Senate Business & Commerce January 10, 2012

Senate Business & Commerce

January 10, 2012

 Opening Remarks

Senator Kirk Watson

• Current drought lead to an energy shortage during the drought
• Serious concern for liability in keeping the lights on short term
• Need grid management plans in place to avoid rolling outages
• Underlying fundamental issue is ERCOT facing a capacity shortage because there are not enough plants and generators on the ground to produce reliable electricity
• Achieving water goals will contain significant energy resources
• Needs to manage energy portfolio and manage risk at the same time
• Reliable and affordable electricity is vital to Texas’ economy; without water and electricity Texas won’t attract businesses to the state

Agency Updates (see attachment)

Donna Nelson, Chairman, Public Utility Commission

• Provided update on EPA’s CSAPR: motion for temporary stay was granted
  • Final arguments will be in April
• Resource adequacy is at the forefront for PUC; recognize the economic importance as well
• Generation Signals:
  • PUC has already asked ERCOT to make a number of changes to market rules that will improve the signals being sent to generators
  • General idea is that market rules should minimize the distortionary effect of administrative tools that ERCOT uses to ensure reliability
• Testified the wholesale market is the most efficient in the US with low prices
• Economic downturn, plus switching to nodal market, combined with low, stable gas prices makes it more difficult for merchant generators to get access to capital; generators are not recovering enough money to build new infrastructure
• Change needs to be a multifaceted approach; goal is to avoid rolling outages and keep prices at a competitive level
• Also have rulemaking projects open to remove barriers to storage technologies
  • Emergency Interruptible Load Service (EILS) – participants agree to reduce their electric usage during times of scarcity in exchange for a payment
  • New rule was proposed in December that would replace EILS with Emergency Response Service (ERS) purpose of the proposed new service is to increase the amount of demand response available to ERCOT over that provided by the current EILS service; looking at ways to expand
• Also working with CenterPoint and Oncore on pilot project using advanced meters and aggregate electric load of participating customers; would be able to reduce usage to maintain grid reliability
• SB 980 requires PUC to initiate one or more proceedings to review and evaluate whether the Texas universal service fund is fulfilling its purpose and if changes are needed; in the process of fulfilling requirements and moving forward with rules
• SB 1133 concerning a report on Extreme Weather Preparedness and Best Practices; PUC hired Quanta Technology to prepare the report; expect it to be provided by end of Sept. 2012
• Senator Leticia Van de Putte expressed concern with lack of communication in the past between ERCOT and PUC in rolling out the nodal market
  • Nelson indicated there was no lack in communication, but lack in leadership at ERCOT, which has changed; testified to their great working relationship
  • Van de Putte expressed concern with proactive conservation messages to homeowners and large industrial users in hot spot times to reduce their load because of inconsistency across Dept. of Defense contracts
    • Texas has 18 military installations; urged consistency across the DOD platform because it is the same customer in several different areas
• Sen. Watson indicated Nelson’s testimony confirms problems that need to be addressed; natl. gas prices are so low it provides disincentive to build the capacity needed to get through next summer
  • Indicated PUC should not be fine tuning year to year; storage generation is important and should be done in a way that creates a matrix of planning and roles
  • Discussed system benefit fund monies and indicated the money was not used for its dedicated purpose;  the system benefit fund is dedicated to support four things, including low-income assistance and customer education
    • Expressed discontent that the customer education portion of the fund appropriation was reduced to $750,000 in 2003 and stayed stagnant ever since when customer education is an important component
    • Nelson indicated the Fund would have $825 million in it by the end of 2013
• Nelson indicated PUC’s message at this point needs to be concerned with conservation and demand response; there was money in the advance meter rollout to provide for customer education, but more money would be useful
• Chairman John Carona commented about the Department of Energy’s selection of Duke Energy to build a 36 megawatt storage facility in Texas; asked when will PUC grant ERCOT the ability to do pilot programs?
  • Nelson indicated the PUC is going forward with two different rules concerning storage that will hopefully come out in February 2012 and move forward quickly
• Senator Eddie Lucio commented on the systems benefit fund figures and hopes that PUC will be getting more dollars from the fund for public education next session 

Eleanor Kitzman, Commissioner, Texas Department of Insurance (see attachments)

