PUC Vote Signals Support for Market Shift

Texas regulators signaled Friday that they would pursue a major overhaul of the wholesale electricity market in hopes of ensuring the long-term reliability of the state’s electric grid.

At a meeting that turned testy, the Public Utility Commission voted 2-1 to mandate an electrical “reserve margin,” which is backup capacity that grid operators could tap if consumption in power-thirsty Texas soars above expectations. Those on both sides of the debate called Friday's nonbinding vote the first step in shifting Texas’ "energy-only market” to a “capacity market,” a controversial move regulators have weighed for more than two years. Under the current setup, utilities are paid only for the energy they generate. In a capacity model, in use to various degrees in other markets, the companies get paid for maintaining backup capacity.

The Electric Reliability Council of Texas, the nonprofit that operates the state’s energy grid, currently aims for a 13.75 percent cushion above what Texans consume when demand is highest. That threshold, however, is merely a goal and not a requirement. ERCOT has warned that reserves would shrink in the coming years, as new power generation fails to keep up with demand as the state’s population surges and its temperatures rise.

The PUC’s vote was big news to those trying to determine the bitterly divided commission’s trajectory on an issue with huge implications for Texas electricity providers and ratepayers.

Observers were closely watching Commissioner Brandy Marty, a newcomer, who had yet to publicly weigh in on the issue. She joined Chairwoman Donna Nelson in supporting a required threshold, voicing concern that a host of factors are threatening the grid’s reliability and, in turn, the state’s economy.

Commissioner Ken Anderson Jr. fiercely opposed the move, calling it “a huge tax on consumers” and the "first step on a very slippery slope that has the potential to destroy the economic engine that is Texas.”

Without shifting the market, electric utilities say they have little incentive to invest in backup capacity that would mostly sit unused.

John Fainter, president and CEO of the Association of Electric Companies of Texas, called the PUC’s vote “a step in the right direction.”

But critics of the market shift, including consumer advocates, libertarian groups and some environmentalists, say it would shift billions in costs to ratepayers and violate free market principles.

State Sen. Troy Fraser, R-Horseshoe Bay, who co-authored legislation that deregulated Texas' electric market in 1999, said the commissioners should wait for more information before solidifying their opinions, calling the vote a “severe miscalculation” that is “putting the cart before the horse.”

In the coming months, ERCOT plans to overhaul its forecasting methodology, which it says might overstate demand. Meanwhile, the Brattle Group, an independent firm, is expected to soon release a new report on reserve margins.

Fraser also questioned the PUC’s authority to overhaul the market, and said he would soon meet with his colleagues to discuss the Legislature’s role.

“I don’t think it was ever envisioned that the PUC would change the market,” he told the Tribune. “That’s a huge decision, and it should not be made by an agency. It should be made by the Legislature.”