Texas built a competitive retail electricity market: consumers choose among roughly a hundred providers, and generators build power plants at their own risk with no guaranteed return. Transmission, the high-voltage lines that move power from where it is made to where it is used, runs on a different model. One utility builds each line and recovers every cost from ratepayers, plus a return, on time and on budget or not, and faces no competition.
ERCOT’s latest reserve-margin forecast goes negative in 2029 and 2030. To close that gap, ERCOT and the PUC have directed utilities to build a high-voltage backbone from West Texas to the I-35 corridor, which Smitherman puts at $33 billion, rising toward $40 to $50 billion by completion. Under the monopoly model, that cost lands on ratepayers.
On this week’s Energy Capital Podcast, Joshua Rhodes talks with Barry Smitherman, the only person to have chaired both the Public Utility Commission and the Railroad Commission of Texas and now chairman of Texans for Affordable Transmission, about bidding transmission out to non-incumbents under cost and timeline caps. He sat on both commissions during the CREZ buildout, Texas’s early-2000s program that moved West Texas wind to market, and saw competitive transmission work firsthand.
Retail and wholesale competition worked, Smitherman says; transmission he calls “the last remaining monopoly.” The conversation covers:
The CREZ precedent, where four non-incumbents built parts of the buildout on or under budget, and why the PUC then handed the Permian Basin Reliability Project lines back to incumbents without repeating it.
Senate Bill 1938, the 2019 law reserving Texas transmission for incumbent utilities, which the Fifth Circuit likened to requiring someone to own an oil well before drilling a new one, and which may still hold inside ERCOT.
Private lines, the model NextEra used two decades ago to run its own line from West Texas wind to the grid, and why Smitherman would let generators and large loads do the same today.
How the PUC and the Legislature settle whether ERCOT transmission must go to incumbents will decide what ratepayers pay to build the backbone.
Timestamps
00:00 - Introduction & Texas Energy Landscape
05:31 - Permian Basin Load Growth and the 765 KV Lines
12:11 - Data Center Demand: Real vs. Speculative
14:09 - Texas Energy Fund and the Energy-Only Market
21:28 - How Texas Transmission Gets Built Today
23:13 - The Case for Competitive Transmission
31:46 - The Eastern Backbone and Cost Accountability
33:54 - Private Lines and Large Load Options
43:04 - Repealing SB 1938: The Path Inside ERCOT
44:34 - Getting Transmission Right: Future Tech and Landowners
Resources
People & Organizations
Joshua Rhodes (LinkedIn)
Barry Smitherman (LinkedIn)
Books & Articles Discussed
It’s Time for Texas to Get Competitive on Transmission Development — Barry Smitherman, RealClearEnergy
Need for Speed: An Analysis of Speed to Market and Cost Results of Competitive Transmission — R Street Institute
Texas Energy Fund — Public Utility Commission of Texas
House Bill 5066 (2023) — 88th Texas Legislature, origin of the Permian Basin Reliability Plan
Senate Bill 1938 (2019) — 86th Texas Legislature, the right-of-first-refusal law at the center of the competitive transmission argument
FERC Order No. 1000 — Transmission Planning and Cost Allocation — Federal Energy Regulatory Commission
Related Podcasts by Energy Capital
How Texas Decides Which Data Centers to Connect — with Tiffany Wu
Transmission Takes a Decade, Load Doesn’t — with Raina Hornaday
Transcript
Joshua Rhodes: Hey everyone, and welcome to another episode of the Energy Capital Podcast. I’m really excited today to have Barry Smitherman to talk a lot about Texas energy topics. Barry’s been in a lot of different seats, a lot of different chairs when it comes to Texas energy, and I think he’s got a really unique perspective in terms of being able to share what’s going on and kind of what we might be looking forward to. So Barry has a BBA from Texas A&M, an MPA from Harvard Kennedy School. And is JD from the University of Texas at Austin. So Barry, like me, you are also a person internally conflicted. I also went to A&M and UT and catch no end of flack for that. But after that, he was Assistant District Attorney for Harris County. And then he’s been chairman of both the Public Utility Commission, the Regulator for Electricity, and the Railroad Commission of Texas, the regulator of oil and gas, which to my knowledge, there’s not that many people who have been on both of those commissions, let alone the chair of both of those commissions. Is that right?
Barry Smitherman: I’m the only one.
Joshua Rhodes: Well I couldn’t find anyone else, so it’s either so that’s good to know. Barry’s now the president of Smitherman and Associates, the chairman of the Texas Geothermal Energy Alliance, managing partner of Success Capital Group, and the chairman for the Texans for Affordable Transmission. Barry Smitherman, welcome to the Energy Capital Podcast.
Barry Smitherman: Thanks, Josh. Great to be here.
Joshua Rhodes: I think one of the things is like there’s a lot going on in Texas Energy. There’s never not been a time when there’s been a lot going on in Texas Energy, but it feels like right now, in particular, post Winter Storm Uri, post market restructuring, data centers, electrification, like all these things, there’s a lot going on in Texas Energy. And you’ve sat in both chairs, like at the electricity, at the public utility commission, and in oil and gas at the railroad commission. When you look at the energy landscape right now, what do you think that most people who are only looking at one side of this are missing?
