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Preparing for deregulation means business units changed

Tuesday, February 5, 2002 by

In preparing the utility for changes in the electric wholesale and retail markets, Austin Energy General Manager Juan Garza announced the realignment of the utility’s business units and organizational structure. Four senior vice presidents and two vice presidents will report to Garza directly.

Garza said the new alignment was decided by a consensus of his executive team. “I wouldn’t move” on these changes, “unless they were in agreement,” he said. Garza said it is very important to him that the team be unified and committed to supporting one another as the utility moves into deregulation, even though Austin Energy will not be in direct retail competition with other utilities.

Senior Vice President Al Lujan will lead the unit that includes power delivery, transmission and distribution operations (TRANSCO & DISCO). Andy Ramirez, senior vice president for power production ( GENCO), is in charge of power production and energy products. Mike McCluskey, senior vice president over wholesale and retail markets ( QSE &REPCO), will continue to lead customer care and marketing and market operations. New duties for him include conservation and renewable energy programs, except for Green Building.

Elaine Kuhlman, senior vice president for finance and corporate services ( FINANCO), will be in charge of business services, human resources, communications, corporate consulting, finance and information technology and telecommunications.

Roger Duncan, who has been in charge of all of the utility’s conservation programs, will continue to oversee Green Building, while adding more duties in policy areas. His new title is vice president for governmental relations, energy and environmental policy. He will continue to work with national energy policy organizations, as well as federal, state and local officials. Bob Kahn, vice president for legal services, will continue to be the utility’s legal advisor. Both Kahn and Duncan will report directly to Garza.

In a memo explaining the reorganization, Garza said, “The City Council has given clear direction that the City of Austin does not plan to opt in or open its service area for retail competition at this time. However, it is always prudent to be in a position to respond if conditions should change.”

Garza told In Fact Daily he is more optimistic about the future of deregulation in Texas than was his predecessor, Chuck Manning. (See below.) Besides, he said, “It’s too late to undo that. There are market forces that were put into place when Ronald Reagan was President. The technology exists to support it.”

Unlike California, Garza said, the State of Texas is deregulating in a prudent manner. “It looks like Texas is avoiding the common mistakes made elsewhere.” He said Austin should be fine this summer, because it has sufficient generating capacity. The better test for the whole system, he said, will be next fall when thousands of college students return to school. They will be asked to pick their utility provider and many may decide to switch. That should be a real test for ERCOT (Electric Reliability Council of Texas), he said. Garza said he had just toured the new switching facility in Austin, whereERCOT has its main bank of computers.

Parting comments from former utility chief

Chuck Manning stepped down as general manager of Austin Energy at the beginning of the year. He did so to return to his home state, where he became chief operating officer of the Municipal Electric Authority of Georgia. As Manning prepared to leave Austin Energy, In Fact Daily asked him for his thoughts about the future of the utility and deregulation. Here are excerpts from that conversation.

In Fact Daily: First, can you comment on deregulation in this state?

Manning: Deregulation in Texas, I think, will go rather smoothly, except during the peak load times of the summer. Because of the way generation has been sited, absent transmission capacity—in this state you can build a power plant that gets permitted and get siting and you have direct access to the transmission system, but not to the capacity of the transmission system.

IFD: What do you mean exactly?

M: For example, many power plants have been located very close to one another, which means they all use the same infrastructure. The thing that was noticed this summer in the pilot market was the impact of so many users trying to use the same transmission line.

IFD: How long do you think it would take to remedy that situation?

M: Well, ERCOT (Electric Reliability Council of Texas) has got a proposed schedule of between $3 and $4 billion in transmission capital improvements. They’ve made some of those, plus or minus 3,000 miles of new transmission or reconductor transmission lines . . . (But) until the capacity of the transmission system balances out with availability in the generation system, there’s going to be market scenarios where the constraints of the transmission system are going to be reflected through to the pricing of the product. Thank goodness Austin, by and large, should not be impacted by that because we have our own generation; we have our own transmission capacity. So, I think initially the market will have very little effect on Austin, certainly not a negative effect.

IFD: How are current prices?

M: San Antonio is still the best in the state, but the real comparison is—public power is cheaper than anybody. We still have the best prices. Austin, San Antonio, LCRA. Public power is cheaper than competitive market prices, which I think speaks extremely well for public power. Plus, public power has a direct commitment to customer service.

IFD: Do you think that it would have been a mistake a few years back when there was some rumbling about selling Austin Energy?

M: I think that would have been a tragic mistake. And I think the biggest evidence of that is the 14 western states where many of the utilities, many municipals, did not have total resources. They were dependent on third parties for all or just a portion of their energy. Utilities went through hundreds of millions of dollars because they could not sustain themselves on the generation side. And to have sold either the utility, or just its generation, would have been a tragic, tragic mistake.

IFD: And in the future?

M: In the future, I think one of the things the financial markets, such as Moody’s, etc., (is going to ask is) are you dependent on the market? What’s your exposure to the market? Do you own your own generation? And I think those are real key questions and the answer is ‘Yes, we do. We’re in the driver’s seat.’ If you can completely supply 100 percent of your needs, you can pick and choose. You can go to the market and decide, is it cheaper to run your plant today or buy something today. So you have the market advantage. If you don’t have complete self-serving capacities, then you can become easily exposed to the market. That’s the real advantage that San Antonio or Austin Energy does have.

