AECT Electricity 101 - March 2010 Update

Electricity 101:
Operations and Recent Statistics
March 2010

Legislative advertising paid for by: John W. Fainter, Jr. • President and CEO Association of Electric Companies of Texas, Inc.
1005 Congress, Suite 600 • Austin, TX 78701 • phone 512-474-6725 • fax 512-474-9670 • www.aect.net

AECT Principles

• AECT is an advocacy group composed of member companies committed to:

- Ensuring a modern, reliable infrastructure for the supply & delivery of
electricity.

- Supporting efficient competitive markets that are fair to customers and
market participants.

- Supporting consistent and predictable oversight and regulation that will
promote investment and ensure the stability of Texas’ electric industry.

- Promoting an economically strong and environmentally healthy future for
Texas, including conservation and efficient use of available resources.

• AECT member companies remain dedicated to providing Texas customers with
reliable service and are committed to the highest standards of integrity.

The Association of Electric Companies of Texas, Inc. (AECT) is a trade organization of investor-
owned electric companies in Texas. Organized in 1978, AECT provides a forum for member
company representatives to exchange information about public policy, and to communicate with
government officials and the public. For more information, visit www.aect.net.
2

U.S. Divided into Eight
Reliability Regions

• The eight reliability regions in the FERC
continental U.S. are subject to the
oversight and enforcement authority of NERC
the North American Electric Reliability
Corporation (NERC), which is subject to
the Federal Energy Regulatory
Commission’s (FERC) oversight. NERC
is responsible for developing standards
to ensure and improve reliability for
delivery of electricity on the bulk power
system.

• Electric systems in Texas are located
within four separate reliability regions:
- Texas Regional Entity (TRE),
which oversees participants in the
Electric Reliability Council of
Texas (ERCOT) (green shading);
- SERC Reliability Corporation;
- Southwest Power Pool (SPP); and
- Western Electricity Coordinating
Council (WECC).
(ERCOT)

3

AECT Member Companies
Within ERCOT

Retail Electric Providers

Transmission and Distribution Utilities

Generation Companies

4

AECT Companies
Outside of ERCOT

SERC Reliability Corporation

Southwest Power Pool (SPP)

Western Electricity Coordinating
Council (WECC)

5

Contents

Slide 7: AECT Member Companies
Slide 23: Electric Market Structures in Texas
Slide 36: Texas’ Wholesale Electric Market
Slide 46: ERCOT Generation Mix
Slide 53: Types of Generation: Benefits and
Challenges
Slide 64: Emissions and the Environment
Slide 77: Transmission and Distribution Utilities
Slide 87: Energy Efficiency
Slide 95: Competitive Retail Electric Market in
ERCOT
6

AECT Member Companies

7

AEP SWEPCO
Vertically Integrated Utility

Southwestern Electric Power Company,
headquartered in Shreveport, LA,
serves 460,000 customers in East
Texas and the Texas Panhandle,
Northwest Louisiana, and the western
edge of Arkansas. SWEPCO has been
providing low-cost, reliable electricity to
customers since 1912. SWEPCO is a
vertically integrated company operating
as a member of the Southwest Power
Pool.

8

AEP Texas
Transmission & Distribution Utility

AEP Texas is connected to and serves
more than 900,000 electric consumers
in the deregulated Texas marketplace.
As an energy delivery company, AEP
Texas delivers electricity safely and
reliably to homes, businesses and
industry across its nearly 100,000
square mile service territory in south
and west Texas.

9

CenterPoint Energy

CenterPoint Energy maintains the wires,
poles and electric infrastructure
delivering service to more than 2 million
consumers in its 5,000-square-mile
electric service territory in the Houston
metropolitan area. While CenterPoint
Energy employees ensure the reliable
delivery of electricity from power plants
to homes and businesses, the company
neither generates power nor sells it to
retail customers.

10

El Paso Electric Company

El Paso Electric is a vertically integrated
utility serving approximately 357,000
customers in the Rio Grande Valley in
west Texas and southern New Mexico.
El Paso Electric is an operating member
of the Western Electricity Coordinating
Council.

11

Entergy Texas

The Entergy Texas service area starts
at the southeast Texas/Louisiana border
and stretches up into the piney woods
of east Texas, down to the Gulf of
Mexico and across to the lake country
north of Houston. Entergy Texas serves
approximately 385,000 customers in 26
counties.

12

Exelon Generation
Electric Generation Company

Exelon Generation owns and controls about
33,000 megawatts of electricity generation
capacity from a diverse portfolio that includes
the nation’s largest fleet of nuclear power
plants. The company maintains strong
positions in the Midwest and Mid-Atlantic
regions. In Texas, it owns or controls about
3,700 megawatts of natural gas-fired
generation, with plants in Dallas, Fort Worth
and LaPorte. Exelon has also announced
plans to submit a combined Construction and
Operating License application for the possible
construction of a nuclear power plant in
Victoria County.

13

First Choice Power
Retail Electric Provider

First Choice Power began serving
customers as a retail electric provider
across Texas on Jan. 1, 2002, when
deregulation of the electric industry was
introduced in Texas. First Choice Power
is one of the largest retail electric
providers in the state. It is led by a
management team with experience in
the deregulated markets in Texas and
throughout the nation.

Competitive Areas of Texas

14

Luminant

Luminant is a competitive power
generation business, including mining,
wholesale marketing and trading,
construction and development. It has
over 18,300 MW of generation in Texas,
including 2,300 MW of nuclear and
5,800 MW of coal-fueled generation
capacity, and is the largest purchaser of
wind-generated electricity in Texas and
fifth largest in the U.S.

15

NRG Energy

NRG Texas is the second largest
electrical generator in Texas with more
than 1,100 professional employees
operating a diverse generation portfolio
of almost 11,000 megawatts of power.
NRG Texas also has an extensive
repowering program including a new
combined cycle gas plant at the Cedar
Bayou plant east of Houston, a coal unit
at Limestone; two wind projects in West
Texas and the first new nuclear units
proposed for the United States in more
than 29 years.
16

Oncor

Oncor is a regulated electric distribution
and transmission business that delivers
reliable electricity to consumers. Oncor
operates the largest distribution and
transmission system in Texas, providing
power to more than 3 million electric
delivery points over more than 115,000
miles of transmission and distribution
lines.

