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Texas Electricity Savings:

  Texas business owners have the opportunity to save up to 20% on their monthly electricity bill

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  Home owners in Texas can also take advantage of Texas deregulation

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Deregulation: A Work in Progress

States are learning that when it comes to deregulation programs, one size does not fit all.

A lot of gas has passed through the pipes since the federal government deregulated the utility industry. As states like Texas, Ohio, and California have framed a new set of regulations to serve both consumer expectations and market competitors, a lot of mistakes have been made and a lot of lessons have been learned. Perhaps the principal lesson to come out of all the chaos is that changes should be unrushed and tailor-made.

Texas success

It is difficult to separate natural gas and electricity in Texas where 48.5% of the electricity is generated by natural gas. The Railroad Commission oversees the still regulated natural gas industry for residential and commercial customers, while the Public Utilities Commission wrangles a herd of electricity providers serving unbundled customer groups.

With 250,000 miles of gas pipeline, Texas is both the largest producer and the largest consumer of natural gas in the nation, using 23% more than California.

The Texas gas customer base consists of 10% residential/commercial and 90% industrial and power generation. While residential and commercial service is still regulated, most large industrial and electric generation customers are free to negotiate their own rates. Because users are so close to the source and supply exceeds demand, they have enjoyed relatively low prices in comparison to other parts of the country.

The Texas legislature has seen fit to leave the rate-setting authority with the individual cities, which in turn have no desire to give up their jurisdiction. The RRC, meanwhile, sets rates for customers outside the city limits or within the city on appeal. The result of this split jurisdiction is a lack of rate consistency among cities. Also, the process lacks efficiency since each city bears duplicate costs for rate setting. However, this is an issue most agree is a small price to pay for retaining local jurisdiction.

“Texas allows the market to work when it can,” says Karl Nalepa, assistant director of the Regulatory Analysis & Policy Section of the Texas Railroad Commission’s Gas Services Division. “The RRC is a complaint driven regulatory agency. When we receive complaints, we have the authority to investigate and seek a solution that fits the problem.”

Prior to 1995, electric utilities in Texas were monopolies with guaranteed, but regulated, incomes. Because utilities were obligated to provide reliable electricity to all customers in their areas, utilities maintained excess capacity.

More than 39 generation projects have been completed in the past few years, giving Texas 25% excess electric capacity on average.

Wholesale deregulation took place in 1995 followed by retail deregulation in January 2002. Retail consumers are no longer obligated to buy power from their local utility but can choose to purchase power from a list of competing licensed retail electric providers serving their area. These REPs are required to disclose their fuel mix to the consumer along with other purchase information. Consumers can shop for a REP based on pricing, type of service contract, and/or use of renewable resources.

The independent Electric Reliability Council of Texas, Inc., administers the state’s power grid that serves 85% of the state’s electric load with 70,000 megawatts of generation and 37,000 miles of transmission lines. Areas outside of ERCOT’s control are El Paso, Amarillo, and Beaumont as well as most co-ops and municipalities.

Municipalities can opt in to deregulation or not. So far, none have and prices to consumers remain good.

Unlike other states, the Texas grid is not connected to other states and is unable to bring in or send out electricity. This has served to keep supplies up, making the market more competitive.

There is another benefit to this independence, according to Jess Totten, Director of the Electric Division of the PUC. “We’ve had an advantage in regulating wholesale and retail by developing rules with one agency rather than trying to coordinate development with separate agencies.”

Totten thinks one of Texas’s biggest hurdles has been setting up the computer system that tracks customer switching. A customer registration function notifies providers so that billing can be stopped by the old provider and initiated by the new provider in a timely fashion. At the same time, a change verification postcard is sent to the customer as a means of preventing slamming.

When all is said and done, just about everyone thinks deregulation is working in Texas. Totten believes Texas was able to learn from other markets and had adequate time (two years) to develop rules. In turn, all of this attracted good players.

Ohio: mixed reaction

The Gulf of Mexico supplies 90% of the gas used in Ohio.

Restructuring in Ohio has brought greater competition and lower retail prices. In 1997, most residential and commercial customers were given the opportunity to choose their gas supplier. Since then, over 1 million Ohioans have switched to independent marketers.

Following this, in 2001, legislation was passed to unbundle electric customers. In the Akron area alone, almost 25% of revenues has shifted to independent marketers.

On the dark side, some customers say they have been switched against their will and many others are not sure how to take advantage of the new situation.

In other parts of Ohio, no independent marketers have chosen to compete with local utility rates.

Some consumer advocate groups think the deregulation of Ohio’s electricity has been more trouble than it is worth.

California failure

California is second in the nation in consumption of energy yet produces only 16% of the gas it uses and 75% of its electricity.

In 1998, deregulation forced utilities to sell their generation plants and to purchase electricity daily and hourly at spot market rates. With the addition of a hot summer, supply shortages, and policy disputes with FERC and the CPUC, the result was the perfect storm.

Estimates of the cost of the ensuing blackouts around the state were $2.3 billion. A National Federation of Independent Business survey showed 44% of small-business owners surveyed believed electricity deregulation was a bad idea. Another 3% faulted poor implementation and 18% termed deregulation a political compromise doomed to failure. On another front, Wall Street may no longer see California as a good place to do business.

Interestingly, Los Angeles, which opted not to deregulate, has experienced no blackouts or bill increases. If fact, energy costs on average are 18% lower than in other areas. This has prompted groups like TURN in the San Francisco area to call for a municipal power company in the city by the bay.

Last year, in an interview with PBS, Governor Gray Davis admitted deregulation has been a failure. According to Davis, the 1996 law was flawed because it deregulated the wholesale market, but not the retail market. In fact, it reduced rates to customers and froze them for five years. In addition, it forced the utilities to sell off their plants without requiring that California retain first claim on the power produced in those plants.

Most observers look for the California Public Utilities Commission to spend most of its energy this year settling outstanding financial issues involving the three major utilities and planning California’s upcoming massive bond sale. These items alone ensure retail rates will see no relief from last year’s 40% hike.

California’s Governor Gray Davis and the state’s PUC put together a deregulation plan destined for failure. One of the key elements causing that failure was forcing utilities to sell their power plants and deregulating the wholesale market without the retail market. In Texas, deregulation has gone well, according to Karl Nalepa, assistant director of the Texas Railroad Commission’s Gas Services Division’s Regulatory Analysis and Policy Section. The way the setup works, individual cities can set residential rates within their jurisdictions; commercial and industrial customers can negotiate their rates. This lets the market work when it can, Nalepa says.

The good, the bad, and the ugly; deregulation turned ugly in California when the state legislature forced utilities to sell their power plants and set up a flawed plan, says Governor Gray Davis (left). In Texas, Railroad Commission Gas Services Division Regulatory Analysis and Policy Section Assistant Director Karl Nalepa says the Texas plan lets the market work with deregulation.

by Karen Stidger, Contributing Editor


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