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<title>Texas Legislature Passes Electric Utility Restructuring Bill</title>
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<p align="left"><strong><small><font face="Arial">About The Author:</font></small></strong></p>
<p align="left"><font face="Arial" style="font-size: 9pt">Robert A. Olson is a partner in the law firm of
Brown, Olson & Gould, P.C. which maintains a nationwide practice in energy law,
public utility law and related commercial transactions.</font></p>
<p><small><font face="Arial"><font style="font-size: 9pt">He can be reached at:</font><br>
<br>
<b><font color="#0000FF">Brown, Olson & Gould, PC</font></b><br>
2 Delta Drive<br>
Suite 301<br>
Concord, NH 03301<br>
<a href="mailto:[email protected]">[email protected]</a><br>
(603) 225-9716<br>
<a href="mailto:[email protected]"></a></font></small></p>
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<td width="69%" valign="top"><img src="../images/statelin.gif" alt="STATELINE by Robert Olson" border="0" WIDTH="375" HEIGHT="75"><p><b><u><br>
June 1999<br>
</u></b><font size="6"><b>Texas Legislature Passes Electric Utility
Restructuring Bill<br>
</b></font><strong>by Robert Olson -- Brown, Olson and Wilson, P.C.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
06/99</em>)</font></p>
<p><font face="Arial">Recently, the Texas legislature passed new
electric utility restructuring legislation which requires retail competition in the
electric utility market by January 1, 2002. The bill is supported by Gov. George Bush and
is expected to be signed into law. The bill was widely supported by diverse groups such as
The Association of Electric Companies of Texas, The Environmental Defense Fund, New Energy
Ventures, Competitive Power Advocates and The Consumers Alliance of the Southeast because
of its balance and fair provisions for stranded cost recovery, emission controls and
generation control<b>.</font></p>
<p ALIGN="JUSTIFY"></b><font face="Arial">In general terms, the bill will give residential
customers a choice of electricity providers by January 1, 2002, freeze rates at existing
levels before competition begins, reduce rates when<b> </b>competition begins and limit
market control in any particular power region. The bill also addresses reliability,
customer protection, customer education and improvements in air quality.<b> </b></font></p>
<p ALIGN="JUSTIFY"><font face="Arial"><b>Stranded cost provisions <br>
</b>Under the Act, an electric utility is allowed to
recover all of its net, verifiable, non-mitigable stranded costs incurred in purchasing
power and providing electric generation service. The utility can recover retail stranded
costs from all existing and future retail customers and loads within its geographical,
certificated service area as it existed May 1, 1999. Stranded costs shall be allocated
among customer classes as follows: 50% of such costs shall be allocated in the same manner
that costs are allocated in the underlying assets in the utility’s latest Commission
order regarding rate design, and the remainder shall be allocated according to the energy
consumption of the customer classes. Retail and residential stranded costs shall be
allocated the same way among the retail and residential customer classes respectively. The
stranded costs may be quantified by using one of the following methods. </font></p>
<ul>
<li><p ALIGN="JUSTIFY"><font face="Arial">Sale of generation assets</font></p>
</li>
</ul>
<ul>
<li><p ALIGN="JUSTIFY"><font face="Arial">Stock valuation</font></p>
</li>
<li><p ALIGN="JUSTIFY"><font face="Arial">Partial stock valuation</font></p>
</li>
</ul>
<p ALIGN="JUSTIFY"><font face="Arial">No utility will be forced into an outright sale of
generation assets.</font></p>
<b><p ALIGN="JUSTIFY"><font face="Arial">Unbundling<br>
</font></b><font face="Arial">The bill includes an unbundling provision. Each
electric utility will be required to separate, or unbundle, its costs and rates into
transmission, distribution, power generation, retail electric services, a system benefit
fund charge and a expected competition transition charge, on or before September 1, 2001.
