June 1999
Texas Legislature Passes Electric Utility Restructuring Bill
by Robert Olson  --   Brown, Olson and Wilson, P.C.
(originally published by PMA OnLine Magazine: 06/99)

Recently, the Texas legislature passed new electric utility restructuring legislation which requires retail competition in the electric utility market by January 1, 2002. The bill is supported by Gov. George Bush and is expected to be signed into law. The bill was widely supported by diverse groups such as The Association of Electric Companies of Texas, The Environmental Defense Fund, New Energy Ventures, Competitive Power Advocates and The Consumers Alliance of the Southeast because of its balance and fair provisions for stranded cost recovery, emission controls and generation control.

In general terms, the bill will give residential customers a choice of electricity providers by January 1, 2002, freeze rates at existing levels before competition begins, reduce rates when competition begins and limit market control in any particular power region. The bill also addresses reliability, customer protection, customer education and improvements in air quality.

Stranded cost provisions
Under the Act, an electric utility is allowed to recover all of its net, verifiable, non-mitigable stranded costs incurred in purchasing power and providing electric generation service. The utility can recover retail stranded costs from all existing and future retail customers and loads within its geographical, certificated service area as it existed May 1, 1999. Stranded costs shall be allocated among customer classes as follows: 50% of such costs shall be allocated in the same manner that costs are allocated in the underlying assets in the utility’s latest Commission order regarding rate design, and the remainder shall be allocated according to the energy consumption of the customer classes. Retail and residential stranded costs shall be allocated the same way among the retail and residential customer classes respectively. The stranded costs may be quantified by using one of the following methods.

• Sale of generation assets

• Stock valuation

• Partial stock valuation

No utility will be forced into an outright sale of generation assets.

Unbundling
The bill includes an unbundling provision. Each electric utility will be required to separate, or unbundle, its costs and rates into transmission, distribution, power generation, retail electric services, a system benefit fund charge and a expected competition transition charge, on or before September 1, 2001. The electric utilities will also be required to separate their business activities into a power generation utility, a retail electric provider, and a transmission and distribution utility before January 1, 2002. The utility may accomplish this separation of functions by creating either separate non-affiliated companies, or separate affiliated companies owned by a common holding company or by a sale of assets to a third party. The utility must file an unbundling implementation plan with the PUC by January 10, 2000.

Price to Beat
The legislation includes a "Price to Beat" provision that allows customers an automatic price reduction if they have not already chosen an alternative Retail Electric Provider, ("REP"). As of January 1, 2002, customers of investor-owned utilities, municipally owned utilities (which allow customer choice) and electric cooperatives (which allow customer choice) in qualifying power regions will be able to choose a REP. If a customer has not chosen another REP, the REP currently affiliated with that customer’s transmission and distribution utility will charge at the "Price to Beat" rate. That rate will be 6% less than the bundled, corresponding average rates which were in effect on January 1, 1999. This price will remain frozen until either 36 months or 40% of the residential and small commercial customer load has switched to non-affiliated REPs, whichever comes first.

Market Power and Capacity Auction
Ownership and control of regional capacity, or electricity delivery to a region, will be limited to 20%. Electric utilities who own more than 20% of the generation capacity located in, or capable of being delivered to, a power region must file a mitigation plan with the PUC no later than December 31, 2000. To further monitor the capacity of a power region, every owner of any entity which offers electricity for sale must report its capacity to the PUC for a market power assessment. Independent system operators in the region will submit an annual report to the PUC on or before October 1, 1999 identifying existing and potential transmission and distribution constraints and system needs, as well as alternatives and recommendations for meeting system needs.

Electric utilities will be required to auction at least 15% of their installed generation capacity at least 60 days before the date set for customer choice to begin. Entities owning less than 400 MW installed generation capacity are exempt from this requirement. The PUC will adopt rules for the procedure of the auction.

Authorities of the Public Utilities Commission
A "Code of Conduct," which prescribes terms and conditions necessary to prohibit anti-competitive practices, will be established by the PUC. The code will apply to all market participants and their affiliates. The PUC is required to adopt rules governing transactions or activities between a transmission and distribution facility and its affiliates. The PUC is authorized to order an electric utility to provide specific improvements in its service area, or to order two or more electric utilities to establish facilities for interconnecting service. The PUC must ensure that an electric utility, or transmission and distribution utility, provides nondiscriminatory access to wholesale transmission service for qualifying facilities. This does not include wholesale generators, power marketers, power generation companies, retail electric providers, and other electric utilities or transmission and distribution utilities. The commission shall also ensure that ancillary services necessary to facilitate the transmission of electric energy are available at reasonable prices. The PUC is authorized to require each electric utility and transmission and distribution utility to supply data which will assist the PUC in developing reliability standards.

The PUC also has the authority to delay competition and set new rates if it determines that a power region is not able to offer fair competition and reliable service to all customers on January 1, 2002. Customer choice pilot projects may be used by the PUC to evaluate the ability of each power region and electric utility to implement customer choice.

A much discussed provision of the bill requires the PUC to develop and implement an educational program to inform customers about the changes in electric service provision and the customer choice pilot program. The educational program must include low-income and non-English speaking customers and be neutral and non-promotional yet provide customers with the necessary information to make informed decisions regarding their electric service. The educational programs are to be funded from the System Benefit Fund.

State Authority to Sell Power
The bill authorizes the State, through the Commissioner of the General Land Office to sell or convey power directly to the public retail customer whether or not that customer is also classified as a wholesale customer. The Commissioner must attempt to first sell power to public retail customers that are agencies of the State, institutes of higher education or public school districts.

Renewable Energy Goal
Each retail electric provider, municipally owned utility and electric cooperative is required to obtain a minimum of 1.65% of its annual capacity requirements from renewable energy technologies by January 1, 2003. Every two years, the minimum percentage of annual capacity increases as follows:

January 1, 2005 - 2.15%
January 1, 2007 - 2.75%
January 1, 2009 - 3.0%

The PUC must establish a renewable energy credits trading program which requires entities that do not satisfy the above criteria to purchase credits to satisfy the requirements.

Robert A. Olson is a partner in the law firm of Brown, Olson & Gould P.C. which maintains a nationwide practice in energy law, public utility law and related commercial transactions. He can be reached at:

Brown, Olson & Gould, PC
2 Delta Drive, Suite 301
Concord, NH 03301

rolson@bowlaw.com | (603) 225-9716