Texas under scrutiny as electric deregulation nears

David Koenig

Friday, Nov. 23, 2001 | 10:11 a.m.

DALLAS -- Electric deregulation was a huge failure in California, resulting in soaring rates and rolling power blackouts -- and making consumers in other states suspicious about giving up their regulated monopoly utilities in favor of competition among power companies.

So regulators and industry officials have turned their attention to Texas, where deregulation is scheduled to begin in early 2002 after a bumpy test program.

"People are looking to Texas as the next iteration of retail competition. A lot of states have pulled back after the California experience," Brett Perlman, a member of the Public Utility Commission, says. "If Texas is successful, Texas will become the model for the nation."

Texas officials, optimistic that their plan will succeed, say that unlike California, which must import much of its power, Texas brings in little and has built more than 50 new power plants since 1995, providing an important cushion.

Texas also made it easier for power generators and resellers to negotiate long-term contracts, which officials say will help lock in lower prices. And Texas provides more price information, making it easier for consumers to comparison shop, they say.

California officials warn that Texans may be a little too smug. They spot trouble already in Texas, including price spikes in some spot markets for electricity -- a clear sign, they say, that power companies are learning how to maximize profits by forcing prices higher.

"There are things that can be done by people who own the power to create a shortage," said John Rozsa, an aide to California Sen. Steve Peace, who was heavily involved in the state's deregulation debate.

California officials accuse the power companies -- many of them Texas-based -- of withholding supplies or clogging transmission lines to drive prices higher. They say the same techniques could be used in Texas.

Supporters and opponents of deregulation do agree the stakes will be high in Texas for power companies and consumers.

"If the wheels fall off, it would be hard to put it back together," said Bob Manning, an executive with San Antonio-based H-E-B Grocery Co., which hopes to cut its $40 million annual electricity bill through deregulation by at least 6 percent.

The idea behind electric deregulation is simple and powerful. Instead of forcing residents and businesses to buy their power from a monopoly, let them choose among several competing companies.

In theory, competition should cause prices to fall, as it did for air travel and long-distance phone service. That's what the Texas Legislature thought when it voted in 1999 to let utility customers pick a new power company beginning Jan. 1, 2002.

Power traders such as Enron and Dynegy lobbied heavily for deregulation, figuring they could profit by gaining a chunk of the utilities' business although they produce little power themselves.

To prepare for deregulation, the Legislature approved a seven-month pilot program in which a few commercial and residential customers would be able to switch. Soon, glaring problems emerged.

The trial program was delayed three times. When it finally began this summer, the state's main power grid struggled to switch customers to their new power company. Prices for backup power used on hot summer days soared.

Through it all, the Public Utility Commission and the power companies and their allies have insisted the pilot program was serving its purpose of highlighting potential problems.

"Anytime you buy a new home there are a whole bunch of things you need to get fixed before you move in," said Perlman.

The unresolved issues, he said, include how utilities will pass on the cost of fuel to their customers, who were guaranteed a 6 percent rate cut on Jan. 1.

In addition to the technical setbacks, deregulation suffered a blow when Shell Energy, a unit of the Anglo-Dutch energy giant, pulled out of Texas after signing up 40,000 customers. Suddenly one of the biggest players and a potent competitor to utilities such as TXU Corp. and Reliant Energy had vanished.

Shell has said that doing business in Texas became uneconomical after other states delayed deregulation.

Brian Lloyd, a top PUC official on pricing issues, said he was confident that as deregulation catches on, other power companies will move into Texas, ensuring strong competition.

Already, however, deregulation will be delayed beyond Jan. 1 because of a lack of competition and questions about power-transmission in sections of Texas.

Last month Consumers Union, AARP and other groups asked the PUC to delay competition throughout the state because of computer glitches and billing problems.

But large commercial customers are looking forward to deregulation, expecting to be big beneficiaries.

"A grocery store is an energy hog," said H-E-B's Manning. "We have a lot of refrigerators that run 24 hours a day, 365 days a year. We help (the power companies') bottom line."