Barry Smitherman: Well, I think people don’t realize how complementary the two sectors are to each other. I’ll give you a couple of examples. One, if we can use wind and solar as a component of our electric generation, that frees up some of our natural gas to be put on a ship and sold internationally. Yeah. And the price of LNG delivered in Europe is about four to five times what you could sell it for at Henry Hub. Wow. So there’s a complementary nature there. Secondly, when wind and solar are not available, say it’s nighttime and the wind isn’t blowing, we need natural gas to back that up. So it complements wind and solar. The transmission infrastructure, and I know we’re gonna talk about this a little bit later in more detail, out in the Permian Basin, beginning with the CREZ projects back in the two thousands, were originally designed to move wind energy from west to east. But the reality is because of where it was placed in the Permian Basin, it actually provides electricity to the oil and gas sector out in the Permian, because we have open access transmission. Right. And there are many other ways that are less direct. You know, for example, oil and gas throws off millions, if not billions, of dollars in tax revenues, revenues to universities. That keep our taxes low, which encourages business to come to Texas, and those businesses then consume a lot of electricity. So I think we need to stop thinking about it in a tribal way, which we have for a couple of years now, particularly after Winter Storm Uri, and think about being complimentary.
Joshua Rhodes: Yeah, no, I think that’s right. I think a lot of our electricity does come from natural gas. I think for the past twenty years or so it’s been about forty five percent. It seems to be the most stable in terms of percentage. And in absolute terms, that’s grown because we’ve consumed more electricity. But one of the things like the electricity sector and the gas sector are inherently coupled. You know, having served on the railroad commission, how do you assess kind of like those industries are coordinating today? I know there’s gas and electric coordinating. Groups and things like that, but how well do you think that they were talking to each other when you were on the commission and how well are they talking to each other today?
Barry Smitherman: Well, I think they’re talking to each other a lot better today, certainly after Winter Storm Uri, when it became obvious that part of the reason that we couldn’t provide electricity to everyone twenty four seven was because some of the natural gas was not being delivered to the power plants. And there are a variety of reasons for that, but it was an issue. Yeah. And so I know that the railroad commission, the PUC and ERCOT They communicate with each other today, I think, better than they did in the past. I know when I was on the PUC, I had a great communication line with Michael Williams, who was chairman of the railroad commission. So in 2011, when we had a seven-hour outage, and when Michael and I were on the phone continually talking to both power generators and to pipelines to make sure we were getting gas. Flowing to the right place at the right time. So I think it’s a lot better. I’m sure it could use some improvement, but there is clearly a recognition that those two have to work together.
Joshua Rhodes: Yeah. No, absolutely. So getting more into like the electricity side is a lot of what we talk about on this podcast. A lot of the conversations we’ll have later about transmission and all these other types of things are kind of being driven by large increase in electricity demand that is coming down the pike. And while data centers kind of take up most of the airspace these days, we were talking about load growth in Texas well before we taught the internet how to talk and my students to cheat on their homework. But essentially You’ve mentioned like electrication of the oil and gas out in the Permian and Delaware basins. Can you talk about that coupling there? Like I think one of the issues right now is we’re actually having the siting issues around those seven sixty-five lines right now, but and they’re coming at a time when data centers are all the rage. But these lines were put in place well before that. Isn’t that right?
Barry Smitherman: Well, the original beginning of these lines was House Bill five six six, which was passed in two thousand and twenty three session, I believe. Yeah. Because the oil and gas industry had been demanding more power out in the Permian Basin for a long time. And they were having some problems getting power from Dallas or from the I-35 corridor into the Permian Basin. And so The legislature directed ERCOT and the PUC to sort of like we did back in the CREZ days, come up with a plan to provide more electricity to the Midland area, the Permian and the Delaware, solve any kind of local congestion problems that you had out there. And so ERCOT took about six months to come up with the Permian Basin Reliability Plan. And that plan has three important 765 kV from West Texas to the I-35 corridor. That was all premised on the load growth out in the Permian and Delaware basins, which was estimated between twelve and twenty-four additional gigawatts by twenty thirty-eight. Right. Then on top of that, we’ll layer in the data center growth, the hyperscalers, crypto. And suddenly ERCOT is looking at a load profile over the next five or six years that goes from eighty-five gigawatts of demand, which is our peak now, to I don’t know, you picked the number, 120, 130, 150. I read the other day 400 gigawatts of projected demand. So it is on top of what we already were estimating. To happen in the oil and gas patch.
Joshua Rhodes: Yeah, I think the latest numbers, the highest numbers that I’ve seen are about four hundred and forty five gigawatts of large loads. Personally, I was going for five hundred because you know, why not? We’ve had folks on the podcast call it infinite. We’ve had folks on the podcast push back against it being infinite because infinite in the sense that we can’t five X the grid in five years, but there is a lot of that load growth coming. And so I think it’s an important distinction there in terms of the infrastructure that’s looking to be cited today versus what people are thinking about the electricity sector. ‘Cause I remember a couple of years ago I was doing a project I was doing a consulting project for someone we were looking at load growth and they were trying to get me to figure out how to discount the amount of data center load that was coming because the numbers were large and they were also asking me to do the same for the oil and gas load and I really said I think the oil and gas load is real. Like I mean, I think that’s real. There was that S P report that, like you said, was twelve plus gigawatts in an area that had eight hundred megawatts of load. I mean, it feels like to me that that load is really real. We’re talking about how do we discount the data center load, but that oil and gas load feels really real to me. Is that your take on it too?
