Guide to Electric Power in Texas

Third Edition Guide to Electric Power in Texas

January 2003 Houston Advanced Research Center and Institute for Energy, Law & Enterprise University of Houston Law Center Guide to Electric Power in Texas Third Edition

January 2003

Houston Advanced Research Center 4800 Research Forest Drive The Woodlands, Texas 77381 281/367-1348 Fax 281/363-7924 http://www.harc.edu Institute for Energy, Law & Enterprise University of Houston Law Center 100 Law Center Houston, TX 77204-6060 713/743-4634 Fax 713/743-4881 [email protected] http://www.energy.uh.edu our Public Utility Commission and Legislature, Preface are important benchmarks. This edition of the Guide, like previous versions, was prepared to provide a comprehen- This Third Edition of Guide to Electric Power sive and balanced educational resource for a in Texas comes at a time of great change and wide range of retail customer groups, from uncertainty in the electric power industry in interested residential consumers to large com- Texas and the United States. Nationwide, the mercial and industrial organizations. The outstanding questions deal with how best to Guide was first published in 1997, after the build workably competitive markets for bulk, Texas Legislature created our own wholesale wholesale transactions of power and the finan- market and when thinking began to coalesce cial settlements that accompany these sales. with regard to participation in the marketplace Should we adopt a national market design that by retail customers. Our goal was then, and will establish and enforce common standards remains, to provide both background on our for how these transactions take place? Will state’s electric power industry and history and such an approach ensure adequate and effi- the points of debate on how best to provide cient investments in transmission capacity? free choices and a different set of options so How can we best provide open, transparent that the benefits of competition can be intro- flows of information so that trading, market- duced and flourish. Texas remains unique ing and risk management for both power and among the states in how our electric power a critical generation fuel, natural gas, can pro- system is organized. Most electric power cus- ceed with confidence and integrity? What are tomers reside within the Electric Reliability the roles of national and state regulators and Council of Texas or ERCOT, an island within policy makers? And will our market design the interconnected national grids. Our state encourage continued experimentation with competes for jobs and industries with other renewable energy sources like wind and solar, states, and so how our grid and other parts of where those make sense, and help to foster and the electric power system work are important improve environmental quality across the sys- for comparative advantage. As the electric tem? These and other issues are being debated power industry evolves nationwide we may at a time when our energy policy decisions as become increasingly integrated, and so how a nation are being monitored by other coun- our rules and framework “fit” with other state tries as never before, a consequence of the and regional approaches is of great interest to sharp conflicts surrounding California’s elec- customers and the electric power industry. tric power restructuring program and the cor- Finally, this book serves as a resource in porate governance and ethics issues emanat- Mexico, where there is ongoing discussion ing from the energy trading sector. about how best to restructure that electric Among state-based programs, our Texas power system and where closer ties to Texas Electric Choice initiative remains the one most are a strategic objective on both sides of the watched. As a consequence, customer educa- border. tion and participation, as well as customer The Guide was conceived of and prepared at feedback both to electric power providers and the Houston Advanced Research Center (HARC) and the Institute for Energy, Law & Enterprise (IELE) at the University of Guide to Electric Power in Texas, Copyright 2003, Hous- ton Advanced Research Center, The Woodlands, Texas. Houston’s Law Center. The University of Houston is a HARC affiliate. The Houston Advanced Research Center is a private, non-profit research organization lo- This report may not be resold, reprinted, or redistributed cated in The Woodlands, Texas seeking to im- for compensation of any kind without prior written per- mission from the Houston Advanced Research Center or prove ecosystem and human health through the Institute for Energy, Law & Enterprise, University of research and service. HARC’s activities are Houston Law Center.

i focused on three primary areas – Energy, En- East Asia. The IELE helps to expand energy vironment and Life Sciences. HARC relies on content in UH courses and degree programs the expertise and knowledge of its research and hosts an international education program, partners, such as the University of Houston, New Era in Oil, Gas and Power Value Creation for projects and publications like the Guide. each May. The IELE is supported by the fol- The University of Houston’s IELE is a uni- lowing financial partners. The University of versity-wide research, education, and outreach Houston is a member of the HARC higher edu- center on energy and related environmental cation consortium. issues. Formerly the Energy Institute located in the C.T. Bauer College of Business, our main focus is on economic, legal, regulatory, and financial frameworks to support sustainable, commercially successful energy development worldwide. Our work at the IELE extends Baker Hughes JETRO – Houston/ METI, Japan across the energy value chains, from oil and BG LNG Services McKinsey & Company gas exploration and production, to transpor- BP Global LNG Ocean Energy tation and distribution, and to conversion and Bracewell & Patterson L.L.P. PA Consulting delivery for end use as petroleum products Canadian Consulate General – Public Utility Commission of (gasoline, jet fuel and so on), electric power, or Dallas Texas natural gas. The IELE specializes in the par- ChevronTexaco Worldwide Reliant Energy ticular problems and issues surrounding the Power and Gasification and Shell Oil Company natural gas-to-electric power value chain, in- Worldwide LNG Smith International, Inc. cluding liquefied natural gas (LNG). The ConocoPhillips Worldwide LNG Tractebel/Distrigas transmission and local distribution “grid busi- Duke Energy U.S. Department of Energy – nesses” have historically been operated as Dynegy Office of Fossil Energy public utilities because of their strong network El Paso Global LNG U.S. Department of State economies of scale and potential to exert mar- Enterprise Products Partners, L.P. (Agency for International ket power. For the past 25 years, the natural ExxonMobil Development) gas and electric power industries have experi- Fulbright & Jaworski L.L.P. Vinson & Elkins L.L.P. enced substantial restructuring in the U.S. and Gardere Wynne Sewell L.L.P. other countries as ways are sought to introduce competition, spur innovation and entrepre- neurship, and instill market pricing and market-driven behavior. These policy actions have been taken mindful of the public interests involved. This bigger picture underlies the purpose and intent of our Guide. In addition to the Guide, the IELE maintains For additional printed copies ongoing research on issues in electric power of this report contact: restructuring and our natural gas supply and delivery system in the U.S., and on compara- Institute for Energy, Law & Enterprise tive approaches to gas and power restructur- University of Houston Law Center ing both within the U.S. and across a number 100 Law Center of countries. Our briefing paper on the Texas Houston, TX 77204-6060 Electric Choice program can be found at 713/743-4634 www.powertochoose.org. We place particu- Fax 713/743-4881 lar emphasis on Mexico and the emerging [email protected] North American continental marketplace, www.energy.uh.edu South America, West Europe and Turkey, and

Part 1 Facts on Texas Electric Power...... 1

Facts and figures on the Texas electric power system. Part 2 The Basics of Electric Power ...... 9

Physical and organizational characteristics of an electric power system; how electric power systems work. Part 3 History ...... 19

Short history of Texas electric power and U.S. activities that have helped shape electric power systems. Part 4 Regulations & Policies ...... 27

Brief description of major U.S. energy legislation and Texas legislation as they affect electric power. Part 5 Major Issues ...... 45

Discussion of major issues affecting electric power decisions — consumers, environmental, economic development, financing, and others. Part 6 Future Trends ...... 63

Discussion of four key trends to watch in the electric power industry. Appendices ...... 73

Basic Economic Principles Glossary Further Readings

iii Third Edition Guide to Electric Power in Texas

January 2003 Houston Advanced Research Center and Institute for Energy, Law & Enterprise University of Houston Law Center Facts on Texas Electric Power

lectricity – it’s always there Facts on Texas except for an occasional E storm, and we expect it to Overview be there wherever we go. It works Electric Power so well most of the time that we’re the ERCOT part. How did this hap- surprised when it’s in the news. In pen and why? Texas today, electricity is big news, Texas relies heavily on coal for Electricity: We Make and Use a Lot big business and important to all of electric power generation, although us. we have more than three times the By far, Texans use more electricity than any Texas electricity is different. We amount in natural gas generation other state and many countries. In 2000, we make more, use more, and have our capacity. Fuel competition is driv- bought almost 10 percent of all electricity sold own niche in the U.S. system. Texas ing change in the industry. Why? produces and uses more electricity Texas electricity on average is in the U.S., exceeding customers in California, than any other state in the U.S., con- cheaper, but we spend more and the next largest state, by 44 percent. We used siderably more than California costs vary widely across the state over 60 percent more electricity than Florida, which has about 13 million more and from consumer to consumer. people. Why? And what does that Why is it cheaper (when it is) and the third largest consuming state or almost mean for the future? why do prices vary? twice as much as Ohio, the fourth largest con- Texas also stands alone in the Finally, how will these character- suming state, and more electricity than the 20 way it is connected to the electric istics change in today’s industry power grid – there’s the eastern part now that full competition was lowest consuming states combined. Texas uses of the system, the western part, and started on January 1, 2002? a lot of electricity! Texas utilities sold 318 billion kilowatt hours (kWh) of electricity in 2000 - 97 billion more as residences. This lower cost for large custom- than California and almost 122 billion more ers is attributed to lower delivery costs and than Florida. And this doesn’t include electric- more stable demand. In 2000, average rates for ity generated by industry for its own use. Tex- different types of customers in Texas were ans use this much electricity because of the con- 7.96¢ per kWh for residential centration and type of businesses and the cli- customers; 6.88¢ for commer- mate. cial customers; and 4.42¢ for Facts on Texas Electricity – 2000 industrial customers. These are Who Uses Electricity in Texas? average rates that vary from No. of Generating Stations (2001) 531 Total No. of Electric Utilities 182 There are more than 9 million customers that area to area in the state. Also, No. of Investor Owned Utilities 10 buy electricity from Texas utilities and about an industrial or commercial No. of Municipal Utilities 79 86 percent of these are residential. There are customer using small amounts No. of Cooperatives 87 nearly 1.1 million commercial customers and of electricity would pay higher No. of River Authorities 4 more than 61,000 industrial customers. Utili- rates. Total Annual Consumption 318 GWh ties receive much of their revenue from resi- Total Generating Capacity (2001) 79.5 GW dential customers who spent about $9.3 billion Making & Moving No. of Residential Customers 8 million on electricity in 2000. In this same year, indus- Electricity No. of Commercial Customers 1.1 million try spent $4.5 billion and commercial users Texas electricity used to be No. of Industrial Consumers 61,280 about $5.8 billion. made and moved primarily by Avg. Residential Consumption 14,570 kWh The average Texas industrial customer con- electric utilities. However, Avg. Commercial Consumption 77,600 kWh sumes as much electricity as 114 homes. The electric power is not simple Avg. Industrial Consumption 1.66 mil. kWh average residence consumes more than 14,500 and utilities are not the only or- Avg. Residential Rate 7.96¢/kWh kilowatt-hours (kWh) per year while the aver- ganizations involved, espe- Avg. Commercial Rate 6.88¢/kWh age industrial customer uses about 1.66 mil- cially now that we are imple- Avg. Industrial Rate 4.42¢/kWh lion kWh per year. Average commercial cus- menting Texas Electric Choice U.S. Avg. Residential Rate 8.24¢/kWh tomers use more than 5 residences - approxi- – what this third edition of U.S. Avg. Commercial Rate 7.43¢/kWh mately 77,600 kWh. Guide to Electric Power in U.S. Avg. Industrial Rate 4.64¢/Kwh Large volume electricity customers, such as Texas is really all about. There industries and large commercial operations are several types of utilities; Source: U.S. Energy Information Administration (EIA) and the Public Utility Commission of Texas. pay lower rates than low volume users, such many investor-owned utilities

1 Facts on Texas Electric Power

have created separate subsidiaries to make and What are Electric Utilities? What’s a Kilowatt-hour? sell electricity, and these must function apart Private utilities are a unique U.S. invention. from the parent company; some industries Historically they have been highly regulated Part of our bill for cogenerate electricity moved on the power monopoly industries that provide water, tele- electricity is based on how many kilo- grid; power marketers now buy and sell elec- phone service, natural gas, and electricity in watt-hours (kWh) tricity; an Independent System Operator (ISO) this country. While still closely regulated, natu- we use. The “W” is has been created in Texas; and there is govern- ral gas, telephone, and electricity regulation capitalized because ment involvement in all of this. has changed over time toward less regulation it is named after James Watt who de- With the passage of Senate Bill 7 (SB 7) in May and increased competition. In most other coun- vised this measure 1999, the Texas legislature restructured the state’s tries, these services are provided by govern- in 1892. electricity industry. Through the Texas Electric ment owned and operated monopolies. This A kilowatt equals Choice program, the goals laid out in SB 7 are is changing as these countries seek more effi- 1,000 watts of power so a 1,000 being implemented. The idea is to allow cus- cient ways of providing these services through watt light bulb tomers to benefit from competition to make private investment and competitive markets. (very bright) burn- and sell electricity, and to create a marketplace Texas actually has four types of electric utili- ing one hour would that is more efficient while at the same time ties: investor-owned (IOUs), municipal utili- use one kWh. Watts are simply protecting customer rights and providing edu- ties (munis), electric cooperatives (co-ops), and a measure of the cation and assistance to customers that need river authorities. In 2000, Texas had 10 IOUs rate at which work it.Importantly, while the marketplace is chang- which provided roughly 84 percent of the is done by electric- ing, the fundamentals of electricity remain the state’s electricity. TXU Electric and Reliant ity with a kilowatt equaling about 1.34 same. The electric power system consists of Energy HL&P were the largest. According to horsepower. complex equipment - the power plants that SB 7, only the transmission and distribution generate electricity, the transmission system, (T&D) activities can now be seen as utilities local distribution and the control systems as- while the generation and retail sales are now sociated with each of these. competitive businesses. However, in parts of Texas where retail competition was delayed, utilities remain integrated (see Part IV for details). There are 87 electric coop- Texas Electricity and Population Growth eratives, four river authorities 1960 to 2000 and 79 munis that are par- 350,000 22.0 tially regulated by the Public 20.0 Utilities Commission of Texas 300,000 18.0 (PUCT). Of the munis, 19 actually generate electricity 250,000 Population 16.0 14.0 with the remainder buying 200,000 and distributing electricity to 12.0 their customers. 10.0 150,000 Electricity Consumption 8.0 Cogenerators, Qualifying

100,000 6.0 Facilities and Independent Power

4.0 Producers 50,000 The U.S. Public Utility 2.0 Regulatory Policy Act of 1978 0 0.0 1960 1965 1970 1975 1980 1985 1990 1995 2000 (PURPA) created a category Use of electricity in Texas has grown much faster than the population. By of non-utility power produc- 2000, consumption per capita was over 4 times what it was in 1960. This ers called qualifying facilities increase has occurred across the board, with residential consumers (QFs). This category includes outpacing industrial customers. Source: U.S. EIA. cogeneration plants, facilities

2 Facts on Texas Electric Power

using waste products as fuel (such as petro- Regulators Electric Utilities Generating Capacity in Texas leum coke or manure), and renewable re- Texas utilities and By Primary Energy Source — Year End 2001 sources like wind and solar. Cogeneration electric power are (cogen) provides process energy (usually regulated primarily Primary Generating Percentage of Energy Source Capacity (MW) Total Capacity steam) as a by-product of power generation. by the Public Utility PURPA required the host utilities of QFs to Commission of Coal Fired 16,185 20.4 % Gas-fired 56,364 70.9 % purchase energy from the QFs at avoided costs. Texas (PUCT). Cre- Nuclear 5,139 6.5 % In Texas, QF cogeneration plants may sell ated by the state leg- Renewable 1,061 1.3 % power to the steam host and excess energy to islature in 1975, Petroleum 220 0.3 % the host utility or another electric utility. Texas was the last Hydroelectric 471 0.6 % In 2000, about 15 percent of the total power state to authorize a Total 79,479 100 % generation capacity in Texas was associated PUC. Source: ERCOT EIA-411 filing (4/1/02). with non-utility generators (NUGs). With the The primary Fed- addition of about another 8,000 MW of mostly eral regulator is the Federal Energy Regulatory merchant plants, the share of NUGs reached Commission (FERC). The FERC regulates the about 20 percent by the end of 2001. Until re- transmission and sale of wholesale power in cently, Texas accounted for more than 20 per- interstate commerce and thus has regulatory cent of total U.S. non-utility power generation. authority over most of the utilities in the U.S. Restructuring of the industry required the gen- Texas utilities are subject to FERC jurisdiction eration arm of utilities to be separated from only for the sale of electric power in the whole- the transmission and distribution operations. sale or “bulk” market in the U.S. (FERC has Today, even the generation companies affili- no jurisdiction in the Texas wholesale market) ated with the old utilities have to compete to or the transmission of power for interstate sell the power they generate. As such, almost sales. The PUCT has requirements comparable all generation in Texas is now non-utility. to FERC’s for utilities operating in Texas.

Recent Actions FERC Orders 888 and 2000 Electricity Retail Sales Basic Electric Power System 889 issued April 30, 1996 Millions Consumers were major federal actions of kWh Industrial Local Distribution affecting electric utilities. Texas 318,263 Order 888 required FERC- California 244,057 Residential regulated utilities to file tar- Florida 195,843 direct delivery iffs (what they would Ohio 165,195 to large New York 142,027 customers may charge) for wholesale trans- bypass Local Commercial mission services. Order 889 Illinois 134,697 Distribution required FERC-regulated Pennsylvania 133,845 utilities to create an informa- North Carolina 119,855 Transmission tion system for access by oth- Georgia 119,185 ers (by August 1996). Michigan 104,772 These two orders did not re- Indiana 97,775 quire separation or unbun- Virginia 96,715 Generation dling of all utility services, Washington 96,511 but did require the func- Tennessee 95,728 tional separation of transmis- Alabama 83,524 sion from power marketing. Top 15 States 2,147,992 The FERC has left it up to the Total U.S. 3,421,414

states to decide whether and Source: U.S. EIA. how utilities should be reor-

3 Facts on Texas Electric Power

ganized. Some of the Utilities in North American Electric Reliability Council (NERC) Texas That Provide In December 1999, the FERC Electricity Services issued Order 2000. In that policy, the FERC requires all

Investor Owned Utilities owners of transmission assets American Electric Power (AEP) to organize these facilities into Company El Paso Electric Company Regional Transmission Organi- Entergy/Gulf States Utilities zations (RTOs). The intention Company Houston Lighting & Power is to create larger markets for Company the transmission of electricity, Sharyland Utilities Southwestern Electric Power facilitating competition and Company Southwestern Public Service competitive pricing. Under Or- Company der 2000, it is expected that the Texas-New Mexico Power Company portions of Texas that are in- Texas Utilities Electric Company West Texas Utilities cluded in the Electric Reliabil- ity Council of Texas (ERCOT) would function as a separate Cooperatives Brazos Electric Power RTO. The FERC is holding Cooperative hearings and encouraging Northeast Texas Electric Cooperative, Inc. meetings among all stakehold- Texas Interconnection Eastern Interconnection Sam Rayburn G&T, Inc. ers (utilities, generators, mar- ERCOT: Electric Reliability Council of Texas ECAR: East Central Area Reliability Coordination San Miguel Electric keters, customers and so on) to Agreement Cooperative, Inc. Western Interconnection MAAC: Mid-Atlantic Area Council STC/MEC Power Pool determine how best to imple- WECC: Western Electricity Coordinating Council MAIN: Mid-America Interpool Network MAPP: Mid-Continent Area Power Pool ment Order 2000. NPCC: Northeast Power Coordinating Council When the Texas legislature SERC: Southeastern Electric Reliability Council Municipal Utilities SPP: Southwest Power Pool FRCC: Florida Reliability Coordination Council City of Brady passed SB 7 in May 1999, utili- Brownfield Municipal Power ties were required to unbundle and Light City of Austin Electric Utility their services into generation, transmission City Public Service-San Antonio City of Coleman and distribution (T&D) and retail. Today, gen- City of Electra eration and sales (both wholesale and retail) City of Floydada of electricity are competitive businesses while City of Hearne Lubbock Power and Light the T&D companies remain regulated utilities. Public Utilities Board- Brownsville The Equipment of an Electric Power City of Robstown Sam Rayburn Municipal Power System Agency The physical equipment of an electric power Texas Municipal Power Agency Bryan, Denton, Garland, system includes generation which makes elec- Greenville tricity, a transmission system that moves elec- Tulia Power and Light tricity from the power plant closer to the con- Weatherford Municipal Utility System sumer and local distribution systems which City of Whitesboro move electric power from the transmission sys-

River Authorities tem to most consumers. Guadalupe-Blanco River Authority Generation Lower Colorado River Power plants use coal, lignite, natural gas, Authority General Locations of Investor Owned Sabine River Authority fuel oil, and uranium to make electricity. In ad- Transmission and Distribution Utility Brazos River Authority dition, renewable fuels include moving water, Service Areas solar, wind, geothermal sources and biomass.

4 Facts on Texas Electric Power

The type of fuel, its cost, and generating electric power generation assets. As older units plant efficiency can determine the way a gen- are retired, this capacity will decline. On the erator is used. For example, a natural gas gen- other hand, “merchant,” or non-utility, genera- erator with steam turbines has a high marginal tion capacity added almost 15 gigawatts be- cost but can be brought on line quickly. Coal, tween 1999 and 2002, bringing total generation lignite, and nuclear units have lower marginal capacity of the state to more than 80 gigawatts. costs but cannot be brought on line quickly. By comparison, that is twice as much as the They are used primarily to provide the base entire country of Mexico. Merchant generators load of electricity. are companies that seek to invest in new elec- Costs for fuel, construction and operations tric power generation capacity based on their and maintenance vary greatly among types of assessment of supply and demand conditions power plant. For example, renewable genera- in the marketplace. Thus, these companies only tion plants, such as solar or wind, have virtu- enter the market if economic conditions war- ally no fuel costs but are expensive to manu- rant. facture and install. Nuclear- and coal-fueled Capacity vs. Actual Generation – As of early plants have low fuel costs but can be more ex- 2002, almost 70 percent of Texas generating pensive to build and maintain. Coal units also capacity is natural gas. In contrast, gas-fired incur additional costs for meeting air quality generation accounted for only about 50 per- standards. Natural gas plants have higher fuel cent between 1999 and 2001. The rest of our costs than coal or nuclear, but have lower ini- electricity is mostly generated from coal, lig- tial construction costs. nite or nuclear power plants. This is because Companies affiliated with utilities have the of fuel costs. Although coal and nuclear power capacity to generate almost 65 gigawatts of plants are more expensive to build than natu- power (65 million kilowatts). This capacity has ral gas plants, fuel costs for coal and nuclear not changed much since the opening of the are considerably less. Thus, electricity is usu- wholesale market to competition. This is be- ally dispatched first from nuclear plants, then cause, unlike other states, SB 7 did not require coal, and last from natural gas. Nuclear and utilities to fully divest themselves of all of their coal generators provide most of the base load of electricity day-in and day-out, while natural gas generators provide the peak loads 2000 Rate Savings in Texas which occur during certain periods of the day as compared with the U.S. average electricity such as when air conditioning is in high de- costs per kilowatt-hour. mand. Storing Electricity – Unlike water and natural gas, electricity cannot be easily stored. This presents a fundamental challenge to the electric power system. There is no container or large “battery” that can store electricity for in- definite periods (see following). Energy is stored in the fuel itself before it is converted to electricity. Once converted, it has to go out on the power lines. Electricity Storage Technologies - Com- pressed air, pumped hydroelectric, advanced Source: U.S. EIA. batteries and superconducting magnetic en- Texans enjoy lower electricity rates than the ergy storage are the four main technologies average U.S. rates, although these savings being studied for possible electricity storage. have declined in the past 3 years. Texans also spend more annually on electricity. Compressed air and pumped hydro are already being used in some locations in the U.S.

5 Facts on Texas Electric Power

move power between T&D utilities by adjust- Cost Per Kilowatt-Hour and ing generator output in the T&D utility areas Average Annual Cost Per Customer Texas and the U.S. - 2000 involved, not by switches. Movement among Avg. Cost several utilities means complex adjustments in Cost per kWh Per Customer which rules of operation are followed carefully. Texas U.S. Texas U.S. The transmission system has been built over Residential 7.96¢ 8.24¢ $1,160 $879 several decades and early developers could not Commercial 6.88¢ 7.43¢ $5,337 $5,464 have envisioned the movement of electricity Industrial 4.42¢ 4.64¢ $73,287 $93,760 being considered under many of today’s com- Other 6.77¢ 6.56¢ $8,295 $7,369 petitive scenarios. As such, the transmission All 6.49¢ 6.81¢ $2,220 $1,828 system is a critical link in the move to change Source: U.S. EIA the electric power system. Texans pay 5% less per kWh than the U.S., but because we use 28% more electricity on average, our electric bills are 21% higher. Local Distribution Systems Most homes and businesses use 120- and 240-volt electric power while industries often Transmission System use higher voltages. Large commercial and in- Power plants are located at points, which dustrial customers may bypass the local disallow access to the fuel source, generally away tribution system, receiving electricity at high from population centers, and electricity must voltage directly from the transmission system. be moved from that point to the consumer. The Substations on the transmission system re- transmission system accomplishes much of ceive power at higher voltages and lower them this task with an interconnected system of to 24,900 volts or less to feed the distribution lines, distribution centers, and control systems. systems. The distribution system is the poles There are about 50,000 miles of transmission and wires commonly seen in neighborhoods. lines in Texas. 37,000 miles of lines are located At key locations, voltage is again lowered by within the ERCOT system (see NERC map on transformers to meet customer needs. page 4). These consist of roughly 8,000 miles Customers on the distribution system are of 345 kilovolt (KV) lines; 17,000 miles of 138 categorized as industrial, commercial and resi- KV lines; and 12,000 miles of 69 KV lines. dential. Industrial use is fairly constant, both About 13,000 miles of lines are located in non-ERCOT Real Change in Cost of Electricity in Texas areas of Texas, especially Adjusted to 1996 Dollars (1996 GDP Deflator) within the Southwest 1990 to 2000 Power Pool territory (the Cents per kWh 1996$ 9.00 Panhandle and east Texas). Residential Electricity is transported 8.00 at high voltages (69 KV or Commercial greater) over a multi-path 7.00 powerline network that

provides alternative ways 6.00 for electricity to flow. The large three-conductor lines 5.00 Industrial and substations are familiar to most Texans, but the 4.00 control systems that keep the system functioning are 3.00 less visible. 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Source: U.S. EIA. The control systems

6 Facts on Texas Electric Power

over the day and over seasons. Commercial use tem Operator (ISO) as proposed by ERCOT. is less constant and varies over seasons. Resi- An ISO is an independent, unbiased third- dential and commercial use is more variable, party entity that oversees the activities related sometimes changing rapidly over the day in to the reliable and safe transmission of elec- response to occupant need, appliance use and tricity within a specified geographic area. Af- weather events. ter SB 7, ERCOT also provides the platform for Many Texas municipal utilities and co-ops an open, competitive marketplace for the ma- provide only distribution services, purchasing jority of Texas customers. ERCOT is required power from the IOUs, other cooperatives or to (1) ensure non-discriminatory access to the river authorities. T&D systems for all electricity buyers and sellers, (2) ensure the reliability and adequacy of Texas and the U.S. the regional electric network, (3) ensure that The electrical systems in the U.S. and much information related to customer retail choice of Canada are divided into three major regions is provided in a timely manner, and (4) ensure - the Eastern Interconnection, the Western In- that electricity production and delivery are ac- terconnection and the Texas Interconnection, curately accounted for among all regional gen- which includes most of the state. These are erators and wholesale buyers and sellers. As groups of utilities which connect to each other the ISO, ERCOT operates an information net- to form the three power grids. work for all market participants’ use as a pri- The utilities operate in such a way that elec- mary means of facilitating efficient and equi- tricity can move reliably between utilities table use of the transmission system. within the Interconnections. Few direct connections exist between the Interconnections. How Much Does It Cost and What Do ERCOT has two high voltage DC (direct cur- We Spend? rent) connections, both to the Eastern Intercon- Texas electricity is cheaper than the U.S. av- nection. The northern tie has a capacity of 200 erage but because we consume more, monthly megawatts and the eastern tie, a 600 megawatt bills are higher. Electricity rates and costs for capacity. These DC ties accept AC (alternating Texas residential, commercial and industrial current) in and provide AC out, but they are customers are compared with the U.S. in the not necessarily synchronous (see page 12 on table on the previous page. system stability). The electricity rate averaged for all customer In response to a major blackout in 1965 in classes in 2000 was 6.49¢ per kilowatt hour the Northeast, the North American Electric Re- (kWh), 4.7 percent lower than the U.S. aver- liability Council (NERC) was created. Most age. The average residential electricity rate in electric power systems in the U.S. and Canada Texas was 3.4 percent lower than the U.S. av- are members of one of NERC’s 10 Regional Re- erage. However, higher use in Texas resulted liability Councils (see Part 2 for details). in residential bills that were higher by $281 - ERCOT serves approximately 85 percent of about 32 percent higher. the state’s electric load and oversees the op- In 2000, commercial customers in Texas paid eration of approximately 70 gigawatts of gen- 6 percent more per kWh than the overall Texas eration and over 37,000 miles of transmission average and about 14 percent less than resi- lines. Most of the Texas Panhandle and part of dential customers. East Texas are in the Southwest Power Pool At 4.42¢ per kWh, industrial customers paid (SPP). The El Paso region is in the Western Elec- slightly more than half the rate of residential tricity Coordinating Council (WECC). A small customers. Texas industrial rates were 4.7 per- part of Southeast Texas (Beaumont area) is in cent lower than the U.S. industrial average. the Southeastern Electric Reliability Council With interruptible service, large electricity us- (SERC). ers may have lower rates. Such rates also re- In 1995, Texas created an Independent Sys- flect lower fuel costs in Texas, the economies

