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Trial and Error in Texas


A hard year puts deregulation to the test.

Fortnightly Magazine - January 2009

a rulemaking modification to strengthen the financial assurance requirements of retail providers,” says Terry Hadley, a spokesman for the PUC.

Those changes include beefing up financial certification standards for REPs, improving disclosure practices so customers are better informed if their provider goes under, and revising the so-called provider-of-last-resort process.

The early days of deregulation were all about drawing new players to the table. Market barriers, traditionally almost insurmountable in the electric business, were intentionally left low. The strategy succeeded in giving customers choice—dozens of REPs now operate in Texas—but not all the new players could afford the game.

When the wholesale market went haywire in May, five of the smaller REPs couldn’t meet their credit requirements. In that situation, under SB7, the customer account passes to a provider of last resort. Electric service is not interrupted, but rates almost always go up, sometimes significantly. Hadley says the crisis demonstrated a need to improve the system.

“Most troubling was the effect on customers who essentially did the right thing,” he says. “They shopped for a provider, looking for value. However when the provider left the market suddenly, the provider-of-last-resort rule as it currently exists dramatically increased their electricity rate until they were able to switch.

“They can switch at any time, but the dilemma is that these smaller providers that go out of business often do not provide necessary notification, so there’s a delay in the customers finding out. The process worked in terms of keeping the juice on, but the notification aspect did not.”

Neither did the low table stakes.

“Right now the lowest barrier to be a retail provider is $100,000 cash,” Hadley says. “That will be significantly strengthened.” The PUC is considering new rules that would require prospective REPs to have an investment grade rating or tangible net worth of at least $100 million, with liquid capital of at least $1 million.

“Early on the intent was to encourage as much market entry as possible,” Hadley says. “Now that the market has matured, the current commission has realized it’s time to strengthen the minimum financial requirements for providers.”

Work in Progess

The challenges of 2008 revealed a lot about Texas’s deregulation scheme—both what works, and what doesn’t.

“I think it showed the evolution of [deregulation],” Hadley says. “We’re now in our seventh year. At first the key issue was getting customers to realize that they had to shop for electricity if they wanted the best price. Now we’ve evolved to the point where a significant number of customers have to deal with the fallout when smaller providers can’t meet financial requirements.”

The ongoing maturation process will reshape the PUC’s approach to reducing transaction costs and increasing consumer protection. Plus, wind generation presents growing challenges for load forecasting and market management.

“We have to get smart about predicting wind generation,” Hadley says. “If you think you’re going to have 5,000 MW of wind blowing tomorrow and it doesn’t show up, that’s a big number. And vice versa, if you decide not to count on any of it, then you might bring