WSJ -- Power-Price Surge Strikes Texas ...........................................................
May 30, 2008
Power-Price Surge Strikes Texas
Unexplained Jump Could Add Millions To Consumers' Bills
By REBECCA SMITH
Wholesale power prices in Texas have surged to new heights, confounding market officials and worrying regulators who see early signs that the situation could destabilize the state's deregulated electricity markets.
The spikes in wholesale power prices -- ominous and so far unexplained -- could take a big toll on both power providers and electricity customers if they persist. The state's utility commission held an emergency meeting Thursday, "which shows the level of concern," said commission spokesman Terry Hadley.
Under electricity deregulation in Texas, businesses and individuals can choose to buy their power from more than 100 suppliers, who purchase electricity from power generators or from daily auctions. The price spikes are already overwhelming some small electricity suppliers. Two retail electricity service providers -- National Power Co. Inc. and Pre-Buy Electric LLC -- have defaulted on certain agreements, and 15,000 of their customers have been reassigned to "providers of last resort," exposing those customers to very high prices.
"Two or three more [providers] could exit this week because they're having major difficulties," said energy consultant Denise Stokes, head of Competitive Assets LLC in Red Rock, Texas, near Austin.
The situation will eventually cost consumers "tens of millions of dollars," though it may take weeks to show up in utility bills, according to Dan Jones, the state's independent market monitor.
Mr. Jones said he and other grid officials are examining the computerized system that is used to balance generating supplies with consumer demand, as well as market rules and the conduct of market participants.
Until last month, high prices were an occasional event in the spot market but weren't a cause of special concern. In the past eight days, though, blisteringly high prices have become chronic, suggesting something is broken or that manipulation of the market may be occurring.
Earlier this year, Texas raised the maximum price a generator may seek for selling bulk power in daily energy auctions to $2,250 a megawatt hour from $1,500 a megawatt hour. The state has the highest such bid cap in the U.S. In seven out of the past 10 days, spot-market prices exceeded $2,000 a megawatt hour for various lengths of time each day in certain parts of the state, even though electricity demand was nowhere near the system's limits, as it might be on a hot summer day. In fact, demand is expected to rise at least 20% from current levels by late summer, adding to concerns about runaway prices.
On May 23, for example, the spot price surged above $4,000 a megawatt hour (equivalent to 40 cents a kilowatt hour) by 5:30 p.m., one of the highest prices in memory. Although only a small portion of the electricity consumed in the state is purchased through this spot market, which is operated by the grid operator, the Electric Reliability Council of Texas, the price often is used as a benchmark for other contracts.
Officials fear that if prices continue to be high, it could create a cascading problem in which electricity resellers are driven out of business because they are paying more for electricity than they can charge. Even if providers do pass costs on to customers, they may see higher default rates because consumers -- already struggling with high gasoline and diesel prices -- can't afford the higher bills.
When a retail service provider ceases business, its customers often are transferred to a backup supplier known as the provider of last resort. Texas rules permit that company to charge its new customers as much as 130% of the average spot price for electricity in the preceding month. So the higher the spot price, the more money it can charge its customers. If a company bought power only at especially high-priced times of the day or if it sold electricity at fixed prices, it could find itself unable to pay for its power purchases and could default, throwing still more consumers onto other suppliers.
For some people, the situation elicits feelings of déjà vu. California's deregulated market went through a crisis from May 2000 until June 2001, when wholesale electricity prices surged, reflecting tight supply conditions that were exploited by some power traders, such as those at Enron Corp. The state's biggest utility, Pacific Gas & Electric Co., filed for bankruptcy protection because it obtained its electricity through a spot market at prices far higher than what it was permitted to charge its customers -- a mismatch that could happen in Texas, as well.
The Texas Public Utility Commission on Thursday expressed concern about reports that consumers are beginning to see prices of 25 cents to 35 cents a kilowatt hour, double prevailing prices.
The Texas market is the most deregulated of any state market. Under the deregulation plan, most utilities broke themselves into different companies, some of which were kept and some sold. TXU Corp., now part of closely held Texas Energy Holdings, was unique in that it retained all the business lines, including the state's biggest generation company; a retail electricity-sales company; and a still-regulated energy-delivery unit.
More than 100 companies are electricity resellers, obtaining wholesale power from the markets operated by the Electric Reliability Council of Texas or from generators under private contracts. Some have long-term deals; some depend largely on the spot market. There have been shakeouts in the past in which prices surged suddenly, causing some firms to go broke.
Utility commission spokesman Mr. Hadley said the commission knows rates "will be higher, but no one knows how high they will go."
Write to Rebecca Smith at rebecca.smith@wsj.com
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