New Market Structures:
THE TEXAS ALTERNATIVE
Robert W. Gee
President
THE GEE STRATEGIES GROUP
APEC COAL TRADE AND INVESTMENT
LIBERALISATION AND FACILITATION
(TILF) WORKSHOP
Kuala Lumpur, Malaysia
March 8, 2002
Overview

How the Texas electricity market will be
fundamentally restructured
 Operational Basics of “Texas Electric Choice”
 Purpose of Market Power Mitigation Measures
 Role of the ERCOT Independent System
Operator for wholesale market
 Future Challenges: Sufficient Generation and
Transmission Capacity
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Texas Is Unique

85 percent of market not subject to federal
wholesale jurisdiction within Electric
Reliability Council of Texas
 Texas restructuring plan extends to
wholesale market reforms
 Areas outside of 85 percent are still subject
to new law but application being deferred or
under consideration for deferral
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Electric Power Regions of the U.S and Canada
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No Rush to Judgment in the Lone
Star State

Not under economic pressure for reform
 State took several years to weigh options
and alternatives
 Had benefit of witnessing experience in
other countries (U.K.) and other states
(California, Pennsylvania)
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50 State Average Residential
Electric Bills & Rates -1999
Average Annual
Electric Rate
Average
Annual
Electric Bill
1,20
0
1,00
0
800
600
14
Texas 3rd highest
average annual
residential bill of $1,047
per customer.
Texas 27nd highest
average residential rate
of 7.55 cents per
kilowatt-hour.
400
12
10
8
6
4
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Basics of “Texas Electric Choice”

Statewide customer choice began January 1, 2002
 Integrated utilities split into separate businesses
 Base rates frozen until 2002
 “Price to Beat”: 6% rate reduction in 2002 for
residential and small commercial customers
 Customers have access to renewable energy, energy
efficiency programs, and distributed generation
 Municipal and cooperative utilities given choice to
opt in or out of competition
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“Unbundling” Utilities: Before and
After under Texas Retail Choice
Integrated Utility
Generation
Transmission &
Distribution
Retail Services
• Metering
• Billing
• Customer Service
• Energy Service
All regulated
Generation
Ancillary Services
Competitive
Transmission &
Distribution
• Wires
Regulated
• Non-bypassable Fee
• Nuclear Decommissioning
• Administer DSM
• Metering
Retail Services
Metering
Billing
Customer Service
Energy Services
THE GEE STRATEGIES GROUP
Competitive
8
Fundamental Structural Market
Reforms
– Each utility must separate into a:
Power Generation Company (PGC)
 Transmission and Distribution Utility
(TDU)
 Retail Electric Provider (REP)
– The REP will be the entity with the primary
contact with customers and will purchase
energy and T&D service on their behalf

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The New Market Structure
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How Does It Work?








All REPs & PGCs have equal access to the transmission &
distribution grid
Retail customers contact REPs for service
REPs & PGCs contract for power to serve retail customers
TDU bills REP for customers’ use of the grid
REP sends bill to retail customer
Aggregators can also bargain with REPs on customers’
behalf
Customers have option to change suppliers
Residential & small commercial customers (below 1 MW of
peak demand) who do not change still get 6% rate reduction
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Key Features of Retail Market

Uniform terms and conditions for delivery
service
 Published tariffs for delivery service
 Switching, billing, and other information
exchanged electronically through uniform
rules
 Utilities do not provide competitive services
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How Information and Power
Flows
ERCOT Competitive Market Participants
Qualified Scheduling Entity (QSE)
Load
Serving
Entity
(LSE)
Aggregator
(Optional)
Customers
ERCOT
Resource
Power
Marketer
(Optional)
Transmission and Distribution Service Provider (TDSP)
NOIEs (Municipality/Cooperative)
Public Utility Commission of Texas (PUCT)
Legend
Key Information Flow
Power Flow
Non-Regulated Organization
Regulated Organization
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Preventing Market Power:
Ownership Restrictions on
Generation

Law limits generation ownership of single
company to 20 percent in power region
 Code of conduct for transactions between affiliates
 Requires divestiture by utility-affiliated power
generation company w/ greater than 400 Mw of
capacity of at least 15 percent of its capacity
during the first five years of retail competition, or
until utility-affiliated company loses 40 percent of
residential and small commercial business.
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Price to Beat – The Competitors’ Edge

Default rate offered by utility- affiliated REP at 6% discount for
residential and small commercial customers

