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The committee met to hear testimony regarding recent discussions of the Public Utility Commission related to moving to a capacity energy market in the state.
 
In his opening remarks Chairman Troy Fraser noted that in 1999 when the legislature deregulated the energy market he was co-sponsor of the bill that did so as well as vice-chair of the committee.  There has been a very interesting path through deregulation, the Texas market continues to be a national model for the way electrical systems should work.  Through the years, Fraser has had an exceptional relationship with the Public Utility Commission (PUC). It was decided that the best action during deregulation would be to make PUC as autonomous as possible.  There is now a major concern in the situation regarding a vote being taken to move toward a capacity market and now the legislature must get involved again.
 
Trip Doggett, CEO, Electric Reliability Council of Texas (ERCOT)

  • Over the last 9 years energy consumption has grown 14.5% in Texas; 1.6% per year
  • Peak consumption has grown 10.7% over the last 9 years
  • Texas was expected to fall below the target reserve margin in 2015
  • Between May 2011 and December 2011 ERCOT became concerned about the potential shortage
  • The latest report issued May 2013, Texas was right on target for 2014 and began to fall below the target from 2015 and beyond
  • Between December 2012 report and May 2013 report much improvement was shown
  • Looking for a reserve margin of 13.75%
  • The de-rating of wind resources occurred because wind is not generally blowing greatly around peak times; for non-coastal wind the number is closer to 14% but coastal wind is close to 33% which would add some megawatts to the generation estimate
  • Moody’s projection for growth of non-farm employment has in the past paralleled the load growth for Texas; it is believed that consumption is starting to react to scarcity pricing and causing less consumption growth
  • Fraser noted that industrial and commercial users have begun to react the most and caused the most significant decrease in consumption; residential consumers with smart meters have begun to react as well
  • Sen. Chuy Hinojosa asked what happens if there weren’t a decrease in consumption and there wasn’t enough reserve
  • Fraser noted the concern is not with running out, just an event such as a generator going out and not producing energy
  • Hinojosa asked about brown outs
  • Doggett noted that if more plants go offline than expected at one time during a peak time, it could cause brown outs
  • Fraser noted his objective is to get more generation built and is trying to figure out the best way to make that happen
  • Sen. Leticia Van de Putte asked how much consumer agreements have helped with unexpected shortages
  • Emergency response service has been expanded and public outreach programs have been implemented to attempt to mitigate shortages in unexpected times; industrial consumers and large usage consumers are being studied to understand better when their peak times are and what they are using energy for
  • Fraser is concerned about the ten year forecast and the fact that it is made more difficult by the unpredictable nature of generation investment and the inaccurate methodology for projecting consumption
  • Sen. Carlos Uresti asked about the one-in-ten year standard
  • It establishes a target for the amount of surplus generation over load forecast that needs to be carried for most events such as loss of generation, higher than normal load, etc.; the formula says that the load in Texas can be carried through all but one event that happens statistically once in ten years
  • Fraser noted the concern about outages only spans 28 hours per year; PUC has laid out a plan that could cost $4 billion per year in additional payments and could potentially not solve the problem; forcing people to build thousands more megawatts could create a huge cost for consumers

 
Donna Nelson, Chairman, Public Utility Commission

  • PUC began looking at the issue of a potential energy shortage a few years ago
  • Fraser asked if Texas has ever fallen below the reserve margin
  • Currently the reserve is 13.2% so a little short but Texas has never fallen much below the margin
  • In an energy only market, prices go up when reserves go down; because supply and demand have to be matched at every moment in time it is more difficult
  • An energy only market is designed to operate at a lower reserve margin such as 9-10%
  • The core question is whether Texas is comfortable with a more narrow reserve margin
  • Fraser asked if Nelson is in favor of a cost-benefit analysis and reminded her that she asked Fraser to pull an amendment down that would have required a cost-benefit analysis during the legislative session
  • Nelson noted she is in favor of an analysis but she doesn’t agree that it would cost Texas $4 billion to implement a required reserve margin
  • Van de Putte asked if the cost benefit analysis will include a breakdown by customer type
  • Looking more at the cost impact to the wholesale market, not as much for residential customers; last year Brattle performed an analysis that showed there would only be around a 1.5% increase in costs to residential consumers
  • Van de Putte noted that she never believed Texas would switch to a more socialized system but if it does happen the costs to all consumers need to be understood

 
Ken Anderson, Commissioner, PUC

  • The cost would probably be done on some sort of load share system; there are a few legal issues; not sure if PUC has the ability to spread cost among cooperatives and municipal systems
  • Fraser noted that he would be surprised if Brownwood’s municipal system would volunteer to absorb their share of $4 billion
  • Anderson noted that he was against a required capacity market; it doesn’t make sense to pay for capacity to prevent an event that would interrupt energy when it is 100 times more likely for energy to be interrupted because of a transmission issue
  • Fraser asked about other capacity markets and the potential for rolling blackouts
  • Yes there have been some very recently such as PJM’s outtage

 
Brandy Marty, Commissioner, PUC

  • Fraser noted one of Marty’s first votes at the commission was to move toward a capacity market
  • No, it was to have a required reserve margin
  • Fraser asked how do you mandate a reserve margin without going to a capacity market
  • Currently, Texas would most likely have to build rules to handle a required reserve margin
  • Fraser noted that it seems like mandating an energy reserve is step 7 and we should still be at step 1; need to have the Brattle report; Fraser sees no reason why the mandatory reserve margin should even be considered yet
  • PUC will begin having talks about different market options in the near future to decide if there is a way to require a reserve margin without implementing a capacity market

