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Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: "SCIENTECH IssueAlert" <IssueAlert@scientech.com< X-To: X-cc: X-bcc: X-Folder: \Richard_Shapiro_June2001\Notes Folders\Texas X-Origin: SHAPIRO-R X-FileName: rshapiro.nsf Today's IssueAlert Sponsors: [IMAGE] Are you looking to invest in, attract investors for, provide services to or understand the business and technology dynamics of the hottest companies emerging in the energy sector? Attend the Energy Venture Fair, June 25 & 26, 2001, in Boston, MA and hear CEOs from 75 hot energy companies present their business plans. Complete event description available at www.energyventurefair.comor call Nannette Mooney at (818) 888-4445, ext. 11. [IMAGE] Learn about the unique challenges the Customer Information Systems market is facing with SCIENTECH's package of interviews conducted directly from the CIS Conference in Albuquerque, New Mexico. Get your exclusive collection of Power Hittersinterviews for a special discounted price at: www.scientech.com We look forward to seeing you at the EEI annual Convention in New Orleans, June 3-5, 2001. Come and visit SCIENTECH's booth #310 to discuss how SCIENTECH can help you in today's rapidly changing marketplace. [IMAGE] [IMAGE] June 1, 2001 Update on Texas Deregulation: Myriad of Issues Converge as Pilot Kicks Off By Will McNamara Director, Electric Industry Analysis [IMAGE]The City of Dallas has become another of Texas' major customers to take advantage of the savings available in the state's emerging competitive electric market. The city has signed an electricity contract with AES NewEnergy. Under the terms of the contract, AES NewEnergy will provide electricity to approximately 100 service accounts located at municipal sites throughout the city that are currently served by TXU Electric. The city of Dallas, one of the nation's largest cities, has a population of more than 1 million people. Analysis: The date at which Texas customers will begin to receive power from new suppliers under the state's electric pilot program has been pushed back to mid-July, but today marks the start of when new suppliers begin turning in their bid forecasts to the Electric Reliability Council of Texas (ERCOT). Full electric competition begins in Texas on Jan. 1, 2002. Thus, it's a good time to do an assessment of the many interesting dynamics that have emerged in the Lone Star State, some of which might pose unique challenges to the state's electric market. As Texas continues to prepare for full competition, its electric pilot program is getting off to a rather slow start (at least on the residential side), an ongoing debate about incorporating Texas into the national transmission grid continues, and ERCOT defends itself against claims that the state should be "closely watched" this summer. At the same time, Pat Wood, the state's highest-ranking utility regulator, marks his departure from Texas to assume a position with FERC. In previous columns, I've established the main points of Texas' restructuring plan (see 3/6/01 IssueAlert at www.scientech.com/rcifor a review). As incumbent utilities in Texas are allowed to create unregulated energy providers that can compete outside their traditional service territory, an interesting game of musical chairs is taking place among the various incumbent competitors. For instance, Dallas-based TXU is positioning itself to hold on to its North Texas customers while expanding into Houston, while Houston-based Reliant attempts to retain its base in Houston while moving into Dallas. At the same time, new competitors (AES NewEnergy among them) have moved into the state, attempting to get a jumpstart on securing customers during this pilot phase. At last count, 19 regional electric providers have registered with the Public Utility Commission of Texas (PUCT) to provide power to Texas customers. Also worth noting is the fact that, after much speculation, I recently confirmed that AEP has indeed registered as a retail electric provider (REP) in Texas under the name Mutual Energy, representing approximately one million customers. First, let's look at the electric pilot program. After issuing a recent delay in the start date for the pilot (originally slated for June 1) to ensure that computer systems were running effectively, those Texas customers participating in the pilot should start receiving power from new providers in mid-July. State officials had high hopes that most of the 5 percent of the state's electric customers eligible to participate in the pilot would select a new electric provider. However, at last count, fewer than 15 percent of the 261,000 residential customers that are eligible have signed up since enrollment in the pilot began Feb. 15 (this represents about 1 percent of TXU's residential customers and 3 percent of those currently served by Reliant). The pilot officially ends when full competition begins. Fears arising from the national coverage of the California situation appear to be dissuading Texas residential customers from participating, along with general apathy about electric service. Also at play is a 6-percent discount that residential and small business customers receive from their incumbent utilities, which may lower the incentive for these customers to seek out a new provider. While Texas residential customers appear hesitant (or apathetic) about electric competition, the state's large industrial and commercial customers are eagerly embracing the opportunity to sign on with a new electric provider. There are about 2,000 large electric users in the state (defined as those businesses that consume more than 1 MW of power at peak usage). C_customers have filled up many of the slots available in the pilot program for their customer classes, and naturally appear to be generating the most competition in the state. Within this space, AES NewEnergy is gaining momentum. In addition to its contract with the city of Dallas, NewEnergy also secured a deal with H-E-B, one of Texas' leading retail companies with 280 stores in the state. AES NewEnergy is a subsidiary of AES Corp. (NYSE: AES), which controls more than 64,000 MW in 32 countries. Formed in 1995, AES NewEnergy claims