Utility Spotlight: Tx dereg different than Cal...?

fyi
---------------------- Forwarded by Lloyd Will/HOU/ECT on 02/13/2001 06:02 PM
---------------------------

"Dick S George" <dsgeorge@firstworld.net< on 02/13/2001 11:07:59 AM
To: "DS George" <dsgeorge@firstworld.net<
cc:
Subject: Utility Spotlight: Tx dereg different than Cal...?

CC list suppressed...

Compassionate Competition?

(Utility Spotlight) 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. (See
News Digest, Jan. 1, 2001, p. 8.)

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. (See www.tnree.state.tx.us.)

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?

CONFIDENTIALITY: This e-mail and any attachments are
confidential and may be privileged. If you are not a
named recipient, please notify the sender immediately and
do not disclose the contents to another person, use it
for any purpose or store or copy the information in any
medium.