Local TV news coverage of the proposed end of 90+ years of electric competition in Lubbock

November 5, 2009

Michael Giberson

I was interested when one of the local news shows  ended their 6 o’clock news segment yesterday on the proposed purchase of Xcel’s Lubbock electric system by Lubbock Power & Light by saying, “Coming up tonight on NewsChannel 11 at ten we hear from an economist and teacher who tells us the other side of the issue and how citizens and taxpayers could be affected.”

“Good,” I thought to myself, so far we’ve heard what the city and the utility think, so let’s see “the other side of the issue.”  I anticipated they would talk to one of my colleagues across campus at the economics department, but there are a few other economists in town.

Here is what we saw on the 10 o’clock news:

“To have everything in one hand is scary to some,” says former stock broker and Lubbock High School AP economics teacher….  She says this deal is all about efficiency.

“But what we do know is this type of monopoly is present in almost every city in America. It is so expensive to build infrastructure of electric company that it’s best to put it one place,” adds Moore.

The efficiency of monopoly?  Huh?  The news segment then jumped to quoting from the president of the regional Xcel operating unit, who said the biggest change will be the elimination of the two sets of power lines.

Other side of the issue???  No, this is the city’s official story.  What happened to “how citizens and taxpayers could be affected”?

I guess I’ll go see what news the morning newspaper has to offer.

2 Comments | Economics, Education, Electricity | Tagged: , , | Permalink
Posted by Michael Giberson

What the FPL 2009 3Q earnings call transcript says about the Texas retail market

November 5, 2009

Michael Giberson

Seeking Alpha has begun publishing transcripts of quarterly corporate earnings calls. Typically these calls are discussions presented by the CEO and other corporate officers followed by Q&A with financial analysts.  The calls offer a more “inside look” at company operations than you get from reading newspaper or magazine stories or even trade press.  What’s more, the calls provide insight into the markets that the company participates in.  The FPL Group Inc. 3Q 2009 call provides several insights into the electric business in Texas, where FPL participates in both the wholesale and retail markets.

FPL, through its NextEra Energy Resources subsidiary, owns both fossil-fueled and wind power plants in Texas and several other places.  Currently the company is the second-largest operator of wind power plants in the world behind Iberdrola.  FPL owns Gexa Energy, a energy retailer in Texas serving about 172,000 customers (according to Wikipedia).

The earnings call spanned the range of FPL Group activities and interests.  There is much here of interest in Texas: FPL has recently completed a 200-mile self-funded transmission line linking four of its wind power plants in ERCOT’s west region directly to the higher-priced ERCOT south region, they’ve added both wind power and natural gas generation in Texas, and they are constantly trying to balance their risk exposures for their wholesale and retail obligations in the state.

I thought the call was particularly interesting for what it implied about retail market profit margins during the current low-wholesale power prices in Texas (and most other places).  Earnings from their merchant generator fleet are down:

Although we were pleased with the $0.11 year-over-year improvement in NextEra Energy Resources’ quarterly earnings per share contributions, the financial performance did not meet our internal expectations. Two factors primarily drive this: the Texas merchant gas fleet and the wind resource. Let me explain a bit further.

On the former, contributions from the Texas gas fleet were approximately $24 million or $0.06 per share below our quarterly expectations. Both spark spreads and ancillary revenues were much lower than we expected.

As for the latter, as I mentioned a moment ago, the wind resource in the third quarter was well below normal or roughly $0.06 per share below our expectations. … For the year, the poor wind resource has reduced per share results by nearly $0.13.

Elsewhere in the call:

Meanwhile, our retail business in Texas … added about $0.04 per share incrementally given favorable margins. The remaining contributions from the existing merchant fleet amounted to negative $0.02 per share, but there is nothing notable in any one category worth calling out.

Later in the call:

Just one last comment: As I’ve said before, we’re certainly not happy that ancillary revenue is down at our gas plants in Texas, but one of the reasons that [inaudible] retail business is up $0.04 quarter-over-quarter is because they didn’t have to pay the ancillary cost to our gas assets and other gas assets.

A couple of comments:

First, the ownership of both wholesale and retail assets in the Texas competitive market provides a sort of natural hedge against fuel price movements. When wholesale power revenue or ancillary service revenues are low, as currently, the wholesale business suffers but the retail side benefits. (See related discussion on wholesale-retail combination in Texas, and earlier here.)

Second, while retail prices have fallen in Texas, they haven’t fallen as far and as fast as wholesale prices, so retail margins are higher for FPL.  The call doesn’t fully clarify the reasons here.  The most straightforward explanation is that FPL likely has many customers on one- or two-year fixed price contracts, with prices that relatively high now (but presumably competitive one or two years ago.) Also, as noted in the call, costs for ancillary services were unexpectedly low, which reduced expenses for the retail side.

But margins may be higher, too, if retail prices are slow to adjust to dropping wholesale prices.  I wonder whether there is an asymmetric price adjustment phenomenon in competitive retail electricity? Do consumers shop around more and switch companies more when prices are going up as compared to when prices are falling?  Probably, and that should be enough of a force to produce a “rockets and feathers” effect on prices.

