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Trial and Error in Texas

 

A hard year puts deregulation to the test.

Fortnightly Magazine - January 2009

In the spring, a series of price spikes forced several Retail Electric Providers (REPs) out of business, and led briefly to dramatically higher rates for some customers.

In September, Hurricane Ike—the third costliest hurricane ever to hit the United States— slammed into the Texas coast, wreaking havoc on utility infrastructure. CenterPoint Energy alone announced repair costs totaling $750 million.

Then there’s the global economic crisis. The utility sector, as the third-largest borrower after the financial sector and the federal government, already faces massive exposure to the credit crunch. But that exposure is amplified for Texas REPs, which require large amounts of capital to cover their positions in the Electric Reliability Council of Texas’s (ERCOT) various markets  (see sidebar, “Texas Credit Quality”).

Such developments set the stage for a November 18 pre-session hearing of the Texas Senate Business and Commerce Committee, which oversees regulated industries. Committee Chairman Sen. Troy Fraser billed the hearing as an annual forum in which to ask the central question, “Is our deregulated market working?” The first person to testify responded by invoking Dickens.

“It was the best of times, it was the worst of times,” stated Barry Smitherman, chairman of the Public Utilities Commission of Texas (PUC). “Things are positive here in our state. We continue to see development in generation and transmission. Nevertheless, there are storm clouds on the horizon, coming in from outside Texas, that are beginning to have an effect on the Texas market.”

The crises that buffeted Texas in 2008 tested the state’s deregulation model, now in its seventh year, on several fronts. And though the challenges largely were met, companies and consumers paid a heavy cost. Experts hope the lessons learned will strengthen the market and provide a better framework going forward.

A Brief History of Texas

“From my perspective, the punch line of all this is that every time we do something we learn that restructuring in this industry is harder than we thought it would be,” says Lynne Kiesling, an economics professor at Northwestern University who has written extensively on the Texas market.

Kiesling says it’s important to understand the ways the Texas experience differs from deregulation efforts elsewhere, differences that extend well beyond the simple fact that the state is an energy island—ERCOT being the only North American grid contained within the borders of a single state.

First consider the culture.

“There is a deep cultural element of independence, meritocracy and self sufficiency that goes back to the Republic of Texas,” she says. Then there’s political will. The deregulation movement in Texas was accelerated by the state’s governor in the 1990s—George W. Bush—a self-described “decider,” who was keenly focused on developing a retail power market in the state.

“There wasn’t a specific, clearly defined notion of what that meant,” Kiesling explains. “But that’s a feature, not a bug. California was very defined, but they fell on their face.”

Finally, there was infrastructure and experience.

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