Texas Generators: REPs Won't Be Exposed To High Real-Time Prices If Acting "Responsibly"

In reply comments in a Texas PUC rulemaking concerning changes to the scarcity pricing rules, Texas Competitive Power Advocates (TCPA), in addressing stated concerns about high real-time prices, said that, "Customers should not be exposed to high real-time prices if their REPs are (as they should be) hedging their customers' real-time price exposure."

As previously reported, TCPA has proposed in the project eliminating the Low System-Wide Offer Cap (LCAP) in ERCOT

See details on when the LCAP is triggered in our prior story here

As previously reported, a group of REPs favored retention of the LCAP, stating that the Peaker Net Margin mechanism (under which LCAP is triggered), "protect[s] consumers from sustained high prices by providing a 'circuit breaker' effect and resetting the HCAP to the LCAP if the market is distorted[.]"

In its reply comments, TCPA said, "The contention that customers will be harmed by extended exposure to scarcity pricing in real-time is based on the flawed premise that customers are broadly exposed to real-time prices."

"One of the primary benefits that retail electric providers (REPs) offer to their customers is protection from exposure to potential price volatility in real-time. Many customers are on fixed price contracts, meaning that their price cannot be changed in response to increases in real-time energy prices. But even customers on variable products generally should be protected from exposure to scarcity pricing in real-time, because their REPs, if acting responsibly, should have purchased a good portion of their wholesale power ahead of time (e.g., in the bilateral market) to mitigate the risk of exposure to high real-time prices. The impact to forward prices from a prolonged scarcity pricing period would also likely be mitigated (and thus so would forward contract prices), because forward prices reflect investors expectations of future market conditions, and the likely expectation would be that the market would respond to scarcity pricing -- and thus the scarcity would not last over the longer term. It is therefore misleading to suggest that the customer will be exposed to high real-time prices if there is prolonged scarcity pricing unless the customer had knowingly contracted to accept that risk. While the REP may be exposed to high real-time prices in a prolonged scarcity pricing period, that is a risk that is wholly within the REP's capabilities -- as well as value proposition and fiduciary responsibility to the REP's investors -- to manage. And this is not a valid argument for suspending scarcity pricing in the event scarcity materializes, e.g., by placing a cap on ORDC revenues or resetting the SWOC to LCAP," TCPA said [emphasis omitted]

Project: 48721