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Power Deregulation: A Tale of Two States

Unlike in California, Texas' transition has been fairly smooth and brought lower prices.

March 17, 2003|Dana Calvo | Special to The Times

HOUSTON — Men's Fitness magazine has voted Houston the fattest city in the country for three years running. So after the incriminating issue hit newsstands last year, it was little wonder that the 24 Hour Fitness on Richmond Avenue saw a crush of new customers working out on dozens of power-hungry treadmills, elliptical machines and stair climbers.

Electricity use spiked -- but the health club's monthly bill actually dropped, by 10%.

"We probably saw anywhere from 2 to 3 cents a kilowatt-hour decrease," said Mike Morris, director of purchasing for San Ramon, Calif.-based 24 Hour Fitness USA Inc. "For a company like us, that adds up."

Texas is walking slowly and relatively smoothly into its second year of electricity deregulation, with lower bills and many apparently satisfied customers. That's in stark contrast to California, where deregulation is synonymous with rolling blackouts, soaring power costs and market-rigging by energy companies.

The average residential electricity bill in Texas dropped by more than 9% in the fourth quarter of 2002 from the same quarter the previous year. By the end of last December, nearly 7.4% of residential customers, or about 361,000 households, had taken advantage of deregulation and changed electricity providers. Among businesses and other institutions, more than 10% had switched.

In California, squalls from what some call the "perfect storm" of deregulation persist. On March 26, federal officials are scheduled to release the results of their investigation into the causes of the California energy crisis of 2000-01, which sent prices soaring and left millions temporarily without power in the wake of deregulation.

The factors that conspired to derail deregulation in California included a low power supply, providers' inability to pass along price hikes to consumers and what state regulators said was rampant market manipulation by energy companies.

Texans said they took note of California's troubles and crafted their plan to avoid similar pitfalls. The Lone Star state also was helped by its relatively plentiful supply of electricity.

Morris remembers electricity bills for 24 Hour Fitness' California gyms doubling in a year. "In Texas, we did not experience the same kind of spike that we experienced in California," he said.

The so-far-so-good experience in Texas has given cautious hope to a small group of deregulation advocates in California.

"Texas shows that if it's done right, it can work," said Mitch Wilk, former president of the California Public Utilities Commission.

Under deregulation, utility monopolies are eliminated and the market is thrown open to providers, which are allowed to compete for customers. As in California, Texas businesses and households typically get their power from either a municipal utility or a utility company that operates for profit.

But industry experts point to several factors that appear to play into the different outcomes for deregulation in Texas and California:

* Price regulation: California's plan opened the doors for competition, but rates paid by most residential and small-business customers remained frozen. As a result, utilities could not raise their prices as they were hit with soaring wholesale costs for power in California's electricity markets.

Pacific Gas & Electric Co. ultimately sought bankruptcy protection, which Southern California Edison narrowly avoided.

"You, in essence, had a plan that was bound to fail when prices went up," Wilk said. "The assumption was that prices would only go down."

In Texas, electricity companies can go before state regulators twice a year to seek rate hikes, and they are guaranteed a response in a relatively speedy 45 days.

* Divestiture: California regulators, eager to prevent a dominant power plant owner from dictating prices, ordered the major investor-owned utilities to divest themselves of half their natural-gas-fired power plants in 1998. The utilities, lured by lucrative offers, sold them all. That put the utilities at the mercy of power companies that are being investigated by federal regulators for allegedly rigging the market to raise prices.

In Texas, a utility is required to sell off power facilities if its power generation company has a market share of more than 20%, but no company has been big enough to force a divestiture. Texas deregulation law required utilities to divide their generation, transmission and retail services into independent companies so that profits in one area can't be used to subsidize services in another and unfairly gain market share.

* Power purchases: Utilities in California were forced to buy power primarily through the centralized market, the California Power Exchange, on the hour or day before it was needed. That created a volatile spot market and made conditions ripe for market manipulation.

The Texas deregulation plan allows utilities to make medium- and long-term contracts.

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