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Below is the HillCo client report from the September 4 House State Affairs Committee hearing.
 
The Committee met to receive updates from agencies as well as to discuss the Employee Retirement System (ERS) contract with United Healthcare.
 
Electricity Generation and Capacity
 
Donna Nelson, Chairman, Public Utility Commission (PUC)

  • In the process of implementing the wastewater ratemaking transfer
  • Already implemented changes to system benefit fund
  • In the process of implementing changes to universal services fund
  • Most significant current issue is EPA rule 111(d)
  • Putting finishing touches on operating demand curve
  • Examining ancillary services and transmission building processes
  • Have spent quite a significant amount of time discussing resource adequacy; implemented operating reserve demand curve in June; have a had a relatively mild summer so it has not really been tested
  • Reviewing the reliability standard right now; currently use 1 event in 10 year standard; have a project open examining that standard
  • On June 2 EPA issued a proposed rule for regulating greenhouse gasses on existing power plants; will be significant effect on Texas; rule would punish states like Texas who are first movers into renewable energy; re-dispatch of resources is an administrative intervention in the market
  • Mandates a 50% reduction in coal generation as PUC has determined it
  • Require Texas to make significant increases in renewable energy; anywhere between 100-150%
  • Must share 18% of the nationwide burden of reductions
  • Working with RRC and TCEQ to develop joint comments
  • The question will be can our market respond quick enough for the proposed necessary closings

 
Ken Anderson, Commissioner, PUC

  • Have seen many upgrades to generation this summer; over 2,000 Mw of new gas generation has come onto the cycle
  • ERCOT has taken the lead in the US on the model for determining resource adequacy
    • Has substantially reduced peak load forecast; now down to about 1% a year
    • Too early to see whether utilization of generation fleet is getting more efficient; will mean more money for generators
    • Proposed EPA rules are very problematic and create a great deal of uncertainty
    • In addition to new generation that has come on line or broken ground there are a number of generators who have filed permits
    • ERCOT probably only needs between 600-800 new Mw per year of effective load carrying capability to maintain current reserve margin
  • Rep. Dan Huberty asked if in ERCOT the capacity is 72,000 Mw but that is all variable based on what comes offline
    • Closer to 75,000; what is actually available on-line varies based on time of day and season; in the summer it is above 60,000; in the winters it is under 60,000 generally
  • Huberty asked if there is 16,000 Mw coming on line in the near future
    • Perhaps; may only see 20% of that and it will be phased in gradually
  • Best analysis shows that comparing August 2014 to August 2013, ERCOT day ahead market prices have been $1-5 higher; mostly related to higher gas prices; that is after the addition of 2,000 Mw of new gas
  • Putting aside the fact that the summer has been very mild, Texas is in pretty good shape; the next three years should continue that outlook, after that it is all guess work
  • The commission has been looking at other reliability infrastructure issues
    • Security of transmission distribution system; trying to identify critical infrastructure and follow up with steps taken to improve security; can’t talk about it much in public
