The Texas method for assigning provider of last resort draws criticism from market players and consumer advocates.

Texas, like every other jurisdiction that has instituted choice, has had to confront the methods, obligations, and responsibility associated with the assignment of a provider of last resort (POLR). In other words, what do regulators and market participants do about customers who choose not to choose, customers whose competitive provider goes out of business, and customers who are not paying their bills?

Texas chose a different path to the POLR assignment, but is currently revisiting some of those choices because of various degrees of dissatisfaction with the original decisions. For example, when queried about what she liked about the current POLR rules, Barbara Alexander, a consumers affairs expert who provided testimony on behalf of Texas Legal Services, replied, "Nothing." But we get ahead of the story. To understand Texas POLR, one must understand the basics of the Texas market structure.

The Texas retail electric market opened to choice on January 1, 2002 to much industry fanfare. The wires functions of the business were split from the generation and retail portions. All customers who did not make a choice were assigned to the affiliated retail energy provider (AREP) of their local transmission and distribution utility (TDU). The rates charged for the smaller customers (<1 MW) by the AREP were and are administratively determined and are known as the price to beat (PTB). The AREP can offer only the PTB for the first three years of market choice or until 40 percent of customers have switched to someone else. The PTB includes all transmission and distribution (T&D) charges passed on from the TDU. This means an REP (affiliated or not) is the single retail contact of customers (i.e., the TDU charges are just a line item on the REPs bill to their customers). Unlike the AREP, other REPs are not hamstrung and may charge whatever they determine is optimum. The market for larger customers (>1 MW) is more freewheeling. The initial price charged by the AREP for non-switching customers is not determined administratively, and the AREP may sign up customers to custom deals just like any other REP.

The Texas POLR Today

POLR is a fixed, non-discountable service under the Public Utility Regulatory Act. The Public Utility Commission of Texas (PUCT) went through a POLR rulemaking in preparation for the market opening. In this process it was determined that the POLR obligation was to be bid out for a one-year term in different segments, defined by all or part of a utility service territory and three customer classes (residential, small commercial, and large non-residential). AREPs were precluded on bidding for POLR in their own TDU territory for the residential and small non-residential classes.

Currently, POLR obligation is a mixture in Texas. Customers may be placed on POLR: 1) if they request such service; 2) if their REP defaults (without having sold their contracts to another REP); and 3) for non-payment. As of May 2002 only one customer has requested POLR assignment; none have been "dropped to POLR" by REP default. There have been, however, over 11,000 potential customers (completed, scheduled, or in review) dropped to POLR assignments for non-payment ¹ Currently only the POLR can ask for a customer to be disconnected. Thus before a customer is disconnected they must be "dropped to POLR," and then must also miss payments with the POLR.

In early 2001 the PUCT solicited bids for POLR obligation. The process did not end satisfactorily. Terri Eaton of the PUCT described in part what impelled a new rulemaking to improve the POLR process. "The selection process for the POLR was very difficult. Only one qualified bidder, TXU, submitted qualifying bids for POLR service, and by rule could not be the POLR in its own service territory. We [the PUCT] had to assign POLR obligations to various REPs through a contentious, contested, case-hearing process. There was a great amount of criticism that the original POLR prices bid were very high. There was pressure to keep rates low. Ultimately, TXU lowered its rates for service awarded under its initial bid."

The high prices, fees, and deposits for POLR customers incensed consumer advocates. "We feel like it is designated for the poor people only because the rich people don't need it," said Bobbie Rice, a Dallas resident representing the Association of Community Organizations for Reform Now (ACORN). "It's a dumping ground for working poor and very poor families." ² The high prices were justified by REPs as commensurate with the risk associated with serving POLR customers at a fixed, non-discountable rate, and serving non-paying customers ³

Who should be the POLR and who should have the right of disconnection? Many of the consumer advocates argued that the POLR structure should be close to structure of other states; when a customer of a competitive REP is dropped for non-payment they should (at least for the interim) have the right to return to the AREP at the PTB rate. Alexander said, "POLR should not be a bifurcated service, with the low-income customers relegated to a higher price service with additional charges. Texas should be like every other state. ... The current bifurcated service is not appropriate, [is] discriminatory, and would not be supported by any consumer advocate."

Fixing the Problem: A Universe of Proposals

Alexander says she would support a POLR construct in which customers that are dropped by their REPs for non-payment are sent back to their AREP. The AREPs would then have both the responsibility of being a POLR and the right to disconnect, she points out. "Competitive providers should not have control over life and death issues, as electricity supply is for many," Alexander contends. Further, she argues, the PUCT could not control and regulate the process if all REPs were given the right to disconnect. "The potential for abuse or mistakes from REPs is too high for significant health and safety issues associated with disconnection. Also, [in] what other market can one competitor stop me from shopping with another competitor? Can KMart stop me from shopping at Sears if I am late in payment to KMart? Why should it be any different with competitive electricity?"

