Texas Power Market Changes Include Little Talk of Rates

Texas electricity regulators last week approved a major change in the power markets. In a quick, unanimous vote, they doubled the amount that wholesale power prices could rise.

That move, and others that are being contemplated to fix the strained Texas power market, will almost certainly have a knock-on effect on the monthly power bills of ordinary Texans. But there has been little discussion or study of the impact on ratepayers. Instead, regulators have focused almost exclusively on making sure that the grid provides reliable electricity and avoids blackouts.

Keeping the lights on and cheap power are, of course, important goals for Texas. But they are often in conflict with each other, because building power plants requires money. And Texas regulators, while occasionally voicing approval of Texas’ currently low power prices, have focused almost solely on the reliability end of the spectrum.

Last month at a House State Affairs Committee hearing on the power markets, state Rep. Burt Solomons, R-Carrollton, inquired about prices. “When you say costs are going to rise, are we talking about $1 a month, or are we talking about $50 a month or are we talking about what?” he asked Sam Newell, a consultant for the Brattle Group who authored a major report this year outlining possible changes to the power market for the Texas Public Utility Commission.

Newell did not answer the question, saying only that prices would rise whether or not regulators made changes to the power markets. An exasperated Solomons then said: “Maybe you just don’t want to say it publicly, but I mean I would think at some point in time you have an idea of how much it would rise. And that’s all, I think, the public wants to know. … Apparently nobody wants to say, ‘Well, prices are going to rise — well, what does it mean for people who buy electricity?’”

 

Newell responded: “Again, this is not relevant to the choice you have to make. This is not relevant to the choice you have to make.”

To ratepayer advocates, the lack of discussion of power prices is frustrating. “It’s troubling that the PUC is slow to provide cost estimates,” said Tim Morstad, a Texas representative for AARP, the group representing people 50 and older. “When we look across the market, these are giant numbers that can reach into the billions.” His group argues that before the PUC makes any decisions about reshaping the Texas power markets, it should study the impact of the various options on ratepayers. “The key is to find the place we have reliable service at the cheapest price,” Morstad said.

A 135-page report prepared by Newell and the Brattle Group for the PUC this year contains no estimates of how much various potential changes to the electric markets could cost ratepayers. Those changes include a higher cap on wholesale power prices (which the PUC implemented after the report came out), and potential payments to power companies to have electricity on standby whenever it is needed, a scenario called a capacity market. Newell has said, on a UBS analysts conference call, that raising the wholesale price cap to $9,000 would increase costs “a couple of percent” on Texans’ electric bills.

The Texas Industrial Energy Consumers said in a PUC filing this year that the $9,000 price cap could results in wholesale power costs as high as $13 or $14 billion, if conditions similar to summer 2011 were to recur. That translates, very roughly, to $50 per Texas household.

Tom “Smitty” Smith, the Texas head of Public Citizen, a consumer and environmental advocacy group, said the PUC was not focusing on power prices. “I haven’t heard them discuss it,” he said.

Kenneth Anderson, a PUC commissioner, says that although there has been “maybe not a lot of discussion [about costs] in the open meetings” of the commission, there had in fact been “a lot of study” about the issue. He referenced Newell’s UBS comment, as well as a 13-page study in July by the University of Texas at Austin’s Center for Energy Economics. The study shows that raising the wholesale price cap to $9,000 per megawatt-hour, as the PUC recently did (the move will take effect in 2015), would impact average wholesale power prices (which reach the cap only on rare occasions when the grid is strained). Specifically, the study suggested that wholesale power prices could nearly double from levels earlier this year, when the cap was just $3,000 per megawatt-hour. However, “the model does not provide results on retail prices,” the report states. (Retail prices are the prices paid by ordinary Texans.)

Asked about why the issue was not studied more, Anderson explained that there were large numbers of variables. “[It’s] difficult to separate out one piece of the puzzle out of what the impact will be,” he said. Among those factors are natural gas prices — whose current low levels have been a key factor in pulling down Texas power prices recently — and technical items that the grid regulators are assessing, such as the amount of power to keep in reserve.

Already, one company that sells power to Texas ratepayers has passed on the costs from the higher price cap on to consumers. One Fort Worth customer saw an extra $44.92 added to his bill, and others have seen such charges. The PUC is evaluating whether the actions by the company, called Ambit, were warranted, according to the Fort Worth Star-Telegram. Anderson says Ambit is the only company known to have taken such action.

 

Average residential power rates in Texas in 2011 were 11 cents per kilowatt-hour, according to the Energy Information Administration, down from their high of 13 cents per kilowatt-hour in 2008 and roughly on par with 2005 levels.

Newell, the Brattle Group consultant, also told the House State Affairs Committee that power prices would rise even if grid regulators made no changes.

“We’re entering a period, probably for the foreseeable future, that’s going to require investment in infrastructure. That has to be paid for. And it [will] be ultimately reflected in retail prices,” said John Fainter, head of the Association of Electric Companies of Texas.

Besides electric rates, other components of power bills are also poised to rise. Charges for thousands of miles of high-voltage power lines to ferry wind power across the state from West Texas are starting to appear on bills. All ratepayers will help fund the project, which totals about $7 billion, with a roughly $5-per-month surcharge on bills. Those payments have already begun in North Texas, according to the Star-Telegram.

Morstad, the AARP representative, says that Texans who live in “competitive” electric areas — which includes most of the state except for Austin, San Antonio and places served by rural electric cooperatives — often get confused by the language that electric power retailers use to entice them to sign up. They are also, he said, sometimes hit with unforeseen charges, such as minimum-usage fees and high disconnection fees.

One of the PUC’s next decisions is whether to create a capacity system in order to pay backup power providers to be available. (The current system pays companies when they generate power, rather than paying for them to be available.) Anderson is opposed, citing the potential cost of the payments to be available. Donna Nelson, the PUC chairwoman, recently indicated that she was leaning in favor of it. An Oct. 5 UBS report estimates that such a system would cost Texans up to $2.3 billion.

In testimony last week before the House State Affairs Committee, Phillip Oldham, a representative for the Texas Industrial Energy Consumers, said that the Texas grid problems could be solved without a capacity system — the cost of which, he stressed, is a “material” issue. Already, he said, the challenge is easing: A few new power plants are getting built, and some “mothballed” plants could be brought back into service in urgent situations.

“I don’t think things are as dire as they looked earlier this year,” Oldham said. “And I do think we have time to get this answer right.”

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