Wholesale electricity prices surge in Texas

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Wholesale electricity prices surge in Texas

David Lazarus, Chronicle Staff Writer Tuesday, August 7, 2001 ©2001 San Francisco Chronicle

URL: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2001/08/07/MN159453.DTL

Wholesale electricity prices spiked sharply higher in Texas yesterday as the state struggled to deregulate its power market without plunging into the same energy abyss that swallowed California.

Shmuel Oren, a professor of industrial engineering at the University of California at Berkeley who is advising Texas authorities, said the price spikes show that the Lone Star State's energy market is not yet ready for full deregulation.

"You need precautions for when markets fail," he said.

Oren added that, in light of the price volatility since Texas began experimenting with deregulation last week, he will recommend a series of measures to smooth out the bidding process and prevent individual power companies from pushing wholesale prices through the roof.

Still, it is unlikely that Texas will end up following California's lead in begging for help from President Bush and federal energy regulators. The state already enjoys a surplus of power and has more plants on the way.

Electricity prices in California soared above $3,000 per megawatt hour after the deregulated power market imploded last summer. Runaway wholesale costs bankrupted Pacific Gas and Electric Co. and forced the state to spend more than $10 billion keeping the lights on.

Texas will not unleash deregulation on a statewide basis until January. But a pilot program begun last week got off to an inauspicious start when, on the first day of trading, wholesale electricity prices skyrocketed to $1,000 per megawatt hour.

The normal trading range is between $3 and $45 -- nearly the same as what California utilities paid before deregulated prices went haywire.

WHOLESALE PRICES SURGE Sam Jones, chief operating officer of the Electric Reliability Council of Texas, which oversees the state's power grid, said the price spike last week stemmed from two power generators failing to submit bids in time, leaving another generator's $1,000 offer as the market's prevailing price.

However, he said, wholesale prices surged as high as $500 per megawatt hour several times yesterday, leaving state regulators scratching their heads over how to bring the market under control.

"Market participants are still learning how the system works," Jones said. "It's a pretty big learning curve."

DEREGULATING SLOWLY To avoid repeating California's catastrophic mistakes, Texas is proceeding slowly and cautiously with deregulation. The pilot program involves no more than 5 percent of the state's residential and small business customers.

Although more than 90,000 Texans signed up for the program, only a small percentage had opted to switch power providers as of yesterday, Jones said.

Berkeley's Oren, who has been hired to advise the Public Utility Commission of Texas on deregulation issues through 2002, said an impatience to move quickly is one reason California's energy efforts ended up derailed.

"It was a mistake for California to throw the baby in the water and make it swim," he said.

LONG-TERM CONTRACTS OK Another key lesson Texas learned is to allow its utilities to enter into long-term contracts with power providers. California attempted to foster competition by barring long-term contracts, leaving the state's utilities at the mercy of the volatile "spot" market.

More important, Texas officials take solace in the fact that their state produces about 20 percent more electricity than it can use, whereas California must import power to make up for an energy shortfall.

"One thing we learned in California is that you cannot deregulate the market without sufficient excess capacity," Oren said.

Jones at the electric reliability council said power prices may remain unpredictable during Texas' pilot program, but the kinks in the system should be worked out during the 4 1/2 months before statewide deregulation begins.

'TEXAS CAN'T BE GAMED'

To underline this point, the council issued a statement in March declaring that "Texas is not California!!!" and outlining 10 reasons why California's woes will not be repeated there.

Nevertheless, consumer advocates are wary of the state's plans. They fear that deregulation can only lead to price manipulation and higher electricity bills.

"Deregulation supporters here claim the Texas market can't be gamed," said Janee Briesemeister, senior policy analyst for Consumers Union in Austin. "I don't believe that. Any market can be gamed."

She said the price spikes yesterday and last week indicate that Texas, like California, cannot insulate itself from market volatility.

"Obviously when you have price spikes like that, everything is not hunky- dory," Briesemeister said.

E-mail David Lazarus at dlazarus@sfchronicle.com.



-- Martin Thompson (mthom1927@aol.com), August 07, 2001


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