Past, Forecast Volatility Lifting Retail Prices in Texas, TXU Execs Report

Despite lower wholesale electric prices and natural gas prices, retail pricing across REPs in ERCOT has not come down as much as may be expected, due to last summer's volatility, and expectations for future volatility lifting forward pricing, TXU Energy executives said on an earnings call yesterday.

Asked by an analyst why retail pricing has not fallen more in line with a wholesale decline, John Young, Energy Future Holdings Corp. President and CEO, noted,
"[W]e're still on the heels of the pretty hot summer last year, and so the market is still trying to deal with ... the volatility associated with ... the hours of scarcity pricing that that triggered."

While gas prices have decreased, "it takes some time" for that prior-year volatility to be worked out of the market, Young said.

In particular, "volatility has been starting to show up in the forward curves," added Jim Burke, CEO of TXU Energy.

While settled real-time prices are lower, Burke noted that the forwards really started to move to the upside this summer.

"[T]he marketplace is starting to realize that the cost of swing and effectively managing the risk of this [retail] load, particularly in the summer, proved in 2011 to be quite detrimental if you're not going in to the position a little bit more hedged," Burke said.

Despite softer gas pricing, "we're still looking at prices in the $55-$65/MWh [range] to serve a retail customer at the wholesale level for 2013," which excludes wires charges, Burke added.

"The full cost of serving has not been coming down as much as the real time prices might indicate," Burke said.

Still, executives expect competition to result in retail pricing falling more in line with wholesale pricing, and said that the volatility is just making the process take longer.

TXU's customer attrition during the third quarter was first reported by Matters yesterday