    • There has been an occurrence of a phenomenon (subsynchronous oscillation) regarding the distances of transmission lines; changes in frequencies can occur to cause increased stress in existing generation; can cause damage if it occurs too frequently; have a project open to look at potentially damaging effects; haven’t determined who pays for the problem
  • Rep. Jose Menendez asked about growth of wind generation; over the last 10 years it has gone from less than 1% to 10%; if the federal tax credit goes away what will be the effect on wind growth
    • Depends on where the wind will be sited; deployment of assets would be most affected in the panhandle; not so much on the coast; the reason is that wind in the summer along the coast more closely follows the increase in consumption
  • Menendez asked about EPA’s new restrictive coal rules; would it not make sense, because the infrastructure is already in place, for the plants that are affected, to retrofit their existing coal burning capabilities to gas
    • That is an option with respect to some plants; cannot say, for Texas units, that it is likely to occur; depends on the nature of the coal that is being used; brownfield sites would be a good location to put in new gas plants
  • Rep. Jessica Farrar asked about how subsynchronous oscillation would affect wind farms in the panhandle
    • The one time it did occur was at a wind farm; damaged the turbines inside the units; could be $10-100 million in damage; if plant came off the grid it could cause price spikes and would affect reliability if it happened in a peak time
    • A number of solutions have been proposed; vendors with ideas for solutions; cost must be evaluated and who is responsible to pay for the implementation
  • Rep. Rene Oliveira asked for a clarification of the distinction between the effect on panhandle and coastal wind farms regarding the tax credit
    • Panhandle wind happens at off-peak times and at peak times on the coast
  • Oliveira noted the House Select Committee on Economic Development Incentives could study the issue; if the federal credit disappears is there a projection of what would happen
    • Coastal farms could sustain; new West Texas wind farms would be challenged; there are already significant incentives in place that do not exist in other parts of the country; generators do not have to pay to access the grid for the most part; land use regulation, permitting and siting is easier in Texas than anywhere else; it helps that there is not a lot of federally owned land in Texas; hard to say what the impact on West Texas farms would be
  • Oliveira noted several years ago it was discovered that school districts were making deals with wind farms, abating their taxes, etc.; there is still some concern about that because the state was subsidizing the districts when they were giving these tax credits
  • Oliveira asked about how much of the total capacity wind makes up
    • Wind makes up 15% of installed capacity in the state; in regard to effective amount of energy being produced it varies, some days around 50%, some days closer to 0%
  • Oliveira asked if tax credits go away it would only affect new infrastructure and not existing
    • That is correct for the most part; they could still supply the grid and probably would not pack up and leave
  • Oliveira noted this is important to consider as school finance changes are debated
  • Chairman Byron Cook asked if the energy only market still serves the state well
    • Yes

