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Texas' Role in National Energy Policy: Dr. Anderson's Insight

Dr. John A. Anderson highlights Texas' exemplary stance in national energy policy, outlining critical flaws from other states' restructuring efforts and contrasting them with Texas' proactive measures. Covering areas like generation inadequacy and rate freezes, he discusses Texas' responses to these challenges. ELCON's advocacy for competitive electricity prices is also emphasized.

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Texas' Role in National Energy Policy: Dr. Anderson's Insight

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  1. Texas’ Role in theNational Energy Policya presentation by:Dr. John A. AndersonExecutive DirectorElectricity Consumers Resource Council (ELCON)Washington, DC At: The Texas Conservative Forum’s 2001 Conference September 27, 2001 • Austin, Texas

  2. Overview • The Texas role in National Energy Policy primarily should be to set an example for the nation by demonstrating that electricity restructuring actually can – and will – work • Thus, I first identify some “fatal flaws” of restructuring • Primarily gleaned from other states” failed state restructuring efforts • Then, contrast the Texas efforts with those fatal flaws

  3. What is ELCON? • The national association for large industrial users of electricity • Founded in 1976 • Members from a wide range of industries from traditional manufacturing to high-tech • We advocate an adequate and reliable electric supply – but at competitive prices

  4. 10 Examples of Fatal Flaws • Anti-build – NIMBY attitude • Retail rate freeze – or price caps • Stranded cost recovery mechanisms • Generation divestiture and a lack of vesting contracts • Mandatory power exchanges and auctions • Gaming – Under-scheduling load and over-selling transmission • Provider of last resort (POLR) • Unrealistic transition • No curtailable load market • Independent operation of the grid

  5. Flaw #1:Inadequate Generation • In spite of significant demand growth: • California maintained a de facto “no build” policy – believing that conservation could meet all the needs • No new generation, and very little transmission, was built in over 10 years • Siting and permitting requirements are very severe

  6. Texas’ Response toFlaw #1 • Texas is far ahead of the nation • Some estimates put Texas’ generation reserve margins exceeding 20% in the 2002-04 time frame • Projects are underway to increase transmission capacity and the Texas PUC has worked to streamline the approval process to speed-up construction of transmission projects

  7. Flaw #2:Rate Freezes or Caps • California reduced prices by 10% for residential and small commercial customers – then froze them • No matter the cost of power, there was no change in price • Thus, there was no incentive for customers to reduce consumption as costs rose

  8. Texas’ Response toFlaw #2 • Utilities were unbundled into: • Generation, wires, and affiliated retail electric providers (REPs) • Affiliated REPs have to offer: • A “price to beat” for small consumers (< 1 MW) for 5 years at 6% below the current bundled rates • Industrials have no rate protection • It appears that competitive REPs can beat the price to beat: • Some small consumers can thus save even more than the mandated 6%

  9. Flaw #3:Stranded Cost Recovery • California’s stranded cost recovery mechanism made it impossible for customers to save by shopping – and also impossible for marketers to profit • The utilities fully expected prices to fall • The CTC was defined as the difference between the fixed retail price and the PX price • Consumers are not dumb • With no way to save, they decided not to shop

  10. Texas’ Response toFlaw #3 • Very limited stranded cost recovery has been allowed • Although limited recovery will occur through 2004 • A “true up” will result in a final evaluation of stranded costs • Consumers are slated to receive excess stranded cost recovery • In some cases, these credits completely offset the charges

  11. Flaw #4Generation Divestiture • PG&E, SCE, & SDG&E were required to divest up to 50% of their fossil fuel generating plants • In actuality: • They sold all of their fossil generators in “blocks” to out-of-state entities without “vesting” contracts from the new owners • The utilities vulnerable to price shocks because of the price freezes • At present, PG&E and SCE have incurred over $13 billion in purchased power costs that cannot be recovered

  12. Texas’ Response toFlaw #4 • Utilities in Texas unbundled into separate companies • The affiliated REPs are allowed, but not mandated, to sign supply contracts • They are expected to buy the cheapest generation, not necessarily from their affiliate • The big difference is that Texas has more than adequate generation

