Just in case you've only received this 10 times today May 7, 2001 =
Texas May Face a Glut of Electricity, But It Won't Help in the Rest of U=
.S. Pride and Policy Make State a Magnet For Power Plants and an Island Unt=
o Itself By ALEXEI BARRIONUEVOand RUSSELL GOLD Staff Reporters of THE WALL=
STREET JOURNAL While California struggles to keep its lights on and New Yo=
rk City braces for possible electricity shortages this summer, Texas utilit=
ies could soon face the opposite problem: a power glut. Texas' wide-open =
spaces and relatively weak zoning and environmental rules have helped make =
the Lone Star state a magnet for power-generation companies as it prepares =
to deregulate its electricity market next year. The result: Texas' electric=
ity-production capacity this summer is expected to exceed its peak power de=
mand by 11,000 megawatts -- nearly enough to light up New York City. By the=
summer of 2002, the excess may be closer to 15,000 megawatts, enough to po=
wer 15 million homes. And with 27 new generating plants under construction,=
more than any other state, some power producers fear that overbuilding ult=
imately could send Texas' wholesale electricity prices into a tailspin. A G=
rid Apart All this sounds like good news for the electricity-starved East a=
nd West Coasts -- but it isn't. That's because the U.S. is divided into thr=
ee major power grids -- with the West on one, the East on another and most =
of Texas on a third, with very few links to the rest of the country. In the=
world of electricity, that makes Texas "an island with a couple of little =
footpaths over to it," says Larry Makovich, senior director for electric po=
wer research at Cambridge Energy Research Associates, a Cambridge, Mass., c=
onsulting firm. Some Texas utility executives argue that their state's isla=
nd status is principally an accident of geography. But no one disputes the =
fact that good old Texas pride -- and a deep-seated skepticism toward feder=
al regulation -- also played a role in shaping the state's grid. So, too, d=
id a renegade utility's desperate 1976 bid to save itself from a corporate =
breakup and the resulting four-year legal battle, which the industry later =
dubbed the "Texas Range War." Texas' isolation isn't expected to end anytim=
e soon. If Texas became fully interconnected, its big utilities say, the st=
ate could become more susceptible to blackouts, if other regions drew off t=
oo much power. "From a reliability standpoint, it would be a degradation to=
the Texas grid," says Steve Schaeffer, a senior vice president at Reliant =
Energy Inc., the former Houston Lighting & Power Co. Competing Interests M=
oreover, the utilities estimate that building the transmission lines needed=
for a full connection to the nation's other grids would take at least thre=
e years and cost Texas ratepayers about $600 million. They don't want to in=
vest that much money to sell power to California or New York to ease what t=
hey view as temporary imbalances. Some in the state also believe low rates =
and excess power could give it an advantage in persuading businesses to loc=
ate there. "America will be shy enough electricity that this will be one of=
our greatest inducements for growing Texas," says Matthew Simmons, preside=
nt of Houston investment bank Simmons & Co. Texas is an extreme example of =
the haphazard way electricity grids developed in the U.S. Until the 1960s, =
most power plants were built near the customers they served. Then, utilitie=
s began building larger, more-efficient coal and nuclear plants, connecting=
them with their neighbors to ensure that if one of these big plants went d=
own, there would be a backup ready to keep the power flowing. 'No Big Money=
' But the old-line Texas utilities, which have long benefited from the stat=
e's plentiful supplies of fuels such as natural gas and lignite coal, were =
reluctant to join in this wave of interconnections. Back then, in the mid-t=
o-late 1970s, electricity outside Texas was generally more costly. And surr=
ounding states weren't planning big enough plants to back up the huge new o=
nes Texas was building to power its fast-growing cities and energy-thirsty =
petrochemical industry. "There was no big money to be made by shipping powe=
r one way or the other over the lines," says Reliant's Mr. Schaeffer. By co=
nfining their grid to Texas, state utilities also avoided oversight by the =
Federal Energy Regulatory Commission. Thus, FERC couldn't force Texas to se=
nd power out of state in case of an emergency. The state's dominant utiliti=
es -- Texas Utilities Inc., the Dallas-based predecessor of what is now TXU=
Corp., and Houston Lighting -- went to great lengths to ensure there were=
