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Federal Transmission Costs, Utility M&A Provide Opportunity To Expand Choice To New Texas Areas

September 12,2019

Ongoing federal transmission cost allocation issues, and a utility merger proceeding, present opportunities to advance electric choice in Texas to those investor-owned utilities which have not yet implemented retail electric choice

We have previously cited the risk that Texans may pay billions in federally administered transmission costs -- largely to integrate renewables to the benefit of customers in other states -- as presenting an opportunity for Texas to take control of its energy future and embark upon a path that would see Texas free itself from such Washington-based regulation, and chart a future to bring customer choice to the state's remaining utilities.

Since looming changes in transmission cost allocation at the Southwest Power Pool -- with essentially all of the proposals to date resulting in Texans paying more -- were discussed at a recent Texas PUC open meeting, it's time to revisit consideration of alternatives for utilities such as Southwestern Public Service and SWEPCO (and also Entergy since MISO faces the same issues)

More than anything else, the largest hurdle facing any movement to retail choice, in any jurisdiction, is the status quo, compared to the unknown of restructuring. Even in situations where there is some frustration with utility costs or a high-level desire for more choice, restructuring faces an uphill battle in areas that have enjoyed stable (if not necessarily low) and predictable rates with regulatory certainty

Situations in which the status quo is disrupted, therefore, present one of the best opportunities to advance retail choice, because choice is no longer being measured against keeping the same, existing paradigm. Rather, the decision is now between two unknown paradigms. And in Texas' case, the decision is between having FERC play an even greater role in the ultimate cost to customers, versus a path that could free Texans from such fiat.

As background, while not discussing anything related to expanding retail choice, Texas PUC Chairman DeAnn Walker did at the August 8 open meeting raise concerns about transmission cost allocation in SPP, given recent action by the SPP board on the Holistic Integrated Tariff Team (HITT) process.

Walker noted that states within SPP with large amounts of wind generation were dissatisfied with the current cost allocation, under which states with such resources were paying for transmission to transport the wind to out-of-state load zones, benefiting customers who were not allocated as much cost

Walker noted that among the HITT recommendations adopted by SPP are changes to cost allocation, and the direction to create new load zones

"Almost every recommendation I have seen has Texas paying more," Walker noted

Walker also noted potential changes to the SPP highway/byway allocation, with almost all outcomes having a negative impact on Texas

Additionally, a wind rich task force in SPP has proposed a generator injection rate, which Walker said would be harmful to Texas ratepayers

Walker during the August 8 open meeting said that she is concerned with the potential that, "we end up, at the end of the day, with everyone else getting what they wanted, and us needing to maybe fight it at FERC or something."

"If the policy's right, even though we may have to pay a little bit more, if the policy's right, I'm fine doing it; but if the policy's wrong and we're just having to pay more so no one else has to, I'm not OK with that," Walker said

SPS and SWEPCO are currently in SPP and subject to FERC regulation, including FERC regulation of transmission cost allocation. Entergy Texas is in the Midcontinent ISO, which is facing similar renewables-driven transmission cost allocation issues

It is unknown how much SPP wind and similar transmission costs in total are in play, and how much could be allocated to Texas utilities in SPP.

In approximately a decade since approval, SPP's current Integrated Transmission Planning (ITP) process and highway/byway cost allocation methodology has enabled the approval and construction of 643 transmission projects totaling $5.8 billion in transmission facilities in the SPP region.

We believe that, given the magnitude of potential transmission costs, the question should be asked, are Texans better served by having their utilities wholly under the authority of Texas regulators, as could be accomplished by integrating the non-ERCOT utilities into ERCOT (and disconnecting completely from the FERC-jurisdictional grids).