17

Optim Energy

Optim Energy is a joint venture of PNM
Resources and Cascade Investment,
L.L.C. It provides wholesale generation
and marketing and trading services in
the ERCOT region. The company owns
two generation assets, both in Texas,
representing 920 megawatts. In
addition, the company and NRG are
jointly developing a 550-megwatt
combined cycle natural gas unit near
Houston.

18

Reliant Energy

Reliant Energy, Inc., based in Houston,
Texas, provides electricity and energy-
related products to more than 1.8 million
retail and wholesale customers in Texas
and in the Mid-Atlantic Region. As one
of the largest electricity providers in
Texas, Reliant works hard to provide its
customers with competitive electric
prices, innovative products and
unmatched customer service for their
homes and businesses.

19

Texas-New Mexico Power Co.

Currently, TNMP provides electric
service to 76 cities and more than
226,000 customers throughout Texas.
TNMP is owned by PNM Resources, an
energy holding company based in
Albuquerque, New Mexico.

20

TXU Energy

TXU Energy is a market-leading
competitive retailer that provides
electricity and related services to more
than 2 million electricity customers in
Texas. TXU Energy offers a variety of
innovative products and solutions,
including 24/7 customer service,
competitively priced service plans,
energy efficiency options and renewable
energy programs.


21

Xcel Energy

Xcel Energy owns Southwestern Public
Service Company, a regional electric
utility that provides retail and wholesale
service to about 1 million persons in a
45,000 square-mile area comprised of
the South Plains and Panhandle of
Texas, and eastern New Mexico.

22

Electric Market Structures in Texas

23

History of Electric Utility
Regulation in Texas

Pre-1975
• Cities regulated electric utility service and rates.
• Generally, a declining cost industry – rate applications most often filed to decrease rates.

1975
• Inflation, construction costs and fuel costs drive electricity rates up.
• 64th Texas Legislature enacts Public Utility Regulatory Act (PURA) to implement state regulation of
electric utility service and rates (Cities permitted to retain original jurisdiction).
– Service area, transmission line and generating plant certification.
– Rate regulation (based on cost of service plus reasonable return on investment).
– Rates based on historical test year costs and original costs of infrastructure, less depreciation.
– Service quality regulation.
– Customer protection.

24

History of Electric Utility
Regulation in Texas

1976-1995
• 1978 U.S. Fuel Use Act required utilities to discontinue use of natural gas and encouraged the use of
coal and nuclear for fuel.
• Inflation, volatile fuel costs and the need to add new generating capacity continue to increase
electricity rates.
• Rate proceedings at PUC become increasingly adversarial.
– Consumer groups concerned about frequency and amount of rate increases.
– Utilities concerned about increasingly large PUC cost disallowances that are at odds with the
regulatory compact and erode rates of return.
• Large customers tire of subsidizing other ratepayers seek opportunities to by-pass regulated rates and
obtain choice of suppliers.
– Cogeneration/self-generation.
– Advocate wholesale competition and transmission open access.
– Advocate “retail wheeling”.
• Natural gas was favored again when the 1978 U.S. Fuel Use Act was repealed in the 1990s.

25

Steps to Electric Competition
In Texas

Jan.
2007
Jan.
End of
2005 price-to-
Jan. Affiliate
beat
2002 REPs
July Retail
allowed to
2001 offer non-
choice
price-to-
Sept. Texas
begins in
beat
1999 ERCOT
Choice prices
June ERCOT pilot
Electric program
1999 begins
rates
May frozen
Retail
1995 competition
Wholesale legislation
competition
legislation
Passed (SB 7)
passed (SB 373) 26

Wholesale and Retail Electric
Competition Were Passed
With Broad, Bipartisan Support

• Senate Bill 373, which opened the wholesale electricity market in Texas,
passed in 1995 when the Democrats were the majority party in the
House and Senate.
– The Speaker of the House and the Lieutenant Governor were both
Democrats, and the bill sponsors and authors were both Democrats.

• Senate Bill 7, which opened the competitive market, passed in 1999.
– The Senate and the Lieutenant Governor were Republican, but the House
was still majority Democrat. The House sponsor and author of the bill and the
House Speaker in 1999 were both Democrats.
– Senate Bill 7 passed the House with a vote of 144 Ayes and 4 Nays.

• It was a bipartisan measure: 74 of the Aye votes were from Democrats,
while 68 were from Republicans.
– The bill passed the Senate with a vote of 28 Ayes and 3 nays.

27

Steps to Competition:
Wholesale Competition

• Senate Bill No. 373 enacted in May 1995
– Required utilities to provide non-discriminatory open access transmission
to support wholesale competition in ERCOT.
– Recognized new, unregulated participants in ERCOT wholesale market.
 Exempt wholesale generators
 Power marketers
– Allowed non-utility wholesale market participants to offer market-based
prices in ERCOT.
– Deregulated electric cooperative distribution rates.
Note: Non-ERCOT areas are subject to FERC jurisdiction for wholesale
services, including transmission services.

28

Retail Competition

• ERCOT market restructuring legislation, Senate Bill 7, passed in
1999
– Initiated competition in ERCOT retail markets beginning January 2002.
– Municipally-owned utilities and electric cooperatives allowed to “opt-in”.
– Included environmental and energy efficiency provisions.
• Required reduction of nitrogen oxide (NOx) emissions from older power plants by
50%, and sulfur dioxide emission from coal-fired facilities by 25%.
• Utilities required to fund energy efficiency programs equal to at least 10% of each
year’s annual growth in demand.
– 1999 - 2001 – Preparation for retail competition.
• Electricity rates frozen.
• ERCOT develops systems required to support competition.
• PUC promulgates competition rules.
• PUC determines rate unbundling cases.
– July 2001 – Retail competition pilot project begins.

