Steffy: Fixing Texas’ power market woes

We made it through the summer, and the lights stayed on.

The question hanging over Texas’ deregulated electricity market, though, is: What happens next?

For much of the summer, I’ve written about the problems facing the market, such as the lack of incentives for desperately needed power plants.

Many of the issues have centered on arcane aspects of the market, which only underscores a fundamental problem with deregulation: From the beginning, consumers have been an afterthought.

“What has gotten lost in this debate is what the customer wants,” said Brett Perlman, president of consulting firm Vector Advisors and a former commissioner on the Public Utility Commission of Texas. “They want reasonable prices, and they want reliable service.”

The commission has catered to generators’ whims because it wanted to ensure the lights stayed on. Yet generators say the prices are still too low for them to make money or to justify the cost of building new plants. Without them, the threat of rolling blackouts could return next summer.

“If we continue to grow in Texas like we anticipate, there is going to have to be infrastructure investments in our industry,” said John Fainter, president of the Association of Electric Companies of Texas, which represents big generators. “That investment’s going to have to be recovered and, hopefully, a profit made on it.”

Generators, though, want the utility commission to intervene in the market on their behalf, which could result in a de facto oligopoly. As a result, we’re moving further away from a free market, and consumers are going to pay more. Call it pseudo-reregulation.

“The regulator was supposed to step out of the market, and what the generators want now is for them to step back in,” said Geoffrey Gay, an Austin attorney who represents the Texas Coalition for Affordable Power, a nonprofit group of 160 city governments that have pooled their electricity buying for municipal use.

After discussing the issue with a wide range of market players, I’ve come up a short list of feasible changes that could benefit customers and restore some stability to the market.

Easy steps

The first three would be easy to implement and would probably face little opposition:

  • Improve the existing demand response program. Large commercial customers get breaks on their bills by agreeing to reduce electricity use in times of peak demand. Encouraging more companies to participate and improving the speed and coordination with which the grid handles the requests would reduce the chance of blackouts in the short term until new power plants are built.
  • Over the long term, create a system of payments collected, ultimately, from retail customers, that generators would use to build additional power plants for meeting peak demand. The payment would essentially create a reliability surcharge on customers’ bills, although Perlman believes it could be structured to minimize the costs. The downside: Customers weren’t told they were sacrificing reliability when deregulation was adopted. While it’s a practical solution for improving reliability, it’s like charging cruise ship passengers a flotation fee to ensure that the ship won’t sink.
  • Improve the oversight in the wholesale market to make it more difficult for generators to withhold power and drive up prices. After questionable market activity over the summer, the utility commission allowed some generators greater leeway to withhold power. The market needs more transparency, not less, and regulators need to impose fines on companies that withhold generation that the market is counting on.

More drastic steps

The last three measures are more drastic, though none is as drastic as deregulation itself was a decade ago:

  • Allow cities to invest in generation. Private companies are having trouble getting financing to build power plants because of tight credit markets. Cities, though, could sell bonds to finance plant construction. “I have a lot of clients with triple-A bond ratings,” Gay said. This would avoid the private financing issue and reduce construction costs. More important, it would diversify the generation base and create more competition among generators. The result: more power flowing into the wholesale market, driving prices down. The generators will hate this because it will break the oligopoly they’re trying to establish and undermine their market power.
  • Retailing has always been the window- dressing of deregulation, the veneer that lawmakers slapped on so the public would perceive a benefit. All it’s done is add complexity and confusion to the process of paying for electricity. It’s time to allow the regulated transmission companies like CenterPoint back in the retailing game. It would crush small retailers, but they’re unlikely to survive against the oligopoly of generator-owned retailers, such as NRG Energy’s Reliant and Green Mountain Power.
  • Reduce, rather than raise, wholesale price caps. The PUC doubled limits on wholesale prices over the summer, and it wants to do so again next year. But that adds volatility to the market and increases hedging costs for retailers, leading to higher prices for consumers. While lowering the caps would eat into generators’ profits, tweaks to the rules governing how they sell power could enable them to still make money while allowing an orderly rise in prices as demand increases, avoiding spikes.

All of these have their drawbacks, of course, but it’s time to restructure the market around customers, where the focus should have been all along, rather than manipulating it for the benefit of the generators.

Loren Steffy, loren.steffy@chron.com, is the Chronicle’s business columnist. His commentary appears Sundays, Wednesdays and Fridays. Follow him online at blog.chron.com/lorensteffy, www.facebook.com/LorenSteffypage and twitter.com/lsteffy.