ERCOT Market Should Expect REP Defaults Due to Nodal Transition, Brewster Says

The ERCOT market should expect that some retail electric providers will default in 2011 as a result of mismanaging their commercial operations in the nodal market, Chris Brewster, Partner at Lloyd Gosselink, said during a panel discussion on the nodal market at the Gulf Coast Power Association's fall conference. Brewster typically represents load interests, particularly cities.

Brewster noted that the day-ahead market and Reliability Unit Commitment (RUC) process do not have analogous counterparts under zonal, and thus REPs will be challenged to manage around the risks of each market design.

At the very least, Brewster expects REPs to try to "push down" on customers when faced with nodal results which are contrary to their expectations. While the PUCT has said that fixed price contracts for customers under 50 kW may not include any pass-through related to nodal, contracts for customers above 50 kW are not subject to any such prohibition. Brewster compared the potential scenario to 2008 where some mismanaged REPs passed-through unexpected ERCOT congestion costs to customers on fixed priced contracts.

Although not going as far as Brewster in raising the specter of defaults, Luminant's Brad Jones, Vice President of Government Relations, agreed that he is worried about the commercial status of some market participants. Bob Helton, Vice President at International Power America, likewise said that he is worried about small REPs who may be feel comfortable with their preparation for nodal, but haven't absorbed all of the new risks inherent in the market because they rely on a QSE for commercial operations and don't deal with the issues on a daily basis.

ERCOT COO Mike Cleary said that participation in nodal testing among REPs is the most successful he's seen versus similar transitions in other markets, but did report some REPs have informed him that they are testing to avoid being flagged as "red" on the nodal readiness report, as opposed to devoting significant resources to truly understand the operation of the new market.

Cleary and Helton both stressed to market participants, "if you think you're ready [for nodal], check again, and check again, and check again."

Panelists also discussed other improvements or issues that they would like to see addressed, most of which have been previously reported in the context of ERCOT or PUCT proceedings. Jones reiterated concerns with collateral calls and improving the day-ahead collateral calculation as soon as possible after go-live (Matters, 1/19/10).

Jones again stressed that robust participation in the day-ahead market is necessary for a successful market. Aside from collateral requirements hindering participation, Jones said that the extremely higher shadow price caps in the day-ahead market versus the real-time market may also discourage day-ahead participation.

Helton said that ERCOT should implement a look-ahead Security Constrained Economic Dispatch under nodal.