Texas PUC Staff File Draft Proposal For Adoption For Changes To Low Price Cap In ERCOT, Would Reject Make-Whole Cost Allocation Recommendations From Retail Providers

REPs Had Proposed Specific Cost Recovery Mechanism, Opposed Use Of Uplift

June 18, 2021

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Reporting by Paul Ring • ring@energychoicematters.com

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Staff of the Texas PUC have filed a draft proposal for adoption to modify the value of the low system-wide offer cap (LCAP) in ERCOT by eliminating a provision that ties the value of the LCAP to the natural gas price index, and replacing it with a provision that ensures resource entities are able to recover their actual marginal costs when the LCAP is in effect.

Specifically, under the draft proposal for adoption, "The low system-wide offer cap (LCAP) will be set at $2,000 per MWh and $2,000 per MW per hour."

As under the current rules, if the LCAP is triggered due to peaker net margin being reached, "ERCOT will continue to apply the operating reserve demand curve and the reliability deployment price adder for the remainder of that calendar year. Energy prices, exclusive of congestion prices, will not exceed the LCAP plus $1 for the remainder of that calendar year."

The draft proposal for adoption provides for a make-whole payment as follows: "Reimbursement for Operating Losses when the LCAP is in Effect. When the system-wide offer cap is set to the LCAP, ERCOT must reimburse resource entities for any actual marginal costs in excess of the larger of the LCAP or the real-time energy price for the resource. ERCOT must utilize existing settlement processes to the extent possible to verify the resource entity's costs for reimbursement."

Staff does not recommend adopting provisions related to the recovery of such make-whole payments, stating that the issue is better addressed at ERCOT

The Texas Energy Association for Marketers had said in comments to the PUC that uplift should not be the mechanism used to collect funds for make-whole reimbursement. "Load serving entities cannot hedge for market uplift. Further, load serving entities that were not counterparties to the settlements that led to increased cost above the LCAP should not bear the additional costs of those settlements. Thus, a market uplift mechanism should not be incorporated into the rule, nor should uplift be indirectly allowed through an absence of direction to ERCOT, because uplift would create new market uncertainties and impose unjust burdens on market participants who were uninvolved in the transactions at issue," TEAM has said

TEAM has said that the rule, "should make clearer that those who were counterparties to the settlements for procurement of real-time energy should bear the additional costs of those settlements, and that the funds collected by ERCOT to reimburse resource entities with operating losses incurred while the LCAP is in effect should be collected from those counterparties."

TEAM proposed rule language that stated, "funds for reimbursement to be collected from the market participants that procured the real-time energy that was priced above $2.000."

Staff recommends rejecting this proposal

"Broadly speaking, the commission agrees with STEC, Texas Retail, and TEAM that the make-whole provision should be implemented in a manner that encourages market participants to fully hedge their loads," Staff said

However, Staff said that, "ERCOT is best positioned to evaluate the precise consequences of each potential recovery methodology."

"The commission expects the proposals of the commenters in this project to be among the proposals ERCOT considers in designing its reimbursement process," Staff said

Staff also disagreed with TEAM and Texas Retail Energy that the make-whole provision should be limited to resource entities that have received a RUC instruction from ERCOT. "[T]his is not a practical limitation since ERCOT would not know which resource entities risked exposure to high gas prices or other cost drivers in time to issue the necessary RUC instruction," Staff said

Staff notes that the make-whole provision only applies when the real-time energy price is at or exceeds the LCAP, but declined suggestions from certain cities and TCAP to limit the provision to specific events.

Staff said that, "overly limiting the availability of the make-whole provision could contribute to the creation of new emergency conditions."

Staff's draft also notes that the scope of the rulemaking was limited to removing the gas price index from the LCAP, and that SB 3 requires further consideration of scarcity pricing rules in ERCOT

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