June 10, 2002

Confidence in Texas' Electric Deregulation Program Declines As Problems Rise

by Dan Piller

Almost half a year after its much-ballyhooed launch, electric deregulation in Texas remains an unfulfilled promise.

Rates, which dropped Jan. 1 when deregulation took effect, are rising again. Most consumers have been slow to switch from their longtime monopoly utility to a new electricity provider, while thousands of others have encountered billing problems. Electricity trading has been tarred by disclosures of "sham trades," adding to the dark cloud cast over the industry by Enron's collapse.

Barely 4 percent of Texas' 5.5 million eligible meters have been switched from an investor-owned utility to one of several new electricity marketers. In North Texas, just 3 percent of TXU's customers have switched, according to a Wall Street report released last week.

Despite those small numbers, the task of accounting for customer switches has proved to be too much for the computer systems of the utilities, the providers and the Electric Reliability Council of Texas (ERCOT).

ERCOT chief executive Tom Noel says as many as 300,000 bills and accounts out of nearly 1.2 million switches attempted since trials started in August have been lost or delivered late, due largely to computer errors. Most of these switches are for people who have moved, not from changing their electric providers.

TXU acknowledges that it has lost track of about 90,000 of its 2.8 million customer accounts.

"There's been a lot of finger-pointing," says Noel, who has been on the hot seat in front of legislators for paperwork problems that have plagued deregulation since Jan. 1. Last week, ERCOT's chairman, Jack K. Hawks, resigned under fire.

Noel notes that ERCOT has been working to tie together the computer systems of the various utilities and energy marketers, but says "in reality, we all are responsible."

The missteps have caused second-guessing even among the leading advocates of deregulation, including Erle Nye, chairman of Dallas-based TXU Corp., and state Rep. Steve Wolens of Dallas, one of the authors of the 1999 Texas law that opened up the power market.

"In hindsight, we should have given deregulation a longer trial period before we plunged in," says Nye, referring to a pilot program run by ERCOT in late 2001.

Says Wolens: "We underestimated the magnitude of the task involved in the switching process."

Meanwhile, the big consumer savings touted by government and industry leaders, including then-Gov. George Bush and former Enron Chairman Kenneth Lay, have yet to be realized.

A 6 percent reduction in TXU's rates mandated by deregulation on Jan. 1 is likely to disappear later this month when the Public Utility Commission acts on TXU's request to raise rates 6 percent because of rising natural gas costs. TXU's new rate, when monthly charges are included, will be near 9 cents per kilowatt hour.

Rival providers, who opened the market in January with rates at least a penny below TXU's regulated "price-to-beat," have recently hiked their rates in anticipation of TXU's increase. As of last week, just one of the eight competitors in the Fort Worth-Dallas market -- Reliant Resources of Houston -- was offering a price below 8 cents per kilowatt hour.

The skimpy margin between the price to beat and the competitive prices has prompted a round of 'I-told-you-so' from deregulation critics.

"Deregulation is a clear case of overpromising," said Reggie Harris, director of the Southwest office of Consumers Union. "This is reminiscent of what we were told years ago about nuclear power, that it would be 'too cheap to meter."'

Competition was weakened in Texas this spring when one of the new market entrants, New Power Holdings, stopped taking new customers amid financial difficulties. After booking 86,000 accounts during the pilot program, and about a third of all switches under deregulation, New Power is facing possible bankruptcy. The company, 44-percent owned by Enron, was squeezed by that company's collapse.

The loss of New Power was significant because it was the most aggressive marketer -- offering an opening price of more than 1 cent per kilowatt hour below TXU's price.

The price comparisons have left many consumers unimpressed. Darwin Hushhour of Keller, a customer of the Tri-County Electric Cooperative, said he was surprised to learn that his mother-in-law would have to pay a monthly price higher than his for electricity from TXU when she moved from Bryan to an area of Keller not served by Tri-County.

"I was feeling left out because Tri-County said it wouldn't be a part of deregulation," Hushhour said. "Now I feel better. At least I can check around for another rate for my mother-in-law, but so far it doesn't look all that attractive. As for me, I plan to stay with the cooperative."

