Senate Bill 7

Texas Senate Bill 7, enacted in 1999, deregulates the state’s electric industry. Competition officially began on Jan. 1, 2002. The objective of the law is to let competitive markets work wherever possible and to regulate those utilities that are truly monopolies.

The Senate Bill 7 required all Investor Owned Utilities (IOUs) to freeze their electric base rates on September 1, 1999. Once retail competition began in 2002, this price was reduced six percent from the frozen rate, and is known as the “price to beat.”

Other important Senate Bill 7 requirements

* 50% reduction for NOx emissions and a 25% reduction for SO2 emissions from grandfathered plants by May 2003.

* Additional 2,000 MW of renewable energy capacity by January 1, 2009. Distribution utilities must offer energy efficiency incentives to meet 10% of load growth.

* Establishes System Benefit Fund ($0.50 per MWh) for customer education, low-income customer assistance, and to offset reductions in school property tax revenues. The Fund may be raised to $0.65 per MWh to cover a 10% rate reduction for low-income customers.

* A detailed affiliate code of conduct assures that the regulated utility does not act in a way that favors its affiliates or harms its competitors.

* Retail Electricity Providers (REPs) providing total loads over 300 megawatts in Texas must provide at least 5% of the MWhs to residential customers. A $1/MWh penalty, paid to the System Benefit Fund, is applied for each MWh that is under the 5% requirement.

* Maintains current level of funding for city franchise fees.

* No power generation company may own and control more than 20% of the capacity located in or capable of delivering electricity to a power region. Capacity entitlement auctions can be used to get to 20%. Divestiture is not required.

* Each investor-owned electric utility owning more than 400 MW shall sell, at auction, entitlements to at least 15% of the utility’s installed generation capacity for 60 months or until the 40% loss of load test is met.

* Pilot projects allowing customer choice to 5% of utility customers’ load begins on June 1, 2001.

* Customers that do not affirmatively choose a new provider stay with the affiliate REP.

* In areas where customer choice is in effect, a Provider of Last Resort shall be designated by the PUC, a municipally owned utility, or a co-op to offer a standard service package at an approved price to any requesting retail customer.

* Expands the responsibilities of the Electric Reliability Council of Texas (ERCOT) to monitor independent system operators and calls for the establishment of an independent organization in areas outside of ERCOT.

* Metering and billing for residential consumers will be regulated until the later of (1) September 1, 2005 or (2) until 40% of residential consumers are served by a competitor.

* Utilities may reduce stranded costs during the rate freeze period. At anytime after the start of the freeze period, a utility may securitize 100% of its regulatory assets and up to 75% of the initial estimate of stranded costs made using the Commission’s ECOM model.

* After January 1, 2004, stranded costs will be trued-up and quantified using any combination of (1) sale of generation assets, (2) stock valuation method, (3) partial stock valuation method, (4) exchange of assets, or (5) an administrative method for nuclear assets not valued through one of the stock valuation methods.

* Allows the use of securitization for stranded costs that remain at the time of true-up, which will occur no earlier than two years after the start of retail competition. Creates a formula to allocate stranded costs on an energy basis, which shifts some of the recovery from residential to industrial customers.

* The General Land Office will be allowed to sell electricity to state agencies, institutions of higher education, public school districts, or political subdivisions of the state.

* Legislative Oversight Committee will be established to monitor the implementation and effectiveness of electric utility restructuring and make recommendations for any necessary further legislative action.

How does this effect San Antonio Residents?

CPS as a public utility is not required to compete with the Investor Owned Utilities, although it may opt into competition if it so desires. Currently CPS has the lowest rates in the state and will probably not opt into competition in the near future. Options for CPS and other municipally owned utilities are as follows:

• No change
• Open service area to competition.
• Open service area to competition and compete elsewhere for new customers.
• Continue providing distribution services (“wires only”), but discontinue electric sales in service area. (In this case, another retail provider would need to serve that area.)