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Compassionate Competition?

With its own private power grid, Texas thinks it's got restructuring licked.

Fortnightly Magazine - February 1 2001

Maybe it's the new tenant in the White House. Or maybe it's just the natural rivalry between Republican pork rinds and Democrat brie and Chablis.

At any rate, around mid-January I found my email box stuffed with "pushed" press releases touting the Texas solution to utility restructuring. According to the clippings, the Lone Star State has at last created a regional power market that will actually work-and with no help from California.

One such clipping is a new consultant's study commissioned by the Association of Electric Companies of Texas. It checks off all the mistakes that California made, one by one, and then purports to show how the Texas model sets things right. "This study provides an effective analysis of the course Texas has followed on the road to competition versus how it was done in California," said John Fainter, president of the AECT. "It provides compelling evidence that Texas is on track to achieve significant benefits from competition."

But as I see it, the Texas law (Senate Bill 7, the Texas Electric Choice Act, signed in 1999 by then-Gov. George W. Bush) contains the same basic failing as did Assembly Bill 1890, the California law-it creates a tariff structure for Texas that will surely run aground if electricity prices don't behave as expected. Just like California, the Texas law creates a rate freeze keyed to revenue levels set under the old regulated regime, and then mandates a guaranteed rate cut on top of that for residential and small commercial customers (6 percent in Texas, instead of 10 percent, as in California), good until Jan. 1, 2007 (both with adjustments allowed for fuel cost increases).

So if power prices in Texas should spike out of control between now and 2007, more than warranted by fuel costs, you could have the same mess as in California-utilities buying high and selling low.

Yet the Texas model does lack one drawback. It doesn't have FERC. That's because Texas enjoys its own private power grid, the ERCOT ISO-formed by the Electric Reliability Council of Texas-which operates entirely within the state and thus stands largely exempt from the Federal Energy Regulatory Commission. That gives Texas an advantage-a state-regulated ISO, dedicated to state interests.

"WE DON'T PERCEIVE ANY IMMEDIATE THREAT OF GENERATION SHORTAGES." That's what I heard from Bill Bojorquez, ERCOT's director of settlement, when I talked with him on Jan. 12. ERCOT is generally seen as friendly to merchant generation, and the PUC has already OK'd standards for ERCOT for generation interconnection, to help create a climate that encourages construction of new power plants.

Bojorquez calls ERCOT the nation's largest ISO in terms of load (peak demand last summer of 57,600 MW), and tells how it's doing things differently from other regions. For instance, ERCOT will create no central power exchange or auction market for wholesale power or ancillary services. "We won't settle any markets," says Bojorquez. And ERCOT will rely on socialized uplift charges to recover congestion costs, beginning June 1,

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