7 Facts on Texas Electric Power

Inc., a co-op); the next lowest rate was 5.35¢ Cost Variation Among Utilities (¢ per kWh, 2000) (Southwest Arkansas ECC, a co-op) and the next highest rate was 13.04¢ (Rio Grande Elec- Residential Commercial Industrial tric Coop Inc., a co-op). The rates varied from Texas Average 7.96 6.88 4.42 122 percent higher than the state average of Texas Lowest 1.51 5.18 2.71 7.96¢ to 81 percent lower. IOUs averaged 7.97¢ Texas Highest 17.66 27.66 12.37 while co-ops averaged 8.42¢ and munis aver- IOU Average 7.97 6.94 4.76 aged 7.84¢. IOU Lowest 5.86 5.18 2.71 Electricity rates for commercial customers in IOU Highest 10.60 9.83 9.26 Texas varied from as low as 5.18¢ (Southwest- Co-op Average 8.42 7.71 5.56 ern Electric Power Co., an IOU) to 27.66¢ per Co-op Lowest 5.35 5.26 3.31 kWh (City of Flatonia, a muni); the next high- Co-op Highest 17.66 10.9 8.18 est rate was only 17.01¢ (City of San August- Muni Average 7.84 8.20 6.48 ine, a muni). The rates ranged from 24 percent Muni Lowest 1.51 5.47 3.51 below to 302 percent above the average com- Muni Highest 11.63 27.66 12.37 mercial rate of 6.88¢. IOUs averaged 6.94¢ Source: U.S. EIA. while co-ops averaged 7.71¢ and munis averaged 8.20¢. Rates for all customer groups vary widely across Texas. In particular, co-op Rates for industrial users varied from as low and muni rates demonstrate large variability due to generation type, the ex- as 2.71¢ (Southwestern Public Service Co., an tent of the T&D system and the size and mix of customer types. On average, however, IOU rates are lower than those of co-ops and munis. IOU) to 12.37¢ per kWh (City of Hearne, a muni) with a variation from 38 percent lower of serving large users, and lower variability. to 180 percent higher than the state average of In the U.S. from 1991 to 2000, average elec- 4.42¢. IOUs averaged 4.76¢ while co-ops aver- tricity rates (adjusted to constant 1996 dollars) aged 5.56¢ and munis averaged 6.48¢. decreased by 17.1 percent. Industrial customers have seen their rates decrease by 22.7 per- The Electric Power Industry in Texas cent. Rates for commercial customers de- Historically, total expenditures for all energy creased by 19.7 percent while those for resi- have accounted for about seven percent of the dential customers decreased by 14.4 percent. Gross Domestic Product (GDP) in the U.S. In Texas, rates also declined over the same Purchase of natural gas and electricity services period but not as much. Average electricity have amounted to more than three percent of rates (in 1996 dollars) decreased by 10.7 per- GDP. Investment in natural gas and electric- cent. Residential rates decreased by 12.6 per- ity services has been about five percent of to- cent and commercial rates by 13 percent while tal, fixed, nonresidential investment. Energy industrial rates declined by 10 percent (see is big business in the U.S. and electricity is a chart on page 6). vital input to our national economy. Texas accounts for almost 10 percent of net Cost Variation Among Utilities electricity generation in the U.S., a result As reported in the table above, electricity mainly of our large petroleum refining and pet- rates have varied widely within the state dur- rochemical industries. We provide about nine ing 2000. Each utility had its own rates and cost percent of the $226 billion electricity final sales basis, and each was treated separately in rate revenue in the U.S., more than any state ex- making by the PUCT. The process of establish- cept California, which provides 10 percent. ing rates and cost basis will continue for T&D Clearly, electricity is important to Texas. It is utilities under SB 7. relatively cheap, and so has been beneficial to Residential rates varied from as little as 1.51¢ business and residential growth. The size of per kWh (City of San Augustine, a muni) to as the Texas electric power industry means that much as 17.66¢ (Harmon Electric Association policies and business trends that impact electric power in the U.S. will have a big effect here. 8 The Basics of Electric Power

he main function of an electrical The Basics of power system is to transmit all Telectricity demanded reliably, Overview and in the exact amount, where it is Electric Power needed. In addition, it should provide for unforeseen contingencies arising eration, transmission and distri- Electricity travels fast, cannot be stored eas- from larger than expected demand or bution (T&D) facilities within a ily or cheaply, and cannot be switched from system outages. The industry structure specified service area. Today, the has three main segments - generation, generation and sale of electric one route to another. These three principles are transmission, and distribution. power in ERCOT can be provided basic to the operation of an electric power sys- Generation – The process of produc- by unregulated (but certified) tem. ing electric energy by transforming companies in competitive mar- other forms of energy such as coal, kets. T&D operations are still pro- Electricity is almost instantaneous. When a natural gas or solar power. vided by regulated utilities, who light is turned on, electricity must be readily Transmission – The movement or must unbundle their systems so available. Since it is not stored anywhere on transfer of electric energy over an in- that generation, sales and related terconnected group of high voltage services are separate and so that the power grid, electricity must somehow be lines between points of supply and “open access” can be provided in dispatched immediately. A generator is not points at which it is transformed for a fair, nondiscriminatory way to simply started up to provide this power. Elec- delivery to consumers or other electric all competitors. Competitors in- systems. Transmission ends when the clude competing generators, mar- tric power must be managed so that electric- energy is transformed for input into keters, aggregators (who combine ity is always available for all of the lights, ap- the distribution system. customers into larger groups), re- pliances and other uses that are required at any Distribution – The portion of the tail electric providers or REPs electrical system which operates at low (who handle customer accounts particular moment. voltages and delivers electricity to an and sales) and qualified schedul- Electricity traveling from one point to an- end-user such as a home, business or ing entities or QSEs (who handle other follows the path of least resistance rather industrial plant. the scheduling of electricity sup- Most electrical services used to be plies from generators and demand than the shortest distance. With thousands of provided by large, vertically inte- from aggregators, marketers and miles of interconnected wires throughout the grated companies that owned the gen- REPs). U.S., electricity may travel miles out of any Basic Measures of direct path to get where it is needed. Electricity Diagram 1 As a result of these three principles, design- Volts Electric Current ing and operating an electrical system is complex and requires constant management. The push or pressure forcing electricity in a circuit. Defining and Measuring Electricity Electricity is simply the flow or exchange of Amperage When a metal wire, electrons between atoms. The atoms of some Unit of measurement such as copper, is (amps) of electrical current passed through a metals, such as copper and aluminum, have or flow magnetic field, electrons that move easily. That makes these Watts, Kilowatts and electrons are metals good electrical conductors. Electricity is created when a coil of metal Megawatts exchanged from A measure of electricity’s atom to atom. This wire is turned near a magnet (Diagram 1). ability to do work. forms a moving Thus, an electric generator is simply a coil of Equals volts times amps stream or current of wire spinning around a magnet. This phenom- Kilowatt=1,000 watts electricity. enon enables us to build generators that pro- Megawatt = 1,000,000 watts duce electricity in power plants. Resistance The push, or pressure, forcing electricity The measure in ohms of from a generator is expressed as volts. The flow how much force it takes to of electricity is called current. Current is mea- move electric current through a conductor. sured in amperes (amps). Resistance in conductors Watts are a measure of the amount of work causes power to be done by electricity. Watts are calculated by consumed as electricity flows through.

9 The Basics of Electric Power

multiplying amps times volts. Electrical appli- Types of Generators ances, light bulbs and motors have certain wattage requirements that depend on the tasks Steam Turbine they are expected to perform. One kilowatt Uses either fossil fuel or nuclear fuel to generate (1,000 watts) equals 1.34 horsepower. heat to produce steam that passes through a turbine to drive the generator; primarily for base Kilowatts are used in measuring electrical load but some gas-fired plants are also used for use. Electricity is sold in units of kilowatt- peak loads; range in size from 1 to 1,250 megawatts. hours (kWh). A 100-watt light bulb left on for ten hours uses one kilowatt-hour of electricity Combustion Turbine Hot gases are produced by combustion of natural (100 wattsx10 hours=1,000 watt hours=1 kWh). gas or fuel oil in a high pressure combustion The average residential customer in Texas uses chamber; gases pass directly through a turbine more than 14,500 kWh annually. In 2000, Tex- which spins the generator; used primarily for peak ans used more than 318 billion kWh. loads but combined cycle plants are used for base load; generator is generally less than 100 Electricity in the U.S. is generated and usu- megawatts; quick startup suitable for peaking, ally transmitted as alternating current (AC). emergency, and reserve power. The direction of current flow is reversed 60 times per second, called 60 hertz (Hz). Because Hydroelectric Generating Units Flowing water used to spin a turbine connected to of the interconnection within the power grids, a generator; range in size from 1 to 700 megawatts; the frequency is the same throughout the grid. can start quickly and respond to rapid changes in Operators strive to maintain this frequency at power output; used for peak loads and spinning 60 Hz. reserve, as well as baseload. Higher voltages in many instances can be Internal Combustion Engines transmitted more easily by direct current (DC). Usually diesel engines connected to the shaft of a High voltage direct current (HVDC) lines are generator; usually 5 megawatts or less; no startup used to move electricity long distances. time; operated for periods of high demand. Others Geothermal, solar, wind, and biomass; many Diagram 2 different technologies; range widely in size and capabilities. Steam Turbine Electric Power Plant

Steam turns Transformer increases voltage the Turbine . . . which turns the Generating Electricity . for transmission Generator Rotor There are many fuels and technologies that producing Electricity can generate electricity. Usually a fuel like coal, natural gas, or fuel oil is ignited in the

Steam furnace section of a boiler. Water piped Boiler heats pure through the boiler in large tubes is super- water circulating heated to produce heat and steam. The in pipes to make Spent steam goes to the Condenser . . . steam turns turbine blades which are con- steam nected by a shaft to a generator. Nuclear Condenser power plants use nuclear reactions to pro- Lignite, coal, natural gas or duce heat while wind turbines use the wind oil is used to to turn the generator. Condenser heat the and is converted cooling water A generator is a huge electromagnet sur- furnace. comes from a back to boiler water power plant lake rounded by coils of wire which produces for another cycle or water tower electricity when the shaft is rotated (Dia- gram 2). Electricity generation ranges from 13,000 to 24,000 volts. Transformers increase

10 The Basics of Electric Power

Uses of Generating Units

Base Load Unit Generates the minimum or baseload requirement Peak of the power system; operates at a constant rate Reserve/Standby Load and runs continuously. Load Peak Load Unit Demand Used to meet requirements during the periods of greatest demand.

Intermediate Load Unit Intermediate Load Used during the transition between base load and peak load requirements. Base Load Reserve or Standby Units Available to the system in the event of an unexpected increase in load or outage. Time

can carry. Power lines operated at 60 kilovolt the voltage to hundreds of thousands of volts (kV) or above are considered as transmission for transmission. High voltages provide an lines. There are about 50,000 miles of transmis- economical way of moving large amounts of sion lines in Texas. electricity over the transmission system. Even though higher voltages help push along the current, electricity dissipates in the Transmission & Distribution form of heat to the atmosphere along trans- Once electricity is given enough push (volt- mission and distribution lines. This loss of elec- age) to travel long distances, it can be moved tricity is called line loss. About 7 percent of all onto the wires or cables of the transmission electricity generated in Texas is lost during system. The transmission system moves large transmission and distribution. quantities of electricity from the power plant Switching stations and substations are used through an interconnected network of trans- to (1) change the voltage, (2) transfer from one mission lines to many distribution centers line to another, and (3) redirect power when a called substations. These substations are gen- fault occurs on a transmission line or other erally located long distances from the power equipment. Circuit breakers are used to dis- plant. Electricity is stepped up from lower volt- connect power to prevent damage from over- ages to higher voltages for transmission. loads. High voltage transmission lines are intercon- Control centers coordinate the operation of nected to form an extensive and multi-path all power system components. One or more network. Redundant means that electricity can utilities can make up a control area. To do its travel over various different lines to get where job, the control center receives continuous in- it needs to go. If one line fails, another will take formation on power plant output, transmission over the load. Most transmission systems use lines, ties with other systems, and system con- overhead lines that carry alternating current ditions. (AC). There are also overhead direct current (DC) lines, underground lines, and even un- Transmission Constraints der-water lines. There are some important constraints that All AC transmission lines carry three-phase affect the transmission system. These include current -- three separate streams of electricity thermal limits, voltage limits, and system op- traveling along three separate conductors. eration factors. Lines are designated by the voltage that they

11 The Basics of Electric Power

Power System Limits Thermal/Current Limits the generators and preventing voltage col- Electrical lines resist the flow of electricity lapse. Generators operate in unison at a con- Thermal Limits The maximum amount and this produces heat. If the current flow is stant frequency of 60 Hz. When this is dis- of electrical current that too high for too long, the line can heat up and turbed by a fault in the transmission system, a a transmission line or lose strength. Over time it can expand and sag generator may accelerate or slow down. Un- electrical facility can between supporting towers. This can lead to less returned to normal conditions, the system conduct over a specified time period before it power disruptions. Transmission lines are can become unstable and fail. sustains permanent rated according to thermal limits as are trans- Voltage instability occurs when the transmis- damage by overheating formers and other equipment. sion system is not adequate to handle reactive or violating public power flows. “Reactive power” is needed to safety requirements. Voltage Limits sustain the electric and magnetic fields in Voltage Limits Voltage tends to drop from the sending to equipment such as motors and transformers, The maximum voltage the receiving end of a transmission line. Equip- and for voltage control on the transmission that can be handled ment (capacitors and inductive reactors) is in- network. without causing damage to the electric sys- stalled to help control voltage drop. If voltage tem or customer facili- is too low, customer equipment and motors can Distribution ties. System voltages be damaged. The distribution system is made up of poles and voltage changes and wire seen in neighborhoods and under- must be maintained System Operation Constraints within the range of ac- ground circuits. Distribution substations moni- ceptable minimum and Power systems must be secure and reliable. tor and adjust circuits within the system. The maximum limits. A Operating constraints are needed to assure that distribution substations lower the transmission widespread collapse of this is achieved. line voltages to 34,500 volts or less. system voltage can result in a blackout of por- Power Flows: Electricity flows over the path Substations are fenced yards with switches, tions or all of the inter- of least resistance. Consequently, power flows transformers and other electrical equipment. connected network into other systems’ networks when transmis- Once the voltage has been lowered at the sub- sion systems are interconnected. This creates station, the electricity flows to homes and busi- Stability Limits An interconnected sys- what are known as loop flows. Power also nesses through the distribution system. tem must be capable of flows over parallel lines rather than the lines Conductors called feeders reach out from the surviving disturbances directly connecting two points - called paral- substation to carry electricity to customers. At through time periods lel flows. Both of these flows can limit the abil- key locations along the distribution system, varying from millisec- onds to several minutes. ity to make other transmissions or cause too voltage is lowered by distribution transform- With an electrical dis- much electricity to flow along transmission ers to the voltage needed by customers or end- turbance, generators lines thus affecting reliability. users. can begin to spin at Preventive Operations: The primary way of slightly differing speeds Customers at the End of the Line causing differences in preventing service failures from affecting other frequency, line loads areas is through preventive operations. Stan- The ultimate customers who consume elec- (current) and system dards and procedures from the NERC are fol- tricity are generally divided into three catego- voltages. These oscilla- lowed. Operating requirements include (1) ries: industrial, commercial, and residential. tions must diminish as the electric system at- having a sufficient amount of generating ca- The cost to serve customers depends upon a tains a new stable oper- pacity available to provide reserves for unan- number of factors including the type of ser- ating point. If a new ticipated demand and (2) limiting the power vice (for example, if service is taken at high or point is not quickly es- transfers on the transmission system. The low voltage) and the customer’s location with tablished, generators can lose synchronism guidelines recommend that operations be able respect to generating and delivery facilities. and all or a portion of to handle any single contingency and to pro- the interconnected sys- vide for multiple contingencies when practi- Industrial tem may become un- cal. Contingencies are identified in the design Industrial customers generally use electric- stable, causing damage to equipment and, left and analysis of the power system. ity in amounts that are relatively constant unchecked, widespread System Stability: The two types of stability throughout the day. They often consume many service interruption. problems are maintaining synchronization of times more electricity than residential consum-

12 The Basics of Electric Power

ers. Most industrial demand is considered to cal inventory. be base load. As such it is the least expensive In addition, hundreds of organizations and load to serve. Many industrial loads are ex- corporations make up the electric power sys- pected to remain within certain levels over tem. These include investor-owned utilities, time with relatively little variation. Major in- municipal and cooperative utilities, river au- dustrial customers may receive electricity di- thorities, power producers, holding compa- rectly from the transmission system (rather nies, retail electric providers and others. than from a local distribution system). Activities are regulated by state and federal Some industrial plants have their own gen- agencies under the direction of state and fed- erators. If they are qualifying facilities (QFs) eral legislation. Regional coordination is ac- or exempt wholesale generators (EWGs), their complished through reliability councils. excess electricity can be sold to utilities on the grid. Organizations Private Utilities: The IOUs are granted a li- Commercial cense by the state to provide electrical services Commercial loads are similar to industrial to a particular area. Many areas compete un- in that they remain within certain levels over der multi-certifications which allow more than intermediate periods of time. Examples of commercial customers are office buildings, Energy Sources for Generating Electricity warehouses, and shopping cen- FOSSIL FUELS ters. Fossil fuels are derived from decaying vegetation lignite reserves and, in 2001, ranked first in the over many thousands or millions of years. Coal, U.S. in consumption, fifth in production and Residential lignite, oil (petroleum) and natural gas are all fossil seventh in recoverable reserves. Residential electrical use is fuels. Fossil fuels are non-renewable, meaning that we extract and use them faster than they can be Natural Gas the most difficult to provide be- replaced. Fossil fuels are combusted in boilers, and Natural gas is a mixture of hydrocarbons cause households use much of combustion turbines and engines in order to convert (principally methane, a molecule of one carbon their electricity in the morning water to steam that is used to power the turbines in and four hydrogen atoms) and small quantities and evening and less at other an electric generator. A concern is that fossil fuels, of various non-hydrocarbons in a gaseous phase when combusted, may emit gases into the or in solution with crude oil in underground times of the day. This is less ef- atmosphere that contribute to climate change. reservoirs. Texas has approximately 42 trillion ficient to provide and therefore Considerable effort is underway to devise clean cubic feet (tcf) of proven natural gas reserves, a more expensive use of the technologies that will allow fossil fuel use with few 24 percent of proven U.S. domestic reserves. or no emissions. utility’s generators. Over time, Fuel Oil as homeowners buy new appli- Coal Fuel oils are the heavier oils in a barrel of ances and change life-styles, the A black or brownish black solid combustible crude oil, comprised of complex hydrocarbon expected loads also change. Ex- fossil fuel typically obtained from surface or molecules that remain after the lighter oils have amples of residential loads are underground mines. Coal is shipped by rail to been distilled off during the refining process. power plants and may be imported from other Fuel oils are classed according to specific gravity individual residences. countries. In Texas, as in other coal producing states, and the amount of sulfur and other substances electric generating stations are often “mine-mouth,” that might occur. Virtually all petroleum used Putting the Parts meaning that they are built at the mine and in steam electric plants is heavy oil. Currently, Together extracted coal is taken directly to the generator. a negligible amount of Texas electricity is Coal is classified according to carbon content, generated using fuel oil. The physical parts of the elec- volatile matter and heating value. Lignite coal tric power system are genera- generally contains 9 to 17 million Btus (British RENEWABLES tion, transmission and distribu- thermal units, a measure of heat content) per ton. Renewable fuels are those that are not tion. Numerous power plants, Texas lignite has somewhat lower heat content. Sub- depleted as they are consumed. The wind, sun, bituminous coals range from 16 to 24 million Btu moving waters (hydroelectric), water heated in thousands of miles of transmis- per ton; bituminous coals from 19 to 30 million Btu/ the earth (geothermal) and vegetable matter sion lines, and thousands of ton; and anthracite, the hardest type of coal, from (biomass) are typical renewable energy sources substations and other infra- 22 to 28 million Btu per ton. for electricity. (cont’d next page) structure are part of this physi- Texas has about 10 billion tons of recoverable

13 The Basics of Electric Power

ing emergency service, of the Energy Sources for Generating Electricity (cont’d) wires in their service territories. Hydroelectricity Solar Electricity Municipal Utilities: These Electricity can be created as turbine generators Radiant energy from the sun can be are driven by moving water. Texas has one converted to electricity by using thermal utilities provide all of the same quadrillion Btus (quad Btu) per year of potential collecting equipment to concentrate heat, functions as the private utilities hydroelectric resources. (For comparison, the U.S. which is then used to convert water to steam but are managed by a municipal- consumes about 99 quad Btu of energy per year.) to drive an electric generator. Solar electricity ity. Municipal utilities, like their Texas has about 472 megawatts of installed is about a decade behind wind electricity in capacity. While hydroelectricity is considered a development for commercial applications. private counterparts, charge a renewable fuel, management of flowing rivers and Texas has 250 quad Btu per year of potential rate of service sufficient to recoup cycles of rain and drought can impact hydroelectric solar-powered electricity, or about 90 their investment and ensure for capacity greatly as well as contribute to other gigawatts. Solar electricity represents an continued reliable services environmental effects. important future energy source for Texas, especially for niche markets like off-grid within a service area. Wind Electricity power. Solar energy depends on available Cooperatives: Historically, Electricity can be created when the kinetic sunlight and is reliant on storage or cooperatives developed in re- energy of wind is converted into mechanical supplementary power sources. sponse to the need to serve rural energy by wind turbines (blades rotating from a hub), that drive generators. It has been estimated Biomass and Geothermal areas. Public utilities could not that Texas has four quad Btus per year of potential Electricity can be created when various recover the costs of building elec- wind electricity. 37 percent of the Texas Panhandle materials (like wood products and agricultural trical facilities to remote areas could produce 205 gigawatt hours of electricity per waste, or even crops grown for use in electricity and, therefore, did not want to year (about 64 percent of Texas consumption), if production) are combusted. Heat from transmission can be built economically to move combustion is used to convert water to steam serve those areas. Federal legis- this electricity to population centers. It has been for power generation. Texas has an accessible lation in the 1930’s allowed for estimated that three states - Texas, North and South biomass resource base of three quad Btu per the creation of Rural Electric Co- Dakota - could provide, in principle, all of the year, although this would require a substantial operatives by providing low in- electricity needed in the U.S. Again, this depends amount of acreage and soil resources and large on the economics of transmission. Wind energy is amounts of water to produce sufficient biomass terest loans guaranteed by the intermittent and in Texas, and many other states, feedstock. Electricity can also be created when government. Local cooperatives is located away from major demand areas. SB 7 steam produced deep in the earth is used to coordinate closely with utilities calls for 2,000 megawatts of new renewable energy run turbines in a generator. Texas has an in adjoining areas to ensure reli- to be part of the total electric power generation accessible geothermal resource base of one mix by 2009. Today, there is more than 1,000 quad Btu per year. Currently, a negligible ability to their service areas and megawatts of wind capacity. More than 900 amount of Texas electricity is generated using to avoid duplication of facilities. megawatts of this capacity were built in 2001. biomass. Municipal Governments: In Texas, municipal governments are generally responsible for ap- one service provider. In exchange for the obli- proving rates which utilities will charge for gation to serve all customers, utilities are al- their services. It is their responsibility to review lowed the opportunity to earn a reasonable the prudence of investments made by utilities return on those investments which are deemed to determine if costs will be allowed to be re- by the state to have been constructed in the covered. Municipal governments that do not interest of serving customers in their service want to perform this review process can turn area. This relationship between private indus- over this responsibility to the PUCT. try and governments at the local or state level Public Utility Commission of Texas is the historical arrangement for providing (PUCT): Established by the Texas legislature electricity service. In 2000, there were 12 in- in 1975, this statewide regulatory body was vestor-owned utilities in Texas. After SB 7, only created to oversee the operations of private and the T&D services remain as regulated services municipal utilities. Originally this included provided by the utilities. The operational rights electricity, telephones, water and sewage. To- of these systems were transferred to the day it includes primarily certain electric utili- ERCOT ISO (see below for more on the ERCOT ties and telecommunications companies. The ISO) while the utilities will continue to pro- PUCT has jurisdiction over electric and phone vide the expansion and maintenance, includ- in unincorporated areas of Texas. Municipal

14 The Basics of Electric Power

governments can vote to turn over this respon- ability Council (SERC) Energy Sources for Generating sibility to the PUCT. and the ERCOT. ERCOT is Electricity (cont’d) Non-Utility generators (NUG’s): Electricity by far the largest of the customers have always had the option of pro- four with a service area NUCLEAR Nuclear energy is a non-renewable, non-fossil viding their own electrical supply. In Texas, that serves about 85 per- fuel form of energy derived from atomic fission. refineries, chemical and other large industrial cent of the electrical load plants generate large portions of their own in Texas (The implementa- Nuclear Electricity electricity needs. A non-utility generator is a tion of SB 7 has been de- The heat from splitting atoms in fissionable material, such as uranium or plutonium, is used corporation, which is not affiliated with a pub- layed in SPP, WECC and to generate steam to drive turbines connected to lic or municipal utility or a cooperative, that SERC territories within an electric generator. Uranium is a heavy, natu- generates electricity. Federal legislation Texas). rally radioactive metallic element which has two (PURPA) provides the option for some NUG’s principle isotopes, uranium-235 or uranium-238. Uranium-235 is the only isotope existing in na- to sell excess electricity to utilities (see Part 4 - Reliability Councils ture in appreciable quantities and is thus indis- Regulations and Policies for details). Utilities The need to coordinate pensable to the nuclear industry (which includes are required to buy this excess electricity at the electrical systems in North applications other than electric power for civil- cost they would incur to generate an equiva- America arose after a series ian use). Uranium-238 absorbs neutrons to produce a radioactive isotope that decays to pluto- lent amount of electricity themselves. of major blackouts in the nium-239, which is also fissionable. About 10 per- With the restructuring of the industry, much Northeast in 1965. The cent of electricity produced by Texas utilities is of the generation in Texas has become non-util- North American Electric nuclear. Nuclear plants have been by far the most ity generation. Utilities have created new, af- Reliability Council (NERC) expensive to construct, although uranium is the least expensive fuel to use (apart from questions filiated generation companies that are func- was formed for “coordinat- about disposal costs). No nuclear plant has been tionally separated from their T&D businesses. ing, promoting and com- ordered in the U.S. since 1978. The costs and po- As SB 7 preserves existing contracts, utilities municating about reliabil- tential hazards associated with decommissioning assigned the PURPA contracts they hold with ity.” Most electric power nuclear facilities are likely to be substantial and the disposal of radioactive wastes from these fa- NUG’s either to the affiliated power genera- systems in the U.S., Canada cilities remains an unresolved issue in the U.S. tion company (PGC) or the affiliated retail elec- and some in Mexico are However, in recent years nuclear facilities have tricity provider (REP). members of one of 10 Re- proved to be reliable generators and the propor- Federal Energy Regulatory Commission gional Reliability Councils tion of nuclear power consumed in all of the U.S. has grown. Nuclear generation produces no (FERC): The FERC is successor to the Federal (the state of Florida recently greenhouse gas emissions. New, small scale Power Commission (FPC) which was charged became a separate member nuclear generation technologies such as pebble- with regulating the natural gas and electricity of NERC). Each region ad- bed modular reactor are under development. industries in 1938. The FPC was abolished in heres to operating rules for 1977 and in its place the Department of En- one of the three major ergy and the FERC were established. The FERC power grids in the U.S - the Eastern Intercon- has jurisdiction over interstate electricity trans- nection, the Western Interconnection and the actions as well as wholesale (sales for resale) Texas Interconnection. The Texas Interconnection electricity transactions. Its original authority is the ERCOT region. over natural gas remains in place, among other Utilities in each of these interconnections are functions. continuously synchronized so that their sys- Regional Reliability Councils: As a result tems operate at the same frequency. In addi- of the complexity of the electricity industry, re- tion, utilities communicate with each other gions have been established throughout the about system maintenance and operation to United States to ensure reliable operation of ensure that sufficient electricity will be avail- the electrical system. These regional reliabil- able when it is required. ity councils are nonprofit organizations funded Since its formation in 1970, ERCOT has op- by utility and non-utility entities. The coun- erated as one of 10 regional reliability councils cils in Texas are the Southwest Power Pool within the NERC umbrella organization. In (SPP), the Western Electricity Coordinating 1996, it became the ERCOT ISO (Independent Council (WECC), Southeastern Electric Reli- System Operator), keeping its security respon-

15 The Basics of Electric Power

sibilities while adding facilitation of the whole- sion lines in ERCOT, there are an additional sale transmission market to its responsibilities. 13,000 miles of transmission lines operated in This includes administration of the ERCOT non-ERCOT areas of Texas, especially within OASIS (an on-line information system for en- the SPP. ergy transaction scheduling and energy ac- ERCOT member facilities form a single in- counting) and coordination of transmission terconnection, located entirely within the state. planning with ERCOT. Today its The other areas are served by El Paso Electric What is ERCOT ISO? role is expanded in response to the (far west Texas), Southwestern Public Service SB 7. Under the new legislation, (Texas Panhandle), South Western Electric The ERCOT ISO is the nonprofit and with the “customer choice” Power and Entergy/Gulf States Utilities (East corporation that administers the power mandate that came into effect in Texas). Two DC ties provide 800 megawatts of grid. January 2002, ERCOT has been transfer capability between this intrastate in- The ERCOT ISO serves 85 percent of the state’s electric load and oversees the given the responsibility to develop terconnection and the Eastern Interconnection. operation of over 70,000 megawatts of market structure, infrastructure, The ERCOT operating protocols incorporate generation and over 37,000 miles of and business processes to facilitate the reliable operation and planning of the in- transmission lines. Texas restructured its retail competition. terconnected system. The basic element within electricity industry, bringing “customer choice” as of January 1, 2002. Under the The ERCOT ISO’s members in- a Regional Reliability Council is known as a new legislation, ERCOT has the clude participants from Coopera- control area. Control areas are responsible for responsibility to develop market tives and River Authorities, Mu- matching electricity supply and demand on an structure, infrastructure, and business nicipals, Investor-Owned Utilities, instantaneous basis. One or more utilities can processes to facilitate retail competition. The ERCOT ISO is one of 10 electric Independent Power Marketers, In- operate within a control area but only one is reliability regions in North America dependent Retail Electric Provid- assigned the responsibility of being the Con- operating under the reliability and ers, Independent Generators, and trol Area Operator. safety standards set by the NERC. As a Consumers. As of October 7, 2002, Control areas are electrical systems, bound NERC member, ERCOT’s primary responsibility is to facilitate reliable ERCOT’s Membership included by interconnect metering and telemetry which power grid operations in the ERCOT 147 voting and non-voting Mem- continuously regulate through automatic gen- ISO region by working with the area’s bers. The Member groups are com- eration control. Control areas generate and in- industry organizations. prised of 44 Cooperatives and terchange schedules (purchases and sales) to The PUCT has primary jurisdictional authority over ERCOT to ensure the River Authorities, 23 Municipals, match loads, and contribute to the frequency adequacy and reliability of electricity 13 Investor Owned Utilities, 21 In- regulation of the interconnection. across the state’s power grid. A Board dependent Power Marketers, 15 Vertically integrated utilities typically oper- of Directors comprised of market Independent Generators, 14 Inde- ate their own control areas. In some areas of participants governs the ERCOT ISO. Its members include retail consumers, pendent Retail Electric Providers, the country, utilities have joined together to investor and municipally owned electric and 15 Consumers, as well as two create “tight power pools” which act as con- utilities, rural electric coops, river Adjunct Members. trol areas for multiple utilities and centrally authorities, independent generators, Transmission systems of the dispatch all of the generating facilities in the power marketers, and retail electric providers. members cover 200,000 square pool based on economic criteria without regard miles. ERCOT members serve over to ownership. There are over 140 separate con- 12 million customers, with annual trol areas in the U.S. electricity sales of 270 gigawatt hours, repre- There used to be nine control areas in senting 85 percent of the total load in Texas. ERCOT, operated by TXU Electric, Houston ERCOT transmission lines extend as far north Lighting & Power, Central and Southwest Ser- as Wheeler in the Texas Panhandle to 650 miles vices, Texas Municipal Power Pool (a combi- south to Brownsville in the southernmost tip nation of Brazos Electric Coop and Texas Mu- of Texas. The lines run from the junction of I- nicipal Power Agency), Lower Colorado River 10 and I-20 in West Texas to the Sabine River Authority, City of Austin, South Texas/Medina bordering Louisiana, also approximately 650 Coop Power Pool, the Public Utilities Board of miles. Brownsville, and Texas New Mexico Power In addition to the 37,000 miles of transmis- Company. In order to manage its tasks under

16 The Basics of Electric Power

the restructured industry, the ERCOT region and analyzes all of the electricity transmission has become a single control area and the components every two to four seconds for sta- ERCOT ISO has become its operator. tus, load, and output to maintain the reliable ERCOT is responsible for coordinating the transmission of electricity at every moment. actions of market participants and also ensur- The ISO has a sophisticated new technologi- ing that the transmission system is not over- cal infrastructure, called the Energy Manage- loaded. Parallel flows and reactive power are ment System, and an expanding engineering monitored to help accomplish this. The ISO is staff that monitors the balance between power also responsible for coordinating exchanges of generation and power demand. The ERCOT electricity between neighboring control areas, ISO also keeps one eye on Texas’s future trans- although this is very limited in the case of mission requirements. ERCOT as there are only two interconnects with neighboring regions. Finally, the ISO en- Market Operations sures that adequate reserve electricity capac- This includes monitoring the balance be- ity is available to meet any operational or emer- tween forecasted electricity power generation gency situations. schedules and actual electricity demand A balanced Board of Directors, made up of among all competing market participants. The members from each of ERCOT’s electricity ERCOT ISO estimates electricity generation market groups, governs the ERCOT ISO. A and demand requirements for every 15-minute Technical Advisory Committee (TAC) consist- interval of every day. Plus, it assesses the an- ing of members from each market group makes cillary services required to maintain reliable policy recommendations to the Board of Di- electricity production for the actual demand rectors. Four committees assist TAC: Protocol at any moment and procures additional ancil- Revisions, Reliability and Operations, Retail lary services which are held on standby to en- Market, and Wholesale Market. The commit- sure reliability when there are gaps between tees are assisted by numerous workgroups and forecasted and actual electricity usage. task forces. The Board of Directors hires the CEO and also appoints the ERCOT ISO’s of- Financial Operations ficers. These executives direct and manage the This duty includes client relations, meter ac- ERCOT ISO’s day-to-day operations. The quisition and data aggregation, settlements, ERCOT ISO is organized to provide a voice for billing, business rules, registration, load pro- the various groups that are ERCOT market filing, and the renewable energy credit pro- participants so that decisions on system secu- gram management. rity and market facilitation can be made in a democratic and open atmosphere. Registration Beginning with the phased-in competitive The ERCOT ISO is the centralized registra- retail market Pilot Program on June 1, 2001, tion agent for both retail electric providers and ERCOT’s duties are categorized into four pri- market participants for the entire state of Texas. mary operations: Production Operations, Mar- ket Operations, Financial Operations, and Reg- istration.

