Advanced Technologies in the Texas Electric Market Julie Parsley, Commissioner Public Utility Commission of Texas National Energy Marketers Association March 31, 2004

Advanced Technologies in the Texas Electric Market ERCOT Market and Basic Framework Opportunities for Advanced Technologies Competitive Energy Services Competitive Metering Distributed Generation Energy Storage High Temperature Conductors Power Electronics FACTS Devices HVDC Ties Broadband Over Power Lines

Texas Electric Market The electric industry in ERCOT is approximately: $17 billion a year at the wholesale level $24 billion a year at the retail level ERCOT represents approximately 85% of Texas About 300 million MWh of power flow through the ERCOT system on an annual basis Prices have increased due to rising natural gas prices: The wholesale price has been approximately $55/MWh The retail price has been approximately $80/MWh

ERCOT Boundaries Within ERCOT Only Texas PUC has Jurisdiction; in Other Areas, Texas and the FERC Have Jurisdiction ERCOT - Electric Reliability Council of Texas SPP - Southwest Power Pool SERC - Southeastern Electric Reliability Council WSCC - Western Systems Coordinating Council

Restructured Electric Market Power Generation Companies (PGCs) Transmission and Distribution Utilities (TDUs) Retail Electric Providers ( REPs) End User Retail Provider Retail Provider Retail Provider Regulated Open Access Unregulated Unregulated

Basic Framework of the ERCOT Market PGCs register with the PUC and must comply with the ERCOT Protocols and the PUC’s wholesale code of conduct. TDUs must provide nondiscriminatory access to wholesale transmission service. Pricing is based on a postage stamp method. TDUs must offer standard terms of service. REPs contract with PGCs for power to serve retail customers. Customers may contract with competitive energy services providers for additional products and services. REPs must meet certain financial and technical qualifications to be certified by the PUC. REPs must comply with the PUC’s customer protection standards. After two years of retail competition, the market has many participants and active customer switching: 75 retail electric providers (REPs) certified by PUC 170 Aggregators registered with the PUC 150 power generation companies (PGCs) registered with the PUC 121 power marketers registered with the PUC 55 qualified scheduling entities (QSEs) registered with ERCOT In December 2003, non-affiliated REPs sold 39% of all MWhs in competitive areas.

PUC and ERCOT Oversee the Market Role of the PUC Continue to regulate service quality and rates for TDUs Ensure a fair competitive playing field for all unregulated services Establish and enforce customer protections Oversee ERCOT Role of ERCOT, the Independent System Operator (ISO) Central control center for grid operations Maintain system reliability Customer registration agent for customer switching Conduct transmission planning

Competitive Energy Markets Require Services that the Power System Was Not Developed to Provide The transmission system was not developed for commercial sales. Electricity consumption is increasing and power quality is important to sensitive microprocessor-based equipment. The conventional grid must be transformed to a smart electricity network.

Competitive Energy Services (CES) Utilities are prohibited from providing CES as of September 1, 2000. Opportunities for CES providers: Specialize in particular competitive services (e.g., load-management, lighting, facilities operations, transformation equipment, hedging and risk management) without providing electricity. Partner with REPs to provide CES with electricity. CES are generally available on a competitive basis. Utility can petition to provide a CES if it is not widely available. Affected person or PUC staff can petition to designate other services as CES or end a utility’s provisioning of a CES. Examples of CES: Energy-efficiency and load-management services and products Power quality and reliability equipment and related diagnostic services Home and property security services Hedging and risk management Facilities operations and management Transformation equipment and related services (i.e., maintenance, leasing) Performance contracting Indoor air-quality products Customer-premise metering equipment and related services Non-roadway security lighting

Competitive Metering Competitive metering for commercial and industrial (C&I) customers began January 1, 2004. Metering for residential customers is provided by the TDU until the later of September 1, 2005, or the date on which at least 40% of the residential customers are served by unaffiliated REPs. C&I customers may choose who owns the meter (the retail customer, REP, TDU, or other person authorized by the customer) and the customer owns the meter data. ERCOT has a stakeholder process to establish and periodically revise a list of meters qualifying as competitive meters. To date, customer participation is lacking. The PUC is examining whether there are potential barriers.

Distributed Generation (DG) Customers are entitled to access to on-site DG. DG is an electrical generating unit(s) located at a customer’s point of delivery up to ten MWs which is connected at a voltage less than 60 kV. DG adds more competitive options, provides cost savings, and benefits the electric system during periods of capacity constraints. Texas has approximately 220,305 kWs of DG capacity. Wholesale market redesign efforts to move from a zonal model to a nodal system should accommodate future expansion and innovation. For more information, go to: http://www.puc.state.tx.us/electric/business/dg/dg.cfm.

Energy Storage Compressed Air Energy Storage (CAES) basically uses technology to store energy in the form of compressed air in an underground salt cavern. CAES could be used to optimize non-firm generation and manage transmission congestion constraints. Study performed in 2003 in connection with curtailments of wind generation in West Texas. There are regulatory implications surrounding cost recovery for assets (storage) that are neither purely transmission, nor purely generation.

High Temperature Conductors High temperature conductors (HTCs) may be an attractive alternative to new wires to address thermal limitations and loading issues: HTCs can increase transfer capability using existing towers and ROW. HTCs do not require regulatory approval through the CCN process. Aluminum Conductor Composite Reinforced (ACCR): Can provide transmission capacities up to 3 times greater than traditional Aluminum Conductor Steel Reinforced (ACSR). ACCR cost is 4 to 6 times the cost of ACSR. Aluminum Conductor Steel Supported (ACSS): ACSS has been used in Texas since 2000. One Texas utility has approximately 2,000 circuit miles of ACSS and is participating in research on a national level testing five different types of conductors. ACSS cost premium is only 10% over ACSR.

Power Electronics Power electronics improve system stability and enable higher power transfer levels over greater distances. Flexible AC Transmission Systems (FACTS) devices: Can help with functions that are required for smooth operation of the electrical network (frequency control, load-flow control, reactive power, and voltage stability). Can control the power flow and increase transfer capability. Do not require regulatory CCN approval or additional ROW. High-Voltage DC (HVDC) ties: Increase the capacity of an existing power grid and allow power transmission between unsynchronized AC systems. Require CCN approval. Texas has three HVDC ties and one pending CCN case for an additional HVDC tie with Mexico.

Broadband Over Power Lines (BPL) Over 5,000 comments and replies received in response to the FCC’s April 2003 Notice of Inquiry addressing areas such as potential benefits, potential interference, and measurement procedures. NARUC task force formed in December 2003. FCC NPRM issued Feb. 2004. AT&T recently announced that it was exploring opportunities in Texas. Texas PUC has not formally addressed the many surrounding issues. In closing, I envision a future where power electronics and communications technologies will interact to create a smart electric network where system operators have access to real time information in ways that can serve to greatly increase the reliability and efficiency of the electric system.