Texas Electricity: Forever in transition

Robert MichaelsProfessor of Economics

California State UniversityFullerton CA 92834

rmichaels@fullerton.edu

Electricity: Last of the great deregulations

Electricity going to market in over 100 nations

Intrinsically complex – Technology and Regulation

Public interest – efficiency, equity, environmental matters

Failure? U.S. switching growing as % of eligible volumes Share of residentials in switched load rising

Load Switched to Non-Utility Supply (GW)

0

10

20

30

40

50

60

70

80

2001 2002 2003 2004 2005 2006

Year

Lo

ad

Sw

itc

he

d (

GW

)

Non-Residential Residential

U.S. Residential % of Total Load Switched

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2

4

6

8

10

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16

18

2001 2002 2003 2004 2005 2006

Year

Pe

rce

nta

ge

Residential %

Where Texas stands At both retail and wholesale, Texas [ERCOT]

the greatest state success story Success is

Efficient, competitive wholesale markets Benefits of retail markets available to all users Long term predictability of investment climate,

freedom to contract Texas notable for mistakes it didn’t make

How to measure success Real success and future investments

Who does the planning? Short-term rate effects and long-run

efficiency Object was to put risks on investors, not

ratepayers Wholesale: accurate price signals, new

contracts Retail: New choices -- suppliers, rates,

sources Do not use measures of regulation to

measure success under competition

Retail: What happened

Competitive suppliers started at PTB, immediately went below New service offerings

Power prices and gas prices Down vs. up? All markets pass costs through Consumers value predictability Resource diversity issues

The future of retail markets

Competition and Switching statistics Is “stickiness” rational? [Dallas City Hall] Mandatory customer reassignments? Which customers need help?

Growth in suppliers and plans Innovative rate designs New service packages New information resources (Houston) Here comes Wal-Mart (?)

The future of ERCOT markets ERCOT markets continue contract-dominated

How important is the balancing market? Market power in generation? By zones?

2009 changes will improve efficiency Day-ahead markets and generator commitment Nodal prices as signals re both transmission and

generation scarcity Renewables, small generation, and demand

response are compatible with competition But integrating resources like wind not easy