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Texas PUC Chair Proposes LSE Obligation As Part Of ERCOT Market Reforms

Majority Of Commissioners Express Serious Concerns With LSE Obligation

Commissioner Warns Against End State Market Being Few Gentailers With Unregulated Monopolies

October 21, 2021

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Copyright 2010-21
Reporting by Paul Ring •

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Texas PUC Chairman Peter Lake proposed several key concepts that should be the "foundation" of the ERCOT market redesign process, as the PUC works to develop a blueprint for market reforms

Lake described the proposals as "key elements", and not an endorsement of a single plan

Lake drafted a memo presenting such concepts as a starting point for discussion. "I want to emphasize that these design concepts are preliminary; nothing is set in stone at this point," Lake wrote

Lake proposed an LSE obligation with the following elements ("details"):

• Steady state; no trigger provision

• Three year forward requirement

• Obligation: 100% of LSEs load share ratio of ERCOT forecast net peak load (3 years from operating day == 50% of load share ratio, 2 years == 70%, 1 year == 90%, 6 months == 95%, 1 month == 100%)

• Physical obligation

• Penalties: Levied on LSE for lack of adequate credits, levied on generator for lack of performance + obligation to procure amount short in RT market

• Transparency: ERCOT maintains bulletin board where all credit transactions are posted w/ counterparties, volume, & price; IMM has full authority to investigate market manipulation

• Phase-In: Consider phased implementation w/ temporary price caps, limited penalties, etc. as market adjusts

• Accreditation based on reliability standard by resource type

• Accreditation accounted for w/ credit system by resource for each operating day

Lake cited "Key Questions / Requested Data" of the LSE obligation as follows:

• How do we ensure the continued viability of the competitive retail market?

• How do we prevent market manipulation by affiliated gentailers at the expense of independent retailers?

• How do we ensure demand response resources can participate fully and at all points in time?

• What is the appropriate accreditation level for each resource?

• What is the appropriate segment of time for each obligation? (Months? Weeks? 24 hour operating day? 12 hour segments? Hourly?)

Lake stressed that if he does not get satisfactory answers to these questions, including on the retail market and demand response, "this thing's done," and he would not support implementation

Commissioner Will McAdams said that he was not prepared to endorse at this time "details" as proposed in Lake's memo with regard to any issue (including LSE obligation)

McAdams cited market power concerns with the LSE obligation

McAdams said that if an LSE obligation "squeeze[s]" independent and unaffiliated retail electric providers out, "I will vote no on that today." McAdams further said that this concern serves as a "red line" with respect to the LSE obligation

McAdams suggested that a firming requirement could be achieved via a resource obligation, rather than an LSE obligation.

McAdams sought an analysis of a firming requirement such as an LSE obligation

McAdams welcomed more study on the issue of a firming requirement (on either side), but said that the Commission needs to be ready to "kill" the proposal at any moment if studies show it will be harmful

McAdams said that an LSE obligation proposal needs to be "peer reviewed" similar to a new drug prior to use.

Commissioner Lori Cobos was not prepared to endorse the LSE obligation at this time, saying that she has a lot of questions about it.

Cobos noted that, if adopted, the Commission would not know if the LSE obligation is successful in assuring reliability and generating investment until several years out

Cobos cited the "significant impacts" from the LSE obligation on the retail market, and said that the retail market must be "protected"

Cobos cited the complexity in adopting an LSE obligation due to the retail market, due to switching, migration and POLR events.

Cobos noted that the PUC's work on securitization was in part meant to stabilize and protect the retail market, and expressed concern about destroying such work

Cobos suggested consideration of alternatives that would hold resources accountable

Cobos said that the IMM doesn't have visibility into the bilateral market that would be used in the LSE obligation

Commissioner Jimmy Glotfelty is "not totally convinced" that an LSE obligation is needed, calling it a "massive market change."

Glotfelty said that he doesn't want the end state of the market to be just a few gentailers with unregulated monopolies

Glotfelty said that it would be "really hard" to support an LSE obligation if it is detrimental to the retail market

Glotfelty cited the complex nature and long timeframe for implementation of the LSE obligation, and said that he is not sure that it will incent new generation

Glotfelty said that the market needs a reliability standard, but does not have a specific number yet in mind

Addressing concerns raised by Commissioners concerning the LSE obligation, Lake said that the PUC "can't not take action" and asked that the PUC take a "serious look" at what such a mechanism would look like

While Lake said that he did not want barriers to entry being too high, he thought some barriers are beneficial, and said that there is some merit to a "market based credit check" that an LSE obligation would serve as (due to REPs needing to have financial wherewithal and investor confidence that the REPs' customers will be there in the future, to engage in the forward procurement)

Lake said that the PUC needs to "pick something", whether an LSE obligation or an alternative, as it moves forward with market design reforms, and wants designs or alternatives answered by December

Commissioners agreed to issue various questions for comment concerning the LSE obligation

Cobos expressed concern that the LSE obligation was being proposed only because other stakeholder options were not workable in the eyes of the Commission

Cobos asked proponents of the LSE obligation that, having heard the concerns raised by Commissioners today about their proposals, if they could create a design to achieve the same level or reliability without a significant market change

Lake proposed a question for stakeholders: What would a fleet-wide generator firming standard look like?

Commissioners continue to discuss a market design change roadmap at a meeting today. Lake hoped that a strawman would be issued next week with comments due by early November

Commissioners discussed various ORDC changes, which Cobos proposed be implemented in concert with the price cap changes for this winter in January.

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