Pat Wood: The TT Interview

More than a decade ago, Texas made revolutionary changes to the way electric power is bought and sold, and the state also instituted one of the nation's first requirements for renewable energy. Pat Wood, then chairman of the Public Utility Commission, was in the thick of it all.

Wood grew up in Port Arthur, where his grandfather had managed a Gulf Oil refinery and his great-uncles had piloted tanker ships, and he knew from an early age that he wanted to work on energy.  

Wood studied civil engineering on a Texas A&M scholarship and attended Harvard Law School, and he was working as a legal counsel to one of the Railroad Commissioners when George W. Bush appointed him to the PUC in 1995. He was a key player on a bill that deregulated the Texas electric market and mandated the construction of 2,000 megawatts of renewable energy. After Bush became president, he named Wood the chairman of the Federal Energy Regulatory Commission (FERC). Based in Houston, Wood still works on energy, developing projects and serving on boards.

This interview has been edited and condensed.

TT:  The electric grid in Texas is expected to be under some strain in years to come with the amount of reserve power falling as the state grows, etc. What is your take on how serious this is and whether we can climb out of it?

 

Wood: Oh it’s serious, and it’s real. Just to clarify, it’s not the grid that’s under stress, [but] rather the power supply. We had this in ’98 when I was on the [Public Utility] Commission — when ... the projected growth in Texas looked to be a big problem vis-a-vis the supply. We’ve been here before. What happened then was that the very public nature of the debate about future capacity got people focused on the investment.

What’s different this time is that the price signal [that would encourage power providers to build more power plants] is not very loud. In fact, it’s nonexistent. ... Right now with [natural gas prices at 10-year lows] and a lot of wind, we’re not getting a very strong price signal at all from our energy market.

Now there’s more to it than just [raising the price cap on wholesale power, as the PUC has proposed] and I will give PUC Commissioner [Ken] Anderson credit for delving deeper into the other types of issues. …There are a number of things they are discussing, and they’re quite detailed and technical.

To the future investors in the ERCOT market on the generation side, they’re very important discussions that they’re having, and my sense of that today is that they’re moving swiftly in the right direction. I expect that the current round of proceedings will wrap up by the summer. I think we’ll have a pretty good road map and the people that build generation going forward will have a pretty good sense of what sort of return on investments they can get if they build here in Texas. 

There is also a lot that can be done, particularly on the energy demand side. By that I mean more aggressive conservation programs where you let market signals encourage customers that have the ability to shut down for a certain small amount of hours in the day to get paid to do so.

TT: Do you mean even individual consumers can potentially do more — or be helped to do more — to save energy?

Wood: They could, but if you went from the current penetration we have today, which is focused on the largest customers, to then focus on the medium-sized customers  — and by that I mean grocery stores, shopping centers, Target, customers like that — you can pick up a whole lot more responsive load before you need to get to the residential customer. The residential customers comprise about 40 percent of the [electrical] load at peak. Industrial and commercial are each about 30 percent. That’s a lot of lower-hanging fruit to pick before you get to residential.

And in discussing this, I’m not saying that Target would have to bid to shut down a store to get paid; it would maybe curtail 20 percent of its demand from 4 to 6 pm [when electricity usage peaks].

 

This capacity tightening may force that day to come sooner rather than later, which I think is a great thing for Texas, to latch onto this smart-grid investment that we’ve been making statewide over the past couple of years into a level of demand responsiveness that really moves our grid to 21st century capability well ahead of the other states.

So you asked a good question, and I think that the answer is that’s probably not the 2012-2013 solution, to go to residential and get substantial amounts of demand reduction at peak, but I think 2015 and beyond it might be a routine occurrence to rely upon residential demand response.

TT: People ask, does the fact that we have no incentive to build more power plants, does that mean deregulation isn’t working?

Wood: No, the market signal is the same thing whether it’s sent to the utility as in the old days, or it’s sent to a broader category of people, which now include all the potential generators of electricity and users of electricity. In the days of regulation, once you got the regulator’s approval for a power plant, then it didn’t matter if it ended up being economic or not, you would build it and with regulatory approval, you could get your money back.

Today, power plant investors are not able to have all their risks shifted to the end user. Power plant investors have to live with the decisions they make. I consider this one of the great victories of wholesale competition — the shifting of power plant investment risk to those who can best manage that risk. 

But this is still, at the end of the day, an industry permeated by the public interest, and that’s where the PUC comes in. They look at the big picture and ask, “is there something about this setup, about our rules here that is not working to benefit the public?” Because this is such a critical commodity.