Production Operations Clearly, the ERCOT ISO is one of the most crucial and This task involves system security, planning, central entities in today’s restructured electricity industry and market support. These technical responsibilities include supporting resource and ob- in Texas. ligation scheduling, real time operations, operations analysis, system planning, analysis and data collection. The ERCOT ISO monitors

17 18 History

lectric power systems in the U.S. History and Texas were established first E in urbanized areas where Overview The electrical system we have today did not enough customers existed to support development. Electrification was extended Company Act (PUHCA) in 1935 come into being overnight. It has been built to rural areas through special state and which restricted the size and scope piece by piece over the last 120 years. This his- federal programs that subsidized infra- of these businesses. tory (as well as the history of other utilities and structure development. Electricity arrived in Texas in The early electric power industry was 1878 and by World War II nearly industries) provides a useful framework for quite competitive, with companies com- all of the state was electrified. Our thinking about the future. peting to build systems and add custom- Public Utility Commission was not The first commercial electric power installa- ers. Regulated, private monopoly fran- established until 1975, a time of chises evolved as a way of ordering in- upheaval in the industry as world tion in the U.S. was constructed in the latter dustry development. oil prices soared and the long-time part of the 19th century. The Rochester, N.Y., Regulation began at the state level trend of declining electricity costs Electric Light Co. was established in 1880 and through public utility commissions, the reversed. first of which was formed in Massachu- The electric power industry in Thomas A. Edison’s Pearl Street steam-electric setts in 1885 to regulate natural gas. Texas and the U.S. today faces a station began operation in New York City two Emergence of large holding companies new challenge as competition in- years later. Within a year, it had 500 customers that controlled many local utilities led creases and customers seek out for its lighting services. A short time later a sta- to the federal Public Utility Holding new options and choices. tion powered by a small waterwheel began operation in Appleton, Wisconsin. months after Edison’s first electric system began operation in New York City. By 1890, electricity was available in several Texas cities. Hundreds of small electric companies were created and generators were built especially to power ice plants, trolley systems, and cot- ton gins. These specialized power generators were often extended to surrounding homes and businesses to be used only at night. For example, power lines from trolleys were simply connected to homes from lines running along the street. Edison’s Pearl Street Steam Electric StationÐ1882 Early electricity use was largely confined to Texas cities where factories and other large The electric power industry in the U.S. grew electric users were located. The cost of serving from its small beginnings in less than 100 years rural areas was prohibitive due to the miles of to become the most heavily capitalized indus- lines that would be needed. While many cities try in the country. It comprises about 3,100 dif- had two or more companies competing for ferent corporate entities, including systems of customers, rural areas went unserved. In 1935, private investors, federal and other govern- the Rural Electrification Act was passed by the ment bodies, and cooperative-user groups. U.S. Congress which provided low interest, Less than one-third of cooperative groups have long-term financing that would bring electric- their own generating facilities, most being in- ity to farmers and farming communities in volved only in transmission and distribution. Texas and other states. In 1934, the Lower Colorado River Author- Early Texas History ity was chartered to develop flood control, hy- Electricity first came to Texas in 1878 with droelectric and related services. Other feder- electric arc lights that had gained attention at ally financed hydroelectric plants followed on the Paris Exposition. Electric lights were in- the Colorado, Brazos and Red Rivers. These stalled in Galveston and Dallas only a few plants sold power to rural cooperatives to pro- Copyright (c) TheThomas Bettmann Alva Archive Edison 19 History

vide electricity to rural areas. In 1937, the Texas mitted. These two factors – PUHCA require- Legislature passed legislation to match the U.S. ments plus technological limitations - yielded REA for the formation of rural electric coop- a utility model in which electric power was eratives. owned widely by many companies and was By the end of World War II, almost all of operated under close government regulation. Texas was electrified. Electricity use grew rap- (The reader can refer to Part 4 on Regulation idly after the War with prices dropping from and Policies for details on U.S. federal ap- as high as 15¢ to only 4¢ per kilowatt hour. In proaches and issues.) 1942, the Texas Interconnected System (TIS) The idea of private ownership with public was informally organized among utilities to oversight had emerged in the early part of the help meet heavy wartime demand for electric- century for many services in the U.S. includ- ity. Even though not as simple to operate as ing the telephone, transportation and energy. separate island systems, the interconnections For electricity, as with these other industries, in the early TIS were single lines making in- the general philosophy was that only one elec- terchange of electricity relatively easy to tric service provider was needed for an area handle, predict and understand. or there would be duplication of generating facilities and power lines, resulting in waste Public Utilities: A U.S. Private/Public and inefficiency. Private companies were Model granted exclusive franchises to serve desig- The Public Utilities Holding Company Act nated geographic areas. This monopoly privi- (PUHCA) of 1935 provided the basic structure lege bore an obligation to serve all customers of the current U.S. electrical industry. The Act within a service area. In return, companies had limited the size of electric holding companies the opportunity to earn a reasonable rate of that owned utilities and required that these return (profit) as determined by the PUCs. This utilities serve integrated, contiguous territo- private/public model is unique to the U.S. (al- ries. In addition, technological constraints lim- though Canada had a similar model in some ited the distance that electricity could be trans- locations) and was introduced at a time when

Texas Growth in Consumption of Electricity 1965 to 2000

The amount of electricity consumed in Texas has increased by more than Annual Growth Rate five times in the past 30 years. How- (3 Year Rolling Average) ever, the rate of growth has dropped substantially, a pattern similar to the rest of the United States. Growth rates have declined from above 12 Electricity percent in the 1960s to levels of 2 Consumption to 3 percent in the last 10 years.

Source: U.S. EIA.

20 History

Timeline of Electricity Events in Texas and the U.S. (see Regulations & Policies–A Closer Look for details on regulatory actions) 1975 Public Texas Public Utility Utility Regulatory Commission Act of Texas 1878 Lignite created Electric arc 1935 power lights installed PUHCA plants in in Texas Texas 1937 1979 First 1885 1913 1935 Rural 1965 1973 Three nuclear Fort Worth First high Rural cooperatives Northeast OPEC Mile plant Electric Light and voltage line in Electrification created in power oil Island opened Power formed Texas Act Texas outage embargo in Texas 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 1882 1932 1942 1968 1970 1978 Houston Light Technology Texas NERC ERCOT PURPA & Power for natural Interconnect formed formed PIFUA formed gas use in System NGPA boilers Nuclear plant construction begins in Texas

widespread communication, transportation utilities. America’s growing dependence on and energy services were seen as critical for imported oil combined with production quo- Recent Timeline economic growth and to bind the nation. Other tas instituted by a cartel, the Organization of 1990 to 2002 countries also recognized the importance of Petroleum Exporting Countries (OPEC), led to 1996 ERCOT 2002 these services, but instituted governmentally rapid energy price increases. Inflation and ISO FERC proposes owned and operated programs. higher interest rates followed. Larger power 1995 Standard Texas 1999 Market plants were being built that could produce introduces Texas Design Forces for Change in the U.S. electricity at much lower O&M costs but also wholesale SB 7 (SMD) competition Until the 1960s, the electric utility structure at much higher construction costs. The con- 1999 2001 1992 FERC Calif provided services at a relatively low cost. Util- struction of larger plants, high interest rates Energy Order suspends ity owners and investors were generally satis- and inflation led to increases in consumer rates. Policy 2000 restructuring Act fied with the rate of return on new plants as For the first time, consumers on a large scale well as the ability to pass on most costs of op- were faced with increasing service costs for erations and maintenance (O&M) for old electricity while companies were being 2002 plants. They could also increase profits on ex- squeezed by rising costs and interest rates. 1996 Calif. Retail isting facilities through technological innova- In 1965, a massive power outage in the north- FERC Energy Choice Orders Crisis begins tions and efficiencies. Consumers were gener- eastern U.S. plunged 33 million people into 888/889 in 1993 2001 Texas ally satisfied since they were guaranteed ser- darkness. For the first time since electricity Texas Texas vice and the technological improvements kept began its rapid growth in the U.S., the atten- debate Pilot on Program the cost of service low or declining as demand tion of most Americans was focused on elec- resource grew for electricity. tricity. A continuous, reliable source of electric- planning Earlier in 1935, the Federal Power Commis- ity had become vital to the nation’s economy sion (FPC) had asserted its jurisdiction over the and security. wellhead price of natural gas sold in interstate In 1967, the FPC determined that the elec- commerce. Through various pricing methods, tric industry must take steps to increase reli- the FPC set prices so low that new production ability and reduce the potential for such black- would not meet demand. This caused curtail- outs. In 1968, the North American Electric Re- ments and high prices in the U.S. interstate liability Council (NERC) was formed as the markets. electric industry’s voluntary response to the In the late 1960s and early 1970s, various need for increased reliability. Almost every economic and technological factors affected electric utility now belongs to NERC.

21 History

During the 1970s, large industrial and commercial customers were the first segments of Parallels for Electric Power in Texas the economy to look for alternatives to utility- Texas was affected by many of the same provided electricity. They sought legislation forces as the utility industry in the rest of the which would allow them to obtain electricity country. During the 1950s and 1960s more elec- from other sources. Residential customers and trical appliances entered the consumer market consumer groups complained to elected offi- and the economy was strong. In Texas, new cials who began to review utility rates more homes were being built with air conditioning and units were added to existing homes. Annual growth in demand averaged 10 percent during this time. The Power Plants Opened in Texas advent of large, more efficient power by Size of Plant, Year Opened and Fuel plants reduced prices further to 2¢ per Megawatts kilowatt hour for residential custom- 7000 ers. The rapid growth of electricity use was fairly constant until the early 6000 1970s, when high fuel prices from the crisis in world oil markets, environ- Natural Gas Coal/Lignite Nuclear mental concerns and a slowing U.S. 5000 economy resulted in reduced growth. While many other utilities in the U.S. 4000 struggled with rising fuels costs, Texas was blessed with an abundance of natural resources - oil, gas and lignite 3000 - and natural gas became the fuel of choice for electricity up through the 1960s. In the 1970s, in the heavily regu- 2000 lated U.S. natural gas market, the perception grew that there was a shortage 1000 of natural gas, a perception made worse by widespread curtailments during the winter of 1976. In actual 0 fact, regulatory distortions had created 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 a situation in which inadequate supplies of natural gas were being developed. Because natural gas prices were carefully. Cost increases were more frequently controlled in the interstate markets by the FPC, disallowed when officials believed that utili- but largely unregulated in the intrastate mar- ties were not incurring costs in a prudent man- kets in locations like Texas, more gas was be- ner. ing sold in the intrastate markets leading to Legislators were also pressured by utilities shortages elsewhere (even though prices did who believed that they had a contract which not reflect this situation). Erroneously, state allowed them to recover costs they incurred and federal laws were passed which prohib- in providing services to the community. Utili- ited the construction of new gas-fired base load ties argued that if they were not allowed to power plants. Utilities in Texas and elsewhere recover costs, this jeopardized their financial moved to diversify their fuels to include coal, standing, could force bankruptcy and thereby lignite, and nuclear power. endanger the provision of this basic commod- Texas also followed the drive in the U.S. to ity. increase reliability after the 1965 blackout. In

22 History

1967, the Texas Interconnected System (TIS) in the 1960s. Status of State Electric Industry developed more formal agreements to handle Restructuring Activity (EIA, July 2002) administrative as well as planning and opera- Restructuring and tional activities. In 1970, the ERCOT was Re-regulation in Twenty-four states and the District of Columbia formed out of the TIS. And in 1975, the Public the U.S. (D.C.) have either enacted enabling legislation or issued a regulatory order to implement retail Utility Commission of Texas (PUCT) was es- Since the 1960s, access. Dark gray colored states are active in the tablished to oversee statewide issues that were much has been restructuring process, and these states have either not addressed by regulation at the local level. learned about public enacted enabling legislation or issued a regulatory Texas was the last state to establish such a com- utility industries in order to implement retail access. Retail access is either currently available to all or some customers mission. The main issues for the PUCT were the U.S. Many as- or will soon be available. Those states are Arizona, fuel diversification and increased rates for elec- sumptions that were Connecticut, Delaware, District of Columbia, tricity. made when the cur- Illinois, Maine, Maryland, Massachusetts, Regulators and utilities felt they had a solu- rent utility industry Michigan, New Hampshire, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island, Texas, tion which would address these issues simul- structure evolved in and Virginia. Clear colored states are not actively taneously. The solution was the construction the 1930s - not just for pursuing restructuring. Those states are Alabama, of large lignite and nuclear power plants, electricity but also Alaska, Colorado, Florida, Georgia, Hawaii, Idaho, which would take advantage of expected lower natural gas, tele- Indiana, Iowa, Kansas, Kentucky, Louisiana, Minnesota, Mississippi, Missouri, Nebraska, North generation costs (through economies of scale) phones and other Carolina, North Dakota, South Carolina, South for larger facilities. Between 1971 and 1988, al- public utility services Dakota, Tennessee, Utah, Vermont, Washington, most 15,000 megawatts of lignite and bitumi- - are being challenged Wisconsin, and Wyoming. A medium gray colored nous coal plants were built. In the late 1980s, by changes in tech- state signifies a delay in the restructuring process or the implementation of retail access. Those states two nuclear facilities were built: South Texas nologies and resulting are Arkansas, Montana, Nevada, New Mexico, Nuclear Project (HL&P) and the Comanche changes in industry Oklahoma, and West Virginia. California is the only Peak nuclear facility (TXU Electric). structure. In a nut- light gray shaded state because direct retail access In 1979, the Three Mile Island nuclear plant shell, markets moved has been suspended. in Pennsylvania suffered a serious accident ahead of public policy which caused public outcry for more stringent and we are in the pro- regulation of nuclear power. Construction cess of adjusting pub- costs began to increase along with increased lic policy to fit new re- O&M costs for all nuclear facilities. As con- alities. struction costs increased, utilities asked for and The most influential received rate increases to recover these costs change has been the as well as inflation-driven increases for oper- growing role for com- ating and maintenance. Consumer complaints petition in the deliv- led to even greater scrutiny of rate increases. ery of services. This

When nuclear plant construction was com- has been a general Restructuring Active pleted, some utilities proposed rate increases trend in the U.S. since Restructuring exceeding 50 percent. The PUCs examined airline and banking Restructuring Suspended Restructuring Not Active each request on a case-by-case basis, disallow- deregulation were ing some and approving others. Utility credit proposed in 1975 and ratings in some cases were downgraded and for the electric power industry it has been some came close to or declared bankruptcy, as marked by three characteristics. One is the in the case of El Paso Electric Company. By the impact of technology change. Improved de- early 1990s most of the ratemaking issues as- signs for gas-fired turbines and computer in- sociated with nuclear power were resolved. formation technologies that allow real-time However, also by the 1990s, growth in electric- management of systems and market transac- ity consumption in Texas had declined sharply, tions have had a tremendous impact on the ranging from one to three percent per year in electric power industry. The second character- contrast to the more than 10 percent per year istic is the introduction of entrepreneurial busi-

23 History

State Initiatives on nesses, often a consequence of technology manage competitive sales of gas and with third Electricity change, seeking to enter existing industries party marketing, it was a natural transition for Restructuring protected by regulation. These include the industry to also participate in building Arizona nonutility generators of electricity and power these skills for electric power. These shared Phase in customer marketers, and they are equivalent in effect to skills have led to a strong “convergence” be- choice between 1/99 start-up airlines, the array of electronic bank- tween the natural gas and electric power in- and 1/01. Recent ing services, long-distance and wireless service dustries. decision to reconsider retail competition. providers and independent marketers of natu- As for gas, the FERC has ordered that open ral gas. The third characteristic is the value- access be implemented for interstate transmis- California seeking behavior of customers, in particular sion and wholesale power transactions, which On 3/31/98 began those who purchase services in large enough directly affects the wholesale electricity mar- offering retail choice to all customers of the quantities to exert influence - large industrial ket (bulk sales for re-sale to retail customers). three largest utilities. and commercial enterprises. These character- Also as with natural gas, certain types of in- Stranded cost recovery istics – technology change, new entrants and formation must be made widely available with and related pricing consumer value - have been at work in every common standards for information platforms. issues forced some competitors to exit the industry affected by restructuring and re-regu- Finally, utilities must separate or “unbundle” market. Price spikes of lation in the U.S. their transmission and marketing functions, Summer 2000 led to the Analogies for restructuring the electric much like the interstate natural gas pipelines suspension of power industry in the U.S. include telephones have done, so that a competitive third party restructuring. and natural gas. In all three industries, the un- marketing industry can evolve and to ensure Connecticut derlying principle for historic change is that fair, nondiscriminatory access to transmission. Access to competitive of “open access.” Open access is not a new idea. It is up to the individual state legislatures to suppliers for 35 percent Contract carriage for natural gas pipelines was determine the extent to which these initiatives of consumers by 1/00 (with a ten percent rate debated when the 1935 U.S. Natural Gas Act should be extended beyond the FERC’s juris- reduction) and for all was passed (giving the FPC regulatory author- diction, to both large and small retail commer- consumers by 7/00. ity over interstate gas markets). With open ac- cial and industrial customers and individual Utilities to sell non- cess, telephone lines, natural gas pipelines and households, and to wrestle with the details of nuclear generation assets by 1/00 and electric wires become like toll highways. Any implementation. interests in nuclear service provider can access the highway as generation by 1/04 - may any customer. In this way, competition can Restructuring and Re-regulation in first State to require be fostered even though the grids - telephone Texas divestiture of nuclear assets. 5.5 percent lines, pipelines and electric wires - remain In the early 1990s, Texas began examining renewable portfolio managed as physical monopolies. The devel- restructuring the electric power industry. standard. opment of sophisticated information technolo- These have included measures designed to gies is a major factor in making open access a promote jobs and economic growth by ensur- Delaware A phase-in of retail reality. ing low cost electricity. Almost all electricity competition for large At the national level, electricity restructur- consumed within the state of Texas is gener- customers in Conectiv’s ing is progressing in similar fashion to natural ated in the state and because of this it has been service territory gas, the most immediate predecessor industry excluded from interstate commerce provisions. beginning on 10/1/99 and ending on 4/1/01; to experience transformation (although tele- This has allowed Texas to operate differently a residential rate cut of communications transformation continues to than other states. 7.5 percent for Conectiv evolve). Natural gas restructuring is also an The FERC has the authority to regulate the customers and a rate important factor in the drive to restructure the transmission of electricity only in interstate freeze for co-op customers. electric power industry. Open access and un- commerce. In 1992, the U.S. Energy Policy Act bundling for the natural gas industry has been or EPAct authorized creation of exempt whole- cont’d on page 25 a key element in development of gas-fired non- sale generators (EWGs). In 1995, Texas Senate utility power generation. Since the gas indus- Bill 373 (SB 373) was enacted to restructure the try already had experience with creation and wholesale electric industry and EWGs were au- implementation of information systems to thorized. The law required utilities to provide

24 History

unbundled transmission service on State Initiatives (cont’d) a non-discriminatory basis and establish an ISO. The PUCT authorized the ERCOT ISO, to be opera- District of Columbia Massachusetts Ohio Retail competition in Retail access and rate Retail choice on 1/1/ tional by July 1997. A Senate In- 2001. Eight electricity cuts of ten percent by 01 with five percent terim Committee on Electric Indus- suppliers and three 3/98 and another five residential rate try Restructuring was also formed aggregators certified, percent 18 months reductions and a rate in 1997. The Committee continu- but only two suppliers later. Divestiture of freeze for five years. and one aggregator generation assets 15 percent of eligible ously met with stakeholders to for- providing service. As encouraged. customers switched in mulate the restructuring bill for of 11/01, 3.1 percent of 2001. Texas. customers, Michigan In May 1999, Texas Senate Bill 7 representing more Retail choice for all Pennsylvania than 40 percent of customers by 1/02. One-third customer (SB 7) was passed to restructure the demand switched. Five percent rate choice by 1/1/99; electric industry allowing retail reduction, frozen at two-thirds by 1/1/00; competition. Base rates (excluding Illinois least until 12/31/03. final third by 1/1/01. fuel) have been frozen for three As of 1/1/01, all Rates for large C&I As of 7/1/01, 591,596 commercial and consumers capped customers were years, and a six percent reduction industrial customers through 2003, and participating in (price-to-beat) has been required eligible for retail small business electricity open for residential and small commer- access, and residential consumers’ rates markets, while in 4/ cial consumers for five years or customers eligible in capped through 2004. 01, 787,846 customers 5/02. 12 percent of were participating. until REPs affiliated with incum- ComEd’s eligible New Hampshire bent IOUs lose 40 percent of their customers - half of the Five percent rate Rhode Island consumers to competition. Utilities company’s load - reduction on 10/01/ In 7/97, the first state unbundled their integrated busi- switched. 2000 for residential to begin phase-in of customers. The full statewide retail nesses into three separate catego- Maine reduction of 15.5 wheeling (for ries - generation, transmission and Retail competition by percent. Residential industrial customers). distribution, and retail electric pro- 3/00. A market share rates capped for three Retail access for vider - and are limited to owning cap of 33 percent for years, and business residential consumers large IOUs in old rates for two years. by 7/98. or controlling no more than 20 per- service areas. PSNH to divest its cent of the installed generation ca- Divestiture of generation assets by Virginia pacity within ERCOT. SB 7 also re- generation assets by July 2001, and operate Creation of a regional quires an increase in renewable 3/00. 30 percent of as a T&D utility, transmission entity by generation from regulated by the PUC. 1/1/01; deregulation generation and 50 percent of new renewable energy of generation by 1/1/ capacity to be natural gas-fired. sources. New York 02; phase-in of Following a pilot test, retail compe- Retail choice to be consumer choice tition started on January 1, 2002 Maryland phased in beginning in between 1/1/02 and Three percent rate early 1998 on utility- 1/1/04; rates capped (more information on SB 7 and the reduction for by-utility basis. through 7/07 for those Texas Electric Choice program can residential consumers, who remain with the be found in Part 4 - Regulations and funding for low- New Jersey incumbent utility. Policies). income programs, All consumers to shop disclosure of fuel for their electric sources by electric supplier by 8/99; five suppliers, recovery of percent immediate rate stranded costs through discount, and ten a nonbypassable wires percent over the next For more and updated charge, and a three- three years. Recovery information: year phase-in for of utilities’ stranded www.eia.doe.gov/ costs through a wires competition beginning cneaf/electricity/ in 7/00 and completed charge paid by by 7/02. consumers. chg_str/regmap.html

25 26 Regulations & Policies

evelopment of federal elec- Regulation & tric power regulation and D policy has been a long, com- Overview plex process led by world events Policies: that changed perceptions about competitive pricing in the sale of and, consequently, the behavior of electricity for re-sale to retail users. energy markets. Of particular im- FERC has been implementing this A Closer Look portance was the disruption of mandate with Orders 888 and 889 Middle East oil supplies in the ‘70s in 1996 and Order 2000 in 1999. and the ensuing crisis atmosphere Regulation at our state level is In its early history, electricity was generated which led to sometimes conflicting fairly recent. In 1975 Texas became and used locally. A local utility sold nearly all federal initiatives. Results have in- the last state to establish a public cluded growth in electric power utility commission. Basic functions of the electricity it generated to customers generation by non-utility busi- of the PUCT have not changed within the same community. Therefore, state nesses and elimination of federal much, but the ways of implement- legislators gave regulatory authority to munici- price controls on natural gas well- ing its responsibilities have been head production. influenced by national trends - at- palities while rural electrical systems operated Federal actions in the ‘90s have tention to energy efficiency and under little or no direct state regulation. Al- built on these ‘70s changes. The conservation, market-based strat- though there was considerable federal regula- natural gas industry was restruc- egies and response to federal ini- tured to encourage competition in tiatives for wholesale market com- tion that developed, in Texas this localized interstate pipeline transmission, petition. The PUCT had to focus on view of regulation did not change until 1975. making it easier to use of natural retail competition as well since The major changes in electric power regula- gas for electric power. In the Energy Senate Bill 7, passed in 1999, re- Policy Act of 1992, Congress en- structured the electric power in- tion occurred in the 1930s, the 1970s and the couraged competition in wholesale dustry in Texas and allowed all early 1990s. In 1935, the Public Utility Hold- bulk power, meaning that power customers retail choice starting ing Company Act (PUHCA) strengthened state exchanges between marketers, utili- January 1, 2002. ties, non-utility generators and oth- regulation of electric power and caused the ers could take place, introducing break up of large holding companies that had come to dominate the market. In 1978, several federal energy bills were passed under the Na- nected, crossing state and even national tional Energy Act which included new obliga- boundaries. Over the last 20 years, federal tions for utilities. States were given primary regulations have moved toward allowing more responsibility for much of the implementation. non-utility companies to participate in the elec- In 1992, the Energy Policy Act (EPAct) and ac- tric power business. There remains some un- tions by federal agencies encouraged addi- certainty as to what roles federal and state tional competition in the wholesale electric regulators should play in controlling these power market. new, competitive markets. In Texas, the Public Utility Regulatory Act However, two issues are emerging. One is (PURA) was passed in 1975, creating the Pub- the extent to which regulators act as market lic Utility Commission of Texas (PUCT). The facilitators, and thus have responsibility for Commission had the primary responsibility of providing and overseeing appropriate rules for maintaining rates and services that were fair competitive activity. The second, more recent to consumers and utilities. The Commission’s issue is regulatory oversight of energy trad- initial responsibilities included establishing ing and marketing. These activities are essen- service areas, certifying generation and trans- tial to properly functioning natural gas and mission facilities and setting service standards. electric power markets. They help to link buy- The four primary functions of the Commission ers and sellers, to “clear” market imbalances have been rate-setting, certification of facilities, (moving energy from places where there is monitoring of regulated utilities for compli- excess supply and therefore lower prices to ance with Commission rules and assisting the locations where supplies are tight and prices resolution of consumer complaints against are higher) and to manage the price risk vola- utilities. tility inherent in natural gas and electric power Today, electric power systems are intercon- once they are subjected to competition and

27 Regulations & Policies

become commodities. However, energy trad- The Role of Federal Regulation of Non-Utility ing and marketing are complex, fast-moving Electric Power Participants Identified in Major activities. During 2001 and 2002, questions What began as a novelty in the 1880s was, Federal Legislation have arisen about the transparency associated by the 1920s, a necessity for modern society. with trading and marketing operations, cor- At the turn of the century, following Thomas Non-Utility porate reporting on these operations and the Edison’s blueprint, the electric power indus- Generator (NUG) adequacy of the market structures being de- try consolidated into large holding companies A general term encompassing all electricity signed by policy makers, regulators and indus- that controlled local utilities. Local utilities had generation that is not try to ensure that trading and marketing are already begun to buy competitors and neigh- solely owned by utili- undertaken without abuse. All of these issues boring companies. ties and generally not are posing new challenges for U.S. electric By 1927, there were 180 holding companies subject to rate regulation (includes IPPs, power industry restructuring efforts, and for operating in the U.S. The number of operating QFs and EWGs). U.S. energy policy in general. companies had decreased from more than 6,300 to less than 4,500. By 1932, the eight larg- Independent Power Producer (IPP) A non-utility power generating company that is not a qualifying History of Federal Regulation of the Electric Utility Industry facility (QF).

Qualifying Facility 1920 (QF) 1978 Federal Water Power Act A generator or small National Energy Act The Federal Power Commission (FPC) power producer that Five bills designed to respond to the crisis in world was established to oversee licensing meets ownership, op- oil markets. Other actions were included in the of hydroelectric power on federal erating and efficiency National Energy Plan. criteria established by lands. FPC later became the Federal Powerplant and Industrial FERC pursuant to Energy Regulatory Commission Fuel Use Act (PIFUA) (FERC) which regulates many activi- PURPA; and has filed Prohibited the use of natural gas in new electric ties of electric utilities. with FERC for QF sta- utility boilers and some industrial boiler tus. applications. Certain geographic areas were excluded due to air pollution concerns if coal and Exempt Wholesale oil use were increased. Generator (EWG) Public Utility Regulatory Policy Act (PURPA) A type of power gen- Established Qualifying Facilities (QF’s) as a new erator identified by the entrant to the electrical generation market. QF’s EPAct which, unlike 1935 could build smaller generation facilities free from QFs, is not required to Public Utility Holding Company Act (PUHCA) PUHCA regulation. Utilities were required to pur- meet PURPA’s cogen- Title I: Provided for the Securities & Exchange Commission chase electricity from QF’s at the utilities’ avoided eration or renewable to break up large holding companies which had become cost (the cost the utility would incur to generate fuels limitations. Utili- prevalent in the utility industry. the equivalent amount of electricity). ties are not required to Title II: Extended to the Federal Power Commission the Natural Gas Policy Act (NGPA) purchase power from authority to regulate wholesale power sales by electric utili- Initiated a process of phasing out federal controls EWGs. FERC is autho- ties. Utilities were allowed to charge prices based on the on wellhead prices of natural gas, which resulted rized to order utilities cost of operation while allowing for a reasonable return on in increased gas supplies and lower prices. The to provide transmis- their investment in capital. combination of PURPA and NGPA stimulated sion service to EWGs Federal Power Act growth in gas-fired non-utility power generation on a non-discrimina- This part of PUHCA allowed the Federal Power Commis- capacity. tory basis comparable sion to regulate transmission of electricity across state to their own use of boundaries (interstate commerce). It also allowed FPC to these facilities. FERC regulate wholesale trade of electricity (electricity sales des- orders 888/889 ad- tined for resale). dress this issue. Rural Electrification Act This act provided low interest loans (primarily to electricity cooperatives) to ensure that electricity was provided to rural farm areas. This led to the rapid growth of cooperatives that served rural areas.

