SHOCK: Texas Official Muses that Generators May Be Intentionally Underbidding to Keep Prices Down [to Manufacture Crisis?]

The continued lack of scarcity pricing in ERCOT, despite a host of pricing reforms and grid conditions which support scarcity, prompted Kenneth Anderson, Public Utility Commissioner of Texas, to muse whether generators were intentionally underbidding.

Matters stresses that, in context, Anderson did not make the remark as a specific allegation, and it was made more in the context of pondering aloud why certain pricing was present in the wholesale energy market despite scarcity conditions, with Anderson even pausing for a slight chuckle after his musing. However, the fact that Anderson would even raise the possibility of such behavior lends voice to an undercurrent that has been present in the market among certain stakeholders, but which has not had a public voice, possibly due to fear of retribution (such stakeholders having various business relationships with the generator(s) involved in such behavior). Furthermore, Matters stresses that Anderson did not personally speculate as to the motivation of such bidding behavior, though Matters, itself, will note below that the motivation for such behavior, if present, is clear.

Anderson's comment came during a workshop on the B+ Operating Reserves Demand Curve proposal.

Anderson was discussing the continued lack of scarcity pricing, even as demand and weather would support higher prices, despite: (1) increases in the price cap; (2) clarifications from the Commission as to the market power rules (both officially regarding the small-fish-swim-free rule and thus far unofficially as to what is included under "marginal cost"); and (3) a series of initiatives to prevent price reversal. Anderson noted yesterday that real-time prices, for much of the afternoon, were in the $40 range, rising just above $50 toward the end of the PUCT's meeting, despite grid conditions that would suggest scarcity.

Anderson said that the main value of the Operating Reserves Demand Curve is in the shoulder months where there has not been much scarcity pricing despite conditions indicating scarcity. However, while Anderson was initially less concerned about the need for the curve to support scarcity pricing in the summer, the market's non-scarcity pricing in the recent hot days has raised his concern.

"I almost wonder if there's negative power, market abuse [slight chuckle]," Anderson said, with, "a lot of people intentionally underbidding, because otherwise I can't account for what's going on in the market."

As noted above, Anderson did not speculate as to, if such behavior is present, why it is occurring.

However, Matters would note, without opining on whether such bidding is actually occurring, that it would be entirely rational for generation owners that favor a centralized capacity market, who would receive billions of dollars in wealth transfer payments not available under the energy-only market even under scarcity pricing, to ensure that the energy-only market does not work as intended, and to introduce inefficiency into the market, as "proof" it cannot be relied upon for scarcity pricing, and therefore, resource adequacy.

Although Matters notes such behavior would be rational, Matters stresses that it makes no allegation that generators are engaged in such behavior. But to the extent any capacity owner would claim that such a line of thinking is patently absurd, Matters would simply reply that, in aggregate, the generator and wholesale supply community has never distinguished itself as anything but seeking to maximize rents, as can be seen as how every word in every tariff was exploited to maximize rents in the initial California deregulation experiment, which eventually led to not only the suspension of retail choice in that state, but stopping the march of retail choice in all but 20 states (give or take), rather than allowing it to flourish. It's taken over a decade to undo the damage (which still largely remains), and only now is there even a hint, and a small hint at that, of retail choice expanding from its current footprint.

To be clear, Matters has no problem with rent-seeking behavior, to the extent it can be disciplined by customer choice and new entry. However, the capacity market essentially gets the government to "carry the water" for rent-seeking generators, by forcibly compelling customers to pay generators rents they would never receive in a real market.

Back to the specific issues in Texas, Matters wishes to stress that Anderson did not, nor does Matters, make any allegation that the underbidding, if it has been practiced, is contrary to any law or regulation.

What Matters does wish to stress, however, is that generators are largely in control over the prices they receive in the energy market, especially during scarce conditions. There was a concern raised by GDF Suez about continued over-mitigation and its impact on scarcity pricing (and Matters wishes to stress here that given its prior history of bidding at or near scarcity pricing when scarcity conditions are present, if any generator is indeed underbidding, it is likely not GDF Suez), and Matters will not state here that all price reversal due to deployment of ancillaries has been removed from the market.

However, it would still seem many generators are reluctant, for whatever reason, to bid at scarcity pricing, which is their right. However, when they later blame the lack of scarcity pricing as indicative of a broken energy-only market, their behavior must then be questioned.

To a lesser extent, aside from supporting the rationale for a capacity market, the decision to not bid at scarcity prices could also be seen as a strategy to limit new entrants, by making it appear that new entrants could not rely on scarcity pricing to recover start-up and fixed costs.

Certainly, when it comes to other commodities, such behavior has prompted specific below-cost pricing laws (gasoline, milk). By citing such laws, Matters in no way endorses any law which sets minimum prices, but cites them only to reinforce that it is not patently absurd to think incumbents might price below costs in certain instances in order to protect their current standing in the market.