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Government Knows Best: Texas Capitulates to Capacity Owners, Adopts Mandated Reserve Margin
In a triumph of government largesse over customer choice, a majority of the Public Utility Commission of Texas have endorsed a mandated reserve margin for the ERCOT region.
Though no formal order to institute a mandated reserve margin was before the Commission (and thus no formal vote was taken), Chairman Donna Nelson and Commissioner Brandy Marty voiced support for such a mandate at Friday's open meeting.
In doing so, the duo agreed to await the Brattle economically optimal reserve margin report prior to setting the level of the mandate, and the mechanism to achieve it.
Also of note, while agreeing on a mandatory reserve margin, neither Nelson nor Marty opined on when the mandate needs to be met, and whether this mandate must be met on a forward basis (and if so, how forward).
Commissioner Kenneth Anderson called the decision premature since the Commission has not yet agreed on what standard should be used to measure the reserve margin -- 1 event in 10 years, or 1 hour in 10 years, etc.
Until the Commission knows what it wants to avoid in setting the reserve margin, Anderson said that it does not make sense to set it as a mandate, particularly as the Commission awaits improvement in load forecasting and other components of ERCOT's Capacity, Demand, and Reserves report.
Anderson said that he was "unalterably opposed" to a mandated reserve margin, given that it is, "totally uneconomic," and, "has the potential to destroy the economic engine that is Texas."
The mandatory reserve margin could lead to a, "huge tax on consumers that will not ensure reliability," Anderson said. Anderson said that if a capacity market were ultimately adopted as the means to achieve the mandated reserve margin, it would amount to a, "corporate welfare payment."
"I want it clear that folks know who to call to complain about why they paid this tax for so many years and then still had blackouts," Anderson said.
The decision cannot be seen as anything other than the Texas government intruding on customer choice, and a view that only government intervention can assure reliability.
As such, the decision reflects a certain arrogance that it is the government which protects and drives the Texas economy, and without government intervention to prevent "blackouts," the Texas economy is at risk.
Nelson said that the decision before the Commission was, "Is electricity important enough to us as a state that we want to make sure we keep the lights on" -- and by adopting a mandated reserve margin, the answer is that only the government, not customer choice, can make sure the lights stay on.
Likewise, Marty said that, "The thing that just really resonates with me is whether or not the lights go out because we didn't plan to have enough energy," putting the Texas government into a central planning role (emphasis added).
"The lights going out because we don't have enough energy, to me, is an inexcusable situation for us to find ourselves in, in this state. It's a third-world problem," Marty said, again, finding that only the government can prevent this catastrophe by adopting a mandated reserve margin.
Marty further said that the question is, "Will they [the lights] go out because this Commission didn't make choices that will protect the future of Texas and ensure that we have the power."
Note here the Commission assuming the role of arbiter in the market, supplanting customer choice, and once again the portrayal of government as the "protector" -- that customer choice alone cannot lead to the efficient outcome.
The rationale that the Texas government must step in because the failure of the electric market to assure reliability is too large a risk to take is not at all different from those supporting taxpayer-funded bailouts of Wall Street and auto companies, because allowing such entities to fail posed too great a risk to the economy as a whole. But the Texas issue is actually worse. Although Matters does not oppose characterization of a mandated reserve margin as a bail-out, we, ourselves, do not use the term because the entities benefiting from the PUCT's action (capacity owners) are generally not distressed. Indeed, there has been no allegation, except at the fringes perhaps, that the current Texas model does not allow full recovery of costs, plus ample margin, for plants that are, or will be, needed (and with a $9,000 price cap, it would be hard to argue that). The alleged problem is instead that there is no certainty of these profits in the future. So the Texas government isn't taking action to save distressed companies which may or may not be important to public welfare; it's taking action so that profitable firms, with market mechanisms already providing the opportunity to earn profit, can be certain they make a profit.
Nelson said that it was not all that useful to talk about the decision as a "tax," while Marty likened the term to "scary rhetoric," which is ironic, since "scary rhetoric" is what capacity market supporters have been engaged in for over the past two years, by taking the normal out-year projections of declining reserve margins and equating them to certain blackouts, and risks to the "public health" and economic vitality of Texas, in stark contrast to the successful history of the energy-only market, and continued business satisfaction with the current Texas electric market design.
While the PUCT did not set a mechanism to enforce the mandatory reserve margin, by making the reserve margin a mandate, there will have to be some payment, through some market design or another, to achieve the mandated reserve margin if capacity owners do not show up of their own volition.
We therefore conclude with the words of then-Commissioner Barry Smitherman from 2006, who in a memo said, "In my opinion, capacity payments represent an attempt to
re-regulate a market which the Texas Legislature has clearly determined should be
deregulated."
"Capacity payments are a costly subsidy paid to generators; like any subsidy, once given, it will be very difficult to take back," Smitherman said in 2006
"The supporters of capacity payments claim that the subsidy is necessary in order to incent new generation investment. Given the fact that the ERCOT market is now and has long been an energy-only market and that 26 Gigawatts of new generation were built in ERCOT
between 1998 and 2004, this claim appears unsubstantiated," Smitherman said, with seven additional years further substantiating Smitherman's comments, with the energy-only market never experiencing a shortage that would have been cured by making the target reserve margin a mandate.
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October 28, 2013
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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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