Certainly the cost of any such integrations would be huge. However, such cost should not be measured against $0, but rather, what is the incremental cost to Texans from being subject to costs solely driven by membership in FERC-jurisdictional RTOs, that would not exist if such utilities were members of ERCOT (mostly, socialized transmission costs as well as any other FERC policies which may be adopted in the future which Texas itself would not adopt, perhaps such as paying full LMP for demand response)

In 2009, the cost of Entergy Texas joining ERCOT was proposed at $1 billion, though ETI later said an alternative could be accomplished for a net of about $500 million ($640 million in capital costs, less $112 net incremental benefits). That cost ultimately led the Commission, and then the legislature, to pause Entergy's transition to competition, but again, lawmakers were comparing such transition to the status quo, which, at such time, did not even include Entergy being a member of MISO and therefore subject to FERC regulation for transmission rates (and allocation for regional transmission costs). Moreover, the author of the 2009 bill ceasing the Entergy transition to competition is no longer in the legislature

Meanwhile, rates for customers at Entergy and SPS remain on par with competitive rates in ERCOT (if not actually higher at SPS and ETI, as 6- and 9-month competitive retailer fixed rates in the Oncor service area are about 7 to 8 cents currently). A residential customer using 1,000 kWh at Entergy and SPS paid about 11 cents per kWh (all-in) in July 2019. In January 2019, the Entergy rate was also 11 cents, while SPS was 10 cents. Even SWEPCO, whose much lower rates have made it historically the least viable service area for a transition to competition, saw a residential customer using 1,000 kWh in July 2019 pay 11.9 cents per kWh (the rate was 8.9 cents in January 2019).

We're not suggesting that moving SPS, Entergy, etc. into ERCOT, followed by a transition to retail competition, would be easy; rather, that such an outcome should be seen as more viable than introducing choice in states where lawmakers, regulators, and utilities are outright hostile to retail choice

We do not believe there is a legislature more receptive to retail choice than Texas (not that legislative approval would necessarily be required, but realistically, these would be legislative decisions). While we can't speak for the current mind of the utilities, Entergy was prepared in 2009 to transition to competition.

The rate parity (with some competitive offers even lower) between rates in ERCOT and SPS and Entergy pose an unrivaled opportunity where choice advocates can show that rates would not increase, as often cited by critics, from any transition to competition

Moreover, while restructuring is often seen as disruptive, disruption to the status quo is already coming, and just keeping things the way they are now (with no new socialized transmission costs) does not appear to be a likely scenario.

Instead of the transition to competition causing the disruption, there is now the opportunity to rely on competition to mitigate an otherwise looming disruption -- presenting the issue as saving Texans from federal overreach and preventing Texans from being subject to socialized costs to pay for another state's green energy

Finally, there is an economic development component. If Texans are going to be paying billions in transmission costs, customers would be more receptive to that money remaining in Texas, to integrate a utility into ERCOT, for the benefit of Texans, versus sending money out of state

While our suggestion of ERCOT integration is admittedly extreme, it should not be lost that it has been about 10 years, or more, since the various non-ERCOT utility transitions to competition plans were shelved or delayed. At the time, such action was generally premised, in large part, on the lack of a viable wholesale market outside of ERCOT to support retail choice. However, all of the utilities, except for EPE, are now in an RTO with a day 2 market, and have been for several years. MISO furthermore has a history of supporting retail choice in several states. The premise supporting the delay of customer choice at these utilities has changed.

Entergy serves about 450,000 customers in Texas. SPS serves about 267,000 customers in Texas. SWEPCO serves 185,000 customers in Texas

El Paso Electric

Meanwhile, as previously reported, El Paso Electric is undergoing a change in control proceeding before the PUC.

While EPE does not face the same transmission cost allocation issues as those utilities in FERC RTOs, EPE's rates are also on par with residential rates in ERCOT, with EPE's residential rate at 11.6 cents per kWh in July 2019

While consideration of competition is not required under the statute for merger proceedings, the PUC has in the past, as part of its overall consideration of the public interest, considered whether any transaction would negatively impact competition, and, as first reported by (story here), EPE has submitted testimony regarding the impact on competition

While the Commission could not approve a transition to competition in the EPE merger proceeding (due to the absence of statutorily required prerequisites), it could serve as a vehicle to direct EPE to meet various statutory requirements governing any transition to competition at EPE. Notably, the PUC retains authority to approve a transition to competition at EPE provided that the statutory conditions are met (see details here)

The intervention deadline for the El Paso case is Sept. 17 (Docket 49849)

-- By Paul Ring

ERCOT   Texas   Electric choice   Deregulation  

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