Monday, March 12, 2007

The New, Old TXU

I started writing something on Greg Abbott's potential TYC blunder when I was forwarded the following letter.

Apparently, TXU manipulated the energy market and profited $19.6 million directly from ratepayers. TXU's behavior in the summer of 2005 indicated "market power abuse". The TXU deal must be more than lip service to the enviro's, the new TXU ought to be accountable to the public at large. To CEO John Wilder: this means more than just watching out for your shareholders.

I guess that new 10% rebate, which customers are already receiving may just be a small rebate from what they've already been overcharged.

To: Chairman Paul Hudson
Commissioner Julie Caruthers Parsley
Commissioner Barry T. Smitherman

From: Brian H. Lloyd
Special Projects Manager

Through: W. Lane Lanford
Executive Director

Date: March 12, 2007

Re: Project No. 32125; Investigation by the Independent Market Monitor of the Wholesale Market Activities of TXU From June 1 to September 30, 2005

As you will recall, the PUC Staff, in conjunction with the Independent Market Monitor ("IMM"), opened an investigation into the wholesale market activities of TXU in early September 2006. The investigation was initiated as a result of several concerns raised in the 2005 State of the Market Report for the ERCOT Wholesale Electricity Markets ("SOM Report") regarding the bidding behavior of TXU during the summer of 2005.[1] The SOM Report did not analyze the effect of TXU's activities on balancing energy market prices, and as such, did not draw definitive conclusions about whether or not TXU's behavior constituted market power abuse or any other violation of law.

The IMM has competed [completed?] the more thorough and detailed investigation into the concerns that were raised in the SOM Report and has provided its final investigation report to the Commission.

The IMM's Investigation Report concludes that TXU's bidding behavior during the peak usage hours in the summer of 2005 ("the Study Period") was not competitive and increased balancing energy prices by an average of 15.5%. The IMM found that TXU's behavior increased the costs to purchasers of balancing energy by approximately $70 million during the Study Period and that TXU earned approximately $19.6 million more profit during the Study Period than TXU would have if TXU had bid in a competitive manner. Because TXU had the ability and incentive to raise prices, the IMM concluded that TXU had market power in the balancing energy market. Since TXU, in fact, raised prices in the market and profited from its activities, the IMM concluded that TXU's behavior constitutes market power abuse. The IMM also notes that TXU's behavior would tend to increase prices in other wholesale and retail markets, although those effects are not easily quantifiable.

Commission Staff has reviewed the IMM's Investigation Report and will expeditiously evaluate the appropriate penalty or other remedy for TXU's actions, including the filing of a Notice of Violation by the Executive Director to recommend the assessment of administrative penalties pursuant to PUC Procedural Rule 22,246. As you are aware that process will provide TXU an opportunity to decide whether to accept the determination and recommended penalty or to request a hearing before the State Office of Administrative Hearings to contest the occurrence of the alleged violation, the recommended penalty, or, both the occurrence of the violation and the recommended penalty. TXU also will have the option to request a settlement conference.

Because of the level of interest that this matter has generated, I believe it is in the public interest to release the report now instead of waiting for the full development of a Notice of Violation, which may take some time. Accordingly, the Staff is releasing a public version of the report that is redacted. The only information that has been redacted is certain unit-specific information concerning some of TXU's generating plants. This information is considered by TXU to be confidential trade secret information, the release of which may cause competitive harm to TXU. Staff does not believe that the withholding of this information impacts the ability of the public to review and understand the analysis presented in the report.

As you will ultimately decide whether or not you agree with the IMM's findings on the alleged violation and Commission Staff's recommendations on penalties, the Commission Staff involved in the prosecution of the Notice of Violation and the IMM will not be discussing this matter with you privately. However, should you desire a report regarding this matter at an upcoming Open Meeting, please have your staff so inform me, and I will see that it is placed on the agenda.


[1] The SOM Report had ken prepared by Potomac Economics as part of a contract with the PUC for wholesale electric market monitoring services. Potomac Economics has since been retained by the PUC as the IMM for the ERCOT region pursuant to Public Utility Regulatory Act Section 39.1515.


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