29

Transition Period

• January 2002-2006 Transition Period
– “Affiliated” generators
• Required to make 15% of their power available to non-affiliated retail providers
• During first two years, limited to guaranteed market price for power as projected by
PUC
• Given incentives to install environmental clean-up equipment

– Transmission and Distribution Utilities
• Initial rates set using estimated/generic costs
• Recovery of stranded and other transition costs authorized but delayed until 2004
True-up proceeding
– Securitization bonds lower cost to customers

– “Affiliated” retail electric providers
• Required to lower base rates by six percent (Price to Beat)
– Adjustable only for increases in natural gas prices
– Price to Beat remains in place until 12-31-06
• No price competition allowed in former service area until 2005

30

Structural Unbundling

• Incumbents required to separate business activities into the following
units.
– Power generation company.
– Retail electric provider.
– Transmission and distribution utility.
• Generation and retail businesses are not regulated utilities.
– Power Generation Companies must be registered with PUC.
– Retail Electric Providers must be certified by PUC.

• Transmission and distribution businesses remain regulated utilities.

• Methods for separation of business activities.
– Creation of separate non-affiliated companies.
– Creation of separate affiliated companies owned by a common holding
company.
– Sale of assets to a third party.

• Each ERCOT utility chose different models.
• Code of conduct rules enforce separation requirements. 31

ERCOT: Separate companies provide
retail, transmission & distribution and
generation services

Power Flow
Financial Flow
Regulated

• In competitive markets, consumers have multiple retail electric providers
(REPs) and service plans to choose from.

• Wholesale and retail prices are set by competitive market forces, while the
PUC sets transmission and distribution rates. 32

ERCOT: Separate companies provide
retail, transmission & distribution and
generation services

Power Flow
Financial Flow
Regulated

• Because wholesale electric prices are set by the competitive market, the
risks associated with the cost of construction, operations and maintenance
of a generation plant are borne entirely by the generator and its investors,
not by end-use customers.
33

Outside ERCOT: A single company
provides retail, transmission & distribution
and generation services in each area

Power Flow
Financial Flow
Regulated

• In fully regulated markets, the PUC sets retail rates charged to end-use
customers.
• Each of these service areas is part of multi-state electric grids, with
differing regulations. In many cases, vertically integrated utilities purchase
wholesale power from certain unregulated entities. 34

Outside ERCOT: A single company
provides retail, transmission & distribution
and generation services in each area

Power Flow
Financial Flow
Regulated

• New power plants in these regions can be built by both regulated entities
and certain unregulated entities or qualifying facilities.
• Regulated utility power plants, however, must be approved by the PUC
after a rigorous review of need and siting.
35

Texas’ Wholesale
Electric Market

36

The Competitive Wholesale Market: A
Success Story

Competition has brought greater efficiency
to the wholesale market
– Generators shoulder the risk of building new power plants, bringing efficient,
cost-effective generation to consumers.
– New power plants produce more electricity per unit of fuel.
– New power plants include modern environmental emissions controls.

The competitive market is in the public interest
– Operational efficiency of a competitive market helps push wholesale prices
downward.
– No market structure is more effective at ensuring efficient operations than a
competitive one.

Policy decisions should be focused on
maintaining vibrant competition
– Texas leaders should support policies that maintain the competitive market.
– The competitive market will bring forward the right mix of technology and fuel
type based on environmental choices by policymakers.
37

Permitted and Operating Electric
Generating Units in Texas

38

ERCOT Wholesale
Market Management

• System Reliability
– ERCOT oversees system reliability.
– ERCOT is part of national reliability council.
– ERCOT protocols, approved by PUC, mandate system reliability standards that all
market participants must follow.

• Statute and Rules Address “Market Power” and Generation Merger Issues
– Independent Market Monitor oversees wholesale market operations.
– Generating capacity owned and controlled by a Power Generation Company limited to
20% of installed generating capacity capable of delivering power to a power region.
– Administrative penalties for market power abuse were reviewed and updated during the
79th Regular Session.
– Mergers of Power Generation Companies subject to PUC review.

• Market Design
– ERCOT will transition to a Nodal Market in 2009 as a result of PUC rulemaking.
– The change is expected to bring cost-savings and additional efficiency to the market by
enhancing market transparency and allocating costs more accurately to market
participants.

39

Wholesale Market
Management Outside ERCOT

• System Reliability
– Larger, multi-state Councils (SERC, SPP, WECC) oversee system reliability.
– Each is part of national reliability council.
– Protocols, approved by the Federal Energy Regulatory Commission (FERC), mandate
system reliability standards that all market participants must follow.

• Wholesale market operations overseen by FERC

40

Increased Population Drives
Future Electric Consumption

Texas’ Projected Population Growth
Assuming Net Migration Equal to 2000-2004
(median scenario)

•To meet increases in electric 43.6 million

load created by Texas’ rapid
population and economic 36.3 million
growth, Texas will require 30.3 million
additional power, transmission
and distribution, customer 25.1 million
demand response and energy
efficiency.

2010 2020 2030 2040

Source: Texas State Data Center

41

Electric Consumption Continues to
Grow in ERCOT

Note: The peak in electric consumption in 2000 was Source: ERCOT, “Report on Existing and Potential
due to an exceptionally hot summer. Electric System Constraints and Needs,” December
42
2009

Peak Demand Also Growing, Requiring
Additional Investment Long-Term

Source: ERCOT, “Report on Existing and Potential
Electric System Constraints and Needs,” December
43
2009

ERCOT Restructuring Spurred
Massive Generation Investment

Generation Investment in ERCOT: Before and After Wholesale Competition

44

Update on ERCOT Reserve Margins

Source: ERCOT, “Report on Existing and Potential Electric System Constraints and Needs,” December 2009

45

ERCOT Generation Mix

46


• The generation technology mix is an outcome of a robust competitive wholesale
market and environmental policy decisions.

• In addition to the price of fuels and the cost of technology, environmental and siting
issues impact choices made by generation developers.

• Coal, including lignite, is an important fuel in the ERCOT electric generation mix.

– Coal is the most abundant fossil fuel in the United States, with an estimated
200 year supply remaining (per the Energy Information Administration (EIA)).
– Electricity produced from Texas lignite exceeds the entire generation of 28
states individually.
• Texas lignite accounts for about 45% of the coal used in the state for electricity.
• Texas’ lignite mining industry is a key part of the state economy, providing over
33,000 permanent jobs and contributing about $10.5 billion in annual Total
Expenditures.

