Electricity Restructuring Will 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

Why Texas won’t become California Supply and Demand Bilateral markets Ancillary Services and real-time markets Transmission policy Institutional governance Utility retail rate structures Continuity

Supply and demand California –700 MW built in state – 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

Markets [I] Texas -- ERCOT ISO and bilaterals continue, new ancillary services markets California : 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?

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”

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

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

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

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

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, G&T IOUs, munis, and coops Politics and California Boards –Pressures for price controls –Legislators ex officio on Oversight Board

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

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

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

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?