IFD: What about the money that Austin Energy ended up owing to ERCOT last year?

M: It was called a BENA—Balancing Energy Neutrality Act. Theoretically, it should be a zero-sum game, that everything that is sold is dispersed—and it really should be a hold harmless, a neutrality effect, but it doesn’t turn out that way. During the summertime because of congestion along the transmission system, it doesn’t work that way. This coming summer, the party that causes congestion will have to pay for that impact of congestion. This past summer, all of those costs of congestion (were dispersed) to all the generators in the state. Because we have about four percent of the load, we had to pick up 4 percent of those costs of BENA. Statewide, starting July 31st, the BENA cost was about $96 million for the first few months of the market.

IFD: How do they decide who’s causing the congestion?

M: You know the capacity of the generator and monitor the load coming out . . . Theoretically, in an open market, you’ve got generators spread out around the state and you have customers everywhere. Theoretically . . . any generator should be able to get to any customer, no matter where they are. (But in reality) the generators have to tie into the transmission system.

If you have generators close to the clients that they’re serving, there’s less stress on the generation system. The energy out of a generator is going to flow to where the load is. Wherever the load is, the energy’s going to flow that way. The generation, instead of being built where there was transmission availability, mostly was built south of Austin . . . One reason is gas . . . all new generation is gas-fired. The major cost with gas is transportation. So . . . you have an advantage, being close to the fuel source . . . The last time I looked, the 5-county area around Dallas is 9,000 MW short of generation. The load there is bigger than the current capacity to serve it. . . You have all this new generation in the south of the state. The deficit of generation is in the north and the load is in the north, so as this energy in the south tries to get to the north, you run into congestion . . . This system just will not handle all of the energy that wants to flow north, (which creates) market constraints. Whenever you have market constraints, your price can escalate.

IFD: So is the solution to put in more individual transmission lines up towards the north?

M: That is certainly one solution. ERCOT right now is doing just that. There are a total of six areas in the state that are constrained. The state is building about 3,000-3500 miles, which will eventually solve the problem. You built the power plants first. That introduced the transmission constraints because there’s now too much generation for the capacity of the transmission system.

IFD: What were they thinking?

M: (Even the federal government overlooked this particular problem.) There’s a group you can site plants with and you have the right to connect to the transmission. But there’s no . . . oversight of the connection between generation and transmission. That’s where the linkage is not good. There’s no coordination between the generation and the transmission regulators.

IFD: Is that going to change?

M: (It could change, but Texas would still have a problem because the generators have already been built.) So, the real market risk is in heavy load conditions . . . If you had Labor Day 2000, where you had 110 or 112 degrees, it would be physically impossible to get any (particular) generator to any market. That’s because the system can’t accommodate that. So the person who gets paid is the person who can get it to market. So, there’ll be premiums . . . Whoever causes that congestion will have to pay for the cost . . .whereas this summer, everyone had to pay for the cost . . . Austin has grown about 32 to 35 percent in peak demand in a four-year period. That is a phenomenal amount of growth . . . We had unprecedented growth. (He lists the high tech boom, expansion of downtown and general growth throughout the service area.) You would expect moderation (in growth). If you continue growth at that rate, that’s not healthy . . . Because growth has slowed, the utility has a chance to assess where to invest, to make sure the system continues to be reliable.

Tuesday Wednesday, Thursday,

Friday

Signature lawsuit moved up . . . Mike McKetta, attorney for the Austin Police Association PAC, which has sued the city to overturn a charter provision requiring incumbents to collect more than 20,000 signatures to run for re-election, says the case will be heard on Friday. Judge Suzanne Covington of the 201st District Court will preside, McKetta said . . . Two major business groups supporting single-member districts . . . Greater Austin Chamber of Commerce CEO Mark Hazelwood and Susan Harris and Kirk Rudy of the Real Estate Council of Austin waited until after midnight at last week’s Council meeting to speak out on the subject. “We believe that the single-member district structure would promote sound and good government by improving representation for every area and constituency within the city,” Hazelwood said. Rudy said his group also supported single-member districts, with a few strings attached. “We think it is essential that the redistricting committee that will be established to draw the lines for the districts be established prior to the elections,” Rudy said. That would require some quick action, since the single-member district proposal is proposed for the ballot in May . . . Reactions beginning . . .The draft of the new ordinance defining the role of boards and commissions is eliciting reactions from effected commissioners. Design Commissioner Girard Kinney said the part referring to his commission is “almost the antithesis of what we do and what we need to do.” Commissioner Phillip Reed said the ordinance presented some “huge discussion items.” The commission is also in the process of re-crafting its own by-laws. The Design Commission originally was intended to offer design awards on buildings . . . Cleaning up Texas’ waterways . . . Environmental problem-solvers will meet Thursday and Friday at The University of Texas at Austin’s J.J. Pickle Research Campus to address pollution in the state’s rivers, lakes and estuaries. The Center for Research on Water Resources at UT’s College of Engineering will host the forum. The event is free and open to the public but online registration is required. The Web site address is http://www.texastmdl.org . Applications will be taken until all 300 slots are filled. For more information, contact Sharon Bernard at 471-0076

© 2002 In Fact News, Inc. All rights reserved.

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