Donna Nelson: The TT Interview

Donna Nelson, appointed in July by Gov. Rick Perry to chair the Public Utility Commission, is keenly aware of the challenges facing the state's electric grid right now, following an extremely hot summer in Texas (and a very warm start to fall).

Nelson grew up in South Dakota and got interested in legal and regulatory issues early, after working in Washington in the late 1970s for one of  her home state's senators, Larry Pressler. Coaxed to Texas by a cousin who worked for a Houston law firm, she attended law school at Texas Tech University and worked in a number of government positions, including as an adviser to Perry on energy, telecommunications and cable issues, until being appointed as one of the three members of the Public Utility Commission in 2008. As chairwoman, she replaces Barry Smitherman, now a railroad commissioner.

She spoke with The Texas Tribune last week about the issues facing the PUC. This interview has been lightly edited for clarity.

TT: I wondered how worried you were over the summer that we would end up having rolling blackouts. How close did we come [to rolling blackouts], potentially for the first time ever in a recent summer?

Nelson: [The problems this summer were] a combination of three things, I think. The weather was extreme, right — it was very, very hot. We were in a severe drought. I mean, if you looked at the drought map of Texas, it was like one little tiny area, I think up by Dallas, that wasn't in the exceptional drought category. And then we had all the stress on all the plants from operating continuously. ...When you operate them at maximum capacity for a certain length of time, you run a risk that either you'll have to take them out because something happens, or that they trip off and you'll have a forced outage.

But I think what made us all hold our breath a little was the fact that we hadn't operated in those extreme conditions before — and so it's hard to deal with that from a planning perspective. Some people say that this summer, and the fact that we deployed some of our demand response, shows that our market doesn't work. I think it shows how well our market worked under extreme circumstances, and we avoided rolling outages. [Editor's note: Demand response involves reducing the amount of electricity used by participating companies or homes at times of extreme stress on the grid, like hot summer afternoons].

TT: How did coastal wind perform? There's been a lot of back-and-forth about that.

Nelson: It performed well. I mean, it performed much better than the West Texas wind. The interesting thing is — wind is so variable, and even the coastal wind is variable. In August, we had a low generation in wind of 26 megawatts to a high of 6,310 megawatts.

TT: Wow.

Nelson: And that's on off-peak. On on-peak, we had a range from 357 megawatts to 4,658 megawatts. ... So that's what makes wind hard to plan for. I think overall it would be fair to say that the coastal wind fits our load profile better — in other words, it blows strongest during peak demand, [whereas] West Texas wind is the exact opposite of that. The peak generation [for West Texas wind] is in the early morning hours [and the] middle of the night.

TT: How much wind can we put on the grid and still be operating it reliably?

Nelson: That's really a question for ERCOT [the Electric Reliability Council of Texas, which is the state's grid operator], because you run into all sorts of issues. You run into issues because of the variability, which is illustrated with the numbers I just gave you, and you have to have some sort of a backup that can come on very quickly. And so you have that issue, and you have the issues with just maintaining grid stability as you [add] more wind. ... We built the transmission lines capable of getting to 18,000 total megawatts, and I think it's safe to say that we can get to that point. But the deeper you get, or the more installed wind capacity you get, the harder ERCOT has to work to make sure it doesn't cause issues.

TT: One or two more questions about the weather. The drought — it's the big issue I've been covering. How much of a concern is this for power plants? Is this a real concern about potential reliability?

Nelson: Well, it's a concern because virtually all power plants use water for cooling, and so the lower the water levels get, the bigger the issue is.

TT: But when might it become a concern? Next spring? Next summer? If it doesn't rain and hopefully it will.

Nelson: Well, it's really hard to predict because there so many variables you'd have to predict. You'd have to predict the weather and everything, you know. It's definitely something we're keeping an eye on.

TT: Would this make it reasonable to think about planning more for water-related restrictions on energy in future siting of power plants?

Nelson: We don't site power plants.

TT: Right.

Nelson: But you know, the problem is there's not one single [generation] source out there that doesn't have, I don't want to say a downside, but — they each have pros and cons. And one of the pros of wind is that it doesn't take water. The con of wind is that it's so variable. So, every other — you know, nuclear takes water cooling, natural gas, coal, so...