• The existing framework of Texas’ competitive wholesale electric market has helped
lead generators to invest in and announce plans for over 27,000 MW of new
generation, including natural gas, coal, nuclear and renewable power.
Sources: EIA, National Mining Association, The Perryman Group 47

In 2009

Source: Public Utility Commission of Texas (PUC) Chair Barry Smitherman Presentation to the Gulf Coast Power Association, Oct. 6, 2009 48

In 2013

Assuming 18,000 MW of wind, approximately 5,600 MW of new
coal, 4,300 MW of new natural gas

Source: Public Utility Commission of Texas (PUC) Chair Barry Smitherman Presentation to the Gulf Coast Power Association, Oct. 6, 2009 49

Gas on the Margin in ERCOT
Year-Round

Examples are purely illustrative

• There are multiple types of power plants with different operations in ERCOT that are operated
on different schedules.
– Because of their lower marginal costs, nuclear and coal-fired power plants in ERCOT operate
approximately 90 percent of the time.
– In contrast, natural gas-fired power plants are ramped on and off, depending upon demand.
– Wind-generated electricity is only intermittently available, depending on wind conditions.

• Some natural gas-fired generation is required to operate at all times in the ERCOT region to
meet demand.
– Natural gas-fired generation sets the market price of wholesale electricity in ERCOT.
– Natural gas-fired units that are used to meet peak demand tend to be older units that cost more to 50
operate.

Business Climate for Generators
in ERCOT

• In ERCOT, generation companies assume all of the financial risk included in a new generation
projects.

• The decision to build new generation thus depends upon whether the generator believes the
electricity can be sold at a price to recoup construction costs, cover operations and
maintenance costs and achieve a profit.

• Market forces have been effective in bringing new generation to the state, with over 37,063
MW of generation constructed since the advent of wholesale competition in 1995. Another
4,433 MW of new generation is under construction, according to the PUC.

• While not all is expected to the built, the PUC reports 25,756 MW of new generation has been
announced:
– 6,389 MW of new coal-fired generation
– 6,002 MW of new nuclear generation
– 8,012 MW of new wind-powered generation
– 5,253 MW of new natural gas-fired generation

• Though such news is positive, market forces and legislative and regulatory certainty will
ultimately dictate how much of the announced new generation is actually built.

Data source: PUC, “New Electric Generating Plants in Texas,” as of November 17, 2007 51

Texas Has the Most Installed
Wind Energy Capacity

27% of the nation’s installed wind generation capacity
is located in Texas.
Source: American Wind Energy Association, 12/31/09 (www.awea.org/projects) 52

Types of Generation:
Benefits and Challenges

53

Three Key Factors Affecting Choices
for New Generation

En
n
tio

vir
ra

on
ne

m
Ge

en
ta
of

l Is
pe

su
Ty

Wholesale

es
Market

Cost of Construction and Fuels

54

Coal-Fired Generation

Type of Generation
+ Coal-fired plants provide baseload generation, by running
approximately 90 percent of the time.

Environmental Issues
- Greater air emissions than natural gas-fired plants,
including rate of about twice the CO2 per kWh generated.
- Risk of higher costs due to future carbon-capture
requirements.

+ Currently, pulverized coal generation is economical to build based on current
natural gas prices.
+ Long-term domestic supply of coal, including lignite.
+ Fuel cost is relatively low
- High initial capital costs relative to natural gas-fired plants.

55

Natural Gas-Fired Generation

Type of Generation
- Natural gas plants, such as combined-cycle plants, can
provide baseload generation, but demand conditions in
ERCOT result in a lower capacity factor than for coal-fired
or nuclear-powered generation.
+ Other simple-cycle natural gas plants have quick start-up
and shut-down times to allow them to meet peak demand.

+ Lowest air emissions among fossil fuels.
+ Newest power plants operate more efficiently, burning less
fuel per MWh of generation.

+ Low initial capital costs.
- When natural gas prices are high, gas-fired power plants are expensive to operate.

56

Nuclear-Powered Generation

Type of Generation
+ Nuclear-powered plants provide baseload generation by
running approximately 90 percent of the time.

+ No air emissions.
- Long-term storage of waste needs to be implemented.
- Historic concerns regarding public perception of safety of
nuclear power.

+ Lowest fuel cost of all large-scale generation.
- High capital costs.
- Longest permitting and construction times among generation types.

57

Wind-Powered Generation

Type of Generation
+ Wind is plentiful in certain parts of Texas.
- Wind blows intermittently, making it a less reliable power
source.

+ No air emissions.
- Can affect migratory birds.
- Concerns about aesthetic impact.

+ No fuel cost.
- Limited ability to replace other generation to satisfy reserve margins.
- Imposes other costs on the system, such as increased ancillary service
requirements, backup capacity and the need for transmission lines to reach rural
wind farms.

58

Solar Generation

Type of Generation
+ Solar power is generally reliable, but intermittent, as it
depends on certain levels of sunlight.
- Plants are generally small in scale.

+ No air emissions.
- Large areas of land needed for effective solar arrays.

- Can have 15 to 20 times the capacity cost of natural gas-fired generation
+ No fuel cost.
- Cannot be used to replace other generation to satisfy reserve margins.
- Imposes other costs on the system, such as the need for transmission lines, since
large-scale solar power plants would be located in areas far from population
centers.

59

Biomass and Landfill Gas
Generation

Type of Generation
+ Biomass and landfill gas generation generally operates
reliably.
- Plants are generally small in scale.

- Plants burning biomass can have high CO2 emissions.
+ Landfill gas facilities reduce methane greenhouse gas
emissions.
- Generation is difficult to permit and site.

- Requires high capital and operating costs when compared with fossil fuel-fired
generation
- Often located far from population centers, requiring high transmission costs

60

Hydroelectric Generation

Type of Generation
+ Hydroelectric power is reliable to operate, except during
drought.
- Texas has very little potential for new hydroelectric power
generation.

+ No air emissions.
- Can kill fish.

+ Once built, hydroelectric power is among the least expensive forms of power, as it
has no fuel costs.
- High capital costs

61

Energy Efficiency and
Demand-Side Management

Type of Technology
+ Several cost effective solutions available.
- Success requires broad implementation.

+ Reduces emissions that would otherwise accompany fossil
fuel usage.

+ Can improve cost levels for residents and customers.
+ Reduces need for building new power supply.

