By Kathleen Davis, Associate Editor
May 6, 2002 — The retail market within the Electric Reliability Council of Texas (ERCOT) has been open since New Year’s Day. While the fragility of deregulation in many states has been making headlines, the newborn Texas market has been remarkably quiet.
To get an inside look at how the ERCOT region is faring with deregulation, EL&P spoke with three individuals with unique perspectives on the market: Tom Noel, CEO of ERCOT; Becky Klein, Commissioner of the Public Utilities Commission of Texas (PUC); and David Itz, Director of Marketing for Calpine (a qualified retailer for commercial and industrial customers in Texas). Itz also serves on the board of ERCOT as a representative for independent power producers.
Bigger and better in Texas
Klein stated that the Lone Star State has made provisions in the system, which allowed Texas to slide smoothly into full deregulation without a peep.
“The Texas electric restructuring law is unique be-cause it has several features that have provided for an orderly process in moving the electric industry from a regulated monopoly system to a restructured opening of both the wholesale and retail markets,” she commented, pointing to the relatively problem-free history of the open market.
According to Klein, the 1995 law which opened up wholesale generation resulted in the construction of 45 new plants, which gives the market a supply cushion of approximately 20 percent.
“All this new generation means that Texas is not susceptible to the supply-shortage blackouts that plagued California last year,” she said. “It also provided a solid foundation on which to place the opening of the retail market.”
A 1999 law opened the retail market, with two provisions that Klein holds up as key to the smooth transition the market has seen so far: The law gives retailers the ability to pass along higher fuel costs, which keeps them from being forced out of the market by rising fuel costs, and the pilot program allowed the state to work through system glitches that could have plagued the actual opening. Additionally, the market contains a “stair-step approach,” as Klein labeled it, that stretches out over the next seven years.
“If the milestones are not reached, then lawmakers will be able to fine-tune the law and make necessary adjustments,” she added.
Itz agreed that the ability of retailers to pass along fuel costs was a big step forward for deregulation in Texas, and he added that the intrastate grid system of ERCOT helped make the state “a pretty good test tube for deregulation.”
But the one thing that Itz pointed to as setting the Texas market apart from so many other restructuring experiments is simple.
“I think going all the way to retail is one of the unique things about this market,” he said. “What sets us apart? We fully implemented deregulation.”
Noel focused on the details in his view of the market. He told EL&P that the main issue setting Texas apart from states like California and Pennsylvania is the lack of a power pool.
“The bulk of our power is traded bilaterally among consenting adults, if you will,” he said. “The market participants themselves do all that. They’re doing their own hedges, their own short, long and medium contracts to ensure that their supply is adequate. Generally speaking, that’s worked quite well for us.”
No twiddling of thumbs
“The fact the Texas market opened on time is a success story,” Klein said. “At the same time, this does not mean Texas should rest on its laurels. We realize new issues will appear.”
To deal with those issues the PUC has established a market oversight division, which, according to Klein, is in place “to ensure that all participants in the open market have equal access and that individual players do not engage in market power, or gaming, to the detriment of others.”
Itz, too, is conservatively optimistic about the market.
“I would label it a success. It is deregulated; customers are switching,” he said. “But, there are some kinks that need to be worked out.
“What I hear is, ‘Every day things are getting better.’ There are some complaints by customers that they can’t get switched when they want to, but these are complaints more ‘It’s taking me two to three weeks to get switched’ rather than ‘It’s taking me several months to get switched.'”
Noel may be the most conservative of all. He labels the ERCOT market as a “work in progress.”
“The reality is we’ve been in single control area operation since the 31st of July without major difficulty,” Noel commented. “Our retail market is open and functioning quite well, but it’s certainly not perfect. I tend to be a little conservative in terms of categorizing our success, but market participants tell me that, already, this is a real success story.”
He is quick to give credit where he thinks it is due, however, stating that a committee of representatives visited California and PJM, among other places, a few years ago and “borrowed extensively” from what they thought worked. Of course, he also said they tried to avoid what didn’t work well.
Devil in the details
It looks like that simple philosophy paid off in the end, even if there are a few glitches in the process.
Instead of major stumbling blocks like price caps and partially deregulated markets, Texas has smaller issues, like ID numbers.
