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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. Shocking Issues in Electricity Contracts - Outline. Background - Why deregulation? Market Structure (Then and Now)

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Shocking Issues in Electricity Contracts

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Shocking issues in electricity contracts l.jpg

Shocking Issues in Electricity Contracts

By:

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

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


Shocking issues in electricity contracts outline l.jpg

Shocking Issues in Electricity Contracts - Outline

  • Background -

    • Why deregulation?

    • Market Structure (Then and Now)

    • Load Classifications – Where do your Clients fit?

      • <1MW

      • >1MW

  • Shocking Issues!

    • Consumer Protection Rules

    • Credit

    • Term

    • TDSP charges/liability/relationship

    • Products

    • Other States


  • Why deregulation l.jpg

    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


    Before deregulation l.jpg

    Vertically Integrated, Fully Regulated Monopoly

    Generatingstation

    Transmission wires

    Transmission substation

    Distribution wires

    Customers

    Fuel

    Before Deregulation

    Power Production

    Delivery

    Billing/Customer Service


    After deregulation l.jpg

    Transmission & Distribution

    Retail Customers

    Generation

    After Deregulation

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


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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

    • Customer Protection Rules

    • Credit – “The utility never required collateral”


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    II. Shocking Issues

    • Customer Protection Rules

    • Credit

    • Term


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    II. Shocking Issues

    • Customer Protection Rules

    • Credit

    • Term

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


    Ii shocking issues13 l.jpg

    II. Shocking Issues

    • Customer Protection Rules

    • Credit

    • Term

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

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


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    II. Shocking Issues

    • CPR

    • Credit

    • Term

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


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    II. Shocking Issues

    • CPR

    • Credit

    • Term

    • TDSP

      • Charges


    Ii shocking issues16 l.jpg

    II. Shocking Issues

    • CPR

    • Credit

    • Term

    • TDSP

      • Charges

      • Liability


    Ii shocking issues17 l.jpg

    II. Shocking Issues

    • CPR

    • Credit

    • Term

    • TDSP

      • Charges

      • Liability

      • Relationship


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    II. Shocking Issues

    • CPR

    • Credit

    • Term

    • TDSP

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


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    II. Shocking Issues

    • CPR

    • Credit

    • Term

    • TDSP

    • Products

      • 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

    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)

    Load Shape (kW)

    Hour Ending 01 through 24 for Average Weekday


    Slide21 l.jpg

    Fixed Price Product

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

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

    Load Shape (kW)

    Hour Ending 01 through 24 for Average Weekday


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    II. Shocking Issues

    • CPR

    • Credit

    • Term

    • TDSP

    • Products

      • Pure Index v. Pure Fixed Price

      • Partial Index/Partial Fixed Price


    Slide23 l.jpg

    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

    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)

    Load Shape (kW)

    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

    • CPR

    • Credit

    • Term

    • TDSP

    • Products

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


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    II. Shocking Issues

    • CPR

    • Credit

    • Term

    • TDSP

    • Products

    • Other States

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


    Ii shocking issues26 l.jpg

    II. Shocking Issues

    • CPR

    • Credit

    • Term

    • TDSP

    • Products

    • Other States

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

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


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