62

Estimated Cost of New Generation

Chart Source: EEI

63

Emissions and the Environment

64

Texas Is Already Leading the Way
in Clean Power Plants

Texas has the largest emissions of any state since
it produces ~80% more power than the next ranked state.

0.247
0.395 OK 0.223
NM AR

0.156
0.103 LA
TX

2008 NOx Emission
Rate Averages
Area (lbs/mmBtu)
National 0.222
Over 80% of the fossil-fueled
electricity produced in Texas Texas 0.103
comes from East Texas.
Source: EPA Clean Air Markets Division – 2008 Acid Rain Program Data 65

Electric Generator-
NOx Reductions Achieved Under
TCEQ 1-hr Ozone SIP Rules

– HGA SIP- 86% overall reduction from 1997

– DFW SIP- 88% overall reduction from 1997

– Beaumont SIP- 45% reduction from 1997

– East Texas SIP- 51% reduction from 1997

Between 2000 and 2005, electric generating
companies in Texas spent over $1 billion on NOx
emission reductions alone.
66

Texas’ Electric Generating
Plants Among Lowest NOx
Emitters in the Nation
NOx

0.800

0.700
Texas has the 9th
lowest average NOx
0.600
emissions rate.
NOx (lb/MMBtu)

0.500

0.400

0.300
U.S. Average-
0.222 lb/mmBtu

0.200

0.100

0.000

NJ
ND

NE

OH

UT

IN

TN

IL

FL

NY

NH
NM

MN

WI
WY

DE
SD

KY

PA

MI

MT

MD

OK

AL

MS

MO

WV

GA

IA

LA

NC

VT

WA

NV

OR

TX

MA

ME

RI
ID
KS

CO

DC

VA

AR

AZ

SC

CT

CA
67
Source: EPA Clean Air Markets Division – 2008 Acid Rain Program Data

Average Emissions Rates of NOx from
Existing Texas and U.S. Power Plants
NOx (lb/MMBtu)

Notes:
NOx Emission Rates for New Coal-Fired Power Plants range from 0.05 to 0.08 pounds per million Btu
NOx Emission Rates for New Gas-Fired Power Plants are approx. 0.015 pounds per million Btu
68

Texas’ Electric Generating
Plants Among Lowest SO2
Emitters in the Nation
SO2 Rank

1.800

1.600
Texas has the 19th
1.400
lowest average SO2
emissions rate.
SO2 (lb/MMBtu)

1.200

1.000

0.800

U.S. Average-
0.564 lb/mmBtu
0.600

0.400

0.200

0.000

NJ
OH

IN

ND

NH

TN

NE

IL

FL

NY

UT
MN

NM
WI
DE

WY
MD

PA

GA

MI

AL

WV

KY

MO

SD

NC

IA

MS

MA

TX

OK

LA

MT

OR

NV

ME

WA

VT

RI

ID
VA

SC

DC

KS

AR

CO

AZ

CT

CA
69

Average Emission Rates of Sulfur
Dioxide from Existing Texas and
U.S. Power Plants
SO2 (lb/MMBtu)

70

1995-2008 Emission Rate Trends

Sulfur Dioxide Nitrogen Oxides
(SO2) (NOx)
lb./mmBtu lb./mmBtu
Year Nation Texas Nation Texas
1995 1.086 0.517 0.551 0.313
1996 1.096 0.527 0.518 0.314
1997 1.093 0.523 0.509 0.310
1998 1.058 0.485 0.481 0.307
1999 0.999 0.481 0.440 0.286
2000 0.875 0.380 0.399 0.261
2001 0.843 0.385 0.373 0.221
2002 0.794 0.384 0.348 0.173
2003 0.815 0.390 0.320 0.142
2004 0.779 0.353 0.286 0.124
2005 0.753 0.349 0.268 0.116
2006 0.702 0.338 0.255 0.111
2007 0.644 0.321 0.237 0.103
2008 0.564 0.316 0.222 0.103
1995 - 2002 data are from the Acid Rain Program Scorecard Table B1
2003 - 2006 data are from the Clean Air Markets Division database for the Acid Rain Program 71

CO2 Emissions in
Context of Texas’ Economy

A common refrain is that CO2 emissions generated in Texas are higher than in
other states. However, it is critical to view that in the context of other truths:

− Texas generates more electricity than any other state; in fact, Texas produces almost
80% more electricity than the next most generating state.1

− Much of the CO2 emitted in Texas results from the generation of “products” that are
very significant to our state and nation. For example, Texas produces about:
− 60% of petrochemicals produced in the U.S.
− 30% of gasoline and diesel refined in the U.S.
− 10% of electricity generated in the U.S.

− The dollars of gross product produced in Texas per ton of CO2 emitted is high, and it
increased by more than 1000% between 1963 and 2001.

− The ratio of the amount of CO2 emitted per MWh of electricity generated in Texas is
lower than half of the states that have more than a nominal amount of coal-fired or oil-
fired electricity generation (see previous slide).

1
72
Source: EIA, 2008 State Electricity Profiles

Technical Feasibility of
CO2 Reductions

Technology EIA 2008 Reference Target

Efficiency Load Growth ~ +1.05%/yr Load Growth ~ +0.75%/yr
Renewables 55 GWe by 2030 100 GWe by 2030
Nuclear
15 GWe by 2030 64 GWe by 2030
Generation

No Heat Rate Improvement 1-3% Heat Rate Improvement
Advanced Coal for Existing Plants for 130 GWe Existing Plants
Generation 40% New Plant Efficiency 46% New Plant Efficiency
by 2020–2030 by 2020; 49% in 2030

CCS None Widely Deployed After 2020

10% of New Light-Duty Vehicle
PHEV None
Sales by 2017; 33% by 2030

DER < 0.1% of Base Load in 2030 5% of Base Load in 2030

Chart Source: EEI and EIA
73

Additional
Emission Reductions

 Federal Clean Air Interstate Rules (CAIR)
− Requires additional NOx and SO2 emissions reductions from power plants in
2009, 2010, and again in 2015, with a cap and trade program.
− The NOx and SO2 emissions from all new units must “fit” under the 2009, 2010,
and 2015 caps; such emissions are not in addition to those caps.
− TCEQ has recently revised its rules to implement CAIR.