to be present in "very state where a competitive energy market is emerging." I spoke with representatives from the city of Dallas regarding their selection of AES NewEnergy among other providers, including those based in Texas. Interestingly, NewEnergy was the only REP that responded to the city's bid. Another large deal was recently announced between Cinemark USA, which operates movie theaters around the state, and TXU. Under the contract, TXU will provide energy services to 22 Cinemark theaters outside of its traditional North Texas service territory. Unlike the city of Dallas, which only received a bid from one REP, comparative price was a factor in Cinemark's selection of TXU. Whether or not Texas should be forced to join the nation's transmission grid is a debate that has been heating up over the last few weeks. Ironically, although President Bush usually supports free market forces, he reportedly is considering a mandate that would force ERCOT into becoming interconnected with the nation's two other transmission grids, the Western Interconnection and the Eastern Interconnection. Presently, ERCOT stands independent from the other two grids and wants to keep it that way. However, because Texas is generally thought to have excess power, it is now being considered that the Lone Star State should be made to export some of that supply to power-starved California. Presently this is not possible due to the fact that ERCOT has limited interconnections to surrounding power pools. This is not the first time that this issue has been tossed around. While President Bush was still governor of the state, the Public Utility Commission of Texas (PUCT) studied the option of linking Texas to the other grids and found that it would be cheaper for the state to remain disconnected. However, as the issue of FERC's oversight over regional transmission organizations gains momentum, the Bush administration may overrule Texas' current sovereignty over its transmission system. Further, the debate on this issue is related to the policy of eminent domain in the Bush administration's energy plan, which would give FERC the power to buy state property for the construction of interstate transmission lines. However, the question of just how much excess generation Texas might have to give to California has come into question over the last several weeks. The North American Electric Reliability Council (NERC) sparked the controversy recently when it issued a report identifying a number of areas in the United States that should be "watched closely" this summer due to supply concerns. In the same report, NERC also mentioned that Texas should be watched closely, but out of concern about the state's pilot program rather than supply deficiencies. ERCOT immediately disputed NERC's claim, reiterating the state's oft-repeated contention that it is more than prepared for competition and in fact has a 17.9 percent reserve power margin. In addition, Texas officials point to the fact that, since 1995, 22 new plants have started operations in the state, 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. Nevertheless, in response, NERC stood behind its assessment, which it based on two possible ramifications of the summer's pilot. NERC is concerned that as Texas consolidates 10 control areas into one and 5 percent of the state's utility customers switch to new providers as is hoped by the state, this could take a toll on transmission capability. Another challenge facing Texas is the shrinkage of its regulatory commission. As noted, Pat Wood has now officially left his post as chairman of the PUCT to become a FERC commissioner. Wood's departure leaves only Brett Perlman as the sole PUCT commissioner, something that concerns many stakeholders as a number of final decisions on rules that will govern Texas' electric market are still pending. Texas Gov. Rick Perry has made no announcement as to when Wood might be replaced on the PUCT (along with Judy Walsh, who left the commission last January). Moreover, the fact that the state's pilot program has not attracted a large number of residential customers is not surprising. Texas may not have a strong competitive residential market for some time, considering the 6-percent discount for residential and small business customers that was included in the state's restructuring plan. Rather, the competitive C_market, which is where the largest savings can be obtained anyway, may be the true test of the success of Texas' competitive market. This determining factor, along with the state's ability to retain a strong power supply, ultimately will decide the fate of Texas' electric industry. Because the vast majority of the new generation in Texas is fueled by natural gas, there are also some related concerns about competitors being able to beat the fixed rates of utility REPs if natural-gas prices remain high. However, despite these factors, Texas is clearly gearing up for competition and pursuing deregulation in its own independent fashion. The eyes of the energy industry remain fixed on Texas as the state-which by the way will reportedly soon become the largest state in terms of megawatts generated-continues its attempts to distance itself from the national debate that has somewhat tainted electric deregulation. An archive list of previous IssueAlerts is available at www.scientech.com [IMAGE] The most comprehensive, up-to-date map of the North American Power Systemby RDI/FT Energy is now available from SCIENTECH. Reach thousands of utility analysts and decision makers every day. Your company can schedule a sponsorship of IssueAlert by contacting Nancy Spring via e-mail or calling (505)244-7613. Advertising opportunities are also available on our website. SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this email and include their full name and email address or register directly on our site. If you no longer wish to receive this daily email, send a message to IssueAlert, and include the word "delete" in the subject line. SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. SCIENTECH's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. Copyright 2001. SCIENTECH, Inc. All rights reserved.
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