Meanwhile Enron, like an unwanted relative that won't leave, continues to haunt deregulation. Last week, PUC recommended that Enron be fined $7 million for using phony "wash trades" during peak electricity demand periods last August to drive up prices and revenues.

The proposed fine was an indication that, contrary to promises made by deregulation boosters in Texas, the state's vaunted wholesale market can indeed be gamed by clever wholesale electricity traders, and that California-style wholesale price spikes can happen here.

Some worry that Texas may be vulnerable to another round of wholesale price rises this summer as the state's electric grid moves the peak loads needed to power air conditioners.

Although the state expects to generate up to 25 percent more electricity than the 60,000 megawatts needed on its hottest days, Texas' transmission system is vulnerable to congestion. And Fort Worth-Dallas is a prime worry. On a peak hot day, the Metroplex will consume about 9,000 megawatts of electricity while nearby generators can create about 5,000 megawatts.

The deficit has to be drawn over transmission wires, usually from generating plants in central and south Texas.

"I'm worried about congestion on the transmission system this summer," said Wolens. "We could have a problem."

Noel is more sanguine, describing Texas' transmission system as healthy. Still, he added, "there is no question that more transmission is needed, particularly for the D/FW area."

In 2001, TXU opened a 345-kilovolt transmission line from a Limestone County generator to hook up with the Fort Worth-Dallas grid. But three other major transmission projects -- two approaching Fort Worth-Dallas from the southwest in Comanche County and another northwest from Graham -- won't be ready for another year.

The experiences of California and even Texas last August show that any constraints in the electricity delivery system can prove expensive since electricity can't be stored. The wholesale trading market for electricity is unregulated, and system operators usually can't follow trades that are made mostly on Internet platforms.

So on days when electricity is in short supply, wholesale prices can run from the normal $20-$35 per megawatt hour to $1,000 or more.

Noel says that ERCOT has learned from the hiccup last August and has adopted a transmission rate structure for wholesalers that penalizes, rather than rewards, traders such as those at Enron who deliberately overloaded the grid system.

"This summer, if you cause the congestion, you'll pay for it rather than benefit by it," Noel said. >

State and federal regulators are working on various rules that would control the wholesale markets. Politicians are taking notice.

Democratic gubernatorial candidate Tony Sanchez has already run television spots highlighting "skyrocketing" electric rates.

Anti-deregulation forces see a possible opportunity in this political cycle. "I hope that deregulation becomes a major political issue in this campaign," said Tom Smith, director of Texas Public Citizen and a longtime critic of deregulation. "Tony [Sanchez] is setting up the issue beautifully."

The glitches in Texas, coming soon after the California disaster, have given other states cold feet. Arkansas, Montana, Nevada, New Mexico, Oregon and West Virginia, which had been set to open their electricity markets this year, have delayed deregulation. Florida and North Carolina, two larger states whose legislatures have considered deregulation bills, have decided to pass for the time being.

TXU's Nye points to Enron, which he called "the poster boy for deregulation," as a prime cause of renewed skepticism. Enron and its now-discredited management for years preached the virtues of opening both the regional transmission grids and the monopoly utility systems to free market competition.

Enron aside, the old-line investor-owned utilities have proved to be tough competitors even when the laws allow them to be undercut in price. Virginia, like Texas, began deregulation on Jan. 1. But after five months, the competitive market has all but evaporated as none of the new providers were able to compete with the dominant Dominion Power. Similarly, Illinois has failed to generate a competitive retail market after deregulation.

Wall Street, at least, had assumed greater switching. "TXU has lost only about 3 percent of its customers, fewer than I anticipated. We figured on a 20 percent turnover by the end of the year," said Daniel Ford, an analyst with Lehman Brothers.

TXU's Nye looks for residential electricity marketing to heat up this summer.

"People become price-sensitive when their costs are highest," says Nye. "If we're going to see significant movement of customers, the summer will be the time."

For information on how to switch electric providers, go to: www.powertochoose.com

Copyright 2002 Fort Worth Star Telegram