TT: Let's talk a little bit about the cross-state pollution rule. Environmentalists say we can make up for the loss of some of these coal units by increasing focus on energy-saving measures like demand response, which you had mentioned earlier. Is that not a viable option?

Nelson: There are many problems with [the cross-state] rule-making. The most immediate problem is the timeframe. So, there's absolutely no way that we can get the kind of savings that we would need to offset the loss of generation. Is it possible over a longer period of time? You know, the deeper you get into those issues — for instance, with the ... industrial demand-response — what we saw this summer was that as prices got very high, those industrial customers didn't bid. We have a cap of 1200 MW, and only about 900 MW were bid in. So the electricity generation becomes more valuable to them as prices get higher.

So Texas is in a really good position to have some sort of a residential demand product because of our roll-out of smart meters, but that is just something that takes time. You know, you're basically changing the way electricity has historically been measured, and you're changing the customers' interaction with it. And so, to do that, it just takes some time to get everything in place that you need to have in place that you need to work. So we're ahead of everybody else — Texas is.

TT: I was going to ask where are we [on smart meters]?

Nelson: We have 4 million out of 7 million [smart meters] installed. So where we are is within ERCOT, all of the four [transmission and distribution utility] areas — they all have approved plans for installing advanced meters. TNMP, which has only about 3 percent of the load in ERCOT — theirs was only recently approved, but the other three [areas] are well on their way to having them installed, I think, by mid-2013, but vast majority of them by the end of 2012.

But then you have to find a way to aggregate [the households for demand response programs], and the way the Texas legislature wrote the statute on advanced meters, they left ownership of the data with the customer, which is exactly how it should be. But we're in the process of finalizing a rule that would dictate what third parties need to do to interact with the customer to get access to that data. We just want to make sure the customers understand what they are doing. And so it's most likely that it would be a third party that would get access to the data who would do the kind of aggregation you need to get a meaningful demand-response product.

TT: Back on CREZ [Competitive Renewable Energy Zones, the wind-power transmission build-out] for a minute. The cost of this has increased quite dramatically, it seems to me, from the initial estimate of close to $5 billion to close to $7 billion [now]. Is that potentially going to increase more, and is that a concern of yours?

Nelson: Well, we always like to keep costs as low as we can. But I think going in to CREZ, the $5 billion was an estimate, and ERCOT acknowledged that when it came out. It was based on straight line [construction of transmission lines. When] we had to route the CREZ lines — those were controversial cases. And I think we were faced with a choice in many cases of — it was a balancing between spending as little as we could while also respecting the rights of private property owners, and both of those concepts are very important to Texans. So, yes I'm concerned about the price, but we will be reviewing those prices — the rates —before they're put into effect.

TT: What can Texas ratepayers expect on their bills?

Nelson: Well, the other thing I was going to say was, it does concern me, but we also have load growth, and so it's going to be spread out among more people. So I think they're still saying around $5 a month is the cost.

TT: For, like, 10 years, 15 years?

Nelson: For the residential customer. Well, until the lines are paid for. ...Transmission lines — they last a long time, so it's a relatively long period of time. But see, when I was saying there are pros and cons of all the different technologies, that's one of the cons of wind. It blows the most in areas with no load — with little load; I shouldn't say no load.

TT: What do you think of solar power?

Nelson: I think solar would be a great addition, but I'm not sure it makes financial sense yet, and from the standpoint of wind being variable, solar is even more variable. Because as soon as the cloud passes over the sun, it drops off really quickly. I think solar would be a good — solar companies could build solar facilities out in West Texas and use the transmission lines that we're building that are now primarily going to be used for wind. So we could get some synergy there.

TT: What other than the issues we've talked about do you see as being really big on the PUC's agenda over the next couple of years?

Nelson: Well, the biggest issue facing us right now is resource adequacy. And it's caused not only by all the EPA [Environmental Protection Agency] rule-makings, but it's also — you know, the generators — we have an energy-only market. ... I think there are only a few markets in the world that are energy-only. Texas is one of them. And the reason we have energy-only is [that] when the market was set up, the people who sat in my seat thought that that was the most efficient market — the lowest cost to customers.