 Regional Haze
− Requires reductions in NOx, SO2, and Particulate Matter (PM) emissions based
on best available retrofit technology (BART) for different types of facilities,
including electric generating units, industrial boilers, and refineries.
− EPA has decided that NOx and SO2 emissions reductions made for CAIR will
suffice for the NOx and SO2 emissions reduction requirements under Regional
Haze.
− The TCEQ is developing rules to implement BART.

74

Giving Back to the
Environment

• AECT member companies help to improve our environment through stewardship,
support for new technologies and partnership with other agencies.

Environmental Stewardship Environmental Partnerships
- Reducing releases of chlorofluorocarbons from
- Climate Challenge Program
electrical equipment - Energy Star
- Recycling coal combustion products - Energy Smart Schools
- Educating schools and communities about - Environment Research Program
renewable energy
- Designating land and reservoirs for public - EPA SF6 Partnership program
recreational use - Mickey Leland Internship Program
- Preserving and restoring forests by planting -TCEQ Teaching Environmental Science
millions of trees - Green Lights
- Helping other industries adopt pollution- - Habitat Protection
prevention plans - Learning From Light!
- Launching education campaigns to help - Millennium Council
communities save energy - Million Solar Roofs
- Creating wetlands and wildlife habitats on - National Energy Education Development
company properties (NEED) Project
- Natural Gas Star
- Reclaimed water utilization
- Offering renewable energy products to retail
customers
75

Selected Environmental
Programs and Fees

• The electric industry is among the most heavily regulated in the nation, complying
with hundreds of regulations and paying millions of dollars in fees annually.

Selected Current Selected Current
Environmental Programs Environmental Fees
- Compliance with National Ambient Air Quality - Title V federal operating permit fees
Standards - Air inspection fees
- State Implementation Plan - Air quality permit fees
- NOx reductions for electric generating units - Air quality permit renewal fees
- Clean Air Interstate/Clean Air Mercury Rules - Wastewater inspection fees
- New Source Review (NSR) - Wastewater permit application fees
Prevention of Significant Deterioration - Water quality fees
- Non-attainment NSR, including offset - Potable water fees
- State Minor NSR - Water use permit application fees
- Title V and Acid rain permits - Hazardous waste generation fees
- Compliance Assurance Monitoring - Non-hazardous waste fees
- Continuous Emissions Monitoring Systems - Low level radioactive waste fee
- Toxic Release Inventory - Injection well fee
- Monitoring cooling water
- Mass Emission Cap and Trade Program
76

Transmission and Distribution Utilities

77

TDUs’ Role in the Competitive ERCOT
Market

• Transmission and Distribution Utilities:
– Provide reliable delivery of electricity on a 24-7 basis.
– Invest in and build infrastructure (e.g., transmission lines, Smart Grid) to support
the needs of Texas’ growing economy.
– Manage their transmission networks under the direction of ERCOT; coordinating
with ERCOT on transmission planning activities.
– Respond to outages (e.g., storms, natural disasters) that affect the grid and restore
service as quickly as safely possible.
– Provide key market information, such as premise information and metering
services to facilitate successful operation of the ERCOT deregulated market.
– Provide regulated transmission and distribution services to facilitate operations of
wholesale and retail business entities.
– Charge regulated delivery rates to REPs
 Rates based on a historical cost of service including a PUC-established return on capital
investment
 Allocation of ERCOT-wide transmission costs
 Non-bypassable charges include the cost to deliver electricity, System Benefit Fund,
recovery of true-up costs and nuclear decommissioning expenses for existing nuclear
facilities

78

T&D Market Design:
ERCOT

• ERCOT Transmission
– 1995 amendments to the Public Utilities Regulatory Act (PURA) required PUC to
ensure open access to transmission grid, allowing new independent generators to
utilize transmission network.
– TX76RSB 7 adopted “postage stamp” transmission pricing structure and eliminated
impact of location on transmission rates.
– Transmission Cost of Service (TCOS) ratemaking structure implemented and billed
to distribution service providers (DSP).
– DSPs recover TCOS through the TDSP delivery rate and transmission cost recovery factor
(TCRF), approved by PUC.

– New transmission investment is coordinated through the ERCOT regional
transmission planning process and requires PUC facility certification.

79

Transmission Investment in Texas

• Since 2008, TDUs have
invested about $1.4 billion
in the ERCOT transmission
grid.

• ERCOT estimates that the
electric grid will require
adding or improving 5,729
circuit miles of transmission
lines at a cost of about $8.2
billion from 2009 through
2015.

• This investment includes
the cost of integrating
Source: ERCOT, “Report on Existing and Potential Electrical Competitive Renewable
System Constraints and Needs,” December 2009 Energy Zones (CREZs) into
the competitive ERCOT
market.
80

Continued Transmission and Distribution
Investment Needed Throughout Texas

• According to the Texas State Data
Center, 5 million new residents are
expected in Texas by 2020.

• New generation must be delivered
effectively and efficiently to
population centers of the state.

• Texas must provide regulatory
certainty and fair rates of return to
ensure appropriate capital
investment.

• Though not shown here, areas of
Texas located outside the ERCOT
grid are also growing, both in terms
of population and economic
development.
Source: ERCOT, “Report on Existing and Potential Electric
System Constraints and Needs,” December 2009

81

Challenges of Transmission
Line Construction

Example of Transmission Construction Process in ERCOT

• While certain types of generation can be constructed quickly -- often as short as 12-18
months -- transmission lines typically take between three and five years. Generation can be
brought into the market more rapidly if the siting takes advantage of the existing transmission
infrastructure.
• Building long transmission lines can affect many landowners, often requiring a lengthy and
extensive easement acquisition effort.
• The transmission line siting process must take into account the impact of those lines on
environmentally sensitive and historically significant lands.
• Utility is not typically allowed to begin recovering costs until year 5 or 6. 82

Distribution Investment
Also Needed

• The need to replace an aging distribution
infrastructure to meet population and demand
growth will require continued investment.

• It is becoming more evident that rising construction
material costs are an increasingly important driver
contributing to the higher actual and planned utility
industry infrastructure investments.
• Nationwide, distribution investment is expected to be almost triple the size of
projected transmission spending, according to the Edison Electric Institute.
Distribution investment is likely to exceed generation and environmental capital
spending, as well.