That’s why I always resisted using the word deregulation because it’s differently regulated, and it’s more competitive, but if anybody thinks that we have deregulated this industry, then they have missed the whole story. It is still quite regulated and will continue to be so. We moved the dial from 10 to 4 in terms of regulation. So no, it’s not a failure of a competition that the PUC is still involved in overseeing it; it’s just the way it is.

And the PUC works hard to try not to be too ideological. I like the way they’re approaching oversight. They’re being pragmatic. I was probably much more ideological than they are. But in setting the market up, we had to be driven. Today as they are dealing with a mature market, they are right to look at “what works here.”

TT: You mentioned cleaner types of electricity, so I wanted to talk a little bit about wind because you had such a role in it. Did you think back [in 1999, when Texas enacted its renewable energy requirement] that wind would grow this much? Where do you see it going forward? Is it a thing that is an unmitigated good for Texas or does it have pros and cons for Texas?

Wood: I had no idea it would go this far. We set a goal at 2,000 megawatts and we gave ourselves 10 years to do it, from ’99-’09. I remember thinking at the time that it was doable but aggressive. Of course now, we’re five times that.

So no, clearly I thought wind would be a much smaller player, but I think technology and transmission access is important. The improvements in technology are leading to more efficient and cost-effective turbines, but the price of wind power has come down quite a bit. Of course, so has the price of gas-fired power, which is a real boon for customers.

Clearly our regulatory policies were very friendly to new generators. As we saw with the gas build out in the 1990s and in the early part of the last decade, we saw a lot of gas-fired generators come in, and effectively replaced the inefficient gas-fired generators that were built in the 1970s which were generating power mostly at peak. We had a lot of new gas plants coming in, but at the same time, wind came in as well.

The uptick in wind development validates our policy to adopt a market-based subsidy program for our renewable portfolio standard (RPS) [the renewable energy requirement]. What’s curious there though, is that we really haven’t had any significant transfer of wealth through the renewable portfolio standard from customers to generators because the supply was always greater than the state target, so we had plenty of time to catch up and plenty of people to buy the power. So that was kind of a nice thing that I don’t think gets talked about too much with our wind surge.

I have to give credit to Gov. Bush for doing that. He was okay with our RPS but wanted it to be market-based due, as I recall, to his concerns that earlier ... regulations which fixed a set price for co-generated power in many states led to too much overpayment. That’s why we devised the renewable energy credit trading program, and those credits have never really cost that much certainly compared to other states.

So that’s the past. The future on wind — clearly we’re expanding the grid to go from 10,000 MW capacity to 18,000 MW, to get that very high-quality, low-cost wind from the north part of the Panhandle into the rest of Texas. That was the goal of the CREZ process, to get the best wind and make sure it was attached to the grid. Construction of that transmission is moving at a pace so that by at the end of 2013, the transmission will be complete.

As you know I’ve been working on this expansion since 2006 with Hunter Hunt and Sharyland Utilities. We are interconnecting with a lot of that high-quality wind up there. All those wind developers have put down earnest money for a spot on the transmission grid. And I read just last week, [T. Boone] Pickens is back in the wind-building industry. The rubber hits the road next year when the transmission goes live. At that point you’ll see even more wind attaching itself to the grid.

TT:  What about renewables in general? Are we ever going to see a solar boom in Texas?

Wood: I don’t know. I’m on the board of SunPower, and certainly the company has advocated the last two rounds of the Legislature for Texas to follow the lead of other sunny states and adopt some sort of incentive program here. But on a personal note, when I look at the whip-saw around the world, as policies have been yanked out from underneath the industry, I’m thinking we’d probably just be better moving forward on the normal economics.

Yes, friendly policies that allow for interconnection and transmission, a lot of stuff we’ve done well here in Texas, clearly need to happen around the country for solar as well as wind. And the federal tax credits for renewables are an attempt to level the field with the tax code advantages gas producers have had for years.

Wind is probably near the end of that cycle worldwide. I think very much so. I think solar is probably five or six years behind it. Again, the solar federal incentives run through 2016, so that was a nice long runway. That was part of the bailout bill in 2008 was a relatively long extension on the solar tax credit nationwide.

But, again, Texas has been pretty stingy, and I don’t think this is going to be any different with any sort of programs like that. Certainly not in the manner [of] New Jersey, for example, which is a very focused solar program, which has again been great for business, but I’m not sure that that’s going to be something that acquires a lot of support here in Texas. I can make a good case for it, but I don’t think that case has been made.

