STATE OF DEREGULATION: Distancing itself from California, Texas declares it’s like a whole other country

Kathleen Davis
Associate Editor

In a country besieged by California’s deregulation fallout-PG&E declares bankruptcy, SDG&E and Dynegy square off with rapid-fire, press-release finger pointing-finding a state looking forward to restructuring is rather like finding the last dodo, but Texas does seem to be rescuing deregulation from the brink of extinction.

When Governor Perry signed the proclamation for “Texas Electric Choice Month” in late March, he was joined by the chairman of the Public Utility Commission of Texas (PUC), as well as a state senator, a state representative and the principal authors of the state’s restructuring legislation-with none of them scrambling to distance themselves from deregulation. Instead, they expressed a positive outlook for the state’s retail electric future.

Reflecting what most would call a pre-California mindset, PUC commissioner Brett Perlman stated simply, “Competition for electric service should result in prices lower than they would have been under regulation.”

Tom Baker, TXU Electric & Gas president, echoed Perlman’s statement before a joint Texas Senate-House committee when he commented that “Texas is well on its way to becoming the national model for how to do electric industry restructuring the right way.”

He added, “The consensus of virtually everyone who has examined the differences between the Texas and California plans is that Texas has adopted a plan that will bring real competitive benefits to our state, while avoiding the errors that have helped lead California into trouble.”

Remember the Alamo

And, so far, Baker seems correct in his assumption: If California’s blackouts have become a war cry, it’s not a sentiment echoed by Texans. So far, their restructuring process has been fairly honest, open and straightforward. The state’s rallying cry seems to be more along the lines of “Anything you can do, I can do better.”

That attempt to “do better” began in 1995, when Senate Bill 373 was enacted. This early version required utilities to provide unbundled transmission service on a non- discriminatory basis; it also called for the establishment of an independent system operator, now under the umbrella of the Electric Reliability Council of Texas (ERCOT).

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A total of four separate bills on deregulation attempted to leap the legislative hurtle in 1998, only to fall short each time. Finally, in early 1999, the state Senate approved SB 7 (signed into law by then Governor George Bush), which will open Texas’ retail electricity market to competition by January 2002. The bill also allows utilities to recover at least $4 billion in stranded costs, along with giving consumers a 5 percent rate reduction. According to SB 7, no utility may own more than 20 percent of the generation in their own operating territory. (See map.)

Along with a three year rate freeze and the promised rate reduction (upped to 6 percent by the time it passed), SB 7 requires a reduction of NOx (50 percent) and SO2 (25 percent) emissions. There’s even a minimum renewable energy requirement, which has led to some 600 MW of new wind energy projects in the Lone Star State, according to the American Wind Energy Association. (However, the bill does not require municipals and cooperatives to open their regions to competition unless they so choose.)

Progress through each separate step of restructuring has been steady since 1999. Central Power & Light, Reliant and TXU have all filed and completed the initial securitization process. Most investor- owned utilities have filed and completed the business separation step, with Reliant and TXU scheduled to complete the step early this year. The cost unbundling for TXU, Reliant, American Electric Power (AEP), Entergy, Southwestern Public, Texas-New Mexico Power and Sharyland Utilities should be completed by the third quarter of 2001.

The PUC approved a request by Central Power & Light to securitize $764 million of regulatory assets plus transaction costs. (Legal reviews were requested of the amount, which was upheld in district court and has been bumped up to the Texas Supreme Court.) The PUC approved only a fraction of TXU’s requested $1.650 billion, allowing TXU to securitize $363 million of regulatory assets. TXU’s appeal of this decision has also been moved to the Texas Supreme Court. Reliant Energy’s request for $740 million was also approved.

This summer the state begins a pilot program as a dry run for the opening of retail competition in 2002. Five percent of the state’s investor-owned utility customers can choose a retail electric provider (REP) under the program. According to the PUC, the state’s seen an overwhelming response from business customers, with utilities conducting lotteries to determine which of their business customers will be able to switch REPs in June when the program gets underway.

Residential customers are being selected on a first-come, first-serve basis, with nearly 30,000 already signed-up for the program. However, 30,000 isn’t a huge dent when taken in perspective, according to some deregulation naysayers.

Of the 75,133 consumers eligible in Reliant’s territory, only 15,676 customers have switched. In TXU Electric’s territory, only 6,427 out of a possible 113,295 have made the move, and a mere 146 of the 7,963 available through Texas New Mexico Power Co. have signed up. Obviously, the focus leans toward the commercial, which doesn’t surprise Janee Briesemeister, senior policy analyst at Consumers Union in Austin. “We expected these classes [commercial and industrial] to be oversubscribed,” she stated. “We knew that deregulation is all about benefiting large customers.”

New Power Co., however, declared a Texas-sized victory when they signed over 5,000 residential Texas customers in less than a month. Consumers who switched to New Power from either TXU Electric & Gas or Reliant Energy signed up for either the “guaranteed savings” or “peace of mind” plan. According to New Power, both plans offer free Decembers and prices below the utility. (They even estimated that consumers who switched to one of New Power’s two-year plans could save between seven and 12 percent.) The two plans offered by New Power differ in one basic aspect: rate. “Peace of mind” is fixed for two years, while “guaranteed savings” is adjustable, although New Power promises that the price will “always be lower than the local utility.”

