Vote to require spare power on Texas grid spurs debate

HOUSTON — State utility regulators decided in a split vote Friday to require reserve power on the Texas grid, prompting protests from consumer and free-market advocates that the move will drive up electric bills.

Public Utility Commission of Texas Chairwoman Donna Nelson and Commissioner Brandy Marty both voted to make reserve margins mandatory, in a surprise vote that drew sharp objection from Commissioner Ken Anderson.

“I am unilaterally opposed to mandatory reserve margins as uneconomic with the potential to destroy the economic engine that is Texas,” Anderson said, speculating that a mandatory margin eventually could force consumers to pay for generation capacity that sits idle most of the year.

Nelson said she voted for mandatory margins to ensure that the state can provide reliably for future electricity demand.

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The technical and seemingly arcane debate foreshadows a bigger future argument over the way electricity is priced and delivered in Texas.

Since deregulation took effect in the early 2000s, power generation and retail electric sales in most of the state occur in a competitive market. In those areas, only the transmission and delivery of power remain in the hands of regulated monopolies.

But San Antonio still has a municipally owned utility, CPS Energy, so its rates are not tied to the deregulated electricity market.

“This is not a big change for us,” CPS Energy spokeswoman Lisa Lewis said. “It’s how we function today.”

In the competitive generation market, under an arrangement called energy-only, power plants earn money only for generating electricity that consumers actually use.

Some of those companies say that to continue meeting demand, they should operate in what’s called a capacity market, in which they would be paid for maintaining power plants that would go online only when power use peaks.

Nelson’s and Marty’s votes Friday seemed sympathetic to that view, though they didn’t explicitly endorse a capacity market.

The rule they approved would require reserve margins that exist now as desirable targets but aren’t mandatory. Requiring specific reserve amounts could increase pressure to fund and build more generating capacity.

The Electric Reliability Council of Texas, which manages the deregulated grid, tries to keep capacity at least 13.75 percent above what Texans consume when demand is highest — typically when air conditioners are laboring against the hottest summer days — or when unexpected plant shutdowns reduce generating capacity.

In emergency situations where there isn’t enough generation to meet demand for electricity, ERCOT now orders utilities, including CPS, to curtail generation, which results in rolling blackouts.

The vote Friday did not set a level for the mandatory reserve margin, delaying that until a consultant completes a study set for release later this year.

Proponents of a capacity market say it would address concerns about whether generation will be sufficient to meet growing peak demand.

“It’s good that the commission is moving forward and giving greater certainty on this important issue,” said John Ragan, president of the Gulf Coast Region for NRG Energy, which has voiced support for a capacity market. “We hope the dialogue will continue to ensure Texans have the power they need as the state continues to grow.”

“We hope the dialogue will continue to ensure Texans have the power they need as the state continues to grow.”

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In May, the Electric Reliability Council of Texas estimated that electricity reserves would hover just above the preferred 13.75 percent margin next year, falling to 9.4 percent by 2018 and to 4.5 percent by 2023.

Anderson, who opposes a capacity market, has argued that investment decisions on new generation typically take place less than five years before construction is completed, skewing longer-term capacity projections toward false shortages.

Consumer groups said Friday’s decision marks the first step toward a capacity market, with consumer bills ultimately paying for the excess generation muscle.

“Mandating a reserve margin is the first step toward creating a capacity market that would increase electricity costs by billions of dollars, ” said Randy Moravec, executive director of the Texas Coalition for Affordable Power, in a written statement.

“A state mandated reserve margin also violates the free-market principles upon which the state’s competitive electricity market was created.”

The Texas Public Policy Foundation, an Austin-based free-market research institute, raised similar objections to the PUC move.

“Rather than addressing Texas’ reliability concerns through a free and functioning market, the Lone Star State is instead moving toward a system of corporate subsidies and centralized control, ” said Bill Peacock, director of the foundation’s Center for Economic Freedom.

UBS Investment Research said in a note to investors that it views the mandatory margin as “inevitably leading to the implementation of a capacity market, ” which it characterized as positive for generating companies.

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