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Texas REPs: Administrative Pricing Imposing Costs on Us = Bad; Administrative Costs Imposed on Load = Good Texas retail electric providers have surprisingly (or not so surprisingly when the parties involved are considered) filed harsh comments in opposition to an Operating Reserves Demand Curve (ORDC) in ERCOT.
That, in and of itself, may not be surprising; Matters itself does not embrace the ORDC as the ideal market design (we prefer pricing to be set solely by actions of all market participants, which, we would note, does not happen in a capacity market).
What is surprising is the vitriol reserved by REPs for the ORDC proposals, when you consider that most of the REPs filing the comments have been essentially silent regarding the implementation of a capacity market (and we consider such silence to mean acquiescence), and one of the commenting REPs has been among the capacity market's biggest supporters.
Given that both solutions impose unhedgeable costs on REPs (forward capacity tags which follow migrating load in a capacity market and concerns over uplift in an ORDC), we'd be compelled to consider why the vitriol was hurled at one of the solutions, but the other was tacitly supported by REPs.
The answer, it seems, is clear. While under both scenarios Texas customers face higher costs for electricity, in only one of these solutions is the REP exposed to the new costs, and it's under an ORDC. Therefore, while a Texas capacity market is forecast to add billions of dollars annually to Texas customers' bills, because REPs would not pay such costs, they are content to let load fight the battle alone.
More specifically, under a capacity market, because the capacity cost is known in advance (depending, of course, on the specific forward period adopted by Texas, but we'll assume the PJM design is adopted), the REP can simply bake that cost into its rates, at least as far as the forward period. (Longer-term fixed contracts, such as the 5-year contracts currently offered to Texas residential customers and even certain 3-year contracts depending on their start date versus the capacity auction date, would be challenged in the market, and forced to include a substantial premium, and we think would essentially be eradicated)
Alternatively, even if the capacity cost were not known, the REP can simply structure its contract to include a pass-through of the capacity cost (though we believe such a product could not be defined as "fixed" under Texas rules, as the capacity "market" price, if you believe supporters, is the result of a market, not a change in law or regulation). Because of the use of customer-specific capacity tags, these costs are easily assignable for the REP.
In any event, Texas REPs will be able to bill their costs for capacity. It's simply a pass-through to customers, and does not directly affect their margin (arguably, if capacity prices raise retail rates, the REP's otherwise applicable margin might be challenged in order to try to keep rates low).
However, as reflected in their comments in opposition to the ORDC, REPs are deathly afraid of "uplift" -- by which they mean uplift not assigned to specific customers and just assigned to all load, with no forward warning. We put "uplift" in quotes because the capacity market is essentially uplift, just on a forward basis and allocated based on capacity tags, but REPs do not care about this uplift because they can simply pass it on to customers.
But the uplift potentially arising from the ORDC (by repeating such concern Matters does not aver to its validity) cannot simply be passed through to small volume customers, except on certain types of contracts.
Specifically, the Texas Energy Association for Marketers, Direct Energy, and (as stated in an introduction) ConEdison Solutions Inc. (hereafter, REPs) filed comments in opposition to the ORDC. According to the filing, the members of TEAM participating in this proceeding are: Accent Energy d/b/a IGS Energy; Cirro Energy; DPI Energy (d/b/a Trusmart); Entrust Energy; Just Energy; Spark Energy; StarTex Power; Stream Energy; and TriEagle Energy. Matters notes that, in the electronic filing of comments appearing online, none of the signatures to the comments is associated with ConEdison Solutions; it is unclear whether a page is missing or whether their inclusion in the introductory paragraph is erroneous. To the extent ConEdison Solutions did not join these comments, we do not mean to say that they have.
Specifically, the REPs said that they, "are concerned that the [ORDC] proposal risks substantial uplift to retail customers of dramatic and unpredictable wholesale energy prices and creates additional risk in the ancillary services settlement process that cannot be hedged."
All the concerns above may be valid, but they are equally valid regarding the capacity market.
Spin it how you like, the capacity market is: (1) an uplift of new costs to ERCOT customers, (2) subjects customers to dramatic and unpredictable pricing (see volatility in the PJM capacity market), and (3) introduces new risks that cannot be hedged (past the forward period of the capacity market).
We do not mean to minimize the REPs' concerns with ORDC, but "where's the outrage" when a capacity market would produce the same results? Customers of these REPs should take note that the difference appears to be that the capacity market "sticks it" to the customer, which the REPs are (apparently) fine with (no doubt they'll issue missives of how they represent the interest of their customers, but the lack of comments in serious opposition to the capacity market is damning). But with ORDC, because it is not an easy forward pass-through with a tag, and eats into REP margins, the REPs take a position on it.
Specifically, Direct Energy favors a capacity market.
To be fair to TEAM, in its initial comments TEAM preferred alternatives proposed by Brattle rather than the capacity market, but still said that the capacity market should be studied further, if the other options are not adopted, with an eye towards Texas-specific changes that would be needed. Specifically, TEAM said in June 2012 that a transition to a capacity market should remain "on the table" as resource adequacy solutions are considered but only if no more measured adjustments to the energy-only market can be feasibly implemented. However, it is fair to say that TEAM did not express outright opposition to a capacity market, and merely preferred other alternatives (notably, backstop procurement). Moreover, since those early comments, TEAM has been silent, at least publicly, with respect to a capacity market.
The REPs continue, "These risks are greatest when an artificially high minimum contingency value is established for the ORDC as this effectively forces the market to produce a desired result of higher energy prices by administrative manipulation rather than allowing prices to be established by the market's 'first principles' of supply and demand."
Any credibility this statement has is lost when REPs advocate for a market design, the capacity market, which similarly violates such "first principles," where demand is manufactured by the government.
REPs also discuss the pricing impacts implicated by the ORDC. However, a key point is missed. Putting the issue of uplift aside, the energy-market prices from the ORDC can be avoided. Load may voluntarily curtail, with the aid of value-added services offered by the REP. In contrast, under the capacity market, your capacity tag follows you for a whole year, and is based on past actions.
Despite concerns over liquidity and premiums, hedging would also still be more effective in an energy market with an ORDC, versus the capacity market where hedging is virtually non-existent.
The REPs also oppose excessive adders for the "value of non-market actions" under the ORDC because, "Otherwise, load will be effectively overpaying for actions that are already being paid for at an efficient price."
Again, any capacity resource which is currently in-the-money in the energy market, and therefore will be available in the energy market, which also receives a capacity payment, not as the result of the interaction of a willing buyer and seller but the forced transfer of wealth from load to capacity owners, essentially has load, "overpaying for actions that are already being paid for at an efficient price." In short, the capacity market pays the vast majority of capacity resources for doing what they'd be doing already (be available to sell in the energy market).
Yet one of the commenters (Direct Energy) is pushing for a capacity market, and the balance of the commenters have expressed no serious opposition.
Valid as they may be, it's hard to take the REPs' concerns with an ORDC seriously when they're willing to ignore the same concerns when the impacts are felt by their customers, and not them.
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July 31, 2013
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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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