Shock to the System
Brace Yourselves: Deregulation Is Coming, Eventually
illustration by Doug Potter
Stiles' office declined to schedule an interview and would only say that he would submit a bill some time in the next few weeks. Yet, it's getting rather late to introduce legislation that will require as much discussion as this one; the complete dismantling of a regulated monopoly such as the electric industry will require more than a few committee meetings. So what's taking so long? Is it really the endless maneuvering over the governor's billion-dollar tax "cut" and school financing that's keeping Patterson and Stiles at bay, as some observers have suggested? Or is there something seriously wrong with the idea to begin with, at least for the majority of customers? Indications are that the latter is true: Three weeks ago, consumer groups walked away from talks with Patterson, Stiles, and pro-deregulation businesses in the middle of forming the bill, leaving the legislators to defend their deregulation plans with the sole support of a select few outside the industry who want in.
Indeed, there has not been the necessary groundswell of public support that would make retail competition an imperative this session. The noise over deregulating retail electric service is coming from a relatively small group of entities that stands to profit from the deal. And that may be the problem, since the issue is too complex to be carried by special interests. An alliance of oil and gas companies and business trade groups called the Texas Coalition for Competitive Electricity, along with large industrial users and Enron of Houston, the largest power marketer in the nation, are leading the charge for retail competition, claiming consumers will benefit from lower electric bills and more choice. (For more on the lobbyists on all sides, see the accompanying article by Robert Bryce.) And they suggest we better move quickly to be ready for changes in Washington. Congress is considering several bills to amend federal laws regulating the industry, essentially freeing states to deregulate on both the wholesale and retail end.
Texas' own Congressman Tom DeLay (R-Sugar Land) has led the charge in
Washington on the deregulation front. He filed HB 4297 last year, which, along
with Rep. Daniel Schaefer's HB 3790, would have required the states to
introduce retail access. Neither bill successfully made it through to passage,
but DeLay's office says he will refile his bill in early March.
Texas: Why Bother?
In the four states that have passed legislation to allow retail competition -- California, Pennsylvania, Rhode Island, and New Hampshire -- none are up and running yet except in small pilot projects, so it's impossible to use any of them as a test case for Texas in the final details. But one thing is certain: In all four, deregulation initiatives were bolstered by consumer frustration with high electric bills and had popular support and participation. Since those four states pay the highest prices in the nation for their power, it's no wonder that experimenting with retail deregulation seemed to be a gamble worth taking.
In Texas, however, deregulation advocates may have a tougher time whipping up a similar sense of urgency. New Hampshire residents, for instance, on average pay nearly twice as much for electric power as Texas residents -- about 13cents per kilowatt hour (kWh). Residents of the other three states also pay significantly more than the national average, while Texans, who are blessed with an abundance of natural resources such as natural gas and coal to generate electricity, enjoy electric costs that fall on the low end of national averages -- about 7.6cents per kWh. And Texas businesses shouldn't be whining too loudly -- our state's commercial rates are even lower than residential rates, at around 6.5cents per kWh. (Austin residents also get a pretty good deal -- the city's electric utility department reports that in fiscal year 1996, it charged about 7.5cents per kWh.)
The idea of retail competition is that Texas households would be able to choose their electricity provider as they choose their long-distance company. But making that concept a reality means more than just a new logo on your electric bill. The state's electric industry has traditionally worked as a "vertical" structure wherein 27 large utilities, cooperatives, and river authorities produce most of their own generation, and, along with 131 other smaller utilities, own all of their transmission lines, and control distribution of power throughout the state. Deregulation would transform the industry into a "horizontal" structure, enabling a multitude of co-generators and power marketers to get in on the generation and transmission of power, and even allow direct access to customers. To service most residential customers, however, the existing utilities in the state would likely continue as distribution centers, and would be allowed to charge a transmission fee to the co-generators for use of their lines.
Texas started down the electric industry deregulation slope two years ago when the governor signed Senate Bill 373 which opened up wholesale competition by forcing utilities to accept bids from co-generators. Still in the beginning stages, the benefits from wholesale deregulation have yet to be fully realized or comprehended. According to officials at the Public Utility Commission (PUC) -- the state regulatory agency that oversees the industry, approves contracts, and sets electric rates -- their policy analysts are still working on creating a model for wholesale sales. In particular, the agency wants to ensure fairness for all parties.
Certainly the early signs are that wholesale competition will result in lower rates. For utilities, that is. Only a few existing power supply contracts for smaller municipal utilities and rural cooperatives have come up for renewal at the PUC, but in each case, the new contracts will provide lower rates. The PUC "Report to the 75th Legislature" on the progress of wholesale deregulation states that in each case, open wholesale access is the reason. The report also notes, however, that because of lengthy utility contracts, some of which will not come up for renewal until the year 2015, "wholesale competition will have a fairly limited and marginal effect on the cost of electricity to Texas electricity users." This may sound like an argument for retail deregulation, which would clear the way for all customers, especially residential users, to get in on the competition. But the commission is careful not to make predictions about potential savings, and even debunks several studies being circulated, including one performed by Texas Perspectives for the Association of Electric Utility Companies of Texas that predicts an initial price hike under retail competition. The commission notes that all of the studies, both statewide and national, make assumptions of benefits or calamities based on invalid comparisons. But there is one clear and likely danger accompanying both retail and wholesale deregulation, they point out, and that is the unfair burden on small users of "stranded costs," or long term utility investment debt.
