No one in the electric industry wants a repeat of what happened in California two years ago. As the first state to deregulate its retail electric markets, California got plenty of attention but, in the end, very little of it good. Throughout 2001, talk of electric deregulation in California brought up words like “crisis,” “chaos” and “catastrophe” as the state weathered wholesale markets gone awry, price spikes and rolling blackouts.

Watching the California situation unfold, most other states halted any plan to deregulate, fearful of the same or worse happening in their own state. Not Texas. The Lone Star state plowed forward on deregulation and, at the start of the year, rolled out full retail competition.

To date, things look good in Texas, certainly better than they did in California two years ago. Of course, Texas had the benefit of seeing what happened in California. But perhaps just as importantly, Texas approached deregulation in a different way. It is still too soon to tell if the Texas model will be a long-term success, but early signs are promising and presently do not point to a repeat of the California electric crisis of early 2001.

To begin with, Texas has taken a longer, slower and more deliberate — some would argue more thoughtful — path to electric deregulation. In Texas, deregulation kicked off in 1995 with the liberalization of rules regarding wholesale electric markets. By early 1997, the Public Utilities Commission of Texas (PUCT) was asking for a bill to introduce statewide retail electric choice. By May 1999, the Texas house and senate had passed Texas Senate Bill 7 — SB 7 as it is commonly referred to in Texas — setting the date for full competition as Jan. 1, 2002, nearly three years since the passage of the bill and almost six years after wholesale deregulation had begun.

Patience is a Virtue

That six-year process set the stage for the state's early success in electric deregulation. Opening wholesale markets first gave regulators and utilities a chance to see competitive electric markets in action, prior to full retail competition. Six years of wholesale competition also gave Texas time to prepare its regulatory mechanism for full competition. The Electric Reliability Council of Texas (ERCOT) used the time to consolidate 10 different control centers into one central location, increase staff and resources, create new transmission pricing and interconnection policies, develop statewide planning expertise, and produce detailed annual reports showing transmission constraints and needs throughout Texas.

“We really beefed up ERCOT to where it is in charge of planning for the bulk of the system,” says Jess Totten, director of the electric program at the PUCT. “It helps to have one organization in charge of planning for the system as a whole.”

“We offer a one-stop type of shop,” adds Kenneth Donohoo, manager of system planning technical operations for ERCOT. “We have very streamlined policies. Companies can make a decision on transmission and go forward. We did not want to have the capacity shortfall we had in California. We have enough generation [in Texas] and that raises the bar a little. It shows the importance of transmission.”

Waiting until 2002 also gave Texas utilities time to plan for the change. SB 7 requires all utilities that want to stay in the transmission business to create separate entities for transport.

• The Lower Colorado River Authority (LCRA) developed an entity called LCRA Transmission Associates in order to pursue transmission opportunities in West Texas.

• Reliant creating a wires company called Centerpoint (Houston, Texas) and has opened retail sales and marketing offices in north and west Texas.

• TXU has created a separate transmission and delivery business called Oncor (Dallas, Texas). David Gill, transmission rates and regulatory manager for Oncor, says TXU has been preparing for full competition for the past several years. “We have been in the open access transmission business since about 1995,” Gill says. “We have been operating since then much like a separate company.”

Texas also has taken the time to address two other issues critical to transmission entities — transmission rates and interconnection agreements.

Texas transmission rates are so-called “postage-stamp” rates, meaning that the rate is the same throughout a region, no matter how far the electricity must travel. Transmission costs are also rolled into the regular electric rate paid by all load-bearing entities. This accomplishes at least two things that transmission owners like. First, it mitigates the risk of building new transmission facilities, since transmission owners are guaranteed a rate of return on investment. Second, transmission enhancements are included in the rate, so new generators can come online without being forced to pay significant sums to upgrade transmission, thus adding more power to the grid at regulated rates.

“All they [transmission owners] are required to pay for is up to the high side breaker,” says Donohoo. “Upgrades and interconnect charges are all rolled into transmission cost of service, an annual service that the load pays for. That is pretty unique to Texas and recognizes that we are all in one state.”

Gill has much the same to say about the interconnection policies in Texas. With ERCOT as the central clearinghouse, transmission companies can rely on one organization for studies and clearances. “The studies and policies are clear,” he says. “We have standard interconnection agreements. In Texas, you don't see the uncertainty you see in other states.”

A Texas-Sized Advantage

You also don't see a self-contained reliability council in other states. While ERCOT does not cover all of Texas — it covers 200,000 sq miles (517,998 sq km), including about 85% of the state's population and electric load — it is, importantly, contained completely within the state. That alone gives Texas a significant regulatory advantage over other states, according to Ken Malloy, CEO of energy industry think-tank Center for the Advancement of Energy Markets (CAEM; Washington, D.C., U.S.).

“In every other region, you may have as many as seven or eight or nine different states that have to come together and created a market structure to fit a wholesale market that is regulated by FERC,” Malloy says. “In Texas, the wholesale and retail markets are regulated by the same entity. Texas has wholesale and retail regulatory symmetry.” That, Malloy says, gives Texas some key advantages. One is that ERCOT need not concern itself with being at cross-purposes with the policies of other states within its region. Another is that coordination between ERCOT and the PUCT is made easier.

“ERCOT understands that it is a creature of state government, and is more responsive to state government needs to have a smooth transition to competition,” Malloy says. “The other RTOs are creations of FERC, and they can be a little less responsive to state regulation.”

