Deregulation in Texas fails to make power more reliable, cheap

By Eric Nalder

A decade of electricity deregulation in Texas has driven up the pay of investor-owned utilities’ chief executives, but it has not fulfilled promises to produce the nation’s most reliable and cheapest power. In fact, deregulation has had the unintended consequence of discouraging the building of new power plants, leaving the state’s power supplies vulnerable as Texas continues to grow.

Over the same period, municipally owned utilities such as Austin Energy and San Antonio’s CPS Energy have shown they can outperform the for-profit companies on reliability while paying their CEOs far less.

A new report from the Texas Coalition for Affordable Power says Texans in deregulated areas paid $10 billion over the national average for power over the last decade.

Many experts at utilities, universities and government agencies told Hearst Newspapers that deregulation impacted all players in the electricity industry, including companies such as CenterPoint Energy in Houston, which is still regulated by the state but no longer controls generation and sales.

CenterPoint is now a “wire company,” which means it owns the local power lines and has prime responsibility for electricity reliability, but its place in the community became more diffused.

A study published in January by the U.S. Department of Energy showed that reliability has degraded across the board nationally at the investor-owned utilities, such as CenterPoint, which are responsible for reliability.

Profits take priority

Meanwhile, U.S. Securities and Exchange Commission records show that CEO pay packages are set at investor-owned utilities with comparisons to packages at other private utilities. Pay packages at volatile companies that sell electricity on the retail market lifted the compensation at traditionally regulated utilities like CenterPoint, records show.

And the pay packages also de-emphasized reliability in favor of profits, records show.

“Many of the things that we do in running a municipally owned utility are driven by community needs and community support relationships,” said Derrick Howard, chairman of the San Antonio city board that regulates CPS Energy, one of the nation’s largest nonprofits. “That may not be the case with private institutions.”

Executive pay vs. shareholder return

Some examples illustrate the effects of deregulation:

» In 2008, CenterPoint had a tree problem. Hurricane Ike toppled them into power lines like pickup sticks, causing the city’s longest outage ever. Too many trees had been allowed near power lines, a city investigation would later conclude.

» In 2009, the year after the controversy surrounding that outage, CenterPoint CEO David McClanahan got a $1.4 million pay raise, elevating his pay package to $7.6 million, more than seven times what he made just nine years earlier, when the Texas Legislature dramatically deregulated the state’s electricity system.

» According to documents on file with the securities commission, McClanahan’s 2009 raise was a reward for a good year of stockholder returns. Share price is the primary incentive in his pay package.

Health hazard

Liz Welch, 25, is a waitress at Chili’s Bar and Grill in Mount Pleasant. She worries about the fumes from the aging Monticello coal power plant near town. She suffers from asthma symptoms, she said.

Studies have shown emissions from the old plant are a health hazard. It’s scheduled for mothballing. But the authorities who run the Texas power grid are hesitating, according to documents. The problem is a lack of financial incentives in the Texas free market for companies to build plants to replace the 1,300 megawatts produced at the old Monticello plant – mostly because of depressed natural gas prices.

The state has gone from having the best power reserves prior to deregulation to having the nation’s worst, creating the peril of rolling blackouts during summer heat waves, according to a report published this year by the North American Electric Reliability Corp.

Companies such as Energy Future Holdings, the Dallas holding company that owns the Monticello plant, aren’t getting enough financial incentives to build new ones.

The Texas grid operator and the utility commission are struggling to find ways to encourage construction of new generating plants.

Energy Future Holdings is an example of what deregulation wrought; a company with $7 billion-a-year revenue, part from retail electricity sales and part from electricity generation. But it also is troubled.

“Substantial indebtedness” threatens its solvency, according to Energy Future’s most recent federal regulatory filing.

Yet John Young, president and CEO of Energy Future Holdings, had his pay package more than double in a single year, between 2010 and 2011, from $6.9 million to $15 million.

The report from the Texas Coalition for Affordable Power said that while prices have declined in recent years because of a drop in natural gas prices, the savings have not outweighed previous years of electricity prices above the national average.

Overall, “deregulation was a bad idea,” said Tom “Smitty” Smith, director of the nonprofit Public Citizen’s Texas office.

Some benefits

Yet Smith cites benefits of deregulation, too. Texas is among the nation’s leaders in the use of wind generation, and in the installation of “smart meters,” which have gone into more than three quarters of Texas’ homes and businesses.

Promoted by the Legislature, those electricity control devices provide a step toward reliability improvements.

“We feel the competitive market has been through some fits and starts. But as it has matured it has provided advantage to consumers,” said John Fainter, president of the Association of Electric Companies of Texas.

In 2000, just after the Texas Legislature approved deregulation, the average CEO pay package was $2.7 million for the heads of major utilities operating in the state, according to an analysis done for Hearst Newspapers by Longnecker & Associates, a Houston executive compensation consulting firm.

Over a decade later, in 2011, the average pay package hit $7.5 million, a 175 percent increase. Longnecker’s analysis showed the national increase was 150 percent.

Top executive pay packages at investor-owned utilities are now dramatically higher than at traditional municipal utilities in the state and elsewhere. The nonprofit utilities operate apart from the retail electricity market in Texas but perform the same tasks.

Earlier this year, tea party activists and other critics raised a furor about the pay package and expenses of Doyle Beneby, who heads the nonprofit municipal utility in San Antonio, CPS Energy. Yet at $820,000 a year, half of that in deferred bonuses, Beneby receives only a buck for every $7 to $9 pulled in by his private counterparts, based on national and state averages.

Larry Weis, the general manager at Austin Energy, another nonprofit, gets $345,000 a year. His utility, operating outside the deregulated system, has one of the four best reliability records in the state, according to outage statistics collected over the last seven years by the Public Utility Commission of Texas.

The municipal-owned utilities conduct some of the state’s most innovative experiments to address power outages, said David Power, deputy director of Public Citizen.

Howard, the CPS board member, said the biggest difference between running municipal and investor-owned utilities is in the audience. Investor-owned CEOs must answer to stockholders and customers, while the municipal nonprofit utility head answers primarily to customers through the political system.

In the age of deregulation, municipally owned utilities are opening eyes nationwide for their reliability and strikingly lower CEO compensation. “These munis do a superb job,” said Lexington, Mass., activist Patrick Mehr. “It’s one of the best-kept secrets in the United States.”

‘Reliability a focus’

CenterPoint boss McClanahan manages an interstate pipeline business and a natural gas utility beside the electric utility, company spokesman Floyd LeBlanc points out. Other executives below McClanahan focus on the electricity side, he said. Their goals contain reliability incentives, but financial goals are much larger.

Spurred by the Hurricane Ike troubles, CenterPoint obtained a $200 million federal grant to install smart meters, it has upgraded tree trimming efforts and has future plans to create a more “intelligent grid” with computerized controls that will fix a break faster, records show.

“We do make reliability a focus,” LeBlanc said.

But records on file with the state utility commission show CenterPoint’s reliability numbers degraded recently. LeBlanc blamed it on transformers that failed during the heat waves of 2011. He acknowledged that transformers can be upgraded to withstand those stresses, though it is costly. At a recent meeting, New York state regulators docked Consolidated Edison $5 million for similar transformer failures during a 2011 New York City heat wave.

Investor-owned utility executives face tough choices weighing reliability improvements against cost, said Mark Armentrout, former chairman of the Electric Reliability Council of Texas and president of a utility consulting firm Texas Technology Partners.