Electricity Restructuring Will Texas Be the Next California

1
Electricity RestructuringWill Texas Be the Next
California?

• Robert J. Michaels
• California State University, Fullerton
• and
• Econ One Research, Inc.
• I. A. E. E.
• Houston, Texas
• Nov. 9, 2000

2
Why Texas wont become California

• Supply and Demand
• Bilateral markets
• Ancillary Services and real-time markets
• Transmission policy
• Institutional governance
• Utility retail rate structures
• Continuity

3
Supply and demand

• California
• 700 MW built in state 1995 - 2000
• load up 5,500 MW to 44,000 MW peak
• 2,800 MW under construction, first on-line mid
  2001
• 8,000 MW in other stages
• New emergency permitting for small plants, Green
  Team legislation
• Texas
• ERCOT adds approx. 4,000 MW in past year
• 10,000 MW NUGs planned or in construction

4
Markets I

• Texas -- ERCOT ISO and bilaterals continue, new
  ancillary services markets
• California -- 1998 new, designed power
  exchange, ISO, under new Oversight Board
• Regulators wanted compulsory PX, politics forced
  bilateral option
• Feasible to institute voluntary PX in Texas
• Unlike California, no barriers to entry at outset
• Is there a loss in transparency without a PX?

5
Markets II

• No important price caps in Texas
• Less complex ancillary services markets
• timing and structure of bids
• Gaming appears less likely in Texas
• Can adjustment period between day-ahead and
  hour-ahead be manipulated?
• Has Texas learned about must-runs from
  California?
• Out-of-merit order purchases penalize market
  power
• Market Monitoring

6
Market Power

• Two largest California utilities required to
  divest 50 of in-state fossil plants, actually
  divest all
• San Diego divests to condition Sempra merger
• Texas utilities to divest so none owns over 20
  of ERCOT capacity
• Different outcomes because Texas has no PX
• California restricts hedges and bilateral until
  recently

7
Transmission

• ERCOT has been mix of postage stamp and
  impacted megawatt-mile rates
• Status of firm transmission rights regime?
• Texas charges responsible parties for redispatch
• California postage stamp and schedule
  adjustment bids
• Limited FTRs sold to non-utilities
• Problems connecting generators, distributed power
• Non-ISO transmission
• Cost-shifting and politics take 40 of
  cross-border capacity out of California ISO

8
Pricing and competitive entry

• Both states freeze retail rates, unbundle
• California collects strandings in headroom
• Texas makes utilities offer a price to beat.
• Is this price really cost-based or market based?
• Monthly California headroom calculations
  eliminate savings for all but largest users
• 2 of residentials departed, mostly for
  subsidized green power

9
Stranded costs

• 3-6B in Texas, annual utility sales 20B
• Pre gas price run-up
• California about 20B, annual sales 28B
• Texas mostly nuclear, California mostly QF
• Both allow securitizations, Texas less liberal
• Questions still in litigation -- treatment of
  negative and FASB 109 amounts

10
Governance I

• California ISO, PX, Oversight Board
• PUC, Energy Commission, legislature still active
• State - FERC jurisdictional conflicts
• ISO and PX have stakeholder boards broader than
  Texas
• Cal ISO 25 members, 13 classes, constantly
  shifting coalitions
• ERCOT 3 votes each for marketers, IPPs, TDUs,
  GT IOUs, munis, and coops
• Politics and California Boards
• Pressures for price controls
• Legislators ex officio on Oversight Board

11
Governance II

• ISO management has gone to FERC without
  consulting Board
• Hold-ups in EOB approval of appointments
• California decision problems on transmission
• ISO taking emergency capacity initiative
• May lose to environmental regulators

12
Continuity

• Texas continues ERCOT ISO in place since 1996
• No radical switch to PX
• No change in rate designs like California
  Headroom
• No institution utilities can game to increase
  collections before a deadline
• Retail access transition problems met with pilot
  programs

13
A philosophical difference?

• Texas -- electrically isolated region
• purpose of market is to allocate available
  generation efficiently and induce new in-state
  construction
• California -- open to WSCC region
• Import dependent, treats market as a place to
  obtain surplus imports and postpone in-state
  construction

14
Nov. 1 FERC wants California to be more like
Texas

• FERC Staff report on summer prices recognizes
  west-wide market
• Notes perverse outcomes of single PX price and
  lack of risk management
• Market Order
• Dissolves existing ISO and PX boards
• Lifts PX buy/sell requirements
• Choosing new independent boards?