83

T&D Market Design:
Non-ERCOT

• Non-ERCOT Transmission
– Wholesale open access transmission rights subject to Federal Energy
Regulatory Commission (FERC) jurisdiction.
– FERC transmission pricing reflects location of generation.
– FERC requires generators to bear higher cost relative to the ERCOT
system of connecting with the transmission grid.
– Certification in Texas is with the PUC.
– Recently adopted PUC rules allows most non-ERCOT utilities to recover
transmission investments between rate cases through a transmission cost
recovery factor (TCRF).

84

Competitive Renewable Energy Zones:
Legislative and Regulatory Steps

• The Texas Legislature mandated steady increases in renewable power in
TX76RSB 7 (1999) and TX791RSB 20 (2005).
– Starting Line: 880 MW in 1999
– Old Goal 1: 2,880 MW by 2009 (Achieved by 2007)
– New Goal 1: 5,880 MW by 2015
– New Target 1: 10,000 MW by 2025
– New Target 2: 500 MW non-wind renewable generation

• TX791SB 20 (2005) also required PUC to:
– designate Competitive Renewable Energy Zones (CREZs) in areas in which renewable
energy resources and suitable land areas are sufficient to develop generating capacity
from renewable technologies;
– develop a plan to construct necessary transmission capacity in a manner that is most
beneficial and cost effective to customers; and
– take into account transmission constraints, the need for generation and the level of
financial commitment by generators when defining CREZs.

• PUC adopted Substantive Rule 25.174 in December 2006, which creates
framework for determining CREZs.
• Texas currently has 8,976 MW of installed renewable generation capacity (Oct
2009). 85

Map of Adopted
Competitive Renewable Energy Zones

86

Energy Efficiency

87

Energy Efficiency in Texas:
Overview

• Texas continues to be an energy leader through policies designed to improve the state’s
energy efficiency programs and bring improved technologies to the electric market.
– Utility programs have reduced customer consumption that has allowed existing resources to meet
new customer load, reducing the need for new generation.
– Advanced metering can help customers better manage their electric usage by providing information
and opportunities that enable customer to take control of their energy consumption and bills.

• The Texas Electric Choice Act requires electric utilities to provide energy efficiency
programs and incentives, including low-income energy efficiency programs.
– TX80RHB 3693 raised the energy efficiency goal for electric utilities from 10% of annual demand
growth to 15% in 2008 and 20% in 2009.

• ERCOT competitive retailers are developing innovative plans and products that will help
customers use less energy (e.g., customer education programs, energy audits, Internet-
controllable thermostats, etc.)

88

Energy Efficiency Programs
Have Exceeded Goals

Total Energy Savings by Investor-Owned Utilities
2003 - 2008

• In 2008, utilities in Texas exceeded their statewide legislative energy efficiency goals for the
sixth straight year. Utilities achieved 202 MW of peak demand reduction in 2008, which was
76% above their 115 MW goal.

• Energy savings from standard offer programs and market transformation programs resulted
in an equivalent reduction of 882,519 pounds of nitrogen oxide emissions per year.
Source: Frontier Associates LLC, “Energy Efficiency Accomplishments of Texas Investor Owned Utilities, Calendar Year 2008” 89

TX80RHB 3693:
Enhancing Energy Efficiency

TX80RHB 3693 included a host of programs designed
to help reduce electricity usage in Texas.

• Raises energy efficiency goal for electric utilities from 10% of annual demand growth to 15%
in 2008 and 20% in 2009.

• PUC will study energy efficiency programs by January 15, 2009, and submit a report to the
legislature.
– The study shall address whether utility energy efficiency programs should continue and whether
energy efficiency programs are best provided by the competitive market.
– The findings of the study will determine whether a goal increase to 30 percent is achievable by 2010
and 50 percent by 2015.

• PUC will work with ERCOT to develop a method to account for projected energy efficiency
impacts in ERCOT’s forecasts of future capacity, demand, and reserves.

90

TX80RHB 3693:
Enhancing Energy Efficiency

• The bill also includes:
– an energy efficiency cost recovery factor;
– a utility financial incentive for exceeding goals; and
– the ability for utilities under a rate freeze to defer recognition of these costs.
– Provisions aimed at reducing energy consumption by schools and government
buildings.
– Stronger, more energy-efficient building standards for low-income housing.
– Creates an annual sales tax holiday during Memorial Day weekend for energy efficient
products that bear the designation of the nationwide “Energy Star” program.

91

Benefits of Advanced Metering

• Customers can better manage their electric
consumption, better manage their bills and
lessen their environmental impact.

• Advanced meters and other new technologies
and associated infrastructure will provide information
and opportunities that will enable customers to better
understand the impact of controlling their energy
consumption (e.g., shifting usage to off-peak times).

• Advanced meters will also allow for more automation of utility functions
such as meter reading and connections/disconnections, helping to
reduce costs.

92

The Smart Grid Transforms the Way
We Buy, Deliver and Use Electricity

Key Stakeholder Benefits
• Real time grid feedback allows for more effective loading of utility assets
Electric • Enables increased monitoring and diagnostics to enhance the life of utility assets
• Improved line fault detection and diagnostics
Utility • Improved system reliability and greater ease/timeliness of power restoration
• Automated meter reading

• Power quality and reliability improvements
• Friendly access to detailed consumption information to make informed choices
Consumers and enable faster transactions
• Enables and promotes energy conservation

• Expands retailer’s ability to offer new products
• Facilitates time-of-use rates and critical peak pricing
Retailers • Establishes platform to offer future home appliance monitoring and control
• Allows retailers to offer pre-payment programs

• Enables demand-side management
• Facilitates integration of solar and wind generation into grid
Environment • Promotes energy efficiency through immediate energy consumption awareness
• Facilitates reduced electric consumption which leads to reduced power plant
emissions
93

Advanced Metering Activities
in Texas

• CenterPoint Energy and Oncor have received approvals from the Public Utility Commission
of Texas (PUC) to deploy advanced metering systems (AMS) across their respective
service territories.

• The approved deployment plan for CenterPoint Energy calls for installation of advanced
meters over five years beginning in March 2009. Through mid-September, CenterPoint
Energy has installed over 76,500 advanced meters and expects to install a total of 145,000
meters by year-end.

