Will the the state's $640 million electricity market overhaul bankrupt businesses?

Will some electric providers go belly-up after ERCOT switches over to a complicated new system in December? It’s a possibility says Austin-based energy expert Chris Brewster.

Speaking this week during the Gulf Coast Power Association’s fall conference, Brewster, a principal at the Lloyd Gosselink law firm, noted that some retail electric providers may have a difficult time managing around the risks of the new market design known as “nodal.” The new system, which will dramatically change how the state’s wholesale electricity spot market operates, goes live on December 1.

Chris Brewster

If some REPs don’t default outright, they may attempt to push unexpected costs down onto their customers, said Brewster. He predicted the reaction to the new nodal system may be similar to what occurred in 2008, when several mismanaged REPs attempted to pass unexpected transmission costs onto customers even though they had fixed-rate contracts. Brewster noted that several components of the new nodal system, including the so called “day-ahead market,” do not have analogous counterparts under the state’s current zonal system.

Brewster represents consumer interests at ERCOT, also known as the Electric Reliability Council of Texas. The organization plays a key role in the Texas electricity market, as it has responsibility both for managing congestion on transmission lines and for overseeing some wholesale power transactions.

With the new nodal system, ERCOT will change how it performs both functions. Under the existing system, ERCOT oversees the electricity market it in four broad zones of the state. With the new nodal system, ERCOT will manage it at thousands of separate geographical points, or nodes.

Although supported by large generation companies, independent reports have shown that nodal systems in other states have not lowered electricity prices or eliminated the manipulation of electricity markets. Moreover, the nodal transition in Texas is years behind schedule and so far over budget that it will cost more than twice as much as a similar system in California. It's now budgetted to cost around $640 million, after initial cost estimates of less than $100 million.

You can read more details of Brewster’s comments in an article by Elizabeth Souder, of the Dallas Morning News.

-- R.A. Dyer

Over-budget Nodal System In the News

In December Texas is expected to shift over from its already complicated system for managing the wholesale electricity market to one that’s even more complicated. If the new system works the way it’s supposed to work, computers will spit out distinct prices for wholesale energy sold at thousands of separate locations all across the state. These prices eventually will trickle down into home electric bills.

When this new “nodal” system for managing the electric grid goes live, it will be one of the most expensive and complex of its kind ever created in America.

Copelin

What’s unclear, however, is whether consumers will ever benefit.

Two of the state's largest daily newspapers explore that question and others in articles over the Labor Day weekend about the proposed nodal system. The articles outline the troubling implementation delays, the cost overruns and the lax oversight.

Patel

Industry supporters say the new system will bring new efficiencies to the wholesale electricity market. But Geoffrey Gay, a Lloyd Gosselink attorney who represents cities in utility issues, told the Austin American-Statesman it also could open the door to a new sort of market manipulation. "The guys who can deal with the complexity are not you and me . … It's companies with computer models,” Gay told Statesman reporter Laylan Copelin.

Another troubling issue is the price tag. When first proposed, the nodal system was supposed cost less than $100 million. But as Purva Patel of the Houston Chronicle notes, it’s now expected to exceed $500 million. Texas consumers will end up footing that bill.