of factors that could be replicated by other states that may be considering changes in the features of their own competitive electric markets.
Factors That Could Be Replicated In Other States or Regions
1. Customer Focus: Texas designed its power market with the customer as its focal point. Customers have been the target of information campaigns, of systems to ease switching and the provision of service, of relationships with competitive suppliers (rather than with the utility or the generator). Customer choice is considered both a right and a responsibility, in ways more akin to the expectations of customers in other types of markets than in traditional electric service arrangements provided by monopoly utility companies. In Texas, the customer relationship is a key element of the competitive market, and the relationship lies with the retail supplier, not the utility.
2. Design of Retail Default Service: Texas designed its five-year transition in a way that assisted the state and its electricity customers in actually moving to full
112
AECT, “System Benefit Fund: Current Status,” January 2007. 113
PUCT, “Report to the 80th Texas Legislature: Scope of Competition in Electric Markets in Texas,” January 2007, p. 47.
114
competition, rather than temporarily shielding customers from price signals reflecting the realities of today’s energy market conditions. The transition allowed for periodic price adjustments to the PTB when underlying fuel and purchased power prices changed. These facts allowed a robust retail electricity market to develop and served to transition consumers to a new industry model rather than simply buffer them from price fluctuations in underlying electricity markets. Ironically, one of the measures that many other states adopted as a way to assure that customers received some benefits from competition – that is, the reliance on long-term rate caps – ended up serving in some states to undermine the very development of competitive retail electricity markets, along with the innovations and other benefits that they might produce for customers in the long run.
3. Uniform Business Rules and Codes of Conduct: Entry barriers for prospective REPs were lowered as a result of the policy to have uniform business rules and to centralize the electricity service registration functions at ERCOT. The “Code of Conduct for Electric Utilities and Their Affiliates,” established in 1999, was important to ensure that competitive market participants (i.e., retail electricity providers and power generation companies) received non-discriminatory treatment by transmission/distribution utility companies. In addition, PURA 39.157 provides the PUCT the authority to monitor market power associated with the generation, transmission, distribution, and sale of electricity in Texas and the ability to require mitigation of market power following a finding that market power abuses or other violations are occurring.
4. Customer Education: Texas’s and REP’s aggressive customer education and outreach programs have supported a relatively informed base of retail electricity customers, with nearly universal awareness among “electricity decision makers” of their rights and responsibility to choose their supplier of electric service.
5. Transmission Expansion Policies: Texas supported generation investment through its transmission access and cost-allocation policies. In ERCOT’s approach, new generation pays for only the direct costs of interconnecting with the transmission network, rather than for more remote transmission system enhancements needed to upgrade the network to accommodate moving power from the resource to demand
centers.115 These other costs are broadly socialized among all users. Such a policy
has trade-offs, but served to broaden the geographic footprint of the markets, create incentives for generating capacity additions (including remote wind resources distant from loads) during the early years of the market, and provide customers’ access to remote generation resources.
6. Initial Market Power Mitigation Policies: Texas supported the start of the wholesale and retail markets through its initial policy of requiring traditional utilities to sell entitlements to at least 15 percent of the power from their installed capacity in
115
Ross Baldick and Hui Niu, “Lessons Learned: The Texas Experience,” University of Texas at Austin, undated, p. 39.
ERCOT. These auctions promoted competition by increasing the amount of generating capacity available to competitive REPs.
7. Strong Policies for Environmental Improvement: As part of its restructuring legislation, Texas ensured that emissions from electric generating sources would be reduced through policies that addressed generating resources with air emissions such
as fossil fuel power plants that emitted air pollutants (e.g., SO2, NOx and CO2). Texas
has also excelled in developing wind turbine capacity, not just because of the large wind resource in the state, but because the state’s transmission policies lowered barriers to new wind generation and the state’s integrated market design provided fertile ground for new wind generation.
8. Strong Alignment of Retail and Wholesale Market Design and Policies: The Texas electricity wholesale and retail markets were designed at the onset as a unified whole to support the development of efficient markets in each. The state’s initiatives enabled the market to develop many important “prerequisite” conditions for a market to operate efficiently, including through structural changes; unbundling of the utilities into a PGC, a TDU, and a REP; mandatory auctioning of incumbent utilities’ entitlements to capacity for initial periods of the transition; grid operations and certain market-administration functions (e.g., energy balancing, ancillary services, switching registration functions) carried out by the ISO (ERCOT); market monitoring functions carried out under the oversight of the PUCT and with the assistance of a third-party market monitor; establishment of a series of policies to support informed consumers; a bilateral contracting environment among willing buyers and willing sellers; and creation of an environment in which retail customers were the focus of core relationships in the competitive marketplace. Additionally, long-standing policies to support relatively short permitting periods and strong investment in transmission infrastructure facilitated the entry of generation and transmission capacity. Together, these allowed for the conditions necessary for an efficient electricity market.
9. Stable Regulatory Environment: Finally, a decade of relatively stable and transparent market rules has helped to send favorable signals to the investment community about prospects in the Texas market. These market rules include tools for the REP to manage bad debt risk including the ability to disconnect for non-payment of electric service.