The REPs not affiliated with a Texas utility proposed the same construct. "ARM [Alliance for Retail Markets] proposed that the Commission allow AREPs to bypass the POLR step in this limited situation [customers dropped to POLR for non-payment]. ...This is essentially a return to the old, pre-January 1, regulated-world methodology." ⁴ What is not to like for the unaffiliated REPs (e.g., ARM members)? In this scenario they get rid of the POLR hot potato, and foist unattractive customers onto a competitor. Also, they do not get entangled in the issues of disconnect by a competitive supplier, an issue that has befuddled the Georgia natural gas market.

Not surprisingly, competitors affiliated with a Texas TDU (i.e., the AREP in their own service territory) have different ideas.

Reliant Resource Incorporated (RRI), for example, in its filing with the PUCT suggested the opposite extreme for non-paying customers. "Prior to implementation of retail electric competition, electric customers who failed to pay their bills received a disconnect notice. Generally, such customers paid the unpaid balance prior to being disconnected. However, if a customer did not pay, at that point the provider could disconnect service. RRI believes that this structure was based on sound public policy that competition has not changed. Therefore, RRI proposes that in developing a better framework for POLR service, the customer protection rules [should] be modified to reinstate the right of disconnect to the REP. Thus, customers would no longer be dropped to POLR for non-payment of electric bills." RRI notes that the only class of customers to whom POLR must be provided are those whose REPs go out of business, and customers who request such service. RRI further points out that dropping customers to POLR "may delay the disconnection, but it also increases the Customer's debt and makes it harder to restore service." According to Eaton, some residential customers support this portion of the RRI proposal. They would prefer that there be no extra POLR step because they have the same concern of mounting bad debt and fees.

The initial comments of TXU Energy, the other 800-pound Texas gorilla, differed quite substantially from that of RRI. "Only the POLR should be able to disconnect residential and small commercial retail customers. ...If REPs engage in widespread disconnections, even if they were authorized under a Commission-adopted rule, time-consuming and controversial regulatory oversight might result. Similarly, if REPs abuse the disconnection process, at least in the eyes of the marketplace, allegations of market failure and customer abuse would surely be made, again undermining public confidence in the Texas market." ⁵

TXU went on to propose two pricing options for POLR. The first option would be based on July prices, with REPs bidding that rate plus an adder. The second option would give POLR customers the option of choosing between a month-to-month service (the current rule) and a minimum stay requirement that would allow for a fixed-rate POLR offering, but with the fuel adjustment that is done with the PTB rate. The Office of Public Counsel did not like either proposal, and was particularly dismissive of the first option that uses a peak month price of July to set the base price for the balance of the year.

In late May 2002, the PUCT published proposed POLR rules. They include some of the following:

• Assignment of non-paying customers to the AREP at the PTB;
• The non-AREP POLR would get requesting customers and customers whose REP who had gone out of business;
• Both the AREP-POLR and the non-AREP POLR would be able to offer other goods and services to their assigned customers;
• The initial non-AREP POLR service would be bid out as a percentage over the PTB. No bid would be accepted if it were more than 125 percent of the PTB. If there were no bidders, a non-AREP POLR would be assigned by lottery;
• The non-AREP POLR price would change on a month-to-month basis in accordance with greater than five percent changes in natural gas prices at the Henry Hub; and
• Until January 1, 2005, both the POLRs would have the right to ask to the TDU to disconnect after appropriate notification. After that time period, the rule would allow all REPs the right to disconnect. The PUCT also plans to revisit this issue before January 25, 2005.

These proposed rules were published in the Texas Register on June 7, 2002, with final rulemaking scheduled for August. Perhaps, just perhaps, the process has moved to a consensus. Comments on the newest proposed rules by Steve Bezecny of Reliant certainly make one optimistic:

"RRI generally supports the PUC Staff's proposed rule as a significant improvement. Reliant will suggest certain modifications, however we believe the proposed rule moves in the right direction for customers, REPs and POLRs. Staff's proposed rule has two key features:

"1) The move of non-pay customers from POLR service to the AREP at the PTB. With this move the AREP will have disconnect rights-a right not currently given to the AREP under the current rules. Customers benefit by receiving the PTB price instead of the higher POLR price. In addition, the rule will allow all REPs to disconnect for non-payment beginning in 2005, lowering uncollectible expense, which would ultimately be paid by other customers.

 

"2) With the move of non-pay customers to the PTB, POLR service will be for customers whose REP unexpectedly leaves the market or customers who choose POLR. Since the POLR provider will not be able to predict what loads it will be serving from day to day, the POLR has limited ability to hedge. The proposed POLR pricing in the draft rule contains pricing mechanisms based on certain indicators of current market prices. Reliant is still studying the proposed mechanisms; however, we firmly support the concept in the proposed rule of following current market prices."

1. Project No. 24462-Draft May 2002 Report Card on Retail Competition (Preliminary-For discussion only.) Brian Lloyd, May 21, 2002. PUCT.
2. Dallas Morning News, Oct. 17, 2001.
3. For example, see Reliant Resources's Proposal to Revise POLR Structure, March 12, 2002, Project No. 25360.
4. Alliance for Retail Markets (ARM) response to Commission Staff's request for comment on the selection of Providers of Last Resort (sic), March 12, 2002, Project No. 25360.
5. Comments of TXU Energy, March 13, 2002, Project No. 25360.

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