Texas Consumers Lose 700 Million Dollars Over Past Ten Months to TXU and Reliant’s Exorbitant Energy Prices

Nov. 1, 2006

Texas Consumers Lose 700 Million Dollars Over Past Ten Months to TXU and Reliant’s Exorbitant Energy Prices

If Electric Costs Were Based on Real Cost of Fuel, Average TXU and Reliant Customers Could Have Saved $40 in October Alone

AUSTIN – An analysis by Public Citizen’s Texas Office of Texas Public Utility Commission (PUC) and natural gas data from the past two years shows that the two largest deregulated electric companies have been charging far more for electricity than natural gas prices would dictate under a regulated market. As a result, residential consumers have paid $700 million more than they would have if these two companies had lowered their standard rate to reflect declining natural gas prices.

“Raging fuel prices for electricity has been the deciding issue in past governors races,” said Tom ‘Smitty’ Smith, director of Public Citizen’s Texas office. “Since the deregulation of the electric industry, Texas electric consumers have been paying much more for electricity than it really costs to produce. In the past 10 months, these powerful utility companies have picked more than $700 million from the pockets of the Texans. While this may be legal, it isn’t right. We challenge the governor and his opponents to explain how they plan to fix the problem.”

Before the electric industry was deregulated, the price of electricity was adjusted every six months based on average fuel costs. Under a regulated system, consumers would have received a refund for the difference. TXU has requested and received seven consecutive increases to its price to beat (PTB) rates since January 2002, and Reliant Energy has requested and received six. The current rate for both energy companies was set using unusually high natural gas prices in the wake of hurricanes Katrina and Rita last fall. TXU’s PTB rate was set at $11.53 per million cubic feet (Mcf), and Reliant’s PTB rate was set at $11.38/Mcf. When this analysis was prepared, the price of natural gas was $7.46/Mcf. Although natural gas prices plummeted earlier this year, both energy companies’ rates remained at the level set last fall. To estimate the impact on consumer’s bills, Public Citizen calculated what PTB rates would have been at the end of each month in 2006 through October had they reflected the then-current price of natural gas. The study used the same basis for fuel costs that the PUC would have used had the two electric companies requested a PTB rate adjustment.

TXU’s 1.5 million PTB customers would have saved $434 million in 2006, and at today’s price of natural gas, an average customer would see a $41.08 savings this month.

Reliant’s 1 million PTB customers would have saved $268 million in 2006, and at today’s price of natural gas, an average customer would see a $40.30 savings this month.

“These outrageous electric bills demonstrate that just because we reside in a state that allows competition doesn’t mean we can count on electric bills dropping if fuel costs decline,” said Smith. “It shows why the legislature needs to take action and foreshadows yet another failure of the market – even if the proposed coal plants were to be built, the cost of electricity may not decline.”

TXU bragged to its shareholders on their March 31 2006 filings with the SEC that: “…in contrast to TXU Corp.’s gas-fired generation units, changes in natural gas prices have no significant effect on the cost of generating electricity from TXU Corp.’s nuclear-powered and lignite/coal-fired plants. All other factors being equal, these baseload generation assets, which provided 56% of supply volumes in 2005, increase or decrease in value as natural gas prices rise or fall, respectively, because of the effect of natural gas prices on wholesale power prices…One of TXU Power ’s key competitive strengths is its ability to produce electricity at low variable costs in a market in which power prices are set by gas-fired generation.”

Efforts on the part of PUC Chairman Hudson in February 2006 to review and adjustment the PTB rates at the end of 2006 were rebuffed by the other commissioners. During this summer’s special session, Rep. Sylvester Turner of Houston tried to provide relief from skyrocketing electric rates b y filing House Bills 31 and 32. HB 31 would have clarified that the PUC had the authority to lower the fuel factor, which is the calculation that determines how much utilities can charge. This would have drastically reduced the price of electricity for all consumers. HB 32 would have restored the system benefit fund, which would have given low-income customers 10 to 20 percent relief from their high electric bills. Although the need to protect consumers’ pocketbooks and ensure that electric rates reflected current natural gas prices was abundantly clear, Perry never added either of these measures to the special session call, killing this effort.

Even considering 2005, when these companies claimed to “under-recover” millions due to increasing natural gas prices, the vast over-collection in 2006 far outweighs any “losses.” It is clear that overall the utilities have reaped huge benefits. The Wall Street Journal reported on October 27 that in the second quarter, TXU earned $497 million on $2.67 billion in revenue, gaining a larger profit margin than Chevron Corp. or Exxon Mobil Corp.

The analysis by Public Citizen shows that even when 2005 is considered:

TXU’s 1.5 million PTB customers paid $227 million more than they would have if the rates had reflected current gas prices.

Reliant’s 1 million PTB customers paid $140 million more than they would have if the rates had reflected current gas prices.

Overall, deregulation has failed to produce widespread competition in generation and retail of electricity. If TXU gets permission to build 11 proposed coal plants, the wholesale market power it would gain could allow it to control prices.

“Governor Perry and the PUC could have acted to reduce energy costs by changing the formula for setting the price to beat. Instead, they failed to protect the pocketbooks of average Texans and chose to protect the profits of the powerful utility companies,” concluded Smith. “We urge the Legislature to develop a cost-based electric offering that could provide energy based on actual fuel costs and a reasonable profit. TXU and Reliant’s continued high profits show who is benefiting from the ‘competitive electricity market in Texas’ – and it’s the profiteering power companies, not the people.”

To view Public Citizen’s analysis, visit https://www.citizen.org/our-work/texas-issues.

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