Power deregulation Texas style

Jan.14, 2001

Power deregulation Texas style

Peter Behr

Californis Gov. Gary Davis has been beating a path to Washington, seeking federal help to fix his state's fractured electricity industry.

Better he had gone to Austin, according to Texas energy executives and regulators.

Following a plan produced by president-elect George W. Bush and state lawmakers, Texas is on course to, beginning in six months, deregulate its electric power industry, just as California did in 1996.

The Texas design bears no resemblance to the complex California plan that broke down last summer in the face of power shortages and soaring wholesale electricity prices, say utility experts.

Bush argued during last year's campaign that the Texas deregulation effort could provide an example of how competitive electricity service can succeed-- a model for possible national legislation.

The Texas approach is about to be tested, at a time of record prices for natural gas used to generate a growing amount of electricity. And in the face of California's calamity, the move toward electricity deregulation in two dozen states is in trouble unless success stories emerge, industry analysts agree.

California and Texas approached electicity deregulation in dramatically different ways.

California, whose system depended on competition among independent electric power generators, hasen't had a major new power plant built in a decade, largely because of the state's stringent environmental and siting regulations.

(Alberta, which has pioneered electrical deregulation in Canada, is also struggling to cope with the rising power costs. Critics cite uncertainty about new rules for the deregulated industry as a major factor in a shortage of new power plants. Premier Ralph Klein has blamed rapid growth and soaring natural gas costs for a supply squeeze that has boosted electricity prices.)

But Texas is awash in power plants, and more are being built. Pat Wood III, chair of the Public Utility Commission of Texas, the state's top electric power regulator, said he's attended ground-breaking ceremonies for most of those new plants, taking home the requisite ceremonial shovel. "I have so many damn shovels, Icould start a hardware store," he said.

Furthermore, California has attempted to shield consumers from price rises with a complex, sometimes conflicting set of price controls. The system has brought two major utilities close to insolvency because they cannot pass $11 billion in higher energy costs on the customers. These debts are making it increasingly diiicult for the utilities to purchase power on credit, they say.

Under the Texas plan, electricity rates can go up twice a year to reflect higher costs for producing power, including higher gas costs. Wood said the guarantee made in California that prices won't rise under deregulation is a reckless political promise that misleads consumers.

"The best thing you can promise is that the price you'll pay in a competitive market will be less than you'd pay under regulation. That's the promise this (Texas) legislature made, and they can stand by it in good faith," Wood said.

The rising cost of natural gas, however, could create unexpected problems in Texas, according to Charles Matthews, a Rebublican member of the Texas Railroad Commission, which regulates the gas industry. Matthews has warned that the fourfold leap in the price of natural gas could eventually undermine Texas' plan.

Natural gas production in Texas peaked in 1972, Matthews said. Now, although Texas remains one of the nation's largest sources of natural gas, production isn't keeping up with the explosive growth in demand caused primarily by the popularity of gas-fired electrical generators.

Consumers Union and other roups also warn of higher electricity prices because of the rising cost of natural gas.

Texas utility officials and regulators, however, remain confident that deregulation will work. "I don't think we have gotten it right," said Wood.

The Texas plan will allow consumers to choose among competing providers, rather than buying power from the regulated monopoly utility serving their region.

The rapid construction of new gas-fired generating plants in Texas since 1995 is the biggest single diference between the situations in California and Texas.

In Texas, 22 plants have come on line since 1995 and 15 are under construction, with completion scheduled by the end of 2002. That new supply will ensure price competition in price competition in Texas, Wood said.

To speed plant construction Texas cut away many of the regulations that had restricted plant location. If a plant meets state air-quality regulations, it can be built -- and modern gas-fired power plants do meet the standards, said Tom Smith, director of Texas Public Citizen, an advocacy organization in Austin.

His organization and others, despite misgivings, approved the expansion of power plants that use natural gas, the cleanest of fossil-based fuels, to make electricity.

"None of us wants to have a polluting facility in our neighborhood," Smith said. "But if you look at the emissions from a gas plant versus those from a coal plant, there's no choice.