A Case Study - Retail Electric Provider Bankruptcies

Essay by SutharSunil December 2004

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A Case Study - Retail Electric Provider Bankruptcies

Texas Commercial Energy (the "Company" or "TCE") filed for bankruptcy

protection on March 6, 2003 in the Southern District of Texas following a sudden and

dramatic rise in the price of wholesale electricity. TCE is a Retail Electric Provider

("REP") serving commercial and light industrial customers in the region of Texas

administered by the Electric Reliability Council of Texas ("ERCOT"). TCE acquires

electricity 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 a

fixed price. When the wholesale price of power exceeded the price TCE was charging

the result was the inability of TCE to pay its bills as they came due. At the time of the

bankruptcy, 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 fixed

price. At the time of the bankruptcy, TCE lacked the financial resources to properly

hedge 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 small

amounts of electricity for immediate delivery and thereby balance their fluctuating

obligations to supply and purchase power. ERCOT acted as the middleman between

REP's and generation companies for the purpose of providing a marketplace for

additional power to compliment the REP's fixed-price supply.

ERCOT is a quasi-governmental non-profit entity responsible for maintaining the

electric grid and the integrity of the electric power market in the majority of Texas. The

©2004 Thompson & Knight LLP

traditional integrated, regulated utility has not existed in Texas since deregulation in

January of 2002. The ERCOT model has three...