Increased cap comes with positives and negatives

The increase of the cap for maximum wholesale electricity prices to $9,000 will help meet the generation demand, but the cap is likely to increase rate volatility electricity retailers, a former Texas utility regulator said.

The Texas Public Utility Commission voted in October to raise the maximum amount generators can charge to $9,000 per megawatt-hour from its current $3,000 rate, a decision former Texas PUC Chairman Paul Hudson praised, but he noted the increase price fluctuations. Hudson spoke at the Energy Professionals Association of Texas on Thursday afternoon in Houston.

“One would assume it is going to raise forward prices and increase volatility,” Hudson said, noting that the volatility will mean that retailers will need to develop greater sophistication in buying forward contracts to mitigate the anticipated volatility risk. Hudson also noted that the volatility could also negatively impact generators, even though critics of the price increase have noted that electricity generators stand to gain the most from the price increase.

“Both generation and load can get caught short in those price circumstances,” Hudson said. “That is why there is some care in generator’s discussion of what they want in the marketplace. There is some fear of volatility on all sides.”

Hudson also noted that the Electric Reliability Council of Texas is considering whether to raise its margin of reserve electricity from its current rate, 13.75 reserve, up to 15 or 15.25 percent.

“I believe ERCOT is rethinking whether that level is the right number to maintain the system adequately,” Hudson said. “They are considering raising the number, because they have added more variability resources to the system, such as wind.”

Hudson praised the progress Texas has made in deregulating its retail electricity market in the last ten years, but he stressed educating the public is key for other markets considering whether to open up their retail market.

“There is no denying that early on, customers were confused in the market place,” Hudson said, noting that ample resources should be set aside for education, in order to help ensure a successful transition. He also cautioned that there needs to be some oversight over new retailers seeking to enter the market.

“We have increased the standards for those who could come into the retail space,” Hudson said, explaining that the entrance of some unsophisticated retailers who quickly went bankrupt left customers with a provider of last resort. “The price decreases have been reflected quickly, with product differentiation and customers having a choice, but you need to temper it with a discussion of what are adequate protections in that transition.”