As utilities pass along tax savings, consumers may miss out

By: L.M. Sixel |

State regulators have forced utilities in Texas to pass along $333 million in federal tax savings by cutting their electric distribution rates, but consumers may never see a dime of that money.

The reason is the state’s deregulated power markets. Under the market structure, electricity providers bill for both the cost of the electricity and utility charges for moving power from generators to homes and businesses. Under state law, retail companies can charge their customers whatever they want; they are under no obligation to pass along the savings when utilities lower distribution rates.

About 85 percent of electricity customers are in deregulated markets, including Houston. CenterPoint, the regulated utility in the Houston area, is lowering its transmission and distribution costs by $62 million, according to the state Public Utility Commission records.

So far, the state’s two biggest retail sellers of electricity, NRG Energy and TXU have committed to pass along the tax savings to their customers. But the state’s third largest power retailer, Direct Energy, would not comment on its plans for passing along the tax windfall. Several other companies, including Gexa Energy, Infinite Energy and Our Energy did not respond to requests for comment.

“The federal tax cut was a huge gift to retail electric providers and utility companies in Texas,” said Tim Morstad, who follows electricity markets for the AARP in Texas, the advocacy group for older consumers. “We feel that ratepayers should share in that windfall.”

State Sen. Kelly Hancock, a North Richmond Hills Republican who chairs the committee overseeing the Public Utility Commission, sent a letter to the commission earlier this year, urging power retailers to pass along the tax savings from the utilities to consumers, who are “ultimately entitled” to the money. If electricity providers ignore the request, Hancock threatened to file legislation that would give the commission authority to order retailers to pass along tax savings to consumers.

For the time being, the Public Utility Commission is hoping that competitive pressure will encourage retail electric providers to pass along their savings, said spokesman Andrew Barlow. But it’s unclear how many retail electric providers will respond in a market that includes dozens of companies offering hundreds of electricity plans. The commission plans to track whether savings from tax cuts flowed to consumers through retail electricity providers as part on an examination of how power markets performed over the summer.

Electricity bills have two parts to them: the energy charge, which is the cost of the electricity, and transmission distribution charges, which are passed along from the utility and can account for as much as half of a consumer’s electricity bill. These two costs are typically combined into the single electricity price that retailers advertise.

Industrial and commercial buyers typically require any rate decrease in distribution rates to be passed through, but residential contracts may lack that protective language, said Thomas Brocato, an Austin lawyer who represents the Gulf Coast Coalition of Cities, which includes 36 Greater Houston communities that have banded together on electric utility matters. Many residential contracts, however, reserve the right for retail companies to boost prices in contracts if utilities raise distribution rates.

Over the past 15 years, Brocato said, the Public Utility Commission has pressured retail electric providers to pass along refunds and rate decreases from utilities.“They haul the retail electric providers up there,” said Brocato.

Some providers agree to pass along their savings because it creates good will. Others don’t, keeping the money from lower transmission and distribution costs for themselves. One can make the argument, said University of Houston energy economist Ed Hirs, that the windfall belongs to shareholders, not consumers, much as other companies have used the tax windfalls to boost dividends and share prices through stock buybacks.

In the end, the commission has no power to compel retailers to pass through the rate cuts. In fact, the commission has little regulatory authority over retail providers, except in narrow instances such as consumer fraud.

NRG Energy, which provides electricity to more than 2 million homes and businesses in Texas through subsidiaries such as Reliant Energy, Green Mountain Energy, Cirro Energy and Pennywise Power, told the commission that it would pass along lower transmission and distribution rates to customers whose bills break out the separate the energy and distribution charges. So did TXU.

For customers who pay a bundled fee —which incorporates transmission, distribution and energy into one monthly charge —NRG said it would work with customers to find an efficient solution to pass along utilities’ tax savings benefits. NRG is still working out the details, said spokeswoman Pat Hammond.

TXU vowed to work with the commission to come up with a way to provide “appropriate value” to customers who pay bundled rates, according to a letter sent by TXU president Scott Hudson sent to the commission. The company has not yet determined what it considers appropriate value, said spokeswoman Meranda Cohn.

AARP, the advocacy group for older consumers, believes the commission should identify which retail electric providers are passing along the tax savings and which are not on the state’s Power to Choose website.

“It’s one more bit of information consumers can use to choose their providers that should help encourage retailers to do the right thing which is to pass along the savings,” said Morstad, AARP’s associate state director of advocacy.

As utilities pass along tax savings, consumers may miss out