Wednesday’s Wall Street Journal had an interesting front-page article (subscription required) by Rebecca Smith on TXU, the legacy Texas utility that is following unconventional utility strategies in its approach to Texas’s restructured retail electricity market. Smith’s article focuses extensively on TXU’s changes to its customer disconnection policies. TXU follows a 26-day late payment disconnection policy. TXU argues that this policy is one of the tools they are using to reduce their liability load; TXU is a provider of last resort (POLR) in Texas, so if an energy retailer drops a customer for lack of payment in TXU’s historic service territory, TXU is the provider with the obligation to pick up that customer. One of the long-standing issues with POLR, or default service, is the potentially severe credit risk inherent in such customers, which makes offering POLR to them unattractive (while it can be attractive to other, more creditworthy customers who are low-maintenance and don’t call up the customer service center).
Smith also describes TXU’s controversial decision to outsource their customer service to CapGemini Energy as a cost-reduction strategy. I fail to see why this move is so controversial; if TXU has decided that its core business model does not encompass customer service, yet they must still provide it at a high-quality level, then it’s better for them and for their customers to specialize according to comparative advantage and have experts do the customer service. I think this article does a nice job of pointing out that customer service is one of those areas where excess hiring was typical in the vertically integrated, regulated utility, because the utility could roll that cost into the rate base, get paid a rate of return on it, voila. Now, though, the discipline of cutting costs where possible to compete more effectively and offer a more attractive service to customers at a price they are willing to pay means a change in business model and a change in mindset and culture.
I found one particularly galling action in the story that Smith recounts. The move to restructure electricity regulation was supposed to create a situation in which targeted income assistance programs are sufficiently funded, instead of inefficiently and unfairly spreading the cost of assisting low-income residents who could not pay their bills across all customers through regulated rates. All states have programs called LIHEAP (Low Income Home Energy Assistance Program), which are intended to do this, but in the past have generally been poorly funded and even more poorly advertised or communicated to low-income customers. But in Texas, the state legislature has raided its revenues:
When Texas deregulated electricity, it also provided what was supposed to be a safety net for the poor. Legislation required that energy users pay a percentage of their bills into a fund that would defray costs for the very poor. But during a budget crunch in 2003 and 2004, the state legislature raided the $407.5 million fund, removing $214.6 million, or 53%, for other purposes. The state Senate Finance Committee has just taken action that, if approved by the full Senate and House, would make the entire $426.9 million expected to flow into the fund in the next two years unavailable for its designated purpose of helping poor electricity customers.
OK, so ‘splain me this: how is electric regulation restructuring ever going to succeed when such blatant and pathetic political poaching and thievery persists? Even worse, when things like this happen, of course it’s “deregulation’s fault” for creating the situation in which this thievery occurred. How can policymakers expect companies to do anything other than laugh in their faces when they make promises to commit to policy changes and then they pull venal stunts like this? How can they think that this does not contribute to regulatory uncertainty?
I put this datum down as one more in the column of evidence showing that political compromises, political expediency, and watering down the market-based restructuring means that we have to be ever vigilant if we really want to see the empowerment of customers and entrepreneurial producers through the move to markets. Political thuggery lurks around every corner, and we must not be shy about calling it out when we see it.