28 Regulations & Policies

est holding companies controlled 73 percent the financial and corporate activities of hold- of the investor-owned electric power business. ing companies with utilities that operated in Electric Bond & Share, a subsidiary formed by more than one state. The Federal Power Com- General Electric, was the largest, owning elec- mission (now FERC) regulated rates, terms and tric systems across the United States, includ- conditions on the wholesale trade of electric- ing Texas, and in foreign countries as well. ity and transmission between states (interstate commerce). The wholesale market was mostly PUHCA - 1935 a small, localized activity that operated on a In 1935, Congress moved to limit the size of voluntary basis. PUHCA specifically excluded these holding companies through passage of power generation and local distribution from the Wheeler-Rayburn Public Utility Holding its regulation. Company Act (PUHCA). This act required utilities owned by a holding company to serve The 1970s: Energy Crisis and Policy an integrated, contiguous territory. Over the In 1973, Arab oil producers embargoed sales next ten years, PUHCA forced the realignment to consuming countries in retaliation for poli- of holding companies across the nation. For ex- cies pursued by the U.S. and other countries ample, Electric Bond & Share Company was toward the Middle East. The embargo gave required to divest of some of its utilities. OPEC, formed in 1960 when world oil prices PUHCA authorized the Securities and Ex- were low, effective control of world oil prices. change Commission (SEC) to closely regulate The U.S. plunged into a period of extreme un-

1999 FERC Order 2000 FERC’s third initiative to grid regionalization, Order 2000, calls for the voluntary creation of RTOs 1990 throughout the U.S. FERC wants to bring all Clean Air Act Amendments (CAAA) transmission systems owned by regulated IOUs under regional control in order to eliminate the This act seeks to reduce annual sulfur dioxide (SO2) emissions by 10 million tons by the year 2000 from remaining discriminatory practices, meet the the 1980 level and to reduce annual nitrous oxides increasing demands placed on transmission systems and achieve fully competitive wholesale power (NOX) emissions by 2 million tons by the year 2000 from the 1980 level. markets. If Order 2000 can be successfully implemented, the U.S. grid will transform from a system owned and controlled mostly by vertically integrated utilities to a system owned and/or controlled by a few unaffiliated RTOs.

1992 Energy Policy Act (EPAct) This act created a new class of generators called Exempt Whole- 1996 sale Generators (EWG’s) who could generate electricity and FERC Orders 888 and 889 sell it at market based rates free from PUHCA regulations. Utili- These rules issued by the Federal Energy Regulatory ties which owned transmission facilities are required to pro- Commission implemented the intent of the EPAct to vide services to EWG’s and other facilities on a comparable create a competitive, wholesale, bulk power market. basis to their own transmission access. Utilities are also required Utilities under FERC regulation must provide to provide information on the availability of transmission and nondiscriminatory open access for transmission to constraints on their system. Under EPAct, FERC allowed utili- third parties, functionally unbundle their ties to sell their electricity at market based rates if they opened transmission and marketing functions and create their transmission system up to competition (open access). information systems so that open access can be facilitated. Individual state legislatures and PUCs are responsible for open access at the retail level (sales for resale to ultimate consumers).

29 Regulations & Policies

certainty and discord with respect to energy removed in 1981. (thought to be no longer cheap or plentiful) PIFUA emerged out of widespread concern, and energy policy. Also during the 1970s, FPC following sharp natural gas curtailments in the regulation of gas prices led to perceptions of eastern U.S. in 1976, that there were real physi- inadequacy of gas supplies and to high prices cal shortages of natural gas. In fact, as noted in intrastate markets where FPC regulations above, federal control of wellhead prices for did not constrain prices. natural gas, which affected the price of gas in Federal actions, in par- the interstate market, was later found to be the ticular the five-bill Na- root cause of gas shortages in the 1970s. Be- For the first time since tional Energy Act that cause gas prices were artificially low in the 1935, non-utility power emerged from the Carter interstate market, but higher in the unregu- Administration’s National lated intrastate markets, there was no incen- generators were Energy Plan, emerged in tive to place gas into the interstate pipeline encouraged by federal response during the crisis system. In addition, because gas prices were atmosphere. The National held down by price controls at a time of rapid policy to produce and sell Energy Act included price rises in other fossil fuels, there was no electricity. PURPA PIFUA, PURPA and the incentive for producers to explore and drill for promoted this by NGPA, all described be- gas. PIFUA was an outcome of these policy dis- low. Taken together, these tortions and contributed greatly to the devel- requiring utilities to laws sent confusing and opment of coal and nuclear power generation purchase power from contradictory signals for capacity in the U.S. and Texas. natural gas and electricity, qualifying facilities (QFs). which were to have pro- PURPA - 1978 found impacts on the elec- The Public Utility Regulatory Policies Act Although PIFUA tric power industry and (PURPA) almost directly countered PIFUA in play a role in the eventual implementation. Under PURPA, regulated and prohibited use of natural restructuring of both in- non-regulated utilities were required to con- gas for power plants, dustries. Also as part of sider eleven different rate design standards to the National Energy Plan, determine if they were appropriate for imple- PURPA actually the Department of Energy mentation. These standards included such con- stimulated gas-fired Organization Act in 1977 cepts as time-of-day rates, cost-of-service pric- generation from non- created that agency and ing, interruptible rates, prohibition of declin- established the Federal ing block rates and lifeline rates. utility generators. Energy Regulatory Com- Two of the primary purposes of PURPA were mission to replace the Fed- (1) to encourage energy efficiency through ex- eral Power Commission created in the 1920 panded use of cogeneration and (2) to create a Water Power Act. market for electricity produced from renewable fuels and fuel wastes. PURPA stipulated PIFUA - 1978 that all utilities engaged in the distribution of The Powerplant and Industrial Fuel Use Act electricity were required to offer to purchase (PIFUA) of 1978, passed at the same time as electricity produced by certain qualifying co- PURPA, prohibited the use of natural gas in generation and small power production facili- new utility power plants (except in areas like ties that used renewable fuels. These facilities Los Angeles where increased use of coal or oil were called “QFs” - qualifying facilities. Utili- would make air pollution problems worse). ties had to offer to purchase electricity from Similar restrictions were placed on certain QFs at a price that reflected the avoided costs. large industrial boilers. The Act also prohib- These were costs the utilities would have in- ited use of natural gas in existing electric power curred if they had constructed new facilities plants starting in 1980, but this limitation was and generated the electricity themselves. QFs

30 Regulations & Policies

could use some of the electricity they produced demand, almost immediately appeared, de- to serve the electrical load of host industrial or pressing natural gas prices. In spite of claims commercial facilities, such as refineries, and to the contrary, the bubble persisted, lending sell the excess back to the utility, or sell their even stronger support to new thinking about total output to the local utility. QFs also typi- the natural gas resource base in the U.S. More cally produced or “cogenerated” steam, which recently, the faster depletion of gas reservoirs was sold to the host facility. QF owners were and an inability to add significant amounts to given exemptions to the PUHCA making it gas reserves despite increased drilling, com- possible for a large number of non-utility combined with higher demand mainly caused by panies to enter the electric generation business. new gas-fired power generation, have started The paradox of PURPA was that it helped to to raise concerns about the adequacy of gas re- stimulate growth in gas-fired power genera- source base. These new opinions about the tion, which utilities then purchased under con- natural gas resource base in the “Lower 48” – tract even as they were prohibited from using the contiguous states – combined with new gas as a boiler fuel in their own facilities. Natu- energy security concerns in general has trig- ral gas today accounts for most (more than 40 gered new interest in developing natural gas percent) of non-utility power generation in the supplies in Alaska and northern Canada and U.S. In Texas, 92 in importing increasing amounts of natural gas percent of our in the form of liquefied natural gas or LNG. Federal energy policies non-utility pro- today support greater duction was Federal Policy After the 1970s natural gas- What were the combined effects of the reliance on market fired in 2000. PIFUA, PURPA and NGPA along with other activities. They also elements of legislation enacted by Congress at NGPA - 1978 the height of the 1970s energy crises? Natural seek to encourage The Natural gas was removed from the domain of electric efficiency and Gas Policy Act utility boiler fuels but at the same time its use diversity in fuel (NGPA) was in- by non-utility generators (NUGs) was encour- tended to re- aged. Utilities were forced to add coal and sources and move the distor- nuclear capacity while cheaper capacity was responsiveness to tions associated being developed by NUGs. Policies were en- with federal acted on the premise that natural gas was environmental issues. control of well- scarce while at the same time federal price con- head natural gas trols, the source of the scarcity, were being dis- prices. The NGPA was the most contentious mantled. As changing market conditions, new of the National Energy Plan elements and, as policy initiatives and new thinking emerged a result, the most complex and cumbersome. regarding competitive markets for energy in Federal oversight of natural gas prices, already the U.S., the 1970s laws were altered or re- an arduous task, was made even more so by pealed: PIFUA was repealed in 1987, natural the many categories of gas pricing created in gas wellhead price decontrol under NGPA was the phase-out approach taken with the NGPA. accelerated and finalized in 1989 through the The bottom line, however, was that federal Wellhead Decontrol Act. While PURPA re- price controls would end in 1985. It did not mains on the books, it is being subsumed by take until 1985 for the effects of the NGPA to new initiatives around the country and in Con- be fully comprehended. A surge in exploration gress. and production activity in the U.S. as a conse- In the U.S. and other countries, exploration quence of phased out price controls revealed for oil spurred by the higher prices engineered that natural gas was indeed plentiful. A by OPEC production quotas revealed that pe- “bubble,” the excess of deliverable supply over troleum was abundant. As crude oil supplies

31 Regulations & Policies

surged into the early 1980s, world prices col- established the New Source Performance Stan- lapsed. Natural gas prices remained low rela- dards (NSPS) that directly affected new or tive to oil, supporting rapid growth in non-util- modified coal-fired utility boilers. The stan- ity power generation. The electric power in- dards were revised in 1979, but the most strin- dustry became one where the utilities held ex- gent revision came about with the Clean Air pensive capacity, built to ensure long-term fuel Act Amendments of 1990 (CAAA). The CAAA

diversity, that had been installed at consider- required a 10 million ton reduction in SO2 emis-

able financial risk; where non-utility genera- sions and a 2 million ton reduction in NOX from

tion (particularly from lower cost gas-fired 1980 levels. The reduction in SO2 was set to turbines) grew rapidly; and where fuel com- occur in two phases, one that began in 1995 petition in a low price environment increased and another that began in 2000. The CAAA also overall. Public policy attention became cen- created an innovative tradable emissions al-

tered on two issues, environmental protection lowance program that led to a market for SO2 and encouraging competition. emissions. The concept is that older utilities faced with higher marginal costs for additional

Clean Air Act Amendments - 1990 SO2 reductions could purchase their allow- Combustion of fossil fuels - coal, oil and ances in an open market from utilities (or natural gas - result in emissions of various sub- nonutility generators) that produce less than stances that can pose a variety of environmen- their allowed emissions. Older facilities that tal and health-related problems. The sub- are very expensive to retrofit could also be shut stances targeted most heavily in environmen- down, creating the opportunity for operators tal regulation are the emission gases from fuel to sell all of their allowances in the open mar-

combustion. Sulfur dioxide (SO2) and oxides ket. Consequently, vigorous activity in “emis-

of nitrogen (NOX) are precursors to acid rain sions trading” has resulted, enabling a more deposition because, efficient allocation of responsibility for pollu- under the right set of tion control. Utilities are the second largest conditions, they re- The CAAA also left utilities with a variety source of CO2 emissions in Texas. act with other of options for meeting environmental stan- chemicals in the at- dards. One is to use natural gas which yields mosphere to form lower emissions of targeted pollutants. Utili- While no regulations currently sulfuric acid and nities can also use lower sulfur coal, use blended tric acid, respec- coals or co-fire gas and coal. Utilities can use restrict CO2 emissions, the Clean Air tively. NO is also a different combustion technologies to reduce Act Amendments of 1990 require X major contributor to NOX or employ environmental equipment to monitoring and reporting. ground level ozone. reduce emissions before they are released into Carbon dioxide the atmosphere. The advantages for natural

(CO2) is colorless, odorless and nontoxic but gas under the CAAA coupled with the EPAct contributes to a “greenhouse effect” as it accu- provisions for non-utility generation and low mulates in the atmosphere and causes infra- natural gas prices meant that most new gen- red radiation reflected from the earth to be- eration capacity has come, and continues to come trapped. come, from NUG’s using natural gas turbines. With respect to combustion emissions, increasing concerns about air quality led to pas- EPAct - 1992 sage of the Clean Air Act in 1963 with substan- Like the National Energy Act in 1978, the tial amendments in 1970. (The 1970 amend- Energy Policy Act of 1992 (EPAct) was con- ments are commonly referred to as the Clean cerned with energy efficiency and availability. Air Act). In 1970 the Environmental Protec- Also like the 1970s, the EPAct emerged out of tion Agency (EPA) was empowered to set en- crisis, or perceived crisis, again associated with forceable air quality standards. In 1971 the EPA disruptions in Middle East oil supplies but this

32 Regulations & Policies

time within the context of the 1991 Gulf War power market. All utilities within the FERC’s stemming from Iraq’s invasion of Kuwait. The jurisdiction were required to open their wires push for an energy bill continued even after and provide nondiscriminatory access to all world crude oil prices fell swiftly after surg- third parties at comparable rates, terms and ing during the confrontation. The legislative conditions. They had to provide both network initiatives accompanied a U.S. Department of and point-to-point service. The FERC has a Energy study, National Energy Strategy (NES), reciprocity requirement that publicly owned which the DOE utilities and co-ops, which are outside of FERC was asked to pre- jurisdiction, and who take advantage of open For electricity, the pare by then access among the utilities that FERC regulates, EPAct represented an President Bush. must also provide comparable service. The historic re-thinking of As with the Na- FERC allowed recovery of stranded costs at- tional Energy Act, tributable to its rulemaking as long as they the electric utility the EPAct was were demonstrated to be legitimate and veri- industry and how it just as conten- fiable, with recovery obtained by charging ei- tiously debated. It ther an access charge or exit fees for bulk us- should be regulated. contained provi- ers that elect to leave a utility’s service. Impor- sions directed to- tantly, stranded costs in the wholesale market ward increasing U.S. energy options as well have not been nearly as large as the potential as language supporting more competitive en- stranded costs associated with retail access, an ergy markets. issue for state PUCs. For electricity, the EPAct represented an his- As noted in the previous sections Part 1 - toric rethinking of the electric utility industry Facts on Texas Electric Power and Part 2 - His- and how it should be regulated. It increased tory, under Orders 888/889 only transmission non-utility participation in electric power that and marketing must be functionally un- had started with the PURPA, and it reformed bundled and utilities must provide informa- the PUHCA to encourage a competitive whole- tion systems for access to facilitate third party sale market for electricity. access. The EPAct created a new category of independent power producers called exempt FERC Order 2000 wholesale generators (EWGs). These genera- FERC’s third initiative to grid regionalization tors were not required to meet cogeneration is Order 2000 issued in December 1999, which or renewable fuels limitations in PURPA. Utili- called for the voluntary creation of regional ties were not required to purchase electricity transmission organizations (RTOs) throughout from EWGs. However, utilities were required the U.S. FERC wants to bring all of the trans- to provide transmission access to EWGs for mission systems under regional control in or- wholesaling their power. In effect, EPAct paved der to eliminate the remaining discriminatory the way for FERC’s actions on open access for practices, meet the increasing demands placed wholesale transmission and, indeed, EPAct on the transmission system, and achieve fully encouraged the FERC to move forward with competitive wholesale power markets. If Order open access for electricity (as well as to con- 2000 can be successfully implemented, the tinue to fine tune the open access environment transmission system will transform from a created for natural gas on interstate pipelines loosely interconnected system owned and con- in 1992). trolled mostly by vertically integrated utilities to a system owned and/or controlled by a few FERC Orders 888/889 - 1996 unaffiliated RTOs or “transcos” (independent With Orders 888 and 889, the FERC imple- for profit or not-for-profit transmission compa- mented the intent of Congress implicit in the nies) with decisions to add (or remove) trans- EPAct, to create a competitive, wholesale, bulk mission capacity made through those entities.

33 Regulations & Policies

According to Order 2000, an RTO must be vania-New Jersey-Maryland) ISO and Mid- independent from market participants; have west ISO (or MISO) announced they would appropriate scope and regional configuration; merge their operations in early 2002, the Ten- possess operational authority for all transmis- nessee Valley Authority (TVA), the nation’s sion facilities under its control; and have ex- biggest public power producer, agreed to conclusive authority to maintain short-term reli- nect its 30,000 megawatts of generation with a ability (The FERC has been less specific with network that spans 20 Midwest and Southwest regard to transcos). states and one Canadian province. Southeast To achieve these goals, an RTO must admin- utilities Southern Co. and Entergy Corp. also ister its own tariff; employ a transmission pric- agreed to join the grid formed by the combi- ing system that will promote efficient use and nation of the MISO and Southwest Power Pool expansion of transmission and generation fa- Inc. (SPP). Together, the four groups own or cilities; create market mechanisms to manage operate 150,000 miles of transmission lines and congestion; monitor markets to identify design provide power for an area covering 1 million flaws and market power; operate a single Open square miles. Nevertheless, these deals do not Access Same-Time Information System (OA- necessarily imply that merged areas or opera- SIS); and serve as a supplier of last resort for tions will be handled in the same manner as all ancillary services required in Order 888 and intended in FERC’s RTO proposal. subsequent orders among other functions. As the debate regarding RTOs progressed, During late summer, 2001, the FERC put the FERC issued on July 31, 2002 a “notice of forth a more assertive view, suggesting that it proposed rulemaking” (or NOPR) on standard would encourage formation of only four RTOs: market design (SMD). The intent is to harmo- Northeast, Southeast, Midwest and West. In ex- nize rules across the RTOs in order to create a plaining its vision with regard to the four-RTO seamless, larger national grid and market. The model, the FERC often mentioned ERCOT as FERC also hopes that the SMD proposal will a separate regional grid. However, many op- help solve numerous issues and conflicts that tions are available to ERCOT with regard to have arisen from electric power restructuring possible combinations that could be made with efforts. However, the SMD proposal is very surrounding RTOs as well as remaining inde- large, complex and contentious. As of this pendent. Subsequent to the FERC’s proposal edition, it is not clear whether, and in what for four RTOs, administrative hearings and form, FERC’s initiative will be implemented. mediations have attempted to address concerns across the numerous stakeholders in all National Energy Policy Since EPAct of the affected areas, including consumer During 2000 and early 2001, a crisis atmo- groups and representatives. As these meetings sphere once again prevailed in the U.S. This have progressed, local concerns as well as is- was triggered by several events. sues associated with the formation of the RTOs (like transmission asset ownership, RTO struc- • After a severe collapse, worldwide oil prices ture and “governance” and congestion pricing) surged, a result of efforts by OPEC to regain have resulted in a view that a larger number control of the global oil market. Prices have of RTOs may initially exist as various ap- since moderated, after peaking at $35 per proaches for managing the many issues are barrel in nominal terms, a level not seen experimented with. since the Persian Gulf War. FERC is expected to reach its final recom- • Surging demand for natural gas, in large part mendations regarding the formation of RTOs due to the increased use of natural gas for in 2002. Meanwhile, some utilities and exist- electric power generation, and rising oil ing ISOs are already forming associations to prices led to prices for natural gas never be- coordinate the operations of their transmission fore seen in the U.S. Natural gas prices systems. For example, after the PJM (Pennsyl- peaked well above $10 per thousand cubic

34 Regulations & Policies

feet, in nominal terms, at Henry Hub in traders and generators of electricity, have South Louisiana, the main trading point for added new uncertainties. natural gas in North America. This meant prices in excess of $40 per thousand cubic To address new U.S. energy security concerns, feet at “citygates” like Chicago, where natu- encourage development of diverse energy sup- ral gas from interstate pipelines enters local plies and infrastructure, deal with environmen- gas utility distribution systems. tal and conservation initiatives and attempt to • With both oil and natural gas prices rapidly provide some direction for emerging competi- rising, with accumulated demand for elec- tion in electric power, the White House unveiled tric power in the U.S. at an all time high – in Spring 2001 a National Energy Policy (NEP) the result of an unprecedented eight-year document. Congressional action on the NEP economic boom, with problems surfacing in since that time has resulted in legislation pro- many electric power restructuring programs posed in the House and Senate that must be undertaken by the states (in particular in reconciled through House-Senate conference if California) and with fundamental problems any new, final energy legislation is to emerge. revealed in electric power transmission As of this edition of the Guide, no final legisla- (critical capacity shortages and severe con- tion has been achieved. The FERC is continu- gestion), electric power prices in the young ing its investigations into electricity market fail- national wholesale market reached levels ure in California and reviewing problems in that resulted in political responses from both other states and regions. The myriad of investi- states and the U.S. Congress. At one point, gations and inquiries on energy trading activi- electric power trading at the California-Or- ties have raised questions about whether and egon border reached $10,000 per how oversight should be conducted for energy megawatthour. The situation in California trading operations and practices. Among the was acute, with chronic shortages, rolling states, Texas is regarded as a key barometer for blackouts and a high degree of conflict re- electricity restructuring. garding causes, appropriate actions and federal and state policy and regulatory responsibilities and responses. • Terrorist attacks on September 11, 2001 that destroyed the World Trade Center in New York City and a part of the U.S. Department of Defense’s Pentagon headquarters in Washington, D.C. lent new urgency and new attention to U.S. energy security. These concerns have become exacerbated as the “war on terrorism” became complicated by ten- sions surrounding a possible war in Iraq. The business failure in December 2001 of Enron Corp., long one of the most innovative and aggressive advocates for competitive energy markets and wholesale energy trading in the U.S. and worldwide, cast a new light on emerging electric power structures in the U.S. Enron’s collapse has had repercussions throughout the natural gas and electric power industries as FERC, SEC and Con- gressional and state investigations into Enron’s activities, and those of other energy

35 Regulations & Policies

The use of regulation was established as the Regulation of appropriate means for utility operations and development. The Commission was given the responsibility for assuring rates, operations, Electric Power in and services that are just and reasonable to consumers and utilities. In 1986, the agency’s ju- Texas risdiction over water and sewer utilities was Policy changes at the federal level have had transferred to the Texas Natural Resource Con- a tremendous impact on the Texas electric servation Commission, which is now called the power industry since its inception. To better Texas Commission on Environmental Quality understand the current system of electric util- (TCEQ). The PUCT now regulates the electric ity regulation in Texas, and the impact of fed- utilities, electric cooperatives (only wholesale eral initiatives over the years, a brief descrip- transmission), river authorities and 58 local tion of how the Texas system has evolved is telephone companies. Municipal utilities are helpful. not governed by the PUCT, but are subject to As described in the beginning of this chap- service area certification by the Commission. ter, electric utilities developed to serve a par- The Commission’s initial duties focused on ticular business and grew to serve a town or establishing each utility’s service area, certifi- community. A utility sold all the electricity it cation of facilities and setting just and reason- generated to a local market. As a result, in the able service standards. The Commission was early 1900s the state legislature enacted stat- also charged with holding hearings on pro- utes that granted the authority to regulate rates posed utility rate changes, monitoring the and services to local municipalities. Over the management and affairs of public utilities, years, utilities expanded their operations to monitoring compliance with PURA and provide service to many agency orders and rules, and investigating municipalities and devel- public utility mergers and sales of property. In 1975, the Public Utility oped integrated systems The Commission’s function and responsibili- Regulatory Act (PURA) was such that electricity gener- ties have undergone several legislative changes passed by the Texas legislature. ated at one point on that sys- since 1975. In 1983, the 68th Legislature made tem might be consumed at a several changes to the PURA including requir- PURA forms the basic distant location on the sys- ing electric utilities to file a notice of intent with legislative authority for the tem. The concept of local the PUCT before building new generating regulation did not change plants and to prove to the agency that they had PUC of Texas. until 1975. And so, prior to considered other reasonable resource alterna- 1975, municipalities regu- tives. In addition, the Legislature encouraged lated electric rates and services within their utilities to use alternative fuels, required the municipal boundaries while residents of rural Commission to develop a long-term statewide areas had relatively little regulation. energy forecast to be used in certification proceedings for generating plants, and required Public Utility Regulatory Act (PURA) the agency to conduct management audits of 1975 each utility under its jurisdiction at least once In 1975, the 64th Texas Legislature passed the every 10 years. Public Utility Regulatory Act (PURA) which created the Public Utility Commission of Texas Legislative Changes in 1995 (PUCT). The Commission was authorized to In 1995, the Texas legislature made several regulate the electric, telephone, water and changes to PURA that would help develop a sewer services in Texas. The legislature found competitive wholesale electric market. that these utilities operated as monopolies and Changes to PURA included exemption of were not subject to normal competitive forces. power marketers and EWGs from the

36 Regulations & Policies

Commission’s rate regulation, partial rate de- encing the Texas PUC is the general trend to- regulation of electric cooperatives distribution, ward more efficient government operations. deregulation of wholesale rates of certain river Also in 1995, the Texas legislature made sev- authorities, development of an integrated re- eral changes to PURA that are particularly source planning process, flexible pricing for noteworthy and were in response to the EPAct. wholesale and retail sales, open nondiscrimi- These include the following. natory wholesale transmission service, and Senate Bill 373 (SB 373) was enacted to re- repeal of the requirement to conduct the man- structure the wholesale electric industry and agement audit every 10 years. authorize EWGs. Power marketers are busi- Although the basic activities of the PUCT did nesses that sell but do not generate or trans- not alter much during its 20 years of existence, mit electricity. These businesses and EWGs how the PUCT had gone about its responsibili- were not defined as utilities in PURA and were ties had been heavily influenced by national authorized in SB 373 to sell only wholesale trends and strategies adopted and shared electric power in Texas. Power marketers and among all PUCs in the U.S. One of these trends EWGs could be affiliated with a public utility had been the emergence of integrated resource and could sell power to that utility. However, planning (IRP) as a strategy for improving util- they were required to register with the Com- ity planning and reducing costs to customers. mission and comply with reporting require- IRP or least-cost IRP, as it was sometimes called, ments. was a process in which PUCs were heavily in- SB 373 also required utilities to provide un- volved in decision making both before and af- bundled transmission service on a non-dis- ter the fact. Utilities were required to make criminatory basis and establish an ISO. The “prudent” investments and prudence reviews PUCT authorized the ERCOT ISO to be opera- were often used as an after-the-fact mechanism tional by July 1997. Utilities that own or oper- for regulatory oversight. IRP evolved across the ate transmission facilities had to provide states in response to the large costs associated wholesale transmission access at rates, terms, with new generation capacity additions, espe- and conditions that were comparable to their cially for nuclear facilities. own use of their system. The PUCT could re- Similarly, demand side management (DSM) quire utilities (including municipal utilities) to evolved in response to utility investments and provide access to transmission services to an- concern about energy efficiency and conserva- other utility, a QF, an EWG or power marketer. tion. DSM was generally a component of IRP Except for river authorities, wholesale rates and encouraged utilities to consider gains from were not deregulated, but a utility could re- conservation and efficiency improvements quest wholesale tariffs that were less than ap- before undertaking new investments. Both IRP proved rates, but more than the utility’s mar- and DSM had been controversial, generating ginal cost approved by the regulatory author- extensive debate about whether they created ity (either the PUCT or city government). The real benefits in excess of the costs associated PUCT had interpreted PURA such that the with these policies. They had, nevertheless, costs for these discounted rates could not be affected how all PUCs undertook their basic charged to other customers. activities. The PUCT had an IRP process and a state- Another area influencing PUC operations in wide plan, as required in PURA. Starting in the U.S. had been the notion of incentive rate 1996, utilities were required to file an IRP ev- making. Interest in developing rate structures ery three years. If a utility needed to acquire that were more market oriented and less dis- new electricity sources, a competitive bidding torting to the behavior of regulated utilities as process was required that included different well as their customers had grown in the U.S. sources of electricity. The utility itself or an af- PUCs in every state have been looking at new filiate could also bid, but an independent bid ways of setting rates. Finally, a last area influ- evaluator was required by the PUCT’s substan-

37 Regulations & Policies

ERCOT Competitive Market Participants with retail tariffs or contracts that were less than their approved rates. These rates had to be greater than the utility’s marginal cost, as approved by their regulatory authority (either the PUCT or city government). Legislative Activity in 1997 and SB 7 In 1997, the Texas legislature considered a number of bills that would have restructured the electric power industry in Texas to allow entities other than local utilities to sell electricity in Source: ERCOT, The Market Guide, February 22, 2001 a retail market. One bill supported by the Texas tive rules based on PURA. Nongenerating utili- governor, the PUCT and investor owned utilities had to follow this same process if they ties was introduced late in the legislative ses- wished to increase their supply more than 25 sion but the session adjourned prior to action percent or acquire more than 70 megawatts of on the bill. new power from a supplier. There were also Following adjournment, the Senate Interim requirements for consumer participation in de- Committee on Electric Utility Restructuring veloping the utility’s IRP. was created to study issues and report back to River authorities and electric cooperatives the Senate before the next legislative session were deregulated to some extent in 1995. Cer- which began in January 1999. The seven-mem- tain river authorities had wholesale sales to ber committee conducted hearings around the any purchaser within the authority’s service state to gather information and better under- area. River authorities could also create a cor- stand concerns of citizens and interested par- poration to sell electricity to any wholesale pur- ties. The committee also visited other states in chaser in the state and the corporation would the U.S. as well as other countries that were not be treated as a public utility by PURA. Elec- experimenting with electricity restructuring tric cooperatives providing retail electricity at and more competitive markets. The Texas distribution voltages could become exempt House State Affairs committee also studied re- from rate regulation. This required a majority structuring issues and held hearings. vote by voting members. Flexible retail rates By the close of the 1997 session, several is- could then be adopted (without Commission sues emerged that affected the final formula- approval) which were as low as the lowest tion of Senate Bill 7 (SB 7), including the fol- marginal costs of any of the cooperative’s lowing: wholesale suppliers. • Cost savings to consumers. There were con- A utility could offer flexible retail pricing, siderable concerns about whether small

