Forbes Calls a Texas Capacity Market What It Is -- "More Regulation"

Credit to Christopher Helman of Forbes for calling a capacity what it is in a recent story on the Texas debate -- "a little more regulation."

Helman notes that with Texas restructuring, "Any decisions on whether to invest in new power plants are left up to investors. This is good in that it maximizes free market forces."

Helman continues that, "Yet a little more regulation might not be such a bad thing. Most other electric grids across the country also maintain markets in generation capacity. Utilities in those regions regularly enter into deals years in advance to buy power from generators at particular times and prices — this gives the generators another cash stream that supports construction of additional power plants."

While we disagree with the conclusion that even a "little" more regulation might not be such a bad thing (and would also challenge that a capacity market amounts to a "little" more regulation -- it'd be like saying the individual mandate in the Patient Protection and Affordable Care Act is a "little" regulation), we appreciate Helman calling the capacity market what it is: more regulation, and not succumbing to the spin that it is some form of "competition" or "market."

We can understand those responsible for maintaining the Texas electric market have justifiable fears of what will happen if there is not resource adequacy. We, personally, think that both experience from over 10 years of the energy-only market, plus recent investment and the increased reserve margin, confirm that resources will be built in time to meet future projected shortfalls, but we can understand where apprehension comes from. And we can understand the desire for a mandated reserve margin.

But our point is, if such a policy is adopted, it must be recognized as a return to regulation (perhaps not full vertically integrated franchised utilities), but regulation nonetheless.

And once you admit that the capacity market is regulation, it necessitates questioning whether that's the only regulation which should be introduced into the market. Why it is fair to compel load to pay for capacity, but allow capacity suppliers charge unregulated prices, and earn unregulated profits. Why shouldn't customers paying the fixed costs of assets be entitled to at-cost energy from those assets, which is essentially what happens under traditional regulation (technically cost plus the ability to earn an authorized, regulated return). A requirement that cleared capacity units "offer" energy at marginal cost means little to customers since the unit is still paid (and thus customers pay) the clearing price, which all but the marginal unit do not set. How is it fair that regulation only applies to customers, not capacity suppliers?

We believe that free markets will result in competitive prices, and thus prices should not be regulated, but in free markets buyers have the ability to "walk away" if the prices do not meet their preferences. A capacity market doesn't allow that, and gives capacity sellers all the leverage. Again, simply "mitigating" capacity offers, not prices, is not price regulation, because every supplier but the marginal supplier still earns the clearing price, even though customers might not normally pay that much for capacity absent the government mandate.

Opponents of mandated at-cost capacity (and energy) pricing can argue that in free markets, prices shouldn't be regulated by the government, and the market will efficiently determine price. We agree. But in free markets, demand isn't regulated either. So that argument doesn't hold water. If the government can step in and tell load how much capacity to buy, why isn't also fair, and efficient, for government to step in and tell capacity suppliers how much they can charge for capacity. It'd be an unconstitutional taking, and un-American mandate, the capacity owners would howl. It'd be no less un-American than making everyone buy government-mandated capacity. What's good for the goose...

Based on who they elect as their state and federal representatives, we think most Texans aren't going to like the idea of the government forcing Main Street to pay Wall Street, as is what will happen with a capacity market, especially if the "pain" of the new regulation felt by customers is not also shared by capacity suppliers, who do not give up any right to earn unregulated profits in exchange for having their fixed costs covered.

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