Barry Smitherman: Yeah, I do think it’s real. And it’s amazing what has happened over the last decade in Texas and the oil and gas patch, particularly out in the Permian and the Delaware. You think about this, 20 years ago, Texas was producing less than a million barrels a day of crude. Yeah. I mean, being a railroad commissioner back then was probably a boring job because you were doing only a few permits and There wasn’t a lot of activity. Then with the shale revolution, suddenly we figured out how to crack the coat and get oil and gas out of this shale rock. So in the Permian, it has gone from a million barrels a day to almost six million barrels a day now. I mean, that’s an incredible growth over the last, I’ll call it decade. We talk a lot about oil, but natural gas growth has been yeah almost as much. It’s gone from fifteen MCF to thirty-four in the last year, just in Texas. Texas supplies over one third of all of the natural gas produced in America. Yeah. So the Permian and the Delaware, these are critical national security assets, they’re critical for the economy of the state of Texas. I don’t see that slowing down at all, particularly when we’ve seen the disruptions in the Middle East. Yeah. The ability to deliver reliable, confident, projected oil and gas out of the Permian in the Delaware is something that I don’t think is gonna slow down in the near future.
Joshua Rhodes: Yeah, that’s a good point. I mean, I guess like I flippantly say the comments sometimes like, you know, okay, we taught the internet how to talk and now we need electricity for everything. I mean, figuring out how to combine hydraulic fracturing with horizontal drilling, I mean, that’s almost as well, probably just as big in the natural gas sector in the whole sector, right? I mean, it’s just different bits, but it was, you know, this technology unlock that really allowed these sectors to grow. That’s really interesting.
Barry Smitherman: Absolutely. I think about it. We were planning to import natural gas. We were building natural gas importing facilities along the Texas coast. Now we retrofitted and converted those to exporting. And from Brownsville to New Orleans is probably the most prolific area of natural gas export in North America. So we’re putting a natural gas on the ship. We’re selling it to our allies. We’re selling it at prices that are higher than what you pay domestically. It’s a great story for America.
Joshua Rhodes: No, absolutely. Absolutely. So beyond the oil and gas load, there’s this other driver of electricity out there, mainly the data centers, the four hundred gigawatts we were talking about. So I mean ERCOT is planning around like a level of future demand that would have sounded impossible a few years ago, maybe still sounds impossible today. But from your view, how would you assess what is real versus what is speculative in the electricity sector right now?
Barry Smitherman: You know, that’s a great question. There’s a whole building over at ERCOT of people that are trying to figure out that exact answer. Yeah. I don’t have much input on it, but let’s say that we’re gonna haircut it dramatically. We’re gonna haircut it fifty percent, seventy percent. It’s still over a hundred gigawatts of demand by twenty thirty. So that’s four years from now. Yeah. And if you look at ERCOT’s CDR their capacity demand reserves projection, the latest one. It’s got the reserve margin going negative in 29 and 30. So that’s an issue that’s got to be addressed. And I think that that is trying to be addressed, but we could make some really, really conservative assumptions about how much load we’re going to have. And currently We’re not gonna meet that load.
Joshua Rhodes: No, for sure. I mean the numbers are what the numbers are. Like I’ve, I think I’ve said I haven’t believed them for two years. But I think this Batch Zero process, I think, is trying to inject some discipline in that, figure out what that might look like. We’ll see if Batch One or Batch Two become are similar to Batch Zero. And we’ve done a couple episodes on the Batch Zero process. Even before kind of that, I mean, you know, Texas is putting like real money behind, you know, new dispatchable generation through things like the Texas Energy Fund, which provides low income loans for new or expanded, mostly natural gas, I think is what is taking up that offer. Yeah, dispatchable. I just open to, you know, dispatchable generation. I guess from your point of view and the way you’ve seen like ERCOT’s market design alter and change from from both of those chairs, was that a necessary correction for the energy only market or was it a sign of a failure? Or how did you view the Texas energy fund?
