The Supreme Court of Texas recently issued an order concerning an appeal of an Oncor rate case which, although it was not the issue squarely before the court, clearly addresses the obligation (or lack thereof) of retail electric providers to pass-on any TDU discounts to their end-use customers.

One of the issues on appeal concerned a statutory discount that utilities are required to provide to state colleges and universities, as set forth in PURA. In the rate case, the Public Utility Commission of Texas had concluded that, after the introduction of customer choice, such discount was no longer applicable to the TDUs located in areas with customer choice, since the TDUs no longer charged rates to customers.

State colleges appealed, but the Texas Supreme Court agreed with the PUC, finding that the discount does not apply in the customer choice areas, as the Court further explained that not only are the TDUs no longer required to provide a discount, but that REPs are under no obligation to pass-on to the REPs' customers any discount provided by the TDUs

"PURA is quite clear: in deregulated areas of the state, a TDU 'may not sell electricity'; only REPs can. TDUs cannot charge consumers for electric service; TDUs charge wholesale tariffed rates set by the PUC to REPs, who in turn charge customers negotiated, competitive retail rates. It follows that TDUs cannot discount rates to consumers but only to REPs," the Supreme Court said

"But [PURA] Section 36.351 does not require a discount to REPs," the Court noted.

"The State Universities acknowledge that an REP may not have a legal obligation to pass along a TDU’s discount to consumers but stress that as a practical matter, universities negotiate with REPs for a straight pass-through of the TDU charges without any mark-up. The point remains that if universities continue to receive a discount, it is because of negotiation, not because of Section 36.351," the Court said "REPs’ lack of any obligation to pass along TDU discounts to consumers further illustrates that TDUs do not charge consumers for electric service," the Court said [emphasis added]

Although the Court's observation may amount to dicta, it is nonetheless an important finding given that REPs' obligation to charge TDU rates on a 1-to-1 basis, and particularly the pass-through of any TDU discounts, rebates, or lower charges, has never been tested. [note: we exclude instances where a REP represents to a customer that it charges TDU charges on a pass-through basis or with no mark-up, which is a choice the REP elects and is a contractual issue with the customer]

In particular, the Court's opinion implicates special TDU merger rate credits which parties may seek and which the PUCT may potentially require REPs to flow through to customers as a condition of receiving the rate credit.

Such rate credits, and the requirement for REPs to agree to pass-through the credit to customers, were a part of the acquisition of Oncor by EFH through a leveraged buyout of Oncor's parent; however, the issue was not fully litigated at that time and REPs, though stating they did not believe the PUCT could mandate the pass-through of such credit, essentially acquiesced to a stipulation requiring REPs to pass-through the credits in order to receive them

In an order approving the EFH acquisition of Oncor, the PUCT did state that, "the Commission has the authority to approve paragraph 35 of the stipulation, which conditions payment of the credit on a REPs’ agreement to pass the credit through to its retail customers."

The issue has become prominent again as various suitors apply to acquire Oncor. Specifically, TIEC and other parties have proposed rate credits as a result of NextEra's proposed purchase of Oncor, with TIEC specifically proposing that REPs be required to pass-through any credit to customers (see EnergyChoiceMatters.com for the story)

The Supreme Court's opinion would suggest the PUCT lacks such authority to order the pass-through of merger rate credits from REPs to customers, or otherwise condition a REP's acceptance of the credit on a pass-through to the customer.

The Court also affirmed (in dicta) that customers in areas with customer choice may only obtain electric service through a REP

"Nor do TDUs provide electric service to consumers ... But while TDUs do provide electric service -- the physical delivery of electricity to consumers’ premises --they provide this service to REPs. Only REPs can access the electricity delivered by TDUs. Consumers obtain electricity through the service provided by REPs," the Court said

The Texas Supreme Court's opinion also addressed treatment of income taxes in setting TDU rates, and whether such expense must be set as if the tax return is filed as a consolidated return with affiliates -- another issue which was recently of import in the Hunt Consolidated application to acquire Oncor

See the Court's opinion for more details

What do you think of the Court's finding with respect to REPs and their obligations? Let us know in the comments below

Tags:
Texas   Pricing   Oncor   Litigation  

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