Large or small customer focus aside, on its basic level, this pilot program has one huge obstacle to overcome: They must prove California wrong. So far, Texans don’t seem to be quaking in their boots at the prospect. Reiterating that this pilot program is designed to flag any bugs in the system, PUC chairman Pat Wood commented that it “allows the state, the utility companies and REPs to make sure their computer and billing systems work well before electric choice is fully implemented on January 1, 2002.

“If you build it, they will come,” he added. “Texas built a positive environment for clean, efficient power plants and investors continue to come here. Now it’s time for customers to enjoy the benefits of choice.”

Don’t mess with Texas

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According to Energy Information Administration numbers, Texas leads the nation in output of crude oil and natural gas, and it is the fifth largest producer of coal, leading reasons why Texans pooh-pooh the California comparisons. However, Texas is also a very large energy consumer as well, ranking first in the overall consumption of energy and in the use of petroleum, natural gas, coal and electricity. Utilities serving central Texas have seen growth rates around five percent since 1995, and demand in ERCOT grew four percent during the same time. Outside of ERCOT, the growth slowed to just under two percent through 1999. In 1998, experts estimated that reserves might fall below the 15 percent traditional reserve margin for ERCOT. However, the ERCOT ISO’s recent projections for 2001 through 2003 contain no such fears. (See table.)

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But the Lone Star State doesn’t see that consumption outweighing supply. In fact, in their 2001 Report on the Scope of Competition in Electric Markets presented to the Texas legislature in January, PUC chairman Pat Wood and commissioners Judy Walsh and Brett Perlman stated, “There are a number of reasons to be optimistic about the success of retail competition in Texas.” Among these, the three list: benefiting from previous state’s forays into competition (in fact, at the March event introducing the state’s media campaign for retail choice, Wood admitted that Texas “pirated” from Pennsylvania’s re-structuring design), the exclusive reigns tying ERCOT to the PUC, and the decision to introduce competition at the wholesale market level.

And, like the PUC, ERCOT is also fervent about distinguishing Texas from California, citing a number of differences in the two deregulation structures, specifically:

  • that Texas has been more encouraging with the construction of new generating plants than the Golden State. (Non-utility generators do not require a state license, nor do they have to pay to deliver their power to market.);
  • that Texas is not faced with California’s extensive environmental and regulatory processes. (ERCOT gives the average of seven years to complete a new plant in California compared to a three year estimate for Texas.);
  • that Texas has actually learned from California and adjusted appropriately;
  • that Texas encourages long term contracts, which California has discouraged until very recently;
  • that Texas provides new plants with easy access to transmission lines; and
  • that Texas, on a very basic level, just plain has more power. (ERCOT states that California, on the other hand, is dependent on power imports-approximately 20 percent of overall use, bumping up to 25 percent at peak usage times.)

In fact, the annual ERCOT Wholesale Market Report states that 27 new plants have been completed in the state since 1995, with 27 more currently under construction and 31 in the planning stages. Overall, the 27 completed plants have added over 9,000 MW since 1995, with the 27 under construction slated to add an additional 14,000 MW. The 31 announced projects would total approximately 18,500 MW. Enron, Calpine, AEP and Mirant all have projects currently under construction in the state. Sempra, Avista-Steag, Reliant and Duke are among those looking to build in the future.

But, having plans on the books doesn’t necessarily mean they are through tinkering with SB 7. In mid-April, a Texas House of Representatives committee passed HB 2107, which provides that distribution and transmission charges will be lowered, and that retailers will be forced to pass that savings on to customers. The bill passed the committee by an 8-6 vote, but has yet to be debated in the full House. The pending legislation-sponsored by Rep. Sylvester Turner (D-Houston)-provides that the excess funds collected from consumers to compensate for stranded costs instead be used to cushion transmission and distribution charges for the customer. (Savings are expected since stranded costs have decreased as the price of natural gas has increased.) At press time, no debate had been scheduled.

Whether or not the issue of stranded costs is debated in the House, Texans want to point out one particular advantage they have in the deregulation game: They have the generation.

“Unlike California, we’ve got plenty of power in Texas,” Wood stated. “Even on the hottest day this summer, during peak demand, we’ll have more electricity than we’ll need.”

With 5,385 MW of generating capacity added in 2000 and another 9,188 MW to be added this year, ERCOT estimates a 23 percent excess power margin for the summer’s peak usage. They’re hoping those numbers will put an end to the California questions they’ve been receiving.

“Texas is not California” screams ERCOT’s Web site-in all caps, with three exclamation points and the “not” underlined. It seems the state is getting close to yelling itself hoarse about this subject, but the last word may be more declarative than exclamatory. In their 2001 report to the legislature, the PUC spends 64 pages analyzing the market only to state that “the commission does not recommend any changes or additions to SB 7 or to the Public Utility Regulatory Act that would affect the way retail competition is implemented.”

“The 2001 Scope of Competition in Electric Markets in Texas” report is available at www.puc.state.tx.us. Information regarding ERCOT and the ISO can be found at www.ercot.com.

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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