 
Brandy Marty, Commissioner, PUC

  • PUC has been wrestling with the resource adequacy issue lately
  • With the new, more sophisticated modeling, the current state of the Texas energy market is healthy
  • Cook asked about the 1 in 10 standard
    • Still looking at that question; there is a high potential that at some point in the future it may need to change; before the next time a low point in the market is hit, there will have to be discussion of a more reliable standard; will work to develop what will be the best standard for the state
  • Cook asked if the energy only market serves the state well
    • Yes

 
Bill Magnus, Vice President/General Manager, Electric Reliability Council of Texas (ERCOT)

  • Have not seen near the summer or winter peak marks from 2011, since then
  • Using new load forecasting, the summer peak load was over estimated by about 2,000 Mw
  • The seasonal assessment of resource adequacy (SARA) was issued on September 2; a short term look at where the state should be for generation; should have sufficient installed generation capacity to serve the peak load for the fall and winter
  • The longer term look, capacity demand and reserves report (CDR), is issued twice a year; shows the state to be in good shape; showing steady, healthy growth in load
  • Looking at a change in how on-system wind is counted; a 100 Mw wind generator is calculated at 8.7 Mw because wind is intermittent; finding there is a higher amount of time wind can be counted on; 10% increase for West Texas wind; 50% higher for coastal wind; will show wind counting for more capacity in CDR; in the next report there will be an increase in generation due to that change in calculation; must still be approved by the agency
  • For a long time in the electric business, you could plot electricity use to GDP; starting to see a change in that nationally; more energy efficiency in construction, light bulbs, usage, etc.
  • Also, there is a different rate of growth for energy use and peak, peak has a little higher growth rate; when measuring peak with the load forecast it must be taken into account
  • These changes are decreasing the percent of error in the load forecasts
  • For fuel mix, between 2003 and 2013, there is an increasing percentage of wind; 10% of total energy in 2013 came from wind and that barely registered in 2003
  • Menendez noted it would help to study Mw change in fuel mix at the same time as percentage change in fuel mix because significant increases in wind make it seem other fuel sources are decreasing when that is not the case
  • Menendez asked what it would take to retrofit coal plants to natural gas; there would be efficiencies
    • There is already infrastructure to support existing units so that would be an efficiency; it mainly depends on unit age and investment necessary to retrofit; the answer would be different between each unit
  • Rep. John Frullo asked what percentage wind will ultimately get to for fuel mix
    • Not sure there is a specific limit; at a certain point there is a need to have other generation because wind is intermittent; having a base load that can be counted on is important for reliability; also, being able to dispatch a unit based on need is important; when increasing intermittent resources we must consider that the base load needs to remain steady
  • Drought has a significant impact on load because drought makes it hotter; intake of water is also important for generators and reservoir levels are affected by drought in that way
  • Oliveira asked if there are units in danger of closing because of drought
    • There are some who are developing contingency plans in case reservoir levels get too low; increasing intake pipe length is one option; the agency stays in touch with those units to monitor the situation; ERCOT has hired a meteorologist to look at drought and has developed a drought model to stay on top of the situation
  • There is a lot of work going on in the Rio Grande Valley for transmission
  • CREZ was completed in 2013
  • There are protective devices put into the CREZ system because of the very long transmission lines but the risk of the subsynchronous oscillation phenomenon must be studied more in-depth
  • Oliveira asked if CREZ line costs are going to be paid for by every rate payer in the state; what will cost be
    • It will be spread across the state
    • Nelson replied that latest analysis shows a total cost of $7 billion; should be about $6-7 per rate payer; ERCOT is looking at doing some upgrades to lines in the panhandle which would increase the cost
  • Anderson noted CREZ lines aren’t paid for any differently than any other transmission investment; it was decided that the grid would be treated like the state highway system and the cost would be paid for based on usage (load share); decision was made a long time ago
  • Rep. Harvey Hilderbran asked if there are any variables that allow people who get power from CREZ to pay a little more
    • No
  • Hilderbran asked if that policy was put in place when CREZ was developed or if it was already the policy before the CREZ line
    • It was already the policy
  • Cook noted electricity is a pillar that drives the economy; the CDR has been all over the place and it is important to the state for the commission to get it right

 
Driving Permits for Unlawful Residents
 
Steve McCraw, Director, Texas Department of Public Safety

  • As a result of the Real ID Act, there have become requirements for the state to have a nationwide license program
  • Before the act there was no requirement for a license to show whether a person was in the country lawfully
  • Cook asked if this is a beneficial tool for DPS
    • The more people that have a driver’s licenses means more people that have insurance; a benefit to the entire state
  • Cook asked if non-renewals can be tracked to understand how many people have had a license and could not renew because of lawful presence
    • Do not have a way of determining how many people applied and could not prove lawful presence
  • Rep. Charlie Geren asked if the language should stay in statute creating the requirement
    • It should stay; keeps Texas in compliance with the Real ID Act
  • Geren noted back in 2011 it was determined there was a driver’s license mill where people could get a license and people came in from out of state to get a Texas license
  • Farrar asked how concerned a person should be who applies for a license who does not have a social security number
    • That information is not shared with immigration officials; the biggest threat is cyber security
  • Farrar asked how the public concern about submitting themselves to the process can put them at risk is being handled by DPS
    • The state does not enforce federal immigration laws; that information is available online
  • Farrar noted there should be a public campaign to address concern
  • Frullo asked if there is any difference in a traffic stop when a person is pulled over with a Utah temporary license
    • Not sure there has been any issue with that
  • Oliveira expressed concern that the insurance unlawful residents can get is much higher in cost and could cause them to not buy insurance; would like an analysis of how many non-renewals there have been

