Texas PUC Chair: Re-Pricing Would "Bail Out" Retail Electric Providers, But Not Help Customers

Says Focus Should Be On Helping Co-Ops On "Back End"

PUC Chair Questioned ERCOT CEO Why $9,000 Administrative Prices Extended After ERCOT Instructed TDUs To Restore Residential Load

PUC Chair On IMM: "They're Not Lawyers"

IMM Revises Amount Of Alleged "Error" To Be $5.1 Billion (Takes Into Account Netting, Day-Ahead Positions)

PUC Chair: Will Launch Greater Customer Education On REP Pricing, Rate Increases To Sticky Customers -- "Don't Let Your REP Frog Boil You"

March 11, 2021

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Copyright 2010-21 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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During a Texas House State Affairs committee hearing, Texas PUC Chairman Arthur C. D'Andrea said that re-pricing of the ERCOT market would be a "bail out" of retail electric providers that would not provide rate relief to REP customers.

As more fully discussed below, D'Andrea does not believe that any ERCOT error occurred which supports re-pricing

D'Andrea told lawmakers that the IMM has revised its impact from the PUC's pricing decisions with which the IMM disagrees downward to $3.2 billion.

The IMM had originally said that, "ERCOT recalled the last of the firm load shed instructions at 23:55 on February 17, 2021. Therefore, in order to comply with the Commission Order, the pricing intervention that raised prices to VOLL should have ended immediately at that time. However, ERCOT continued to hold prices at VOLL by inflating the Real-Time On-Line Reliability Deployment Price Adder for an additional 32 hours through the morning of February 19. This decision resulted in $16 billion in additional costs to ERCOT's market, of which roughly $1.5 billion was uplifted to load-serving entities to provide make-whole payments to generators for energy that was not needed or produced."

In a new filing with the PUC, the IMM was more specific in its update.

The IMM said, "This decision resulted over-priced [sic] energy in ERCOT's real-time market by $16 billion. Correcting this error will not reduce costs to consumers by $16 billion because a substantial share of the demand is served by owned generation or forward contracts. Given the deliberations currently underway regarding our repricing recommendations, this letter provides our estimates of the changes in settlement costs that would result from our recommended price corrections described in our March 4, 2021 letter, as well as the settlement effects of our recommendation to cap the Ancillary Services (AS) prices at the VOLL of $9,000 per MWh that we made in our letter dated March 1, 2021."

The IMM further said, "The results of the analysis described in this letter only includes transactions that are settled by ERCOT and, therefore, do not include forward contract settlements. Since all changes in settlements will net to zero for ERCOT, the positive changes for some entities will be offset by negative changes for other entities. Our results are netted at the corporate level, which accounts for any offsetting effects on multiple entities under the same corporate umbrella. Therefore, they provide as accurate an analysis of the effects of entities' financial positions as possible, since some entities both have generation and serve load."

"When we account for day-ahead market positions and all offsetting supply and demand positions at the corporate level, our recommendations would alter the ERCOT settlements by a total of $5.1 billion," the IMM said

The IMM specifically said that two components of the settlement effects are related to correcting the real-time energy pricing

"The real-time energy imbalance settlement effect is [plus or minus] $3.2 billion. This represents the effects on net energy buyers and sellers in the real-time energy market," the IMM said

"Total real-time reserve imbalance settlement (known as the Real-Time AS Imbalance Charge) effect is [plus or minus] $1 billion. This reflects the change in make-whole payments to generators for energy that was not needed or produced. In other words, because ERCOT had a surplus of generation online offered at prices well below $9,000 per MWh, it was obligated to provide make-whole payments to cover the 'lost profits' of all the generators that would have preferred to produce more energy at $9,000 per MWh," the IMM said

"The third settlement adjustment is associated with the remaining recommendation in our March 1 letter. ERCOT priced AS that were in shortage at prices much higher than the value of lost load of $9,000 per MWh. Ancillary services are generally operating reserves held aside to provide additional supply to satisfy the energy demand when unforeseen events occur. Neither ERCOT's protocols nor any Commission Order endorses pricing shortages of operating reserves higher than shortages of energy. Further, it is economically inconsistent to value operating reserves higher than the energy demand that they protect. Hence, we recommended that the Commission correct this pricing error by capping the AS prices at the VOLL of $9,000 per MWh. The net effect of this correction, accounting for offsetting effects at the corporate level, is [plus or minus] $900 million," the IMM said

The IMM said, "Once again, these corrections do not include the effects of any transactions that are outside of ERCOT settlement. We recognize that there are futures markets that are derived from the ERCOT real-time prices. We had hoped that action on our recommendations would be taken quickly, prior to the settlement of these futures markets. Given that many of these futures products have now settled against the original inflated real-time prices, the unintended consequences in these markets of correcting the real-time prices have increased. Therefore, although correcting the prices will allow them to more efficiently reflect the actual supply and demand during this period, this resolution is complicated by the downstream impacts that are difficult to quantify. Importantly, these unintended downstream impacts relate almost entirely to the energy imbalance resettlement. Although this is the largest effect, it is also the portion of the error that was likely the most well-hedged by the ERCOT participants."