Other areas have capacity markets where you basically just pay the generator for installing the capacity. We only pay the generator when they actually put power onto the grid, and so because of the unique nature of electricity and the fact that you have to match supply and demand in real time, and we don't really have meaningful amounts of storage, you have to have a supply of electricity that ERCOT can use to maintain grid stability if they need it. In the Texas market it's called non-spin. And the generators are complaining that when ERCOT puts non-spin into the market that it distorts market prices. So we're really reviewing the way the market sends signals, and whether they're sufficient to incent the building of generation, or whether we need to change those.

TT: Would this summer — with quite high wholesale prices on numerous occasions — have alleviated that somewhat? I'm thinking that the concern basically [in] what you've been saying is that power prices aren't enough to incentivize companies to build new generation.

Nelson: Right. Well, I think the summer prices definitely help. The question that generators are asking — and more importantly the question that the people who provide them with capital are asking — is, is this a one-time event or is this something that's going to be replicated?

This summer — I think in Austin, our average high [temperature in August] was 105 [degrees], and the normal high is 95. And as you know if you've lived in Texas very long, one summer can be very different than another summer. We've had summers where it was rare for us to be at 100. And ... we had like 84 or 85 days where we were over 100 in Austin, and the average is 13. So generators and the people who provide them with capital are saying, is this is an anomaly in essence. But those are the issues we're looking at, and that's a very good question, and that's the kind of questions we're asking.

TT: And is there any way to encourage new generation — I mean, what happens if the market doesn't encourage generation when we need it?

Nelson: Well, then nobody builds. And we won't have enough. So that's why it's such an important issue. We just need to make sure the market is sending the right signals, and like I said — if it were a market that were just totally competitive and there wasn't any administrative intervention, then you wouldn't have to worry about it because the market would work, right. But we do have administrative intervention in form of ERCOT deploying non-spin. Which is understandable. I mean, it's something that we need to have — they need to have as a tool. So we're looking at those issues and we've asked ERCOT to run some numbers and get back to us to try to help us with the issue. But that's a big issue.

TT: And ordinary Texans — are they starting to call into you all — are people starting to feel the summer prices on their bill? Because obviously ordinary people don't really want higher power prices.

Nelson: Yeah, nobody does. You know, I'm sure our customer protection division is getting complaints because they normally get complaints and I'm sure people are calling because their bills are higher. Luckily rates are low right now — rates in the competitive areas. You know, you can get rates in the Dallas-Fort Worth area around 9 cents [per kilowatt-hour] — less than 2001 rates. So it balances out. But everybody's bill is high from the summer because it was so hot. I do think that after people probably got their July bill and it was August that they turned their thermostats up so their bill was not as high.

TT: I'm curious, just from a personal perspective, how did you get from South Dakota to Texas, and how did you get interested in the power and the power and the telecoms industry in the first place? You've been doing this awhile.

Nelson: Well ... I finished college [in South Dakota]. My major was political science, so I was always interested in government. And I moved out to D.C. and I worked for a U.S. senator. And I had always planned on going to law school, but it was in the context of working there and seeing people without law degrees, and how difficult it was if their member lost to get a job, that I thought — it reiterated my desire to go to law school. And I had a cousin who was actually the first female partner at Liddell Sapp when it was Liddell Sapp in Houston. And she had moved down here. I was paying my own way through school, and because of her I knew about how good the schools [in Texas] were and how inexpensive they were. So I moved down to go to law school, almost 31 years ago. And then shortly after law school I did anti-trust law for about six years, and I applied at the PUC initially in 1995 and then followed up in 1996, but I was really interested in working at PUC because of the telecom transition from a regulated marketplace to a competitive one. I thought it was a great place for somebody who had anti-trust background.

TT: Which senator were you working for in Washington?

Nelson: [Larry] Pressler. But it was in the late 70s. He's been gone a long time. Although he was the author of the federal Telecommunications Act in 1996. ... I still have friends who work on [Capitol] Hill. ... Really, when I moved to Texas, I never really expected to stay here, but now I can't imagine living anywhere else.