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Power Trader Seeks Elimination of Small Fish Swim Free Rule in ERCOT

April 22, 2014

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Copyright 2010-13
Reporting by Paul Ring •

Raiden Commodities petitioned the Public Utility Commission of Texas for a rulemaking to eliminate the current Subst. R. §25.504(c), which currently provides that entities with less than 5% of ERCOT installed capacity do not have ERCOT-wide market power.

Raiden Commodities had previously raised objections to the Small Fish Swim Free rule in the debate over NPRR 574 last fall.

Raiden Commodities alleged that, "Actual market experience has shown that large 'small fish' do - regularly and periodically - have the ability to be the pivotal supplier with the commensurate ability to raise price to the cap. This is not a subjective reading of the data - it is a fact. The reason that entities of this size can influence the market in this manner is because the market is efficiently committed and operated from the day ahead into real time."

While Raiden Commodities' petition is replete with data related to when small fish may potentially be pivotal suppliers, it glosses over the fundamental issue in its petition, and the rule itself: the definition of market power.

Raiden Commodities merely states in a footnote that, "As we use the term 'market power' in this Petition its meaning is limited to what is correctly known as 'horizontal market power', i.e., the ability of one or more power suppliers to raise prices above the competitive level." [emphasis added]

Raiden Commodities does not define what the "competitive" level of pricing is, which is the heart of the issue. While Raiden Commodities bemoans the fact that certain small suppliers may be pivotal and therefore influence prices, it does not discuss whether such behavior reflects non-competitive prices.

Texas Commissioners have long recognized that, contrary to economic "theory," marginal cost is not the true competitive level for generation pricing, because generators must be able to recover fixed costs through their bids, and sole reliance on short-run marginal costs to produce prices will mean the marginal unit will always have unrecovered costs.

Moreover, PURA is specifically concerned with "market power abuses," not market power in and of itself. PURA defines market power abuses as including predatory pricing, withholding of production, precluding entry, and collusion.

Raiden Commodities does not allege that the behavior of the small fish reflect any of these PURA-cited market power abuses, instead alleging that their mere existence as pivotal suppliers constitutes a market power abuse.

Implicit in Raiden Commodities' arguments is that pivotal small fish are withholding supply, except at high prices. However, the Substantive Rules only provide that, "a generation entity with market power that prices its services substantially above its marginal cost may be found to be withholding production." [emphasis added]

The rule first distinguishes between offers in excess of marginal cost and those "substantially above" marginal cost, and does not define "substantially above". Moreover, the Substantive Rule does not provide that all offers substantially above marginal cost are de facto withholding, as it only provides that such behavior "may" be found to be withholding -- clearly recognizing that the behavior of offers substantially above marginal cost are appropriate in certain circumstances.

Raiden Commodities also rests its arguments on an old-way of thinking about electricity, claiming that the, "electricity market is particularly problematic because of the inelasticity of the real time demand curve, i.e., the inelasticity of the demand curve creates a high 'reward' for the exercise of market power."

With the ubiquitous deployment of smart meters, the only reason that electricity demand is inelastic is that load serving entities are not sufficiently incentivizing customers to reduce their demand. If a market participant with exposure to the real-time market wants to avoid prices driven by the small fish swim free rule, it can devise any number of strategies to now manage this position using actual customer behavior.

Docket 42424

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