38 Regulations & Policies

(mainly residential) consumers would be Project (40 cities) is saving $4.3 million per able to benefit immediately with retail com- year. petition. Most of these concerns stemmed • Role of co-ops and munis. Many small co- from the allocation of stranded costs and im- ops and munis were concerned about the vi- plications of stranded cost recovery on elec- ability of their businesses in more competi- tricity prices. It was feared that without ad- tive electricity markets. While these organi- equate, broad-based competition, cost sav- zations would benefit from the flexibility ings from restructuring might not be and savings that could be achieved as they achieved to offset stranded cost charges. Ac- looked for competitive suppliers of electric- cordingly, SB 7 allowed for all net, verifiable, ity, co-ops and munis that were next to large nonmitigated stranded costs to be recovered IOUs and that were not able to provide the through a competition transition charge lowest cost transmission and distribution (CTC). Stranded costs, however, did not turn service would face competitive pressure. Al- out to be a problem. In fact, ”stranded ben- though, with unbundling as stipulated in SB efits” were created in 2000 and 2001 due to 7, competition from regulated wires busi- high natural gas prices leading to high nesses would not have been a major prob- power prices and sustained value of coal and lem, munis and co-ops were given the op- nuclear facilities – which many had expected tion to opt out of retail choice. Thus far, no to decline in worth in a competitive market. muni has chosen to offer retail competition, The ability for residential users to fully ben- and only two co-ops expressed interest but efit from retail choice remains a concern. have not formally offered retail competition • Property tax losses to counties, municipali- yet. ties and school districts. In some parts of the • Market power of IOUs. Some policy mak- state, there were (and still are) concerns that ers, regulators and independent providers savings or other benefits (such as economic (generators and marketers) were concerned growth) from retail competition will not ex- that the larger IOUs would be able to exert ceed lost property tax revenues as a result too much market power with retail compe- of write downs on utility assets (stranded tition. This concern was addressed in SB 7 costs). The most sensitive arena for debate by requiring unbundling of generation, T&D was the structure for public school funding and retail activities by the state’s IOUs and, in Texas, which many thought might need more importantly, by limiting the affiliated to be revisited if economic benefits from elec- retail electric provider (REP) to a six percent tricity restructuring were to be achieved. discount for five years or until the affiliated Accordingly, SB 7 included mechanisms for REP loses 40 percent of its customers. reimbursement through the System Benefit • Management and function of the ERCOT Fund. So far, however, school districts have ISO. Throughout the U.S., as well as in Texas, benefited through their new buying power there was (and still is) considerable debate achieved through aggregation as provided about the FERC’s ISO (and now RTO) con- in SB 7. For example, as of this writing, En- cept. The major arguments are: whether ISOs ergy for Schools Aggregation (142 school dis- and RTOs should be structured as for-profit tricts) saved $39.3 million and Texas Asso- or non-profit entities; how they should be ciation of School Boards (180 school districts) governed and whether industry stakehold- saved $30 million per year. Cities and local ers will have too much influence; whether governments are also benefiting. For ex- for-profit “transcos” (companies that pro- ample, the City of Houston is saving $32 vide open access transmission) are better for million, the Public Power Pool (46 local gov- market facilitation; whether the ERCOT ISO ernments) is saving $36 million, the Cities or RTO will perform reliably in a fully com- Aggregation Project (71 cities) is saving $10 petitive market; and what the ERCOT ISO/ million, and the South Texas Aggregation RTO structure should be (for example,

39 Regulations & Policies

whether there should be multiple control ar- tribution and retail electric provider (REP), us- eas). The decision was made to structure ing separate or affiliated companies. Utilities ERCOT as a non-profit ISO with a stake- are limited to owning and controlling not more holder board representing all market partici- than 20 percent of installed generation capac- pants, operating as a single control area, and ity within ERCOT. Retail competition started responsible for physical reliability of the sys- on January 1, 2002. Rates were frozen for three tem (see Part 2 for details on ERCOT). years, and a six percent reduction from this fro- • Increased transmission access to ERCOT. zen rate was required for residential and small This is a contentious, commercial consumers. This will remain the long-term issue. Mak- “price-to-beat” for five years or until the REP Highlights of SB 7 and Texas Choice Program. ing ERCOT less of an affiliated with the incumbent utility loses 40 “island” in the national percent of its consumers to competition. Senate Bill 7 grid would have sub- The bill requires a reduction of nitrogen ox- • Utilities must unbundle into three separate categories: generation, regulated transmis- stantial impacts on ex- ides (NOX) and sulfur dioxide (SO2) emissions sion and distribution and retail electric pro- isting industry stake- from “grandfathered” power plants over a vider, using separate or affiliated companies. holders, especially the two-year period. The law also requires an in- • Utilities are limited to owning and control- IOUs and large NUGs. crease in renewable generation of 2,000 mega- ling not more than 20 percent of installed generation capacity within ERCOT. Given the potential for watts by 2009 and 50 percent of new capacity • Generators are required to reduce their ni- increased integration to be natural gas-fired. trogen oxide and sulfur dioxide emissions of North American A pilot program open to customers in the from “grandfathered” power plants over a electric power markets, state’s IOU service territories was set to begin two-year period. • Generators must more than triple the however, increased retail competition by June 1, 2001. Enrollment amount of power generated from renewable transmission access began in February 2001. A high level of inter- resources such as wind by January 1, 2009. into and out of ERCOT est in participating in the retail choice pilot pro- • ERCOT is defined as the ISO, responsible is probably inevitable – gram by nonresidential customers required for coordinating the actions of market participants and ensuring system reliability. as market participants most of the IOUs to conduct lotteries to choose • Municipals and cooperatives are not af- seek to take advantage the five percent of their customers who would fected by the law, unless they choose to open of larger regional mar- be allowed to choose their electricity supplier. their territories to competition. kets and connections. The residential participants were selected on Texas Choice Program How much transmis- a first-come, first-serve basis. However, the • Retail competition started on January 1, sion capacity will be re- official opening of the pilot program was de- 2002. quired, where that ca- layed twice (from the original date of June 1 to • A six percent reduction from 1999 rates is pacity is to be located, July 31) due to computer system problems ex- mandated for residential and small commercial consumers (<1 MW). This will remain at what cost for devel- perienced by the ERCOT ISO, which is in the “price-to-beat” until 2005 or until the af- opment and how the charge of recording customer switches from ex- filiated REP loses 40 percent of its consum- cost for new transmis- isting utilities to new retail providers. ers to competition. sion capacity is to be al- No new retail provider offered service in ar- • Companies are allowed to adjust their rates twice a year due to fluctuations in the price located across the mar- eas served by Southwestern Electric Power Co. of natural gas. ketplace remain key is- and Entergy Gulf States during the pilot pro- • As of July 2002, more than 40 companies are sues. gram and, subsequently, no customers have re- certified as REPs; 12 REPs are actively pro- After the lengthy in- quested service by an alternative supplier. In viding service to residential customers and 24 REPS are actively providing service to vestigation period, SB 2001, legislation delayed retail choice in the non-residential customers across Texas. 7 was passed in May area covered by the Southwest Power Pool in • As of July 2002, almost 100 companies are 1999. As discussed ear- the Texas Panhandle until 2007. The PUCT also certified as aggregators; 28 are actively pro- lier, utilities must un- accepted a settlement to delay implementation viding service to residential customers and 46 are actively providing service to non-resi- bundle into three sepa- of retail access in East Texas. These delays will dential customers. Others are self-serving rate categories: gen- affect customers of Southwestern Electric entities for associations, restaurant chains, eration, regulated Power Co. in Northeast Texas, a few custom- churches and so on. transmission and dis- ers of Southwestern Public Service Co. in the

40 Regulations & Policies

Panhandle and customers of Entergy within bers are not very large, especially considering the Southeastern Electric Reliability Council. that the switch statistics include customers Reasons cited include the lack of regional who may have switched more than once. transmission organizations (RTOs), no retail CenterPoint (mostly Houston) has the largest electric suppliers and wholesale electricity percentage of residential customers served by markets in these areas that are not yet com- non-affiliated REPs, with six percent. CPL has petitive. seen about 11 percent of its small commercial It is early in the competitive era and the customers switch to a non-affiliated REP. ERCOT region is blessed with comfortable re- However, when it comes to large customers serve margins. As a result, the competitive (with peak demand of one megawatts or market in Texas has not experienced major larger) that are not eligible for PTB, the switch problems as many feared after the California rate is more than 80 percent in all territories. crisis. However, delays with the start of the Overall, 40 to 50 percent of the load seem to pilot program, ERCOT’s difficulties with han- have switched in ERCOT. dling the switching data, withdrawal of REPs Meanwhile, improvements in ERCOT’s com- such as Shell and NewPower, news of poten- puter systems and in communications between tial gaming in congested zones, changes in the ERCOT and other market participants’ systems ERCOT board, concerns regarding Provider of increased the success rate for customer switch- Last Resort, or POLR, rules (See Part 5 - Major ing from 50 percent in early February to more Issues) and the like have been frustrating for than 90 percent in early June. Remaining prob- the market participants. lems include lost switches, rejected switches, Nevertheless, as of November 2002, 48 com- switches done outside ERCOT protocol panies are certified as REPs by the PUCT. Ac- timelines, and usage data transfers, which cording to the Texas Choice web site, 12 REPs leads to billing problems. are actively providing service to residential When price-to-beat (PTB) is compared with customers and 23 REPs are actively providing December 31, 2001 rates, the annual potential service to non-residential customers across savings to residential customers is estimated Texas. Also, as of November 2002, more than to be about $1 billion. Since some retail offers 130 companies are registered as aggregators are below PTB, savings are likely to be higher. with the PUCT; 32 are offering service to resi- In addition, when savings to school districts, dential customers and 50 are offering service city governments and commercial and indus- to non-residential customers. Others are self- trial (C&I) customers are considered, total sav- serving entities for associations, restaurant ings are estimated in billions. chains, churches and so on. C&I customers switch actively to new retail Not all of these companies are active in all providers, most often through energy service parts of the ERCOT region. Currently, depend- contracts that offer lower prices with associ- ing on the location, residential customers have ated incentives for energy efficiency and con- three to nine REPs and six to 14 products from servation. On the residential side, technical is- which to choose. Customers in most populated sues continue to delay switching and REP se- urban locations such as Houston and the Dal- lections by new move-ins, frustrating new las-Ft. Worth area have more choices. For ex- players in the market. Also, the PUCT contin- ample, according to PUCT data, in Reliant ues to examine broad and important market (now CenterPoint) and TXU (now Oncor) ter- issues such as transmission congestion, credit ritories there are nine REPs offering up to ten risk of REPs, generation adequacy (see Part 5 - different products. Major Issues), POLR rules, lack of competition As of September 2002, about 456,000 custom- in non-ERCOT areas and consumer protection. ers had requested a retail switch. Given that there are more than nine million customers in Basic PUCT Activities Before SB 7 ERCOT (eight million residential), these num- While numerous changes were made to the

41 Regulations & Policies

PURA, the four basic activities of the PUCT owned utilities, electric cooperatives and river did not change substantially between 1975 and authorities. City governments had the respon- 1995. These four basic activities include certi- sibility for rate setting inside city limits. These fication, rate-setting, monitoring regulated cases, however, were usually filed with both utilities for compliance with statutes and Com- city government and the PUCT and cities gen- mission rules, orders and service standards erally utilize the PUCT process. Any appeals and assisting consumers in resolving com- of city rates were consolidated into a single plaints against regulated utilities. PUCT proceeding. The PUCT also reviewed Before a regulated utility could provide ser- appeals of municipal utility rates where cus- vice to an area or construct new facilities (gen- tomers were served outside of the city limits. eration or transmission), it needed to obtain a The PUCT set rates by determining a utility’s certificate of convenience and necessity or revenue requirements and rate design. Rev- CCN from the PUCT (the Texas Constitution enue requirements were the amount required prohibits non-exclusive franchises). Prior to to cover reasonable and necessary operating 1996, two hearings were required, one for a expenses plus any new investment while pro- notice of intent (NOI) and a second for the viding an opportunity for the utility to earn a CCN. The hearings would identify the options reasonable return (profit) on the utility’s capi- the utility had considered for meeting the tal investments. In its determination, the PUCT area’s electrical needs. The action would need needed to decide what was allowed to be in- to be in compliance with the utility’s long cluded in a utility’s rate base - the capital as- range energy forecast for its service area. The sets and expenditures incurred by utilities. Es- NOI process applied only to generating facili- tablishing what was to be included in the rate ties but it was repealed in 1995 with the enact- base was actually one of the most difficult as- ment of the Integrated Resource Planning (IRP) pects of regulation in any state. In setting rates, provisions. In 1996, utilities started to include the PUCT considered management quality, new facilities in their IRP. In the case of a trans- operational efficiency, and conservation and mission line, the PUCT is required to take ac- demand-side management activities. The rate tion within one year. Other actions or improve- design included the ways that revenue requirements have no time limit. ments were spread among the various types The PUCT was responsible for setting elec- of customers. tricity rates outside of city limits for investor- The PUCT monitored regulated utilities to ensure that they com- plied with legislative re- Comparison of PUCT Activities Before and After Senate Bill 7 quirements and Com- Before After mission policies, rules, orders and service stan- Certification IOUs needed CCNs for genera- CCNs are now required for new dards. In addition, the tion as well as T&D assets. generation units and new transmis- PUCT monitored utility sion lines (consistent with ERCOT system assessment). earnings and conducted management audits of Rate-setting Responsible for setting electricity Responsible for setting rates for the utilities. rates for IOUs. T&D services. The PUCT helped Monitoring Monitored activities of IOUs. Monitors market activities of a with consumer com- variety of market participants. plaints against regu- Assisting Customers Resolution of complaints regard- Same plus educating the public lated utilities. The con- ing service quality, bill payments, about retail choice. sumer affairs office re- etc. sponded to inquiries Overall Fostering wholesale competition. Fostering wholesale and retail and complaints from the competition. general public. In addi-

42 Regulations & Policies

tion, the office assisted consumers in resolv- SB 7 also repealed PURA Chapter 34, which ing specific problems they might have experi- required the Commission to implement IRP enced with regulated electric utilities. programs. This repeal is generally well received by the market participants as many be- Basic PUCT Activities After SB 7 lieve that SB 7 allows the market to determine As a result of all of the changes brought resource planning and continues to encourage about by SB 7, the work of the PUCT is chang- renewables and DSM services as intended ing. As competition emerges, the large rate originally by the IRP programs. On the trans- cases that consumed the agency in the past are mission side, the ERCOT ISO evaluates the sys- giving way to more sharply focused proceed- tem and puts out reports about the need for ings aimed at protecting competitive markets new facilities. T&D utilities that are willing to and Texas customers. invest in new facilities will have to show that In late 1999 and early 2000, the Commission their plans are consistent with ERCOT’s assess- adopted rules on service reliability, distributed ment. power generation, utility codes of conduct, re- SB 7 also requires the PUCT to develop a newable energy, and the requirements for un- consumer education program to inform con- bundling utility operations. Beyond 2002, the sumers, including low-income and non-En- PUCT will continue to regulate rates but only glish-speaking consumers, about changes in for transmission and distribution service as the the provision of electric service and about the generation side is separated from the wires customer choice pilot program. The four-year business. The Commission will continue to en- education campaign, beginning in fiscal year force rules on quality of service, customer pro- 2001, will be designed to provide customers tection, market power and reliability. The with the information necessary to make in- PUCT will also continue regulating utilities in formed decisions relating to the source and areas of Texas where competition has not yet type of electric services available. begun.

43 44 Major Issues

any of the issues facing the Major Electric electric power industry are M present in day-to-day op- Overview erations and are taking on added Power Issues importance as the industry becomes both in our overall quality of life more competitive. Some of these and in the performance of the include consumer issues, environ- economy. However, although en- mental concerns, economic develop- ergy is important, it is just one fac- ment, financing, integrating non- tor among many that influences the Consumer Issues utility generation into the Texas and pace and direction of economic de- All of us are electricity consumers and, as U.S. energy mix, stranded costs, fi- velopment. It may be desirable for such, are familiar with issues that directly af- nancial performance, and the regu- energy markets to be as accessible fect us. For most people this comes down to latory process. and competitive as other markets In Texas we have many different that provide inputs to economic the cost (our monthly bills) and reliability (do customers, and each group of cus- development. we get our electricity all or most of the time). tomers has different needs and re- Environmental protection is in- However, other consumer issues arise as quirements. Smaller customers, like creasingly important in the U.S., households, need electricity to meet and the electric power industry is changes occur in the electric power arena. basic requirements of lighting, heat- affected by our preferences for These issues have been described as large ver- ing and cooling. We are accustomed cleaner air, higher efficiency use of sus small consumers; or industrial versus resi- to receiving our electricity on de- energy and other values. An array mand, but our bills tend to be some- of options exists for use of cleaner dential consumers. what higher than for the U.S. as a fuels to generate electricity, espe- whole because of the amount of cially renewable energy sources electricity we use for summer cool- like solar and wind, for new tech- Small Consumers and Residential ing. Low income and rural custom- nologies that continue to reduce the Customers ers have particular sets of problems generation cost of electricity and There are many more residential consumers in terms of service and ability to pay. for more flexible electricity systems than any other customer class - more than eight Large users, businesses and facto- that can serve a variety of customer ries, always want lower energy needs and encourage conservation. million Texas households. In 2000, these cus- prices to be more competitive. Large Finally, introducing competition tomers purchased 37 percent of Texas electric- commercial and industrial custom- into the electric power industry has ity and paid 45 percent of the total electric bill. ers had more supply options than posed a host of issues for both utili- households until retail choice was ties and non-utility generators. Fi- Customers with special needs and problems introduced with SB 7 starting Janu- nancial implications, transmission include low-income households, renters and ary 1, 2002. Now, we can all choose access and pricing and the much multifamily households, and the elderly. These our electricity suppliers. discussed “stranded cost” problem Energy, in general, is vital to eco- are some of the issues being con- groups have received special consideration by nomic development in the U.S. and sidered. utility regulators and electric utilities in the Texas. Electricity has played a role form of rate setting, weatherization programs and special programs that allow other customers to contribute to the cost for those less able Reliability to pay. Reliability is also a major concern for all customers. Although outages are familiar to cus- The Monthly Bill tomers, their expectations are that such out- Small consumers cost utilities more per cus- ages will be quickly remedied, unless there are tomer to serve. In Texas, the primary issue for unusual circumstances such as major storms these customers is their total electric bill, not or natural disasters. the rate. This has to do with the customer’s control over their own expenses. If bills in- Obligation to Serve crease quickly for reasons beyond their con- An important issue affecting the small control, residential customers are dissatisfied. sumer more than other customer groups is the Residential consumers, and many small busi- “obligation to serve” issue. As part of the nesses, prefer predictable costs that fluctuate “regulatory compact” between utilities and the within a certain range and that change rela- state of Texas, utilities had an obligation to tively little over time. serve all consumers on demand. This meant having the capability to bring electricity to

45 Major Issues

2000 Electric Bills in Texas current and fu- costs. In addition, income levels in rental ture customers households typically are lower than the aver- Compared with U.S. averages as it is needed. age household. Percent Higher than U.S. Avg. After SB 7, elec- 40.0% tricity supply is Consumer Protection 31.9% 30.0% competitive. Although all electricity customers need con- While the wires sumer protection provisions, small consumers 20.0% 17.9% 12.6% companies are are more likely than large industrial or com-

10.0% still regulated mercial electricity customers to lack the re- and obligated to sources or capabilities to adequately protect 0.0% provide service themselves. Over the years, consumer advo- Residential Commercial Industrial Other Total in their territo- cate groups have emerged in all of the states -10.0% -2.3% ries, customers to intervene in the regulatory process on be- -20.0% can be first half of small customers. -21.8% dropped to a -30.0% provider of last Rural Issues Percent Lower than U.S. Avg. Source: U.S. EIA resort (POLR) if Texas is a big state, with huge swaths of ru- they fail to pay ral areas that are remote from electric power their bills. If they facilities that serve large cities and towns. For fail to pay POLR bills, their service can be ter- this reason, it was important to consider the minated. There are provisions for protecting effect of restructuring on the rural areas of the those who cannot afford to pay. A consider- state. The Rural Electrification Act of 1935 in ation for consumers is how expensive power effect pioneered the concept of universal ser- provided by POLRs might be. vice - the concept that electricity was a fundamental commodity to which all citizens should Social Concerns have access. Today, even though some coop- In Texas, as elsewhere in the U.S., the almost eratives are large and serve suburban metro- universal availability of electricity for every- politan areas, most rural customers still receive one has been built into our regulatory system. their services from cooperative systems. Co- For low-income households, electric utility operatives face similar risks as utilities in a programs have been created to help assure that competitive environment, but since they op- electricity is available at as low a cost as pos- erate as non-profit entities they may face ad- sible. ditional challenges from a changing electric- Of the 20.8 million people in Texas in 2000, ity market. In recent years, financial resources roughly 16 percent lived in poverty, an esti- including federal funds for co-ops started to mated 825,000 households that use electricity. decline. As discussed in Part 4, co-ops were This population and those living on fixed in- allowed to opt in retail choice and, thus far, comes are less able to afford increases in elec- only two co-ops are expected to participate in tricity costs. Under the System Benefit Fund retail competition. provision of SB 7, about 500,000 low income customers are receiving discounts. Large Electricity Consumers Cost and economic competitiveness are key Renters and Rental Housing issues for Texas industrial and large commer- Of the eight million residential customers, cial customers that consume large amounts of almost 37 percent are renters. Most rental units electricity. These customers have considerable are now individually metered, but renter leverage in the electricity market. They are rela- households have little control over the choice tively easy to serve, their loads are more pre- of appliances or energy savings improvements dictable and they sometimes have the option that could be used to better manage electricity of generating their own electricity (e.g., cogen-

46 Major Issues

eration). Large customers also have strong in- cost advantage over centives to increase efficiency and reduce their many of our interna- Sample of Worldwide Electricity Prices consumption of electric power. With retail tional trading part- for Industrial Users choice, most C&I service contracts include ners (see table of in- Year U.S. $/kWh these benefits. ternational electricity Japan 1999 0.143 prices for industry), Germany 1999 0.057 Cost Issues but global competi- Spain 1999 0.056 Texas industrial customers enjoy a cost ad- tive forces are driving OECD 1998 0.063 1999 vantage of roughly five percent over the aver- other countries to Turkey 0.079 OECD Europe 1998 0.065 age U.S. industrial customer (4.42¢ per kWh pursue policies that Netherlands 1999 0.061 versus 4.64¢ in 2000). However, electricity costs lower industrial elec- United Kingdom 1999 0.064 are a significant factor for many Texas indus- tricity costs. France 1998 0.047 tries and they believe that lower rates may be United States 2000 0.046 possible. As a result, competition and access Reliability Australia 1997 0.056 to alternative sources of electricity are impor- With the advent of Texas 2000 0.044 tant issues for these customers. and increasing reli- Sweden 1997 0.034 ance on electronic Canada 1994 0.038 1999 Economic Competitiveness controls and informa- Mexico 0.042 Texas industrial and commercial activities tion systems, the re- Note: OECD = Organization for Economic Coop- must compete in an international marketplace. liability of electric eration and Development Opportunities for lowering electricity costs can power plays a larger Source: International Energy Agency improve the competitive status of Texas indus- role. Even small out- tries, as well as attract new industries to the ages (less than a sec- state. While rates are lower in Texas than other ond) can disrupt industry processes, adding large states, it is overall costs that are impor- to the cost of production and operation. tant. Texas and U.S. industries enjoy a distinct .0

Growth of U.S. Electricity Generation, Population and the Economy 1959 to 2000 1959 Level = 1.0

Population

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Texas is a factor in economic performance, but Self Generation not the only one. Electricity costs are impor- Large electricity users sometimes have the tant, but so are the costs for land, labor, mate- option of generating their own electricity. This rials, transportation and other factors. Employ- potential affects the relationship between in- ment in electric utility services, the most eas- dustry and utilities, especially when self-gen- ily obtained measure of jobs linked to the elec- erators want to sell their excess power to the tric power industry, is only about one-half per- utilities. Industrial cogeneration, the majority cent of the state total nonfarm employment - of self-generation, provides fuel efficiencies per quite small. However, we also have jobs tied kWh that are about double conventional gen- to companies that provide equipment, materi- eration. Also, investment costs per kWh for coals and services to the electric power industry, generation are usually one-half to three-fourths and jobs in electric power services outside of what they are for conventional electricity gen- the utility companies themselves. Texas has a eration. growing number of businesses that indepen- dently market, broker and manage the provi- Economic Development sion of electricity to industrial and commer- How important is electricity to economic de- cial customers all over the U.S. Finally, Texas velopment in the U.S.? The answer is “very,” electric utility companies and independent but in a surprising way. Electricity growth is generators and marketers are engaged in de- driven both by household growth and growth veloping and managing electric power all over in the overall economy, as measured by Gross the world, although these activities are being Domestic Product (GDP). cut back due to current financial problems of Growth in the electric power industry in the the industry and problems in some regions of U.S. is influenced both directly and indirectly the world, like Latin America. by population growth and general economic The link between electricity and economic performance. The direct effects come from de- development can play a role within the state mand for electricity as households are added of Texas as cities and regions compete for busi- or we add new appliances or businesses and ness and job growth. Electricity costs vary industries expand. The indirect effects come widely, and are influenced by a number of fac- from the contribution that electricity makes to tors. For example, electricity from nuclear gen- our life-styles and quality of life and technol- eration or electricity service to remote locations ogy development. can result in higher costs. When it comes to At the same time, electricity has been an es- where businesses or people locate within sential input for industrial and economic per- Texas, however, electricity cost is just one of formance in the U.S., although there are other many factors that are evaluated. things that are equally or more important. Much of the improvements in productivity is Environmental and Energy Policy due to increased automation and computeriza- Issues tion, which depend on reliable supply of elec- Environmental concerns are a prominent tricity. When both household and economic part of every industry today and electric power growth is taken together, they account for most is no exception. Coal and lignite are taken from if not all of the net growth in the U.S. electric underground and strip mines. Natural gas generation capacity. wells are drilled to provide fuel to generate Texas accounts for almost eight percent of electricity. Power plants that use fossil fuels the U.S. GDP and about eight percent of total emit pollutants that are subject to state and U.S. population. The relationships between federal regulations. Transmission lines are electricity growth, population growth and gen- spread across the state, affecting human and eral economic performance are similar to the natural environments. These activities are nation as a whole. Like the U.S., electricity in monitored and regulated, but because of the

48 Major Issues

size and scope of the industry there will con- early 2002. These ratios represent a significant tinue to be concerns about electric power and change since 1997 when gas accounted for 61 its environmental effects. percent and coal for 30 percent of capacity. Coal dominated the amount of electricity actually Fuel Choices => environmental generated - 49 percent versus 37 percent for Power plants use various fuels that are natural gas. With the anticipation of restruc- linked to problems like acid rain, urban ozone, turing, much more gas-fired generation capac- global warming and waste disposal. Each fuel ity has been built since 1998-99, eventually has environmental advantages and disadvan- leading gas to be the dominant fuel both for tages. Coal, one of the lowest priced fuels, re- capacity and generation. quires considerable treatment of emissions to meet environmental standards and its use trig- Air Pollution => environmental gers concerns about global warming. Natural Acid rain, urban ozone, particulate emis- gas, a more expensive fuel, burns cleaner than sions and global warming are the four primary coal but can contribute to ozone formation in air pollution concerns for the electric power urban areas. Wind and solar power which re- industry (also see Part 4, Regulations and Poli- quire relatively high capital costs, produce no cies, for our discussion of air pollution issues direct emissions and have virtually no fuel associated with electricity in the 1990 Clean Air cost, but they can be unsightly or impact wild- Act Amendments) although emissions of sub- life. Nuclear power plants emit no combustion stances such as mercury especially from coal- gases but have raised the issue of long-term fired plants will likely receive disposal of spent fuel and are a focus for secu- more attention. The EPA Emis- rity post September 11. sions Trend Report shows that Coal and lignite were the fuels used to gen- for 1995, Texas electric power erate about 37 percent of Texas electricity in generation accounted for 43

2000. Almost 52 percent was from natural gas percent of sulfur dioxide (SO2) with about ten percent from nuclear power. emissions (associated with acid Less than one percent was from hydroelectric rain) and 21 percent of oxides power or renewable fuels (wind, solar, or bio- of nitrogen (NOX) emissions (as- mass). Some predictions call for electricity from sociated with ozone formation). coal to increase over the next 20 years. Texas However, with natural gas in- uses more coal for electricity than any other creasing its share in power gen- state in the U.S. with the possible exception of eration and implementation of

Ohio. However, 27 states generate a greater acid rain programs, overall SO2 share of their electric power from burning coal. emissions from power genera- In 1971, natural gas dominated the state’s tion declined about 20 percent between 1997 electricity production, generating 99 percent and 2001. Texas also reduced its NOX emissions of all electricity. But in response to natural gas by 16 percent between 1990 and 2000. price volatility related to a perceived natural Another emission from combustion of fossil gas shortage, public policy mandated that utili- fuels is carbon dioxide (CO2). Although not ties eliminate the use of natural gas even in officially considered a pollutant, there are con- existing plants and use alternative fuel sources cerns that it may contribute to global warm- for future generating needs. Utilities in Texas ing. In 1999, CO2 emissions from utilities ac- in the 1970s began to diversify their fuel counted for 33 percent of Texas CO2 emissions sources using coal and nuclear power (see Part (U.S. EPA website yosemite.epa.gov/oar/ 4, Regulations and Policies). g l o b a l w a r m i n g . n s f / c o n t e n t / It is important to note that natural gas domi- emissionsStateEnergyCO2Inventories.html). nates generating capability among Texas utili- Power plants contribute relatively little to ties - 71 percent versus 20 percent for coal in emissions of volatile organic compounds

49 Major Issues

(VOCs - associated with ozone formation and with power generation. mainly produced by vehicles and industrial Particulates: Although power plants contrib- operations), carbon monoxide, nitrous oxide ute relatively little to this problem, particulates (a greenhouse gas and oxide of nitrogen), or are the subject of increasing concern for the methane (a greenhouse gas). Because of effec- impacts on human health. Particulates are as-

tive control devices, power plants contribute sociated with other pollutants, such as SO2 relatively little to the problem of particulates. from power plants, and are likely to be subject Acid Rain: Acid rain refers to precipitation to future air pollution control strategies. The which has a high acidity level that poses a risk EPA has recently adopted new standards for

to human and ecosystem health. SO2 emissions fine particulates (PM2.5). Monitoring equip- from burning coal (or any fuel containing sul- ment has been installed to determine if Texas fur) reacts with water vapor and becomes an locations are in violation of these standards. acid. The acids may mix with water, fall to the earth, or combine with dust particles. These Transmission Lines and Stations => environmental may damage plants, marine life, or human Development of new transmission lines, ex- health, including increasing mortality rates of pansion of existing lines, and construction of

humans. SO2 is subject to federal and state air new distribution facilities is often met with quality standards. public resistance. Environmental concerns are Urban Ozone: Power plants produce a sub- part of the reason given for this resistance.

