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.
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.
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.