A Highlands native, Smitherman had spent 16 years in investment banking, specializing in public finance and infrastructure projects. He was sacked in 2002 for helping to write an op-ed in the Houston Chronicle advising Houston that the bonds the city was considering were a bad deal. Soon after, he took a job as a prosecutor in the district attorney's office in Houston — starting at the bottom, as a "baby prosecutor" — and wrote a book titled If Jesus Were an Investment Banker. Two years later, he become a PUC commissioner, and in 2007 he was appointed to chair the commission, where he has earned a reputation as a fair-minded regulator.
The commission has lately been busy shepherding Texas into the modern energy age. This month it approved a somewhat tighter rule for energy efficiency, requiring that utilities offset 30 percent of their projected growth in demand by 2013. It has also overseen the controversial introduction of "smart meters" into 1.5 million Texas homes so far and approved routes for a planned $5 billion transmission-line build-out bringing the crush of wind power from West Texas to the cities in central and east Texas that need the power. (The commission rejected one route, through the Hill Country, to be operated by the Lower Colorado River Authority, after landowners raised vigorous opposition; the utility has gone back to the drawing board to come up with a new route.)
Smitherman sat down with the Tribune this week to discuss his controversial application for the top job at ERCOT; the state grid operator, whose operations are overseen by the PUC; what surprised him about the Texas electric market; and his view of energy efficiency, smart meters and transmission lines, among other PUC initiatives. What follows is an edited transcript; for the full wonkery — including much more about energy efficiency, cutting off electricity to poor or ill customers, and the controversial Hill Country electric transmission lines — see the full transcript. Or listen to audio excepts of the interview here:
TT: As you know, there's a Sunset Commission proposal that would prevent outgoing PUC commissioners from taking a job at ERCOT for two years. You were interested in the top ERCOT job earlier this year. Can you talk a little about what you think of that proposal and how your decision-making process went?
Smitherman: After my experience, I can't imagine another commissioner in the future even contemplating that. You know, it was kind of funny because it was sort of like I was invited to the party but then told I couldn't dance. Over the last five or six years, I have been asked on a couple of occasions by ERCOT board members if I would be interested in the CEO job, and I'd always demurred. I told them to go find the most talented person in the country. ... This time it appeared as if, after having done a very diligent search over three or four months, that we were not generating the kind of candidates that the board was looking for. So at the request of one of the board members, I began to explore the opportunity. Now, before I did that, I ran a lot of traps. ... I did talk to a couple of people in the media about what they thought the reaction would be. And generally the response was, I think the bigger story is who would take your place at the commission, not the fact that you'd be going to ERCOT. And I met with the ethics commission staff — they did some research for me. I met with the AG's office — they did research for me. All of those came back with a green light — you know, it was both legal and ethical to go forward. And yet some of the board members still had some uneasiness. Their uneasiness made me uneasy. So we decided at the end of the day we wouldn't dance with each other.
I think we have to be careful in putting so-called revolving door restrictions in place. Because the commission has been a good place from which talent has gone to ERCOT. ... You know, the challenge that ERCOT has is, it pays a little bit more than state work but it doesn't pay like the private sector does, right? So they can't really go hire people from the private sector. So if you're looking for a person who knows about ERCOT, understands the electricity market in Texas, which is very unique, understands the Legislature, understands the PUC — talking to someone at the PUC is kind of a logical thing to do. You know, we'll see what happens during the legislative session. I don't think [the Sunset proposal] is necessary.
TT: What has surprised you about the PUC job or has been the most difficult?
Smitherman: Well, I didn't know anything about the PUC when I was asked to be on it. I had gotten a call from my friend Kyle Janek, who was then a state senator ... and he said, "I was with the governor [Rick Perry], today and you're going to be on the PUC." And I said, "PUC — what do they do?" ... and [he] said, "Well, that's great, you're the right person for the job." And three weeks later I was sworn in. ... It surprised me to learn that we have our own grid — you know, the ERCOT grid is not interconnected with the rest of the country, sort of appropriate for a state that was once an independent republic to have its own grid. But that brings to it unique challenges as well as unique opportunities. The challenge is, if the lights go out, it's our fault. ... But we also don't have to worry about problems in another state cascading over into our state and causing the lights to go out.
The fact that we have the ERCOT competitive market, and then we still have the non-competitive, vertically integrated market outside of ERCOT was interesting to find out. So the old world still exists in El Paso and up in the Panhandle and Northeast Texas and down in the Entergy area in Southeast Texas. And then on top of that we have the muni and the co-op world, which is different as well — they're not regulated by us and they're still sort of vertically integrated, even though one co-op has elected voluntarily to be in the competitive retail market. So it's an interesting mixture of all different kinds of models operating somewhat harmoniously together. And all of that was new to me and a great surprise.
TT: Changing the subject to smart meters, there was the Navigant study that you all released a few weeks ago. Are you now satisfied that the meters are accurate?
Smitherman: The meters are accurate. I thought that was an amazingly comprehensive study, and I really applaud the work that Navigant did ... because not only did they verify the accuracy of the meters, then they worked with the utilities and the meter companies so they understood when the meter was giving a particular signal back to the home office, what that signal was indicating. ... They went and looked at every consumer complaint — historical consumption record — and were able to show that when that customer had an electro-mechanical meter and cold weather came about, usage spiked, came back down, spiked, came back down. Then when they got a smart meter, the same activity occurred, almost exactly.
