Independent Market Monitor Issues 2010 State Of The Market Report

In August, the Independent Market Monitor (“IMM”) – a position intended to be a wholesale market watchdog and created by law in 2005 – issued its annual State of the Market Report for 2010. This year’s report was unusual in that it addressed the final year of operations under the old, zonal market design. Thus, the report highlighted inefficiencies and other issues with that market design that will not recur in future years, since in late 2010 the market transitioned to a nodal system.

The 2010 State of the Market Report contains comparative
 data on wholesale market prices for each of ERCOT's four
zones, and ERCOT as a whole. As this table illustrates, prices
increased in all zones from 2009 to 2010. Note the extraordinary
prices of 2008 -- they resulted from very high natural gas prices
and congestion on the grid, resulting in especially high prices
in the North, South, and Houston zones.

However, the report is notable for its conclusion that wholesale energy prices increased on average in 2010, going from $34.03 per MWh in 2009 to $39.40 per MWh on a load-weighted average basis. The report attributes a 16% increase in natural gas prices for much of this increase.

Despite this general price increase, the IMM again argues that wholesale prices in ERCOT are too low, and have been sufficient to support new investment in power plants in only one the last four years. That year was 2008, a year in which, as the report admits, ERCOT suffered from high prices resulting from inefficient congestion management between the North, South, and Houston zones. The experience of that summer, in which prices neared $4,000 per MWh at times and caused the default of a number of Retail Electric Providers (“REPs”) should in no way be viewed as any kind of “success” for the market.

Additionally, the report again concludes that the ERCOT wholesale market performed competitively in 2010, with no evidence that generators were withholding power or engaging in similar manipulative behavior.

-- Chris Brewster

Generators seek proposal to hike prices

A proposal designed not to limit the price of electricity – but to actually increase it during certain periods — could face Public Utility Commission scrutiny in 2010, according to some market watchers.

Extremely costly to consumers, the proposal would create a process whereby generators would receive payments for their wholesale power that would be substantially higher than prices dictated by the market. The process would kick in during periods when wholesale power on the ERCOT grid is running in relatively short supply.

Cities and other consumer representatives have argued against the policy, and it was rejected during proceedings earlier this year at ERCOT. But it retains support both from electric generators and by the Independent Market Monitor of the ERCOT market, leading many to believe that the PUC will take up the issue again this year.

The IMM and industry groups say the price supports are needed to encourage the further development of generation in Texas. Cities and consumer groups have noted the fundamental inconsistency of price supports within the context of the state’s deregulated market, a market supposedly based upon the premise that competitive forces should dictate prices.

Cities also note the extreme cost of the proposal — up to approximately $750 million per year, by some estimates. The expense would obliterate any supposed savings industry advocates have claimed will come from the nodal market redesign, or from improved ERCOT operations. The proposal also would put further upward pressure on retail prices — that is, the electricity prices customers actually pay — which have remained consistently above the national average ever since the state’s transition to deregulation.

-- R.A. Dyer