A Case Study Retail Electric Provider Bankruptcies

1809 words - 7 pages

A Case Study - Retail Electric Provider BankruptciesTexas Commercial Energy (the "Company" or "TCE") filed for bankruptcyprotection on March 6, 2003 in the Southern District of Texas following a sudden anddramatic rise in the price of wholesale electricity. TCE is a Retail Electric Provider("REP") serving commercial and light industrial customers in the region of Texasadministered by the Electric Reliability Council of Texas ("ERCOT"). TCE acquireselectricity on the wholesale market and then resells it on a retail basis to its customers.TCE enters into 12, 24 or 36 month contracts with its customers to supply electricity at afixed price. When the wholesale price of power exceeded the price TCE was chargingthe result was the inability of TCE to pay its bills as they came due. At the time of thebankruptcy, TCE was purchasing almost its entire supply of energy on ERCOT's"Balancing Energy" market as opposed to locking in a steady supply of power at a fixedprice. At the time of the bankruptcy, TCE lacked the financial resources to properlyhedge its power supply against price fluctuations in the market. ERCOT established the"Balancing Energy" market as a mechanism to allow REP's to buy and sell smallamounts of electricity for immediate delivery and thereby balance their fluctuatingobligations to supply and purchase power. ERCOT acted as the middleman betweenREP's and generation companies for the purpose of providing a marketplace foradditional power to compliment the REP's fixed-price supply.ERCOT is a quasi-governmental non-profit entity responsible for maintaining theelectric grid and the integrity of the electric power market in the majority of Texas. The©2004 Thompson & Knight LLPtraditional integrated, regulated utility has not existed in Texas since deregulation inJanuary of 2002. The ERCOT model has three categories of participants - GenerationCompanies "Generators"), Transmission and Distribution Service Providers ("TDSP's")and Retail Electric Providers ("REP's"). REP's purchase power from the Generators anddeliver that power over the TDSP's power lines to the end users. This economic model isroughly similar to that used by resellers of telephone service. REP's make money justlike any other retailer - they buy large volumes at wholesale prices and resell in smalleramounts to end users.As a rule of thumb in the ERCOT market, short-term wholesale power sells for 10times the price of natural gas. For example, if gas sells for $5/mmBtu, then power willsell for $50/MW-h. On February 24 and 25, 2003 during an unusually severe cold snapacross the country, the price of natural gas on the spot market rose to $22/mmBtu andpower followed suit with prices rising to $220/MW-h. At the time, typical rates for retailpower varied from $75 - $85/MW-h. Due to a variety of factors, including the extendedperiod of extremely cold weather, some issues relating to trading which are in dispute,transmission constraints and generation outages, spot prices for...

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