Move forward with Texas electricity deregulation, executives say

Executives from large incumbent utilities in Texas testified Wednesday before a joint legislative committee in Austin that competition should go forward in 2002 as spelled out by legislative mandate. But they warned the Public Utility Commission of Texas (PUC) should be careful when setting an interim price (price-to-beat) that utility affiliates must charge in their service territories before all fetters are removed from the market in 2007.


By Ann de Rouffignac
OGJ Online

HOUSTON, Feb. 21�Executives from large incumbent utilities in Texas testified Wednesday before a joint legislative committee in Austin that competition should go forward in 2002 as spelled out by legislative mandate.

But they warned the Public Utility Commission of Texas (PUC) should be careful when setting an interim price (price-to-beat) that utility affiliates must charge in their service territories before all fetters are removed from the market in 2007.

The hearing was called by the Texas Electric Utility Restructuring Oversight Committee to hear further testimony of the possible effects of the state�s restructuring plan on Texas.

Linn Draper, CEO of American Electric Power Co. Inc., testified natural gas prices would continue to be volatile and the price-to-beat must accommodate those changes. The price-to-beat is the amount existing utilities must offer within their original service territories and is supposed to be 6% less than prevailing rates before the market opens. The price-to-beat is currently being negotiated by market participants before the PUC.

Steve Letbetter, CEO of Reliant Energy, said the price-to-beat must �absolutely� track the market.

But setting the initial price will be tricky.

�If it�s too low, no one will come into the market,� he said. �If it�s too high, you could lose all of your business.�

Erle Nye, CEO of TXU Corp., added that arbitrarily setting the price too high also means consumers might pay higher prices than they would have under regulation.

�The question is how many people have rates lower than they would have had without deregulation,� said Nye. Letbetter said the entire cost of energy should be passed through, not just the cost of gas.

�The price needs to be tied to the market,� said Letbetter

Middle class priced out?
Some members of the legislative committee asked the utility executives if the price of electricity after deregulation could rise so high that even the middle class couldn�t afford it. They noted with fuel costs and purchased power costs passed through twice a year, electricity might become unaffordable.

Democratic Rep. Sylvester Turner said passing through all energy costs leaves consumers vulnerable to open ended price hikes.

�If we allow this to go through, we are advocating significant increases to residential customer bills,� said Turner.

Letbetter disagreed. The market will adjust and prices would come down �eventually,� he said.

Nye said costs could rise above what people can afford to pay for electricity. But in those instances the traditional methods of taking care of that should be used such as subsidies and welfare.

He agreed with Letbetter that it is better to allow the market to drive prices and then handle high costs for the poor through subsidies.

Turner argued at some point even the middle class may have trouble paying for electricity which is a unique commodity that people can�t do without. He's said it's not like cable or telephone or airplane tickets.

Turner suggested that legislators should step in with a price cap at a certain point when electricity becomes unaffordable. The amount should be negotiated among the participants, he said.

Utility executives said a cap would do more harm than good.

�Artificial barriers or rules like a price cap could train wreck this market,� said Letbetter.

Unless the cap was over $1,500/Mw-hr it would discourage the building of new peaker plants, he added. In the Texas market, a peaker that only runs on average 55 hr/year needs at least $1,500/Mw-hr to recover capital costs, he said.

�I get very nervous about tweaking any part of the market,� Letbetter said.

But both legislators and utility executives agreed mistakes in California won't be replicated in Texas.

�We believe that Texas avoided structural faults in California of inadequate supply of generation and transmission,� said Draper. �We will dodge that bullet. We also have allowed bilateral contracts and long- term deals that will dampen some of the volatility that was seen in California.�

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