Finally, and I don’t think the call made this connection, but I wonder whether there is a link between the lower-than-expected wind resource and the low revenues/costs associated with ancillary services.  To some degree, variable wind power output increases the demand for energy balancing and other ancillary services required by the transmission system for reliable operations.  Possibly with less wind power coming on the system, fewer ancillary services were required.  Of course low natural gas prices and on-average slightly lower electric power demand would also reduce the cost of ancillary services, so the explanation may not be wind-output related.

NOTE: FPL’s 200-mile self-funded transmission line, dubbed the “Texas Clean Energy Express,” raises a host of interesting issues worthy of examination.  One of these days…

ALSO: Of course FPL Group Inc. isn’t the only company with an interest in the Texas electric power market.  Search “Texas AND electric” at Seeking Alpha’s Transcript Center for much much more.  If you find anything interesting, let me know.

1 Comment | Electricity, Energy markets | Tagged: , , | Permalink
Posted by Michael Giberson

The (soon to be revised) history of electric competition in Lubbock

November 5, 2009

Michael Giberson

The city of Lubbock Texas has had two competing electric power companies since 1917.  If a just announced deal goes through, competition will be eliminated.

The new “official story” is that competition produced inefficiency, but this view is in stark contrast to old “official story” as told in the “The History of Lubbock Power & Light” posted on the LP&L website.  That historical review makes the case that competition has been a good thing for the city.

Here’s the first paragraph from the historical review, with some emphasis added:

In the electric utility industry, retail competition for electric customers is a relatively new concept. Not so in Lubbock, Texas. The good people of Lubbock have benefited from retail competition for electricity since 1916.

The short version of the story is that city officials were unhappy with an early electric utility supplying Lubbock, so started a municipal utility to provide more reliable service and reasonable rates.  The private utility tried to sell its distribution system to the city at the time, but the city refused to buy it.  (Various dates are mentioned here: 1916, 1917, and, below, 1942.  See a note below explaining these dates.)

According to the existing LP&L history, competition began paying off right away:

The effort by those early Lubbock leaders was realized a success on September 28, 1917 as the municipal power plant began producing electricity priced at only ten cents a kilowatt-hour. The other utility cut its rates accordingly soon after. Imagine that!

The private utility had been charging 20 cents per kilowatt-hour and under pressure from the city had previously only reduced its rates a few pennies.  Competition brought down rates.

Today, the vast majority of Lubbock remains dual-certified and customers still have a choice of electric utility providers. Customers whose account balances are current are allowed to switch from one company to the other at their discretion. The competition for the electric dollar in Lubbock has resulted in some of the lowest electricity costs in the state of Texas and in the nation. Another major benefit of competition is that customers enjoy increased levels of customer service than would be found in cities this size with only one electric provider.

Lubbock Power & Light’s mission is to provide low cost, reliable electric service. We feel we’ve been successful in that mission. All electric customers in Lubbock have benefited from the decision of those early pioneers to begin retail competition.

I’m guessing the official story is about to change. These remarks clearly may be seen as inconvenient given the recent agreement between LP&L and Xcel. (As mentioned here earlier, the municipal utility has agreed to acquire Xcel’s distribution assets in the city and take over retail power service to current Xcel customers.)

The new story, as explained in the LP&L news release :

Since 1942 Lubbock has been served by both companies, resulting in duplication of electric power services, lines, poles and substations. Both companies have determined this to be an inefficient and intrusive way to provide electricity to the community.

Here is the viewpoint from the Xcel representative, also in the LP&L news release:

“The duplication of retail electric service in Lubbock has not been efficient, and we believe we can best serve Lubbock and our other Texas retail customers by only providing the low-cost wholesale electricity to LP&L,” said David Eves, president and CEO of Southwestern Public Service, an Xcel Energy company.

Lubbock’s mayor, also from the LP&L news release:

“It’s natural for LP&L to pick-up the Xcel retail electric service, since the City of Lubbock already provides utility service to all the properties in Lubbock,” Mayor Tom Martin said.

Some questions based on the LP&L history:

  • If the duplication of facilities has not been efficient, why did rates drop in 1917 after a duplicate system was built?
  • If this system is inefficient, why is it that electric rates are comparable to other systems in the area and relatively low compared to elsewhere in the state?
  • If the existing system is inefficient, and the new system is better, they why isn’t LP&L promising to lower rates after the wasteful, duplicative system are consolidated? Are they planning to reduce costs and not pass the savings along to consumers?

According to the now inconvenient history on the LP&L website, a “major benefit of competition is that customers enjoy increased levels of customer service than would be found in cities this size with only one electric provider.”

If this deal goes through, we will become one of the “cities this size with only one electric provider.” LP&L’s message is that we should expect customer service to suffer if the deal goes through.

NOTES ON DATES: The decision to start the utility was made in December 1916, but the system didn’t go into service until September 1917.  The “1942″ reference above is to the date that Southwestern Public Service bought the Lubbock distribution utility from Texas New Mexico Utilities. Southwestern Public Service is now a unit of Xcel Energy.  TNMU was a successor company to the private utility that the city was unhappy with in 1916/1917.

2 Comments | Economic history, Electricity, Energy markets | Tagged: , , | Permalink
Posted by Michael Giberson