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Use of Incendiary Language in Pro-Capacity Market Op-Ed by NRG Leaves Open Flank to Attack Retail Choice The use of incendiary language in a recent op-ed by NRG Energy in favor of a capacity market in Texas begs the question, that if we can't trust the market to assure resource adequacy, what else should we not "bet" on?
As previously reported, the op-ed in the Houston Chronicle, by John Ragan, president of NRG Energy's Gulf Coast Region, says that without a capacity market, Texas would be making a "bet on the Texas weather" in order to keep the lights on.
Matters previously detailed how the capacity market in reality allows capacity owners to play with house (ratepayer) money when making their bets, allowing them to reap profits without risk, but putting aside the policy question of whether capacity markets are appropriate, NRG's use of incendiary language in the op-ed is essentially a gift to opponents of retail choice and competition, one which can be exploited in other states seeking to implement the Texas retail model (in whole or part), or those examining retail choice for the first time.
Ragan says that Texas can't "bet" on the weather, but what this really means is that Texas can't bet on the market to assure resource adequacy, at least not without government-supported controls on demand (e.g. mandated reserve margin and mandated capacity purchases).
While Ragan essentially argues that this government intervention is OK because electricity is unique (with little storage capability at present time), and because businesses moving to Texas must have adequate power or they will relocate, these justifications can be expanded to several issues that ask ratepayers to "bet" that the market will produce the most efficient outcome -- namely default service, and retail pricing.
If we can't rely on market forces to result in reliable electric supply without government support, why should we then assume that these market forces produce just and reasonable retail rates? If government intervention is needed to assure an adequate reserve margin, why isn't government intervention desirable in creating a default service and/or Price to Beat (or even price caps), to assure businesses moving to Texas that they won't be subject to high and/or volatile rates -- after all, without government intervention, we're just "betting" that market forces will discipline retail pricing.
If we were opponents of retail choice in Pennsylvania, Ohio, or Arizona, this is language, from one of the largest retail suppliers in the U.S., that we'd love to see. You can be assured we'd be equating the elimination of default service with a "bet" that retail rates would be lower -- a mere throw of the dice, a vain hope that this whole retail choice experiment would work.
We'd highlight that the Ragan op-ed amounts to an admission that government intervention is needed to assure safe and adequate service, and say that this is not only true for reliability, but also for just and reasonable customer rates. We can't eliminate the "safety net" of default service and just "bet" that effective retail competition will discipline prices.
Indeed, if the concern is that the Texas electric model won't attract and retain businesses, why doesn't Texas just re-regulate. Texas is competing with its neighbors for economic development, and according to EIA average rate data for April 2013 (flawed as it may be), Arkansas and Oklahoma, with their regulated electric prices (and regulated reliability), have lower commercial and industrial rates than Texas. If job creation is so important to Texas, a driver as important as the cost of electricity to businesses' relocation decisions can't be left to "bets" that the retail market will produce low rates; the government must assure just and reasonable rates through retail rate regulation.
Of course, the reality is that most businesses want less, not more, regulation by the government, especially when it comes to obligations directly imposed on them such as a new capacity mandate (generation owners of course being one of the exceptions, who want to use the government, and not free markets, to prop up their prices by regulating into oblivion plants running on certain fuels, and by mandating that customers purchase fictitious products like capacity). It is, of course, patently absurd to think that Texas imposing rate caps on a private enterprise like retail electricity would create an attractive business climate, but it's equally absurd to think businesses are going to welcome new, government-imposed costs on them in the form of a capacity market (simply ask any industrial still clinging to life in the eastern RTOs about capacity payments).
In fact, the ability of the Texas miracle to attract businesses and produce jobs should, if anything, validate the current energy-only approach, which is well established and is the environment which has incubated the Texas miracle. Despite "fears" which are mainly propagated by capacity owners seeking a new revenue stream, Texas and its "unreliable" electric system continue to attract businesses and manufacturers. Why mess with it by introducing a new government mandate -- one that no business is asking for?
Notably, Ragan's op-ed is at odds with the plain language of NRG's vision for the end-state of the Pennsylvania retail market, in which NRG espoused that, These comments were specifically about default service, but they are equally as applicable to power generation and resource adequacy.
NRG, in its Pennsylvania comments, also envisioned a market with customer reaction to prices: "when customers see real-time, market-based prices they can respond to those changing prices and reduce their electric bill by shifting or curtailing their consumption."
If customers have a mandated capacity tag, that stays with them, unchanged, for an entire year regardless of their retail supplier, the benefits of reducing consumption in response to real-time pricing is severely diminished. We'd also note that this vision of customer "demand response" in response to real-time prices is at odds with capacity market supporters' claim that simply allowing demand response to grow organically in response to penal energy-only price caps is not a viable option for resource adequacy.
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July 3, 2013
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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
"[r]eliance on a well-structured competitive market model, in which end-use customers receive efficient price signals and do not assume long-term investment risks, and investors and market intermediaries actively manage such risks, will best serve customers." [emphasis added].
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