Public Utility Commission of Texas

The Public Utility Commission of Texas has finalized the recommendations it will include in its upcoming 2019 Report on the Scope of Competition in Electric Markets in Texas to the 86th Texas Legislature, which goes into session January 8, 2019. The Commission voted on the recommendations at its December 20, 2018 meeting; the most significant inclusions involve a recommendation to increase the threshold for the review of mergers and acquisitions of power generation companies from 1% to 10% of installed generation capacity, and a request that the Legislature provide clarity on which entities may own and operate battery storage devices.

Review of Power Generation Mergers and Acquisitions
Under Texas Utilities Code § 39.158, the Commission is required to review mergers and acquisitions of entities if the newly merged companies will offer for sale more than 1% of the total electricity for sale in the state. The Commission is required to approve the merger or acquisition unless the new company exceeds a 20% installed generation capacity limit set by § 39.154. The Commission recommends increasing the threshold for the review of mergers and acquisitions of power generation companies from 1% of installed generation capacity to 10% of installed generation capacity. The Commission did not recommend changing the limit that prevents one company from owning more than 20% of installed generation capacity. Additionally, the Commission requested the Legislature clarify the meaning of the phrase “total electricity for sale,” which denotes the total regional capacity used in this calculation, and clarifying that the review under § 39.158 applies only in a power region open to customer choice.

The Commission reasoned that the current 1% threshold unnecessarily delays numerous transactions that have a negligible likelihood of breaching the 20% limit, noting the number of applications for review of these mergers and acquisitions has increased from five applications in 2015 to 26 in 2018, most of which came at the end of the year. Changing the threshold for review would avoid undue delays, and in effect avoid the regulatory uncertainty and impediments to business that current regulations cause.

Use of Battery Storage in ERCOT
Under Texas Utilities Code § 35.152, electric energy storage that is intended to be used to sell energy or ancillary services at wholesale are classified as generation assets, and the owner or operator is classified as a power generation company. Section 31.002(10) defines power generation company as a person that generates electricity that is intended to be sold at wholesale, does not own a transmission and distribution facility, and does not have a certificated service area. Section 39.105 states a transmission and distribution utility (TDU) may not sell electricity or otherwise participate in the market for electricity except for the purpose of buying electricity to serve its own needs.

These rules surrounding battery storage have been an issue since AEP Texas, a TDU operating in ERCOT, requested to install two utility-scale batteries to address reliability issues in its distribution system. The docket was dismissed by the Commission on grounds there was insufficient information for a decision to be made; the Commission subsequently opened a Project to further evaluate the possibility of an electric utility owning and operating an energy storage device. The argument made by AEP was that a TDU owning and operating a storage device on its system, that does not intend to sell power at wholesale or participate in the electric market, but only intends to support reliability, does not violate existing rules. Opponents argued TDUs are not able to own and operate storage devices, because they would be participating in the wholesale energy market through the charging and discharging process. The comments received in the Project have highlighted these two arguments, and are sharply contrasting.

The Commission is asking the Legislature for clarity on how these rules apply to battery storage, noting many options exist for TDUs, such as: prohibiting a TDU’s involvement with an energy storage device other than to provide transmission and distribution service to it; allowing a TDU to contract with a power generation company for reliability service from an energy storage device; and limiting a TDU’s ownership and operation of an energy storage device in circumstances where the TDU’s ownership and operation of the device would provide the lowest-cost transmission and distribution service.

The Commission is also requesting that the Legislature provide clarity regarding whether electric cooperatives and municipally owned utilities, known as non opt-in entities, may own or operate batteries without registering as a power generation company. Sections 35.151 and 35.152 of the Texas Utilities Code requires an owner or operator of electric energy storage equipment (i.e. batteries) to register as a power generation company; however, electric cooperatives and municipally owned utilities cannot qualify as a power generation company, therefore it could be inferred they are not permitted to own or operate a battery. The Commission believes this would leave opt-in entities “in a precarious position,” and thus requested legislative guidance.

 

Other Recommendations

Registration of Retail Electric Brokers
The Commission is recommending the Legislature require retail electric brokers to register with the Commission in a manner similar to retail electric aggregators to ensure customers who use such brokers have adequate consumer protections. Retail electric brokers connect buyers with sellers of electricity, and many non-residential electric customers use brokers as an alternative to developing in-house expertise to negotiate retail electric contracts. Residential customers also use brokers, authorizing these brokers to make electricity contract decisions on the customer’s behalf. Whether a broker represents the customer or retail seller can vary from deal to deal, risking customer confusion and blurring the parties’ responsibilities. The Commission already regulates many market participants and has customer protection rules in place, including requirements that participants demonstrate industry expertise and financial stability. Electric aggregators perform many of the same functions as retail electric brokers and are required to register with the Commission under Texas Utilities Code § 29.353 of the Texas Utilities Code; the Commission believes brokers should be regulated as well to protect customers.

Electric Industry Security
The Commission is recommending the Legislature establish a collaborative cybersecurity outreach program to ensure the safety and reliability of electric service. The Commission envisions this program including regular meetings with utilities to identify best practices and emerging threats, coordination of workforce training and security exercises, and related research. Members introduced bills addressing these issues during the 2017 legislative session, but none were enacted.