Barry Smitherman: Dispatchable. You know, it’s a great question and a very complicated question. Right. And I’ll try to answer it quickly. But free markets require a couple of things. One, a clear price signal, two, low barriers to entry, and three, minimal government intervention. And that’s the way we began the market back in 2002, when we had a thousand dollar price cap, and that price cap eventually went up to nine thousand. So the theory of the model was During periods of scarcity, we have temporary high prices. Those high prices inform generators to build new generation in order to take advantage of those high prices. That was the idea. And I think it worked pretty well. I mean, there were periods of time when we had projected negative reserve margins, but the industry always responded to those projections by building new generation. But a couple of things happened. One, Because of environmental regulations put forward by certain administrations, you couldn’t build a new coal plant. So that was off the table. Then after Fukushima, it became increasingly difficult and expensive to build a new nuclear plant. So that was off the table. So suddenly we’re left with natural gas. And as natural gas prices were rising in the 2007, 2008 time frame, I think everyone, including Texas, was looking for a way to diversify the portfolio. Yeah. So we embarked upon capturing the wind out in West Texas. At about the same time, the federal government decided that they would provide subsidies for wind and solar for renewables. So we got a whole bunch of that. You know, right now we have forty gigawatts of installed wind, we have forty gigawatts of installed solar. It’s more than any other state. Right. And we have twenty gigawatts of battery. So that’s a hundred gigawatts ostensibly of zero carbon. Resource. So all of that was proceeding until Winter Storm Uri. And I think as a result of that, the fact that a lot of people died who didn’t have power during certain periods of time. Billions of dollars of property damage, billions of dollars in lost revenues. The legislative leadership decided that they needed to do something. And part of that is because we were not Getting the price formation that we needed in the ERCOT wholesale market to incent someone to build another billion-dollar natural gas plant. So they came up with the Texas Energy Fund. This was really before the data center craze hit us. And instead of a hundred gigs of demand in a couple of years, we’re looking at, you know, whatever, 150, 200, 400. And The need to get speed to power, I think, underscores the value of the energy fund. Now, Senator former Senator Phil Gramm always said if you tax something, you get less of it. If you subsidize it, you get more of it. So we’re gonna get more thermal generation. I think they’ve committed something like four billion dollars already for projects, six or seven projects mainly being done by the incumbents, NRG, Vistra, Calpine. Constellation. So they’re building the units. So probably get the rest of it committed in the not too distant future. Even if all seven and a half billion gets built, that’s not enough to meet the future demand that’s being projected. So generally I think in our state we try to avoid government intervention and putting our thumb on the scale for certain types of technology. But I think when our leaders looked at the future and the past, in particular the consequences of URI, they said, okay, we’re gonna violate that principle a little bit here.
Joshua Rhodes: I mean, hindsight’s always 2020, right? You’re doing the best you can with the information that you got at the time. I mean, maybe if we had seen these demand numbers and, you know, forwards and electricity prices, we would have thought twice about that. Maybe if we’d have seen hydraulic fracturing, you know, coming around, we would have thought twice about, say, the CRES lines or whatever they were. But you can tell me if you agree with this. I mean, I think one of the things that Texas has done pretty well is recognizing that. You know, increasing that sandbox for everybody to work and to play in does well. The electricity sandbox. And so whether that’s the CREZ lines, which, yeah, we’re going out to get the wind to diversify the electricity space, but ended up providing electricity out to oil and gas. And then, you know, now these like Permian reliability projects, which ostensibly to electrify provide more electricity for oil and gas, but I look at the maps out there and I see the best solar regions we’ve got kind of at the end of these lines and some land that You know, otherwise is maybe five dollars an acre scrubbage fee or something like that, you know, all of a sudden can go to a couple hundred bucks per acre for solar leases. I mean, I think in general these tranches of transmission lines end up doing well for Texas, even if the conditions change, as they do in the future. Yeah, I don’t know. Do you have any thoughts on that?
Barry Smitherman: Well, I do think that building transmission is a no regrets policy. Yeah. I think you’ll never feel bad about building the grid out more. I mean, that’s the approach that we took with CREZ. Yeah. That this would be utilized by some resource, whether it was wind or solar or the oil and gas industry. We needed to move power from the west to the east and we needed to move it in such a way that it didn’t get stuck in the Dallas Fort Worth area. Which was the path that it would take in the past. So building these seven sixty-five kV lines is the right decision for a variety of reasons. One, ERCOT and the PUC cannot compel anyone to build new generation. That’s not our model. Right. So if that’s not your model, you have to move the existing generation around more efficiently to get it from where it’s produced to where it’s consumed. Now, that’s not to say we shouldn’t put these lines in the right place. I’m involved in some of those cases on behalf of some landowners, full disclosure. I just want to make sure that when we site the lines and we’re following the statute and the PUC’s rules. And secondly, it doesn’t mean we can’t do them as inexpensively as possible. But they should be built. Yeah, we are the leader in North America in building transmission infrastructure, smart meters. All the tools that we can deploy to bring out the most power that we can from our generation fleet.
Joshua Rhodes: No, absolutely. Yeah, I guess full disclosure I have to say I’ve been involved in some of those siting
Barry Smitherman: That’s right. I think you and I were involved in one docket at the same time.
Joshua Rhodes: I think so. I think w you us and about five thousand others. That’s a pretty big docket. All right. So that brings us to transmission. So our audience is pretty technical and pretty savvy, but maybe let’s just start explain and explain transmission maybe for a non technical audience. Like when the ERCOT or PUC determines a major line is needed, what happens today? Who gets to build it? Who takes the risk? How do the utilities earn a return on this investment?
Barry Smitherman: Yeah. So in a normal cadence, the utilities would go to ERCOT and they would say, We need to build a line from this point to this point. And here’s why. It’s needed for reliability or it’s needed for economics. And then ERCOT has something called a regional planning committee, and they do all their magic, they work through it, and then they recommend it to the board and the board approves it and it goes to the PUC. Okay. And Assuming the PUC agrees that the need is there, you have to establish the need and the fact that the current system is inadequate, then they award that project to the incumbent. Generally, that is the utility like CenterPoint or Oncor that owns the substation, okay. From which the line will either leave or arrive. And so they go out and build it, and it’s all cost plus. The mathematics of utility rate regulation is that. A utility gets back from ratepayers all of their reasonable expenses plus a return on their invested capital. So when you add those two numbers together, that creates what’s called a revenue requirement, which is a fancy way of saying this is how much money I can extract from my customers in a given year. All right.