• Discussed Auto and Homeowners insurance reports put out by the NAIC; data is based on 2008 data
• Indicated national comparisons are problematic because of variations between states in coverage, policy forms, limits of coverage, etc. and also indicated that average is the least useful statistic because not every state reports data in the same way
• NAIC report ranks Texas near the top; even with adjustments for other factors Texas in in the top three
  • Complex situation and the explanation seems to be weather-related risk
• Texas has had more FEMA declaration s in last 6 years (119) than any other state in the country; runner-up was Oklahoma with 82
  • Texas has more catastrophe claims; high-frequency and high-cost
• Rates vary by area of the state; coastal is going to be most expensive and the coast is 30-60% higher than Dallas
• Market is competitive, rates are high and are increasing
• Chairman Carona inquired about companies that offer both homeowners and auto insurance and whether or not other states require them to write both; is there a benefit to tying them together in the market?
  • Kitzman indicated different factors affect each coverage types; she was not aware of any state that mandates carriers that write one must write the other; as a regulator she offered that there are concerns with forcing companies to write a line of business they don’t have expertise in
• Senator Lucio inquired, concerning auto insurance, why physical damage premiums are so high and why does it cost so much to replace/repair vehicles in Texas?
  • Kitzman indicated TDI is not able to determine why it costs more from the data sources typically used for insurance companies; there is some speculation that it could have to do with higher value vehicles/newer vehicles
  • Lucio questioned her use of saying Texas has a “competitive market” when the state ranks in top 15 in terms of premiums; Texas families are paying a lot more for their auto insurance
  • Kitzman indicated competition depends on how it is defined; she uses it to mean there are lots of carriers that are willing to write the business
    • Texas is higher than in most states and reasons for that appear to be underlying cost of claims; that is where TDI has to dig in to and find out what is driving it
    • Texas is an urban state; the only state that has more people living in urban area than Texas is CA
    • 83% of Texans live in an urban area and urban locations are associated with higher loss cost; there is more congestion, higher populations, more vandalism, theft, etc. that drive up the cost of claims
• Senator Van de Putte inquired if there are any legislative restrictions causing the high costs, such as the anti-auto theft program that got cut in the recent session or the decriminalization of burglary of vehicles
• Senator Carona indicated there are arbitrary barriers on Texas’ policy forms; the legislature for many years has been the lap dog of insurance industry
  • Asked Kitzman to, in the next 90-120 days, prepare for the committee things that can be done legislatively to help to drive down the cost of insurance
• Senator Lucio commented that the rise in homeowner insurance premiums 10% is a small comfort
  • If a policy holder cannot pay their deductible, what does this mean for the civility of our broader homeowners market? Indicated he would be submitting a letter for response
• Kitzman indicated her concern is that consumers do not understand what they have and what is a good deal
  • Need to do a better job of helping consumers understand/educate them
• Senator Watson stated he authored a bill last session to make it better and easier for consumers to have the information; encouraged her to look at it
• Senator Van de Putte clarified the consumers do not know what they are getting; asked her what would TDI’s definition be of something not worth it (aka Junk Policy) and report back to committee

Interim Study Charge on Drought and Electric Generation

George Bomar, Texas Department of Licensing and Regulation, State Meteorologist

• Explained how Texas’  heat and lack of ample rainfall is manifestations of La Niña, a cyclical phenomenon that for Texas has been moderate and began about one year ago; usually lasts one year but this one has lasted 15 months and its second phase is expected to peak this month or in February
• Recent moisture has put a dent in agricultural drought, but not the hydrological drought; streams, creeks and water tables remain at alarmingly low levels
• Texas has little reason to expect major relief from drought—especially the “hydrologic” variety—until deep in 2012
• Chairman Carona inquired if there are scientific solutions that can be done to induce greater rainfall
  • Bomar indicated there are currently 6 cloud seeding projects going on in Texas and hope to continue into 2012 to make a difference

Donna Nelson, Chairman, Public Utility Commission

• Working with ERCOT to asses impact of drought on electric generating capacity; ERCOT is researching regions most affected by drought and working closely with TCEQ and Texas’ Division of Emergency Management
• Looking at demand response together with mothball plants that may come together when facing a drought and high temperatures again
• Addressing water issues to make sure generation uses less or no water
• Market signals should encourage generators to address water issues going forward
• Will continue to work with ERCOT and generators to make sure the drought has a minimal effect on electricity
• Senator Watson inquired about the types of market signals being sent; indicating the state’s solution appears to be not to do anything and let the situation play out because they cannot make any money
  • Indicated the state should think about how to encourage more capacity so there are not problems in the short and long term; need to grow the economy and create jobs in concert with water efforts

