You may or may not be aware, but the Texas Public Utility Commission is proposing to increase price caps in ERCOT starting this summer and increasing them each year for the next several years. [ERCOT is the Electricity Reliability Council of Texas-- they manage the flow of electric power to 23 million Texas customers - representing 85 percent of the state's electric load.]
What does this mean for you? Just the threat of an increased price cap, as as well as the proposed implementation of several new EPA regulations has caused summer heat rates (generation costs) in ERCOT to increase significantly over the past 9 months. So, even though natural gas prices are at 10 year lows, electricity prices have not followed them all the way down due to these pending regulations. The Public Utility Commission has proposed that this change in wholesale rate caps would be an allowable "Change in Law", which will allow retailers to increase prices to customers (home and business) in ERCOT even if you are on a Fixed Price contract. The even more disconcerting aspect is that it seemed that the PUC viewed possible increases in collateral costs and hedging costs and many other costs of doing business as an allowable expense to be passed along. Those costs are difficult to quantify and allocate to specific customers, which essentially means that retailers will have a blank check to increase rates to their customers. Who does this impact? This change will affect every business, school district, home, industrial plant, etc. in ERCOT.
Why is the commission doing this? The commission's proposed reason for wanting to increase price caps is to create incentives for companies to build new electricity generation in ERCOT. The growth in load in ERCOT is exceeding the growth in new generation, and a need for an increase in generation or a decrease in peak demand to maintain stability in the system does exist. However, to my knowledge, the PUC has not outlined any studies on 1) the effectiveness of increased price caps at enticing the construction of new generation 2) the dollar impact of the price cap increases on the electricity costs of every single user in ERCOT 3) the decrease in businesses entering the state to do business because of the newly increased costs, especially in the manufacturing sector which are high users of electricity 4)the jobs lost due to these increases in costs. It is anticipated that once you have increased those caps, they will never come back down---the genie will be out of the proverbial bottle. Once the risk of prices rising to these cap levels increases, it will forever add additional risk to operate in ERCOT which will translate to higher costs for all. It is important to note that even with the large increases in Heat Rates due to the expected price cap increases, so far, no significant new generation has been announced. Who benefits? Existing generators that can take advantage of these $4500-$9000 per MW price caps as well as profit from the higher market heat rates that result from the risk of the market reaching those high price caps. Some Retail Electricity Providers in the short term-- if the PUC moves forward with allowing the implementation of the higher price caps to trigger the "Change In Law" provisions of their contracts, the PUC would in effect be providing them with a blank check to increase your already negotiated rates--those retailers that are struggling financially have the greatest incentive to increase rates. However, in the long term, these higher price caps will increase the REP's costs of doing business. Other thoughts... Even with these price caps there is no guarantee or even an indication that we will not have rolling blackouts this summer. Similar to the flawed market in California which led to Enron manipulating the market (due to skewed rules) and harming the state's economy for over a decade, the market in Texas is not designed such that adequate price signals are being provided to customers to incentivize them to curtail their load during peak times. Most users are on fixed price contracts that do not distinguish the price based on whether they are using power during the peak times or at night. It is all the same price. So, even though the PUC is wanting to dramatically raise these caps, there will not be a disincentive for users to turn down load at peak times if the price that they are paying is not reflective of the cap. Smart Meters are being deployed across the state at this time which will provide REPs with real time usage data on every customer. When those are deployed, the market will be able to migrate to more time-of-use pricing products, which will then create better pricing for those that do not use during peak times and create economic disincentives for using power at the peak times. The PUC is rushing to implement these price cap increases, without considering the long term impact of the deployment of smart meters. Just as the cellular phone pricing model was created which had higher prices during peak times relative to non-peak, it is reasonable to expect the electricity market to do the same, once those usage patterns can be more adequately tracked. What should the PUC do? The PUC should either demonstrate and communicate the known and measurable benefits to the consumers of implementing these price caps OR should instead consider other alternatives to increase incentives to build new electricity generation. Some ideas: 1. Have tax incentives been considered? Generous tax incentives, with a competitive bid process to determine eligibility for those incentives (those that are willing to build efficient, clean burning generation in areas that would relieve congestion on the grid), would create immediate results with a known and measurable cost to the ratepayers in ERCOT. The issue with the increase in price caps is that it does not guarantee the desired result and there is no known understanding of the increase in prices in ERCOT. 2. Has the PUC or the State considered investing in assisting generators in reconfiguring coal plants to allow them to be in compliance with new emissions requirements? While I am not typically in favor of government assisting private enterprise, there is a "greater good" aspect to keeping these plants on the grid, but not polluting the air. This could perhaps be achieved via tax incentives or low cost loans, with the state somehow receiving a return on the investment via the generation revenues. Again, this solution would have known costs, and known amount of generation added, and a MUCH shorter time frame for putting new generation in place.