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LCRA’s transmission business prospers in wake of deregulation

Friday, September 25, 2015 by Jack Craver

Typically it’s not public entities that benefit from deregulation, but a 1999 law deregulating Texas’ electricity-generation market has been a boon for the Lower Colorado River Authority’s transmission business.

“It’s a future of continued growth,” said Ross Phillips, LCRA executive vice president of transmission services, at a meeting of the LCRA Planning and Public Policy Committee last week.

Among other things, the LCRA Transmission Services Corporation (TSC) is planning to spend $918 million over the next five years to build new transmission facilities and improve existing ones, as well as to own $4.3 billion in assets.

That’s hardly a change in pace from recent years, during which TSC has grown dramatically. It has expanded since its first year of operation, in 2002, from an overall value of $381 million to $2.12 billion.

That rapid growth comes in the context of Texas’ somewhat singular electricity market. For one, Texas is the only state besides Alaska that operates its very own electric grid, or interconnection — there are only three in the lower 48 states. That means buildout of transmission lines is less complicated in Texas than in other parts of the country, where such a project might involve crossing state lines and incurring more federal oversight.

Texas is also one of 17 states that has a deregulated electricity market. In order to spur competition among electricity generators, the state legislature passed a law in 1999 requiring transmission providers to open their transmission lines to any qualified entities that request their services across the state, including utilities, municipalities, cooperatives and private companies.

The law also mandated that utilities, including LCRA, “unbundle” their transmission and distribution services from generation services and retail electricity sales. As a result, LCRA set up a separate entity, the TSC, which conducts the transmission business for LCRA.

When an entity wants to start generating electricity, it goes to the state’s grid operator, the Electric Reliability Council of Texas, and asks to be connected to a transmission line. ERCOT then asks the nearest transmission operator to link up to the generator.

“We can say no, but nobody ever says no,” said Phillips.

Generators generally don’t have to pay for buildout of the transmission lines, although they will sometimes pay for engineering studies. The transmission provider pays for the buildout and then seeks to recoup the cost through the money paid by ratepayers.

The rates are set by the Public Utility Commission, which determines whether the proposed rates submitted by the transmission provider are reasonable, based on the cost of setting up and maintaining the transmission lines. There are 40 transmission operators in Texas, but ratepayers pay the same for transmission no matter which entity they are served by. The PUC sets a uniform rate throughout the state based on the total cost of opening and maintaining transmission lines.

“You spend your money before it’s approved,” explained Phillips. “It’s backwards from what a lot of people do, but it works because it makes me pay attention when we spend money.”

Phillips compared the system to public infrastructure.

“The state puts down the highway for you,” he said. “The state puts down the transmission system for you to make it cheaper for you. In theory, that means more generators are going to come to Texas, which means more competition to pull rates down.”

According to Phillips, the law has served its purpose. Since 2002, he said, TSC has connected to generators from nine different companies that produce a combined 4,826 megawatts, more than the total electricity generated by LCRA.

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