The Public Utility Commission of Texas (PUCT) approved two proposals to raise system-wide energy price offer caps at an open meeting held on April 12, 2012. The proposals aim to ease growing generation resource adequacy concerns in the Electric Reliability Council of Texas (ERCOT) power market, which is one of the few major energy-only electric power markets that exist worldwide and represents about 85 percent of electric power usage in Texas.
The overarching goal of the PUCT in approving these two price cap hikes is to ensure adequate electric power supply in ERCOT as forecasts for reserve margins, or the difference between available generating capacity and expected peak system load, grow increasingly narrow. The target reserve margin for the ERCOT region is 13.75 percent. Projections from ERCOT representatives indicate that reserve margins for the remainder of 2012 may be tight but should exceed the target reserve, while reserve margins may dip below that target in 2014 (potentially around 7 percent) depending on various uncertainties, such as environmental regulations and gas prices.
Under Section 25.505 of the PUCT Electric Rules energy price offers are currently limited to $3,000 per MWh. When competitive energy price offers in ERCOT become scarce, the price of energy from certain types of services, particularly power dispatched for reliability purposes, is administratively set to the high system-wide offer cap. The first of the two recently-approved proposals raises the high system-wide offer cap to $4,500 per MWh beginning on August 1, 2012. The second of these proposals raises the high system-wide offer cap incrementally over a two-year period to $5,000 per MWh beginning on June 1, 2013, $7,000 per MWh beginning on June 1, 2014 and $9,000 per MWh beginning on June 1, 2015.
A difference of opinion among the three-member PUCT resulted in the high system-wide offer cap increases being tentatively approved in two separate proposals. Chairwoman Donna Nelson and member Rolando Pablos approved the August 1, 2012 increase to $4,500 per MWh. PUCT member Ken Anderson argued against raising the cap this August and instead for long-term, permanent change to give market participants direction to plan, finance and build new generation. He stated that the August 1, 2012 increase won’t “make a wit’s bit of difference” in bringing mothballed generation back online this summer or encouraging long-term development of generation resources. Commission Anderson also argued such sudden action might leave market participants with insufficient time to readjust their risk strategies and might enable retail electric providers that offer fixed-rate contracts to residential customers to raise retail prices under these fixed-rate contracts to cover costs associated with the difference between the current system-wide offer cap and any higher cap approved by the PUCT. Note that Section 25.475 of the PUCT Electric Rules limits the ability of retail electric providers to increase charges during the term of fixed-rate contracts but contains an exception for changes resulting from laws that impose new or different costs on a retail electric provider that are beyond its control.
PUCT staff will conduct a public hearing for the August 2012 cap increase proposal, if requested, on May 29, 2012, and initial comments on this proposal must be submitted no later than May 29, 2012. PUCT staff will conduct a public hearing for the incremental cap increase proposal, if requested, on June 15, 2012. Initial comments on this proposal must be submitted no later than June 1, 2012.© 2013 McDermott Will & Emery