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On Capacity Market Decision, Lawmakers Question PUC's Authority

At a contentious hearing on Monday, lawmakers expressed skepticism about transforming Texas' wholesale energy market in an attempt to ensure the long-term reliability of the state's electric grid.

Sen. Troy Fraser, R-Horseshoe Bay, asks the Senate to adopt the conference committee report on voter ID legislation on May 9, 2011.

A bipartisan panel of state lawmakers grilled the Texas Public Utility Commission on Monday, raising hard-edged questions about the agency’s authority to overhaul Texas’ wholesale electricity market in hopes of ensuring the long-term reliability of the state’s electric grid — a move that would send billions more dollars each year to electricity providers.  

In a highly technical and occasionally contentious Senate Committee on Natural Resources hearing, several lawmakers expressed skepticism about the need for a market overhaul and accused the PUC of moving too fast on an issue that they said the Legislature should ultimately decide.   

“We have an agency that’s starting to move in a direction where the Legislature might not have intended it to go,” said state Sen. Troy Fraser, R-Horseshoe Bay, the committee’s chairman and the co-author of the legislation that deregulated Texas' electric market in 1999. “There are 181 of us who have an opinion on this. I request you pick up the telephone and talk to some of the legislators before you take that vote.”

At issue is whether Texas should shift its current “energy only” market to a “capacity” market, which would pay power plants to maintain excess capacity to have on hand when the state’s energy demand soars — usually in blistering weather — or if other plants go offline. 

Consumers would ultimately bear those costs, which some analyses have pegged at $4 billion per year. Capacity market proponents, however, say the switch would drive down prices in the long run. They say it would boost reliability, lower the costs of outages and stabilize the market, lowering the costs of capital.

Under current market conditions, electric generators say, the status quo provides little incentive to invest in capacity that would probably sit unused and be turned on only during peak-demand days.

The question has pitted electric utilities against consumer advocates and industrial energy users.

The PUC signaled that it would move toward a capacity market when commissioners last month, in a nonbinding 2-1 vote, supported mandating a “reserve margin” — the gap between supply and peak energy demand. Adopting a capacity market would be one way for the PUC to enforce the reserve margin.

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. But the threshold is only a goal, not a requirement, and the group has forecast that the state’s reserve margin will steadily shrink in the coming years as demand grows and investment in new power generation fails to keep up. 

Although the commission’s rule-making process can take months, if not years, observers on both sides of the debate characterized the PUC's vote as the first step toward a market shift.

But there are major questions about the accuracy of ERCOT’s forecasts, which tend to overstate demand and understate capacity. The grid operator has acknowledged those shortcomings and plans to overhaul its methodology in the coming months. 

Along with Fraser, several senators at the hearing — including Leticia Van de Putte, D-San Antonio; Donna Campbell, R-New Braunfels and Rodney Ellis, D-Houston — said they were troubled by the PUC’s trajectory, particularly because the Legislature had yet to weigh in. Other lawmakers in attendance sat mostly quietly, occasionally asking simple questions, in an apparent effort to absorb the finer points of an issue that carries a high learning curve. None of the senators spoke in favor of a capacity market. 

Fraser, recalling the deregulation debate in the late 1990s, said lawmakers decided to give the PUC “broad authority to keep the lights on” but not “unbridled authority to do an entire redesign." 

He called the utility commission “dysfunctional” and diagnosed it with what he called “agency creep.”

“It’s a disease we have in Austin,” he said, “where you give authority to an agency and they grab more and more power.”

Commissioners Donna Nelson and Brandy Marty — the two members who support a reserve margin — said they believe the agency’s authority on the issue comes from a provision in the deregulation law that grants it the ability to make rules to ensure the grid’s reliability.

“I believe that keeping the lights on in Texas is one of the core responsibilities of this commission,” Nelson said. “It’s always been my goal, if possible, to keep the system we have.”

John Fainter, president and CEO of the Association of Electric Companies of Texas, said at the hearing, “The agency not only has the authority; they have the obligation to maintain reliability.”

A loss of reliability, he said, “is a risk we don’t want to take.” 

Ken Anderson Jr., the lone utility commissioner who opposes the market shift, agreed with Fraser's criticism, calling it “a serious question about whether we do have the authority.” 

He said a shift to a capacity market would seem to violate a section of the law that says electricity prices “should be determined by customer choice and the normal forces of competition.”

Critics of shifting to a capacity market say the PUC should hold off on any action until is has revised forecasts. Meanwhile, they say, capacity market proponents who use the current data are overstating the reliability problem.

“There’s been a tendency to say the sky is falling, but at the end of the year, we have enough power,” Fraser said.

Campbell said that capacity market advocates were painting a "false dilemma," and that she worried that capacity market payments would not guarantee that generators would build new capacity anyway. 

Texas’ record heat in 2011, when the reserve margin plunged far below the council’s target, sparked talk of rolling blackouts. The blackouts didn’t happen, but the situation exacerbated concerns that the state might struggle to keep the lights on during particularly hot days. Since deregulation, the state has not seen any summer blackouts.

The last grid-wide blackout was in February 2011, when a deep freeze caused a large number of the state’s power plants to fail. The blackouts generally lasted a few hours.

Van de Putte said she wants a breakdown of how much a capacity market would cost individual ratepayers and large energy consumers.

So far, the agency has looked at market-wide impacts, but it has not broken down individual costs, Nelson said.

“I’m really concerned about how you’re building this case,” Van de Putte said. “We need to know who is going to pay.”  

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