Supply Pinch in Texas Tests Electricity Rules

By REBECCA SMITH / Wall Street Journal  Oct. 3, 2011

Supply shortages in Texas' electricity market have state regulators considering major changes that would boost supplies but also could raise electricity prices for consumers.

Low wholesale prices have prompted power companies to defer construction of generating plants and shutter old units, cutting supplies. Meanwhile, demand hit record levels this year, due to extreme heat and continuing population growth. Texas came close to rolling blackouts this summer and had rolling blackouts in February when electricity supplies gave out during a cold snap.

State officials acknowledge there is a problem and are considering radical changes to market rules that would boost electricity prices for consumers in coming years, hoping it would cause power companies to build more generating plants. They also are laying the groundwork to blame federal environmental regulators for supply problems.

Before the deregulation of its energy market took effect in 2002, Texas officials could have told utilities to build more power plants. Now, about all regulators can do is revise market rules at Ercot, the Electric Reliability Council of Texas, which runs a daily energy auction. The goal is to make power production more profitable so generators build more plants.

One proposal under consideration is to create a floor for electricity prices—meaning that electricity will no longer be as inexpensive for the retailers or end-users. Another proposal is to raise a price ceiling. Currently, wholesale prices are capped at $3,000 a megawatt hour; Texas officials are considering lifting it to $6,000. (Outside Texas, federal officials cap prices at $1,000 a megawatt hour.)

Daniel Jones, the official Texas market monitor, warned in August that power prices in 2010 "were insufficient to support new-generation investment," thus providing further justification for raising wholesale power prices, especially when supplies are short.

The average price of power in the Ercot was $40 a megawatt hour last year, down from $86 in 2008 and up slightly from the $35 fetched in 2009. (Prices for 2011 aren't yet available.) In order to justify the expense of new plants, generation companies say they need higher prices for the power they sell through contracts—prices that are being depressed today by low prices of natural gas, used to generate nearly half of the state's supply—or higher spot-market prices. That way, when demand for power was especially high, newer, costlier plants would be able to sell at least some power at very high prices.

That is why they are pressing for the opportunity to collect higher prices, at times, and lift a bid cap that prevents those high prices from being charged. The downside for consumers is that this would allow all generators selling electricity into the spot market to collect a higher price because all suppliers are paid a common market-clearing price.

Big energy users and consumer advocates are upset about talk of raising wholesale power prices. After all, they suffered through the high prices in 2008, and earlier years, and think generators should tough it out now.

"This is how markets work," says Tim Morstad, energy expert for AARP. "Sometimes there are lean times."

A spokeswoman for Texas Gov. Rick Perry, a Republican front-runner in the race for the White House, says he isn't directly involved in trying to solve the power-supply problems but "trusts his agencies" to take steps "to make sure that Texas power remains reliable and affordable."

Structuring electricity markets to guarantee both steady supplies and reasonable prices remains one of the most elusive goals of policy makers. The Texas legislature deregulated the state's electricity market in 2002, hoping it would unleash innovation and bring lower electricity prices, even though its prices already were below the national average. Mr. Perry, who was a new governor at the time the deregulation took effect, has remained a strong supporter of the move.

Jay Doegey, an attorney who represents a coalition of 160 cities that buy electricity for street lighting and other purposes, says: "What's important, now, is to not over-react" by throwing money at the generators. He says it is foolish to make big changes based on one year of record heat and demand, and he thinks the state should invest more money in energy efficiency.

Texas suffers when electricity reserves get thin because it can't import much power from other states. Years ago, utilities severed most electrical connections to other states, at the order of state utility regulators, so the Texas market could escape federal oversight.

With supplies looking meager, Texas officials' rapport with the federal Environmental Protection Agency is getting worse. That's because the EPA is ordering big reductions in harmful emissions from 27 states, including Texas, beginning in January. The rule falls heavily on power plants because they're big emitters.

H.B. "Trip" Doggett, chief executive of Ercot, the organization responsible for keeping the lights on in Texas, says the EPA rule "boosts the risk of outages" because it could result in generating-plant shutdowns. The amount of threatened capacity is small, perhaps 1,300 megawatts of capacity, but the state's attorney general is seeking to block the law's implementation.

EPA officials say Texas power companies can comply without shutting plants by running more flue gases through pollution-control equipment and, possibly, shifting to cleaner-burning coal. If that doesn't do the job, they can purchase emission credits.

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