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Texas Oil & Gas Producers Criticize Skeletal Nature of Capacity Market Proposals; Point to Prolonged Nodal Implementation As Indicative of Pitfalls
The Texas Oil and Gas Association, "has seen increasing evidence that centralized forward capacity markets do not work as intended and never can," the group said in January 3 comments to the Public Utility Commission of Texas.
TXOGA said that the key problems with centralized forward capacity markets are:
• "Problems arise at the speed of markets and can only hope to be corrected at the speed of administrative law, which is much slower.
• "Capacity markets get more complicated over time and are constantly 'in the shop with the hood up.'
• "This dynamic of constantly needing to 'fix' the model would lead to even greater regulatory uncertainty in ERCOT than in PJM because of the Texas institutional setting.
• "Capacity markets force the PUCT, not consumers, to make all the key decisions in ERCOT, which contradicts the intent of SB 7.
"Beyond these inherent problems, TXOGA is additionally concerned with the compressed timeline to consider resource adequacy options, including a custom built capacity market. To put the current timeline into perspective, the move from a zonal market design to a nodal market design took place from March 2002 to December 2010. The original resource adequacy rulemaking took place roughly from 2001 to 2006. In each case, stakeholders spent substantial time reviewing the details of all potential alternatives."
"The time was used wisely," TXOGA continued. "The PUCT and stakeholders discovered that many variations in the design that seemed appealing in a PowerPoint presentation or a high-level description in filed comments were found to be fatally flawed when stakeholders and the PUCT took the time to fully understand the implications of how those approaches would operate over time."
"Though the PUCT and its stakeholders have talked about the potential for a centralized forward capacity market over the past two years, the PUCT has just started evaluating possible proposals in the past few weeks. TXOGA notes that a number of times at workshops during the past year, stakeholders have asked to discuss the complex details of centralized forward capacity markets, only to have the PUCT tell stakeholders that 'Now is not the time for that discussion,'" TXOGA noted.
"The current energy-only market design has proven itself to be both efficient and the fulfillment of the goals of the original electricity deregulation bill in 1999 (known as SB 7) and subsequent policy choices made, at the Texas Legislature and the PUCT. TXOGA does not believe that a centralized forward capacity market is the answer to whatever reliability issues the PUCT believes remain in the ERCOT market. When hanging a picture on your living room wall, you do not use a sledgehammer to pound in a nail," TXOGA said.
"A forward capacity market is not a true competitive 'market' but a complex scheme of mandated payments from customers to generators. By design, the 'capacity market' would be forcing customers to buy an amount of capacity that the PUCT -- not the market -- has determined to be necessary. This construct is fundamentally at odds with the pricing and competition requirements of PURA, and there is no specific authorization for this type of government intervention in the competitive market," TXOGA said.
While capacity market supporters have cited the PUCT's ability to compel the purchase of ancillary services as indicative of its authority to compel the purchase of capacity, TXOGA noted that, "where the Legislature intended for the PUCT to regulate generation, it specifically said so."
"The authority and requirement to procure ancillary services, for example, is explicitly provided in PURA § 35.004(e), and the requirement to develop renewable capacity is explicitly provided in PURA § 39.904. These sections demonstrate that the Legislature understood how to mandate development of a generation or generation-related products outside the competitive market, but did not authorize general regulation of the amount of installed generation capacity," TXOGA said
"Notably, a new peak-driven ancillary service, like those proposed by Texas Industrial Energy Consumers (TIEC), would pay only the resources providing the service and not all generation in the market, and would be authorized under PURA § 35.004. In contrast, [a] forward capacity market is not ... authorized because it is not an 'ancillary service.' Contrary to PURA § 39.001, a complex, administratively mandated forward capacity market does not permit electricity costs to be dictated by customer choice and competition, and cannot in any way be considered a 'practical and limited' mechanism that would have the 'least impact' on the existing market in ERCOT," TXOGA said (emphasis by TXOGA).
"Finally, it is important to note that the Legislature has met many times since the market was restructured in 1999, and has discussed the structure of the ERCOT market on more than one occasion. Not once has the Legislature even suggested that it intended anything other than an energy-only market to prevail in the ERCOT region. PURA has been amended many times in the intervening 14 years and not once has the Legislature adopted any provision that would cast doubt on its approval of the energy-only market. At a minimum, the PUC should await further action and input from the Legislature before considering such a radical change to the current market," TXOGA said.
TXOGA also made note of the September firm load shed in PJM which occurred despite PJM's capacity market.
The Texas Oil and Gas Association represents more than 5,000 members, who produce in excess of 90 percent of Texas' crude oil and natural gas, and operate nearly 100 percent of the state's refining capacity. The oil and gas industry employs over 400,000 Texans, providing payroll and benefits of over $41 billion in Texas alone.
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January 6, 2014
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Reporting by Paul Ring • ring@energychoicematters.com
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