TXU Customers Pay for Flawed Interpretation of Electric Law (March 2003).
By Tim Morstad

Over two million North Texas residential and small business electric customers will soon face a 12 percent increase in their electric bills due to a broken provision in the state's electric deregulation law. Equally troubling is that rules established by the Public Utility Commission set the stage for this increase.

For nearly a century, state law required ratepayers to pay for the cost of the service and a reasonable profit margin to the utility. But electric deregulation has changed this.

Instead of requiring utilities to fully justify rate changes, state regulators have interpreted our electric deregulation law to allow former monopolies, such as TXU, to increase rates without proving that their existing rates do not cover their costs. While this may be reasonable under an economics model that assumes rigorous competition drives prices down, it is certainly not appropriate in today's barely competitive electric market. Virtual monopolies like TXU should not be allowed to raise their rates without justifying their need.

How did we get here? In deregulating the electric market, the Legislature recognized that electric power competition would not develop overnight and that residential and small business customers were more at risk. They wisely foresaw a need to continue price regulation of companies like TXU until effective competition took hold. To protect ratepayers in the new electric market, the law established a regulated rate for the incumbent utility called the Price To Beat (PTB). In the North Texas area, TXU is required to charge the PTB rate to residential and small businesses customers until 2005.

But when the electric deregulation law was implemented, a radical reinterpretation of this consumer protection transformed the PTB from providing a safe harbor for consumers into something that looks like a tool to aid new electric providers. The argument was made at the PUC that the PTB must be maintained sufficiently high to entice competitors to enter the market at a profit, with no regard to whether consumers are paying fair prices.

What does this mean for TXU residential and small business electric customers in North Texas? It means that until the PTB provision of the electric deregulation law is fixed, your rate can be increased any time the price of natural gas futures jump over 4 percent for a 10-day period on the New York Mercantile Exchange--a volatile market. This is the sole criteria companies like TXU must meet to request a rate increase. And once these companies request the raise, the PUC has no choice but to approve it. Sound outlandish? It is.

Let's put this change into practical terms. In February 2001, TXU requested a rate increase under the regulated system citing natural gas prices of $5.31/MMBtu. TXU's latest rate increase uses lower natural gas prices of $4.91/MMBtu, yet calls for a 26% higher fuel factor. In our view, the new system looks like a bad deal for consumers.

Are you getting a good deal on your electric rate? State regulators don't know: they no longer look at the costs of generating or acquiring that electricity. Even if a competitor offers electricity at a lower rate than TXU, you still may not be getting a good deal, since even this rate may be well above what it cost them to provide the power. In fact, consumers are seeing retail rates increase at the same time many electric companies in Texas are mothballing power plants citing low wholesale prices.

The missing piece of the puzzle is competition. And until competition can hold prices down, dominant companies like TXU--which control 93% of the residential electric market in North Texas--should still be made to justify rate increases by showing their costs are not covered in their current rate.

Even more troubling is that when gas prices decline--even for a significant period of time--the PUC is not permitted to reduce the PTB rate unless TXU asks them to. The law allows only former monopoly companies to request adjustments. While TXU can theoretically ask the PUC to lower that rate, they have little motivation to do so. All the adjustments to date have been increases.

It is time the Texas Legislature clarified the intent and purpose of the PTB. Family budgets are under the same strain as the state budget. Lawmakers should ensure electric bills are fair, not inflated.