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, 2001, when pilot programs start up in Texas for retail electric choice, and continuing at least through 2003. It will not create a scheme for tradable transmission congestion rights (TCRs) unless congestion costs exceed $20 million in any 12-month period. However, Bojorquez concedes that ERCOT is "transitioning" to a new single control area, and is building new control area facilities in Wheeler, Texas, with a backup office in Austin. (That effort proved a budget buster in California.)

And ERCOT offers another unique feature. As I learned from two technology experts from Lodestar, which has signed software deals with the ISO, ERCOT will perform all the forecasting, load profiling, and customer aggregation, and will initiate most of the required data transfers between utilities, suppliers, and the scheduling coordinators, known in Texas by the delightful acronym of QSE-pronounced as "quesy"-which stands for "qualified scheduling entity."

According to Steve Doroff, Lodestar's senior vice president of product development, and Jason Iacobucci, product manager at the company, the Texas law barred utilities from passing along to their ratepayers any new cost incurred for any new services associated with retail choice. That rule was enough, they said, to convince the utilities to delegate all the ordinary marketing functions to the ISO, including the development of data formatting and communications protocols between suppliers, utilities, and scheduling coordinators for customer enrollment and load and revenue estimations, using electronic data interchange (EDI) and XML software systems.

This feature has proved a godsend to the Texas market, says Lodestar. It centralizes the myriad of data transfers under the control of one player-with one software network-instead of fragmenting the job among various utilities, marketers and aggregators, and new players such as the "meter data management agent," as in California. That means Texas will be spared the trouble of having to estimate and allocate the dollar cost of sales and marketing functions between utilities and unregulated retailers. That task has become a minefield for PUCs.

Nevertheless the retailers, suppliers, and utilities are free to develop their own software systems to interact with ERCOT. "If the QSEs are smart, they won't take ERCOT's word for it," Doroff told me. "They'll do their own calculations."

"THIS SCENARIO MAY BE MORE PROBLEMATIC FOR TEXAS THAN CALIFORNIA," says Mark Krebs, the outspoken attorney from Laclede Gas.

Here Krebs was talking about generation siting, not ISO market design. Yet his words show that Texas eventually may face the same problems we saw last year in California.

Writing on Nov. 30, on behalf of the American Gas Cooling Center, Krebs told Jim Linville, of the Texas Natural Resources Conservation Commission, that the new draft rules proposed in Texas in November 2000 governing air emissions for distributed generation and small-scale electric generation (comments taken until Feb. 5) might spell trouble for the state.

Krebs criticizes the Texas policy of forcing all DG plants statewide to comply with emissions rules designed for the Houston/Galveston ozone nonattainment area, where many cogeneration and DG units are planned.

"The potential impact," writes Krebs "would appear to be a ban upon all DG (with the illusory exception of renewables and fuel cells) on the ostensible grounds that, as stated in the rule, 'increased use of small electric generating units could undermine the emission reductions achieved with recently permitted combined-cycle power plants.'"

Senate Bill 7 requires a 50 percent reduction for NOx emissions and a 25 percent cut for SO2 for grandfathered plants by May 2003. As ERCOT acknowledged in January 2000 in a study of generating plants in the Dallas/Ft. Worth area, such rules may force power producers to take generating plants out of service in the Dallas area. ERCOT commented further in a report on potential electric system constraints released Oct. 1:

"The DFW area could experience significant problems of peak period supply adequacy and voltage stability if significant amounts of the in-area generation become unavailable and no new in-area plants are built. … A number of new merchant power plants are being planned or built in North Texas, but all are outside the … metro area. Greenfield sites for new generation development are limited and are likely to encounter public opposition."

Sound familiar?


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