Electric Deregulation May Bring Higher Rates in Texas

Electric Deregulation May Bring Higher Rates in Texas

By R.A. Dyer, Fort Worth Star-Telegram, Texas -- June 7

Despite promises of cheaper electricity, Metroplex residents could soon pay more under electric deregulation than they paid 18 months ago under the old regulated system, according to an analysis by Fort Worth and other cities.

The higher rates would result from a proposed TXU rate increase that, if approved, could take effect by next month. The increase, tied to higher natural gas prices, would erase any benefit from a 6 percent rate reduction included in the Texas deregulation law, the analysis shows.

People outside the Metroplex will also pay more under electric deregulation if the Public Utility Commission approves increases for other utilities, according to similar reviews.

"This is not what the Legislature intended," said Kristen Doyle, an attorney for Fort Worth, Dallas and other cities served by TXU, Central Power and Light and other utilities. "If that (TXU) increase gets approved, it will cost more for electricity under competition than it would before deregulation."

Although not disputing the underlying figures, a TXU spokesman called the cities' analysis unfair. He also said that deregulation allows customers to shop for cheaper electricity if they don't like what TXU is charging.

The dispute raises questions about a central promise of deregulation: Will it result in cheaper electricity for Texans? It also addresses what has become an increasingly hot topic as the gubernatorial race enters into the summer months.

In TV advertising, Democratic challenger Tony Sanchez has linked Republican Gov. Rick Perry with an electric "price hike". The Perry camp calls the advertisements inaccurate and cites PUC figures showing that major utility rates dropped when the law took effect.

Neither side disputes that rates dropped Jan. 1, the first day of deregulation, when compared with utility rates at the end of last year. But a precipitous drop in the cost of natural gas -- not a 6 percent rate drop mandated by the law -- explains most of that decline.

The state's major utilities can charge no more than those Jan. 1 rates for the next three years, although they can request adjustments to reflect higher fuel costs. To control for such changes in fuel costs, the cities compared the proposed rate increase to pre-deregulation rates during a period with similar natural gas prices.

Under the company's proposed increase, TXU figures natural gas at a $3.63 per million British thermal units. In January 2001, TXU figured natural gas prices at $3.83.

After deregulation -- under the proposed rate increase and with gas prices slightly cheaper -- TXU customers would pay 8.7 cents per kilowatt hour, the analysis shows. Before deregulation -- and during that period with slightly more expensive natural gas prices -- TXU customers paid about 8.5 cents per kilowatt hour, according to the analysis.

That's about an $87 electric bill for the average Metroplex homeowner under the proposed rate increase. About 18 months ago, the average homeowner paid about $85 per electric bill. The post-deregulation bill would be higher, despite the 6 percent rate reduction that took effect Jan. 1, according to the analysis.

An administrative law judge recently approved the proposed rate increase, which now goes to the full PUC for consideration. If approved, Metroplex customers could be paying the higher rates next month, a company spokesman said.

TXU's Chris Schein questioned the fairness of the cities' analysis, saying the commission now uses different methods when calculating fuel charges.

"We're absolutely comparing apples to oranges here," Schein said. "And from those comparisons, the cities are using misleading information designed to confuse everyone."

For instance, the commission no longer allows TXU or other major utilities to recoup any of their past losses associated with fuel costs. Schein said that TXU has been undercharging for fuel for several months and that the company will never recoup those losses.

"That is a million dollars statewide that customers will not have to pay," he said.

TXU also uses more natural gas than during that previous period, and the company's proposed increase fairly approximates its current fuel expenditures, he said.

The cities agree that the commission uses new methods to determine fuel costs -- but they argue in a challenge of TXU's proposed rate increase that those methods are unfair.

Although TXU no longer charges customers for past fuel losses, for instance, neither must it lower rates if its fuel costs drop and it overcharges customers. Under the old system, the utilities could recover only their exact fuel costs -- no more, no less.

Likewise, the commission previously considered a broad variety of fuel-related components -- including expenditures for natural gas, lignite, coal and nuclear generation -- when setting rates. Under deregulation, the commission focuses on a single component: natural gas futures.

Doyle, the attorney representing Fort Worth and other municipal governments, said the new method hurts consumers and undermines electric deregulation. As a result, homeowners could pay more under deregulation.

"Natural gas prices are the most volatile component of fuel factors," Doyle said. "And if you just tie in natural gas prices, you are passing 100 percent of the risk to the customer. It's like buying 100 percent of your energy on the spot market, every single day."

A PUC spokeswoman said the commission closely followed the 1999 deregulation law when it adopted rules on judging utility requests for fuel-related rate adjustments. She said that the commission must now follow those rules, and that those rules do not leave much room for interpretation.

"There is a good deal of math to it ... to determine the calculation was done correctly," PUC spokeswoman Carrie Collier said.

Doyle also argued that although Metroplex residents would have paid less under the regulated rates -- even those rates were too high.

That's because the PUC allowed higher rates for several years before deregulation so utilities could recoup the cost of various big-ticket investments, officials say. Ratepayers paid TXU at least $887 million extra from 1998 to 2001, according to documents on file at the PUC.

TXU spokesman Schein said the PUC would have authorized utilities to charge for those investments anyway -- with or without deregulation -- and that consumers may have saved interest payments by paying for them earlier.

But given the previously higher rates to cover investments and the new method of calculating fuel costs, Doyle said consumers could end up paying more under deregulation.

"Rates are already overinflated," Doyle said. "The commission let (utilities) overearn to pay down those (investment) costs -- that was acknowledged. Then the commission gave ratepayers a 6 percent reduction as a safe harbor as they went into a deregulated market. I don't know when the goal changed, but now they're flooding that safe harbor."

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