stantial portion of NOX as a product of com- Transmission lines may require intrusion on bustion. These oxides react with VOCs in the natural areas, be visible from scenic areas or presence of sunlight to produce ozone. Ozone intrude on residential neighborhoods. They has various nonfatal effects on human health may destroy or disrupt wildlife habitat. Solar

and some types of vegetation. NOX and VOC and wind power facilities supported by envi- emissions are subject to federal and state air ronmental groups have faced similar public re- quality standards. actions. Global Warming: Background or natural There has been ongoing public concern greenhouse gases keep the earth’s temperature about the health effects of high voltage power within a certain range by capturing part of the lines. The National Research Council (1996) has sun’s heating effect within the earth’s atmo- found that there is “no conclusive and consis- sphere. Some fear that enhanced global warm- tent evidence” that electromagnetic fields

ing will result from increased levels of CO2 and cause any human disease or harmful health other greenhouse gases in the atmosphere, effects. Despite these findings, this issue will leading to increased temperatures, changes in likely continue to be an environmental and

precipitation and other harmful effects. CO2 health concern for the general public.

and NO2 are two greenhouse gases produced by fossil fuel (coal, natural gas, and petroleum) Related Energy Policy Issues => power plants. environmental+energy Natural gas has much higher hydrogen con- Environmental concerns are also linked to tent than coal. As a result, it has about 60 per- energy issues such as the use of alternative cent of the carbon content of coal and, as such, fuels to generate electricity and energy effi-

produces less CO2. According to the EPA, in ciency. Alternative fuels are defined in differ- 2000, coal-fired units produced almost twice ent ways, but are often simply alternatives to

as much CO2 as non-coal units in Texas despite conventional fuels. There are usually environ- the fact that gas-fired power accounted for 52 mental or energy-related benefits associated percent and coal-fired power for only 37 per- with alternative fuels. For example, natural gas

cent of total generation. Nationwide, CO2 emis- used as a transportation fuel is considered an sions from coal-fired units account for nearly alternative that can be cleaner than conven-

80 percent of total CO2 emissions associated tional gasoline, but natural gas for power gen-

50 Major Issues

eration is not considered to be an alternative Gulf Coast and areas in the Trans-Pecos region fuel (it is considered by many to be a cleaner of west Texas. With the requirement of renew- fuel, however). able power in SB 7, there has been increased Alternatives for power generation include interest in wind power. Today, there are more hydroelectric power, solar electricity, wind en- than 1,000 megawatts of wind power capacity ergy, biomass energy and geothermal power. in Texas as compared to about 50 megawatts The fuels for each of these are available at little in 1997, and more capacity is expected. or no cost; they are often renewable fuels; and A key consideration for wind and solar re- they may produce little if any direct emissions. source development is that the areas of best Proponents argue that the environmental costs potential in the state are far from urban popu- of conventional electric power are not reflected lations. Transmission access is one of the main the cost of electricity produced. If these costs jor impediments to developing these fuel (externalities) were included, alternative fuel sources for widespread use. electricity could be very competitive (see Texas Biomass energy is produced from conversion Renewable Energy Resource Assessment, July of plant and animal matter to heat or to a 1995, Texas Sustainable Energy Development chemical fuel. It encompasses the widest range Council). of technologies including converting garbage Hydroelectric power is produced as water to methane, burning materials to produce heat moves from a higher to lower level and pushes to generate electricity and fermenting agricul- a turbine. Texas has about 471 megawatts of tural wastes to produce ethanol. Biomass re- installed hydroelectric capacity which pro- sources from urban waste are more available duced about 0.4 percent of Texas electricity in populated areas of Texas, while agricultural- generation in 2000. Considerable opposition based fuels are strongly associated with rain- exists to developing more hydro power, not fall distribution as well as agricultural produc- only in Texas but throughout the U.S. tion. Many biomass energy approaches rely on Solar electric power can be produced renewable fuels. Because of the differences in through various technologies. Costs have de- these technologies, it is difficult to generalize clined substantially and in some applications, on the environmental issues associated with solar electricity is economically competitive. them. Texas has good solar resources available to a Geothermal power relies on the heat energy large portion of the state; the best resources, in the earth’s interior. Texas has a variety of however, are geothermal resources, mostly located in the not near major eastern half of the state and some along the populated ar- western portion of the Rio Grande. Most re- eas. Solar pan- sources could not be used for electricity pro- els and large duction. However, heat from these resources solar arrays could be used as a substitute for heat from an face environ- electrical source. The economics and environmental and mental effects of such applications limit their community op- viability. position similar While the benefits of cleaner, alternative en- to placement of ergy sources for electricity are appealing, they other large do pose operational considerations for the electric power management of electricity services. For one facilities. thing, they are “intermittent” power sources Wind energy technology is available today (the sun does not shine at night, the wind is at competitive prices (advanced wind tur- variable), and peak availability of alternative bines). Wind resources are fairly site specific. energy sources does not always coincide with The best areas include the Texas Panhandle, peak demand. Options like solar and wind

51 Major Issues

cannot provide consistent power production, however, has fallen significantly to about four in contrast to the coal and nuclear facilities that cents per kWh within the last decade and costs are usually used for “base load” (the units op- are expected to drop another 20 to 40 percent erate continuously providing a consistent over the next ten years. power base). Many solar technologies tend to What many renewable technologies (and be implemented in conjunction with natural some small scale technologies like natural gas gas turbines. In addition, both solar and wind microturbines and fuel cells) do offer are op- require large amounts of acreage when de- tions for users in remote locations or localized ployed for large-scale power generation and solutions for energy demand. An isolated com- extensive use of materials (steel and other munity can distribute electricity to its residents products) that require considerable energy to “off-grid” (meaning that there does not have produce. to be a connection to a transmission system). Technological advances are such that some Or, excess power from location-specific gen- success in integrating wind-generated electric- eration, including cogeneration, can be distrib- ity has been achieved. Likewise, hydro facili- uted “on grid.” Distributed and off-grid gen- ties provide a readily available power reserve eration bear significant implications for the fu- (interrupted only by periods of extreme ture. drought). Solar poses more of a problem, because some form of storage is required. Scien- Energy Efficiency and Conservation => tists are experimenting with a variety of stor- environmental+energy age solutions, like letting daytime heat accu- Energy efficiency and conservation are two mulate in fluids like molten salt so that tur- sides of the same environmental and energy bines can continue to operate after sunset. policy coin. The impacts of the environmental However, it will be some time before the eco- issues discussed above are all reduced by sim- nomics of utility-scale renewable technologies ply using less electricity. New electricity de- become favorable. mand is met through energy savings rather The operating cost than the provision of more electrical power. Hypothetical Energy Savings from of new natural gas Energy efficiency usually applies to techno- Efficiency Improvements turbines has logical improvements that reduce electricity Year 2010 dropped by half or needs, such as more efficient electric motors, more during the low energy lighting and automatic sensors that Gigawatts $billions/yr past decade, so that turn lights off in unoccupied spaces, improved electricity from insulation and high efficiency refrigeration. Energy Savings in Gigawatts most renewable en- Cogeneration can provide an energy efficient ergy technologies is means to sequentially produce both power and usually 150 to 400 useful thermal energy (steam/chilled water) percent more ex- from a single fuel. Technology improvements pensive than natu- have substantially increased fuel efficiency and ral gas-fired tur- lowered capital costs during the last decade. Customer Savings in bines with the Reduced energy use also includes changes $Billions range dependent in operations and behavior that result in less upon the age of gas electricity consumption. These include strate- turbine and the gies such as shifting industrial and commer- This analysis shows an estimate of the price of natural gas cial processes to off peak hours, or using elec- potential for saving 36 Gigawatts of (Comprehensive Re- tric power at night to chill water that would electric energy through demand reduction. view of the Northwest then be used to cool buildings during the day, Energy System, De- offsetting other demands for electricity. Source: Texas Energy for A New Century, Texas Sustainable Energy Development Council, August cember 1996). The Utilities have implemented energy efficiency 1995 cost of wind power, and conservation efforts through programs

52 Major Issues

called demand-side management (DSM). Like of new demand side technologies with new other DSM programs around the U.S., utilities businesses to provide these technologies in the in Texas helped customers to reduce electric- marketplace. Strategies like marginal pricing, ity use by providing energy audits and infor- which force customers to pay more of what it mation on energy saving appliances and hab- actually costs to provide electricity, may be its (“bill stuffers”). Other initiatives used in more effective for rationing electricity use. some states include offering rebates to custom- REPs in locations where retail choice is allowed ers who install energy saving appliances, com- provide an array of energy efficiency services, pensating utilities that reduce electricity load including inspection of the site for potential through efficiency programs by allowing them energy savings, installation of energy efficient to earn a higher rate of return or encouraging equipment and insulation, monitoring of en- customers to reduce peak-period demand (i.e., ergy usage, and so on. If retail choice becomes installing devices such as trips on swimming more widely adopted, REPs may provide more pool filter motors that reduce a customer’s load of these services to a wider range of custom- during daily peaks in demand). ers, including residential users. Utility spending on DSM programs in the With the growing attention to efficiency and U.S. increased from about $900 million in 1989 conservation, new businesses have emerged to almost $3 billion in the mid-1990s. In con- and existing ones have grown creating numer- trast, DSM spending in Texas decreased dur- ous opportunities. These businesses include ing the 1990s (Senate Interim Committee on Elec- everything from companies that research, de- tric Utility Restructuring, 1998). Some estimates velop and manufacture energy saving devices are that increased efficiency in Texas could re- (like lighting and building materials, auto- place all projected increases in electricity de- matic/remote thermostat controls, advanced mand in the residential and commercial sec- real-time meters, storage devices, etc.) to those tors, and that efficiency could offset 43 percent that provide independent audits and informa- of total projected energy demand. These esti- tion services. REPs can definitely benefit from mates are probably high, given that not all sav- commercialization of these technologies and ings may be technically or economically are actively pursuing some in Texas. Thus, achievable. energy efficiency can generate economic ben- The drive to encourage efficient use of elec- efits in a competitive environment. tricity has had a powerful impact not only in the U.S. but worldwide. Historically, the most Financing and Operations active use of DSM applied to utility operations To generate over $233 billion in annual rev- has been in California, the Northwest and enues from U.S. electricity sales and nearly $21 Northeast. However, with market restructur- billion in Texas alone has required big invest- ing and retail competition, utility DSM efforts ments. Likewise, policies to make the electric have largely been phased out. Nevertheless, power industry more competitive have big fi- SB 7 has an energy efficiency provision that nancial and operational impacts on these in- requires each utility to provide incentives suf- vestments. ficient for REPs to acquire additional cost-effective energy efficiency equipment equivalent Electricity Investments and Technology to at least ten percent of the utility’s annual Transmission and distribution costs have growth in demand. been most heavily impacted over the years by Many economists argue that if costs and ben- inflation (which affects the cost of labor and efits are correctly measured, electric utilities materials), interest rates (which affects the may be spending much more on efficiency pro- costs for utilities to borrow money), dealing grams than the value of benefits obtained. In- with environmental concerns (costs associated deed, one of the main arguments for electric- with environmental studies and mitigation) ity restructuring has been the encouragement and other factors. In contrast, the costs associ-

53 Major Issues

ated with generation have generally declined and power industry decisions. If, as expected, due to technology improvements, including ERCOT becomes increasingly linked to sur- those for alternative electric energy sources, rounding portions of the U.S. grid, FERC ac- and lower costs for conventional fuels. tions will grow in importance to the Texas The impact of technology innovations has marketplace. had a significant impact on generation costs. Improvements in natural gas turbine design Non-Utility Generation have made gas much more competitive with In Part 4 - Regulations and Policies, a revo- coal. New turbines are essentially jet engines lution in the U.S. electric power industry was that use a pressurized mixture of gas and air described, fostered by the PURPA and later the to spin the turbine. New “combined-cycle” tur- EPAct. Non-utility generation has played a sig- bines take excess heat generated from the gas nificant role in reducing costs of technologies turbine and use it to power a conventional for natural gas, solar and wind generation. steam turbine. This combination has pushed However, the process of integrating non-util- turbine efficiencies beyond 50 percent, and ity capacity has posed a significant challenge continued improvements are expected in com- to utilities and PUCs. Under PURPA, which ing years. New turbine designs are relatively encouraged the growth of non-utility genera- cheap, modular and can be brought on-line tors, non-utility generators that meet defined quickly. Gas derived from coal or biomass can conditions must be classified as “qualifying also be used to drive combined-cycle turbines. facilities” (QFs). Power purchases from QFs Turbines using higher pressures and efficiency were based on the cost that utilities would gains in performance are improving rapidly. avoid in not building new generation capac- Because of the development of turbine tech- ity. The complex issues of making this system nologies and improvements in alternative en- work have been evident in Texas and the rest ergy technologies (mainly in solar panel and of the nation. wind turbine design), the costs for electricity generation from natural gas (so long as fuel Shift to Competitive Bidding cost do not rise appreciably) and alternative Under PURPA, utilities had an obligation to fuels are on a downward trend, while flexibil- buy power from QFs (if capacity was needed ity and ease of installation are on an upward and the price was lower than the utilities’ trend. Where investments of billions of dollars avoided cost). This made it possible for a large were a matter of course for nuclear and coal number of non-utility companies to enter the facilities, it is likely that the financial require- electric generation business as owners of QFs. ments of the electric power industry in the fu- The regulations governing QF procurement in ture, including Texas, will be much different. a number of states forced utilities to buy too It is clear that for the electric utilities, especially much QF capacity at too high a price. In re- those that have invested heavily in coal and sponse to this problem, many states shifted nuclear facilities, the advent of cheaper, more from the administrative determination of flexible turbine design and generation alterna- avoided cost-based prices, at which utilities tives means that competitive pressure every- had to buy all QF power that was offered (if where in the electric power industry is likely capacity was needed), to competitive bidding to increase. programs in which utilities estimate their capacity needs and then put these needs out for The Challenge of Integrating competitive bids. As QFs’ business expanded, As noted previously, because ERCOT is a industries and interest groups argued that this separated grid, much of the Texas electric process should be opened to all potential elec- power industry has not been subject to regu- tricity suppliers, not just QFs. They argued that lation by the FERC. But FERC actions on a utilities’ most effective role was as portfolio number of issues have impacted both PUCT managers for retail customers (principally resi-

54 Major Issues

dential and small commercial). Within this role, ing on their host utility as a backup. utilities would examine all sources of genera- The wholesale market in Texas developed at tion - QFs, non-QF independent power pro- a rapid pace since 1995. Significant participa- ducers (IPPs), DSM (conservation), third-party tion by new entrants and the opportunity for utility suppliers and utility-owned generation. future entry helped establish a healthy whole- They would then choose the most cost-effec- sale market, which is expected to increase the tive power mix. However, after SB 7 un- chances for success of the retail competition bundled old utilities into separate generation, initiated by SB 7. T&D and retail entities, existing PURPA contracts are transferred to either affiliated PGCs Emergence of Coordination Market or REPs. U.S. utilities, including those in Texas, have routinely engaged in hourly energy exchanges, Use of Antitrust Laws using low cost electricity from a generator in QFs were covered by PURPA, but IPPs’ sales one control area that might otherwise have or sales by utilities with excess capacity were come from a more costly generator. Over time, subject to FERC regulation at the wholesale the range of products available in the coordi- level and outside of ERCOT. The ratemaking nation markets has also expanded. Longer du- principles were consistent with the regulation ration contractual arrangements emerged and of a legal monopoly franchise and prudent in- vertically integrated utilities came to rely on vestment standards, but incompatible with the medium term capacity and thereby defer new QFs’ contracts or for IPPs’ speculative market generation construction. These longer term entry. capacity and energy contracts were signifi- Some wholesale customers complained cantly different from the very short term coor- about being captive to regulated tariffs of the dination arrangements from which they local utility. They wanted the option of acquir- emerged. This coordination market grew during bulk power from other utilities. In any ing the 1970s and 1980s in response to grow- event, municipal distribution companies re- ing regional differences in marginal operating quired access to the utility’s transmission grid costs and supply/demand balances. A major to “wheel” generation to the distribution sys- reason is that FERC did not apply rigid cost of tem and to integrate dispersed generating fa- service formulas to regulate these rates (see cilities. page 59 for a description of cost of service At the time PURPA was enacted, utilities ratemaking). were not required to provide transmission network access. FERC could order “wheeling” FERC’s Role Integrating Non-Utility Generation only if it did not affect competitive relation- In 1988, FERC began to reconsider its pric- ships. Wholesale customers turned to antitrust ing regulations in an effort to encourage entry laws to get access. Municipal utilities used the of IPPs (not QFs) into the electricity sector and nuclear power licensing process to open up to encourage utilities with excess capacity to transmission systems on reasonable and non- sell it to third parties under long term con- discriminatory terms and conditions. Munici- tracts. As a result, IPPs and unregulated util- pal and cooperative utilities also brought suits ity-affiliates making power sales outside of under antitrust laws to obtain access to “es- their retail service territory have had little dif- sential” transmission facilities. Once utilities ficulty obtaining market-based pricing author- began offering transmission service to some ity from FERC. wholesale customers, FERC used its authority During this time, the FERC accommodated to bar undue discrimination to extend these entry of power brokers seeking to arrange services to others. By the mid-1980s, distribu- power transactions between sellers and pur- tion utilities were able to meet much of their chasing utilities with such transactions having requirements from competing suppliers, rely- a minimum of regulatory obligations. Utilities

55 Major Issues

and utility affiliates seeking market-based pric- from point-to-point service to a full range of ing authorization to sell in or near their ser- services that are “comparable” to services vice areas are required to provide adequate that the integrated utility provides to itself. “open access” transmission service to other • Allowing wholesale customers to file for buyers and sellers. This is the essence of the “generic” tariffed transmission service even FERC’s Orders 888 and 889. in the absence of a specific buyer and a spe- Absent statutory authority to require utili- cific seller. ties to provide nondiscriminatory transmission • Encouraging the formation of RTOs to deal service prior to the EPAct, FERC began to en- with transmission planning, operations, and courage utilities to “voluntarily” file open ac- pricing issues on a comprehensive regional cess transmission tariffs. FERC then condi- basis. tioned its approval of mergers between vertically integrated utilities on their filing of open Unfinished FERC Business access transmission tariffs and the availability The FERC has increased transmission access, of market-based pricing. but has much left to do with regard to trans- Then FERC placed a ceiling on the price that mission and ancillary services pricing. These a utility could charge for transmission service issues are especially important in the U.S. to third parties. This price was equal to the where many transmission owners operate por- average embedded cost of transmission facili- tions of the synchronized AC system in which ties per megawatt of system peak load. The property rights are poorly defined and associ- political and regulatory difficulties of build- ated external and “free ride” problems are ram- ing major new transmission facilities are gen- pant. erally thought to cost more than the revenues Control areas are responsible for balancing from selling temporarily excess transmission loads and resources, maintaining frequency capacity. and voltage, providing spinning reserves, dis- A study by FERC showed that the cost of patching in response to transmission con- transmission is highly dependent on the volt- straints, providing emergency support and age used. Since capacity increases with the coordinating operations with interconnected square of the voltage, the use of high voltage control areas. Based on Order 2000, FERC has upgrades effectively reduces cost. The FERC been working on an RTO model that would has been encouraging the formation of RTOs address these issues. which would take responsibility for (1) re- Transmission owners are also getting ready gional transmission facility planning, (2) the by establishing industry standards in coopera- provision of information about transmission tion with FERC so that when the RTOs are capacity and costs, and (3) ultimately, compre- formed, they can be operated reliably and ef- hensive regional transmission service pricing. ficiently in a consistent manner at least within FERC provided the details of RTOs in Order each region. 2000, discussed in detail in Part 4. How existing FERC policies get implemented, and how the FERC’s unfinished busi- Major FERC Policies on Transmission Access ness get done, are contingent on resolution of Major actions which have affected transmis- the FERC’s SMD proposal (see Part 4 - Regu- sion access include the following: lations and Policies). • Requiring utilities to publish detailed information about the availability of transmission Related Generation Cost Issues capacity on their systems and related oper- Generation costs are being driven down by ating characteristics of their bulk power fa- technological advances, lower fuel costs (not cilities. guaranteed to last) and competition, but elec- • Expanding the range of transmission ser- tricity rates vary widely around the U.S. and vices that utilities must be prepared to offer between wholesale and retail markets. This ap-

56 Major Issues

parent disparity can be understood by consid- based (Midwest) or hydro based (Northwest) ering changes in electric power policy. generation. Recent spikes in the price of natu- First, the U.S. added nearly 100,000 MW of ral gas, which may reflect changing fundamen- nuclear capacity during the 1970s and 1980s tals with respect to natural gas supply and to meet growing base-load demand and in re- deliverability, may diminish the cost advan- sponse to state and federal laws and policies tage for gas-fired power. that dictated fuel diversification. In many In a nutshell, most of the base load nuclear cases, nuclear capacity was much more costly and coal capacity added during the last twenty to build than anticipated. In spite of fears that years was done to ensure service to retail cus- nuclear units would not operate at high reli- tomers. These investments have been found to ability levels, capacity factors for nuclear units be prudent. Today, these long term investments have been trending up. Where once many ex- may seem questionable, but recall from Part 4, perts believed that nuclear units would be con- Regulations and Policies, that utilities were verted to other fuels, the outlook for contin- constrained to fuels other than natural gas. ued operation of nuclear units is more optimistic. “Stranded Costs” or “Stranded Next, currently there is substantial excess Benefits”? generating capacity in many parts of the U.S. The debate about retail wheeling in the U.S. due to slower growth in demand and rapid ex- and Texas largely has been about whether to pansion of NUG capacity. The price of genera- extend the FERC’s policy of open access in the tion services in the wholesale market reflects wholesale market down to the retail level. The this excess capacity and is often below the long- major issues centered on who would pay for run marginal cost of expansion. generation and generation-related financial Third, utilities in some areas of the country commitments that might not be fully recover- (especially California and the Northeast) were able when public policy was changed to allow required to purchase too much QF capacity at for electricity to be sold at unregulated mar- too high a price under long-term take-or-pay ket prices. These commitments included in- contracts. These costs have been borne largely vestments in power plants, long-term power by retail customers. purchase and fuel obligations and other costs Fourth, utility energy conservation programs that were deferred for future recovery, all of that provide subsidies to customers to use elec- which were reviewed by regulators, found to tricity more efficiently have both reduced de- be reasonable and prudent and have been in- mand for electricity and led to higher prices. cluded in rates. Utilities have been allowed by regulators to Many utilities, regulators, legislators and pass through the costs of DSM programs or consumers were concerned about whether a recapture expenses through higher rates of re- credible mechanism could be found to pay for turn. these stranded costs in the transition to more Finally, as mentioned before, efficiency im- competition. Industrial customers and some provements of combined cycle natural gas tur- independent suppliers and marketers hoped bines have significantly reduced long-run that utility shareholders would pay for a large marginal electricity costs. The abundant sup- fraction of these costs. Utilities and power gen- ply and low prices for natural gas throughout erators, however, agreed with FERC Order 888, the U.S. for much of the last decade was highly which states “[t]he recovery of stranded costs visible in the emerging wholesale electricity is critical to the successful transition to a more market. As a result, electricity prices across competitive market.” A reasonable opportu- much of the U.S. were generally influenced by nity to recover stranded costs was believed to accessibility to natural gas or natural gas-fired be consistent with honoring past commit- wholesale power although in parts of the coun- ments, including the regulatory compact of try prices are still dominated by either coal providing service to all customers in exchange

57 Major Issues

for a reasonable opportunity to earn a reason- stranded costs will be provided by customers able return on investments that state PUCs seeking other generating service providers. As found to be prudent and subsequently in- noted above, the FERC viewed stranded cost cluded in rates. Many representatives of small recovery to be essential for successful transi- retail customer interests opposed retail wheel- tion to open access. Retail stranded cost deter- ing because they were concerned that the bur- minations were to be made by state PUCs and den of stranded costs would be shifted to “cap- legislators, although the U.S. Congress consid- tive customers” who would then be unable to ered pursuing legislation that would impact take advantage of retail competition opportu- how much of the cost would be born by share- nities. holders versus ratepayers. Most states, includ- Many proponents of retail wheeling have ing California and Texas, adopted a competi- viewed it as an opportunity to get utilities out tion transition charge (CTC) for the recovery of the “taxation by regulation business” and of stranded costs when they passed restruc- focus their attention on producing electricity turing legislation. In Texas, the CTC was origi- as cheaply as they can. While this has appeal nally set at $0 by the PUCT because the mar- to some, it must be recognized that state and ket values of assets were greater than their municipal governments receive substantial book value (as indicated by the estimates of revenue from utility sources, such as gross re- stranded benefits provided earlier). In Califor- ceipts taxes, local and state franchise taxes, nia, however, CTC caused problems for utili- property taxes and sales taxes. ties that were not allowed to pass fluctuations As states began to move forward with com- in wholesale prices on to their retail rates until petition, a critical question was “how big is the they fully recovered their stranded costs. Utili- stranded cost problem?” It was not easy to ties which recovered their stranded costs define. In the mid-1990s, estimates from sooner were able to adjust their retail rates Moody’s Investors Service ranged widely, from during California’s crisis, at least until the rates $100 billion to $300 billion for the U.S. and from were refrozen by the State Legislature. $1 billion to $10.3 billion for Texas. The PUCT’s It is important to note that not only utilities Report to the 75th Legislature (January 1997) es- were impacted by the transition to greater com- timated a range of a negative $3 billion petition. Many NUGs undertook the risk of (stranded benefit) to $22 billion (stranded cost). developing facilities under contract terms that The Senate Interim Committee 1998 report es- were thought not to survive in more competi- timated that stranded costs range from a negative markets. tive $9.8 billion to $18 billion. The range of Today, the issue of stranded costs has faded stranded costs is dependent on several factors, somewhat as assets once thought to be vulner- including the projected market price of elec- able to market competition have retained their tricity, the projected cost of fuel, what assets value. In particular, nuclear and large coal- are included, whether only wholesale compe- fired power generation plants proved to be tition or both wholesale and retail competition critical to the U.S. power system as demand take hold and the isolation of stranded costs soared during 2000-2001. The switch from as opposed to other costs associated with the stranded costs to stranded benefits also was transition to greater competition. For example, due in part to high natural gas prices leading the PUCT calculated stranded costs at $1 bil- to high power prices. lion in 1998, $3.7 billion in April 2000, -$1.5 billion in August 2000 and -$2.2 billion in Financial Performance of Utilities spring 2001 with the last two estimates reflect- Under regulated rates, the utility industry ing benefits. has traditionally been considered as a safe and The FERC, having jurisdiction over most reliable investment target. Many feared that wholesale rates, ruled in Order 888 that full the electric utility industry would experience recovery of prudently incurred wholesale negative financial impacts from the transition

58 Major Issues

paid in taxes; and al- Dow-Jones Averages for Utilities most 60 percent has 1971 to 2002 been used to cover (through Nov. 11, 2002) operating and maintenance expenses. As California’s energy crisis and the immediate impact of the Enron’s bankruptcy fade, many power companies are returning to more conservative growth and earnings fore- casts. Some are reducing their dependence on volatile trading activities and they are diversifying, especially into natural gas. Integrated utility companies ap- to competition. Certainly, bond and equity peared to be doing much better than IPPs in markets discounted the utility sector on the this new environment until recently. Increased basis of increased competition and the cost of scrutiny of debt loads incurred by utilities as transition. For example, the Moody’s Investor they created and expanded their non-regulated Services estimate of stranded costs also noted businesses has led to growing credit problems that the industry’s current equity was $165 bil- for IOUs in Texas and across the U.S. lion. This makes the low stranded cost estimate 60.6 percent of equity and the high estimate Issues in the Regulatory Process 181 percent of equity, a huge impact for utili- The way in which we have regulated utilities. Reflecting the uncertainties created by the ties in the U.S. has long been an issue. Texas introduction of competition, Standard & Poor’s has not been immune to the consequences of Corporation downgraded four public power our particular regulatory system. Some oppo- entities and two public power projects (all in nents of retail choice want to maintain the util- California) in 1996. In 1997 and 1998 more than ity as an entity that has a “public service obli- 20 utilities were downgraded. After the Cali- gation fulfilled with private sector efficiency.” fornia crisis and the collapse of Enron, more In the U.S. we have relied on regulators to serve utilities as well as IPPs and power marketers as a substitute for competitive efficiency were also downgraded. Enron’s problems cre- through rate regulation reviews of utility costs ated the belief that most companies, especially and by disallowing costs that are not prudent, trading/marketing firms and IPPs, have been necessary or efficient. With SB 7, Texas un- carrying too much debt to finance power plants bundled the integrated utilities. As a result, and/or their trading activities. generation and retail have become competitive Nevertheless, revenues for the U.S. indus- businesses that are not subject to rate regula- try as a whole rose from $198 billion in 1993 to tion. Rates for access to the T&D network, $233 billion in 2000. Historically, about 17 per- though, remain regulated by the PUCT. cent of total revenues has been retained as net The traditional method of regulation has operating income; about 14 percent has been been “cost of service ratemaking” (already

59 Major Issues

mentioned in this chapter and in Part 4 - Regu- sulting in recovery only of prudent expendi- lations and Policies). To determine a utility’s tures in rates. revenue requirements, PUCs must determine Cost of service rate making is in the process the “allowable” operating costs of a utility (e.g., of changing as other methods of regulating maintenance and other operating costs) and utilities become more widely used and, of the “capital related” charges. The latter is the course, as it becomes limited to T&D service “rate base” upon which a utility is allowed to in restructured markets including Texas. In recover depreciation, interest costs and the cost general, PUCs (and the FERC) are moving to- of capital associated with equity investments ward “market-based pricing” in regulatory de- in transmission and distribution facilities. cision making. Incentive rate making, price (Note that the FERC also has traditionally used caps and other techniques are increasingly cost of service ratemaking for interstate pipe- used as regulators strive to make utilities and lines and electric utility transmission facilities.) their customers more responsive to market dy- Most of the controversy over rates in rate namics and encourage efficient use of re- hearings turns on which operating costs sources. should be “allowed,” which should be “disal- In addition, with the restructuring of the in- lowed” because they are unnecessary, which dustry, the PUCT no longer deals with the re- capital investments should be included in the view of generation projects although new T&D rate base and what, in the end, the appropri- facilities will still have to be subject to rate ad- ate “fair rate of return” or “just and reason- justments. But, as ERCOT will provide the able rate of return” on investment should be. guidelines for the type, capacity and location PUC hearings provide a framework for the of new T&D facilities needed, the review of regulatory process. PUCs may penalize a util- proposals for these projects should be more ity for incurring unnecessary operating costs straightforward. or for making “inefficient” investments. While Another big issue has been rate design. Utili- the rules governing these decisions may be ties typically have a large number of tariffs vague and subject to controversy, PUCs across available to customers that fall into different the U.S. follow very similar practices in evalu- size and voltage classes. Marginal costs to serve ating the financial and accounting information smaller customers (typically residential and that is reported by utilities. commercial) are different when compared with One of the major criticisms levied against other classes of customers. This reflects the fact traditional cost of service or “cost plus” rate that smaller customers take power at lower making is that it provides poor incentives for voltages, require costly low-voltage distribu- cost minimization, in particular because a bias tion investments and have low load factors. may be created in favor of capital expenditures. Marginal costs to serve very large customers Some have speculated that because utilities tend to be low reflecting the fact that they take earn more revenue as the rate base grows, they power at high voltages and have higher load have historically emphasized capital expendi- factors. Increasingly, U.S. utilities are offering tures rather than more efficient ways of deliv- larger customers time-of-day rates and inter- ering services. Evidence of this is mixed. ruptible rates. An area that had been especially targeted in Because the marginal costs of providing elec- this regard is nuclear energy. Many controver- tricity service to a variety of customers under sies occurred in Texas over the inclusion of a variety of conditions are different, there has nuclear facility costs in utility rate bases and been considerable debate about how regula- the extent to which customers should be tors and utilities should set prices. The evi- charged. The PUCT conducted fully litigated dence on this is mixed. As electricity systems prudence reviews of nuclear and other plant were built, it helped to have large volume cus- construction expenditures and, where appro- tomers on the system which allowed utilities priate, imprudent costs were disallowed, re- to more easily and economically extend ser-