Affiliated REP must charge PTB until it loses 40% of PTB customers
or January 2005, whichever first

In non-ERCOT areas, PTB must be maintained for 5 years

PTB can be adjusted for changes in market price of natural gas and
purchased energy

No PTB for industrial and large commercial customers-- Open
competition permitted

Difference between PTB and market price to serve represents
“headroom” for non-affiliated REPs
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The “Price to Beat” – Illustration
10
8.5¢/kWh
8
8¢/kWh
¢ per kilowatt-hour
???
Generation &
Retailing
6
CTC
4
System Benefit
Fund
2
Transmission
&Distribution
0
Bundled Rate
11/1/99 Utility 1/1/02 Affiliated
1/1/02
Electricity Price REP’s Price to
Competing
Beat (with 6% REP’s Electricity
discount)
Price
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The Pilot Program

Began August 1, 2001
 Limited to 5 percent of utility’s customers
or load
 Large commercial customer response
 Over 100,000 residential customers
participating
 Currently, 28 REPs certified to do business
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Essential Elements of a Workably
Competitive Wholesale Market

Neutral organization responsible for:
– Access to transmission system
– Reliability
– Settle wholesale accounts
– Manage customer switching

Policy promoting equitable interconnection process
for new generation capacity

Mechanism for regional transmission planning

Role of Electric Reliability Council of Texas Independent
System Operator (ISO)
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The ERCOT ISO: Market Principles





Bilateral energy market; No Oversight of
“Pool” or Power Exchange
Maintains reliability and provides access, but
has minimal role in markets
ERCOT creates markets for balancing energy
and ancillary services
Ancillary services can be self-provided
(matching output to load and contingency
reserves)
ERCOT will oversee congestion management
by zones
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How Bilateral Trades Occur
ERCOT Bilateral Market
Electricity buyers
Electricity sellers
Resources
Private bilateral
energy transactions
Load
Serving
Entities
Retail
Customers
Scheduling
Entities
Balanced schedules of loads
and resources; and information
and transactions required to
support reliability.
ERCOT
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Can Texas Avoid the Fate of
California?

Will Texas have
sufficient generating
capacity?
 Will Texas have
sufficient transmission
capacity?
 Texas officials say yes
with proper planning
& oversight
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New Electric Generating Plants in
Texas
Dalla
s
Ellis County
El
Paso
Austi
Sa n
Antoni
n
o
27 Plants completed since 1995--9,343 MW
Housto
n
Harris County
Corpus
Christi
27 Plants under construction--13,991 MW
31 Plants announced or planned
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ERCOT Reserve Margins
80,000
70,000
Megawatts
60,000
50,000
40,000
30,000
20,000
10,000
0
2001
2002
2003
2004
2005
2006
Total Winter Peak Demand (MW)
Total Summer Peak Demand (MW)
Total Capacity (MW)
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ERCOT Installed and Planned
Capacity – 2001
95,211
18,454
6,193
7,798
61,376
1,390
57,606
2000 Existing 2001 Capacity 2001 Capacity
Capacity
Capacity
in Service
Under
Under
Construction Construction
Recently
Announced
59,622
2000 ERCOT 2001 ERCOT
Peak Load
Peak Load
(Forecast)
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Transmission Constraints in ERCOT
Paris
North HVDC
East HVDC
DFW
North East
North
West
South
South
CPL NORTH
Houston Ship
Channel
CPL SOUTH
Corpus Christi
Laredo
THE GEE STRATEGIES GROUP
RGV
25
Transmission Projects in Texas
1
Paris
North HVDC
East HVDC
15
12
DFW
8
13
8
10 5
14
4
18
7
19
23
22 11
20
9
21
16
Under Construction
3
Houston Ship
Channel
Pending at PUC
Recommended by ERCOT
17
Under Consideration at ERCOT
6
Laredo
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Corpus Christi
2
26
Conclusion

Texas is taking a gamble
that it has the “right stuff”
others lacked
 Unique factors may give it
the edge
 Time will tell whether they
got it right
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For More Information Contact:
Robert W. Gee
President
THE GEE STRATEGIES GROUP
7609 Brittany Parc Court
Falls Church,VA 22043
Tel: 703.593.0116
Fax: 703.698.2033
Email: [email protected]
Special Thanks to Commissioner Brett Perlman,
Public Utility Commission of Texas
for assistance in providing graphics
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