ERCOT Retail Competition Risk Assessment for an Electric Utility Co-op

Situation Analysis

In 1999 the Texas Legislature passed Senate Bill 7 (SB7) and called for the establishment of a fully competitive electric power industry. The functional unbundling of investor-owned utilities was ordered. Generation companies sell into the competitive wholesale market while transmission and distribution companies remain regulated. Municipally-owned utilities and electric cooperatives were exempt from the unbundling and thus face a decision on whether retail competition is in the best interest of their customers.

Discovery & Solutions

Strategic Decisions Group was engaged to conduct a complete risk-adjusted analysis to determine the best path forward with the Dialogue Decision Process. Four unique alternatives were developed with the co-op to test the entire decision space with the primary value metric of the total cost of service to the co-op’s customers. Opting-in to retail competition adds several large uncertainties into the co-ops financial modeling. Stranded electricity costs, G&T wholesale rate, and ERCOT locational marginal pricing were assessed with a full range of uncertainty to capture a risk-adjusted view of potentially opting into competition.

Full probabilistic results, detailed sensitivity analysis, and value of information proved out that retail competition should not be pursued. The exposure to energy price volatility, stranded energy cost, and other uncertainties resulted in a higher average cost to serve to co-op’s members.

Results & Impact

Decision Quality and SDG’s Dialogue Decision Process helped the co-op make a confident decision and have a clear path forward:

• There is a clear understanding of the critical risks at the G&T and distribution level.
• Management no longer needs to engage in an endless debate on the benefits of retail competition.
• Distribution cooperatives know which business model is optimal in the event retail competition is mandated by regulators.
• There is no second guessing on the G&T benefit to rate payers.
• There is alignment among the entire cooperative on the retail competition political advocacy position.

“This is the best piece of work I have ever seen our G&T produce.” – Distribution Cooperative President & CEO