Most people and businesses in Texas can now select their electricity provider just like they pick their long distance company.  Commercial and industrial customers saved about $645 million in 2002, the first year of retail competition in electricity, over what they paid in 2001.

But that is just the beginning.  The Public Utility Commission of Texas estimates that about 90 percent of the small commercial customers, 55 percent of the large commercial customers with loads over one megawatt, and 10 percent of the industrial customers that could participate in the $636 million of savings still available in the market have not yet acted to reduce one of their largest overhead or production costs.

As existing contracts come up for renewal, as the competition for the remaining customers increases, and as customers with larger electric loads continue to flex their muscle in the market place, the pressure is increasing for the providers of electric service, called Retail Electric Providers or REPs, to offer more flexible products that can be tailored to better fit specific customer needs and whose contract terms and conditions more fully identify and more reasonably allocate risk.

REPs are certificated by the Public Utility Commission, but the products they offer to customers are essentially unregulated.  Therefore, purchasing electricity has become like other commercial transactions, and the old caveat “buyer beware” applies.  The 31 REPs serving commercial and industrial customers listed on the Commission-sponsored “Power to Choose” website (www.powertochoose.org) typically offer some variation of three basic products.  Fixed price contracts offer businesses energy at a specific price for a specific period.  For those businesses willing to assume a bit more risk, price collar contracts allow variability in energy costs within a defined range.  Price cap contracts put a limit on the maximum to be paid for electricity while allowing the business to benefit from any downward trends in electric prices.

 Even after a business evaluates its tolerance for market price volatility and the basic product type is selected, many pitfalls for the weary remain.  Some of the key areas of concern when reviewing a power sales contract include: unnecessary or unreasonable fees and charges; unreasonable pricing provisions; waiver of Commission-mandated customer protections; how billing errors will be resolved; assignment of the contract by the REP; limitation of liability and indemnity; the ability of the business to modify power requirements or change service locations; dispute resolution; and, what happens if the REP becomes financially weak or bankrupt.  A couple of these items deserve extra attention.

Commodity pricing provisions will often reflect differences between summer and winter periods as well as on-peak and off-peak hours.  Contract prices may be indexed and might be tied to the use of a special type of meter called an interval demand meter that records consumption in real time and transmits consumption information to the REP using a telephone line and perhaps the internet.  Prices for large commercial and industrial customers should reflect both the size of the electric load and how uniformly the electricity is taken and consumed by the business.  The most desirable customers to an REP, and those that possess the greatest bargaining power, are businesses that have a high level of consumption at a fairly constant rate.

 When the Legislature adopted SB 7, the statute that created the framework for retail competition, electric utilities were financially strong, energy companies had good bond ratings, and Wall Street was optimistic about the future of competition in electricity.  Times have changed.  Most energy company stock prices have declined significantly, dividends have been reduced or eliminated and the energy sector is out of favor with investors.  Since competition began on January 1, 2002, two Enron entities, Enron Energy Services and Enron Power Marketing, as well as The New Power Company and Texas Commercial Energy have filed for bankruptcy.  The Public Utility Commission has taken an active role to help assure that customer contracts were transferred to another REP and that any harm to customers has been minimized.  Nonetheless, any negotiated contract should anticipate the possibility of bankruptcy and include very specific provisions that allow the contract to be terminated in the event of bankruptcy.

 One of the most difficult areas to address in contract drafting, but perhaps the most important provision needed for commercial and industrial customer protection, involves limiting exposure to the payment of congestion costs.  The transmission grid that covers most of Texas is controlled by the Electric Reliability Council of Texas, a non-profit organization largely made up of stakeholders.  Through ERCOT, market participants have developed detailed requirements and procedures that govern wholesale and retail operations.  One area involves congestion management.  Congestion typically occurs on a transmission system when an effort is made to move power from one part of the state to another in excess of that which will not overload the lines.  For example, congestion could occur if a REP wants to move low cost power from the southern part of the state to a customer in the Dallas area on a hot summer day when electrical demand is already high and critical lines are already loaded.

To solve the congestion issue, ERCOT has divided the state into four zones and adopted rules that allow ERCOT to redispatch generators throughout the state in a manner that will allow electricity to flow freely without overloading the otherwise affected lines.  Congestion can occur between zones or within a zone.  The important point here is that the costs associated with relieving congestion are uplifted to end-users.  Therefore, where and how a REP gets its electricity can be important.  While many customers did not see a change, some unsuspecting customers were shocked in February 2003 when they discovered they owed their proportionate share of $990 per megawatt hour for about an 18-hour period above their expected commodity price.  Contracts that simply allow the REP to pass on all costs incurred are unacceptable.  The REP must be held accountable for minimizing the counter party’s exposure to congestion costs.  In some cases, it may be possible to include a provision that would allow the business to act as a resource during critical times and get paid for power not taken.

Texas is one of the few success stories among those states that have tried to transition from a fully regulated system to retail competition in electricity.  For small or large commercial customers or an industrial customer, the contract terms negotiated in the bilateral contract with the REP are critical if expected savings are to be realized.  The challenge can only be met and financial risks more fairly balanced if a business understands the not-so-obvious pitfalls.  Making an attorney who understands the electric market part of the negotiating team often makes good sense and will allow managers to have confidence they are making good decisions for their company.

Copyright 2003 Robert A. Rima