Texas utilities battle over electricity pricing

- A controversial plan to change the way wholesale power is bought and sold on Texas's two-year-old deregulated electricity market could cost as much as $500 million to implement.

The debate has pitted the two largest utilities in Texas -- Houston's Reliant Resources and Dallas-based TXU -- against each other.

The difference of opinion revolves around two pricing systems -- "zonal" and "nodal." The pricing mechanisms relate to expenses incurred when electricity is moved from individual generating plants to power centers when demand is higher than local supply and transmission capacity is inadequate to handle the load.

Under the current zonal system, local congestion costs are "socialized" and spread throughout the entire market. Each participant pays a pro rata portion of these costs based on its share of the local power load.

A new nodal system being pushed by Reliant would allocate the entire cost to the entity that creates the congestion.

The problem: The expense of implementing nodal pricing could be as much as a half-billion dollars, which ultimately would be passed on to consumers.

Many market players such as TXU question whether the ultimate benefits will be worth the cost.

However, Reliant is certain that nodal pricing is the only way to go -- at least for the Houston utility.

Jim Ajello, CEO of Reliant Energy Solutions, argues that the company is paying for congestion in Dallas and other high traffic corridors while Houston has little congestion. And companies like TXU, which owns generation in those congested areas, are "profiting unfairly" because they are being paid by the Electric Reliability Council of Texas (ERCOT) to alleviate the congestion while paying "only a fraction" of the congestion charges.

"It's a fundamental unfairness," says Ajello.

In the second quarter of 2003, he says, Reliant paid about $30 million in additional congestion costs, a quadrupling of charges.

"The problem is the costs are not properly assigned," Ajello says. "Our load share ratio is 20 percent to 25 percent because the vast majority of our load is in the Houston area, but Houston doesn't have the constraints that Dallas has."

Congestion costs created in Houston were $8 million between May 2002 and May 2003, while in North Texas congestion costs were $82 million. But Houston customers paid $50 million of the total, Ajello says.

TXU, on the other hand, "is quite happy with the current rules -- they're getting paid by everybody," he says.