Noel admits that there are a few problems with the process of assigning IDs (to the power user) and working out the system of moving that ID smoothly through the transition from service provider to ERCOT before the retailer calls in to discuss the change. If the service provider has lagged a bit in offering the ID, it’s possible the system will reject the transaction.
It’s a small error, and ERCOT is busy adjusting it, but these are the problems that ERCOT is facing right now-not blackouts or protests or triple digit power bills-a little glitch in software and processing.
And yet, even this small error still bothers Noel.
“As long as people out there are inconvenienced by not getting power when they thought they should get power, I can’t qualify this [market] as a success,” Noel stated. “Most objective observers would tell you it’s gone quite well, but it’s not perfect by a long shot.”
“There are some little problems with communication, but nothing large,” Itz added. “We need to enhance the software for electronic transfers of customers, but some of the problems you hear about with switching and software is not ERCOT. It’s the participants having to bring their systems up to speed to talk to ERCOT. There are two sides to the fence here.”
Even with a small glitch or two, the numbers are holding steady. Klein stated that-as of February 20-approximately 179,000 residential and commercial customers were receiving power from a competitive retail provider, with eight retailers serving residential and small commercial and a number servicing the commercial/industrial market.
Itz stated that Calpine has more than 600 MW worth of commercial and industrial customers.
He said, “I think you’ll find-in the first month or so here of retail business-we’re one of the larger retailers out there in terms of MW and probably one of the smaller in the terms of customers served.”
Noel admits that there is a gap between the robust market for the commercial/ industrial class and the less robust one for the residential customer. He gave a number of reasons for the lull: cost of acquiring a new residential customer ranges between $150 and $300 and all consumers who were previously served by an investor-owned utility got an automatic six percent reduction on their January bill. Some even received an additional reduction based on fuel adjustment-pushing that cut as high as 15 percent in some markets and making it difficult for a retailer to beat the price.
“There is good headroom for competition in the residential arena, but keep in mind that a customer can stay where he is and get a reduction,” Noel stated. “So, I think we’re going to see the residential market develop a little more slowly than the commercial one.
“Overall, however, people are very pleased at the outcome [of Texas deregulation] to this point,” he added. ELP
Klein can be contacted via Terry Hadley of the PUC (512-936-7135). Itz can be reached at 713-830-2000. Noel can be reached at 512-225-7010.
Editor’s note: At press time, the PUC’s Market Oversight Division could possibly seek
fines against six companies it says took advantage of certain market rules in North Texas last year.
Has Enron left a negative imprint on Texas deregulation?
Becky Klein, Commissioner, Texas PUC: The Enron bankruptcy has caused everyone in the country to take a closer look at deregulation. The fact is, in Texas, when Enron was removed from the wholesale generation market, other participants moved in to fill the gap and did so in a seamless matter. On the retail level, two Enron subsidiaries have relatively small roles. However, action is already underway to review the ability of these subsidiaries to remain in business in Texas. The Enron situation has prompted the Texas PUC to remain vigilant in ensuring market participants meet every aspect of our financial, technical and managerial requirements. This, in turn, will make the Texas market stronger over time.
David Itz, Director of Marketing, Calpine, and ERCOT board member: Enron has not really affected Texas deregulation as far as I can see. We’re still going ahead on schedule. Enron thought they were going to be a player last year. They didn’t make it, but I don’t see any real effect from their fall.
Tom Noel, CEO, ERCOT: Enron did serve here as a qualified scheduling entity, and they lost their rights to do that when they no longer met the financial security requirements. So we followed our procedures exactly: we moved their customers, and we didn’t miss a beat. Frankly, it has not had a major impact on us at all. There’s no financial exposure as a result, and, all in all, it’s a non-event in this market.
I don’t think it’s relevant, really. Enron spent a lot of money lobbying and clearly thought deregulated markets were a good thing, but they were not the leaders in this state in that regard. I know Pat Wood has been criticized as being too close to Enron, but actually most people would tell you that the things Enron wanted they generally did not get from Pat Wood-either in Texas or in Washington. I think that [criticism] makes a great story, but it’s not factually accurate.
This article is scheduled to appear in Electric Light & Power Magazine, April 2002. To read more, visit http://elp.pennnet.com/Articles/Print_TOC.cfm?Section=Articles&SubSection=CurrentIssue.