The Wholesale Level

While electric utility industry deregulation at the retail level has garnered much attention in 1997, the move toward competition at the wholesale level began more than two years ago. In May 1995, the Texas Legislature passed a bill to restructure the Texas wholesale electric industry. The Public Utility Commission of Texas (PUCT) conducted hearings to implement the Legislaturefs mandate to develop rules for wholesale transmission services, rates and access within the Electric Reliability Council of Texas (ERCOT).

Insight on ERCOT

Although membership is voluntary, ERCOT is composed of representatives from electric power producers throughout Texas, including investor-owned utilities, independent power producers, power marketers, cooperatives, municipalities, and river authorities. ERCOTfs service area encompasses more than 200,000 square miles and includes 14,725,000 customers.

ERCOT is one of 10 North American Electric Reliability Councils (NERCs) in the United States, Canada and Mexico. NERC is an organization formed by the electric utility industry to promote standards for the reliable operation of the nationfs electricity system.

The Role of the ISO

Rules established by the PUCT in Feb. 1996 required utilities to provide unbundled transmission services to wholesalers. The PUC also approved plans to establish an independent system operator (ISO) for ERCOT. Utilities within the ERCOT region – in collaboration with other wholesale market participants – were required to establish an ISO that allowed equal participation by all market participants.

In June 1997, the new ERCOT structure was established and the ISO implemented. In addition to ensuring equal participation, the ERCOT ISO is responsible for managing a statewide electronic information network (the Electronic Transmission Information Network), ensuring reliability of the power grid, ordering changes in utility operation to allow wholesale power transactions to occur, and providing access to information on pricing and availability of transmission and supplementary services.

The Retail Level

Although no laws enacting a path to full customer choice were passed, deregulation at the retail level was a key issue during the 1997 Legislative Session. A bill was pre-filed with the Texas Legislature to create a Council on Electric Industry Restructuring that would conduct a study on deregulation in Texas. The proposed study included an assessment of service reliability and the economic benefits and challenges associated with retail access.

The PUCT collected information for reports to the Legislature before its Jan. 1997 session. The electric utility industry competition and restructuring studies totaled more than 900 pages, including a 200-page report on stranded costs. Costs are referred to as "stranded" because they may not be recoverable in a competitive electricity marketplace. The amount of stranded costs in Texas and how they will be recovered has not been determined. The recovery of past investments will be a key part of the restructuring process.

The PUCTfs Proposal

In its report to the Legislature, the PUCT recommended against any proposals introducing retail access before 2000. The PUCT urged lawmakers to "take a deliberate approach" toward restructuring. According to the PUCT, a phased-in approach would enable Texas to learn from other states, evaluate benefits and challenges and reduce the level of potentially stranded costs.

The PUCTfs commissioners recommended customers be allowed to continue electric service with their current supplier in a competitive environment and public schools and other public groups be chosen as the first to have direct access.

The Bush Bill

In May 1997, Governor George Bush became involved in the restructuring issue when he declared that "now is the time to open the Texas electricity market" to competition. His compromise agreement bill called for Texans to be able to choose their electricity supplier beginning Sept. 1, 2001.

The bill included a 10 percent residential rate reduction over a three-year period and a rate freeze for large industrial customers until 2001. In addition, the statefs largest utilities would be entitled to full recovery of their stranded costs. Utilizing a method called securitization, the state would pay utilities up front for the costs with proceeds from state-backed bonds retired by customers. Although Texasf investor-owned utilities backed the measure, the statefs rural electric cooperatives failed to support the plan. They said that they did not have adequate time to analyze the effects of such a major bill. As a result, the measure did not pass.

Recent Deregulation Developments

Several efforts to restructure the electric utility industry in Texas have been undertaken since the Legislature adjourned its regular session in June 1997:

  • Lieutenant Governor Bob Bullock named a committee of state senators to study deregulation. The committee began meeting in Sept. 1997.

  • The Texas Electric Cooperatives announced the creation of an Electric Industry Restructuring Task Force. The task force will recommend a comprehensive strategy for open access in Texas after it has analyzed the benefits and challenges of deregulation.

  • West Texas Utilities, a unit of Central South West, introduced a program in Oct. 1997 that would allow customers to support the development of renewable energy resources. The program, which will be offered to up to 1,000 residential and small commercial customers in San Angelo, would allow customers to add a certain amount to their monthly bill to receive increments of power from renewable resources and fund the development of "green" resources.

  • Houston Lighting & Power Co. (HL&P) announced its plan for a competitive retail market for electricity in Oct. 1997. HL&P proposed to lower residential rates over two years by cutting base rates 4 percent beginning Jan. 1, 1998 and another 2 percent on Jan. 1, 1999. Small and midsize businesses will receive a 2 percent cut. In all, HL&P proposed to discount the price of electricity by $166 million over the two-year period. The plan was approved by the PUCT, Houston City Council and other communities in HL&Pfs service area on Dec. 17, 1997.

United States -Texas Comparison

Total U.S.


Average Price of Electricity: 6.85¢ per kWh 6.12¢ per kWh
Average Price - Residential 8.38¢ per kWh 7.72¢ per kWh
Average Price - Commercial 7.64¢ per kWh 6.68¢ per kWh
Average Price - Industrial 4.61¢ per kWh 4.00¢ per kWh
Please note: Cost per kWh is based on total electric utility industry.
Source: EEI's Data for the Statistical Yearbook of the the Electric Utility Industry - 1996

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