"Although the other two components of the corrections are smaller, these errors are arguably more harmful because they produce costs that are difficult or impossible to hedge. In other words, participants that have contracted for adequate supply or otherwise fully hedged their energy demand obligations receive an allocation of both the AS themselves and the AS imbalance costs that may be economically ruinous," the IMM said

"Therefore, we recommend that the Commission, at a minimum, seek to correct these two classes of inflated costs. Capping the Ancillary Services prices at $9,000 per MWh should be relatively straight-forward. The Real-Time AS Imbalance Charges would naturally be eliminated if the real-time energy prices are corrected. If real-time energy prices are not corrected, these charges could be addressed by suspending these make-whole payments. This would still allow the generators to be paid the uncorrected real-time energy prices for the energy they actually produced," the IMM said

"With regards to correcting the real-time energy prices, we note that the actions of ERCOT could understandably be perceived as a reliability instruction to generators to keep their resources committed throughout the event. At the corrected price levels, some generators may not cover all of their fixed as-offered operating costs. These costs would typically be recovered through a Reliability Unit Commitment (RUC) guarantee payment for generators instructed to run for reliability. Therefore, if the real-time energy prices are corrected, the IMM would not oppose a make-whole payment comparable to the RUC settlement for the period in question (0:00 February 18,2021, to 09:00 February 19, 2021). This would result in make-whole payments only to generators whose as-offered operating costs exceeded their market revenue during this period," the IMM said

Regarding the IMM's interpretation of the PUC's order setting the prices at $9,000 per MWh, D'Andrea further said of the IMM that, "they're not lawyers."

However, under questioning from Rep. Donna Howard, D'Andrea admitted that when he saw that the $9,000 prices were continuing after ERCOT had ceased residential load shed, he called ERCOT's then-CEO and asked, "what the heck is going on, residential load shed is done." ERCOT's then-CEO explained that there was still industrial load that had not been restored and that is why administrative pricing at $9,000 was continuing. D'Andrea described the industrial load shed as "voluntary plus", but also said that the issue had, "never crossed my mind."

D'Andrea's statement that he himself had questioned why the $9,000 prices were continuing fed into Howard's questioning of market expectations regarding the PUC's order setting prices at $9,000 -- which had stated that, "the Commission determines that adjustments are needed to ERCOT prices to ensure they accurately reflect the scarcity conditions in the market. Accordingly, the Commission directs ERCOT to ensure that firm load that is being shed in EEA3 is accounted for in ERCOT's scarcity pricing signals" -- and whether the order meant that the PUC's pricing direction was required to end once the direction from ERCOT to the TDUs to shed load, which was for residential load, ceased

Howard said that if this language meant that the $9,000 pricing was to end once residential load shed ended, then ERCOT created a market disruption -- the type of disruption that would occur under re-pricing and that D'Andrea said augurs against intervention such as re-pricing

D'Andrea emphasized that REP customers would not benefit from re-pricing because prices are fixed, or, if variable, were set in advance. Re-pricing would not result in REP customers receiving money. Furthermore, D'Andrea said that REPs would be challenged to pass on any costs from the weather event in the future due to competitive pricing pressure from other REPs which may not be facing the same exposure to the weather event

D'Andrea said that if re-pricing is done, "you bail out the retail electric providers," but don't help REP customers. While some cooperatives would be helped by re-pricing, D'Andrea said that the answer is to help co-ops on the "back-end", without re-pricing.

D'Andrea said that he does not believe ERCOT committed any error which led to the prices, and, therefore, the Commission lacks legal authority to order re-pricing, which is limited to ERCOT errors. Legislators, however, have greater freedom to address the issue, D'Andrea said

D'Andrea also said that with the public's attention on the electric industry, the Commission would be emphasizing customer education about shopping for a REP, and telling customers to be mindful of REP price changes for sticky customers -- "don't let REPs 'frog boil' you," D'Andrea said

Committee Chair Rep. Chris Paddie warned lawmakers against re-pricing solely because members didn't like the outcome, and warned against changing rules on a retroactive basis

Paddie said that State Affairs would convene another hearing with the IMM and stakeholders on this issue next week, suggesting any resolution may not be imminent

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