Texas Commissioners Propose Raising Offer Cap to At Least $7,500, Differ on Timeline

Public Utility Commission of Texas Chairman Donna Nelson and Commissioner Kenneth Anderson have both proposed raising the System Wide Offer Cap in ERCOT to as high as $7,500/MWh, but disagree on whether any incremental change should occur for the summer of 2012.

Nelson has proposed increasing the high system wide offer cap (HCAP) to $4,500, and increasing the high end of the Power Balance Penalty Curve to $4,500, by July 1, 2012.

Nelson said that an immediate increase in the offer cap is needed to incent mothballed units to come back online. Nelson further said that immediate action is needed to send the right signals to get needed investment in the energy-only market, without a capacity market or load obligation.

Nelson also suggested that the Brattle Group, retained by ERCOT to study resource adequacy, should be directed to study increasing the HCAP to $7,500 over a period of years.

Anderson expressed concern with raising the System Wide Offer Cap this summer, citing the impact on load serving entities who have hedged; the impact on ERCOT collateral requirements (particularly with such short notice); and the impact on customers with fixed price contracts, as REPs may pass any additional costs due to a new HCAP through to these customers under a change in law or regulation provision.

Anderson completely supported raising the system wide offer cap, but suggested seeking comment on three potential tracks in a rulemaking.

Under a low case, Anderson suggested raising the offer cap to $4,000 before the summer of 2013, $5,000 before the summer of 2014, and $6,000 before the summer of 2016.

Under a middle case, Anderson suggested raising the offer cap to $4,500 before the summer of 2013, $6,000 before the summer of 2014, and $7,500 before the summer of 2015.

Under a high case, Anderson suggested raising the offer cap to $5,000 before the summer of 2013, and then to $7,000 and eventually $9,000 over a three to four year period.

Anderson said that providing a definitive timeline in the rule for raising the offer cap would have a more powerful impact than simply an immediate hike for the summer of 2012, with no assurance of a future increase, because it would assure developers of what the cap would be when new assets come online.

If the Commission proposes these three tracks in a rulemaking, Anderson asked that market participants comment on the impact each track would have on ERCOT collateral obligations, and the cost of hedging, and whether counter-parties would still participate in the market at those costs.

Nelson asked Anderson to contemplate whether he could support raising the offer cap to a number below $4,500 for the summer of 2012, and if so, to propose such a number at the next open meeting.

Anderson also suggested that the Power Balance Penalty Curve could be raised for this summer without a change in the system wide offer cap, and commissioners agreed that the slope of the Power Balance Penalty Curve needs to be addressed.

Aside from issues related to the offer cap, Nelson proposed increasing the triggering threshold for the Peaker Net Margin mechanism to $262,500, which was supported by fellow commissioners.

Additionally, commissioners agreed that generators should be encouraged to enter into Commission-approved Voluntary Mitigation Plans (VMPs), by making it clear that VMPs are available to every generator and that a full contested case with intervenor participation is not required for approval. Per PURA, if the Commission and a person enter into a voluntary mitigation plan, adherence to the plan constitutes an absolute defense against an alleged violation [e.g. market power abuse] with respect to activities covered by the plan.

Other issues which Nelson said that Brattle should evaluate include:

• Increasing the triggering threshold for the Peaker Net Margin mechanism to $300,000 or some multiple of an updated cost of new entry

• Whether the Peaker Net Margin mechanism should be eliminated altogether

• Increasing the low system wide offer cap (LCAP) to 50% of the HCAP.