By Hudson Sangree
AUSTIN, Texas — The 20th anniversary of the landmark law that deregulated ERCOT’s market and paved the way for electric competition provided the theme for this year’s Gulf Coast Power Association fall conference Oct. 15-16.
In keeping with the idea that everything’s bigger in Texas, the GCPA conference filled a supersized ballroom at the Hyatt Regency Austin with 650 attendees, many wearing cowboy boots with their suits and blazers. Some wore Stetsons.
In panels on the history of Senate Bill 7 and ERCOT’s restructuring under the law, utility executives called Texas’ wide-open energy landscape the “greatest market in the world,” where some 200 retail electric providers (REPs) compete for customers.
“That’s the ERCOT miracle,” Mauricio Gutierrez, CEO of NRG Energy, said on a panel of chief executives from ERCOT’s three largest power producers. The panel included Thad Hill of Calpine and Curt Morgan of Vistra Energy.
Texas remains an independent republic when it comes to energy, panelists said.
The ERCOT market is the most deregulated in the U.S., they noted. Its transmission grid is largely separate from the rest of the nation’s high-voltage lines and therefore not regulated by FERC, they repeatedly pointed out. And ERCOT is a unique energy-only market, more like Australia than its U.S. counterparts, speakers said proudly.
In ERCOT, consumers pay only for the generation they need. They don’t pay to place additional generation on standby to ensure longer-term reliability, as do the organized capacity markets that serve much of the U.S. That can cause reliability challenges, especially during Texas summers, panelists acknowledged. (See Magness, Walker to Explain ERCOT Reliability to NERC.)
Nevertheless, supporters contended the ERCOT market provides the greatest benefits of any organized market in the nation — or perhaps even the world — for consumers and utilities alike.
“To me, this is the market that should be an example, not just to this country, but to many other countries,” Gutierrez said.
Investor: Don’t Mess with Texas
A panel of big-money investors, however, expressed skepticism about risking their funds in the Lone Star State, where volatile prices, often based on weather and resource adequacy, create an unpredictable environment.
Denise Persau Tait, president of Starwood Infrastructure Finance, based in Stamford, Conn., said her firm has a $2 billion to $2.5 billion “book” of energy investments in the U.S., but with less than 7% of it in Texas. The intense competition and low margins in ERCOT mean Texas is not a good bet, she said.
Only peak prices, fueled by heavy air conditioning use during Texas’ notoriously hot and humid summers, can guarantee an ample return on investment, but even those profits can be wiped out by milder weather, Persau Tait and other investors on the panel said.
For instance, June and July were not as hot as expected, keeping electricity prices down, while part of August was so hot it drove prices to ERCOT’s maximum of $9,000/MWh and triggered fears of rolling blackouts. (See ERCOT Survives Another Day in the Roaster.)
Starwood has no investments in Texas’ thermal generation, partly because of such unpredictability, Tait said.
“The issue that we’ve had anytime we’ve looked at deals in thermal generation in ERCOT has been volatility in the revenue streams and not being able to underwrite those deals,” she said. The fast-growing solar market in Texas is better, but “we don’t like to invest in deals where you’re relying on the weather.”
Senate Bill 7 Re-examined
A panel on SB 7, passed in 1999, kicked off the conference with a look-back at efforts to deregulate ERCOT.
Those efforts began in 1995 with a bill to promote competition in the wholesale market, but things really got moving when SB 7 unbundled ERCOT’s vertically integrated utilities into generators, retail providers and operators of transmission and distribution systems. Municipal utilities and electric cooperatives were exempted from the bill but allowed to opt in to the market.
Steve Wolens, a longtime member of the Texas House of Representatives and the bill’s drafter and main proponent, shepherded its journey through the Legislature’s lower house. Policymakers at the time knew of deregulation failures in banking, airlines and telecommunications and didn’t want to repeat mistakes, so they went out of their way to get it right, he said.
“What we decided is that to deregulate, we had to worry about predatory pricing,” Wolens said. “How would we deregulate and not undergo predatory pricing so that the little guys could be run out of business?”
Texas lawmakers traveled to other deregulated states, including California and Pennsylvania, both of which began deregulating in 1996, to educate themselves.
“They went to California to find out how not to do a lot of things,” said John Fainter, former president of the Association of Electric Companies of Texas, which represented regulated utilities at the time. “They went to Pennsylvania and had some things that they learned how to do. ‘Price to beat’ [a major component of SB 7] was one of them.”
“Price to beat” helped small utilities gain a foothold in Texas’ freewheeling electricity market. It created a price floor below which established utilities couldn’t go to get rid of upstart competitors. New retailers, however, could set their prices lower than the price to beat.
Wolens said it may have seemed counterintuitive, but it worked.
“It’s not logical to say, ‘We’re going to deregulate, but we’re going to keep the price high,’ and nonetheless that is what we did,” he said.
When SB 7 took effect in 2002, “price to beat” led to a rapid increase of REPs, creating robust competition and lowering prices for consumers, he said.
