This summer's extreme heat has put a severe strain on the finances of Texas electric providers, producing conditions which could result in one or more providers going out of business.  Texans who have chosen their electric provider by just looking for a cheap rate, without any diligence as to the provider's financial health, need to look for a more stable provider to ensure their electric provider does not succumb to these conditions and go out of business.

The wholesale electric market in which Texas retail electric providers operate is an expensive and risky business, even under normal conditions.

On top of the "normal" risk in the electric market, extreme events, especially when prolonged or unexpected, can put electric providers out of business -- or force them to sell themselves in a "fire sale" -- because providers either can't financially cover their customers' unexpectedly higher electric usage, or, more often, the provider can't meet the heightened collateral requirements that come with increased electric usage and/or higher wholesale prices.

Every major market shock in the Texas electric market has been followed by the bankruptcy or default of several electric providers, or has seen providers exit the business to avoid bankruptcy by selling their customers to their competitors in fire sale transactions.

After Hurricanes Katrina and Rita in the fall of 2005, which led to a severe and prolonged spike in natural gas and power prices, several electric providers defaulted and their customers were transitioned to the "Provider of Last Resort" -- a backstop electric supplier whose rates are much higher than competitive prices in the market.

In the spring of 2008, a mix of "congestion" and other operating and market conditions on the Texas grid led to five electric providers defaulting -- leaving customers stranded on the higher Provider of Last Resort rates -- with even more electric companies quietly exiting the business by selling their customers to competitors.

And this February, after the extreme cold and rotating blackouts, several electric providers exited the market by selling their customers to competitors.

It may only be a matter of time until the Texas electric market sees the effect of this summer's prolonged extreme heat, which has drained electric suppliers' financial reserves and collateral.

Already, one Texas electric executive has said, "[a] substantial number of undercapitalized energy companies have suffered financially through the Texas heat wave in August," providing an opportunity to buy these companies, or rather their customers, at a steep discount.

The looming risk of electric supplier default means Texans must ensure that they have chosen a financially stable electric provider that will be around for the long haul.

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