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The History of Electric Deregulation in Texas

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The History of Electric Deregulation in Texas 10 Years of Senate Bill 7 THE HISTORY OF ELECTRIC DEREGULATION IN TEXAS The Unfulfilled Promise of Utility Restructuring A Special Research Project by Cities Aggregation Power Project, Inc. TABLE OF CONTENTS Overview and Executive Summary«««««««««««««««««««««««««« ([HFXWLYH6XPPDU\«««««««««««««««««««««««««««««« 3 0DMRU)LQGLQJV««««««««««««««««««««««««««««««««4 5HFRPPHQGDWLRQV««««««««««««««««««««««««««««««« 5 Senate Bill 7: The History The Early Years «««««««««««««««««««««««««««««««« The Senator and the Napkin Doodle««««««««««««««««««««« Postage Stamp Pricing«««««««««««««««««««««««««« Year 1999³The 76th Texas Legislature³6HQDWH%LOO%HFRPHV/DZ«««««««««11 Senate Bill 7 Key Components««««««««««««««««««««««« 13 Year 2000³7KH&DOLIRUQLD&ULVLVDQGWKH7H[DV([SHULHQFH««««««««««««« 19 ´7KH:RUVW7KH\·G6HHQLQ<HDUVµ««««««««««««««««««««« Year 2001³The 77th Texas Legislature³6D\LQJ1RWR5DWHSD\HU5HIXQGV«««««««22 What is ERCOT?«««««« Excess Mitigation Credits«««««««««««««««««««««««««28 The Enron Collapse«««««««««««««««««««««««««««« Year 2002³7KH0DUNHW2SHQV««««««««««««««««««««««««« 33 (QURQ·V,OOHJDO0DUNHW0DQLSXODWLRQV«««««««««««««««««««« 37 Year 2003³The 78th Texas Legislature³6WD\LQJWKH&RXUVH««««««««««««« Year 2004³7KH(5&276FDQGDO´$&ULVLVRI&RQILGHQFHµ««««««««««««« 43 +RZ&RQVXPHUV/RVWZLWK([FHVV0LWLJDWLRQ&UHGLWV«««««««««««««««« 48 Year 2005³The 79th Texas Legislature³7KH:LQG3RZHU,QLWLDWLYH««««««««« Year 2006³7KH5ROOLQJ%ODFNRXWV«««««««««««««««««««««««« 52 Year 2007³The 80th Texas Legislature³7KH7;8%X\RXW««««««««««««« 57 Year 2008³(5&27·V2YHU-Budget and Behind-6FKHGXOH0DUNHW2YHUKDXO«««««« 61 What is Nodal?....................................................................................................................... 63 The GE Study«««««««««««««««««««««««««««««« Opt-Out Aggregation««««««««««««««««««««««««««« 70 Year 2009³The 81st Texas Legislature³6WLOO$ZDLWLQJWKH3URPLVH«««««««««71 End Notes«««««««««««««««««««««««««««««««««««««« About the Author«««««««««««««««««««««««««««««««««« 82 1 www.capptx.com The History of Electric Deregulation in Texas ABOUT THE CITIES AGGREGATION POWER PROJECT, INC. When it comes to electric deregulation, the Cities Aggregation Power Project enjoys a unique vantage point. The non-profit city coalition was created in 2001 for the specific purpose of purchasing power in the new market. CAPP members have educated themselves about energy policy and have worked shoulder-to-shoulder with experienced energy consultants. Its members have gained first-hand knowledge about what works right and what needs to change. CAPP pools the energy needs of its more than 100 members in order to negotiate for better prices from power generators. CAPP remains committed to making competition work. After all, the price CAPP members pay for electricity affects city budgets and the ability to fund essential city ƐĞƌǀŝĐĞƐ͘ dŚŝƐ ƌĞƉŽƌƚ ĐŽŶĨŝƌŵƐ ŵƵĐŚ ŽĨ ƚŚĞ ĐŽĂůŝƚŝŽŶ͛Ɛ experience as consumers in the deregulated market Ͷ that competition does not simply develop once regulation is abandoned. As we have seen from the recent financial market collapse, the absence of regulation and unchecked profit motivation can also lead to market power abuses that needlessly drive up prices. There also has been reluctance by some to confront obvious market flaws head-on. Electric consumers continue paying unwarranted costs. Mismanagement of technical systems has been common. CAPP supports all efforts to secure affordable energy in Texas. Its hope is that by presenting this detailed history and highlighting some of the documented problems that continue to plague the market, The History of Electric Deregulation in Texas will help ƉƌŽŵŽƚĞƵŶĚĞƌƐƚĂŶĚŝŶŐ͘dŚĞŐŽŽĚŶĞǁƐŝƐƚŚĂƚĂƐůŽŶŐĂƐǁĞŬŶŽǁǁŚĞƌĞǁĞ͛ǀĞďĞĞŶ͕ǁĞ can chart a path forward. CAPP, like all consumers, wants what the architects of Senate Bill 7 set out to create 10 years ago Ͷ a competitive electric market that truly works. Cities Aggregation Power Project 2 10 Years of Senate Bill 7 OVERVIEW AND EXECUTIVE SUMMARY The History of Electric Deregulation in Texas On Jan. 20, 1999, Sen. David Sibley by ratepayers in surrounding states that remain unveiled legislation that would fundamentally regulated or to prices paid by other deregulated change how Texans buy electric power. The states ² Texans in the deregulated market are legislation that came to be known throughout the paying more and getting hit with bigger price industry simply as Senate Bill 7 (SB 7) called for increases. the elimination of regulated energy rates and Has deregulation really produced monopoly providers. At the time, Texas touted competition? Why does the energy industry tell plentiful supplies of cheap power for its booming us that Texas is success when prices have gone