Joshua Rhodes: Okay. So you wrote an article called It’s Time for Texas to Get Competitive on Transmission Development, where you argue Texas has competitive generation and retail markets, but not competitive transmission. So what would competitive transmission actually look like in the state of Texas?
Barry Smitherman: Yeah. So, you know, I think everyone would conclude that retail competition has been beneficial for the consumer. I mean, you can go to any number of websites and you can pick your term, you can pick your price, you can decide if you want a hundred percent renewable, you don’t care about it. Tell me exactly what you want. And there are probably a hundred different providers who will give you that product. And I think generally wholesale competition has been successful as well. The entire burden, the entire risk is placed on the generator to make money or not. There’s no guaranteed return. But this part in the middle, the transmission and distribution is still a monopoly. Yep. It is still owned by one company that gets all of their money from ratepayers, regardless of whether they come in on budget or on time. So we’ve actually done this before. During the CRES process, we needed some additional transmission companies to build out parts of CREZ. So we selected four non incumbents to build parts of this. And they did a great job. These were companies that had built transmission in other parts of America and done it well, but had not done it in ERCOT. So those four were given big pieces of the pie. And each of them at the end either came in on budget or under budget. So that’s a great example of how we’ve done it previously. Now in other markets, PJM, MISO, SPT, California, they have been bidding out projects for a long time under FERC Order 1000. Okay. And there’s a group called Electric Transmission Competition Coalition, big phrase, ETCC. And they are advocating that we do more competitive bidding of transmission with Cost caps, which is a great idea, and timeline caps. So if you go over time or over budget, the developer eats that, not the rate pair. And I think this is what we need to do here in Texas. We love competition in Texas, but back in 2019, the utilities passed a law called Senate Bill 1938, which said that unless you are a Texas utility already. Essentially, you can’t build anything here. That was challenged in court. It went to the Fifth Circuit. And I love this. The Fifth Circuit slapped it down and said it was a violation of the dormant commerce clause and said, imagine if Texas said in order to drill a new oil well, you had to already own an oil well. That would be considered heresy in Texas, the free market state. And to them, this restriction was along the same lines. So that got thrown out. Now you cannot restrict transmission projects from Texas to another state by only giving them to the incumbent. But the opinion did not address the intrastate part of this. In other words, can you still only give a project in ERCOT to an ERCOT utility? So we think that’s bad policy. We think that consumers would benefit from competition, particularly given how much money we’re gonna spend, Josh. I mean, we’re talking about spending thirty three billion dollars to build out the entire seven sixty five kV backbone. I think it’s probably gonna be forty or fifty billion when it’s all said and done. That’s real money that ratepayers are gonna have to pay for. So let’s introduce some competition.
Joshua Rhodes: So in that context, are you envisioning like open solicitations for all large projects, only certain voltage classes, backbones or anything over a dollar threshold? How does that work out directly in your mind?
Barry Smitherman: Yeah. So I think if we take distribution off the table, let the local utility continue to do distribution. I’m just talking about the T part of this. Yeah. And you could say that it’s over a certain voltage, so higher than two thirty, for example. So that’d be three forty five and seven sixty five kV voltage. You could say it has to be over a certain distance, so you know, fifty miles, a hundred miles, something like that. Okay. I think it’s easy to put parameters around it. Mm-hmm. And of course these have to be qualified. Companies to build this. But you think about the utilities that don’t operate in ERCOT. You have utilities like NextEra, which is the biggest utility in America, out of Florida, Duke, Constellation, Exelon, Southern Company in Atlanta. I mean, they’re all over America, but they’re not operating in ERCOT. And for the most part, they have more capital than our local ERCOT utilities do. So why don’t we give them an opportunity to bid on these projects. And by the way, if the incumbents put in the best bid, they get to build the project. Yeah.
Joshua Rhodes: What does the handoff of that look like? I mean, once projects are built, they have to be operated and maintained and all of that. And so is the competition part really just for the building part? So say if a non incumbent comes in and builds a line in Oncor territory, it goes from one Oncor substation to another Oncor substation. Like what happens after that line gets built in this paradigm?
Barry Smitherman: Yeah, again, you know, we suss this all out through the CREZ process. So for example, you know, there was a company called Cross Texas Transmission which got some lines up in the panhandle. Okay. They’re responsible for maintaining that. Every year, as that project depreciates, then the rate base goes down. So over time, it basically gets to the point where unless they add to it, they’re not making a return on it anymore. I mean, they would be free to contract with any number of service providers to do maintenance, to inspect the lines, to do repairs. I mean, a lot of the current utilities do that as well. So I don’t think it’s an issue. Okay. Really what we’re focused on initially is the build out of the lines and the poles from the beginning. That’s where the big capital cost is. Gotcha.
Joshua Rhodes: Okay, that makes sense. See, you’ve mentioned other grids, you know, advocates for competitive transmission point to PJM and MISO as evidence that it can work and Brattle’s estimated that, you know, competitive transmission savings in the twenty to thirty percent range. I guess your opponents will argue that you’re all using the same equipment vendors and solicitations might add delay, litigation, routing risk, and maybe unrealistic bids. Like as Texas is looking to consider if we should do competition, it looks like there’s a bunch of competing information in that space. Like what’s your pitch to Texas lawmakers to overturn the rover and let it happen?