60 Major Issues

vice to smaller customers. This became more the electric power industry. difficult to do as the U.S. industry has had to Regulators, including those in Texas, strive respond to global competition and as indus- to avoid price distortion subsidies. However, trial customers came to enjoy many more elec- some price distortion is always possible (an tricity supply options. artifact of regulation as a substitute for com- In addition, regulators used to prefer pric- petition). With the start of retail choice at all ing schemes to benefit small users that did not customer levels, REPs are expected to provide accurately reflect the cost of serving different competitive market prices, more reflective of size customers. This caused large users to pay marginal costs of serving each customer type, rates larger than the marginal cost of serving and hence remove potential price distortions. them. This preference has played a role in At the same time, the PUCT is relieved of the pushing industrial users toward non-utility burden of designing rates for different cus- options for electricity. The gap between resi- tomer types, and reviewing and monitoring dential and industrial rates has grown over the these rates. In today’s competitive market, the years, reflecting a gradual move toward pric- PUCT’s most important task is to ensure that ing electricity service to more accurately reflect consumers are protected against potential the marginal cost of providing power to all cus- market power practices. tomers as well as changing fundamentals in

61 62 Future Trends

or more than 100 years, elec- Future Trends tricity has been developed and Felectric service provided using Overview What lies ahead for the electric power indus- a public-private model of a regu- try in Texas and the U.S.? If the recent past is lated, private franchise monopoly. As did in the 1930s. we consider altering this model, The changes evident in Texas prologue, then we can be assured that the in- what can we expect? and the U.S. today are taking hold dustry will continue to become more competi- Technology will not remain static. around the world, creating chal- tive and that some changes will take place (per- New developments, encouraged by lenges for many societies and eco- more competitive markets, will nomic opportunities for our own haps extreme, perhaps not). Electricity will re- emerge to change how electricity is industries. main an important component of our daily provided and change our lives as a Since the early development of lives, perhaps increasingly so as we move result. Financial pressures will grow the electric power industry in the as competition increases, but creative U.S., we have witnessed the power deeper into the Information Age. And there is solutions will arise to spur energy en- of society to adapt and move for- sure to be conflict about how to best provide trepreneurship. ward with new technologies. The electricity to all users, how best to facilitate The electric power industry is re- central question today is whether organizing in response to these we will lay the right policy consumers’ desires for choice and how to man- trends, and this pattern will continue. groundwork for what the future age all of this while protecting the environmen- The landscape for electric power holds. To do this, we all need to be tal and social values that are important to us. probably will look very different in as well informed as we can be. the future than it does even today or We can strive to consider what the future will hold in today’s decision making, but that is often not possible. Looking back at the historic changes in telecommunications, airlines, truck- the choice of their retail electricity providers. ing, banking and natural gas, there are many The restructuring bill in Texas (SB 7) calls for things that could have been done differently. 2,000 megawatts of new renewable generation Perhaps the best we can do is to watch the key capacity to be added by January 1, 2009 - larg- trends and try to anticipate the actions of to- est requirement to date by any state. Several day with the needs of tomorrow. Here are four hundred megawatts of new wind power ca- key trends to watch in the electric power in- pacity have already been built in West Texas. dustry in Texas and the U.S. This environment is very conducive for Texas to become a center of innovation in energy Technology Changes technologies. In addition, the long history of The electric power industry has often been the energy industry in the state created a so- criticized as a “low technology” industry, but phisticated community of energy suppliers nothing could be farther from the truth. In this and users. The state also provides a favorable document we have discussed a number of tech- investment environment for startup busi- nologies that are vastly changing the way elec- nesses. Finally, organizations such as the Hous- tricity is produced, delivered and priced. We ton Technology Center, STARTech Foundation have learned in the U.S. that we have an enor- and The Austin Technology Incubator as well mous capacity to research, develop and deploy as the PUCT are working together towards the new technologies that make our lives better goal of establishing Texas as a national energy and push our economy forward. Future expec- technology center. tations for electric power should be no different, but the outcomes may take a different New Generation Technologies form. Utility spending on R&D may be affected In addition to the advances in natural gas by increased competition, but new R&D ar- turbine design, new ways to achieve clean rangements are likely to emerge. combustion of coal and fuel oil and improve- Texas’ recently restructured electric power ments in alternative energy technologies, there industry provides for one of the most ad- are technologies on the horizon that may com- vanced competitive electricity markets in the pletely change the industry. Often discussed U.S. with even the smallest customers having are fuel cells, which use electrochemical reac-

63 Future Trends

tions - like automotive batteries - to produce National Energy Policy. The Department of En- electricity. Auto manufacturers are aiming to ergy has been running a program on these tech- have first models with these batteries available nologies and there are an increasing number by 2005. Most promising are fuel cells that can of utilities and generators who are looking into use natural gas as feed stock for producing hy- them. drogen. Fuel cells are smaller and modular and Microturbines, solar power (either as large could be used to power individual buildings collector farms or photovoltaic cells on build- or neighborhoods with none of the noise and ings), ocean power (using either the tidal cur- unsightliness of traditional generating stations. rents of waves) are other technologies that are Fuel cells, improved solar technologies and being watched closely by the investor commu- other developments may lead to a “decentral- nity. izing” of electric power systems, allowing Many of these technologies discussed here small scale applications and resolving many are not new. All are dependent on favorable of the potential reliability problems that cus- economic and market conditions. A benefit of tomers fear. HARC as well as others around competition is that it will accelerate introduc- the world are testing home fuel cell units. tion of new technolgies. Further into the future, economic nuclear fusion technologies may finally be achieved. Transmission, Distribution and Storage Unlike nuclear fission, fusion is the combina- Technologies tion of atoms to produce heat. Fusion is a long As electricity travels over the transmission sought technology that holds tremendous grid, much of it is lost (sometimes upwards of promise of clean, renewable energy, if it can 10 percent). This is because the materials typi- be achieved. Pebble-bed modular reactor cally used in transmission wires can only with- (PBMR) technology (still based on fission), on stand a certain amount of heat. New, super- the other hand, may yield its first commercial conducting materials may change that. At re- reactor by 2007. PBMR reactors are fuelled by search centers around the world, including the several hundred thousand tennis-ball-sized Texas Center for Superconductivity at the Uni- spheres, known as pebbles, each of which con- versity of Houston, scientists are developing tains thousands of tiny “kernels” the size of new materials that can withstand levels of heat poppy seeds. As compared to pressurized- and stress beyond anything achievable with water reactor (PWR) technology used in more traditional metals. These materials, if they can than half of the world’s existing reactors, be economically developed for applications PBMR reactors are smaller and can be built like electricity transmission, will dramatically faster. Proponents also argue that they are safer reduce the amount of electricity that must be and cheaper. Both claims are challenged by generated and allow electricity to be efficiently critics. transported over long distances. Experiments Given the abundance of coal resources in the with short-distance high voltage lines that use U.S. and the recent concerns about natural gas superconducting materials have produced en- resource base and prices, there is an increas- couraging results. ing interest in technologies that may help lower For electricity to be more easily managed, the emissions from coal-fired generation. To- new ways of handling electricity are needed day, more than half of the nation’s electricity that take advantage of superconducting mate- is generated from coal, but many plants are rials and devices. One such technology is the nearing retirement. Older plants with higher use of superconducting devices for instanta- emissions will need to be replaced. Neither neous management of electric power. Re- renewable nor gas-fired generation may be searchers the Houston Advanced Research sufficient to substitute for all of the coal-fired Center have studied small superconducting capacity. The development of clean coal tech- switches and much larger superconducting nologies is one of the goals of President Bush’s energy storage devices for transmission en-

64 Future Trends

hancement applications. HARC (with a private nesses, independent third party marketers of and public sector consortium and the State of gas and power. These companies - they may Texas) has examined the technical and eco- be entirely unaffiliated or they may be nomic feasibility of applying these technolo- “nonjurisdictional” or unregulated affiliates of gies to constraints in the Texas transmission gas pipelines or gas or electric utilities - act as system. Such devices would enable various intermediaries in a complex marketplace. Us- power management services such as stability ing electronic information, they are able to enhancement, increased transmission capacity, package services and build flexible arrange- voltage and frequency control and other qual- ments and contractual terms between suppli- ity enhancements for a transmission company ers of gas and electricity and end users. or utility. The development of electronic information In a recent conference on energy technolo- systems has been one of the most important gies held at the University of Houston by factors in the re-conceptualization of what con- STARTech and Houston Technology Center, stitutes monopoly in gas or electricity service. several participants, including investment These tools have enabled the separation of the bankers and venture capitalists, identified stor- commodities, gas and power, from the physi- age technologies as the “holy grail” of all en- cal systems used to deliver them to custom- ergy technologies. In particular, flywheel tech- ers. The result is that the scope of regulation nology seems to be most advanced. A Texas can be narrowed to the physical systems, company, Active Power, developed the first where before it applied to both the systems and commercially viable flywheel energy storage the commodities (which were not commodi- system and has distribution deals with com- ties since there were not separate markets for panies such as Caterpillar, GE and Invensys. the exchange of gas and electricity). This has been a critical step in the evolution of both the Information Technologies natural gas and electricity industries. The sophistication of electronic information systems is one of the most important factors Financing in the drive to restructure industries like natu- Technological change and adaptation need ral gas pipelines and utilities and electricity to keep up with changing consumer prefer- transmission and utilities. These information ences in the type and delivery of energy sys- systems have removed many of the barriers to tems. This will mean continued financial pres- common carriage by allowing real-time man- sure on the electric power industry. Two areas agement of energy flows and exchanges. are worth watching: how the industry will Electronic bulletin boards and software sys- raise capital and how the industry and its cus- tems required by the FERC for pipeline trans- tomers will protect themselves against risk and portation and electricity transmission include uncertainty. information on capacities, prices, transactions and other variables. This information is nec- Capital Needs and Resources essary to facilitate a properly functioning mar- Financial capital will continue to be required, ketplace. It also facilitates the development of especially for research and development on “secondary” markets so that holders of excess new energy technologies and for the new sys- capacity on pipelines or transmission grids can tems that will be necessary to manage electric- release or resell that capacity. This prevents ity production and flows in a more competi- many of the kinds of disruptions and short- tive environment. Large companies and utili- ages that have posed serious problems in the ties will continue to draw from internal sources past. (cash flow) and be able to access national and Finally, the advent of information systems world capital markets. But how will smaller, for natural gas and electricity has supported entrepreneurial enterprises compete for fund- the growth and effectiveness of new busi- ing in a deregulated/restructured world, and

65 Future Trends

one in which government funds will be in- tricts to go into default. However, the mecha- creasingly scarce? nisms subsequently put into place ensure bet- One solution will be to access equities mar- ter reporting and financial solvency. kets through public offerings. Energy related offerings have grown rapidly over the years, Risk Management and the interest in technology-based enter- When gas and electricity become commodi- prises should help to support a healthy capi- ties, they also become subject to considerable tal market for energy entrepreneurs. Another volatility in pricing. In the case of electricity, solution will be capital provided by major com- this is complicated by the diurnal or daily pat- panies seeking to enter niche markets with an terns of electricity use and the need for pric- eye to the future. Financial resources may be ing to reflect fluctuations in demand and sup- directed to start-up companies or large orga- ply. Risk management has emerged as a pow- nizations may joint-venture to establish their erful, though often not well understood, own new product lines. Solar power has ben- mechanism for managing volatility. efited already from these trends. Risk management encompasses the array of After the California crisis and the collapse financial instruments and the strategies used of Enron, the issue of financing new genera- to implement them. Futures contracts, options, tion plants has gained a new perspective. In derivatives and swaps are some of the instru- the competitive environment, new generation ments that risk managers use. The basic prin- capacity has been built mostly by IPPs (or ciple is to separate the sources of risk in order NUGs) that usually did not have the same as- to deal with them in a systematic way. For ex- set ownership as integrated utilities. As de- ample, an electricity supplier or consumer who mand continued to increase in the 1990s and is concerned that the price today may be higher increased volatility in electricity prices pro- or lower than what it will be at some time in vided decent returns for gas-fired peaking the future, an important source of risk, can plants, these companies did not have any prob- enter the futures market to hedge against ei- lems using project financing. Especially after ther possibility. the collapse of Enron, Wall Street analysts and Risk management is not new. Ancient civili- rating agencies began to pay closer attention zations used futures contracts for grains and to these companies’ balance sheets (as well as other traded goods. In the U.S., we have long those of many other energy companies). IPPs, had futures markets for agricultural commodi- for the most part, were found to carry high ties, minerals like copper and, since the early debts with respect to their equity. As a result, 1980s, oil. Natural gas and electricity are rela- credit ratings of some IPPs were downgraded tive newcomers. As risk management instru- to “junk” status. Companies are now restruc- ments have become both more sophisticated turing and some will likely continue building and more complex, problems have arisen re- power plants, but financing conditions in the cently for both suppliers and customers, some future may be less favorable. so serious that firms experienced liquidity cri- Small scale and rural energy needs in Texas ses or bankruptcy. The issues, however, lie not could be financed using a familiar strategy, with the instruments but when they tend to establishment of special utility districts. More be used speculatively. Too often, firms attempt than any other state, Texas has allowed the use to use risk management instruments to supple- of special districts to support development. ment income generation rather than strategi- Bond financing through these districts has cally to reduce exposure in commodities mar- typically provided for water and sewer infra- kets. For example, Enron’s collapse is usually structure, but they could also be used for en- associated with the company’s aggressive use ergy infrastructure. The economic crisis suf- of these instruments in their flagship trading fered by Texans after the 1986 crash in world operation and the aggressive accounting prac- oil prices caused many municipal utility dis- tices employed in recording the value of these

66 Future Trends

trades. critical mass. When risk management instruments are used correctly, however, they are a powerful Convergence of Utility Industries: What Happened to and important tool for both suppliers and cus- the One-Stop Shop? tomers in more competitive energy markets. If a householder or business receives cable For example, the inability of California utili- television, telephone and fax, data connection ties to engage in long-term contracts forced (the Internet), electricity, natural gas and wa- them to buy continuously from the spot mar- ter and sewer services then is it unlikely to ket in order to comply with their “obligation think that one organization could supply any to serve.” Combined with the retail rate freeze combination or all of these needs? That was and hence the inability to pass on wholesale the question driving strategic planning in the price fluctuations to customers, Pacific Gas & utilities industries as electric power restructur- Electric had to file for bankruptcy and a state ing unfolded. It came as utilities positioned bail-out was needed to prevent Southern Cali- themselves to grow in new directions and with fornia Edison from doing the same. If the utili- new markets, as competition across industry ties were allowed to manage their price risk lines increased, as consumer preferences (in- through long-term contracts (which is what the cluding the desire for convenience) changed Department of Water Resources did for the and as providers sought to make the most of state), these problems could have been their infrastructure investments and billing avoided. and data processing capabilities. During the incredible summer 1998 heat One of the most important lines of conver- wave, some electric power contracts soared to gence for Texas has been between natural gas thousands of dollars per megawatthour. This and electricity. Changes in the U.S. electric event triggered a surge in defaults among in- power industry are likely to have profound dependent power marketers, shut downs of consequences for natural gas suppliers, pipe- trading risk management operations (includ- line companies and marketers, all of which are ing at least one large utility), and a great deal important businesses for the Texas economy. of worry among consumers, regulators, policy At least for the foreseeable future, customers makers and some suppliers that this was a will continue to require both gas and electric- portent of what competitive markets would be ity. Direct use of gas is more efficient for heat- like. However, after extensive investigations, ing and may be also for cooling, but gas can- it appears that a root cause was lack of trans- not drive a home computer (yet)! mission access that would have caused capac- Some of the rationale for convergence stems ity shortages in key regions (especially the from industry trends. The first companies to Midwest) to be resolved. The lesson - risk man- enter the power marketing business were those agement practices for electric power need that already had gas marketing expertise. In- work, but they are no match for non-competi- deed, the electric power industry has gained tive bottlenecks. much experience from natural gas firms although today we have retail choice in electric- Industry Reorganization ity but not yet in gas. Another important fac- The previous sections capture another im- tor is that gas has been the fuel of choice for portant trend in the U.S., and again Texas is meeting most of the growth in electricity de- not immune. The dramatic changes in technol- mand. This is due to the highly favorable cost ogy and financial pressures stemming from for combined cycle units for new capacity ad- competition are forcing a fundamental reorder- ditions. While low heat rate (high efficiency) ing of the utility industries. This is being mani- combined cycle units are used for base load fest in the convergence of utility industries and along with coal-fired and nuclear units, high resulting merger and acquisition activity as heat rate (low efficiency) gas-fired steam plants companies seek new strategic partnerships and supplied the peak load. As a result, the mar-

67 Future Trends

ginal cost of power has been closely related to So where do things stand today? Most of the the price of natural gas. It is also much easier companies aggressively pursuing strategies to and cheaper to turn a gas-fired plant on and offer multiple products and services to end off than a coal-fired plant. Daily use of gas by users have either postponed, dismantled or electric utilities fluctuates just as daily use of shelved their business concepts or the compa- electricity does. And marketers can move gas nies themselves were subsumed in mergers and electricity interchangeably from one loca- and acquisitions. Spanning the “last mile” to tion to another, reducing price differentials end users to combine energy and information across energy types and regions. Industry ex- proved to be more difficult and expensive than perts often refer to “gas by wire,” meaning that previously realized. The collapse of technol- customers can receive natural gas in the form ogy and telecommunications companies, the of gas-fired electric power. Similarly, custom- latter of which (along with many utilities and ers can receive “power by pipe,” choosing to natural gas pipelines) had invested in a vast take gas directly. Lastly, as already noted, natu- surplus of fiber optic cable capacity, has post- ral gas and electricity overlap at the end user poned indefinitely the concept of multiple level. A householder can, for instance, choose products. Aggressive development of gas-fired a natural gas clothes dryer or an electric one, power generation capacity has left surpluses and a single firm could profit from either de- (a good thing for end user prices) although cision whereas competing ones could not. retirement of old gas-fired units started to de- While our future fuel mix for electricity will plete the surplus. Financial constraints and depend on relative fuel prices, many compa- scrutiny for the host of companies pursuing nies are gambling that gas will have a com- new business models has delayed innovation parative advantage and are building strategies while these organizations work to improve fi- around the synergies between gas and electric- nancial reporting, deal with related issues and ity. respond to increased regulatory oversight, and All of these complex forces led to the idea of the potential for further exertion of regulatory a “one stop shop” for energy, or the “Btu store.” authority. Customers would be able to secure all of their energy needs, whether it is gas, coal, oil, elec- Mergers, Acquisitions and Combinations tricity or an alternative, from one organization. The efforts of companies to position them- The one stop shop would consolidate billing selves for the future led to merger and acqui- and marketing, creating many additional effi- sition (M&A) activity beyond anything previ- ciencies. Companies pursuing this strategy ously experienced in the utility industries. In- believed that it would lead to a critical mass in vestors once looked to the utilities for safe ha- the marketplace, allowing them to package vens from stock market cycles and steady divi- many different kinds of customers in many dends as a consequence of the regulatory com- different locations, generating revenues in pact - that in exchange for their investments, multiple ways from the same assets. utility companies were given an opportunity Countering the idea of the one stop shop was to earn a reasonable return. M&A activity the notion that as energy systems became more changed investor perceptions and expectations decentralized, niche markets would dominate. on an almost daily basis. From 1992 to April In this view of the future, large companies that 2000, 35 M&As were completed between IOUs offer many different services would not nec- or between IOUs and IPPs. Twelve additional essarily have an advantage over those that mergers have been announced and are now narrowly defined their scope and carefully tar- pending stockholder or Federal and State gov- geted their customer audiences. These compet- ernment approval. The size of IOU mergers, ing views of the future lent an extra set of chal- in terms of value of assets, is also increasing. lenges and another layer of complexity to elec- Between 1992 and 1998, only four mergers tricity restructuring. were completed in which the combined assets

68 Future Trends

of the companies in each merger were greater strategic alliances, partnerships or joint ven- Recent Events than $10 billion. More recently, eight mergers tures not only with traditional industry play- Texas Companies completed in 1999 or 2000, or pending comple- ers but also with technology firms, marketing Credit rating issues tion, each have combined assets greater than outfits and such that allow them to develop impact the major $10 billion. and market services. In any case, the corpo- IOUs’ exposure as A second category of M&A activity includes rate landscape has already changed consider- well as the “energy merchants” with electric utilities and natural gas companies. ably, and will continue to do so. total in the billions Increased competition pressured these entities of dollars. to combine operations in order to become more Globalization Reliant Energy efficient, to diversify products, to share exper- While the changes in Texas and the U.S. may separates into tise and experience in energy markets, and to be overwhelming, we are not alone. Around Reliant Resources take advantage of the growing use of gas-fired and CenterPoint the world, reliance on markets to provide en- Energy. power plants. From 1997 through April 2000, ergy services has been a growing trend. Com- Enron declares 23 such mergers involving companies with panies in Texas and elsewhere in the U.S. have bankruptcy. assets valued at $0.5 billion or higher have been played a critical role in providing technology Enron’s trading completed or are pending completion. and financial capital as countries seek to liber- business acquired In its Policy Statement for reviewing public alize energy markets and reduce government and subsequently utility mergers, the FERC demonstrated that ownership and control of energy services. Our downsized by UBS it will more closely scrutinize the impact of energy companies have discovered that their Warburg. mergers on competition in the wholesale elec- skills and expertise at home are transferable NewPower goes out of business. tric market. While the Policy Statement nar- elsewhere, speeding the transition to interna- rows the focus of the FERC’s inquiry, it in- AEP transfers two tionalization. of its REPs (WTU creases antitrust review by adopting the analy- The current, agonizing changes in the energy Retail Energy and sis outlined in the Department of Justice/Fed- merchant businesses – wholesale trading and CPL Retail Energy ) eral Trade Commission’s 1992 Horizontal marketing and IPP activity – along with finan- to Centrica. Merger Guidelines. Using those Guidelines, cial disruptions and setbacks in regions like Shell quits the retail the FERC will assess the increase in market South America where these companies have market. concentration, requiring a hearing for those been active has introduced a new turn of events Other Events mergers exceeding certain thresholds. The in international activity. Many U.S. companies Policy Statement, however, adopts the Guide- recently have shut down their operations over- PG&E declares lines’ generic threshold levels rather than seas and focused back on the U.S. markets, in bankruptcy. higher levels, suggested by many industry ex- part because they did not realize the gains they National Grid Group perts that are more appropriate for the electric expected in the restructured markets of Latin (power-transmission) utility industry. Accordingly, many mergers America and Europe. In part, this is because acquisition of Lattice (gas- may not pass initial screening, at least as to these markets have become quite competitive, pipeline) in UK. some products during some time periods, and which put pressure on prices, and hence on E.ON (Germany) will be set for hearing. Apart from the FERC’s returns. Another, larger factor has been the acquisition of authority, the focus of review will be at the state difficulty of building sustainable markets in Powergen (UK). level. PUCs will likely face considerable activ- countries where governments still retain heavy Exelon Corp. ity from intervenors either opposed to or in influence in their energy sectors. acquisition of Sithe favor of proposed M&As or combinations. Canada most closely parallels the U.S. expe- New England Holdings. In states where the industry restructuring rience. The two countries have moved in close called for the unbundling of integrated utili- Constellation Energy unison, with Canada often in the lead to restruc- Group acquisition ties into generation, T&D and retail market- ture the natural gas pipeline industry and en- of NewEnergy from ing companies, competitive pressures and new courage greater competition among natural gas the AES Corp. market realities are leading companies to look utilities. Although in Canada natural gas re- for ways to cut costs as well as gain competi- serves are considered provincial crown assets, tive advantage. In this environment, in lieu of in both countries exploration and production a full M&A or combination, firms may seek is carried out by many competing companies.

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Canada and the U.S. comprise a common November 25, 2002, energy ministers from market for gas trade. Electricity trade already member countries announced that retail mar- exists between the two countries and there are kets for electricity and gas will open by July possibilities for this activity to increase. Cana- 2007. dians, watching U.S. electric power restructur- The issues in Western Europe include sensi- ing, began to mimic and again in some cases tivities to sovereign preferences (countries in to lead the process. Alberta and Ontario have which state-owned monopolies dominate elec- been the two most active provinces. Although tricity and natural gas service are trying to pro- Alberta appeared prone to experiencing prob- tect these enterprises) and concerns about en- lems similar to those of California in the early ergy security (Europe has been much more vul- days of reform, its market is now fully func- nerable to supply shocks than we have, energy tional. prices are higher and domestic reserves of Of great interest was how the huge provin- natural gas are not significant outside the cial crown companies, Ontario Hydro and Hy- North Sea). Many of the same consumer, envi- dro-Québec, would be treated with regard to ronmental and financial issues that we see here the prospects for privatization. Ontario Hydro prevail in Europe. was broken up and mostly privatized after the In emerging markets, the commitment to free restructuring of the sector in 1998. Its Hydro market energy is much more variable and the One Inc. subsidiary remained wholly-owned results will be much more difficult to predict. by the provincial government until recent ef- In Latin America, Chile and Argentina have forts to privatize it. The Communications, En- been the leaders in encouraging privatization ergy and Paperworkers Union of Canada and and private investment in electricity and natu- the Canadian Union of Public Employees ral gas (as well as other economic sectors), stopped the sale of Hydro One in April 2002. while Mexico and Venezuela, characterized by The Ontario Superior Court of Justice ruled their rich natural resource endowments, have that the government does not have legal au- moved more slowly and unevenly. Brazil, be- thority to relinquish public control of the cor- cause of its size and population will be closely poration, by offering its shares for sale to pri- watched. Opportunities for wheeling electric- vate investors. In addition, price caps were ity exist between the U.S. and Mexico, between placed on electricity prices in October 2002, Mexico and Central America and within the essentially halting reform. There is little re- “Southern Cone,” which includes Argentina, structuring activity in Québec and Hydro- Chile, Brazil and smaller countries in the Québec remains a powerful integrated utility Mercosur free trade region. Economic collapse with significant exports to the U.S. and increas- in Argentina in 2001-2002 and repercussions ing activity worldwide. throughout the region have slowed both re- Western Europe is moving in a similar di- forms and investment. rection taken by the U.S. and Canada. Britain The story is similar in Asia, South Africa, actually has been much more aggressive in Central and Eastern Europe and the Former restructuring its electricity sector than we have Soviet Union. In all cases, much of the impe- in the U.S. But state ownership of utilities was tus for restructuring markets comes from gen- common practice in Europe. This system had eral economic reforms, the need for private in- to be dismantled before other steps could be vestment to build infrastructure and create jobs taken to introduce competition. The European and the need to generate good will among the Community (EC) has formulated directives to industrialized countries. liberalize member country electricity markets, All emerging markets face similar con- with a goal of achieving 30 percent of the mar- straints. Their economies traditionally have ket open to competition by independent power been highly centralized and dominated by suppliers in ten years. The EC has also issued government intervention and ownership. Cor- directives to liberalize natural gas markets. On ruption and poverty are pervasive. Prices tend

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to be controlled by the governments so that distortions and inefficient use of energy are rampant. Political and financial instability remain a problem. Social backlash to reform initiatives is always a possibility as witnessed in Argentina and the myriad of market issues faced in the U.S. these past two years have had global repercussions. Nevertheless, in spite of these enormous constraints, even the most dis- advantaged nations seem at least interested in trying to adapt to the prevailing trends. Almost surely, at some point in the future, countries that make the effort to embrace market principles and private sector participation in energy development will enjoy the payoff. Many countries from Eastern Europe to Southeast Asia continue with their restructuring efforts based on these expectations. Conclusions Is there a reason to be optimistic? The answer is a resounding “yes.” Will change in the Texas and U.S. electric power industries be difficult? The answer is also “yes.” However, if people are well-informed at all levels - suppliers, customers, policy makers, researchers - then we have a better chance of making the best decisions that we can.

