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Electric Deregulation in Texas

Understanding the opt-in decision for Municipal Utilities

BTU is a Municipally Owned Electric Utility or MOU as they are commonly known in the electric industry. The information below is a high level look at the steps involved for a municipal utility or Electric Cooperative (Co-op) in the state of Texas to “opt-in” to the electric industry. There are many, many details that are associated with every step, but this synopsis will begin to explain the major areas that must be addressed.

Contents:

  • What is deregulation?
  • How can a MOU “opt-in” to deregulation?
  • Policy considerations – the opt-in decision.
  • Detailed operational and utility requirements – the opt-in decision.

Summary:

  • Deregulation is a system in which customers choose among electric retailers while the local utility maintains electric wires as a common carrier.
  • In Texas, private utilities are deregulated. Municipals and cooperatives have a local option to deregulate. To date, none of the 72 municipal utilities in Texas have chosen to opt in to deregulation because MOU rates are comparatively low and retail markets have experienced issues including significant price volatility.
  • Policy considerations for a MOU that might opt in to deregulation include:
    • Potential negative impacts on city finances, including bond ratings and the transfer of electric utility revenues to general government.
    • The impact on other city operations, like water and wastewater utilities which share billing with the MOU electric system.
    • The impact on customers now paying comparatively low MOU rates who may experience varied pricing levels in deregulation.
  • To participate in retail electric deregulation, an MOU must meet state-mandated operational requirements. The conversion can be lengthy and expensive, involving: new billing systems, new information technology to interface with statewide deregulation systems, changes in electric rates to unbundled services, splitting the MOU (facilities, personnel, books) to segregate the new retail function, charging customers for state-mandated low-income and other programs, etc.

What is deregulation?

  • Names: electric deregulation, retail deregulation, customer choice, industry restructuring.
  • Basics: customers choose among a variety of electricity retailers, the local utility operates electric lines like a common carrier to transport the electricity of multiple retail providers, state regulations apply to customer switching, certain customer service policies, etc.
  • Utility functions:
    • Retail. Before deregulation, customers purchase retail electricity from a local utility (investor owned, municipal, or cooperative) that is certified by the state to be the exclusive electricity provider in an area. After deregulation, retail is a competitive utility function – customers can choose among suppliers of retail electricity.
    • Transmission and Distribution (wires): not competitive – even after deregulation, local utilities own, operate, and repair electric lines, but the lines can be used to transport the electricity of multiple other retailers.
    • Generation: competitive at the wholesale level – the construction and operation of power plants.
  • Regional deregulation in Texas. Senate Bill 7 enacted in 1999.
    • Deregulated: investor owned utility (IOU) areas within the ERCOT region of the state – about 70 % of the market.
    • Not deregulated – local option: MOUs and electric cooperatives.
    • Not deregulated – IOUs in regions electrically connected to other states (Panhandle area, east Texas, etc.).

How can a MOU “opt-in” to retail deregulation?

  • SB-7 provides that a MOU is not part of deregulation until an affirmative decision to opt-in is made by the local governing body (usually the MOU’s city council).
  • A MOU decision to opt-in to deregulation is irrevocable.
  • After a MOU opts in to retail deregulation:
    • Other retail providers can sell electricity to the MOUs current customers.
    • The MOU must separate its wires function and set non discriminatory rates for other retailers to transport their power on local electric lines. The MOU must still maintain those lines and, for example, restore power after a storm.
    • As one of many retailers, the MOU can still sell electricity locally, Under certain circumstances, the MOU can choose to sell electricity externally.
  • To date, none of the 72 MOUs in Texas have opted in to retail electric deregulation. All have judged that the benefits to MOU consumers and their cities are unclear. Concerns have been raised because retail markets (opened in 2002) are still maturing and have experienced price fluctuations, the entry and exit of multiple retailers, etc.

Policy considerations – the opt in decision.

  • City finances – general fund transfer. All MOUs transfer a portion of electric revenue to general government to fund police, fire, parks, libraries and other municipal services. Opting in to deregulation will impact the MOUs revenue production and funds available for general government purposes.
  • City finances – borrowing costs and bond ratings. The revenue impact of a MOU opting in can be reflected in the bond ratings and the borrowing costs of the MOU and the city as a whole.
  • City operations – shared services. If a MOU opts in, a different billing system is required and is likely to impact the billing of other municipal services (like water and wastewater) which currently share a consolidated city billing function. MOU participation in other shared city functions (like fleet, IT, etc.) can also be affected.
  • Utility operations – expensive conversion. As detailed below, after opting in to deregulation, a MOU must: design and implement a new billing system, procure significant information technology to interface with ERCOT on retail transactions, undertake a major rate change process, and split its organization to have separate facilities, personnel, and bookkeeping for the new deregulated retail function.
  • Customer impacts – electricity prices. MOU prices are a good value, stable and at the low end of the industry. Prices after opting in may vary among residential, commercial, and industrial customers.
  • Customer impacts – service. MOUs have been leaders in customer service and have local policies that are responsive to community priorities, for example regarding customer deposits, disconnections, critical care customers, low income customers, etc. Retailers serving in the area after a MOU opts in are likely to have different policies that may be less reflective of community priorities.
  • Customer impacts – efficiency and renewables. The MOU structure allows local authorities to set policies related to energy efficiency and renewables. After a MOU opts in, access to energy efficiency and use of renewable energy may be different for customers, with policies set by non-local companies and regulators.

Detailed operational and utility requirements – the opt in decision.

  • Complying with state rules for operating in a deregulated environment requires an expensive conversion by the MOU.
    • Functional separation of electric distribution from retail/customer service.
    • New billing system (separate from billing for water, wastewater, etc.).
    • Potential re-configuration of wholesale power contract.
    • Compliance with ERCOT and Public Utility Commission requirements.
  • Regulatory compliance for deregulation that involves additional customer fees and utility expenditures by the MOU.
    • System Benefit Fund. The MOU must collect, and all customers must pay a fee of $.50 to $0.65 per MWh to fund statewide state-regulated low-income discounts and customer choice education programs.
    • Code of Conduct per Public Utility Commission Rules. The MOU (likely with outside legal and consulting assistance) must establish a code that governs interaction between the MOU’s transmission and distribution unit and it own retailing function. Implementation of the code requires added expenditures (separate office space, separate books and records, restrictions on employee sharing, restrictions on information sharing, etc.)
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