11 power plants will help TXU -- but the air?

By Mitchell Schnurman

Star-Telegram Staff Writer

This is one way that electricity deregulation works in Texas: TXU sells less electricity to fewer customers and still earns 33 percent more money.

Little wonder that a TXU executive calls Texas the most successful competitive electricity market in the world. For TXU, Texas deregulation is all good.

For the rest of us in the Metroplex, it's a real pain in the pocketbook. We're paying some of the highest electricity rates in the country, and they've moved in one direction only -- up.

This experience ought to make us pause about TXU's latest request: a proposal to win quick approval for 11 coal-burning plants that are supposed to clean up the air and lower electricity prices.

If deregulation is any guide, we need to slow down the review process, rather than speed it up, and bring a healthy dose of skepticism.

I don't doubt that TXU's expansion will work wonders for TXU and its shareholders. But what will it mean to global warming and Texas' shameful record on pollution?

And will the savings from coal plants actually trickle down to consumers or simply produce higher profits for TXU, a la the current system?

When natural gas prices soared in the past few years, electricity rates climbed, too, because natural gas provides the fuel for many power plants in Texas. People generally accepted the increases, because of the gas link.

But natural gas prices have declined 27 percent since winter and remained in that territory for most of the past six months. Yet TXU's benchmark price, set about a month after Hurricanes Katrina and Rita, hasn't budged.

When gas prices were rising, TXU regularly requested increases in the so-called price to beat. The Public Utility Commission complied, using a standard equation that considers changes in gas prices. But since gas prices started falling, TXU hasn't requested any adjustments, and the PUC can't force the issue.

Competitors haven't cut their rates much, either, which is disappointing. They're supposed to be the checks and balances in a deregulated market.

Instead, most residents in the Metroplex can choose between high electricity prices and prices almost as high.

TXU charges 50 percent more per kilowatt-hour than the U.S. average, and the gap is even greater when compared with municipal-owned utilities in Austin and San Antonio.

This amounts to some real money. Residents who use more than 1,600 kilowatts a month, not a large amount for this blistering summer, are paying close to $100 more for each bill than residents with city-owned electric.

Meanwhile, TXU reported last week that its retail energy segment contributed $461 million in operating earnings for the second quarter, up from $345 million a year ago. The company cited "higher retail and wholesale pricing, primarily driven by the effect of natural gas prices on wholesale power market prices."

That's a technical way of saying that natural gas prices went down, but TXU's retail rates didn't.

"Deregulation has been a huge moneymaker for the electric providers, but it's been a disaster for average Texans," said Tom Smith, director of the Texas chapter of Public Citizen, an advocacy group.

TXU posted brilliant results, because it generates more than half its power from nuclear and coal-burning plants. Power from those sources costs 80 percent to 90 percent less than power from gas plants, according to TXU filings, yet residential rates are set by the much higher gas-plant prices.

In its 10-K filed in March, TXU explained it this way: "One of TXU Power's key competitive strengths is its ability to produce electricity at low variable costs in a market in which power prices are set by gas-fired generation."

Most competitors are buying power from natural-gas plants, which may explain why they're not undercutting prices in a serious way, Smith says. (The steepest discount was 11 percent below TXU last week.) Maybe they're happy to come in just under TXU and fatten their own results.

Some state officials may even like the high prices. They give competitors a better chance to take away business (about 30 percent of local residents have switched providers) and encourage more power-plant construction.

Indeed, deregulation has worked well on those fronts. It helped spawn a surge of new plants at the start of the decade, a good move for utilities, considering the profits to be made here. And more than a dozen marketers now sell power to Metroplex consumers.

But the big promise of deregulation -- lower prices -- hasn't materialized.

Some elected officials believe that will change at the end of the year, when the state drops its price-to-beat system and lets the free market sort things out.

TXU in North Texas and Reliant in Houston will then be free to set rates, rather than having to ask the PUC for rate increases.

TXU officials say they're developing a range of consumer products, not worrying about cutting the company's benchmark rate.

And they're focusing on selling the expansion plan to the public.

Several executives visited the Star-Telegram Editorial Board last week, including Mike McCall, top executive of TXU's wholesale unit. They made a persuasive case that Texas will need more electric capacity by the end of the decade and claimed that coal-burning plants are the best option.

Why fast-track approval? They said the state needs more capacity quickly and building the plants en masse is the most efficient way to do it.

But the plan is so audacious that it landed TXU and its chief executive, John Wilder, on the front page of The Wall Street Journal a few weeks ago. Rebecca Smith reported that some believe that TXU is trying to get the plants started before the federal government imposes restrictions on carbon-dioxide emissions, believed to be a key contributor to global warming.

TXU could save money on construction by not having to build newer-style plants that produce fewer pollutants, the report said, and it could be eligible for "allowances" that give existing plants incentive to run cleaner. The new plants would make TXU the third-largest emitter of carbon dioxide among U.S. power companies, up from No. 10 today, The Journal reported.

It also said Wilder projects that the new plants will eventually add at least $1 billion to TXU's annual profits.

Asked about The Journal article, McCall said TXU wouldn't make a $10 billion investment decision because of the possibility that environmental laws might change.

But local leaders have also raised objections. Mayors Robert Cluck of Arlington and Laura Miller of Dallas are urging TXU to use cleaner technologies, and they're asking mayors from at least 45 Texas cities to help assess the potential impact of so many new plants.

They're right to be worried. If electric deregulation has proved anything, it's that companies look out for their interests first.