For additional printed copies of this report contact: Institute for Energy, Law & Enterprise University of Houston Law Center 100 Law Center Houston, TX 77204-6060 713/743-4634 Fax 713/743-4881 [email protected] www.energy.uh.edu

71 72 Appendices

Basic Economic Principles ...... 74 Glossary...... 77 Further Readings ...... 83

73 Basic Economic Principles

Marginal Cost Basic Economic This is one of the most important criteria in guiding the behavior of firms and individuals in a properly functioning marketplace. Once a Principles firm has accumulated all of the inputs neces- To understand the electric power industry sary to produce a good or service — land, la- in Texas, and the issues we face, it helps to be bor, machinery, etc. — the per-unit cost to pro- familiar with a few economic terms. duce a small increase of the good or service is the “marginal cost” faced by the firm. In a Market properly functioning marketplace, the price The U.S. is a “mixed economy,” meaning that that buyers discover they must pay should we depend on private markets for the provi- equal the marginal cost faced by the seller. sion of goods and services but with govern- When that happens, the right information is ment involvement. A “market” is simply the being communicated and the market “clears,” free interaction between many buyers and sell- that is, there is no shortage or surplus. In the ers, exchanging information about price and utility industries, not all customers are the cost. It can be a place, like the New York Stock same. In addition, marginal costs vary in the Exchange or the Chicago Board of Trade. Or, a short run and long run, by season and during market may be more diffuse, encompassing the day (even minute-by-minute) many institutions and places as well as the The marginal costs for utilities to serve resi- rules that actors follow, like energy markets. dential customers are often higher than for cus- A market is like a bidding process where tomers that use larger volumes of electricity. buyers disclose the amount they are willing to Think of it this way. Let’s say that in order to pay for a good or service while sellers disclose add 10,000 kWh of residential load a utility the amount they are willing to accept. This pro- company has to hook up 100 households. It cess is called “price discovery” and it is very has to spend more to do this (install more important to the proper functioning of a mar- meters, set more billing services, etc.) than it ketplace. Adam Smith, generally regarded to does to add one new 10,000 kWh customer. be the father of modern economic thought, described the process of price discovery in The Economies of Scale Wealth of Nations, published in 1776, to be like Some industries tend to be dominated by an “invisible hand.” monopolies because of the technical nature of For markets to function properly, it is neces- the industry. The utility industries — electric- sary to have “property rights,” meaning that ity, gas, telephone, water and sewer — are ex- there is a recognition of ownership, and legal amples. Once a company has the transmission and institutional protection for property rights. and distribution systems to bring electricity to In this way, when buyers and sellers engage customers, it is much cheaper (the marginal in contracts for the purchase and sale of goods cost is much lower) for that company to add or services, it is clear who owns the good or customers than for a competing company to service, who is taking title to the good or ser- build new, duplicate facilities and provide service, that there are laws protecting the sanc- vice to those same new customers. In other tity of the contract and that, if there were a dis- words, the existing utility company can add pute, the parties would be able to seek a fair many more customers and generate much remedy. Finally, for markets to function prop- more output than the amount of new inputs erly, resources — particularly labor and capi- that may be required. This is called “economies tal inputs exclusive of land — must be mobile of scale.” with no or few barriers to mobility. Economies of scale create “barriers to entry.” The high costs that new firms face to enter an industry relative to the sunk costs (costs that

74 Basic Economic Principles

cannot be recovered if the firm stops operat- largest possible value (or, lowest possible cost). ing) that existing firms have already made are Changes in market conditions, however, can such that potential new entrants may be dis- shift the market to an inefficient equilibrium. couraged. Technology change can alter these Then, we have loss of welfare. relationships. For instance, electricity genera- “Market failure” is a general term used to tion is no longer considered an activity with describe a wide range of reasons for the mar- monopoly attributes. It is relatively easy for ket to yield an inefficient equilibrium. new competitors to enter the power genera- For example, sellers may accumulate too tion industry. Advantages of high efficiency, much power, with the ultimate situation be- new generation plants may outweigh benefits ing one of monopoly (only one seller). In this from existing generators that have some econo- case, part of consumer surplus is transferred mies of scale. to the producers. Markets may also fail because buyers accumulate too much power, with the Profit and Producer Surplus ultimate market power being the case of one All businesses desire to earn a “profit.” Profit buyer (monopsony). In this case, producer sur- is basically the difference between all costs plus is transferred to the consumers. faced by a firm and the revenue that the firm Alternatively, markets may fail because of generates from sales. Producers face a mini- “information asymmetries,” meaning that one mum price at which they are willing to sell side has more information than the other and their goods or services. The market price is can use that to an advantage. usually higher than the minimum, because of There may be social costs of producing a what consumers are willing to pay — compe- good or service other than the private costs and tition among consumers “bids up” the price. these social costs may not be reflected in the The difference between what the producer is market price. This is called an “externality,” willing to take in order to at least break even and it is the typical situation for many envi- and what consumers are willing to pay is called ronmental issues. For example, the social cost economic rent or “producer surplus.” It is a of air pollution in terms of health and safety different concept than profit, because it takes effects are above and beyond the private cost into account the dynamics of a competitive associated with the activity that generates pol- marketplace. lution, whether it is driving a car or operating a power plant. Consumer Surplus Markets can fail because property rights Likewise, consumers are willing to pay a break down or are impossible to determine. For price for a good or service that is generally example, how do we decide who owns the more than what they actually end up paying stock of fish in the world’s oceans? Or, how in the marketplace. This is because competi- do we best manage the production of a natu- tion among sellers “bids down” the market ral resource like petroleum? These are called price. The difference between what consum- “common pool” problems because the bound- ers are willing to pay and what they actually aries are arbitrarily established. pay is “consumer surplus.” When market failure happens, the prices that we see for goods and services are not what they Market Failure and Welfare Loss would be if the market was functioning prop- As discussed above, both producers and con- erly, and consequently we suffer a loss in so- sumers have a surplus when the market clears, cial welfare. or is in equilibrium. “Welfare” for the society as a whole is equal to the sum of producer sur- Government Failure plus and consumer surplus. When government steps in to regulate mar- The equilibrium is efficient if the economy’s ket failure, either real or perceived, this often scarce resources are being used to yield the creates a new and different set of problems,

75 Basic Economic Principles

sometimes worse than the market failure itself! Contestability This is called “government failure.” It happens Economists have learned that in industries because it is difficult, indeed impossible, for characterized by monopoly there are interme- government to know what prices should be diate solutions between a competitive market- and how to correct the price distortions that place, which may not be achievable because arise from market failure. of the tendency for monopoly power to develop for technical reasons, and regulation of Utility Regulation monopoly franchises. The most powerful idea Regulation is most often an attempt to re- is that of “contestability.” Simply put, mo- capture welfare loss (in this case, lost consumer nopoly power may be more constrained than surplus from monopoly provision of utility it would appear to be because of the potential services) and transfer it back to consumers by for competition to develop and for new en- substituting regulatory oversight for competi- trants to contest the existing monopolist. tion. However, this is a difficult thing to do. Knowing that there is a potential for competi- The tradition of utility regulation in the U.S. tion, the monopoly supplier may actually rests on the granting of franchise monopoly charge a price for the good or service that is licenses, in recognition that economies of scale close to the price that would be realized in a exist, and control of monopoly power via the properly functioning, competitive market- allowed rate of return or profit that a utility place. can earn. In return for the opportunity to earn In the utility industries, the idea of a just and reasonable rate of return, the utility contestability is most easily put into practice is obligated to serve all customers within its where large users are concerned. Because of franchise service area. In practice, utility regu- changes in technology that allow competing lation is very expensive because of the amount suppliers to emerge and the volumes that large of time and cost incurred by utilities in sup- users take, giving them some influence in the plying information and for regulators to evalu- marketplace, competition can easily emerge. ate the information and make a determination. In the electric utility industry, this is the case In addition, regulation has often been used to with nonutility generators and the growing generate welfare gains for specific groups of wholesale market for electricity. The notion of customers. contestability has led to a new regulatory philosophy that the amount of market failure due to monopoly can be limited by reliance on competition everywhere possible, reducing the amount and cost of regulation to society.

76 Glossary

Scheduling Entity Obligations for Transmission and Dis- Glossary tribution Losses. A Balanced Schedule must have aggregate Supply equal to aggregate Obligations, by Settlement Interval. Affiliate Balancing Energy: Balancing Energy represents the a. An Entity who directly or indirectly owns or holds at change in zonal energy output or demand determined least five percent of the voting securities of another by ERCOT to be needed to ensure secure operation of Entity; or ERCOT Transmission Grid, and supplied by the ERCOT through deployment of bid Resources to meet Load varia- b. An Entity in a chain of successive ownership of at least tions not covered by Regulation Service. five percent of the voting securities of another Entity; or Bilateral Contract: A direct contract between the power producer and user or broker outside of a centralized c. An Entity that has at least five percent of its voting se- power pool or power exchange. curities owned or controlled, directly or indirectly, by Btu (British Thermal Unit): A standard unit for another Entity; or measuring the quantity of heat energy equal to the d. An Entity that has at least five percent of its voting se- quantity of heat required to raise the temperature of 1 curities owned or controlled, directly or indirectly, by pound of water by 1 degree Fahrenheit. an Entity who directly or indirectly owns or controls at Bundled Utility Service: All generation, transmission, least five percent of the voting securities of another and distribution services provided by one entity for a Entity or an Entity in a chain of successive ownership single charge. This would include ancillary services and of at least five percent of the voting securities of an- retail services. other Entity; or Capacity: The amount of electric power delivered or e. A person who is an officer or director of another entity required for which a generator, turbine, transformer, or of a corporation in a chain of successive ownership transmission circuit, station, or system is rated by the of at least five percent of the voting securities of an manufacturer. Entity; or Cogenerator: A generating facility that produces f. An Entity that actually exercises substantial influence electricity and another form of useful thermal energy or control over the policies and actions of another En- (such as heat or steam) used for industrial, commercial, tity; or heating, or cooling purposes. To receive status as a g. Any other Entity determined by the PUCT to be an Af- qualifying facility (QF) under the Public Utility Regulatory Policies Act (PURPA), the facility must filiate; produce electric energy and “another form of useful Aggregator: A person joining two or more customers, thermal energy through the sequential use of energy,” and other than municipalities and political subdivision cor- meet certain ownership, operating, and efficiency criteria porations, into a single purchasing unit to negotiate the established by the Federal Energy Regulatory purchase of electricity from retail electric providers. Commission (FERC). Aggregators may not sell or take title to electricity. Retail Combined Cycle: An electric generating technology in electric providers are not aggregators. which electricity is produced from otherwise lost waste Ancillary Services: Those services, described in Section heat exiting from one more gas (combustion) turbines. 6 of the ERCOT Protocols, necessary to support the trans- The exiting heat is routed to a conventional boiler or to a mission of energy from Resources to Loads while main- heat recovery steam generator for utilization by a steam taining reliable operation of transmission provider’s turbine in the production of electricity. This process transmission systems in accordance with Good Utility increases the efficiency of the electric generating unit. Practice. May include load regulation, spinning reserve, Commercially Significant Constraint (CSC): A constraint non-spinning reserve, replacement reserve and voltage in the ERCOT Transmission Grid that is found, through support. the process described in Section 7 of the ERCOT Protocols, Annual Transmission Planning Report: A report pre- to result in Congestion which limits the free flow of energy pared at least annually by ERCOT, as required by the within the ERCOT market to a commercially significant PUCT rules, regarding the status of the ERCOT System degree. including identification of ERCOT System existing and Competitive Retailer (CR): Municipally Owned Utility potential Congestion, which includes identification of cur- or an Electric Cooperative that offers Customer Choice rent and recommended construction of Transmission Fa- and sells electric energy at retail in the restructured electric cilities. power market in Texas; or a Retail Electric Provider (REP) Balanced Schedule: An Energy and Ancillary Service as defined in 25.5 of the PUCT Substantive rules. schedule submitted to ERCOT by a Qualified Scheduling Competitive Transition Charge: A non-bypassable charge Entity that consists of projected interval Obligations and levied on each customer of a distribution utility, including projected interval Supply, and that includes Qualified those who are served under contracts with non-utility

77 Glossary

suppliers, for recovery of a utility’s transition costs. Emergency Electric Curtailment Plan: A plan which provides an orderly, predetermined procedure for maximiz- ing use of available Resources and, only if necessary, cur- Congestion: The situation that exists when requests for tailing demand during electric system emergencies while power transfers across a Transmission Facility element providing for the maximum possible continuity of ser- or set of elements, when netted, exceed the transfer capa- vice and maintaining the integrity of the ERCOT System. bility of such elements. ERCOT Region: The geographic area under the jurisdic- Congestion Zone: A grouping of busses that create a simi- tion of the PUCT that is served by TDSPs that are not lar Shift Factor on CSCs. synchronously interconnected with electric utilities out- Control Area: An electrical system, bound by intercon- side the state of Texas. nect (tie line) metering and telemetry, which continuously ERCOT System: The interconnected combination of gen- regulates, through automatic generation control, its generation, transmission, and distribution components in the eration and interchange schedules to match its system ERCOT Region. Load, regulates frequency, and meets all applicable Con- trol Area requirements. ERCOT System Load: The sum of all HVDC interconnections and Generation Resources metered at the point Direct Current Tie, DC Tie: Any non-synchronous trans- of its interconnection with the ERCOT System at any given mission interconnections between ERCOT and non- point in time. ERCOT electric power systems. ERCOT Transmission Grid: All of those Transmission Dispatch: The act of issuing Dispatch Instructions. Facilities which are within the ERCOT Region. Dispatch Instruction(s): Specific command(s) issued by Futures Market: Arrangement through a contract for the ERCOT to QSEs or TDSPs during the course of operating delivery of a commodity at a future time and at a price the ERCOT System. specified at the time of purchase. The price is based on an Distribution Losses: The difference between the energy auction or market basis. This is a standardized, exchange- delivered to the Distribution System and the energy con- traded, and government regulated hedging mechanism. sumed by Loads connected to the Distribution System. Hedging Contracts: Contracts which establish future Distribution Service Provider: An Entity that owns and prices and quantities of electricity independent of the maintains a Distribution System for the delivery of en- short-term market. Derivatives may be used for this pur- ergy from the ERCOT Transmission Grid to the Customer. pose. Distribution System: That portion of an electric delivery Independent Power Producers: Entities that are also con- system operating at under 60 kilovolts (kV) that provides sidered nonutility power producers in the United States. electric service to Customers or Wholesale Customers. These facilities are wholesale electricity producers that operate within the franchised service territories of host Divestiture: The stripping off of one utility function from utilities and are usually authorized to sell at market-based the others by selling (spinning-off) or in some other way rates. Unlike traditional electric utilities, Independent changing the ownership of the assets related to that func- Power Producers do not possess transmission facilities tion. Stripping off is most commonly associated with spin- or sell electricity in the retail market. ning-off generation assets so they are no longer owned by the shareholders that own the transmission and dis- Load: The amount of electric power delivered at any speci- tribution assets. fied point or points on a system. Load Profile: A representation of the energy usage of a Electric Cooperative group of Customers, showing the demand variation on a. A corporation organized under Chapter 161, Texas Utili- an hourly or sub-hourly basis. ties Code, or a predecessor statute to Chapter 161 and Load Serving Entity: An Entity that provides electric ser- operating under that chapter; vice to Customers and Wholesale Customers. Load Serv- b. A corporation organized as an electric cooperative in a ing Entities include Retail Electric Providers, Competi- state other than Texas that has obtained a certificate of tive Retailers, and Non-Opt In Entities that serve Load. authority to conduct affairs in the State of Texas; or c. A successor to an electronic cooperative created before Market-Based Pricing: Electric service prices determined June 1, 1999, in accordance with a conversion plan ap- in an open market system of supply and demand under which the price is set solely by agreement as to what a proved by a vote of the members of the electric coop- buyer will pay and a seller will accept. Such prices could erative, regardless of whether the successor later pur- recover less or more than full costs, depending upon what chases, acquires, merges with, or consolidates with the buyer and seller see as their relevant opportunities other electric cooperatives. and risks. Electric Service Identifier (ESI ID): The basic identifier Market Participant: An Entity that engages in any activ- assigned to each Service Delivery Point used in the regis- ity that is in whole or in part the subject of these Proto- tration and settlement systems managed by ERCOT or cols, regardless of whether such Entity has executed an another Independent Organization. Agreement with ERCOT.

78 Glossary

Market Segment: The Segments defined in Article 2 of cillary Services Obligations (which may be self-arranged) the ERCOT Bylaws. The segments are: + Ancillary Services sales (to ERCOT or to other QSEs) a. Independent REPs, Open Access: A regulatory mandate to allow others to b. Independent Generators, use a utility’s transmission and distribution facilities to move bulk power from one point to another on a nondis- c. Independent Power Marketers, criminatory basis for a cost-based fee. d.Investor Owned Utilities, Out of Merit Order (OOM): The selection of Resources e. Municipals, for Ancillary Services that would otherwise not be selected to operate because of their place (or absence) in the bid- f. Cooperatives, and ding process for that service. g. Consumers. Outage: Removal of a Facility from service to perform Merit Order: The ranking of Resources as a direct func- maintenance, construction or repair on the Facility for a tion of the monetary bid from those resources. specified duration. Metering Facilities: Revenue Quality Meters, instrument Parallel Path Flow: Electricity flows over transmission transformers, secondary circuitry, secondary devices, lines according to the laws of physics. As such, the power meter data servers, related communication Facilities and generated in one region may flow over the transmission other related local equipment intended to supply ERCOT lines of another region, inadvertently affecting the abil- settlement quality data ity of the other region to move power. Municipally Owned Utility (Muni): A utility owned, op- Postage Stamp Allocation: The pro rata allocation of erated, and controlled by a municipality or by a nonprofit charges (or payments), which spreads to designated, En- corporation, the directors of which are appointed by one tities based on a pro rata share (of actual or estimated or more municipalities. consumption). Net Generation: Gross generation minus station auxilia- Power Generation Company: An Entity registered by the ries or other internal unit power requirements metered PUCT that: at or adjusted to the point of interconnection at the Com- 1. generates electricity that is intended to be sold at whole- mon Switchyard. sale; New Renewable Facilities: Renewable energy generators 2. does not own a transmission or distribution Facility in placed in service on or after September 1, 1999. A New this state other than an essential interconnecting Facility, Facility includes the incremental capacity and associated a Facility not dedicated to public use, or a Facility other- energy from an existing Renewable Facility through re- wise excluded from the PURA definition of “electric util- powering activities undertaken on or after September 1, ity”; and 1999. 3. does not have a certificated service area, although its Non-Opt In Entity (NOIE): An Electric Cooperative or affiliated electric utility or transmission and distribution Municipally Owned Utility that does not offer Customer utility may have a certificated service area. Choice. Power Marketer: An Entity that: Non-Spinning Reserve Service (NSRS): A service that is provided through utilization of the portion of off-line gen- 1. Becomes an owner or controller of electric energy in eration capacity capable of being synchronized and this state for the purpose of buying and selling the elec- ramped to a specified output level within thirty (30) min- tric energy at wholesale; utes (or Load that is capable of being interrupted within 2. Does not own generation, transmission, or distribution thirty (30) minutes) and that is capable of running (or Facilities in this state; being interrupted) at a specified output level for at least one (1) hour. Non-Spinning Reserve Service (NSRS) may 3. Does not have a certificated service area; and also be provided from unloaded on-line capacity that 4. Has been granted authority by the Federal Energy meets the above response requirements and that is not Regulatory Commission to sell electric energy at market- participating in any other activity, including ERCOT mar- based rates or has registered as a power marketer. kets, self-generation and other energy transactions. Price-to-Beat (PTB): The bundled rate a Retail Electric North American Electric Reliability Council (NERC): Provider that is affiliated with an Entity required to un- The national organization that is responsible for estab- bundle its electric services, and offer Customer Choice, lishing standards and policies for reliable electric system must charge to residential and small commercial Custom- operations and planning, or its successor. ers upon initiation of Customer Choice, as further de- Obligation: Total Obligations scheduled by a QSE that scribed in Section 39.202 of PURA and PUCT rules. are comprised of energy Obligations and Ancillary Ser- Provider of Last Resort (POLR): The designated Com- vices Obligations where: petitive Retailer as defined in the PUCT Substantive Rules · Energy Obligations = Load + losses + energy sales + for default Customer service, and as further described in energy exports; and Section 15.1, Customer Switch of Competitive Retailer. · Ancillary Services Obligations = ERCOT allocated An- Pumped Storage Hydroelectric Plant: A plant that usu-

79 Glossary

ally generates electric energy during peak-load periods §39.353(b), a Retail Electric Provider is not an Aggregator. by using water previously pumped into an elevated stor- Scheduling Process: The process through which sched- age reservoir during off-peak periods when excess gen- ules for energy and Ancillary Services are submitted by erating capacity is available to do so. When additional QSEs to ERCOT as further described in Section 4, Sched- generating capacity is needed, the water can be released uling. from the reservoir through a conduit to turbine generators located in a power plant at a lower level. Settlement Interval: The time period for which a Market Service is deployed and financially settled. For example, Qualified Scheduling Entity (QSE): A Market Participant the currently defined settlement interval for the Balanc- that is qualified by ERCOT in accordance with Section ing Energy Market Service is 15 minutes. 16, Qualification of Qualified Scheduling Entities and Registration of Market Participants, to submit Balanced Settlement Meter: Generation and end-use consumption Schedules and Ancillary Services bids and settle payments meters used for allocation of ERCOT charges and whole- with ERCOT. sale and retail settlements. Rate Base: The value of property upon which a utility is Spinning Reserve: That reserve generating capacity run- permitted to earn a specified rate of return as established ning at zero load and synchronized to the electric sys- by a regulatory authority. The rate base generally repre- tem. sents the value of property used by the utility in provid- Stranded Benefits: Benefits associated with regulated ing service and may be calculated by any one or a combi- retail electric service which may be at risk under open nation of the following accounting methods: fair value, market retail competition. Examples are conservation prudent investment, reproduction cost, or original cost. programs, fuel diversity, reliability of supply, and tax rev- Depending on which method is used, the rate base in- enues based on utility revenues. cludes cash, working capital, materials and supplies, and Stranded Costs: Prudent costs incurred by a utility which deductions for accumulated provisions for depreciation, may not be recoverable under market-based retail com- contributions in aid of construction, customer advances petition. Examples are undepreciated generating facili- for construction, accumulated deferred income taxes, and ties, deferred costs, and long-term contract costs. accumulated deferred investment tax credits. Supply: Total supply scheduled by a QSE that is Reactive Power: The product of voltage and the out-of- comprised of Energy Supply and Ancillary Services phase component of alternating current. Reactive Power, Supply where: usually measured in megavolt-amperes reactive, is produced by capacitors, overexcited generators and other • Energy Supply = Resources + energy purchases + capacitive devices and is absorbed by reactors, energy imports; and underexcited generators and other inductive devices. • Ancillary Services Supply = Resources + Ancillary REC Program: The Renewable Energy Credit trading pro- Services purchases (including purchases through gram, as described in Section 14, Renewable Energy Credit ERCOT) + Ancillary Services imports Trading Program, and PUCT Subst. R. 25.173. System Benefit Fund: The fund established by the PUCT Replacement Reserve Service: A service that is procured to provide funding for Customer education programs, from Generation Resource units planned to be off-line and programs to assist low-income electric Customers; and Load acting as a Resource that are available for interrup- the property tax replacement mechanism provided by Sec- tion during the period of requirement. tion 39.601 of PURA. Resource: Facilities or Load capable of providing or re- System Congestion Fund: ERCOT’s accounting fund ducing the need for electrical energy or providing Ancil- from which payments for resolving Congestion are dis- lary Services to the ERCOT System, as described in Sec- bursed and to which ERCOT credits Congestion-related tion 6, Ancillary Services. This includes Generation Re- receipts from QSE’s representing Loads. sources and Loads acting as Resources. System Operator: An Entity supervising the collective Resource Plan: A plan provided by a QSE to ERCOT in- Transmission Facilities of a power region that is charged dicating the forecast state of Generation Resources or in- with coordination of market transactions, system-wide dividual Loads each acting as a Resource, including in- transmission planning, and network reliability. formation on availability, limits and forecast generation TDSP Metered Entity: Any Entity that meets the require- or Load of each Resource. ments of Section 10.2.2, TDSP Metered Entities. Responsive Reserve Service: Responsive Reserve consists Technical Advisory Committee: A subcommittee in the of the daily operating reserves that are intended to help ERCOT governance structure reporting to the Board of restore the frequency of the interconnected transmission Directors as defined by the ERCOT bylaws. system within the first few minutes of an event that causes a significant deviation from the standard frequency. Total Energy Obligation: The total energy Obligation for a Qualified Scheduling Entity during a Settlement Inter- Retail Electric Provider (REP): A person that sells elec- val, including the energy from the Balanced Schedule and tric energy to retail Customers in this state. As provided integrated energy of instructed Ancillary Services. in PURA §31.002(17), a Retail Electric Provider may not own or operate generation assets. As provided in PURA Total Transmission Capacity: The maximum power that

80 Glossary

may be transferred across a transmission corridor while maintaining reliability of the ERCOT System. Transmission Access Service: Use of the TDSP’s Trans- mission Facilities for which the TDSP is allowed to charge for the use through tariff rates approved by the PUCT. Transmission Congestion Right (TCR): A financial hedge against the cost of 1 MW flowing across a particular Com- mercially Significant Constraint, in a single direction, for 1 hour. Transmission and/or Distribution Service Provider (TDSP): An Entity that owns or operates for compensation in this state equipment or Facilities to transmit and/ or distribute electricity, and whose rates for Transmission Service, distribution service, or both is set by a Govern- mental Authority. Transmission Facilities: The following Facilities are deemed to be Transmission Facilities: 1. Power lines, substation, and associated Facilities, operated at 60 kV or above, including radial lines operated at or above 60 kV. 2. Substation Facilities on the high side of the transformer, in a substation where power is transformed from a voltage higher than 60 kV to a voltage lower than 60 kV or is transformed from a voltage lower than 60 kV to a voltage higher than 60 kV. 3. The direct current interconnections with the Southwest Power Pool (SPP), Western System Coordinating Council (WSCC), Comision Federal de Electricidad, or other interconnections. Transmission Losses: Difference between energy input into the ERCOT Transmission Grid and the energy taken out of the ERCOT Transmission Grid. Transmission Service Provider: An Entity under the jurisdiction of the PUCT that owns or operates Transmis- sion Facilities used for the transmission of electricity and provides transmission service in the ERCOT Transmis- sion Grid. Wholesale Customers: Non-Opt-in entities receiving service at wholesale points of delivery from an LSE other than themselves. Zonal Congestion: Congestion that can be resolved by deployment of Balancing Energy Services by Congestion Zones, including CSCs and any Operational Constraints underlying or essentially parallel to CSCs.

This glossary is based on glossaries available at www.ercot.com and www.eia.doe.gov. For more defini- tions, please refer to these sites.

81 82 Further Readings

Andrews, Clinton J., editor. 1995. Regulating ERCOT. February 22, 2001. The Market Guide. Regional Power Systems. Westport, Conn: Quo- rum Books. ERCOT. circa 1990. ERCOT: The Texas Connec- tion for Reliable Electricity. Austin, Texas: Bradley, Robert L., Jr. 1996. The Origins of ERCOT. Political Electricity: Market Failure of Political Opportunism? Energy Law Journal 17: 59-102. ERCOT. September 1993. The ERCOT Bulk Elec- tric System: What It Is and How It Works. Aus- Brennan, Timothy J., et al. 1996. A Shock to the tin, Texas: ERCOT. System: Restructuring America’s Electricity Indus- try. Washington, D.C.: Resources for the Future. Flavin, Christopher and Nicholas Lenssen. 1994. Power Surge. New York: W. W. Norton & Dismukes, David, Allan Pulsipher and Kim- Company, Inc. berly Dismukes. March 1996. Restructuring the Electric Utility Industry: Implications for Louisi- Foss, Michelle Michot and Gürcan Gülen. Sum- ana: Phase I: Background and Overview. Baton mer 2001. Electricity Industry Restructuring in Rouge, Louisiana: Center for Energy Studies, Texas: A White Paper (available at Louisiana State University. www.powertochoose.org).

Enholm, Gregory B. and J. Robert Malko. 1995. Foss, Michelle Michot. September 17, 1996. Reinventing Electric Utility Regulation, Vienna. Energy Utility Deregulation: Implications for Cus- Virginia: Public Utilities Reports, Inc. tomers. Presentation to Federal Reserve Bank Facilities Managers Conference. Richmond, Energy Information Administration. March Virginia. 2002. Inventory of Electric Utility Power Plants in the U.S. 2000. Foss, Michelle Michot, Pratt, Joseph A., Conine, Gary, Stone, Allen and Robert Keller. May Energy Information Administration. January 1998. North American Energy Integration: The 2002. Electric Sales and Revenue 2000. Washing- Prospects for Regulatory Coordination and Seam- ton, D.C.: U.S. Department of Energy. less Cross-Border Transactions of Natural Gas and Electricity. IELE White Paper. Energy Information Administration. December 2001. Annual Energy Outlook 2002. Washington, Foss, Michelle Michot. Unpublished manu- D.C.: U.S. Department of Energy. script. U.S. Natural Gas in the 21st Century: Ad- justing to the New Reality. University of Hous- Energy Information Administration. August ton, dissertation. 2001. Electric Power Annual 2000, Volume I, Washington, D.C.: U.S. Department of Energy. Fuldner, Arthur H. 1996. Upgrading Transmis- sion Capacity for Wholesale Electric Power Trade, Energy Information Administration. October Worldwide Web: U.S. Department of Energy. Gee, Robert W. and Kenton C. Grant. 1995. Energy Information Administration. 1995. Regulation in the Lone Star State, from Rein- Performance Issues for a Changing Electric Power venting Electric Utility Regulation by Enholm Industry. and Malko. Vienna, Virginia: Public Utilities Reports, Inc., 273-285

83 Further Readings

Gervais, Marc . July 1993. Electricity Supply and Joskow, Paul. 1994. Competition in the U.S. Elec- Demand into the 21st Century. Washington, D.C.: tric Power Sector: Some Recent Developments. U.S. Council for Energy Awareness. MIT, Center for Energy and Environmental Policy Working Paper 94-008. October. Gülen, Gürcan and Michelle Michot Foss. Forthcoming. Electricity Restructuring in the Kozloff , Keith Lee and Roger C. Dower. U.S. A Status Report. IELE White Paper. December 1993. A New Power Base: Renewable Energy Policies for the Nineties and Beyond. Wash- Gülen, Gürcan. October 2002. A Comparative ington, D.C.: World Resources Institute. Look at Capacity Schemes. IELE Working Paper, presented at the 2002 USAEE Conference in Lower Colorado River authority. 1995. Electric- Vancouver. ity 101, Austin, Texas: LCRA.

Gülen, Gürcan. June 2002. Demand Side Adib, Parviz and Candice Clark. August 1996. Response and Dynamic Pricing. IELE Working Regulatory Reform, Texas Style: The Electric and Paper. Versions published in the Proceedings Telecommunications Industries. Texas Business for the 2002 IAEE International Conference in Review, University of Texas Bureau of Busi- Aberdeen and USAEE Dialogue. ness Research.

Gülen, Gürcan and Michelle Michot Foss. June Public Utility Commission of Texas. June 18, 2002. Mean Reversion and Volatility in Energy 2002. Presentation to the Electric Utility Re- Prices: Implications for Policy. IELE Working Pa- structuring Legislative Oversight Committee. per, presented at the 2002 IAEE International Conference in Aberdeen. Public Utility Commission of Texas, Market Oversight Division. December 2000. Project Hoecker, James J. October 4, 1994. New No. 22209. 2000 Annual Update of Generating Directions for the Electric Industry: A View of Utility Data. Emerging Competition. Presentation to the Edison Electric Institute and Western Coal Southern States Energy Board. April 1996. Council (St. Louis). Emerging Competitive Issues Relating to the U.S. Electric Utility Industry: A Primer. Hoffman, Matthew. 1994. The Future of Elec- tricity Provision. Regulation 1994(3): 55-62. Texas Comptroller of Public Accounts. December 1996. Deregulation Sparks: Electric Hogan, William. May 2000. Regional industry faces overhaul in new era of compe- Transmission Organizations: Millenium Order on tition. Fiscal Notes. Austin, Texas. Designing Market Institutions for Electricity Network Systems. Working Paper. Harvard Elec- Texas Sustainable Energy Development tricity Policy Group. Council. August 1995. Texas Energy for a New Century. Austin, Texas: Texas Sustainable En- Hogan, William. November 17, 1994. Reshap- ergy Development Council. ing the Electricity Industry. Presentation to the Federal Energy Bar Conference (Washington, Texas Legislature. May 1999. Senate Bill 7. D.C.). TU Electric. undated. The Pathway of Power. Joskow, Paul L. and Richard Schmalensee. 1983. Markets for Power. The MIT Press: Cam- U.S. Federal Energy Regulatory Commission. bridge, Mass. April 24, 1996. Fact Sheet: Electric Utility Re- structuring.

84 Further Readings

Virtus Energy Research Associates. July 1995. Texas Renewable Energy Resource Assessment. Austin, Texas: Texas Sustainable Energy De- velopment Council.

Vogel, Carole. April 18, 1996. Texas Transmis- sion Access and Pricing Rules. Presentation for the Natural Gas Association of Houston. Hous- ton, Texas.

Vu, Mia. December 12, 1996. Convergence of Gas and Electricity Markets. Presentation to the International Association for Energy Econom- ics-Houston Chapter (Houston).

WEB SITES: www.powertochoose.org www.puc.state.tx.us www.ercot.com www.ferc.gov www.eia.doe.gov www.epa.gov www.gulfcoastpower.org www.aect.net

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