  13. Flaw #5:Power Exchanges • PG&E, SCE, and SDG&E were required to: • Buy & sell all their energy at the monopoly PX on the Day-Ahead & Hour-Ahead Spot Markets • They were not allowed to buy forward contracts to hedge against volatile wholesale prices • Instead of creating a competitive market • California created an even larger monopoly

  14. Texas’ Response toFlaw #5 • Texas has a capacity auction • However, it is limited to 15% of the former utilities installed capacity • There is no mandatory power exchange • All transactions are bilateral

  15. Flaw #6:Gaming Behavior • Two kinds of gaming were observed in California: • Under-scheduling load, and • Overselling transmission • Each resulted in artificially-inflated prices

  16. Texas’ Response toFlaw #6 • The Texas PUC has instituted a new market oversight division to monitor market power • Time will tell whether it is adequate, but it clearly is a step in the right direction

  17. Flaw #7:Provider of Last Resort • Improperly structured, the California “POLR”: • Suppressed price signals • Consumers saw regulated, rather than market, prices • Discouraged long-term contracts • Consumers used POLR as normal service • Prevented incumbent utilities from being transformed into “wires” companies • This inhibited marketers from obtaining customers

  18. Texas’ Response toFlaw #7 • Texas’ POLR service was competitively bid • But there were no bidders • The Commission ultimately required some of the utility affiliates to play this role • But the rates are quite high • Thus, they do not appear to provide a haven • As a specific example, the rates are above $.20/kWh for industrial consumers

  19. Flaw #8:Inappropriate Transition • Policy makers must be candid – the transition will not be short • Competition must be established – “deregulation” is inadequate • California tried to move very quickly • And in the process was unable to make the necessary corrections

  20. Texas’ Response toFlaw #8 • Texas enacted legislation in 1999 • However, the pilot was not planned to begin until June 1, 2000 • It was delayed until July 31, 2001 to allow time to fix some bugs • The market for ERCOT is still planned to open on January 1, 2002

  21. Flaw #9:Lack of Demand Response • California reduced rates to residential and small business consumers – and froze them at that level for the transition period • This eliminated customer responses • “Curtailable Load Response” markets must be established that are: • Voluntary • Exempt from any price caps • Nondiscriminatory in size • Open to negotiate price and terms and conditions of service

  22. Texas’ Response toFlaw #9 • ERCOT and the PUC are still working on curtailable load response (demand response) markets • At this time, loads cannot bid into the market • Such markets may be created, but they are not yet in place • Loads can set the market price for some ancillary services that are above the $1,000 bid cap that has been imposed on generators

  23. Flaw #10:Independent Grid Operation • The operation of the transmission grid • Must be under the control of an independent entity to assure fair and nondiscriminatory operations • California’s “Independent System Operator” was far from independent • FERC tried to force independence, but has not yet been successful

  24. Texas’ Response toFlaw #10 • The statute contains an independence requirement for the grid operator • However, there is some concern • Competitive retailers have filed a petition at the PUC to try to get more Commission oversight over the ISO and ERCOT • It is quite clear that the need for independence is understood and is being addressed

  25. Observations • Negative experiences in CA, and in other states, demonstrate clearly a failure ofregulation – NOT of competition • All too often, states deregulated monopolies • They did not create competition • The failure of regulation certainly has slowed the movement to restructuring: • This may be good • It is far better for consumers to have no restructuring – than have bad restructuring

  26. Observations (Cont.) • The primary lesson learned is adequate capacity – in both generation and transmission – is a necessary, but not sufficient, condition for competition • However, this is a lesson true in both regulation and in competition • Texas certainly appears to have adequate capacity • This is a key to success

  27. Conclusions • The best role Texas can play in the National Energy Policy may well be to demonstrate to the nation that electric restructuring actually will work • Texas obviously has learned from the earlier failures – and appears to be on the right track • A Texas success would be a tremendous contribution to the nation

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