Sam Houston Electric Cooperative

THE HISTORY OF DEREGULATION IN TEXAS

The restructured electric market, commonly referred to as deregulation, was established by the passage of Senate Bill No. 7 in 1999, also known at the Texas Electric Choice Act of 1999. Since 2002, Texans in the Electric Reliability Council of Texas area, known as ERCOT, have had a choice in retail electric providers.

ERCOT does not include East Texas, the Panhandle nor the El Paso area. The Public Utilities Commission of Texas (PUCT) has declared these areas are not subject to deregulation at this time due to technological obstacles.

The vast majority of Sam Houston Electric Cooperative's service area is not in ERCOT, and therefore is not deregulated. Deregulation has not produced lower prices, so Sam Houston EC's members are in a favorable position.

A key provision of the bill required investor-owned utilities, such as Reliant Energy and Texas Utilities, to "unbundle" the three main components of their business - generation, transmission and retail. Prior to the passage of this bill, electric utilities were subject to regulation by the Public Utility Commission.

The Texas Electric Choice Act of 1999 created different models for different types of providers. Cooperatives are locally based and are owned by their member-customers. They frequently serve areas that competitors do not want to enter. The law also recognized that the engineering and operational aspects of providing choice could be very difficult and costly.

Should the PUCT determine East Texas has overcome technical obstacles to deregulation, the Texas Electric Choice Act allows each cooperative's democratically-elected board of directors to decide if and when to deregulate. Most cooperatives throughout the state, whether in ERCOT or outside of it, are taking a cautious wait-and-see approach to this economic experiment.

Deregulation, as its authors touted it, was a revolutionary way to save Texas consumers money by offering them a choice of service providers. Because the transmission of electricity would remain regulated by the Public Utilities Commission of Texas and maintained by the incumbent utilities, consumers would theoretically be able to save money without a noticeable drop in service quality. Legislators concluded retail electric providers, or REPs, would be able to offer lower priced power than the incumbent utilities because they would take advantage of new business models that would encourage efficiencies.

IS DEREGULATION PRODUCING SAVINGS FOR CONSUMERS?

Consumers who live within the ERCOT region, which comprises 70 percent of the consumers in Texas, have fully engaged in the deregulated electric market since January 1, 2002. On that date, the former regulated IOU monopolies' rates were dropped 6 percent and set as the price to beat. REPs then offered lower prices to lure consumers away.

While it is true that some REPs offer prices lower than the incumbent utility, consumers in the deregulated areas of Texas are paying significantly more for electricity now than they were in the regulated market. In its last report to the Texas Legislature on Jan 15, 2005, the PUC indicated just 20 percent of residential consumers that could change retail providers have done so.

"The price has gone up over 80 percent since January 2002," said Carol Biedrzycki of Texas Ratepayers' Organization in a December 12, 2005 KHOU Channel 11 news report. "We were promised that lower electric prices would result from deregulation but that has not happened."

Much of this increase can be accounted for by the rise in natural gas prices, which is the primary or only fuel source in 70 percent of electric generation in the ERCOT region.

At the onset of deregulation, natural gas was trading just above $2 MMbtu. Since then, the price of natural gas has steadily climbed higher before hitting historic highs in December 2005 that approached $16 MMbtu before settling around $9 in January 2006. As of October 2007, natural gas was trading between $6-$8 per MMbtu.

Although the price decline in natural gas is welcomed, power generators are still paying nearly four times more today than they were when the retail electric market opened up in 2002. Because natural gas is the main or only fuel source in 70 percent of electric generation in the ERCOT region, it is easy to see why prices have climbed.

According to the Department of Energy's Energy Information Administration, several factors in the U.S. and around the globe have pushed the price of this commodity up.

Weak production - Domestic natural gas production continues to decrease as the number of gas wells drilled increases.

High Demand - The continued strong performance of the global economy, and unusually high and low temperatures prevailing across the country in the summer and winter months increased the need for home heating and cooling, which adds to natural gas demand used by electric power generators.

High Oil Prices - Some large-volume customers (primarily industrial consumers and electricity generators) can switch between natural gas and other fuels, such as petroleum products, depending on the prices of each. As a result of this interrelation between fuel markets, when oil prices rise, the competitive pressure to maintain low gas prices diminishes, and the shift in demand to natural gas drives prices upward. Crude oil prices have increased to as much as $99 per barrel in trading during November 2007.

Hurricane Activity - In August and September 2005, Hurricanes Katrina and Rita caused major service disruptions and production shut-ins, resulting in record high prices of natural gas. The recent hurricane activity contributed to an already tight market, as power generation owing to warmer-than-normal summer weather already had resulted in upward price pressure in the markets. While 2006 and 2007 hurricane seasons were much milder than those of 2005, any storm that threatens output in the Gulf of Mexico puts pressure on prices of this valuable commodity.

While customers of regulated utilities outside of ERCOT have seen price increases due to increased fuel costs, they have been in the range of 20 percent or less.

Sam Houston Electric Cooperative is in the business of providing affordable electricity and excellent service. The Cooperative's rates are set to cover the expenses of wholesale cost of power generation, transmission of power over the electric grid and the distribution services we provide.

Currently, 60 percent of the power supplied by Sam Houston EC is produced from coal, 35 percent from natural gas, with hydroelectric and other renewable energy sources accounting for the remainder.

What are we doing to keep costs down for our member-owners? Sam Houston EC is working in conjunction with nine other East Texas co-ops to secure additional sources of generation to mitigate cost associated with purchasing power on the open market during peak periods of usage. And thanks to prudent steps taken by Sam Houston EC's Board of Directors and management, we have a power mix that helps cushion the blow of rising fossil fuel costs.

Sam Houston EC's Board of Directors and management team continue to monitor deregulation's development in the ERCOT region. At this time, Sam Houston EC continues to take a "wait and see" approach when it comes to deregulation.

We believe if deregulation doesn't work in the major metropolitan areas of the state, it isn't going to work in our service area either. We are already extremely competitive when it comes to our rates and member service. And the value of having local offices open in our communities with real people to talk to cannot be overestimated.

Our members have overwhelmingly endorsed the "wait and see" approach to deregulation, and they are confident in the Board's leadership. As we see it, there is no sense in spending our member-owners' money to opt in when Sam Houston Electric's rates are already lower than the rates offered in the deregulated areas of the state and the quality of service our Cooperative provides is second to none.

Sam Houston EC employees are your friends and neighbors. In fact, we are member-owners like you. If you forget to call us with a comment or a suggestion during the day, you can catch us at the Little League game, the local grocery store or the Chamber of Commerce banquet.

Sam Houston Electric is in business solely to provide the best, most reliable service to our membership. With your support, we will continue to do so.