New York Times - 10 Jan 01

Prof. Robert B. Laughlin
Department of Physics
Stanford University, Stanford, CA 94305
(Copied 10 May 09)

Texas Learns in California How Not to Deregulate

Published: Wednesday, January 10, 2001

Nearly three years ago, Texas lawmakers and regulators preparing for electricity deregulation visited California to study its first-in-the-nation experiment. For two Texas legislators, Steven D. Wolens, a Democrat, and David Sibley, a Republican, it was a memorable trip.

"I remember saying to Sibley, 'If this is what deregulation is, we don't want it,' " said Mr. Wolens, a state representative from Dallas.

Neither, it appears, does California anymore. On Monday night, Gov. Gray Davis deemed the state's experiment a "colossal and dangerous failure" and proposed government intervention to meet the state's energy demands, stabilize rising prices and help ensure that the two largest private utilities avoid bankruptcy. Then today, Mr. Davis was in Washington for a White House meeting with top federal officials to discuss California's energy crisis.

Yet even as deregulation is collapsing in the largest state, the second-most-populous state, Texas, is moving forward with its own plan, one intended, in part, to avoid California's problems. In March, Texas will begin a marketing campaign, followed in June by a pilot program involving 5 percent of the state's customers, then culminating with full deregulation in January 2002.

"The more I see out there," Mr. Sibley, a state senator from Waco, said of California, "the more I like what we did."

The Texas law, signed in 1999 by Gov. George W. Bush, remains untested, but the crisis in California has not yet prompted any official second-guessing. The Texas Legislature convened today, and Mr. Sibley predicted that the law would remain intact. The prevailing view among many officials, and one shared by some energy analysts, is that California simply had a bad plan.

"California's deregulation program may have been sound in concept but was clearly flawed in execution and in many ways a victim of circumstances," said Steven Taub, associate director with Cambridge Energy Research Associates, a consulting firm based in Massachusetts. "We should not fear deregulation."

The fundamental difference between Texas and California boils down to simple supply. Karl Stahlkopf, a vice president at the Electric Power Research Institute, a nonprofit research organization funded by the utility industry and based in California, said California had a surplus of electricity until recent years. But as demand gradually outstripped supply, California did not respond by building new power plants. Partly because of tough environmental regulations, Mr. Stahlkopf said, California has not built a major plant in more than a decade. A new plant is scheduled to begin operating in June.

Texas, by contrast, has a power surplus. Since 1995, the state has built 22 new plants, with 15 more scheduled to come on-line by 2002. Texas is also unique among the contiguous 48 states in having its own power grid and thus falls outside federal regulation.

As a result, Texas is self-sufficient, while California must buy electricity from neighboring states. Texas officials also say it takes far less time to build a plant here than in California.

"It's easier to do business in Texas than in California," Mr. Stahlkopf said. "You've got a much simpler regulatory climate and much fewer hoops to jump through."

Environmentalists are far less powerful in Texas than in California, but they did win concessions when the deregulation bill was being debated in 1999. The new generation of plants, fueled by natural gas, are cleaner. But the law also includes a mandate that existing plants reduce emissions as much as 50 percent.

When the delegation of Texas officials made its fact-finding trip to California in early 1998, the primary focus was on the structure of the state's deregulation plan. Texas had already deregulated its wholesale market in 1995 but officials were moving slowly in the retail market. Besides California, they visited New Hampshire and Pennsylvania, and Britain, to study deregulation.

In California, Mr. Wolens recalled meeting with Steve Peace, a suburban San Diego state senator who played a large role in crafting the deregulation bill. At the time, California officials remained enthusiastic about their program but were apparently not blind to the possibility that unforeseen problems could arise.

"He advised us that it was an experiment," Mr. Wolens said. "He had the prescience to tell us to learn from their mistakes." Patrick Wood, chairman of the Texas Public Utility Commission, said several aspects of the California plan raised concerns, notably the requirement that utilities must buy power on the wholesale market through a centrally controlled bidding process. The plan also mandated that utilities buy power only through short-term contracts, leaving them vulnerable to upturns in wholesale prices.

"Everybody on the Texas side of the table was mystified by that," Mr. Wood recalled. "It didn't sound like a deregulated marketplace to us."

In response, Texas has set up a very different system. There is no central bidding pool and companies can enter into long and medium-term contracts to hedge against price inflation. The law also established a "price to beat" system, modeled partly after Pennsylvania's, that will automatically reduce by 6 percent the prices that existing utilities can charge. This rate is essentially locked in for five years, and is intended to invite competition from new providers. Texas officials consider this crucial since a problem in California was that most customers did not switch providers and create a competitive market.

Texas officials and energy analysts are confident their plan will work, particularly since supply is not a problem. Mr. Wood said that the transition would not be painless but that the regulated system already had its own problems.

"Look, there will be things that don't work," Mr. Wood said. "But they really don't work under regulation. What we've got today isn't great."

Jim Marston, head of Environmental Defense in Austin, helped negotiate the Texas plan and the provision mandating the pollution reduction. He believes the law will generally result in lower prices but that fluctuations brought on by harsh weather or spikes in natural gas prices may be greater. Because of that, he cautions about any premature celebration.

"I'm sure the people in California really thought they had thought of everything," he said. "I know they did. What we haven't necessarily done is think about the problems we don't know about yet."