• Oncor’s approved deployment plan initiated in late 2008 will have installation of advanced
meters completed by the end of 2012. To date, Oncor has installed 294,000 meters.

• The cost for the meters will be recovered through a monthly surcharge, which may be
adjusted over time to reflect both the inclusion of AMS costs in future base rates and
variances between the estimated versus the actual cost of implementing the deployment
plan. The respective surcharges for both Oncor and CenterPoint Energy take into account
the savings advanced meters are expected to bring each company.

• AEP Texas has filed its deployment plan with the PUC and anticipates approval by the
fourth quarter of this year.

94

Competitive Retail Electric Market
in ERCOT

95

The ERCOT Competitive Retail Electric
Market is Providing Strong Customer
Benefits

Key Takeaways
– Since the start of retail competition, more than four out of five eligible ERCOT customers
have chosen a new REP or a new product with their existing REP.
– Costs and prices have risen in competitive areas, in areas served by municipally owned
utilities and in areas served by electric co-ops.
– Natural gas influences wholesale electric prices in Texas, and, due to natural gas
increases over the past several years, wholesale electricity prices have increased -- but
only about half as much as natural gas prices.
– Retail electric prices have grown far less than other energy commodities, such as
gasoline, crude oil, natural gas and coal.
– Available prices in the ERCOT competitive electric market are falling significantly, a stark
contrast to the national average which is rising and projected to keep rising. In fact, the
average U.S. residential power price is expected to increase 9.4 percent in 2009,
according to the federal government.
– Natural gas prices reached an all-time high in July, but they’ve subsequently fallen over
the past few months. Because of the robust competition among multiple viable retail
electric providers (REPs), residential electric price offers have fallen by over 28 percent.
– The System Benefit Fund (SBF) provided benefits for low-income Texans during the
summer. Several retailers, including AECT member companies, also offer additional low-
income customer assistance programs, so customers should also contact their REP to
learn more about the options that might be available to them.

96

Customers Continue to Shop in the
Competitive Electric Market

Q1 2006 through Q2 2009

86%
Observable
82% 83% 84% 84% Choice
79% 80% 81%
75% 77%
73%
68%
63%
59%

Source: Letter from Bret J. Slocum, to
Public Utility Commission of Texas, August
5, 2009. Data is through June 30, 2009.

97

Competitive Residential Electric Prices
Have Fallen Since Full Competition Began
in January 2007
Texas-New Mexico Power Co.
AEP Texas North
Service Territory
Service Territory

Lowest available Lowest available
residential price: residential price:
4% decrease 24% decrease

Oncor
Service Territory

Lowest available
residential price:
28% decrease

CenterPoint Energy
Service Territory

AEP Texas Central Lowest available
Service Territory residential price:
26% decrease
Lowest available
residential price:
19% decrease
Since January 2007, competitive prices for residential
customers have fallen in every service area.
Source: http://www.powertochoose.org (1/1/07 & 3/22/10) 98

Better Prices Available Today
Than One Year Ago

March 23, 2009 March 22, 2010 Percent Change

# of 1-Year Fixed-Price
Products
34 48 41% more offers

Average 1-Year Fixed-
Price Offer
12.23¢/kWh 10.91¢/kWh 11% decrease

Lowest 1-Year Fixed-
Price Offer

Lowest Offer Available
in the Market

Source: www.powertochoose.org; prices are a simple average among service territories. 99

Lower inflation-adjusted prices available
today than before competition began

Dec. 2001
Lowest Fixed-Price Lowest Dec. 2001
prices, not
Service Area Offer Variable Price prices, adjusted
adjusted for
(>12-month term) Offer for inflation
inflation

AEP Texas Central 10.2¢/kWh 8.8¢/kWh 9.6¢/kWh 11.7¢/kWh

AEP Texas North 9.5¢/kWh 8.4¢/kWh 10.0¢/kWh 12.2¢/kWh

CenterPoint
Energy 10.4¢/kWh 8.4¢/kWh 10.4¢/kWh 12.7¢/kWh

Oncor 9.5¢/kWh 7.8¢/kWh 9.7¢/kWh 11.8¢/kWh

TNMP 10.1¢/kWh 8.0¢/kWh 10.6¢/kWh 12.9¢/kWh

Sources: PUC Historical Data, Bureau of Labor and Statistics, www.powertochoose.org offers as of March 22, 2010 100

Retail Electric Prices Have Grown
Far Less Than Other Energy
Commodities

Percentage Change in
Commodities
December 2001 - March 2010

Sources: Public Utility Commission of Texas, U.S. Energy Information Association, NYMEX Commodity Exchange, Bureau of Labor Statistics.
Notes: Commodity prices latest available as of March 22, 2010; coal percentage increase is approximate.
Inflation covers period from 2001 to 2009 101

ERCOT Generation Mix More Gas-
Heavy than U.S. Average

ERCOT U.S. Average
Other
Energy (MWh)

Wind Renewable Petroleum
7% 2% (Mostly Hydro) 1%
Natural Gas
Nuclear 9% 21%
Nuclear
15%
40% 20%
36%

Natural Gas 48%
Coal
Coal

Other
Wind Oil
Renewable
3%
10% (Mostly Hydro) 6%
Capacity (MW)

Nuclear Natural Gas
6% 14%
39%
16% Nuclear 10%
Coal
65%
31%
Natural Gas
Coal

Note: Oil-fired generation is negligible in ERCOT, accounting for less than 0.1% of ERCOT capacity and load; numbers may not add
up to 100% due to rounding.
Sources: ERCOT (2009 summer data), EIA (2008 data, latest available) 102

Texas Market Compares Favorably to Other
States Utilizing Natural Gas as the Primary
Generation Source

Average Lowest Available
Price in ERCOT Competitive
Market In December 2009:
8.6¢/kWh

March 2010: 8.4¢/kWh

Sources: Energy Information Administration (data as of October 2009); EIA natural gas-intensive states;
powertochoose.org as of 12/21/09 and 3/22/10

Note: Texas statewide average price includes prices from both competitive and regulated areas of the state.
103

AECT Electricity 101 - March 2010 Update

AECT Electricity 101 - March 2010 Update

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