Barry Smitherman: You know, think it’s really simple. Competition’s good for the consumer. I mean, we compete in purchasing and producing all kinds of goods and services. I mean, you go to H-E-B and you see a hundred different varieties of bread. So the consumer gets an opportunity to purchase that. And I think that those same principles can apply here. We’ve always been a competitive state. We’ve always loved competition, whether it’s in sports, in politics, in business. So why should this be any different? It’s the last remaining monopoly. And I think we can point to a lot of different studies. You mentioned one that was done by R Street recently, think tank, sort of pro competition think tank. They basically say that in California, SPP, and in MISO, the competitive projects come in faster than the incumbent projects. And the cost is either lower or the same. PJM was the only place that had some issues and I think you can explain those away. So I think we can point to our experience in CREZ, where we have four new entrants that delivered on time and on budget or under budget, and experiences in other markets and just the fact that who’s afraid of competition? I mean, why should the incumbents be afraid? They can compete and if they can win the project, they get to build it. Got it.
Joshua Rhodes: Yeah, you mentioned a couple of different folks coming in for CREZ. Is that happening in the Permian Reliability Project or these step lines? Or is there It’s not it’s not? It’s
Barry Smitherman: And those have been awarded to Oncor, AEP, LCRA, and San Antonio CPS. Okay. So I think that ship has sailed. Okay. But there is a second component of the Permian Basin plan that’s called the Eastern Backbone. I don’t know if you’ve seen that map, but it basically would be a seven sixty-five kV map that would go from Fort Worth to East Texas to Houston to South Texas, back to San Antonio, and back to Fort Worth. And when I mentioned thirty three billion before, that project is twenty billion of the thirty three and probably a lot higher by the time you build it without straight lines on a map.
Joshua Rhodes: Yeah, no, I think that’s one of the things you learn. Well, I th one of the things you already knew and you learn going through this process is that straight line on a map actually has to turn into a lot of straight lines and they go in a lot of different directions. Okay, so say we did this either for the eastern line or just for new transmission beyond this, if this ship has sailed. What performance metrics would you want to see five years later? What would you want to see that shows that competition’s working?
Barry Smitherman: Well, certainly cost caps and timeline yeah restrictions are important. So cost cap would be the first one. You put in a bid and if you go over that, your shareholders eat the cost of the overage, not ratepayers. So that’s an important one. Timelines, if you say you can get this project done in four years and it goes to five years, then you’re gonna incur some penalties and you have to put that into the contract as well. So I think there are ways that we can do this, but if we’re principally trying to hold down the capital cost, which again make their way into rate base, which makes its way into every consumer electricity bill in ERCOT, then this original amount ought to be the thing that we should focus on.
Joshua Rhodes: Yeah, that makes sense. And I’m gonna go a little bit off script here, so feel free to not answer this if you don’t want. I know a lot of the talk around like the current transmission infrastructure needs that are going to serve kind of these new large loads, everything is being thrown against the wall right now to figure out what’s gonna stick. And so everything from getting these new large loads to pay for the upgrades, either the deep network upgrades or whatever that are needed, that starts to feel kind of like a invest and connect approach versus our connect and manage approach. But some of that is also trying to figure out if we have this large new customer class coming in that needs a lot of infrastructure, like how do we not put those costs on the existing industrials in the state of Texas or the residential consumer in the state of Texas? And so is there also a parallel here on like instead of postage stamp uplifting this to load, is there a parallel here with competitive transmission and getting certain industries to pay for it? Maybe they’re willing to pay for it, wanting to pay for it to get it built faster.
Barry Smitherman: Yeah, I think that is something to consider. And I think the legislature of this last session thought about this. Okay. And I think the governor’s recent proclamation about data centers bringing their own power and probably their own interconnectivity is an element of that. Yeah. So you know, one of the things that we have done in the past and not a lot of recently is build your own line. So let’s say that you are a data center. And you don’t wanna wait until the Permian Basin lines are built and energized. The eastern backbone is built and energized. You wanna build a twenty five mile three forty five kV line to a power plant or to the nearest interconnection point that can deliver your power. But we ought to allow that to happen. And that probably means that the incumbent doesn’t build it because they got so much else on their plate right now. So you contract with some other qualified party to come in and build it in accordance with ERCOT specs, there shouldn’t be an impediment to that.
Joshua Rhodes: Yeah, because I mean I’m thinking, you know, a lot of these data centers are looking to try to build behind the meter generation. You know, speed to power is like the name of the game. I mean, we’re measuring megawatts not served in the tens of millions of dollars per year and the gigawatts in the billions of dollars per year. And so it feels like there’s a massive gravity pull of like, you know, capital that maybe can’t get spent just because of the regulation that we kind of have around the system. Cause, you know. Maybe a good place to put a data center is not necessarily where you could put a power plant. Maybe it’s not next to a gas pipeline or the appropriate topology. Yeah, I mean I guess like well
Barry Smitherman: Remember this, yeah. Let me remind you that probably now twenty years ago, NextEra built a private transmission line from their wind farms in West Texas to interconnect with the grid close to San Antonio. Okay. They got tired of waiting for the incumbents or for ERCOT to put them a line on the map and they built their own. That was a Incredibly complicated project. They had to acquire the right of way through private negotiations. They had to design the line. They had to clear the right-of-way. They had to pay the landowners. They had to build it. I don’t know if you ever saw it. It was built with fairly low profile poles. The right of way width was more narrow than the normal public project. Okay. And they got it done. And so they could put their wind on the grid and get it injected into a point where they could actually sell it on the market. I think we ought to let that happen. I think Oxy did that in the past when I was on the PUC. They needed to build a private line from a power generation resource to one of their plants and we signed off on that. So that ought to be an option and probably one that we’re going to see more of because no hyperscaler is going to wait four years to get power delivered.
