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 ver- sions, 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 fi- nancial 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 mar- ket-driven behavior. These policy actions have been taken mindful of the public interests in- volved. This bigger picture underlies the pur- pose 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 ii 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