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IssueAlert for  March 6, 2001 

Texas Announces Launch of Pilot Program; 
Pat Wood Distinguishes Texas from California

by Susan Kellogg, Issues Analyst
and
Will McNamara, Director, Electric Industry Analysis

In a satellite media event on March 5, Pat Wood, the chairman of the Public 
Utility Commission of Texas (PUCT), introduced the media to a statewide 
campaign of television advertisements that are part of a kick-off of the 
Texas Electric Choice Pilot Program. Electric choice begins in Texas on June 
1, 2001, with the start of a pilot program in which 5 percent of customers 
served by Texas investor-owned utilities can choose their retail electric 
provider (REP). Most other customers will be able to choose their REP when 
full-fledged electric choice begins on Jan. 1, 2002.   

After fielding questions from a bevy of television media reporters at the 11 
a.m. broadcast, Wood conducted an exclusive interview with SCIENTECH Issues 
Analyst Susan Kellogg on how and why the Texas deregulation plan will work; 
why California didn't; and what role the expanding renewables market 
(particularly wind power) will play in developing a vibrant, competitive 
energy market in Texas.  

Analysis:  PUCT Chairman Wood is confident that Texas has done its homework 
well, and the state's overall deregulation plan has set the stage for a 
successful retail competitive market. When we think of Texas, we think "big, 
confident, independent." However, a comprehensive, statewide group of 
stakeholders explored deregulation from all sides*getting information and 
advice from other deregulating states and international sources*to make sure 
that Texans have a different experience with electric choice than 
Californians did. 

The summary of "what didn't work in California" has circulated in the media 
for weeks, but Wood has an interesting perspective on what complicated the 
state's energy deregulation market. Basically, Wood says, the California 
market worked pretty well until it stopped raining in California, Oregon and 
Washington. In Wood's opinion, the fact that California is dependent for 
one-quarter of its power supply on an intermittent source (in this case, 
hydroelectric power) makes little sense and is largely to blame for the 
supply / demand imbalance still wreaking havoc in the state. The lack of 
power plant investment exacerbated the dynamics of the market when a critical 
piece of the power supply dried up last summer. 

Wood's criticism of the California mismanagement focused on the "it's not my 
job" mentality, considering that three state agencies were involved in 
California deregulation and yet no specific agency seemed to be in charge. 
"Bush would have run me out of Texas if we had done anything like that," 
mused Wood. "Our job is to not only do our job today but to plan for the 
future to look ahead. Granted, there had been no power plant investment, but 
not looking ahead with accountable facts was an inexcusable critical piece of 
planning missed by the California Energy Commission."  

The perfect storm of colliding conditions that plunged California into 
survival mode could have been prevented. The whole energy market has a lesson 
to learn, says Wood. And Texas has an opportunity to practice. 

To counteract the mistakes made, Wood freely acknowledges that Texas 
"pirated" most of the infrastructure of Texas' deregulation bill from 
Pennsylvania's largely successful plan. The Texas legislature meets every two 
years for a 90-day session. Right before the 1999 session, Wood and a 
deregulation team went to Pennsylvania and visited with state commissioners, 
legislators, industry executives, consumer groups, and customers to find out 
what was working and what was not in the Pennsylvania model.  

What they decided to leave behind from Pennsylvania's overall successful 
deregulation strategies was the provision that allowed a Philadelphia 
electric affiliate to go back into Philadelphia and attract the customers 
away from their own utility in the name of competition. Texas' goal, Wood 
clarifies, is to have a market of unaffiliated companies participating, which 
will hopefully generate genuine, long-term competition. Yet, in contrast to 
Pennsylvania, Texas adopted a policy in which customers that do not opt to 
switch to a new provider are defaulted to an affiliated REP of their 
incumbent utility. This affiliated REP, which cannot be the Toperation of 
the incumbent utility, will remain subject to regulated rates in its assigned 
service territory, although it is allowed to freely compete without price 
regulation outside of its service territory.  

As a result of this policy, Texas-based companies such as Reliant and TXU 
have submitted multiple applications to the PUCT, covering separate 
subsidiaries that will serve different customer classes and allowing the 
companies to compete outside of their service territories. At last count, 
over 11 companies had filed for certification with the PUCT to be a REP in 
Texas. Companies that plan to be active in the Texas retail market include 
The New Power Company, Green Mountain Energy, First Choice Power (the 
competitive spin-off of Texas-New Mexico Power Company), TXU Energy Services, 
Sempra, Shell, Reliant, and Enron Energy Services (among others). 

Another Texan invention was the Electric Reliability Council of Texas 
(ERCOT), the independent power grid that serves the bulk of the state and is 
essentially an electrical island in the United States. Not possessing 
multi-state jurisdictions has both its advantages and disadvantages. Wood 
sees it being a plus for the Texas energy market because of the ability to 
monitor the balance of supply and demand of energy flow.  

