Transcript I. Background

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.
B.
C.
Why deregulation?
Market Structure (Then and Now)
Load Classifications – Where do your Clients fit?
i.
ii.
II.
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<1MW
>1MW
Shocking Issues!
A.
B.
Consumer Protection Rules
Credit
C.
Term
D.
E.
F.
TDSP charges/liability/relationship
Products
Other States
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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Before Deregulation
Vertically Integrated, Fully Regulated Monopoly
Power Production
Generating
station
Fuel
5
Delivery
Transmission
wires
Billing/Customer Service
Transmission Distribution Customers
substation
wires
After Deregulation
All entities are separate and distinct now – transmission
and distribution is the only entity regulated
Generation
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Transmission &
Distribution
Retail
Customers
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

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Greater than 1MW
<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. Term
1. Old world, termination at will but
you were a price taker or longterm deal under a regulated tariff
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II. Shocking Issues
A. Customer Protection Rules
B. Credit
C. 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.
B.
C.
D.
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CPR
Credit
Term
TDSP
1. Charges
II. Shocking Issues
A.
B.
C.
D.
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CPR
Credit
Term
TDSP
1. Charges
2. Liability
II. Shocking Issues
A.
B.
C.
D.
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CPR
Credit
Term
TDSP
1. Charges
2. Liability
3. Relationship
II. Shocking Issues
A.
B.
C.
D.
E.
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CPR
Credit
Term
TDSP
Products – “What is an index
price heat rate baseload plus
fixed price trigger product?”
II. Shocking Issues
A. CPR
B. Credit
C. Term
D. TDSP
E. Products
1. Pure Index v. Pure Fixed
Price
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Pure Index
Energy Cost = (Total Usage x Index Rate) + (Total Usage x Retail
Adder) + Wires and Taxes
Load Shape (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)
Hour Ending 01 through 24 for Average Weekday
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Fixed Price Product
Load Shape (kW)
Energy Cost = (Total Usage x Fixed Price) + Wires and Taxes
Total usage multiplied by the
Fixed Price ($/MWh)
Hour Ending 01 through 24 for Average Weekday
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II. Shocking Issues
A.
B.
C.
D.
E.
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CPR
Credit
Term
TDSP
Products
1. Pure Index v. Pure Fixed Price
2. Partial Index/Partial Fixed Price
Fixed Base Block Plus Index
Energy Cost = (Block Usage x Block Rate) + (Index Usage x
Index Rate) + (Total Usage x Retail Adder)
Retail Adder
applies to all
usage
Load Shape (kW)
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)
7x24
Wholesale
Block (@
Block Rate =
Fixed Price)
If load ever dips below the
block, unused block
quantities sold of at
MCPE.
Hour Ending 01 through 24 for Average Weekday
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II. Shocking Issues
A.
B.
C.
D.
E.
F.
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CPR
Credit
Term
TDSP
Products
Other States – “Can you supply
my Hawaii location too?”
II. Shocking Issues
A.
B.
C.
D.
E.
F.
CPR
Credit
Term
TDSP
Products
Other States
1. Each region has different regulations,
which may raise different issues.
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II. Shocking Issues
A.
B.
C.
D.
E.
F.
CPR
Credit
Term
TDSP
Products
Other States
1. Each region has different regulations,
which may raise different issues.
2. Texas deregulation only affects parts of
Texas and nowhere else.
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