In Texas' regulated environment, utilities were guaranteed a fair return on
their investment in return for servicing any and all customers regardless of
expense. As the sole providers, utilities necessarily invested in
infrastructure and power plants to service all customers. In both wholesale and
retail deregulation, there is the opportunity for large electricity customers,
like the high-tech industry or manufacturing plants, to bypass their
traditional electric suppliers and cut deals with wholesalers. "The utility
that loses a departing or bypassing customer may try to shift the bypassed
embedded costs to the remaining captive customers," reads the PUC report. In
other words, Motorola, and most of Austin's other large users, could be whisked
away by a competing power supplier, leaving the city's residents to bear the
cost of South Texas Nuclear Project maintenance and other long term debt costs.
Making sure that residential customers and small business do not get stuck with
that bill was one of the main concerns of consumer groups in their talks with
Patterson and Stiles.
Don't Leave Consumers Stranded
"There are some real cost savings in wholesale deregulation," says Tom "Smitty" Smith, director of Public Citizen, the local branch of the national consumer advocacy group started by Ralph Nader. "But we haven't really gotten into it long enough to see," he adds.
Smith's group supported SB 373 during the last session, but he's more hesitant when it comes to total deregulation. One of the key consumer advocates involved in talks with Sen. Patterson and Rep. Stiles, Smith eventually abandoned those discussions, as did the Texas Rose Consumer group and the Environmental Defense Fund, due to what they perceived as an uncompromising attitude of the legislators and power marketing leaders. Specifically, Smith and the other consumer advocates believed the pro-deregulation forces were not committed to protecting consumers with regards to utilities' stranded costs, or to funding renewable energy sources and energy conservation programs (see sidebar for details).
"There are some potential benefits from deregulation on the retail side," Smitty offers, including lower costs for consumers as a byproduct of competition; the availability of different qualities of power to better service industrial users; and the availability of "green" power from alternative sources such as wind and solar power. "But we had so many issues that the pro-deregulation forces wouldn't budge on," Smith concludes.
With the prospect of total deregulation, an odd alliance formed between consumer groups such as Public Citizen and investor-owned utilities (IOUs) such as Houston Lighting & Power. HL&P's parent company, Houston Industries, joined a coalition of seven IOUs, called the Association of Electric Companies of Texas (AECT), to resist total deregulation for the near future. While recognizing the eventual necessity for retail competition, AECT has advocated a slower approach, citing the need to assure fair consumer treatment. Naturally, AECT members would oppose any rapid dismantling of their monopoly, but their concerns echo the concerns of consumer groups, and are at the crux of the issue of whether retail deregulation would actually be a benefit to everyone and not just to a select few.
The only other deregulation bill in the Capitol's horizon is a little-noticed
piece of legislation called HB 12, filed by Republican Representative Warren
Chisum of Pampa. HB 12 calls for the formation of a committee to hear testimony
from industry representatives and consumer groups and to make recommendations
to the legislature by 1998, meaning that total deregulation would probably not
happen until the year 2000. The bill would also create a pilot program, similar
to the ones already in progress in the four states moving toward
Must It Be Chisum's?
Chisum is in favor of retail competition, and says, in fact, that "it would be irresponsible for Texas not to do anything. We've got to be ready for federal changes. But to ask bureaucrats to make this decision is also irresponsible. We need time to be educated on how to do it right." For example, he explains, when California announced their deregulation plans, "their utility stock prices on the New York Stock Exchange plummeted. Texas has $7 billion in state pension funds invested in utilities. We can't afford those kind of losses." Instead, Chisum advocates a "wait and see" attitude, which seems to be the attitude of most of his colleagues lately anyway, and watch how other states -- which are responding to consumer pressure -- handle the changes. "Why should we jump out there and be first in the nation?" he asks. "We have the luxury, with our low rates, to do it in a structured environment. If we were at 16 cents per kWh, maybe then, I could see us doing it in haste."
However reasonable Chisum's approach may sound, his bill is languishing in the wings. As he points out, "Stiles is chair of the Calendars Committee, and Patterson is a senator. I'm neither." In addition, Chisum hasn't exactly been knocking down his colleagues' doors. "I haven't asked anybody if they're behind me or not," he says proudly, as if his colleagues should sense its worthiness apart from any effort on his part. An odd take for a legislator, but then the conservative Chisum has often stood out in the wasteland on his principles. He's better known for moral stances against alternative lifestyles and opposition to environmental protections than legislation dealing with complex economic changes. That may have something to do with why his bill is not being heralded, but Chisum is undaunted. "I think my bill is going to be the one that passes," Chisum boasts. "I don't have to go around trying to get people to back me up. It's the best bill out there and people will see that."
There may be one person who could bring this bill to light -- Lt. Gov. Bob Bullock, and Chisum intimates that he may call in a favor from his long-time friend. "I've never asked him for anything. But I just might ask him to support me on this one."
Chisum's bill is actually in line with the PUC report to the legislature, which "recommends against any legislation that would introduce broad-based retail-level competition before 2000." The report goes on to point out that, "The movement to retail competition should lead to a more efficient, more customer-responsive, and more innovative industry than exists today. In addition, restructuring cannot be allowed in any way to jeopardize the safety and reliability of the system, to threaten universal service, cause environmental harm, or reverse the state's commitment to renewable energy and energy efficiency." In order to achieve those goals, the commission recommends a transition period for study and education, so that "all transition issues are fully and fairly dealt with." At the pace things are going now at the capitol, it looks as if the PUC, and Texas consumers, will have all the time they need.