The electric utilities will also be required to separate their business activities into a
power generation utility, a retail electric provider, and a transmission and distribution
utility before January 1, 2002. The utility may accomplish this separation of functions by
creating either separate non-affiliated companies, or separate affiliated companies owned
by a common holding company or by a sale of assets to a third party. The utility must file
an unbundling implementation plan with the PUC by January 10, 2000.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial"><b>Price to Beat<br>
</b>The legislation includes a "Price to Beat"
provision that allows customers an automatic price reduction if they have not already
chosen an alternative Retail Electric Provider, ("REP"). As of January 1, 2002,
customers of investor-owned utilities, municipally owned utilities (which allow customer
choice) and electric cooperatives (which allow customer choice) in qualifying power
regions will be able to choose a REP. If a customer has not chosen another REP, the REP
currently affiliated with that customer’s transmission and distribution utility will
charge at the "Price to Beat" rate. That rate will be 6% less than the bundled,
corresponding average rates which were in effect on January 1, 1999. This price will
remain frozen until either 36 months or 40% of the residential and small commercial
customer load has switched to non-affiliated REPs, whichever comes first.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial"><b>Market Power</b> <b>and Capacity Auction<br>
</b>Ownership and control of regional capacity, or
electricity delivery to a region, will be limited to 20%. Electric utilities who own more
than 20% of the generation capacity located in, or capable of being delivered to, a power
region must file a mitigation plan with the PUC no later than December 31, 2000. To
further monitor the capacity of a power region, every owner of any entity which offers
electricity for sale must report its capacity to the PUC for a market power assessment.
Independent system operators in the region will submit an annual report to the PUC on or
before October 1, 1999 identifying existing and potential transmission and distribution
constraints and system needs, as well as alternatives and recommendations for meeting
system needs. </font></p>
<p ALIGN="JUSTIFY"><font face="Arial">Electric utilities will be required to auction at
least 15% of their installed generation capacity at least 60 days before the date set for
customer choice to begin. Entities owning less than 400 MW installed generation capacity
are exempt from this requirement. The PUC will adopt rules for the procedure of the
auction.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial"><b>Authorities of the Public Utilities Commission<br>
</b>A "Code of Conduct," which prescribes
terms and conditions necessary to prohibit anti-competitive practices, will be established
by the PUC. The code will apply to all market participants and their affiliates. The PUC
is required to adopt rules governing transactions or activities between a transmission and
distribution facility and its affiliates. The PUC is authorized to order an electric
utility to provide specific improvements in its service area, or to order two or more
electric utilities to establish facilities for interconnecting service. The PUC must
ensure that an electric utility, or transmission and distribution utility, provides
nondiscriminatory access to wholesale transmission service for qualifying facilities. This
does not include wholesale generators, power marketers, power generation companies, retail
electric providers, and other electric utilities or transmission and distribution
utilities. The commission shall also ensure that ancillary services necessary to
facilitate the transmission of electric energy are available at reasonable prices. The PUC
is authorized to require each electric utility and transmission and distribution utility
to supply data which will assist the PUC in developing reliability standards.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The PUC also has the authority to delay competition
and set new rates if it determines that a power region is not able to offer fair
competition and reliable service to all customers on January 1, 2002. Customer choice
pilot projects may be used by the PUC to evaluate the ability of each power region and
electric utility to implement customer choice.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">A much discussed provision of the bill requires the
PUC to develop and implement an educational program to inform customers about the changes
in electric service provision and the customer choice pilot program. The educational
program must include low-income and non-English speaking customers and be neutral and
non-promotional yet provide customers with the necessary information to make informed
decisions regarding their electric service. The educational programs are to be funded from
the System Benefit Fund.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial"><b>State Authority to Sell Power<br>
</b>The bill authorizes the State, through the
Commissioner of the General Land Office to sell or convey power directly to the public
retail customer whether or not that customer is also classified as a wholesale customer.
The Commissioner must attempt to first sell power to public retail customers that are
agencies of the State, institutes of higher education or public school districts.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial"><b>Renewable Energy Goal<br>
</b>Each retail electric provider, municipally owned
utility and electric cooperative is required to obtain a minimum of 1.65% of its annual
capacity requirements from renewable energy technologies by January 1, 2003. Every two
years, the minimum percentage of annual capacity increases as follows:</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">January 1, 2005 - 2.15%<br>
January 1, 2007 - 2.75%<br>
January 1, 2009 - 3.0%</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">The PUC must establish a renewable energy credits
trading program which requires entities that do not satisfy the above criteria to purchase
credits to satisfy the requirements. </font></p>
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<p align="left"><font face="Arial">
<small>Robert A. Olson is a partner in the law firm of Brown, Olson &
Gould P.C.
which maintains a nationwide practice in energy law, public utility law and related
commercial transactions. He can be reached at:</small></font><p align="center">
<font face="Arial"><small><font color="#0000FF"><b>Brown, Olson & Gould, PC</b></font><br>
2 Delta Drive, Suite 301<br>
Concord, NH 03301 <br>
<br>
<a href="mailto:[email protected]">[email protected]</a> | (603) 225-9716<a href="mailto:[email protected]"></a></small></font>
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