Tripp Doggett, ERCOT (see attachment)

• Concern is around resource adequacy
• Seasonal assessment published for the winter indicates capacity should be adequate through winter,  unless Texas experiences simultaneous occurrence of extreme weather, extreme planned outages and extreme forced outages
• Texas will be right at that reserve margin for 2012-13
• Demand response initiatives are very important; includes message of conservation and energy efficiency expansion and the ability to use demand responsive load tools
• Also need to focus on residential opportunities; working with Oncor and CenterPoint to facilitate smart meter pilot
• Actions to manage drought impact:
  • Surveyed generation entities in the state and reviewed drought concerns and possible mitigations
  • Identified surface water most impacted and projected impacts to generation for 2012
  • Reviewed public sources regarding state and regional water plans
  • Met with TCEQ staff and drought response teams
  • Working with generation and transmission entities to conduct a workshop in February 2012 to share best practices relevant to drought conditions
  • Identified 2 generators on reservoirs with concern; are comfortable they have mitigation plans in place and will not cause problems through summer 2012
• Drought conditions are having impact on generation resources today, although slight, and believes it will continue to be slight through summer 2012; if drought continues through 2013 consequences will likely become more severe; ERCOT will continue to analyze survey results with the generators
• February 2012 ERCOT is hosting a drought work shop to coordinate best practices and consider things in other areas of the country that have been done during severe drought
• Senator Van de Putte discussed an experience she had at a conference; persons from Michigan joked that although Texas’ economy is strong now, in 10-15 years when the state is sucking dirt because there is no water, the jobs will return to Michigan
  • Emphasized the importance of planning and communication between agencies

Dr. Michael Webber, Mechanical Engineering, University of Texas at Austin (see attachment)

• Droughts and other water extremes expose important vulnerabilities in the Texas power sector. However, by switching the fuel mix and implementing advanced cooling technologies, these vulnerabilities can be eliminated or mitigated. Furthermore, these investments will yield significant air quality co-benefits.
• The power sector is highly dependent on water
• The power sector’s water use introduces vulnerability to water extremes
• Implementing advanced cooling technologies reduces drought vulnerability of the Texas power sector
• There Are Environmental Co-Benefits of Reducing Water
• There are several policy options available:
  • The State could buy most of the water rights from power plant operators (which helps meet instream flow requirements), which gives operators the money they need to implement dry cooling retrofits
  • b. The State could provide low-interest loans to reduce the costs of retrofitting advanced cooling technologies
  • Looking forward, the state can (should?) include water availability in the permitting process
  • Looking forward, the state can (should?) require advanced cooling technologies
  • The State could push to put a price on NOx, thereby using efficient market
• In conclusion:
  • The risks of water scarcity to the power sector are real, severe, and expensive
  • There are solutions available:
    • Switch to a less water-intensive fuel mix
    • Implement advanced cooling technologies
    • Reducing water use has environmental co-benefits of reduced emissions
    • There are several policy options available that reduce risks from drought
• Chairman Carona asked that PUC Chair Nelson take Webber’s key points and give a written reply as to the viability of the; also asked TCEQ to work with PUC in preparing the response

Carolyn Brittin, Texas Water Development Board (see attachment)