So I know it was difficult for customers, and I don't think people really appreciate how cold this past winter was — you know, we had 50 percent more heating days than we did the preceding winter. And it just so happens that we put the smart meters in, and it got real cold. But I'm a big fan of these smart meters. I think that it is an empowering element for customers. It is a tool that finally tells the customer how much they are consuming on a real-time basis and gives them some element of control over their consumption. And I truly believe, as most of the pilot projects have demonstrated, that a customer with a smart meter over time will save between 10 to 20 percent off of their bill.
TT: Were you at all disappointed in the scaling back of the energy efficiency proposal the other week? Originally it required utilities to offset 50 percent of their growth in demand with energy efficiency by 2014, and now the top requirement is 30 percent (we're currently at 20 percent).
Smitherman: I was happy that we got something done that is more than what we have been doing. And if you think about it, it's a fairly good accomplishment to go from 20 percent [of growth in electricity demand required to come from energy efficiency] to what will be 30 percent in 2014. ... The original publication version was pretty aggressive, and it had a high scenario of spending something north of $600 million in 2013 [for the program] and a low scenario something in the high $300 million range. And even the low number is three times what we did last year. So it didn't surprise me that there was some opposition to spending that much more money.
Everyone I think recognizes that, in the long run, energy efficiency is cost-effective. But in the short run, you have to extract money from ratepayers in order to pay for the investments, and with the more aggressive targets, we were looking at some parts of the state going to $4-a-customer [spent on infrastructure to increase efficiency] from an average of about 90 cents today. ... So I wanted us to push forward with more than what we're doing now. I also wanted us to have something in place in case the Legislature was unable to address this during the session. They tried to address it last session; it failed at the end for an unrelated reason. But if for whatever reason they can't get to it, we would have something in place for 2013 and 2014. ...
TT: Might a PUC proposal to boost the requirement for non-wind renewables be coming before the legislative session?
Smitherman: It could. ... I mean, it's possible we could get something out for publication. We are sitting in mid-August, so it's not unreasonable for us to wait until the session and see if they can give us some additional direction on that, and if direction is not coming then try to do something after the session.
TT: What is your thought about how CREZ (Competitive Renewable Energy Zones, the $5 billion state transmission line buildout to accommodate wind power) has worked overall so far, taking into account concerns in the Hill Country?
Smitherman: I think it's gone well. Let me divide it between Hill Country and everything else. So we have now processed 10 or 11 CREZ cases — all the priority projects, with the exception of Gillespie to Newton and now the McCamey D to Kendall to Gillespie project. Let's take Gillespie to Newton. We studied that intently. Two to three days before that open meeting, when we rejected the application of [the Lower Colorado River Authority, which wants to build a transmission line through the Hill Country], we had all the maps in the conference room — I and my colleagues individually, not together, we pored over those. And at the end of the day, the decision we made I think was the right one. We felt like LCRA had not given us a robust set of options. Now, one of the things about that is, as news spread throughout the Hill Country, I think it advised people who maybe had not been paying attention that, in fact, one of the tools we have is to reject an application. But we also made it clear this is like the third inning. This is not the end of the story. LCRA can come back with a new application if they want. And so all of you all out there who weren't paying attention the first time, you should pay attention this time. ...
TT: Some folks in the Hill Country are going to argue that there's no longer a need for another line, given that natural gas prices are so low, making wind power less competitive, and given the recession which has dampened power demand. What would be your views on that?
Smitherman: Well, these CREZ lines are providing a couple of benefits. One, there's existing wind generation in McCamey now that's trapped ... [and] needs to find its way into the San Antonio and Austin areas, two communities which really want green energy. ... Gas prices are low today. Two years ago, they were extremely high. ... I feel like over the short run that gas prices will stay low, but predicting commodity prices is very difficult to do. And I think we've made a policy decision in the state, again, to have a portfolio of resources, with wind, natural gas, nuclear, coal, energy efficiency and maybe someday some solar — so that we don't have to bet on any one commodity to try to keep prices reasonable. ... Right now, ERCOT is able to integrate — we had 7000 megawatts of wind on the grid the other day; at times this spring we got up to 20 to 25 percent of our capacity from wind. That's probably about the right number, I mean it gives us a hedge against other commodity prices.
TT: What do you think about Tres Amigas, a major project planned for New Mexico that would interconnect the Texas grid with the Eastern and Western grids?
Smitherman: You know, I'm a little bit worried about it. Because it has the opportunity to really arbitrage the investment that we are making in transmission — for the benefit of California. Because if I understand [the Tres Amigas] business model: They would like to basically stick a big straw into the Panhandle of Texas and take out the wind energy that's developed up there. But that wind energy is not going to develop unless we build the CREZ lines. So my fear is, are we building CREZ lines to the Panhandle so that someone in another state can benefit from our inexpensive energy? I think there's probably a mutually suitable arrangement to be arrived at, where we make sure we have enough wind energy injecting into the CREZ lines for Texans to consume, and let other wind energy — surplus wind energy, that we could not accommodate on the CREZ lines — go west. ... But, at least at this point, it doesn't appear that that's what's contemplated.
TT: What about potential federal regulations on carbon dioxide — how will they change the industry here?
Smitherman: Well, you know, I have very little control over whether that happens or not. But we have tried to position ourselves so that we could better withstand a bad bill [i.e., cap-and-trade legislation] coming out of Washington. And this has been my concern from the very beginning. ... What we've tried to do [with the introduction of smart meters and the CREZ buildout] is position ourselves so that we going to use less electricity, have more control over consumption, and a bigger mix of it coming from renewable. And those three or four things will help ameliorate any negative price effects.