A study published in January by researchers at Rice University concluded competitive markets in Texas had retail prices that corresponded more closely with wholesale costs and were generally lower than in markets where the state’s municipal utilities and electric cooperatives continued to operate non-competitive markets.
‘Everybody Signed It’
Wolens said the legislative process around SB 7 was successful because it included a broad range of stakeholders, with 27 people at the negotiating table representing investor-owned utilities, environmental groups, consumer advocates and others.
Each had something they wanted and something they feared losing, he said. The bill provided opportunities to profit from deregulation, but also included increases in renewable portfolio standards and financial support for low-income customers.
“None of these things would have passed as separate bills,” Wolens said. “It took putting together this 200-page bill like a Rubik’s cube so that everything fit together,” Wolens told the GCPA audience. “There was something in there for everybody to like and something in there for everybody to dislike.”
Wolens said he made it clear the bill wouldn’t pass if those who’d agreed to the deal later tried to alter it with legislative amendments. They all had to sign a piece of paper accepting the entire package.
“Everybody signed it — most of us in blood,” Fainter said. “Some of us were accused of not having any blood.”
The audience laughed.
The bill passed in the House, 145-4, and by an equally large margin in the Senate. It’s remained on the books with few changes for 20 years, standing the test of time, Fainter said.
Troy Fraser, a Texas senator at the time of the bill’s passage, said SB 7 worked because “It wasn’t [written] in the old proverbial smoke-filled room, in the back with no one else [present]. We had all the participants. Everyone knew what was going on. Everyone signed off.”
The bill provided for ERCOT’s board to include 25 members representing the diverse constituencies that negotiated SB 7. Some worried a governing board so large would be unwieldly, but it worked perfectly at the time, Wolens said. Later, the size of ERCOT’s board was cut to 14, where it stands today, he noted.
As the panel wrapped up, Fraser, who described himself as a conservative Republican, told Wolens, a Democrat: “That diversification you put on the board gave us the feeling that the fox was not guarding the henhouse. We had a very diversified board making sure everyone was treated fairly.”
ERCOT’s Job Performance
ERCOT’s role managing its deregulated market got a once-over during a panel moderated by Brad Jones, former CEO of NYISO and chief operating officer of ERCOT. Jones, who said he’s retired, now serves as an advisory member of the GCPA board.
With some knowing encouragement from Jones, panelists jumped on the “Texas-is-best” bandwagon.
Eric Schubert, director of U.S. regulatory affairs for BP Energy, said SB 7 meant FERC doesn’t regulate ERCOT, and that’s proven beneficial.
“FERC’s great,” Schubert said, eliciting chuckles from the audience. “But the fact is that, again, Texans had the ability to negotiate with Texans. They didn’t have to worry about other states. They didn’t have to worry about federal jurisdiction. That simplified matters quite a bit in terms of the development of the ERCOT market.”
It also made it easier to build the $7 billion Competitive Renewable Energy Zones (CREZ) transmission project, he said, bringing wind power from the Texas panhandle and West Texas to the population centers of Dallas, Austin and other cities. CREZ resulted in the construction of 2,400 miles of high-voltage lines, capable of carrying 18.5 GW of West Texas wind to ERCOT’s major load centers. (See Overheard at Infocast’s Texas Renewable Energy Summit.)
ERCOT’s energy-only market has been better at integrating new technologies and renewables than systems with more layers of regulation, Schubert said.
Clifton Karnei, general manager of the Brazos Electric Cooperative and a longtime ERCOT board member, said Texas has a robust grid because of SB 7. The “postage stamp” transmission rates in Texas means everyone pays the same price for transmission access, he noted.
Kenny Mercado, chief integration officer at CenterPoint Energy and an ERCOT board member, said Texas is delivering cleaner, more reliable electricity than ever before.
“We have got it right in almost every aspect today,” Mercado said. “ERCOT has been the critical link to our success over the journey. I’ve learned from the inside out how important the role of ERCOT is. They see everything in real time. They see the electron in real time. They see the dollar in real time. They understand the current state of our market. And they understand the future needs and the future responsibilities.”
Scott Hudson, senior vice president of Vistra Energy and president of its retail business added, “This is the best market to work in in the world.”
Reliability Challenges Ahead
After all the accolades were over, Jones asked about the downsides of SB 7.
Karnei said the long-term sustainability of ERCOT’S energy-only market remains in question. “I think the jury is still out on that,” he said.
Karnei said he calls ERCOT a “casino market.” Some years are great for energy providers; others aren’t. It’s like pulling on the handle of a slot machine. You win some, you lose some, he said.
The future of thermal generation, in which coal and natural gas plants convert heat to energy, is especially problematic, he said. Older plants are being retired and new ones aren’t getting built, panelists said. (See NERC: ERCOT, CAISO Face Summer Reliability Concerns.)
Bill Berg, vice president of wholesale market development at Exelon Corp., said consumers benefit from lower prices in ERCOT, but investment is needed that will increase costs. Otherwise, summer reliability will be at risk.
“It should be an exciting time for the next couple of summers,” he said.
