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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
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
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
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).
why deregulation continued
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

Vertically Integrated, Fully Regulated Monopoly

Generatingstation

Transmission wires

Transmission substation

Distribution wires

Customers

Fuel

Before Deregulation

Power Production

Delivery

Billing/Customer Service

after deregulation

Transmission & Distribution

Retail Customers

Generation

After Deregulation

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

load classifications where do your business clients fit in the newly deregulated world
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
1mw customers have ptb as an option what is the ptb
<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)
ii shocking issues
II. Shocking Issues

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

ii shocking issues10
II. Shocking Issues
  • Customer Protection Rules
  • Credit – “The utility never required collateral”
ii shocking issues11
II. Shocking Issues
  • Customer Protection Rules
  • Credit
  • Term
ii shocking issues12
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
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
ii shocking issues14
II. Shocking Issues
  • CPR
  • Credit
  • Term
  • TDSP - “If I switch providers, the utility won’t provide the same service it does now.”
ii shocking issues15
II. Shocking Issues
  • CPR
  • Credit
  • Term
  • TDSP
    • Charges
ii shocking issues16
II. Shocking Issues
  • CPR
  • Credit
  • Term
  • TDSP
    • Charges
    • Liability
ii shocking issues17
II. Shocking Issues
  • CPR
  • Credit
  • Term
  • TDSP
    • Charges
    • Liability
    • Relationship
ii shocking issues18
II. Shocking Issues
  • CPR
  • Credit
  • Term
  • TDSP
  • Products – “What is an index price heat rate baseload plus fixed price trigger product?”
ii shocking issues19
II. Shocking Issues
  • CPR
  • Credit
  • Term
  • TDSP
  • Products
    • Pure Index v. Pure Fixed Price
slide20

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

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

ii shocking issues22
II. Shocking Issues
  • CPR
  • Credit
  • Term
  • TDSP
  • Products
    • Pure Index v. Pure Fixed Price
    • Partial Index/Partial Fixed Price
slide23

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

ii shocking issues24
II. Shocking Issues
  • CPR
  • Credit
  • Term
  • TDSP
  • Products
  • Other States – “Can you supply my Hawaii location too?”
ii shocking issues25
II. Shocking Issues
  • CPR
  • Credit
  • Term
  • TDSP
  • Products
  • Other States
    • Each region has different regulations, which may raise different issues.
ii shocking issues26
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.