Market power a potential Texas deregulation concern

Market power is an issue of potential concern in Texas and state generators will need to be monitored, Pat Wood, chairman of the Public Utility Commission, said at a public hearing on the progress of electric restructuring in the state. The committee held the hearing to ease fears the state will not be gripped with the same problems of high electricity prices and brown outs as California once the electricity market deregulates in Texas in 2002.


Ann de Rouffignac
OGJ Online

Market power is an issue of potential concern in Texas and generators will need to be monitored, Pat Wood, chairman of the Public Utility Commission, said at a public hearing on the progress of electric restructuring in the state.

�California has a diverse number of power generators,� says Wood. �That�s a plus for California. But a negative here.�

Wood testified before the Electric Utility Restructuring Committee of the Texas legislature Tuesday. The committee held the hearing to ease fears the state will not be gripped with the same problems of high electricity prices and brown outs as California once the Texas electricity market is deregulated in 2002.

Participants emphasized the Texas market has clear advantages compared to California, especially in terms of supply of generation. But industry experts fret that the market power issue is not going away with deregulation and may become a negative once the industry is subject to competition.

When further questioned by Rep. Steven Wolens, the co-chair of the committee, and by Rep. Debra Danburg, Wood testified that the number of generators is important especially when transmission is constrained.

The restructuring law in Texas provides that no one generator can own more than 20% of the state�s total generation. As a result, only one Texas utility�TXU Corp.�will be divesting some power plants. Texas utilities are not required to sell generation, but they must put their generation into affiliates.

In California, divestiture was required and that was a good move for that market, Wood pointed out, because it created a diverse set of generator owners.

20% rule
Rep. Danburg questioned if the 20% rule was sufficient to keep market power under control in Texas.

�To start, that�s a good number,� Wood said. �It needs to be watched.�

But State Sen. Kenneth Armbrister pointed out legislation will be needed to rectify market power issues should they arise.

Industry observers say that even with 10,000 new megawatts scheduled to come on line in Texas in 2001, the three largest utilities will still own or control 60% of the total generation. In California, a single generator does not own more than 9% of total generation assets.

In Texas, electric power will be bought from the generators by retail electric providers who will resell the power to consumers and businesses. Retailers will make bilateral contracts with generators to secure power for customers. This is in direct contrast to California where the generators bid power into a common pool, the California Power Exchange, and the buyers such as utilities or other retail providers then bid for the power to resell to their customers.

But some experts question if a bilateral market will work efficiently. In an interview, Consultant Scott Norwood, principal of GDS Associates, said he wonders how well the Texas contract approach will work compared with the California pool approach.

"I don't see anything more favorable here [Texas] in terms of how the market is set up. It's not going to be real liquid either. There is not a power exchange like in California," he says. With 60% of Texas generation in the hands of utility affiliates, retailers' choices will be limited, Norwood says.

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