Texas Staff File Proposal for Adoption for Increase in Offer Cap Effective August 1

Staff of the Public Utility Commission of Texas have filed a recommended proposal for adoption to establish the ERCOT high system-wide offer cap (SWOC) at $4,500 per megawatt-hour beginning on August 1, 2012, to be effective until a subsequent change by the Commission (37897).

The Commission is to address the proposal for adoption at its June 28 meeting.

Staff's draft preamble states, "While the commission appreciates the comments of ConEd [Solutions], Austin Energy, Mid-American, OPUC, City of Houston, Oncor Cities, Texas Power and TEAM, who would prefer not to have the high SWOC increase on August 1, 2012, the commission concludes that the timing of the increase is necessary to ensure resource adequacy. As explained above, raising the high SWOC at this time is necessary not only to address the currently insufficient profit opportunities for the construction of new generation. It is also necessary to encourage at this time, in light of the declining reserve margin, greater market participation by loads as load resources and through load reductions in response to price signals, and to help ensure that existing generation will remain available."

"Although the increase in the high SWOC effective August 1, 2012 may increase credit requirements for LSEs and may make hedging more challenging, these potential downsides of implementing the increased high SWOC effective August 1, 2012 are outweighed by the benefits of doing so. LSEs should have sufficient access to capital to address any increased credit requirements and should have sufficient expertise to manage any hedging challenges. In 2009, the commission adopted a new §25.107 that substantially increased the financial requirements for REPs and required that they have expertise in energy commodity risk management," Staff's preamble states.

Staff's preamble notes the comments filed in response to a question regarding whether a change in the offer cap implicates Subst. R. §25.475, regarding permissible changes in fixed price contracts. Staff's preamble notes that the issue was not addressed in the proposed rule, and would not adjudicate the issue in the instant proceeding.

"The commission will carefully evaluate the issue in a contested case if a REP seeks to raise its prices to customers on the basis of the cited provisions and a formal complaint is brought by a customer or an enforcement action is brought by the commission's executive director. The commission concludes that this rule is necessary to address resource adequacy, and should therefore be adopted regardless of whether the rule implicates the cited provisions," Staff's preamble states.

"The commission is committed to ensuring that there is enough energy to meet the needs of Texans this summer and in the years to come. Therefore, the commission seeks to provide the proper price signals in the energy-only ERCOT market to incent the construction of new generation; to incent greater market participation by loads as load resources and through load reductions in response to price signals; and to help ensure that existing generation will remain available. Concerning the latter goal, a higher SWOC will make it less likely that older plants will see an insufficient opportunity to recover costs related to capital needs, operating expense, and an opportunity to earn a sufficient return and therefore shut down. Increasing the high SWOC will help achieve this goal by increasing the amount that resources may bid for energy and other ancillary services, which in turn may affect the market price in both ERCOT administered and bilateral markets," Staff's preamble states.

"The commission concludes that it must act quickly and decisively to address resource adequacy issues. Generation investment decisions require a lead time of several years before generation facilities can be built. While the commission believes that energy efficiency, demand response, distributed renewable generation, and emergency response service will play important roles in addressing resource adequacy, the commission does not believe that these measures are sufficient to ensure adequate electricity in ERCOT," Staff's preamble states.

"The back-cast evaluation provided by ERCOT shows that the previous protocol changes, along with increasing the high SWOC to $4,500/MWh, would have almost doubled the adjusted 2011 peaker net margin for the evaluated scenarios, indicating a much more favorable investment environment in ERCOT for generation, while increasing the per MWH load weighted price only approximately 15%. These increases strike an appropriate balance between providing sufficient revenues to encourage generation investment while limiting the resulting price impacts on customers in the near term," Staff's preamble states.

"While the commission cannot guarantee the construction of new generation, a $4,500 SWOC will make ERCOT a more attractive market to maintain existing generation facilities and encourage future generation investment," Staff's preamble states.

"The commission believes that the increase in the high SWOC resulting from this rule is an appropriate and important step to maintain resource adequacy while keeping the short-term adverse effects on LSEs and retail customers at a reasonable level," Staff's preamble states.