Default Violations
Under Texas Utilities Code § 15.024(d), if a person that the Commission issues a Notice of Violation against does not respond within 20 days, the Commission considers the person to be in default, and § 15.024(f) requires the Executive Director of the Commission to set a hearing at the State Office of Administrative Hearings; after the hearing the violation is decided by the Commission. The Commission recommends § 15.024(f) be amended to remove the hearing requirement to allow default violations to move more quickly.

Please contact Chris Reeder, Chris Hughes, Maria Faconti or Jessica Morgan if you have any questions.

It appears the Texas Legislature has taken note of the several news articles and industry insiders sounding the alarm bells for ratepayers to brace for record high electricity prices this summer in a market applauded for its consistently low prices. The Committee convened because the Lt. Governor charged it to study/respond to the reserve margin issue. Approximately 5,600 megawatts (MW) of electric generation have recently retired in Texas causing a concern over whether enough reserve capacity exits to avoid rolling blackouts during the peak summer heat. On May 1, 2018, the Texas Senate Committee on Business and Commerce (Committee) held a meeting to discuss concerns amongst the Senators whether the Electric Reliability Council of Texas (ERCOT) had all of the tools necessary to address the lower reserve margins.  The speculation over what might occur this summer began with ERCOT’s Winter Capacity Demand Report estimated the reserve margins in ERCOT as 9.3% for the summer.

During the hearing, both the Public Utility Commission of Texas (PUCT) Chairman Walker and ERCOT representatives promoted ERCOT’s preparation for the summer and insisted ERCOT had all of the tools necessary to respond to system shortages. PUCT Chairman Walker specifically pointed to ERCOT’s demand response tool, where large customers come offline at times of high system demand.  In addition the low reserve margin reported at 9.3% a few months ago resulted in 525MW of generation coming back online.  The current reserve margin going into summer is now approximately 11%.  ERCOT stated that most of the megawatts coming back online were from mothballed units and that it is likely the possibility of higher prices this summer has made these units economical to run, and can be viewed as an indication the market is functioning as expected.

While the primary concern of the Committee was the potential for record high electricity prices, the Committee also discussed capacity markets more generally and what has changed in the market since the last time the topic of a capacity market was brought up in the Texas Legislature. To respond, PUCT Chairman Walker emphasized her strong belief in the ERCOT market and any changes regarding price fluctuations are merely a result of the cyclical nature of the market.  Chairman Walker pointed to the high prices and low capacity experienced by the market in 2005 and 2006 that encouraged more generation investment was made as a response to these price signals.  PUCT Chairman Walker also reiterated her support of the energy only market and her belief that it will work this summer.

The Committee also spent time discussed the impacts of the Federal Production Tax Credit (PTC) on the ERCOT system, the transparency of the prices in the Texas Government Land Office (GLO) contracts, and presentations from Austin Energy and CPS Energy on successes and failures for both of these municipally owned utilities. From the broad discussions taking place at the meeting it is safe to assume the Texas Legislature will be watching the ERCOT market this summer and energy is likely to be a topic of debate in the coming legislative session.

If you have questions about this or other related matters please contact Chris Reeder, Chris Hughes, Maria Faconti, Jessica Morgan or Mark Vane.

On the heels of last week’s Hearing on the Merits, the proposed transition of Lubbock Power & Light (“LP&L”) from the Southwest Power Pool (“SPP”) to the Electric Reliability Council of Texas (“ERCOT”) was back on the agenda at this week’s Public Utility Commission of Texas (“PUCT” or the “Commission”) open meeting.

During last week’s hearing Chairman DeAnn Walker instructed representatives of LP&L and ERCOT to finalize an agreement in which LP&L pays to help counterbalance some of the transmission infrastructure costs that may be incurred by ERCOT customers as a result of the transition. Walker also advised LP&L and SPP to try to reach a similar agreement for the benefit of the ratepayers in that region.

In response to that directive, LP&L, the Commission Staff, the Office of Public Utility Counsel (“OPUC”), and the Texas Industrial Energy Consumers (“TIEC”) have reached an agreement in principle that would, if approved by the Commission, resolve the outstanding ERCOT issues. A letter summarizing the terms of the agreement in principle filed in PUCT Docket No. 47576 last week states that LP&L will pay $22 million each year for five years to ERCOT wholesale transmission customers through the tariff proposed by Commission Staff to shield ERCOT ratepayers against the expected financial impacts of LP&L’s requested transition, and that LP&L will pay SPP’s study costs of approximately $172,000.

Discussions with ERCOT continued this week regarding what terms the final transition agreement will need to contain to satisfy ERCOT’s concerns. LP&L has completed a draft settlement agreement with ERCOT’s guidance in mind and circulated it to all parties the day before the open meeting. LP&L’s attorney conducted preliminary conversations with the parties regarding the draft and the settlement discussion is ongoing; LP&L expects to gain more guidance from the parties over the course of the next several days. Continue Reading Updates in the LP&L Case on the Heels of the Hearing on the Merits