Houston power prices higher than Dallas

HOUSTON, TEXAS - In the long-running civic rivalry between Dallas and Houston, score one for Dallas.

Houston's residential electric power prices are consistently higher than in the Dallas-Fort Worth area, ranging in recent years from about a half-cent per kilowatt-hour higher to more than 2 cents higher in May and June, according to data from power shopping site ChooseEnergy.com.

A penny or two may not seem like much, but if your house uses 1,000 kilowatt-hours per month - which is on the low side for Houston - that one cent equals $10, or $120 per year. Houston and Dallas are part of the same power grid and subject to the same market forces, unlike the city-owned utilities in San Antonio and Austin.

So what accounts for the difference? Like all things in Texas' power system, it's a combination of issues, none simple.

First, the rates charged for maintaining the local transmission and distribution systems in Houston are higher, by about a half-cent per kilowatt-hour. This is largely because CenterPoint Energy, the local company responsible for power lines and meters, asked state regulators to let it recoup large investments made in power plants it sold off as part of the state's move to deregulation.

Second, the Houston area uses more power than it generates, making it a net importer of power.

The larger Dallas-Fort Worth region, served by more plants, is not a net importer. When power lines coming into the Houston area are congested, wholesale prices increase as generators are paid to find ways around the tight spots.

In May and June, problems in the way the state grid operator manages this congestion led to massive wholesale price jumps that helped drive a number of electric retailers out of business. A third reason, which some dispute, is the level of wholesale and retail competition in the Houston market.

About 75 percent of power generation in the area is concentrated in the hands of just two companies, NRG Energy and Calpine, which some say means less robust price competition.

Some also argue Dallas' largest electric retailer, TXU Energy, has been more aggressive in cutting prices than Houston-based Reliant Energy, particularly since TXU was bought out by a group of private equity investors last year. Wholesale and retail prices are much more volatile than transmission and distribution rates, which are regulated by the Texas Public Utility Commission and seldom change. When they do it's usually after long, hotly contested public hearings.

In the Houston area, CenterPoint charges $3.88 per month to cover such items as meter reading and administrative costs. That single fee isn't always itemized on a customer's electric bill.

On top of that, CenterPoint charges about 2.3 cents per kilowatt-hour for maintaining the transmission and distribution system, and another half-cent or so for miscellaneous items that include saving for the future shutdown of the South Texas Project nuclear plant and providing discounts for low-income customers. Those charges are rolled into the rate retailers offer and don't show up on bills.

For 1,000 kilowatt-hours, the CenterPoint portion of a bill comes to about $31 a month for Houston-area customers. Centerpoint's transmission-distribution counterpart in the Dallas area, Oncor, has a larger monthly fixed fee of $4.95, but the per kilowatt-hour rate is smaller, about 2.27 cents.

That means a monthly total of about $28 for 1,000 kilowatt-hours. The main difference between CenterPoint and Oncor's rates is that Oncor sought reimbursement for a smaller portion of its past investments in power plants, said Paul Gastineau, director of rates and regulatory research for CenterPoint.

"We sold off our power plants, so we needed to recover those investments we put in them that we expected to get back over time," Gastineau said. Oncor's parent company, TXU, kept most of its power plants. The other differences between Houston and Dallas are harder to put a price tag on, but they can be significant.

Houston's role as a net importer of power has been the biggest factor in price differences lately, said Charles Griffey, senior vice president for market design and regulatory affairs for Reliant Energy, a Houston-based electric retailer. To meet its peak power needs, Houston often has to draw on power from North or South Texas.

The connections between those zones can become congested during peak hours, so power generators are offered higher rates to relieve that congestion. That means higher wholesale prices for the Houston area. Flaws in the way the state's main grid operator manages those bottlenecks amplified those problems this year, however.

Instead of hovering around the $100 to $200 per megawatt-hour range that is typical, wholesale prices in Houston and South Texas brief y reached over $4,000 per megawatt-hour. The average wholesale price in Houston so far this year has been 22 percent higher than in North Texas, Griffey said.

The grid operators have tried to fix the problem and, for the time being, the price spikes have lessened. Putting a price tag on the level of wholesale and retail competition around Houston is even harder. Officials with Calpine and NRG don't dispute their large ownership of Houston area power plants, but they note the state's grid operator watches activity here closely to ensure open competition.

They also point to the transmission congestion issues as the main reason for the price differences. Jason Armenta, head of Calpine's electric power trading desk, said he thinks the Dallas area prices are likely lower because the transmission bottlenecks into Houston and South Texas means Dallas generally will have a surplus of energy.

"The market's future expectations of prices are based, to some extent, on the recent price action and congestion in the spot markets," Armenta said. On the retail side, Tom Stewart, director of communications for TXU Energy, said Dallas rates are likely lower because of the 15 percent discount his company gave most of its North Texas customers through the end of the year.

But Steve Madden, senior vice president at retailer StarTex Power, said competitors no longer set their rates based on what the largest retailers are charging, as many did in the early days of Texas deregulation.

"When I do my pricing, I look at the forward curves for natural gas and what kind of prices we can support," Madden said.

Is the Dallas/Houston price difference going to continue? The gap between the two seems to have narrowed for now, according to data from the state-run Power To Choose site and privately operated ChooseEnergy.com. And Oncor is going to ask the Public Utility Commission for a rate increase soon, which will bring its rates more in line with CenterPoint's.

But Ron Fort, an analyst with Sugar Land-based energy brokers Amerex Energy, said one metric indicates the market believes the gap will persist for the time being. The "heat rate" - a measurement of the efficiency of all the power plants in an area, including the costs of transmission congestion - is projected to remain higher in Houston at least through 2010, Fort said.

Higher heat rates mean higher wholesale prices. "We believe as the transmission issues are worked out and new generation assets come on line, these differentials will start to level out," Fort said. "But the question is when?"