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Shocking Issues in Electricity Contracts

By:

Craig Enochs, Jackson Walker, L.L.P., Houston, Texas

John R. Werner, Constellation NewEnergy, Inc., Houston, Texas

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Shocking Issues in Electricity Contracts - Outline

I. Background -

A. Why deregulation? B. Market Structure (Then and Now) C. Load Classifications – Where do your Clients fit?

i. <1MWii. >1MW

II. Shocking Issues!

A. Consumer Protection RulesB. Credit C. TermD. TDSP charges/liability/relationshipE. ProductsF. Other States

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Why deregulation?

Governments response to the energy crises in the early ’70s

‘76 – Public Utility Regulatory Act (“PURA”): Regulation went from local (city) level to the state level. Limited retail choice by allowing only one electric energy provider to serve one area of the state.

’78 – Public Utilities Regulatory Policies Act (“PURPA”): Created incentive for Independent Power Producers (non-utilities) to get into the generation business (utilities had to buy from a Qualifying Facility (Co-Generation) if the electricity was produced).

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Why deregulation? continued

’95 – PURA: Senate deregulated wholesale generation market by disallowing any future generation units to be included in rate base

’99 PURA – Senate Bill 7: Forced integrated utilities to un-bundle their assets (generation, wires, customers) effectively un-bundling the utility monopolies

January ’02 – ERCOT Market Open – Customers have the right to choose their electricity provider

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Power Production Delivery

Fuel

Generatingstation

Transmission wires

Transmission substation

Distribution wires

Customers

Before Deregulation

Billing/Customer Service

Vertically Integrated, Fully Regulated Monopoly

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After Deregulation

All entities are separate and distinct now – transmission and distribution is the only entity regulated

Transmission & Distribution

Retail Customers

Generation

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Load Classifications – Where do your business clients fit in the newly deregulated world?

Less than 1MW – (1MW = about the size of a Super Wal-Mart®)

OR

Greater than 1MW

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<1MW Customers have PTB as an option. What is the PTB?

Utilities Rates frozen January 1999

Solely adjusted for the market rate of natural gas

Simple Calculation (old rate with natural gas @ $x + increase in natural gas since then)

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II. Shocking Issues

A. Customer Protection Rules - “First, you waive all protections the rules offer consumers”

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II. Shocking Issues

A. Customer Protection Rules

B. Credit – “The utility never required collateral”

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II. Shocking Issues

A. Customer Protection Rules

B. Credit

C. Term

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II. Shocking Issues

A. Customer Protection Rules

B. Credit

C. Term1. Old world, termination at will but

you were a price taker or long-term deal under a regulated tariff

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II. Shocking Issues

A. Customer Protection RulesB. CreditC. Term

1. Old world, termination at will but you were a price taker or long-term deal under a regulated tariff

2. New world typically less than 2 years, can be month-to-month

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II. Shocking Issues

A. CPR

B. Credit

C. Term

D. TDSP - “If I switch providers, the utility won’t provide the same service it does now.”

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II. Shocking Issues

A. CPR

B. Credit

C. Term

D. TDSP

1. Charges

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II. Shocking Issues

A. CPR

B. Credit

C. Term

D. TDSP

1. Charges

2. Liability

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II. Shocking Issues

A. CPR

B. Credit

C. Term

D. TDSP

1. Charges

2. Liability

3. Relationship

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II. Shocking Issues

A. CPR

B. Credit

C. Term

D. TDSP

E. Products – “What is an index price heat rate baseload plus fixed price trigger product?”

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II. Shocking Issues

A. CPR B. CreditC. TermD. TDSP E. Products

1. Pure Index v. Pure Fixed Price

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Pure Index

Hour Ending 01 through 24 for Average Weekday

Load

Sha

pe (

kW)

Retail Adder applies to all usage

Total usage multiplied by the Index Rate (e.g., the Market Clearing Price of Energy (“MCPE”) or Heat Rate times NYMEX Gas Settlement Price ($/MWh)

Energy Cost = (Total Usage x Index Rate) + (Total Usage x Retail Adder) + Wires and Taxes

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Fixed Price Product

Hour Ending 01 through 24 for Average Weekday

Load

Sha

pe (

kW)

Energy Cost = (Total Usage x Fixed Price) + Wires and Taxes

Total usage multiplied by the Fixed Price ($/MWh)

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II. Shocking Issues

A. CPR

B. Credit

C. Term

D. TDSP

E. Products

1. Pure Index v. Pure Fixed Price

2. Partial Index/Partial Fixed Price

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Fixed Base Block Plus Index

Hour Ending 01 through 24 for Average Weekday

Load

Sha

pe (

kW)

7x24 Wholesale Block (@

Block Rate = Fixed Price)

Retail Adder applies to all usage

All usage above block amounts (“Index Usage”) multiplied by the Index Rate (e.g., the Market Clearing Price of Energy (“MCPE”) or Heat Rate times NYMEX Gas Settlement Price $/MWh)

If load ever dips below the block, unused block quantities sold of at

MCPE.

Energy Cost = (Block Usage x Block Rate) + (Index Usage x Index Rate) + (Total Usage x Retail Adder)

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II. Shocking Issues

A. CPR

B. Credit

C. Term

D. TDSP

E. Products

F. Other States – “Can you supply my Hawaii location too?”

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II. Shocking Issues

A. CPR

B. Credit

C. Term

D. TDSP

E. Products

F. Other States 1. Each region has different regulations,

which may raise different issues.

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II. Shocking Issues

A. CPR B. CreditC. TermD. TDSP E. ProductsF. Other States

1. Each region has different regulations, which may raise different issues.

2. Texas deregulation only affects parts of Texas and nowhere else.