Deregulation’s Lone Star

Electricity deregulation, touted as a miracle cure for bureaucratic inertia that has kept consumers from having choices about price and quality, has often been more like a round of chemotherapy for those states willing to take it on. While deregulation may be necessary to assure a robust, healthy energy supply in the future, the side effects often have been draining, exhausting and occasionally fatal. Large, previously successful California utilities were driven into bankruptcy. In August, a major Connecticut energy cooperative with 11,000 customers was forced to close its doors because of price spikes for electricity purchased on the spot market.

That kind of news put the brakes on most deregulation plans. But there has been one prominent exception. Texas deregulated most of its electric market in January. And although it’s too early to say for sure that deregulation will be a success in Texas, the early signs are encouraging.

“By this time — nine months into deregulation — most energy providers had dropped out of the market in California,” says John Egan, a strategy analyst with E Source. The story is different in Texas. That state began with a much shorter competitive list than California. But that short list contained companies with a long-term commitment in Texas. “More than two dozen of the original companies are still operating after nine months, which means more active competition,” observes Egan.

Real Choice

In Texas, according to the state’s Public Utility Commission (PUC), deregulation allows customers to choose their retail electric provider (REP), which purchases power from competing power generators. Transmission and delivery are still provided by the local utility, now known as a local distribution utility (LDU). LDUs are responsible for maintaining the wires that deliver electricity.

In January of this year, electricity deregulation was opened for the areas of Texas covered by the Electric Reliability Council of Texas (ERCOT), which manages about 85 percent of the state’s electric grid. Competition in the rest of the state was delayed by the PUC until it was sure of the infrastructure and felt comfortable guaranteeing electric choice in these areas. In addition, electric cooperatives and municipal or city-owned utilities get to decide whether customers may choose REPs.

To assure fair competition, REPs are required to provide an Electricity Facts Label with information on pricing, contract terms, sources of generation and emission levels. The label is standardized so customers can compare the offers of competing REPs. For those who didn’t select a new REP during the pilot program in January, electric service is provided by an affiliate REP, which is a company affiliated with the local utility. Customers of affiliate REPs are free to change to a new REP at any time.

Home Grown

One high card Texas holds that California did not is abundant electric power within its borders. Since 1995, 48 new power plants have been constructed, bringing the state’s generating capacity to about 85,000 megawatts (MW).

“Unlike most states that say ‘not in my backyard’ to power plant construction, Texas actually welcomes them,” says Steven Steinmetz, attorney with Day, Berry & Howard LLP, which specializes in energy law and restructuring issues. And, as Steinmetz points out, Texas uses a standardized set of interconnection rules that are considered the best in the country. With abundant fossil fuels inside state borders, Texas has become an ace location for those interested in building electricity generation facilities. Those factors help explain why ERCOT maintains a 23 percent reserve margin this year and predicts a similar cushion for 2003.

Actually, most of Texas’ power has to be self generated. When the national electricity grid was established in the 1930s for the lower 48 states, Texas was the lone state to opt out. In fact, while the national grid relies on alternating current for transmitting electrons, the internal Texas grid transmits via direct current.

None of this is to say that there haven’t been problems. Some customers had long delays in switching providers. Others did not get their bills for long periods of time.

But those aren’t seen as significant setbacks. “Switching software not measuring up, resulting in pricing and billing problems, are normal problems when a state deregulates,” says Lindsay Audin, president of Energywiz Inc. “And some are grumbling because they haven’t seen the price savings predicted, but Texas deregulation really did not get started until the state was into its summer needs. That is when the marketplace has the greatest difficulty offering low prices.”

The Center for the Advancement of Energy Markets (CAEM) agrees, ranking Texas No. 1 in the country in the progress it is making toward electric customer choice rates. “I am confident that Texas customers will enjoy the benefits of electric competition much sooner than customers in other states,” says Ken Malloy, chief executive officer of CAEM.

CAEM gives Texas high marks for protecting customers by requiring utility companies to separate their competitive and regulated businesses, for adopting business practices that are uniform across the state and for establishing a bilateral wholesale market for electric power. A bilateral market allows retail providers to enter into long-term contracts with suppliers, thereby offsetting price volatility. California precluded utilities from engaging in bilateral contracts, so when the cost of electricity on the spot market rose five times, utilities had no way to even out the price spikes.

Another plus for competition is open-transmission access and wholesale competition, which began in Texas in 1995. The state allows large commercial users of electricity, such as school districts and government entities, to aggregate their energy needs and shop in the wholesale market for the best price, says Egan. “One group represents 142 different school districts that together use $40 million in electricity,” he says. “Another, the Texas Association of School Boards, has 180 districts, representing $30 million in electricity. The City of Houston represents $32 million.”

Early Savings

In May, the Perryman Group, which does long-range economic forecasting, said the effect of electricity competition in Texas for the first four months amounted to $179.6 million in annual cost savings and public sector benefits of $184.1 million.

What does Texas’ early success mean for deregulation in other states? Early reports suggest Texas’ bilateral contracting market is working better than the spot market because it allows the use of financial risk management tools, such as swaps, collars and hedges. That’s one lesson for other states mulling deregulation. But it’s important to remember that the Lone Star’s success is based in part on conditions that would be hard to duplicate in many other states.

Rita Tatum has covered facility management and technology issues for more than 25 years.

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