 
Paul Harrison, President, Alinsco Insurance

  • Sells non-standard insurance
  • It is not a requirement for a person to have a driver’s license to have insurance
  • Rep. Helen Giddings asked if all customers have no driver’s license
    • No that is a small percent, probably 20-30% have not Texas license
  • A lot of people believe the industry is high-risk customers; that is part but it is primarily people who purchase minimum limits and are economically challenged and in and out of the insurance marketplace
  • Many purchase monthly policies
  • There are many people with no driving histories who cannot be underwritten so a surcharge applies to their policies
  • A lot of people who come in without a license have trouble with registration as well
  • Huberty asked what the solution is
    • Part of the solution would be to have the ability to register a vehicle with the new permit being discussed; without registration abilities it will be hard to insure a vehicle
  • Something that has helped the uninsured trends is that the market has benefitted from named driver policies; they offer an affordable price option in the marketplace
  • Oliveira asked what non-standard insurance costs
    • It varies significantly based on the insured
  • Oliveira believes the cost can make insurance unattainable for these populations; not saying it is not a good product
    • The market is very price-sensitive

 
Charles Foster, Foster & Klein Law Firm

  • Practices immigration law
  • There are strong public policy reasons to implement a non-citizen driving permit
  • Large numbers of people have been driving and working in Texas for decades without licenses
  • According to Ray Perryman, there are somewhere around 2 million undocumented people in Texas
    • If they cannot get a license they are forced to drive to work, the grocery store, to take their kids to school, etc. without a license
  • A vast majority of those people cannot become legal citizens

 
 
ERS/United Healthcare Contract
 
Tom Quirk, CEO, United Healthcare Texas

  • Have increased the number of United employees in the state by 41% in the last three years
  • Have over 51,000 providers contracted in the state and over 500 hospitals
  • United was awarded the ERS benefit contract in 2012
  • Continuing to enhance the Texas system
  • ERS account is led by an elite account team at the highest performance service center in the nation which is in Richardson
  • The first two years have been very successful
  • Cook noted he was very disappointed at how difficult it was to get information from United initially; hopeful that in the future it will be much easier
  • Cook believes even with provider increases there is still a significant difference between the United network and the previous provider’s network
  • Cook expressed concern about several aspects of the contract, particularly balance billing
    • Balance billing is done by providers
  • There are many factors that go into the overall cost of care including in-network claims and discounts with the provider community, out-of-network utilization, care management
  • Cook believes the contract may need to have a subject matter expert audit; current data suggests the state and participants are picking up a significant amount of money; need to know if the change was in the best interest of the state; the numbers provided by United do not add up to savings for participants or the state
  • Hilderbran noted it is important to consider that there are lots of different issues that go into making a decision regarding a plan administrator; may need to ask ERS representatives some questions
  • Frullo asked if the normative industry standard at 7% cost increase is the same as the cost increase seen by ERS
    • It should be lower than 7%; would have to ask ERS
  • Frullo asked why the discount percentage did not go up with cost of care
    • There are negotiations that go on throughout the year between the plan and the provider; contracts change all the time and those have an effect on the overall discount
  • Frullo asked about the increase in balance billing costs
    • If a participant chooses to go out-of-network there is a possibility of balance billing; there are certain steps that are taken in those situations to try to mitigate the cost to the participant but it is a possibility when a participant goes out-of-network
  • Oliveira asked if balance billing means that after an adjustment is made to the original bill, the balance that is left is charged
    • It would be in the absence of a contract
  • Oliveira noted he has been getting balance billed with in-network providers
  • Oliveira noted out-of-network costs went from $70 million with Blue Cross to over $300 million in the first year of the contract with United; who picks that up
    • Mostly the state
  • Oliveira noted he believes the cost per participant per month went up 15% after the contract change
  • Oliveira noted if the out-of-network costs went up 4x then there are problems; either the network is not large enough or members continue to use providers who United has neglected to add to the network
    • When the contract was negotiated the disruption to the network was set to be 85% and United came in well under that mark; providers were added after that point to increase the network beyond the initial size
  • Cook asked if there was any additional charge to the state to reduce out of network costs
    • No

