WSJ -- Texas Steps In to Curb Electricity-Price Rises ..................................
June 7, 2008
Texas Steps In to Curb Electricity-Price Rises
By REBECCA SMITH
Texas took urgent action to quell electricity-price spikes that have struck its wholesale market just as the season of highest energy usage begins. Consumers could face record prices this summer reflecting both wholesale-market gyrations and rising fuel costs for power generators.
During a special meeting Friday, the Electric Reliability Council of Texas, which runs the electric grid and manages wholesale markets in the state, changed its rules to give operators more flexibility in eliminating transmission bottlenecks through methods it hopes will be less costly. Ercot will be allowed to pay high prices to some generators, but not have to offer that same price to all generators in the market at the same time, the previous rule.
The change is expected to take effect Monday. Although generators back the rule change, they hope the authority will be used sparingly. Unlike other deregulated markets, Texas expects generators to recover enough money through actual energy sales to cover all their costs and to fund new plants.
But, with rising construction costs, some research shows price spikes are necessary in order for generators to receive enough money to fund construction of new plants. If prices are stifled in the short run, plants may not get built and it could worsen a problem of thinning energy reserves in the long run.
Some retail electricity sellers, which have been hit hardest, are skeptical that the action by Ercot will provide speedy enough relief to spare their customers. Already, retailers are raising prices in the Houston area and southern part of the state where price spikes have been worst.
Texas Power LP, a retailer with 30,000 customers, has raised prices for customers in the southern part of the state by about 50% since April when increases began attracting attention, including a two-cent-a-kilowatt-hour rise Friday. Larry Kelly, chief operating officer, said his firm charges variable prices based on the prior month's procurement costs. Given recent market activity, he said another two-cent increase is possible, which would mean a near doubling of rates since January when the price was 11.9 cents. Rising fuel costs also have played a role
Like other retailers, Texas Power receives daily invoices from the grid runner, saying how much money it owes to generators for spot-market purchases made in the firm's behalf by Ercot. Those purchases are made to keep the electric system in balance and solve "congestion" or bottlenecks in power flows.
Prices for these spot-market transactions have jumped to 10 to 20 times normal, for short periods of time, to $2,000 to $4,000 a megawatt hour or $2 to $4 a kilowatt hour. So far, four companies have gone into default.
Mr. Kelly said his firm's bill for "balancing" or spot-market purchases for the week ended May 24 was $863,000. "It's a whammy," he said, adding that if it keeps up, the firm, based in Arlington, Texas, may be forced to stop doing business in the southern part of the state.
The grid operator's credit requirements add to the pain. Mr. Kelly said his firm was notified this week that it had two days to post $614,000 to back higher-priced spot-market purchases. He said his firm scraped up the money and now has about $2 million posted at Ercot as collateral. "In my four years in this business, it was the first letter like that I ever got," said Mr. Kelly, adding that the credit calls could put some thinly capitalized companies out of business. Texas deregulated its electricity market in 2002. Dozens of retailers now sell electricity to users. They get the electricity from generators and also through Ercot's daily auctions.
It isn't just small companies that are hurt by unpredictable prices. PNM Resources Inc., an Albuquerque-based firm that owns a utility in New Mexico and a power-retailing business in Texas called First Choice Power, took a $30 million hit in the first quarter when its Texas unit bet wrong on the direction of wholesale prices. According to company officials, First Choice bet that price differentials between Texas's four different power-pricing zones would diminish in 2008. Instead, they have increased dramatically. The company said in late May that it has stopped making speculative trades.
Write to Rebecca Smith at rebecca.smith@wsj.com
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