Joshua Rhodes: That’s interesting. Is that possible to still do, or was that taken away by the twenty nineteen Rofer Law?
Barry Smitherman: I think it’s possible to still do because that line, that next era line, was not put into rates. It was all privately financed and privately procured. And so for all intents and purposes, it took the power generation spot and moved it right next to the load.
Joshua Rhodes: Okay, that’s interesting. I don’t know that I’d really appreciated the ability to do like a private line. Again, you can correct me if I’m misunderstanding this, is like so generators typically build in ERCOT what we call the driveway, like their gen-tie, but they don’t generally directly build the highway part. They don’t do deep network upgrades like they do in others. We allocate that to load. And it’s my understanding that even if a generator wanted to, say they wanted to make some deep network upgrades. Because it would reduce curtailment or whatever, that they actually can’t do that. Am I understanding that right?
Barry Smitherman: Say I don’t know the answer to that. Okay. All I can think about is we actually referred to that NextEra project as a gen-tie. Okay. It just happened to be a two hundred mile gen-tie. And so I don’t see any reason why that couldn’t happen again. Yeah. Again, it’s all privately financed. The right of way is privately procured. Okay. I’m sure they had to work with ERCOT on the interconnection to make sure that that was sound. Right. But if you could figure that part out, if this is where I want to terminate the power and inject it into the grid, I ought to be able to do that. But think about it, if you’re doing power to a data center that’s behind the meter, then you’re not injecting any power into the grid. You’re basically just taking it from the generation node and delivering it to the consuming load. Right.
Joshua Rhodes: Okay. Do you know of any projects like that that are happening? I mean, maybe they’re just not in the public discourse or not in any docket because they’re not gonna be put into rate base. Are you familiar with any?
Barry Smitherman: I think there are discussions that are happening right now. Okay. And some of it has to do with co ops and munis as well. Yeah. Because you know, we have those scattered throughout ERCOT. Okay. So if you had a load that was located in a Muni, a municipal utility, then you’re gonna have to work with them probably to figure out how to get that done. But if it’s genuinely behind the meter, to me, it doesn’t matter if the load is right next to the generation source or on the other side of the state, I ought to be able to build a pipe, a transmission line to get my electrons from where they’re generated to where they’re consumed.
Joshua Rhodes: Yeah, I’m wondering if we’ll be seeing more of that. I mean, right now it feels like, you know, there’s so much demand for electricity. It’s kind of like we’re squeezing the balloon, right? And it pops out in other areas. And so that’s very well be like a spot where that’s it’s interesting. I feel like I haven’t heard that much more of it, but maybe some of it’s also coming from, you know, ERCOT has these well, not new, but they’re, you know, kind of borrowed constructs for large loads going into the Batch Zero process, like the WL pun, which is based off of a private use network. Which, you know, has behind the meter generation, but can also interact with the grid a little bit there. I wonder if we’ll see kind of more of that as we go forward in terms of some of these more things like private lines. I guess that would be a place for non incumbents to really play in this market and to really understand Texas, I guess.
Barry Smitherman: Yeah, it would be. I mean, I think we’re gonna see a lot of different models try to be deployed as yeah, these data centers come in and say, Okay, I want power in twelve months and the lines are not gonna be built in twelve months. So yeah. Let’s say for example, they either build their own power plant in an area where they can get the permits to build it, but that’s not necessarily where the data center is gonna be located. So they gotta figure out how to get the power to the data center, or Conceivably, and this has been an issue in some of the other organized markets. You take a large generation resource like Three Mile Island in Pennsylvania, you re energize that as a nuclear plant, you put an Amazon facility next to it, and that power does not go on the grid. It goes directly to the data center and that should be fine, right? It wasn’t producing before. Now it’s producing. And it is taking a load that normally would be on the grid and powering it. Now, I think there probably will be some provisions that say in an emergency, you’re gonna have to provide backup power in three mile and you’re gonna have to put some of that power on the grid. And so we gotta figure that part out. But I think the mechanics of it can be sussed out.
Joshua Rhodes: Yeah, I mean, I think even one of the benefits of having kind of that behind the meter generation that’s still electrically connected to the grid is the grid basically gets the inertia for free. And that can help with high levels of inverter based resources or other other types of systems. So I mean I think it’s a good trade off. So you mentioned that the courts have pushed back against Texas right of first refusal law to the extent of but not necessarily within interestate, so within ERCOT. What would be a realistic path to get it there? Is that litigation, is that PUC rulemaking? Does it have to go to the legislature? Like what’s the fix there?
Barry Smitherman: Yeah, well I think we have to eliminate Senate Bill nineteen thirty eight. Okay. Totally. So it does not apply to the ERCOT only region. And just take it off the books. And that will be one of our legislative agendas in our group, Texans for Affordable Transmission, to try to do that. So that then the PUC has the flexibility, then begin to award projects to non incumbents.
