Texas Deregulates Its Retail Utility Markets with California Lesson in Mind

Jan. 11, 2002
Armed with the knowledge of California's experience in the energy markets, Texas has loosened the reins on its power distribution and begun deregulating

Armed with the knowledge of California's experience in the energy markets, Texas has loosened the reins on its power distribution and begun deregulating its own retail utility markets.

At its core, the Lone Star State's deregulation plan simply involves allowing a number of power producers to compete with one another over the market for power consumption. The state expects that this will lower utility rates and improve the amount and reliability of power in the state, spurring investment from out-of-state companies.

Texas' retail electric deregulation, which began on Jan. 1, has been below the radar for many consumers — so far — in comparison to California's.

Undoubtedly though, many consumers have concerns. After months of headlines about the rolling blackouts and ballooning electricity bills in California, there seem to be immense risks involved. Fortunately, said Marty Rosenberg, editor-in-chief of Utility Business magazine, Texas has spent several years preparing for this.

“One of the key problems that surfaced in California was a shortage of power,” said Rosenberg. “Texas sidestepped that issue before they even tackled deregulation by building up ample resources. So there's plenty of generation there. The marketers will have the wherewithal to market power and it won't be in a time of shortage, which totally muddied the waters in California.”

In contrast, Army Curtis, a partner with Curtis & Clark Engineering, Nacogdoches, Texas, pointed out that California hasn't built a large power plant for years. In contrast, Texas officials have long been welcoming organizations that want to build power plants in the state. Galen Hollar, president of Burrus and Matthews, Dallas, an electrical manufacturers' rep, noted that more are slated to be built.

However, Hollar and Curtis both said that it might be too early for most consumers to be very interested in deregulation.

“Frankly, our experience so far is that the large businesses are very much aware of the potential in deregulation and are very interested in it. As you get smaller in size, there is a lack of awareness,” Curtis said.

One reason for this may be that while consumers across the board are currently experiencing a small savings from the restructuring in Texas, larger customers may be the ones to initially reap the benefits of the competition between power providers, said several sources.

Curtis said the state of Texas has mandated a 6 percent reduction in the fuel portion of electricity bills for all consumers (which amounts to about a 3 percent reduction, overall). Being a large consumer of electricity, on the other hand, now has a distinct advantage at the bargaining table.

According to Curtis, companies whose peak demand reaches 1,000kW are eligible to buy electricity at a fixed price contract. Smaller consumers cannot yet negotiate with power providers. While this demand requirement leaves a lot of small and mid-sized companies without the ability to negotiate contracts directly, part of Curtis' job deals with brokering deals that bring smaller companies together.

“An alternative is to aggregate a number of these small customers together such that their aggregated demand exceeds 1,000kW,” Curtis said. “And then we can get a fixed-price contract … (with) any of the retail electric providers in the state.”

Companies have the option of remaining with their current provider, and paying only slightly less than they did last year. However, one of Curtis' customers has demonstrated a huge savings from aggregating his power consumption.

Bill Elliott, president of Elliott Electric Supply, Nacogdoches, Texas, signed a year-long contract with the help of Curtis & Clark. This year, his company will save nearly $80,000, or approximately 28 percent from last year.

“When we're describing a fixed rate contract,” Elliott said, “it's like a commodity. They say, ‘Can we issue a contract for ‘X’ number of kilowatt hours over the next year?’”

Before that can occur, other transactions must take place between the new components of the deregulated utility system. When Texas deregulated, Curtis said the state split the utility companies up into three different parts — the producer, the transmission and distribution provider and the retailer.

“The key word is commodity,” Curtis said. “Under deregulation, electricity becomes just another commodity. It's exactly the same in buying kilowatt-hours as buying wheat, corn or widgets. There is a commodity market in Texas, for electricity, (and) there is a futures market on electricity.”

That market is very closely tied to the natural-gas market, since natural gas is the most prevalent fuel for producing electricity in Texas, he noted.

The advantage to the system, at this level, employs the same theory as California's system: by enabling power providers to broker deals at competitive rates, consumers will benefit.

Should the rates go down as expected, another likely effect of Texas' deregulation is the creation of new business opportunities for out-of-state companies. Indeed, the deregulation seems attractive to many in-state organizations, according to Elliott. He said deregulation in not mandatory in all areas of the state, including co-ops.

“One of the co-ops was not going to accept deregulation,” Elliott said. “And one of the school systems told them if they didn't deregulate, they would not build a school on that particular utility's system. So, they elected to opt into the deregulated community because of the threat that they would not get the school on their system. That's the kind of situation you're seeing, where larger users who see the opportunity to lower rates are putting pressure on utilities to join the group.”

Elliott said the utilities got involved in deregulation because of the opportunity to be able to operate more like independent companies; they accepted the caveat that they'd have to lower their rates to do so.

Curtis expects the prospect of cheaper, more reliable power to lure more businesses to Texas.

“If a firm wishes to move into an area and do a major plant, or if an existing firm wishes to do a major plant expansion, one of the things that can really hold back plans like that is a lack of sufficient additional power,” he said. “Through the deregulation in Texas and all of the new generation that we're seeing coming on, it's making power readily available, and I think in the long run will spur additional economic development in Texas.”