforded by Subst. R. 25.475, said that, "[t]he facts, however, surrounding this project and the commission's recent history on this same topic do not merit application of Sec. 25.475 protections here."

Direct Energy noted that, "[t]he potential for changes to the system-wide offer cap has existed since at least 2005 when the commission discussed the appropriate scarcity pricing mechanism."

"For example, 'shame caps' were adopted and eliminated, offer caps have been imposed and raised, and adjustments to offer caps have been discussed for months in response to dwindling power generation reserves. The negative impacts, if any, on longer term, fixed price contracts are avoidable in a market where hedging all or a portion of sales is essential to prudent risk-taking and practice. In this liquid, stable and nimble market, REPs have the tools to manage forward risk in a controllable manner," Direct Energy said.

IPR-GDF SUEZ Energy North America, Inc. likewise said that application of the "change in law" provision is strictly limited, "to a cost pass-through of only those material, non-market based Ancillary Service costs in the ERCOT market which it [the REP] actually incurs."

Such costs include Congestion Revenue Rights (both ISO amounts and Zonal amounts), Cost Allocation for Ancillary Services Procurement, and the Real-Time Revenue Neutrality Adjustment Charge, which are not directly hedgeable in the market, IPR-GDF SUEZ Energy North America said.

Otherwise, IPR-GDF SUEZ Energy North America said that the change in law provision cannot be invoked for energy costs and "market-based" ancillary services, because such costs can be hedged against and are thus not beyond a REP's control.

Specifically, IPR-GDF SUEZ Energy North America said that Non-Spin Responsive Reserve Service (NSRS), Down Regulation Service (DRS), Up Regulation Service (URS), Responsive Reserve Service (RRS), and Renewable Portfolio Standards / RECs can be hedged. The RUC Capacity Shortfall Charge can be partially hedged through the purchase of Energy, Capacity and peaking products like energy call options, and Unaccounted-For-Energy can be partially hedged by purchasing energy, IPR-GDF SUEZ Energy North America said.

Broker Blue & Silver Energy Consulting, LLC d/b/a Pro-Star Energy Services similarly would limit any costs eligible under the change in law provision, and would exclude, "any increase in costs for REPs resulting from increasing the SWOC other than those for ancillary services procured by ERCOT." As for the costs for ancillary services procured by ERCOT, Blue & Silver Energy Consulting said that any increase in cost should be limited to the incremental increase occurring during those intervals when the Day Ahead or Real Time market exceed $3,000/MWh, which is the current cap level.

Load interests, including the Office of Public Utility Counsel, City of Houston, Steering Committee of Cities Served by Oncor, and the Texas Coalition for Affordable Power also offered interpretations that a higher SWOC does not trigger the change in law provision.

In contrast, NRG Energy, Inc. said that the higher SWOC would trigger the change in law pass through provisions in PUCT Substantive Rule 25.475.

"The Administrative Procedure Act, Section 2001.003(6) (A), describes a Rule to mean 'a state agency statement of general applicability that: implements, interprets or prescribes law or policy or describes the procedure or practice requirements of a state agency.' The Commission's proposed Subst. R. 25.508 amending the offer cap for a limited time is implementing law and policy. The Commission's proposed rule creates the potential for increased costs to hedge and protect against $4,500 per megawatt-hour prices, or pay wholesale energy costs as high as $4,500 per megawatt-hour. Thus, risk premiums in hedging costs to cover the difference between $3,000 and $4,500 and any wholesale energy costs incurred by REPs between $3,000 and $4,500 are attributable to the Commission's regulatory action. As such, the proposal triggers the pass through provisions in PUCT Substantive R. 25.475," NRG said.

TXU Energy also said that it, "believes that, as a matter of policy, the Commission could reasonably interpret P.U.C. SUBST. R. 25.475 to allow REPs to increase the price of existing fixed-rate contracts for residential or small commercial customers to the extent that the REP's actual costs increase due to an increase in the cost of wholesale power caused by the change in the SWOC."

TXU Energy suggested, however, "that it would be in the best interest of all customers for the Commission to signal to the REPs (i.e., in adopting § 25.508) that it will be watchful of price increases to fixed-rate products for residential and small commercial customers, and REPs might be asked to demonstrate that any such increases are indeed commensurate with actual increases to their costs that have resulted from the increase in the SWOC from $3,000 to $4,500."

TXU Energy noted, "that it does not presently anticipate the need, or indeed have the desire, to make use of the potential flexibility in P.U.C. SUBST. R. 25.475 to increase the price of its residential or small commercial customers' fixed-rate contracts."