• Provided review of the state’s 2012 State Water Plan; is at the press and was adopted in November
• Planning Process:
  • TWC §16.051 (State Water Plan); TWC §16.053 (Regional Water Plans); and TWC §16.054 (Local Water Plans)
  • Comprised of 16 approved Regional Water Plans
  • 50-year planning horizon
  • Baseline conditions-Drought of Record
  • 5-year planning cycle
  • Plan for irrigated agriculture, municipal, electrical power generation, manufacturing, mining, and livestock water uses
  • Plan for about 3,000 individual water user groups
• 2012 Draft State Water Plan
  • Population – 25.4 million to 46.3 million (82% increase)
  • Water Demand – 18 million acre-feet to 22 million acre-feet (22% increase); municipal greatest increase (4.9 to 8.4 million acre-feet); irrigated agriculture declines and is projected to be about equal to municipal demand by 2060 (10 million acre-feet to 8.4 million acre-feet); manufacturing, electric power generation, and livestock increase slightly; and mining projected to remain relatively constant
  • Water Supplies – decrease from about 17 million acre-feet in 2010 to about 15.3 million acre-feet in 2060
  • Water Supply Needs – immediate need of 3.6 million acre-feet growing to 8.3 million acre-feet in 2060; 86% of the current need is irrigation and about 9% for municipal needs; by 2060, irrigation makes up 45% of the projected water supply needs with municipal comprising 41% of the needs.
  • Recommended Water Management Strategies – 562 unique water supply projects designed to meet needs for additional water supplies would provide for about 2 million acre-feet in 2010 and 9 million acre-feet in 2060; 34% from conservation and reuse, 17% from new reservoirs, and about 34% from other surface water strategies
  • State Water Plan Capital Costs – by 2060, if all recommended strategies are implemented, capital costs are projected to be $53 billion; $53 billion is only to develop new water supplies, delivery to a water supply system, and some treatment
  • Socio-Economic Impact of Not Meeting Water Supply Needs – Texas businesses and workers could lose almost $12 billion in income in 2010 and about $116 billion in 2060; losses to state and local business taxes could amount to $1.1 billion in 2010 and $9.89 billion in 2060; lost jobs could total 115,000 in 2010 and 1.1 million in 2060; projected population could be reduced by about 1.4 million people by 2060.
  • Other Water Related Infrastructure Capital Costs – by 2060, estimate capital costs of water treatment and distribution is about $88.9 billion; wastewater treatment and collection is about $81.7 billion; and flood control is about $7.5 billion
  • Total Water Related Capital Costs – $231 billion by 2060
• Chairman Carona inquired about water funding options commonly seen around the country
  • Brittin indicated she would be getting a report for the committee to give to them on taxes and user fees, but there is not a lot of funding provided to implement water projects throughout the US
  • It is more a local requirement for local utility providers to implement water projects
  • Texas has looked at repealing of sales tax on water/wastewater services, bottled water tax, tap fee on every connection, etc.
• Chairman Carona expressed the importance of adopting a solution to funding the state’s water needs; there is nothing more critical to the future of this state

Bryan Shaw, Chair, TCEQ (see attachment)

• Strong advocate for finding new technology opportunities to use less water during power generation
• Need to address capital cost associated with them and incentivize those investments to allow the market to improve cost effectively
• The TCEQ has received 15 senior calls, including calls on surface water in the Brazos, Guadalupe, Colorado, Sabine, and Neches River Basins
• All total, these senior calls have resulted in the suspension or curtailment of over twelve hundred (1,200) water right permits
• Additionally, the TCEQ has stopped issuing temporary water right permits in basins affected by these calls
• TCEQ closely monitors the status of public water systems
• Drought Contingency Plans are strategies for temporary supply and demand management responses to temporary and potentially recurring water supply shortages and other water supply emergencies. 
• The impact of the drought on electric generating capacity of increasing concern as the drought continues.  TCEQ has worked with TDEM, the Electric Reliability Council of Texas (ERCOT), and the Public Utility Commission (PUC) on a number of items
• Senator Van de Putte inquired about the role TCEQ plays in the Railroad Commission’s Eagle Ford Task Force
  • Shaw indicated TCEQ’s primary function is as an information resource; do not have the ability to go in and say you cannot use water for this today; when water rights changes come before them then they can
• Senator Watson asked if TCEQ was comfortable with its budget allocations
  • Shaw indicated hits were taken and although TCEQ is slowed it manages to have the flexibility in absorbing the cuts to meet its requirements  

Sheri Givens, Office of Public Utility Council

• Aware of challenges and concerns; committed to working with impacted stakeholders and ensuring appropriate resources
• Focused on collaboration, communication and cost
• Continue communicating through drought related events with toll free number; saw a 44% increase in customer complaints this past year alone
  • Website is in plain English so they can understand issues
  • Use social media and quarterly newsletters
• Customer education very important
  • Emphasize the value of energy efficiency and conservation to mitigate drought issues
  • Smart meters and shopping for lower prices and information about pill payment assistance
• Cost – have reached out to utilities and generators and none have done quantifiable impact of the cost based on the drought; number of things affect it and are reflected in wholesale costs, which trickle down
• Going to continue in rate making proceedings before PUC; will keep offices apprised of any drought related issue come up; keep active in rule makings and active participants at ERCOT

John Fainter, Association of Electric Companies of Texas (see attachment)

