In opposing the introduction of retail auctions for District of Columbia electricity SOS, the District of Columbia Office of People's Counsel has misconstrued the nature of POLR service in the Texas market.

OPC attempted to counter arguments that Texas has seen 90% of customers make an affirmative choice (either switched or affirmatively selected to stay with the former A-REP), as has been cited by proponents of a retail auction for D.C. SOS.

OPC said, "While Texas has a high percentage of shopping residential customers (90 percent), it is primarily the result of the existence of a high cost of 'providers of last resort' service ('POLR'). The state commission sets the POLR for the incumbent utility in order to attract competition -- including low-priced wind power. It is not surprising, given an onerously high default price, Texans have been more apt to switch to competitors."

In footnotes included in the above quote, the OPC cited Texas Utilities Code Ann. § 39.106 (the POLR statute, which does not speak to specific pricing), and the Texas PUC's July monthly bill comparison of select retail plans (covering only about 10 REPs, [available here], which does not list POLR rates)

OPC is correct insofar as the PUC "sets" POLR rates by determining a market-based formula which results in the maximum rate charged by POLRs (although we'd stress that REPs acting as POLRs have every incentive and authority to charge lower 'competitive' rates in hopes of retaining the customer acquired via a POLR drop).

However, where OPC errs is in assigning a customer's shopping decision to the POLR rate.

Unlike in Northeast markets, Texas POLRs are true providers of last resort -- serving customers on a transitional basis only when a REP defaults (customers may also request POLR service, but this does not occur). POLRs do not serve "everyday" customers as Pepco and other SOS providers do (indeed, there have not been Texas customers on POLR rates for years). POLRs (and their rates) are also NOT incumbents

Texas customers rarely are exposed to a POLR rate (only upon the default of a REP). And POLRs and POLR rates, since the end of the status of "affiliated REPs", have no relation to the "incumbent" (or better phrased, the REP which inherited the customers of the former incumbent). Notably, for new customers, there is no incumbent; customers must select a competitive retail provider to initiate electric service. Customers don't compare their rates to POLR rates, they compare them to other competitive rates in the market, including their current rate (which is set by market forces, not the PUC).

The only customers which may be thought of as being served by an incumbent are those who have not switched from their legacy affiliated REP (which inherited former incumbent utility customers). Notably, since January 1, 2007, the pricing for these customers has not been set by the PUC, and REPs rationally would be pricing these customers at competitive levels to stem migration to lower-priced suppliers. Accordingly, the 90% choice rate cannot be explained by "ugly" incumbent prices in Texas

If OPC had said that switching had been driven by the setting of the Price to Beat (which ended a decade ago), OPC would be closer to the mark, but would still miss it, as, at the time of PTB expiration, the percent of customers who had made an affirmative choice was much lower than 90% (about 60% had made an affirmative selection, not necessarily switched to a competitive REP, at the time that the PTB ended), so an artificially high (as OPC would claim) PTB was not the driver of the further expansion of choice to 90%

Even when the PTB existed, while there were times it may have been above market, there were times it lagged the market, resulting in a very-much below market rate, crushing headroom and driving some REPs out of the market (similar to the boom/bust of the current D.C. SOS). The most notable example is when the PTB lagged large increases in competitive retail rates in the 2005-06 run-up in natural gas prices, particularly in the aftermath of hurricanes. Yet, unlike with SOS where a static SOS rate in the face of rising market prices sends customers running back to SOS, Texas did not see a meaningful erosion of shopping during this period.

Therefore, the flourishing of the Texas market again cannot be assigned to an above-market "default" rate which forced everyone into the retail market. We readily admit that the design of the PTB was a huge driver of the success of the Texas market, but not for the reason of creating an artificially high default rate, but because it set a (generally) competitive rate, not artificially high or low.

We readily admit the PTB was intended to have some "headroom", although, as noted above, in practice this did not always result. TXU (an A-REP) in a 2005 presentation noted that, "low and volatile headroom creates marketing challenges for attacking retailers." TXU estimated that headroom, depending on service area, was as low as 10% in January 2005 (or about a penny per kWh at then-current prices).

Rather, Texas has seen a 90% choice rate because pricing has been competitive -- not artificially low and not non-market reflective, as D.C. SOS is.

The PTB or post-PTB competitive rates from affiliated REPs were not artificially high, but the Texas market design still allowed new competitors to undercut such pricing by either: building a better mouse trap (lower supply or administrative costs), or by creating new products or services that could attract customers at the same price (or even a premium).

Why can't D.C. retail suppliers do this? Most notable is that as competitive REPs battled with the affiliated REPs (A-REPs, or former incumbents in OPC parlance), the competitive REPs did not face the same artificial barriers they do in competing against SOS. Consider:

1. In Texas, every new customer must make an affirmative election of a retail provider, putting new REPs on relatively equal footing with A-REPs (notwithstanding certain legacy brand recognition). In D.C., new customers are defaulted to SOS (and prevented from taking retail supply on Day One of service), and retail suppliers must therefore fight a status quo bias

2. A-REPs were NOT the local wires company, and in many cases, did not share the same brand. This helped customers understand that shopping did not affect reliability or quality of service. In D.C., SOS is served by Pepco, and customers may fear "leaving" Pepco even when Pepco still is their distribution utility when a customer shops.

3. Texas A-REPs do not have guaranteed cost recovery (even under the old PTB model), Pepco does. While Pepco uses full requirements service, which transfers many risks of serving customers to wholesale suppliers who must price in such risk as retail suppliers do, Pepco can still recover any mismatch between actual payments due to full requirements suppliers and collections from customers via reconciliations -- costs not reflected in current SOS rates (a reconciliation factor is bypassable, but reflects past, not current, market conditions).

4. Texas A-REPs must recover the same administrative costs (aside from acquisition costs for legacy incumbent customers) as competitive REPs. While Pepco has a proxy for certain administrative costs included in bypassable rates, retail suppliers would argue that certain costs to serve SOS customers are subsidized in distribution rates, making the SOS price artificially low

Moreover, the experience of the Texas market shows the competition has flourished more without the PTB than when it was present, indicating that, even if it was artificially high, it was not as much of a driver of choice as was the elimination of an administratively-determined "default" rate in favor of full competition that did not have barriers to new entrants that could offer better products and lower prices once they were on equal footing.

Consider, per a Texas Public Policy Foundation citation of PowerToChoose data, the Texas residential market in 2006, the last year of the PTB, was 17 REPs offering 36 plans (note: this was the high-water mark for competition in the PTB era even as REPs were challenged by lagging PTB rates). In 2008, a year after the PTB expired, the residential market was 28 REPs offering 98 plans; as of 2013, the market was 45 REPs offering 264 plans

We stress again that, in the post-PTB era, there are no artificially high default rates prompting customers to shop. While the former A-REPs are free to charge what they want for any legacy customers, market forces constrain them to offering competitive rates, or customers will switch to a competitor. And unlike an SOS provider (which is theoretically agnostic, notwithstanding any margin for SOS under some models), the A-REP certainly does not want to see that customer leave, as it represents lost profit, so it is not going to artificially raise its rates just in the name of fostering competition.

We stress that we do not mean to impugn any of OPC's policy arguments concerning the structure of SOS, which are another matter; we only point out that it is flawed to state that Texas artificially created a high-priced default product in order to force ratepayers to shop.

--- By Paul Ring

Tags:
Default Service   Texas   District of Columbia  

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