up? population and to feed heavy industrial users like Where has Texas gone wrong and what has it ͘͘͘͞^EN. SIBLEY SET THE CRITERIA FOR JUDGING done right? The Cities Aggregation Power Project SENATE BILL ϳ͗͞IF WE DON'T GET CONSUMERS LOWER (CAPP), a group of more than 100 communities RATES, THEN WE HAVE BEEN A FAILURE -- I'LL BE THE throughout Texas, commissioned this report, The FIRST TO SAY IT͘͟ History of Electric Deregulation in Texas, to provide a fact-based chronology of major market events to refineries. But lawmakers said that under Senate help answer these questions. Bill 7 competition and market forces would drive already low prices in Texas even lower. But this is not a typical policy analysis. Rather, The History of Electric Deregulation in Texas Sen. Sibley could not have been more tells the story from the beginning and examines clear about SB 7's bottom line goal. "We want this year-by-year the successes and failures of SB 7. bill to bring down the cost of electricity for all The goal of this report is to provide historical 7H[DQVµ KH VDLG 8QGHUVFRULQJ KLV SRLQW 6HQ context with which to judge some of the most 6LEOH\VHWWKHFULWHULDIRUMXGJLQJ6%´LIZHGRQ W difficult challenges facing the state today and to get consumers lower rates, then we have been a highlight important innovations. And unlike the failure -- , OOEHWKHILUVWWRVD\LWµ sponsors of other reports issued on the Texas Ten years later, there seems to be no end market, the sponsor of this report ² CAPP ² to industry-sponsored reports and studies derives no incentive or profit from selling proclaiming the success of SB 7, many going so far electricity. Instead, the member communities of as to declare the restructured market "an example CAPP want what all Texans want: affordable and for the world." But ask anyone paying an electric reliable power and a healthy economy. The bill and they will tell you that it doesn't feel like a lawmakers who approved SB 7 knew that success. Prices are much higher since the start of affordable power would mean economic deregulation. Using virtually any pocketbook development in our cities and a better life for our comparison ² whether it is to prices paid in parts of citizens. They intended for competition to bring the state that have not deregulated, to prices paid lower prices. 3 www.capptx.com The History of Electric Deregulation in Texas 10 Years of Senate Bill 7 MAJOR FINDINGS failure of market participants. The abuses have increased the cost of electricity for ratepayers. When lawmakers adopted Senate Bill 7, they Efforts to Help Customers Have Been intended the legislation to bring about a fully Ignored competitive market that greatly expanded the number Proposals to limit the monopoly control of of providers, improved customer service and lowered some electric providers, or to limit unfair prices for all Texans. Has the deregulated market increases in a semi-regulated rate under the fulfilled the promise of SB 7? The History of Electric deregulation law, were rejected during repeated Deregulation in Texas records significant events over legislative sessions. Lawmakers also reneged on the past 10 years to help answer that question. Major a key commitment of SB 7 and in the process findings of this report include: hiked rates for hundreds of thousands of poor The Number of Providers Has Increased But Texans. Customer Prices Are Higher, Not Lower Renewable Energy Gains May Be Tempered The number of electric providers has by Higher Costs for Consumers increased since the market deregulated. Over the past 10 years, Texas has become a However, when it comes to the impact on leader in encouraging the development of consumer prices and the establishment of a truly renewable power. However, the aggressive build competitive market, the legislation fails to live up -out of wind power in West Texas is projected to to the early promises. Texans paid prices below drive up transmission costs for all Texans and the national average in the years leading up to create new reliability challenges. Senate Bill 7. Since the market opened, prices have climbed above the national average. Problems with the Power Grid Operator Persist Deregulated prices paid by Texas households have increased by a greater percentage than in The Electric Reliability Council of Texas any other deregulated state with retail (ERCOT), the operator of the power grid, competition. (See chart on page 6) continues to have problems managing the transition to competition. There have been Enron Played a Key Role in the Deregulation of the Market expensive missteps from the very beginning, criminal charges, and a major market overhaul is If not for the disgraced energy company's now years behind schedule and approximately considerable political influence, Texas and other 900 percent over initial cost projections. states may never have
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