 

  • Fraser noted that it seems Nelson is predicting that the sky is falling when ERCOT has predicted that it is quite the opposite
  • Anderson noted that he has enlisted a study and preliminary findings are that the projections about needed generation and load consumption are inaccurate
  • Fraser noted he sent commissioners a very strongly worded letter regarding PUC being given full authority to redesign the market
  • Nelson replied that PURA gives authority over reliability and she assumes the power from that aspect
  • Sen. Rodney Ellis asked the other commissioners if they believe they have authority to make this decision
  • Anderson replied that he hadn’t started looking at the issue until 3-4 weeks ago; not sure that implementing a centralized forward capacity market meets the test of energy reliability; it seems more like an energy tax divorced from consumption
  • Marty agrees that PURA charges the commission with being concerned over reliability; more research is being done in this regard to flush out more answers
  • Fraser noted that the commission has put the cart before the horse; there are many things that could be done prior to installing a capacity market; in the last year the PUC has become dysfunctional; communications between commissioners and between the commission and the legislature have not been as good as they have been in the past
  • Van de Putte asked commissioners to do everything possible to ensure the energy only market continues to work before making any changes that could cause price increases to customers
  • Ellis asked for a breakdown of what the costs will be to school districts as well as other types of customers before a decision is made; doesn’t believe the commission has the authority to make the decision to redesign the market

 
Bill Peacock, Texas Public Policy Foundation

  • Have been working on this issue since 2005
  • Consumers are paying less for energy today than they did 20 years ago
  • There have been multiple commissioners in the past who have had the opinion that Texas should not move to a capacity market
  • Generators have made statements that they believe there is still money to be made in the current market
  • There doesn’t seem to be any reason to believe Texas will suffer from an energy shortage
  • Brattle’s projected savings expected from moving to a capacity market may not even be realized but the billions of dollars in capacity payments are a real cost

 
Robert Michaels, Professor of Economics, University of California

  • The reason Texas continues to function despite a great deal of people saying it can’t is because Texas already has a capacity market; contracts and agreements between generators and retail electric providerss are the security behind capacity investment
  • Capacity markets don’t seem to deliver what they promise to; they deprive regional electric providers of the freedom to choose the resource mix they want

 
John Fainter, Association of Electric Companies of Texas

  • Texas has a very reliable system currently
  • Fraser asked if the system has worked so far
  • Yes
  • The nature of electric companies ties their success to electric reliability; the success of Texas ensures the success of electric companies
  • Fraser asked if PUC has unbridled authority to redraw the market in Texas
  • They have the authority and the obligation to maintain electric reliability in the state with oversight from the legislature
  • Ellis asked if there has been an instance when an ISO has gone from an energy market to a capacity market
  • All other ISOs began as capacity markets
  • Fraser asked why it wouldn’t be more logical for the state of Texas to build generation; would writing a check to electric companies ensure that more generation is built
  • A bidder could come to the table with other efficiencies so that building generation would not need to be the only option
  • Watson asked if PUC has the authority to create a capacity market based on its authority to provide for reliability
  • Essentially
  • Fraser asked if a cost benefit analysis is done and determines that the cost will be $4-6 billion per year or if it suggests that Texas building its own generation is the best option, would the association support the decision
  • Would not support re-regulation of the market

 
Philip Oldham, Texas Association of Manufacturers

  • Manufacturers oppose moving to a capacity market because it is a step backward
  • Since PUC began to take steps toward a capacity market, generation has continued to be developed in the existing market
  • Capacity markets are exceedingly expensive because they rely on an administrative determination of need that is always short
  • Fraser noted PUC has regulatory tweaks that are available and can be implemented with very little issue that have not been considered
  • Fraser noted that if he was a manufacturer he would rather not pay a fee for every hour of the year just to avoid a curtailment for one hour a year
  • Ellis asked about alternatives
  • After 2011 there was a huge uptick in consideration of load management which will continue to help mitigate consumption peaks

 
Chris Brewster, Steering Committee of the Cities Served by Oncor &Texas Coalition for Affordable Power

  • PURA Ch. 35 sets up a market where energy providers compete for business
  • Mandating the reserve margin causes lots of problems that haven’t been made explicit enough yet
  • Mandating the reserve margin would really mandate consumers to purchase more generation because the cost will be passed on to them

 
Erica Bowman, America’s Natural Gas Alliance

  • Concerned about adopting a mandatory reserve margin before relevant information becomes available
  • The question has become what the right level for a reserve margin should be
  • Would like the definition of “reliability” to be established before a decision is made

 
Andrew Dalton, Valero & ERCOT Board Member

  • The additional costs that could come with a capacity market are significant
  • Importing a broken model is not a good idea; would be better to take targeted ancillary service style measures to try to handle a problem that may be as small as 20 hours per year
  • Since 2011 when the last rolling outages occurred, 3 Valero refineries have gone down 7 times because of grid instability and maintenance, etc.

 
Chris Hendricks, Wal-Mart

  • Wal-Mart is concerned with the potential cost impact of switching to a capacity market
  • A case has not been made with substantial evidence to make the change to a capacity market
  • The energy only market has successfully maintained adequate resources at a sustainable cost
  • Based on estimates, Wal-Mart’s annual electricity costs would increase by $6  million just in Texas by moving to a capacity market