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ERCOT is 100 percent over budget on revamp of Texas electric grid

Nov 25, 2008 - Jim Fuquay - McClatchy-Tribune Regional News

The operator of the state's largest electricity grid said it is more than 100 percent over budget and two years behind schedule on its ongoing program to modernize the transmission system.

The Electric Reliability Council of Texas, which serves about 75 percent of the state, disclosed in filings Wednesday with the Public Utility Commission that it expects to spend $660 million implementing a system that divides the transmission network into thousands of "nodes" rather than the current five zones. ERCOT also said it doesn't expect to bring the nodal system online until the end of 2010.

Two influential state legislators said they are unhappy with the news, and the project could be at risk unless a pending study shows that the expected benefits outweigh the cost of the overhaul. The nodal system aims to improve the flow of power across transmission lines, reducing congestion and lowering prices.

"It's exceptionally disturbing," said Rep. Phil King, R-Weatherford, chairman of the House Regulated Industries Committee, which oversees the state's electricity markets. "I don't want to see us strap $660 million on Texas consumers unless the savings exceed that," he said.

Sen. Troy Fraser, R-Horseshoe Bay, chairman of the Senate Business and Commerce Committee, called the budget estimate "extremely high and unacceptable."

A new cost-benefit study of the nodal project is due Dec. 15. A similar study three years earlier projected $6 billion in benefits and a cost of $260 million.

In March, ERCOT Chairman Bob Kahn said he was "75 to 80 percent" sure the program would be completed by the target date of Jan. 1, 2009. By May, ERCOT said it would be later than that but offered no estimate of when.

The PUC authorized ERCOT to pursue the nodal project in 2003. ERCOT initially put a $125 million price tag on the development of the system, but Kahn told Fraser's committee Nov. 18 that money was only to get the program started. ERCOT's board approved a total cost of $267 million in January 2007 and then raised it to $319 million in January 2008, ERCOT said.

The cost of the nodal system is principally being borne right now by the state's electricity generators. But those costs eventually are expected to be passed on to ratepayers.

ERCOT on Nov. 19 asked the PUC to more than double the surcharge, to 38 cents per megawatt-hour, that it needs to pay for the nodal project on an interim basis. That charge, which it seeks no later than by Feb. 1, would first be passed along to electricity generators.

The surcharge compares with negotiated wholesale power prices that routinely average $70 to $75 per megawatt-hour.

Monday, Dallas-based Luminant Generation, the state's biggest electricity generator, filed an objection to ERCOT's plans, saying it departed from established procedure and represented an "enormous additional and surprising burden" to participants in the market. Luminant said it wouldn't have time to work the unexpected charge into previously negotiated rates.

Wednesday, the Alliance for Retail Markets, which represents several of the state's electricity retailers, also objected, noting that the generators' added costs would simply be passed along to retailers.

At the Nov. 18 committee hearing, ERCOT's lack of progress and rising costs on the nodal project drew criticism from committee members. Kahn testified that the project was costing $12 million a month, a figure that sparked sharp questioning. Kahn acknowledged that ERCOT's approach of using a mix of outside software vendors working on open-ended contracts had led to problems. He said some vendors were not giving ERCOT their highest priority and were reluctant to cooperate with other vendors.

"I can't believe you've got cost-plus contracts" that have no set performance standards, Senate Business and Commerce Committee Vice Chairman Chris Harris told Kahn. "Why would you do that? This is serious," said Harris, an Arlington Republican.

Kahn said ERCOT had worked with vendors to improve communication and has "forced them to step up to the line in the last four or five months."

JIM FUQUAY, 817-390-7552