 
Ann Bishop, Executive Director, ERS

  • ERS serves over 400,000 employees in the state
  • Administer about 7 health related contracts including HMOs, Medicare Advantage and Health Selects
  • ERS has a gated product for insurance; in order for the state to pay the most participants must go to a primary care physician
  • The plan is designed to drive behavior such as going to certain providers, taking care of personal health and using generic drugs
  • Management structures are put in place to realize cost savings all the time
  • Cook asked what the cost increase should be year to year
    • Robert Kukla noted the cost increase was around 7% for the last year which is what was predicted
  • Rep. Sylvester Turner asked if changes to the plan are factored into cost projections
    • Yes
  • Turner asked if the representations and contractual obligations made by United have held true
    • Everything has happened as expected
    • Expected an 8% trend line and everything has moved along as expected; customer satisfaction scores match up from the prior provider
  • Turner noted over the next few years ERS is projected to see a deficit in funds; does that have anything to do with who has been contracted with
    • If the cost of health care continues to rise as it has in the past and the baseline appropriation remains the same, ERS will be tapping into the contingency fund and it will run out of money; when that happens plan design changes will have to be made
  • Turner asked about the increase in out-of-network costs
    • Bishop replied that ERS doesn’t know what an individual pays as far as balance billing goes; ERS only knows what the contracted amount is as well as the explanation of benefits; not necessarily the out-of-network cost that providers charge to participants; if ERS knows of an issue brought up by participants, ERS will address the issue; if there is an issue with balance billing ERS will send the vendor in to negotiate a deal to not balance bill members; out-of-network is not an ERS or a United problem, it is an industry problem
  • Oliveira asked what would be done if it was found there was actually a problem with out-of-network
    • Remediation would be done and ERS would require the vendor to go in and negotiate a contract for ERS members
  • Cook noted that United had an amount of $590 per participant per month; what was the amount for the previous vendor
    • Kukla replied that during the bid process a targeted claim cost calculation is done based on the prior history of claims then factored up and down based on management, network and other factors; United set the target of $588, Blue Cross had a target that was a few dollars higher
  • Huberty asked when the provider was changed two years if the deciding factor was price driven or some other factor
    • The RFP was very extensive; each one was evaluated on numerous factors throughout the agency; administrative cost is an important aspect but ERS had to be sure discount levels and care costs are similar; ERS felt the projections showed a slight decrease when it came to provider discounts; another consulting firm was hired and their data came back consistent with the ERS determination; access was another important factor and it was found network access was comparable; the primary care network was broader under United
  • Huberty asked if costs have come in as expected throughout this contract so far
    • Yes
  • Huberty asked what will happen to costs over the next biennium
    • Will be asking for about a 15% increase over the biennium in appropriations; if the full appropriation is not given ERS will look for plan design changes such as changes to the drug plan which is not administered by United; the first change looked at will be to force all Medicare eligible members to use the Medicare Advantage plan
  • Menendez asked about the ERS cost management and fraud report; are those savings still on track
    • Yes
  • Frullo asked about the drug cost increase
    • Much of that came from two trends; a hepatitis C drug that is very expensive but has very good results and compound drugs that have become very expensive; for the compound drugs it was determined that they were including bulk chemicals that are not approved by FDA as well as drugs that do not actively treat the specific diagnosis; ERS put a $300 pre-authorization so that if a drug went over that amount it would have to be pre-authorized and any compounds that are not FDA approved have to be excluded; that is the same guideline CMS uses; the state Medicaid program uses the same guideline as well
  • Frullo asked about the United discount; it seems as costs of services increase the discount increases over time; why has the discount decreased recently
    • The discount affects the providers; they can increase their billed charges but it does not necessarily increase the allowable expense; the discount is allowable expense divided by the bill; when the billed charges are increased and allowable stays flat the discount grows; ERS did not see that trend because billed charges stayed flat so the discount didn’t increase
  • Cook noted he still has as many questions after the hearing as he had before and the committee will likely have to consider the issue again; many agencies have many contracts that end up being a disaster and it is an important topic for discussion