Finally, Malloy says communication between same-state agencies is enhanced. “It's a simple factor of time management,” he says. “The people working on the wholesale market are right down the corridor from you and you can walk down and talk to them.”

Though other states cannot exactly copy the single-state reliability council model, Malloy says there is something to be learned by watching Texas. “Other states will learn the degree of coordination that is necessary both horizontally and vertically,” he says. “The states are always talking about the desire to work with FERC, but there is not the degree of integration, of working together, that is needed.”

Overcoming Constraints

While the Texas grid has held up well in the early days of deregulation, ERCOT is well aware of the work that will be needed to meet existing and growing demand. For the past several years, ERCOT has produced annual reports that identify major transmission constraints in the state.

“Deregulation actually woke up a lot of consumers and regulators and politicians to the fact that we have to build a good transport mechanism if we want to maintain reliability,” Donohoo says. “We started moving on a number of transmission projects in 1998.”

ERCOT's 2001 report listed those projects as eight new 345-kV lines throughout the state, each aimed at reducing at least one major capacity constraint. All are being developed or in service today. ERCOT has also reviewed and recommended five other new 345-kV lines and/or switching station upgrades, and has convened three regional councils — one each for the south, north and west regions of Texas — to determine additional transmission system needs.

In the south Texas region, which includes Houston, San Antonio and much of the Rio Grande Valley, ERCOT sees the addition of 3400 MW of new generation by 2003. In addition, by 2005, ERCOT expects to see up to 9200 MW of new generation in the Houston area alone, leading to what the report says could be “significant transmission constraints” in and out of Houston. Electric load in the lower Rio Grande Valley is predicted to grow at 6.5% per year, with peak load in the valley expected to be approximately 2600 MW by 2006.

ERCOT also sees an increase in power transactions between Texas and Mexico, which may place additional burden on existing transmission in the South. Finally, the report warns that extreme events such as hurricanes must be accounted for when adding new transmission in the region.

Conditions are different in the north Texas region. Primary concern is over overflows in and out of the Dallas-Fort Worth (DFW) metroplex, one of the state's two largest load centers with a total load of about 16,600 MW in 2001.

Last May, TXU Electric (now Oncor) announced the opening of a new US$62 million, 88-mile (141-km) 345-kV double-circuit line between its Watermill Switching Station south of Dallas and Limestone County, a connection point for high-voltage feeds from Houston and southeast Texas. The ERCOT report lists at least four more 345-kV line projects underway in the DFW area, along with at least a dozen line or switching station upgrades yet to begin.

DFW presents a special set of circumstances, however, due to concerns over ground-level ozone, which is produced in part by emissions from fossil-fuel burning energy plants. Thus, though all four counties in the DFW area are among ERCOT's Top 10 in terms of population and load growth, siting new generation in the area will not be easy, leaving the area transmission-constrained — at least for the foreseeable future. ERCOT's answer is to upgrade as many existing metro-area transmission facilities as possible, while adding high-voltage lines that reach as close to the metroplex as possible, given environmental and commercial considerations.

West Texas, in turn, presents yet another set of challenges. The region has a much lower population and load base than the eastern or southern regions of the state, meaning transmission lines must cross vast expanses of land to reach load centers. “In some counties, there are more cattle than there are people,” Donohoo quips.

West Texas also features the dominant resource for renewable energy in Texas — strong, sustainable winds. Donohoo says the area is already producing about 1000 MW of wind power, nearly half of SB 7s mandate that Texas utilities should produce at least 2000 MW of renewable energy by 2008.

Stuart Nelson, manager of asset development for LCRA Transmission Associates, says wind generation creates at least two or three new challenges for transmission owners. First, wind generation can be highly irregular — when the wind blows strong, generation peaks, and when the wind dies down, wind turbines wind down. A second challenge is that the strongest, most consistent winds are almost always found some distance from population and load centers, thus requiring long transmission lines to bring the power to its load base. Third, wind generation can be easier and quicker to build than other forms of generation. “Combined-cycle gas turbines take two years, whereas wind takes only about six months,” Nelson says. “New transmission lines take a minimum of three years and probably five to seven years.”

All Eyes on Texas

The rest of the country is watching Texas electric deregulation with keen interest. Donohoo says ERCOT receives numerous inquiries from out of state and even from as far away as Thailand, China, India and Brazil.

Pat Wood, the current chairman of Federal Energy Regulatory Commission (FERC), was chair of the PUCT prior to going to Washington, and is one of the architects of deregulation in Texas. Many see Texas-style deregulation making its way into federal policy.

“Look past California and at what FERC did a few weeks ago,” says Frank McCamant, executive manager of business development for LCRA Transmission Associates. “You essentially see Pat Wood applying some of the lessons that worked well in ERCOT to the national transmission grid,” says McCamant. “We have a saying here that Pat Wood going to Washington was the ERCOTTING of FERC.”

Gill and Donohoo say others will like what they see when they look at Texas electric deregulation.

“Our choice to create companies that are focused on the wires issue was a very wise choice,” Gill says. “That gives you a chance to focus on reliability and transfer capacity without regard to generation and retail issues.”

“We aren't moving as fast as California,” Donohoo says. “We are thinking about what we are doing ahead of time. We are also looking out over the horizon. We have learned from California, and we are doing it the Texas way. We've focused on the basics. We've got good planning and good communication among the regulators. It looks very good so far.”

James R. Dukart is a free-lance writer based in Minneapolis, Minnesota, U.S.