Another feature of the Texas approach to deregulation is to make the 
transition easier for both retailers and operators, in part by developing a 
seamless integration between supply and demand.  Perhaps most significant is 
the emergence of wind power and other renewables in the state, in part 
because of a mandate (Renewables Credit Exchange) that allows a retailer to 
buy renewable credits from a renewable operator at whatever price they agree 
on.  In addition, Texas has established the Texas Renewables Portfolio 
Standard. Until the end of 2001 is providing a federal tax credit for 
companies that produce electricity from wind. The deregulation law in Texas 
is considered the most supportive of renewable forms of energy when compared 
to the 24 states that have enacted legislation for electric competition. The 
key challenge for harnessing wind power in the state is to get the 
transmission grid to consistently and efficiently transport the power back 
into the main system.  

There is a high desire for wind power in Texas.  According to Wood, once 
green power programs were available in the state, people jumped on board so 
fast that the pilot had to be put off a year so enough power supply could be 
purchased. Wood thinks the demand will certainly outstrip the 3-percent 
mandate put into place by the state. Right now, constructing a wind power 
plant in Texas is actually less expensive than building a more traditionally 
fueled power plant. An ambitious mandate of having 2,000 MW of renewable 
resources by 2009 is fueling investors interest, sending millions of dollars 
to Texas for renewable projects, says Wood.  

Will Wood take his lessons and leadership to Washington D.C.? There are two 
open positions on the Federal Energy Regulatory Commission (FERC), which is 
now chaired by Curt H,bert. For months, it has been rumored that Wood will be 
appointed by President Bush to assume one of those positions. When asked 
whether he had any potential interest in a role with FERC, Wood fielded the 
question diplomatically. He'll "leave that decision to the president," he 
said.   

Right now, Wood is focused on bringing electric competition to Texas. As 
noted, the state's pilot program for electric choice begins this June with 
full competition starting in January 2002. With regard to population, Texas 
represents the second largest energy market (behind California), offering a 
market value of about $20 billion. Thus, many eyes within the energy industry 
are anxiously watching to see how deregulation will unfold in the Lone Star 
State. 

In turn, Wood acknowledges that Texas officials have been watching California 
closely for the last year, and remain confident that the power supply 
problems faced there won't happen in Texas. This is largely because Texas has 
avoided making some of the critical mistakes made in California. One 
important distinction between the two states is that Texas regulators have 
allowed for power plants to be built in about half the construction time that 
has been common in other states such as California. Since 1995, 22 new plants 
have started operations in Texas, generating 5,700 MW. By the time 
competition begins fully in January 2002, 15 more plants and 10,000 MW are 
scheduled to come online. As a result, Texas officials say that*unlike 
California*their state has more than enough generating capacity to meet peak 
demand and provide at least a 15-percent reserve for the next few years. The 
vast majority of these new plants are fueled by natural gas, with wind power 
being a supplement.  

In addition, there are significant differences between the market structures 
in Texas and California. First, California's structure is based on an auction 
pool, which the state modeled on the United Kingdom. Integral to California's 
system is a Power Exchange, into which power suppliers submit power that they 
want to sell on the competitive market. California's PX discouraged a healthy 
bilateral contract market from forming because generators could make more 
money selling into the PX. Texas, on the other hand, has no Power Exchange 
and in fact has encouraged bilateral contracts as the way in which electric 
service contracts will take place. In Texas, customers are encouraged to 
establish long-term bilateral contracts with suppliers to secure the best 
rates, which introduces the opportunity to protect them from wholesale market 
prices as customers in San Diego discovered this summer. 

The market potential for Texas competition appears very strong, which perhaps 
more than anything else is due to good planning on the part of Texas 
legislators and regulators. However, there are still some lingering concerns 
about competition in the Lone Star State. First, there is a shortage of 
transmission lines in Texas, especially in the northern half of the state. 
Although PUCT officials say that sufficient transmission lines will be put 
into place before competition begins, without sufficient lines companies 
could experience transmission congestion. 

Another concern is that Texas may be relying too much on natural gas. Almost 
all of the new plants that have been built in Texas are powered by this fuel 
source. As the price of natural gas has remained high, this could pose a 
problem for the market in Texas. Hedging will be a key part of a successful 
strategy for any provider in Texas, especially considering the rising 
natural-gas prices. Still, the espoused advantages of competition (i.e., 
lower prices for end-users) could fall flat if so much emphasis is placed on 
natural gas as the primary power source in the state. Yet, ironically, 
customers may still benefit because of the multitude of power plants within 
the state. Abundant supply in Texas may keep the cost of power low for 
end-users, but less profitable for suppliers.  

Overall, though, Texas remains the bright shining hope for those who support 
energy deregulation in this country. The size of the state's energy market 
will continue to attract new participants, at least on the front end of the 
restructuring process. Whether they remain in Texas, and whether or not 
competition in the state will truly bring benefits to end-users, remains to 
be seen. 

An archive list of previous IssueAlerts is available at
www.ConsultRCI.com


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