Why Does TXU Want Texas to Raise the Price Cap on the Electricity it Buys?
Here's a question for all you MBAs in Unfair Park Land: Why would an independent retailer operating in a free, deregulated market want the state to take steps to suddenly raise the retailer's costs?
We know we keep running this image with our posts about the electricity market, but we can't think of a more appropriate one.
For example, say you own a mom-and-pop store that sells tomatoes. The government suddenly wants to increase how much you pay for your tomatoes. You won't see any more profit as you pass the higher price on to your annoyed customers. Do you go ahead and tell the state, "Hey, great idea"?
We ask because that seems to be what North Texas electricity retailer TXU did as the Texas Public Utility Commission contemplates a rule change that, as of August 1, would sharply increase the top price electric generators can charge retailers during times of peak demand -- during the dog days of summer, chiefly.
As things stand, the most wholesale electricity generators can charge when power is scarce is $3,000 per megawatt hour. The proposed new rules would boost that to $4,500 this summer, with further increases in years ahead. The ostensible goal is to entice the wholesalers into building more power plants, reducing stress on the state's grid.
But a handful of state legislators, some retail electric companies and others have told the PUC, "Whoa, slow down, hoss." No one is predicting any big shortages in power right now, so why the rush? Let's find out what this sudden increase will do to consumers (hint: think sand in the Vaseline). Besides, they say, what guarantee do we have that generators simply won't pocket any extra revenue -- or perhaps use it to pay down some enormous loads of debt -- instead of building new power plants?
The Texas Energy Association for Marketers, an association of retail electric providers -- the moms and pops -- sent comments to the PUC urging it not to jump rates this summer. Many providers have fixed-rate contracts with their customers, TEAM says, and any unplanned price spikes might force the companies to readjust those contracts, giving customers what electricity experts call "a case of the roaring red-ass."
But TXU told the PUC that the company is just fine with raising the price cap in August. It doesn't anticipate the need to adjust any fixed-rate contracts with its customers, although it would feel really bad about it if that, you know, just had to happen. And TXU believes that ensuring adequate supply is vital.
Coincidentally, Luminant, the big North Texas wholesale power generator, is also in favor of raising the price cap. Coincidentally, Luminant's comments on the proposed changes read similar to TXU's. Coincidentally, both companies are subsidiaries of Energy Future Holdings, the behemoth power company that -- coincidentally, we're sure -- is leveraged up to its gills.
Coincidentally is the correct word, right MBA people? You know, to describe a situation in which end prices are influenced by ownership relationships and agreements among producers and retailers? That's a free market, right?
A free market was what Texans were promised when the state "deregulated" electricity more than a decade ago -- a system of independent generators, retailers and delivery companies whose competing drive for customers would create efficient, affordable, reliable power for consumers. Surely, in that sort of setup, TXU's position on the PUC's proposal wouldn't be influenced by the huge amount of debt be carried by its power-generating owner, EFH. Retailers of other products, like Walmart, generally try to beat down wholesale prices and avoid giving their customers raging red asses because that's not good for business.
I tried to put that question to an EFH spokesman, but he was not keen to talk with the Observer. He did note that NRG Energy Inc., a New Jersey-based power company that operates in Texas, also owns REPs serving consumers here, Reliant and Green Mountain. That's true, and NRG filed comments on behalf of itself and its subsidiaries in support of August price-cap hike. He also pointed out a recent study predicted the increase likely would have a small effect on consumer prices.
But that begs the questions. Exactly what sort of free market are we running here, and what's the line between coincidence and collusion?