Texas Electricity

Luminate which is a subsidiary company of Energy Future Holdings and is the power generation side of their business was fined by the PUCT for approximately 15 Million around December of 2008 for what the PUCT called “market power abuse”. Energy Future Holdings bought TXU Corp which included Luminate, Oncor, and TXU Energy and is now a new company although still uses the same brand names. After looking into the issue further it appears PUCT Commissioner Barry Smitherman has some valid points that the $15 million penalty that was pushed by the staff at the PUCT may have been the wrong decision against TXU which now goes by Energy Future Holdings and whose power generation side is actually known as Luminate. After reviewing the commissioners detailed notes about what caused the MCPE balancing energy markets prices to spike in the summer of 2005 it looks like Luminate’s dominant position in the wholesale energy market in Texas created a bias against TXU simply because Luminant happened to be one of the biggest participants in the wholesale energy market. By having what the PUCT commissioner and others refer to as a “shame cap” it likely hindered other wholesale generation companies from bidding into this market which would have kept prices down. You can read what an uneducated consumer believes to be the truth and then we recommend you read the facts for yourself below which has more to do with unnecessary government regulation over the Texas energy market.

Sent: Friday, December 19 2008 8:41 AM

To: Smitherman, Barry

Subject: TXU fine

As expected! As I look at your picture I could not see the ring around your head from you having your head stuck up Perry’s or Craddick’s @ss. You came in after your predecessor oked the fine two hundred million for stealing from us usurers. We payed double for our electricity and now you let TXU off the hook for stealing from us. Go big business! When you were appointed by the governor I wrote you at the time and called you out on this exact chess move. I consider as big a thief as the other two above mentioned crooks. I plan to run a full page ad in the paper reminding everyone of the Governor’s big business protective practices. He is going down! I can only hope so are you @ss sniffer.

Julio Bejarano

juliobejarano@sbcglobal.net

972-735-0444

PUCT Commisioner Barry Smitherman Explains The Problems With This Penalty Against Luminate

You can read in more detail about this case against TXU on the PUCT website when searching for control number: 34061

Meeting Date: Dec 18, 2008

Date Delivered: Dec 18, 2008

Agenda Item No.: 18

Caption: Docket No. 34061 – Notices of Violation by TXU Corporation, et al., of PURA 39.157 (a) and P.U.C. Subst. R. 25.503(g)(7).

In this docket, the Commission is asked to approve a $15 million dollar settlement between the Commission and Luminant regarding the accusation that Luminant engaged in “market power abuse” as that term is defined in PURA and our substantive rules. I will vote to approve this settlement, the largest in the history of the PUCT, but would like to take this opportunity to explain why I think such a settlement is appropriate.

By way of review, the Notice of Violation (NOV) initially arose out of the “ERCOT 2005 State of the Market Report,” prepared by Potomac Economics (Potomac), which at that time was serving as “advisor” to the Wholesale Market Oversight group within the PUCT. This report was published in July 2006. In Chapter V, “Analysis of Competitive Performance,” Potomac avaluated whether any electric power suppliers had engaged in either “physical withholding” or “economic withholding.” According to Potomac, physical withholding occurs when a particpant makes resources unavailble for dispatch that are otherwise physically capable of providing energy and that are economic at prevailing market prices. Potential economic withholding is evaluated by calculating an “output gap”. The output gap is defined as the quantity of energy that is not being produced by in-service capacity even though the in-service capacity is economic by a substantial margin, given the balancing energy price. A participant can economically withhold resources, as measured by the output gap, by raising the balancing energy offers so as to be dispatched or by not offering unscheduled energy in the balancing energy market.

Potomac concluded, wth regard to physical withholding, that they did not find evidence of physical withholding and that there were positive indicators that the largest suppliers did not engage in physical withholding, but “that firm conclusions would require a more detailed examination.” With regard to economic withholding, Potomac was concerned that Company C (TXU) began offering energy in the last week of June (2005) at prices far in excess of generic costs–that being more than $50 per MWh above generic short run marginal costs. This activity therefore led to an additional investigation by Potomac. Subsequently, Potomac, now in their new role as ERCOT Independent Market Monitor, conducted an “Investigation of the Wholesale Market Activities of TXU from June 1 to September 30, 2005.” That report was filed in March 2007.