no interstate connections. The switches at a hydroelectric plant on the Te=
xas-Oklahoma border were wired to prevent power from flowing between the st=
ates. Elsewhere along the border, a system of relays was installed to preve=
nt unauthorized interstate transmissions. Only one big utility didn't like =
the setup: Central & South West Corp., a Dallas holding company that owned =
power plants in both Texas and Oklahoma. In 1976, it faced a crisis. If it =
couldn't show that its plants in both states were interconnected, it ran th=
e risk of being broken up under a federal law. The law, which barred holdin=
g companies from owning unconnected utilities in separate states, was decad=
es old. But, until then, it hadn't been strictly enforced. On May 4, 1976 -=
- eight days before the Securities and Exchange Commission was set to consi=
der the matter -- Central & South West took an extraordinary step. At 5:30 =
a.m., it sent one of its line crews to secretly rewire a substation in Vern=
on, Texas, near the Oklahoma border, allowing power to flow freely between =
the two states. For a few hours, the grids were connected by a minuscule th=
read. Later that morning, officials at Central & South West phoned other Te=
xas utilities to tell them the company was engaged in interstate commerce. =
Texas' other major utilities reacted angrily. "The sons of bitches are try=
ing to steal my lignite!" Texas Utilities Chairman Louis Austin bellowed, a=
ccording to former Texas Public Utility Commissioner George Cowden, who rec=
alls Mr. Austin making the remark during a private meeting between the two =
men. Around noon, Houston Lighting cut its system off from the rest of the =
state's utilities. Texas Utilities followed suit hours later. By day's end,=
the state's utilities had broken the grid into a half-dozen pieces. That s=
ame day, one of Texas Utilities' chief lawyers, a 6-foot-6 former college-f=
ootball star named J.A. "Tiny" Gooch, dispatched one of his company's crews=
to disconnect the link Central & South West had made between Vernon and Al=
tus, Okla. "They made it so it was physically impossible to [connect] it ag=
ain," says Mr. Gooch's son, Gordon, then a lawyer representing Houston Ligh=
ting. The elder Mr. Gooch, who died in 1986, is considered the patron saint=
of Texas' electrical independence. At an emergency meeting of the utility=
commission three days later, Mr. Austin of Texas Utilities expressed disgu=
st at the prospect of having to burn Texas lignite and natural gas to satis=
fy "Yankees," according to a transcript. And, he added: "I don't like feder=
al regulations." (Mr. Austin died in 1997.) A wire reputed to have formed p=
art of Central & South West's brief Texas-Oklahoma interconnection later wa=
s cut into pieces, encased in Lucite and given out as paperweights by Dalla=
s law firm Worsham, Forsythe & Woolridge, which represented Texas Utilities=
. Alan Erwin, a state utility commissioner in 1976 who still has the souven=
ir on his desk, used the wiring episode as fodder for a 1979 novel, "The Po=
wer Exchange," in which a winter storm cripples Northeast power production =
and the nation turns to Texas for electricity. Texas refuses to ship the el=
ectricity, fearful that other regions would drain it of "what little cheap =
fuel was left." Ultimately, Texas becomes a scapegoat and ends up seceding =
from the union. Real-Life Compromise In reality, the outcome was less drama=
tic. The grid conflict wound its way through many courtrooms. Central & Sou=
th West -- recently acquired by American Electric Power Co. of Columbus, O=
hio -- lost almost every round. After about four years, the utilities hashe=
d out a compromise, at the urging of the federal government. Rather than li=
nk the Texas grid to the East, so that electricity could flow freely across=
state borders through alternating-current cables, they agreed to build two=
direct-current lines. Operators could control the flow over these bridges,=
which at peak capacity could carry a mere 820 megawatts. The parties to th=
e deal, which included the federal government, agreed these links wouldn't =
bring the Texas grid under federal jurisdiction. Today, Texas power continu=
es to be regulated in Austin, not Washington. "It's just a Texas thing," sa=
ys Pat Wood III, chairman of the state utility commission and a recent Bush=
administration nominee to FERC. "We want control of our own destiny." That=
independent attitude has extended in recent years to Texas' business-frien=
dly approach to deregulating its power industry. Unlike California, with it=
s stringent emissions and zoning rules, Texas has made it quick and easy fo=
