PUCT Penalties on Bankrupt Electricity Companies
In Texas last year during the summer several Texas electricity companies went out of business or went bankrupt for very similar reasons. What happens when a small but new retail electricity company enters the market they will usually come in with $100,000 - $200,000 in capital requirement needed to begin operations as a retail electricity provider. Most electricity companies come into the Texas market with much more money than this but if you want to barely get in all you really need is $100,000. Some of the electricity companies that went bankrupt actually had quite a bit more money than the minimum $100,000 needed to start doing business in Texas as an electricity supplier.
Some of these electricity companies in Texas were prepaid electric companies that kept their customer prepaid electricity service money as well as their deposits. Their customers than had to sign up with a new electricity provider and pay an additional deposit and if with a prepaid electric company they also had to prepay for electricity service again. For low income electricity customers they may have shelled out close to $1,000 after being dumped by one electricity provider and having to pay out similar money again to another electric provider.
In Texas over a year later the Public Utility Commission has finally assessed penalties and fees against these disreputable electricity providers in Texas. What went on prior to this final assessment were many certified letters and phone calls to these companies asking them to respond and appear at official PUCT meetings and conference calls. These companies that kept deposits and prepaid moneys did not respond to the Texas state government but kept the money and kind of vanished from the radar. The PUCT had no other choice but to assess some of the steepest available penalties after these electricity companies committed some of the most egregious acts against low income retail electricity consumers.
One after another these bankrupt or simply out of business electricity companies were assessed fines right under 2 million dollars. The PUCT assessed very high penalties against these electricity providers in an attempt to discourage this type of activity from happening again. One of the electricity companies that went out of business attempted to stay in business by raising their promised fixed electric rate. When the company attempted to raise the rate against PUCT rules they were bombarded by customer complaints sent to the PUCT and to the electricity provider over several months. The PUCT had no other choice but to respond and they told these electric companies that they cannot adjust their promised fixed electricity rate. These companies had no other choice but to go out of business as they could not pass on the added cost in fuel prices going up to their customers.
What most Texas electricity companies will do to avoid the risk of fuel prices going up is to hedge their energy on a commodities exchange like the NYMEX market. On the NYMEX you can buy and sell commodities like oil and natural gas. In Texas 45% of the fuel used to produce electricity is natural gas. This large amount of fuel commodity used to produce electricity allows an electricity provider to insure their prices through hedges on a commodities exchange. These hedges also allow for them to offer a fixed electricity rate to their customers. Some providers like the ones that went out of business in 2008 simply did not hedge their energy like a smart electricity utility would do. Instead these energy suppliers bought off of a variable market clearing price index managed by the Electric Reliability Council of Texas. The electric company knowingly took on the risk of changing fuel prices and in many ways were gambling on what the price of electricity and commodities would do.
The gamble on fuel and electricity prices did not pan out as fuel prices tripled in price as compared to what they have done historically. Instead of these electricity providers eating the cost in the change in price they attempted to pass on the higher cost to their fixed price electric service customers. Well you can't go and change a fixed electricity price on your customers without hearing about it. Their customers complained in large columes to the PUCT and to their respective electricity company and because of this the PUCT came down on them hard explaining that you cannot change a fixed electricity agreement.
At this time the PUCT has told these companies that they must pay close to $2,000,000 in fines but it is very unlikely that they will pay as the PUCT has not been able to reach companies like National Power company all year.
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