And I’m not sure in this day and time that that’s going to happen. Because the flood of cheap gas looks like it will last for a while. In the old days, regulators would look at that and say, "Diversify your portfolio, utility, I don’t care how cheap gas is." But we put Big Brother out of business back when I was there, so there’s no one here to kind of hector the retailers into diversifying their portfolios. They’ve got to come to that on their own. Again, the right thing to do, it’s just not the way we used to do it.

TT: So if you were to look at the fuel mix on the [Texas] grid and predict 5 or 10 years, what would you see? Would you see more gas, less coal? What would you see in the future?

Wood: [On] new capacity, I would say 80 percent gas, 20 percent wind and solar. Looks like the nukes are not going to happen in the next 10 years. I do hope that we can get some nuclear, but I don’t see it in five or 10. And coal — it’s a crapshoot there.

If the gas market really jiggers back north, then I think some of those coal permits that have already been granted could be activated, but again coal — the timeframe on that is probably about four years minimum to get a decent-size coal plant built. Those TXU plants might have been the last ones. So I think it’s going to be mostly gas, with a handful of renewables. 

TT: You’re on the board of a solar company and involved in some transmission. What else is going on? 

Wood: Well, as I said, I'm working with Hunt/Sharyland on transmission. I’m on the board of Quanta, which is a company that builds transmission. When I got out of FERC, I said, well these utilities are paying for it, but who is actually doing the work? And I'll be damned — a company that was a leading constructor of transmission was walkable distance from my new home in Houston. ... We do gas pipelines and telephone as well, so it's very familiar territory for me. But I love the infrastructure. I'm just engineering geek at heart. And I really like getting infrastructure built. It's been kind of my reason for being ever since I left FERC. I love markets and I always will, but markets don't work if you don't have infrastructure. ...

The renewable industries — they need to get a place at the table. And I guess if there was anything I was known for, it was that — knocking aside the barriers to entry so that people have a place at the table.

Once they're at the table they've got to compete on their own, but making sure we don't have discriminatory rules that keep the new technologies out of the game is something that I've long been a real advocate of. That includes energy storage. I'm on board of Xtreme Power, an Austin-based company, and one that Governor Perry put some Texas Emerging Technology Fund money in awhile back.

In fact I think we're the most successful recipient of all the monies that were [distributed] from that program over the past five or so years. Awhile back, when I was with Governor Perry, he said go check this company out, and I did and I liked what I saw on that one. So, energy storage is where wind and solar was five to 10 years ago.

They're out of the laboratory. They're in the market in some places, but there are a lot of practices written for the old world that are blocking their ability to participate and really compete freely against other technologies. And customers deserve to have the best thing out there — not to have some monopolist or other entity pushing aside good ideas. So storage is probably the latest of a litany of good ideas that I'm going to make damn sure gets to the market.

 I stay involved in natural gas issues, pretty much, through Natural Gas Partners, a Dallas-based private equity fund that I am a strategic adviser to. You know, natural gas was my first love, so when I first was involved in the restructuring of natural gas pipeline industry as a staffer up at FERC in the early 1990s. ... That to me was the Kool-Aid that I drank was right there. 

TT: Is there anything else you wanted to talk about? 

Wood: We're seeing really good prices for retail customers on the electricity side — after a long decade, a very volatile decade, I should say, with gas prices driving our power rates up and down and up and down. The core economic issue for retail competition to really take off is, does the marginal cost of power — i.e. the cost of producing the very next unit — is it greater than or less than the average cost of power that you're paying today? By that I mean the historic utility cost of nuclear and coal and gas and renewables all averaged in together.

Gas has come back to where it was in 90s, where that marginal cost of electricity is less than embedded cost of power — that really is the jump-start gun for competition. And we're back there again in the US. And I think we'll start to see a lot of other states —maybe more cautiously this time — open their markets. A lot of what we've learned here in Texas will be instructive to rest of the nation.. We've learned a lot of good lessons and some hard lessons. But I think overall our state's better for it.

We've had a lot of investment here, a lot of people relocate to Texas because they like that environment in which they're in charge of their own energy procurement and they're not subject to the politically regulated monopoly. They're out there able to do things on their own. That's one factor that I think I'll always be really proud of — that we did something really good for economic development in Texas.

As rocky as it was in '05 after Katrina and in '08 with the gas price run-up, the market worked just like the gasoline market — it returned back to the wholesale price pretty quick, as markets do when they are competitive. So my hat's off to Gov. Perry for putting good people in the PUC, who believed in markets but also wanted to make damn sure they were well-policed. And focusing hard to make sure it continues to work for the benefit of the customer. Because that's really why we do it.

This interview was transcribed by Anna Whitney and Kate Galbraith.

 

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