In assessing the report of March 2007, it is important to note a couple of things. First, during the period analyzed by Potomac, there was no definition of “market power.” PURA section 39.157 (a) defines “market power abuse” as “practices by persons possessing market power that are unreasonably discriminatory or tend to unreasonably restrict, impair, or reduce the level of competition, including practices that tie unregulated products or services to regulated products or services or unreasonably discriminate in the provision of regulated services. For purposes of this section, market power abuses include predatory pricing, withholding of production, precluding entry, and collusion.” However, PURA does not define “market power”. In PUC substantive rule 25.504, which became effective on September 13, 2006, the Commission defined “market power” to be “The ability to control prices or exclude competition.” Because there was no definition of market power during the June 1 to September 30, 2005 time period, Potomac created its own definition of market power as “the ability for a market participant to profitably raise prices above competitive levels.”

Second, in its analysis, Potomac excluded un-offered capacity from online units. In other words, there were other suppliers of power that could have provided power but shose not to offer energy into the balancing energy market (BES). (To some degree, I believe this was caused by $300 “shame” cap which the Commission has subsequently done away with.) Had those other suppliers offered energy into the BES market, then TXU would have been the pivotal supplier less of the time.

Third, TXU’s offers during the study period were designed to cover the “full costs of owning, operating, and maintaining units expected to be needed to satisfy the forecasted load. This amount includes the initial investment costs and other fixed costs such as leasing arrangements for gas turbines.” Potomac rejected this approach claiming that in a competitive market, there is no basis for an entity to take into account sunk costs [when designing a bidding strategy]. According to Potomac, TXU’s strategy should be the same “regardless of whether TXU won the units in a lottery or TXU paid a large sum to buy the units.” In other words, according to Potomac, TXU should have been bid its generation units either at or near its short run marginal costs.

I have been and continue to be skeptical of all three of Potomac’s above enumerated positions. The Commission’s definition of market power is different and I believe better that the one used by Potomac. In any competitive market, one or more participants may have the ability to raise prices above “competitive levels” for a limited period of time. However, in a market, the response to high prices from one producer is that other competitors, both existing and new, will eventually begin to offer prices below your prices and soon take away your market share and your profits. I don’t know why other generators didn’t offer power into the BES market during the study period (perhaps it was the fear of the $300 shame cap), but we know that had they done so, TXU would have been pivotal less of the time and therefore TXU’s offers would have set the price less frequently. Therefore, it is unclear to me why TXU should be punished for the inactions of others.

In a previous memo by me, filed on May 11, 2005, in Project No. 30513, which was a “staff investigation into the Wholesale Market Activities of TXU” during the fall of 2004 (and which resulted in a determination that TXU did not engage in market power abuse during that time frame), I took exception to Potomac’s previous analysis. In that memo (a copy of which is attached), I said, “It seems perfectly rational to me that a generator would attempt to recover a return on and of capital investment through its BES offers. I think it a bit theoretical to assert that generators in ERCOT are acting rationally only when they offer at short-run marginal cost. If generators are unable to recover long-run marginal costs, then I fear we run the risk of discouraging additional generation at a time when it appears that we are really beginning to need it.” I still believe this to be the case. As a report on Capacity, Demand and Reserves (CDR) recently released by ERCOT demonstrates (page attached), ERCOT’s reserve margins have dramatically improved since May of 2007 when they were projected to be below 12.5% as early as 2009. I am unconvinced that the ERCOT region would have experienced such a robust new generation build were we to limit generators to recovering only their short run marginal costs.

In Order No. 26, issued in this docket on July 21, 2008, ALJs Harvel and Walston opined on the issue of the maximum penalty that could be assessed against TXU if the alleged violation(s) of market power abuse was found to be true. Staff argued for $171 million, Luminant argued for $610,000 or $7.930 million, in the alternative. According to the judges, there is no way to justify staff’s proposed penalty of $171 million. Using the most generous calculation available-3,085 alleged seperate bid curves times the maximum penalty of $5,000 per violation (which was the previous maximum dollar amount but has subsequently been raised to $25,000), the total maximum penalty would be $15.525 million. The ALJs said, “In this case, Staff’s proposed trebling of Luminant’s alleged damage to the market would result in an adminstrative penalty that would greatly exceed the penalty cap contained in section 15.023 (of PURA). Staff has not provided any legal authority to authorize such a penalty.”

Because I believe it would be very difficult to prove in a court of law that Luminant’s bidding behavior in the BES market during the study period was an abuse of market power, and because the proposed settlement is at the high end of the highest probably recovery if Luminant were actually found guilty, I propose that we accept the settlement.

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