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Texas Senators Grill PUC on "Socialized" Market Design Changes; "Reality" Is That Current System Is Working Despite Dire Predictions

November 25, 2013

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Copyright 2010-13
Reporting by Paul Ring •

The fiction that without a mandated reserve margin ERCOT is going to drop to about an equilibrium 9% reserve margin -- the unsupported narrative offered by the Brattle report -- was derided by Texas Senators given that 14 years of operation of the energy-only market have never seen anything come close to this phantom "equilibrium."

Testifying before the Senate Committee on Natural Resources, Donna Nelson, Chair of the Public Utility Commission of Texas, said regarding the energy-only market that, "Every indication is, that if it's working properly, the reserve margin will go down [towards Brattle's forecast equilibrium of about 9%] ..."

"I'm sorry, I've got to interrupt you here," Sen. Troy Fraser, committee chair, intervened. "We've never been close to a 9% margin. I've been watching this market since 1999, and I don't remember the number ever being below 13. So you're projecting that we're automatically going to go to 9, why did that not happen in 14 years?"

"You're projecting the sky is falling, but what we've just heard from ERCOT is the sky is not falling, that the market is working as we designed it," Fraser continued. Fraser noted that the ERCOT region has done real well in the last year-and-a-half in attracting generation that was not originally expected to be developed and therefore not reflected in reserve margin reports, and Fraser expects that to continue.

Nelson continued that at a 10% reserve margin, the average would be 1.5 rolling outages per year, but that in 2011, had there been a 10% reserve margin, there would have been 40 hours of rotating outages.

"Commissioner, come on," Fraser snapped. "We had a 14% reserve margin in 2011, it's absurd to say what if we had an 8. We didn't have an 8, we had a 14% reserve margin and it has continued to maintain that. It's nice for us to project the sky is falling, but we have to look at the reality of what we have, the market currently continues to work pretty well."

"I see no reason that we should be at this point even considering," a mandatory reserve margin, Fraser said, given the complete and inaccurate data before the PUCT, particularly the known errors in ERCOT's load forecasting, and the still-outstanding economically optimal reserve margin report.

Fraser also pressed Nelson on the PUCT's authority under PURA to adopt a mandated reserve margin and capacity market. Nelson cited PURA provisions charging the PUCT with "reliability," leading to this exchange:

Fraser: "Do they [those reliability provisions] give you authority to create a electricity tax?"

Nelson: "No."

Fraser: "Does it give you the authority to re-regulate the market?"

Nelson: "No."

Fraser: "How could you think that that also gives you the authority to totally redesign the market and change from a free marketplace to a socialized market without somehow involving the legislature?"

Fraser criticized the PUCT for what he called "agency creep" and worried that the Commission was exceeding its authority. "This Commission is not functioning as it should," Fraser said.

Aside from the question of the PUCT's broad authority to create such a market design, Commissioner Kenneth Anderson also raised the specific issue of whether the PUCT could compel municipals and cooperatives to join any mandatory resource adequacy construct, saying the PUCT's authority to compel such participation is not particularly clear. To the extent munis and cooperatives do not participate in the resource adequacy construct, the costs would have to be allocated over a smaller portion of customers, further raising per-customer costs.

Nelson also testified that she was in favor of performing a cost-benefit analysis of any market design change, but it was unclear if this meant the cost-benefit analysis envisioned by the legislature, or if Nelson felt the prior Brattle comparison of energy-only equilibrium versus capacity market equilibrium, plus the economically optimal reserve margin report, constituted a cost-benefit analysis.

Fraser: "You are in favor of doing a cost-benefit analysis on anything you're doing?"

Nelson: "We've been ... I asked to do that in August of this past year."

Fraser: "So you are in favor of a cost-benefit analysis on something that would cost as much as a potentially $4 billion increase per year to the electric market?"

Nelson: "I am, absolutely, in favor of doing a cost-benefit analysis. I don't believe that what we're talking about would cost an increase of $4 billion."

Sen. Leticia Van de Putte added, "I really am concerned about how you're building this case and who pays at what time ... Because if we're going to switch, if you are going to make this unbelievable change, and I didn't think we'd ever see it, I never thought we'd go to more of a socialized system rather than a free market energy system, but if you're going to do that, we need to know who is going to pay and where that's going to come from."

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