To Keep the Lights On, Texas Utility Regulators May Triple the Electricity Price Cap

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The Texas Public Utility Commission is finally spitballing dollar figures for just how high they're willing to let wholesale electricity prices spiral when weather extremes send us to our thermostats. For the moment, we're sitting at $3,000 per megawatt-hour.

To keep the lights from going out (ERCOT predicts demand will outstrip supply by 2013), they're talking about tripling it. As we discussed at length in last week's cover story, Texas is facing a wee (read: terrifying) electricity shortfall, primarily because wholesale prices -- tied to the price of natural gas -- are bargain-basement low right now. In Texas, new power plants are financed by power sales and the promise of more power sales, not ratepayer subsidies. With natural gas prices nearing $2.50 per million British Thermal Units, financiers are bearish on generators in the deregulated market. Nobody but the public utilities is building anything.

The theory is -- and it really is nothing but a theory -- that if we raise the price cap on electricity, they'll make even more money and decide to build power plants, and then we won't be totally screwed anymore. Now, nobody can guarantee that generators won't simply take the money and pay the mortgage and shareholders. In fact, a PUC spokesman confirmed that nobody is even thinking about getting something in writing with generators. But, hey, that's the deregulated market. It's a crapshoot.

It left me wondering, though: If the PUC does decide to let wholesale electricity prices go buck wild, who's it going to suck for the most? The ratepayer? Sure, you have a contract, you tell yourself, but when we log record electricity demand like we did last August, all bets are off, except the one where I put money on the cost getting passed down to you.

And what about the generator? Remember February 2011, when Luminant said it lost $30 million during the biggest rolling blackouts in Texas history? If a generator's plant has the misfortune of crapping out or undergoing routine maintenance when prices spike, they have to make up for it by buying electricity on the spot market -- at $3,000 per megawatt-hour. What would Luminant's losses have looked like if the price cap was $9,000? Just do a little multiplication. (Last summer, NRG, the second-biggest power plant operator in Texas, had to adjust its expected earnings downward because a few of its gas-fired plants were offline for maintenance during the August price spikes.)

How about the retail providers? I seem to recall a few going bankrupt back in 2008 because of price spikes and an ERCOT collateral call.

So, cui freakin' bono? Not us.


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TexasElectricityRatings
TexasElectricityRatings

There's a lot of truth in this article, and naturally plenty of deregulated bashing, which seems to become so normal that it is bordering on cliche. Having a contract will always protect you some price spikes, but the big problem is all elec providers will raise rates to cover their risks over time. Also, I'm tired of the notion that people throw out that deregulated customers have the highest rates. It is a fact that the people who actually SHOP the market have access to the 3rd lowest rates available in the 50 states.

Now, that being said, what this article DOES get right is the fact that raising the cap isn't a guarantee of anything other than rates will go up. It certainly isn't a guarantee of new generation.

I'd also like to give the article props for being  the first place I've seen, other than my blog, to point out that raising the cap also raises the ante on the generators in a huge way. And that is supposed to encourage more generation? Not so fast. 

Anyone interested in reading more about this topic, including why I think this move is politically motivated, can check out my thoughts here:

http://texaselectricityratings... 

GusMitchem
GusMitchem

Sounds to me like Natural Gas is so cheap (Thank you fracking) and thus driving down the price of electricity that the ole coal boys cant keep up! Spinning the fracking kills puppies and kindergarteners isn't working too well so big Coal, little Coal and all things Coal are freaking out and pulling every political string they've got !

I love how most of the Unfairparkers are just so anti establishment they don't realize anti-establishment is really just pro some other unmentioned establishment

Paul
Paul

Brantley:

Thank you for your continuing reporting on this subject.

However, I believe that there is one area in the story for which there is a major misconception.  In your story, you stated: "In Texas, new power plants are financed by power sales and the promise of more power sales, not ratepayer subsidies."

Rate payers have never subsidized the electric power generation, transmission, distribution; and, sale of electric power.

This is a major misconception of what the regulated market was like.

The basic principle of the regulated market is that a single entity is given a monopoly over the manufacture, distribution and sale of a commodity item.  In exchange for the grant of this monopoly market, the rates that the monopoly entity may charge for the commodity is subject to review and acceptance by the sovereign( i.e. the state or federal regulatory agency.)

The grant of the monopoly for the utility is also based on the economic concept that duplication of capital investments is inherently wasteful.  This concept of preventing duplication of capital assets in a single geographic territory is still recognized under the current so called deregulated market.  Transmission and Delivery of electric power is still a regulated utility in Texas. 

We are able to obtain power from multiple generators, but we cannot choose which company will physically deliver that power to the point of use.

The push for the deregulation of the electric power industry began in the late 70's and early 80's, one of the difficulties was in obtaining capital for expansion.  At one point the inflation rate was in the teens with interest rates at 18%+ in order to have a real cost of money.  With utility ROR at 10% it was impossible to attract capital for expansions and replacements.

In the regulated environment, the ratepayer was paying for the items such as the peaking power plants that were used less than 1,000 hours per year (Note:  8,620 hours in one year); cost of obtaining and storing 72 hours of fuel oil at natural gas powered generating plants; among others.

It was claimed that electric power generation power costs would be reduced through deregulation.  In the past 12 years, not only has this claim not come true, it has been proven to be a false claim.

After the cap has been raised on price, the next step is that the smart meters will be used for time of day pricing.  That is, the retail power price will now track the 15 minute wholesale rate when the wholesale rate exceeds the contracted retail rates.

The experiment to deregulate electric power generation in Texas is the latest failure for what appears to be an unworkable concept.

Can a utility work in a free market environment?  Maybe, but I don't think so.  All one has to do is to look at the electric power industry before PURPA(1938) was passed.

Oak Cliff Townie
Oak Cliff Townie

 ERCOT = REGULATION

BTW Praise be to ODEN I have a Small House.

Anon
Anon

I wouldn't raise the cap unless it is contingent on permits to build new capacity and some sort of mechanism that locks the producers into actually building and operating the plants. construction of new capacity will resume when the steady state business is profitable again. they won't get the financing they'd need for construction of new supply based solely on an insanely high rate cap. hell, you could get rid of the rate cap altogether and it wouldn't induce anyone to build another plant. in any event, this won't change a thing about the supply/demand situation in the next couple years.

NotTheSuburbs
NotTheSuburbs

So the end result of de-regulation is that we end up with the most unreliable and most expensive electricity in the country?  Huh, hard to figure that would have happened.  What should we fix next?

MushMouth1
MushMouth1

So basically it's a protection racket. Raise the cap and nothing will happen to the grid.

Just look at Enron in California if you want to know why these racketeers want that  cap raised for "emergency" conditions.

Chris Danger
Chris Danger

This is what happens when you dereg kids...Thank your right-wing heroes for this move true believers..

Sa
Sa

Praise to Whoever that I have a small house in *Garland.*  All hail Garland Power & Light!

GusMitchem
GusMitchem

 The unreliable part is generally a very local issue thanks to your neighbors threats to sue over tree-cutting. If you know anything at all that's not really the grid 

Eeesh
Eeesh

What exactly happens? I bet on a theory on a crap shoot on something someone recalls?

NotTheSuburbs
NotTheSuburbs

The blackouts were caused because an economic system was put in place that allows electric providers to reap windfall profits if demand exceeds supply.  Their response was to reduce supply. 

Not sure what the tree-hugging liberals had to do with that.

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