In the debate over changes to the Power to Choose website and plans with usage-based credits which lower the average rate at certain usage levels, the quoting of rates at 1¢/kWh has been vilified in some quarters as patently deceptive, since such rates don't even recover T&D charges.

We wish to stress our quarrel is with the general statement that any rate that under-recovers T&D costs, such as the 1¢ rates, are facially deceptive, and that we do not dispute that 1¢ rates that are impossible to achieve (due to extremely narrow usage bands) are appropriately criticized.

While we do not dispute a REP charging 1¢/kWh will not recover its T&D charges, a case can be made that it is still economic to make such offers to customers, and that REPs charging "real" rates of 5-6¢ routinely show why it would be economic to do so.

In fact, 1¢/kWh power would be economic even without usage credits that limit the low rate's applicability and if the 1¢ power was made available regardless of usage.

We come to this conclusion given the acquisition costs Texas REPs are willing to pay to enroll customers, and the fact that the Power to Choose site is a zero-cost acquisition channel.

While typically acquisition costs may hover around $100, depending on sales channel, we have seen REPs willing to pay substantially more -- up to $400, via rebates or gift cards -- for customer enrollments

If a REP is willing to pay $400 to acquire a customer, instead of paying $400 as a one-time enrollment bonus or credit, the REP can just roll that $400 customer benefit into its retail rate, in order be the first listing on the no-cost Power to Chose acquisition channel

If we consider 1,000 kWh average usage per month, and that the REP's marginal cost to serve the customer is actually 5¢/kWh, a REP charging a customer 1¢/kWh is under-recovering its costs by $40 per month. In other words, the $400 the REP is willing to pay for an enrollment could be used to subsidize the 1¢/kWh rate for a 10-month period.

Therefore, offering a six-month fixed product at 1¢/kWh on Power to Choose, with the goal of keeping the customer at the end of the term and renewing them onto a more profitable rate plan, appears to be no more unseemly than REPs offering hundreds of dollars in enrollment inducements -- it's just another way of presenting the cost of the inducements to the customer

Indeed, Power to Choose, with its default ranking by price and imprimatur of the state, almost forces REPs into 1¢ pricing. While REPs ideally would like to leverage this no-cost sales channel to earn higher margins for customers acquired through the site versus more costly sales channels, the competition to be the first listing renders such desires moot. There's little incentive to price offers on Power to Chose at anything other than the absolute lowest rate possible, taking into account the zero-cost acquisition and any incentives the REP would otherwise make available outside of the unit price (even to customers the REP is paying to acquire), given that the default view is based on price, with only the first 10 offers listed. If REPs try to discipline their pricing, it's a fruitless exercise, because while the REP may not be giving up its margin, it will also likely enroll very few customers through the site.

We wish to stress that we are not attributing this strategy to all REPs with the 1¢ credit-based offers, and we are not saying that such REPs aren't designing their products with the gamble that customers don't hit the usage levels for the 1¢ power, and that the REP hopes to actually recover its costs by charging a higher amount such as 5-6¢

We also concede that our examples, while present in the market, may not be the norm -- $400 is on the very high end for acquisition costs, and $400 incentives are tied to longer-term products with premium pricing versus our short-term, competitive pricing example.

Nevertheless, considering these presumptions, a case can be made that rates as low as 1¢ are economically rational for the REP given other offers in the market and the extreme value placed on acquiring a customer, and that 1¢ offers should not, on their face, be seen as deceptive or misleading because they don't recover T&D charges.

After all, it is entirely possible that REPs aren't recovering their full costs (whether it be T&D or otherwise) on the initial terms of 5¢ contracts when REPs offer hundreds of dollar in incentives and bonuses as part of such "rationally" priced plans; 1¢ power is simply re-working such loss-leading plans to appear at the top of Power to Choose