This is the summer of truth for Texas’ costly experiment in electricity deregulation. By the time the first cool front rolls across Texas in the fall, it should be clear that under our current system, electricity can be cheap, or it can be reliable, but it can’t be both. And it may be neither.
A study commissioned by the Electric Reliability Council of Texas, the state’s grid operator, recommends tripling wholesale prices to avert blackouts like the state experienced in February 2011. The Public Utility Commission will vote on a plan later this month to raise the wholesale price cap by 50 percent, with additional increases planned for next year. ERCOT’s study merely “confirms that we are moving in the right direction,” PUC Chairman Donna Nelson said in a statement today.
After the state embraced deregulation, Texans endured a decade of electricity prices that were higher than most of the country. We were told that was because natural gas prices rose, which no one expected, but now, they’ve fallen to the level they were at when this experiment began. Officials are now saying wholesale prices must triple.
For more than a year, Texas has struggled with capacity issues. The wholesale price caps put in place to keep electricity affordable for consumers have prevented generators from investing in additional generating plants. Lenders are unwilling to pump capital into the market because the return on investment is too low.
The solution? Allow prices to rise. And that’s why, despite a decade low in natural gas prices, which account for most of the state’s generation, and falling coal prices, electricity rates are going up across most of the state this summer. The prices increases won’t bring new generation online fast enough to prevent possible shortages this summer, but hey, you have to start somewhere.
By lifting the wholesale price cap, though, the PUC is unleashing another problem: more market volatility. As I wrote a few weeks ago, some spot markets for electricity are already seeing this. The higher caps expand the range of fluctuation for prices. That means retailers — the companies that sell you electricity — must spend more to hedge against price swings. The more they hedge, the more it squeezes their already razor-thin profit margins. In 2008, five retailers shut down because of price volatility. This summer, more could be forced out of business or forced to break their fixed-price contracts with consumers.
On Tuesday, TXU, a Dallas-based retailer, suggested in a filing to the PUC that companies be allowed to break fixed-price contracts with residential and small commercial customers if higher price caps increase retailers’ costs. In what may be the understatement of the year, TXU said it realizes that “changing the price of a fixed-price product would likely create a negative customer experience.” It added:
If, however, this upcoming summer turns out to have extreme weather or extreme price volatility that affects TXU Energy’s wholesale costs, then TXU Energy might be forced to re-evaluate this position.
In other words, TXU wants a fixed-priced contract without a fixed price.
So 10 years into the deregulation fiasco, we’re looking at a summer in which consumers, having endured years of high prices, can expect them to only go higher; retailers may not be able to afford to honor their customer contracts and generators may not be able to afford to keep the lights on.
This is “moving in the right direction”?