• Emphasize while a lot of water in current technology is needed for the process of electric generation, water consumed is 3% relative to its use
• Have worked to ensure conservation and adequate access to the water needed for domestic, industrial and commercial uses across the state
• There is no silver bullet to dealing with issues; need to be flexible, innovative, and need more resources to provide adequate generation
• PUC and ERCOT have been aggressive on appropriate market incentives to ensure supply continues
• There is no more serious problem than addressing water needs; that is why there are plans; the implementation and funding of those plans is essential
• People will have to have to build reservoirs, reuse water, conduct desalination; conservation and efficient use are the most important things
• Need diverse fuel portfolio consistent with environmental requirements to provide reliable electricity at a reasonable cost

Mark Zion, Texas Public Power Association (see attachment)

• Electric generation, while consuming a lot of water, is relatively small with respect to consumption on statewide level
• Public power generators are planning and working with due diligence to prepare for a continuation of drought conditions
  • Preparing to possibly respond to an ERCOT call to return mothballed units to service (August-October, 2011, Garland Power & Light, Spencer Plant).
  • Encouraging energy conservation (2011 summer ERCOT alerts to public power customers) and reviewing potential additional conservation measures.
  • Participating in industry working groups at ERCOT to develop best practices for drought preparedness.
  • Water rights:
    • Maximizing the amount of water available under current water rights.
    • Purchasing additional water from others with underutilized water rights and exercising contingency contracts to maximize available water.
    • Considering the construction of pipelines to remote water sources.
    • Cooling water pumping improvements:
      • Assessing the ability of plant cooling water intake pumps to operate when reservoir levels are below normal.
      • Examining and/or making improvements to plant cooling water intake systems like extending pipes or installing anti-vortex baffles.
    • Maximizing water re-use and recycling within power plants.
    • Using, or developing alternatives for the use of treated wastewater effluent.
    • Working with state and federal regulatory authorities.
    • Examining “last resort” measures like managing the dispatch of units based on the availability of water or moving water between power plant cooling reservoirs to minimize impacted generation.

Dr. Lauren Ross, Sierra Club (see attachment)

• Conducted study for Sierra Club on water savings that could be achieved by converting to a more water efficient and drought proof technology
• 4 key findings from research:
  • Available data regarding water use for steam electric generation is unreliable
  • The annual water demand of existing coal-fired facilities is about 279,000 acre-feet per year
  • Available alternative electric generation technology has the capacity to significantly reduce water consumption for electrical power generation, and in some cases, even taking that consumption to zero
  • By encouraging water-efficient electric generation infrastructure, Texas can preserve the availability of water supplies for other essential uses and improve the reliability of the power availability during drought conditions
• Two key recommendations:
  • Prioritize accurate data collection and accounting of water withdrawals, return flows and consumption at all Texas steam-electric facilities
  • Develop a plan to incentivize construction of a water-efficient electrical system to improve reliability and conserve water supplies

David Freeman, Public Citizen

• Energy policy used to be to pray for mild weather; thinks that is still the national energy policy
• Problem is low prices are not sufficient to encourage people to build new generating plants
• Success in implementing deregulation for the consumer leaves a big hole; no one in Texas’ system has the authority to require anyone to build a power plant and on top of that there are big water concerns
• State has tremendous economic growth with a future in doubt because there is question about whether the state will have plenty of  electricity and water; need to think in terms of what are the sources of energy that are water proof or not needing water
• Someone needs to have the power to implement the plan
• Identify sources of drought proof electricity
  • Having the investment made and pay it back on the electric bill; harder to do so in a deregulated system, but have to go after the demand side because the supply side is in the hand of the free market
• Supplement deregulation with authority
• Solution to water problem in long run is desalination and that takes a lot of energy

Rudy Garza, Texas Coalition for Affordable Power 

• Suggested:
  • Along with water rights for municipal and residential use, water for electric generation should continue to be given the highest priority in times of critical shortage.
  • Rather than incentivizing construction of new generation facilities that require water resources that may not be available, we should investigate ways to encourage the development of solar power in West Texas without driving current retail rates higher. The goal should be to maximize the efficiency and usefulness of the new CREZ transmission system by matching wind power (which is most productive in evenings and off‐peak hours) with energy generated during peak hours by the sun — that is, from the same source that is bringing us hot summers.
  • Consider building codes for new construction that mandate the use of best available technology for conserving both electricity and water.
  • Carefully monitor pricing under the nodal system to ensure that areas of the states are not punished with disproportionately higher electric rates when the addition of generation units in those areas is precluded because of limited natural resources or mandated constraints.
  • Carefully monitor PUC and ERCOT policies to ensure that principles of competitive markets
  • are not compromised by artificial pricing to enhance profits for incumbent providers.