r power companies to locate their plants almost anywhere they can find a pl=
ace to hook up to the grid. Last year, Texas completed a major upgrade to a=
lleviate bottlenecks on the grid, and it has six similar projects under way=
. Unlike most other states, it decided to charge grid users a flat rate to =
move power anywhere in the state, so they could put plants in low-cost rura=
l areas, far from their customers. Those policies, as well as projections t=
hat the state's electricity demand would grow by a robust 3.5% a year, set =
off a flurry of power-plant construction, beginning in 1998. Since then, $1=
1 billion worth of power plants have been completed or started in Texas, an=
d more are on the drawing board. By contrast to California's approach to de=
regulation, which largely failed to bring new plants online, Texas' strateg=
y "encouraged an overbuild," says Mr. Makovich, of Cambridge Energy Researc=
h Associates. Consider tiny Seguin in south central Texas, where Constellat=
ion Energy Group Inc. of Baltimore is building an 800-megawatt gas-powered=
plant in a former cornfield. Fifteen miles to the west, Texas Independent =
Energy LP of Dallas recently finished a 1,000-megawatt plant. About the sam=
e distance to the north, American National Power, a Houston-based unit of B=
ritain's International Power PLC, is building a 1,100-megawatt plant. If g=
enerators don't get cold feet, Texas is on track to have a capacity surplus=
of 9% this summer and 11% by summer 2002, says Cambridge Energy Research A=
ssociates. That's in addition to the 15% surplus that most experts consider=
an adequate cushion. Some areas of the country, including parts of the Sou=
theast, Upper Midwest, New York City and the West, are struggling with razo=
r-thin capacity margins. After factoring in a similar 15% cushion, the West=
has an 8% capacity deficit and the Upper Midwest has a 4% deficit. As a re=
sult, while electricity futures prices for summer are running at as much as=
$400 per megawatt hour in the Northwest and around $100 in the Northeast, =
Texas futures prices are averaging only $72 to $74 per megawatt hour. Calpi=
ne Corp. of San Jose, Calif., is making the boldest wager that overcapacit=
y and a lack of export possibilities won't sink Texas's wholesale electrici=
ty prices. The company has six plants under construction in the state, two =
of which are expected to come on line next month. And it plans to add an ad=
ditional five plants over the next two years. Altogether, Calpine plans to =
spend about $2.8 billion in the state, its largest investment outside Calif=
ornia. "People from day one probably thought Calpine was crazy," says Darre=
ll Hayslip, a company vice president. "But so far, we are absolutely convin=
ced that this is the right bet." He says Calpine's newer gas-fired plants a=
re 40% more efficient than older plants in the state, a third of which are =
at least 30 years old. Calpine expects that edge to force rivals to retire =
older plants, thus keeping electricity prices from sagging. Duke's Doubts O=
thers aren't so sure. After initially planning new plants in Texas, Duke En=
ergy Corp. began to worry that the state was getting overbuilt. Last May, =
Duke, of Charlotte, N.C., sold its 80% stake in a plant under construction =
in south Texas to Calpine. "We sized up the market early, and then realized=
too many followers were doing the same thing," says Jim Donnell, president=
and CEO of Duke Energy North America. If the electricity situation outside=
Texas grows too grim and too much supply sinks prices in the state, there =
could be "renewed pressure" for Texas to study interconnection options, say=
s John Stauffacher, vice president for regulatory affairs at Houston-based =
Dynegy Inc., which has 1,000 megawatts of capacity in Texas. Calpine, for =
one, wouldn't mind sharing Texas power with the East and West. "I would lov=
e to be able to wheel power from Texas to California," says Mr. Hayslip. Bu=
t, so far, the Texas utilities haven't budged in their opposition to export=
s. A few generators are trying to find the best of both worlds. Tenaska Inc=
. of Omaha, Neb., is building plants at the border between the Texas and ea=
stern grids. Though utilities aren't allowed to be connected to both grids =
at once, the plants are designed to allow the company to switch between gri=
ds as demand and prices warrant. In rural Grimes County, about 90 miles out=
side Houston, Tenaska plant manager Frank Carelli boasts that his 830-megaw=
att plant could disconnect from one grid, connect to the other and be back =
at full power within an hour. A similar Tenaska plant is slated to begin op=
erations this month in Rusk County, near the Louisiana border. =09