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Texas shows California
how to play power game The blackouts in California over the past two years turned
much of the US against the whole idea of electricity deregulation. But
Texas defied the pessimists and deregulated its power market at the
start of this year. Critics warned that the state would face its biggest
challenge in the heat of the summer, when power usage is greatest. Yet,
already midway through August, Texas is still passing the test, boasting
30 per cent more electricity than it needs. Indeed, deregulation has
gone so smoothly in Texas that industry observers are wondering if its
success could turn public opinion back in its favour. "It's the most
interesting laboratory ongoing to solve this debate," said Chansoo Joung,
a managing director at Goldman Sachs who analyses energy. Texas, of
course, is the home of Enron, the nation's biggest energy trader, which
collapsed in a wave of accounting scandals just as deregulation was
set to begin. This week it was placed under formal investigation by
the Federal Energy Regulatory Commission for its alleged manipulation
of the California market. That Enron's trading business was not tightly
regulated led critics to cite it as yet another reason to avoid a process
already being questioned following California's dramatic failure at
deregulation. Some continue to oppose deregulation in Texas, calling
for California-style re-regulation. "It's time to end the failed deregulation
experiment," said Howard Horne Sr, a Houston businessman, just weeks
ago at the annual meeting of Reliant Energy. "In fact, with the demise
of Enron, it's a fair question: Who is for deregulation now?" The answer
is not only Reliant, and the other five pre-deregulation providers,
but also the new entrants into Texas's electricity market. There are
now 32 investor-owned competitors, including the British group Centrica,
whose subsidiary, Energy America, bought into the market on August 1,
acquiring the customers of New Power Holdings. Tom Baker, the president
of TXU's energy delivery business, Oncor, says Texas did its homework,
studying other markets in the US, the UK and elsewhere, to discover
what worked: "Texas took what worked from each market, eliminated what
didn't, and moved ahead." Whereas California made the transition to
deregulation in four years, Texas took eight. California deregulated
wholesale and retail markets at one time. Texas deregulated its wholesale
market first. It let independent power producers in to build power plants,
so that 12,000 megawatts of capacity was added before Texas deregulated
- compared with the 672 megawatts analysts say was added in California
between 1995 and 2000. That prevented shortages. California also worked
with a pool system, in which all power had to be bought from a central
independent system operator selling to the highest bidder. Participants
made big profits on the scarcity of power, discouraging them from building
new plants. In Texas, the independent system operator runs only a spot
market, for those who find themselves short. Ninety per cent of energy
on the Texas grid is contracted bilaterally, preventing such manipulation.
That does not mean there have not been teething problems. Electricity
providers recently took the Public Utility Commission of Texas to court
after it failed to act on their requests to raise rates within 45 days,
as required by law. The court ordered the commission to stop delaying,
noting that companies such as TXU had lost hundreds of thousands of
dollars in potential revenue 'With the demise of Enron, who is for deregulation
now?' daily because of the postponement. Indeed, Mike McNally, chief
financial officer, says deregulation has cost TXU, more than $100m (£64m)
as it improved customer care, risk management and other services. But
TXU is sticking by the process. "It's positioning us for the future,"
Mr McNally says. "We continue to believe the markets will liberalise."
Indeed, Massachusetts recently invited TXU to speak at public hearings
about its experience as it considers the process. On July 31 Texas claimed
the No 1 spot on the 2002 Retail Electric Deregulation Index. Produced
by the Center for the Advancement of Energy Markets, the index praised
its market for establishing a uniform system statewide and establishing
a bilateral wholesale market. "The Texas transition has been relatively
smooth compared with other efforts around the country because we took
our time getting the rules right and making sure the wholesale side
was working before we opened up the retail market," said state Representative
Steven Wolens, who drafted the deregulation bill with Senator David
Sibley. Since the retail market opened, Texans have saved $563m, or
about 15 per cent, on electricity and 400,000 households have switched
to new providers. The pull is competitive rates; and for the environmentally
minded there is now another choice: Green Mountain Energy is buying
electricity generated by wind, sun and water power. |