Joshua Rhodes: So if that law were gone, then you think the PUC would have the authority to do that?
Barry Smitherman: I do I don’t think there would be anything restricting them at that point. I think they could take projects, I mean probably do some pilot projects. Let’s take one or two, maybe one or two lines of the eastern backbone. And let’s say, you know, Houston to Lufkin. Yep. And we can divide it into two pieces or three pieces and let’s bid it out. Let’s see who comes in with the lowest price and let’s run the experiment. Okay.
Joshua Rhodes: All right, so last question. Texas deregulated much of its electricity market in nineteen ninety nine and that decision has, you know, shapes the state for a generation and will continue to. If Texas gets transmission wrong over the next five years, what will people in twenty thirty five wish we had done differently?
Barry Smitherman: Well, I don’t think we’re gonna get it wrong. Okay. I think that we are gonna build a lot of transmission, not only the Permian Basin pieces, but also I think the eastern backbone will get built. I have seen maps where we have a backbone that goes up into the panhandle. Okay. And one that goes down into South Texas. So I think the momentum is to build a big seven sixty five K V backbone. Yeah, we have to do it the right way so that landowners don’t March on the Capitol with pitchforks, you know, in protest to these projects coming through their two hundred year old family farm. But let’s assume we do it the right way. Yeah. The question is, can we do it cheaper? Yeah. Can we do it at a cost of seventy-five percent of thirty three billion? And that would be real savings to consumers. It might also introduce some more creative ideas about how we get more power out of existing infrastructure. What do we do at substations? There’s some technologies that we could be doing a little bit differently. So I think the question is, what’s it going to cost? Not are we going to build it? And it’s a no regret policy because it is impossible to predict what kind of generation resource we’re going to have on the grid in ten years. Can we get small modular nuclear? Maybe. As you said, I’m also chairman of the Texas Geothermal Energy Alliance. We’re seeing some great advances in accessing the heat of the earth to turn it into steam to make electricity. In East Texas in particular. So in ten years, could that be a meaningful part of the grid? Battery technology. Could we have batteries that last longer than four or five hours? Let’s say four or five days. That’s a game changer right there. Yeah. So we can’t predict that, nor can we predict what AI is gonna do for behind the meter applications or empowering consumers to be smarter consumers of electricity. None of that we can predict, but we can build out the backbone.
Joshua Rhodes: Yeah, no, I mean I think that’s smart. I and sorry I lied about that being the last question. One more. If you don’t wanna comment on it, that’s fine. I you mentioned, you know, the landowners coming at with pitchforks and all that kind of thing. We are building or looking to build this backbone of transmission, the seven sixty five transmission, that I think would benefit the entire not just for the electricity sector, but it makes manufacturing of goods cheaper. It just makes using more electricity and cheaper. In the long run. The question is, how do you disentangle that right now? It seems like a lot of folks are upset about this. And I’m curious if you have a feel for how much of it is a pushback against AI, because like data centers right now don’t have that many political friends and they’re not polling very high. We’re not necessarily building these lines for data centers, but it’s happening at the same time. And so I don’t know, how do you disentangle that?
Barry Smitherman: Yeah, I don’t think it’s an AI perspective. I think it’s like the old joke about which one contributes more to your breakfast, the chicken or the pig. The pig makes the absolute sacrifice the chicken gives one or two eggs every day, day after day. So we’re asking landowners to sacrifice their property for the benefit of the rest of Texas. And many of them are going to be willing to do so.
Joshua Rhodes: Okay.
Barry Smitherman: What we have to do though is we got to follow the rules, follow the statute, which says let’s take into consideration the values of the community. Let’s not fragment rural properties. Let’s be sensitive to the environment. Let’s try to parallel existing right-of-ways wherever we can. Yep. Because if you do that Then that legitimizes the process. And I, as a landowner, can say, you know, I’m not particularly happy about this, but I know the PUC followed the law, followed the rules, and so I can live with it. So that’s the important part of it. I mean, we were able to do this with CREZ, Josh, and at the end of the day, we had landowners that were not thrilled, but I didn’t receive one letter. From any landowner over the three thousand miles of CREZ lines that said, I’m really mad at you because you didn’t follow the law. Okay.
Joshua Rhodes: I think that’s a great spot to end. Barry Smitherman, thank you for coming to the Energy Capital Podcast.
Barry Smitherman: Yeah. It’s been fun. Thanks for having me. Thanks.
Joshua Rhodes: Thanks for listening to the Energy Capital Podcast. If today’s conversation helped you make better sense of how the energy system actually works, share the episode with a colleague and hit follow on your podcast app. You can find us on Apple Podcasts, Spotify, and all the usual platforms. For deeper analysis and context each week, subscribe to the Texas Energy and Power at texasenergyandpower.com. That’s where you’ll find every episode, every article, and our latest updates. We’re also on LinkedIn, X, and YouTube. Where we share clips, insights, and ongoing commentary on energy policy, markets, and the grid. Before we go, a quick note. The views expressed on this podcast are my own and do not represent the official positions of the University of Texas, IdeaSmiths, Austin Energy, or Columbia University. A big thanks to Nate Peavey, our producer. I’m Joshua Rhodes. Thanks for listening, and we’ll see you next time.
