Texas PUC rules on capacity auctions

Ann de Rouffignac
OGJ Online

Over objections of potential players in the Texas electricity market, the Texas Public Utility Commission issued final rules governing availability of electric generation to competitive electricity suppliers when the market is deregulated in 2002.

Incumbent utilities, which will be separated into generation, retail, and transmission and distribution units, must auction a certain amount of their generation to competitive providers. The rules do not allow the generation to be auctioned to a utility's retail affiliate.

Under the rules, a utility will not actually sell 15% of its capacity but only auction the capacity in four product forms for terms varying from 1 month to 2 years. The generation capacity will be auctioned for the period of Jan. 1, 2002-Jan. 1, 2007 or until 40% of a utility's residential and small commercial electricity load is served by competitors.

AES NewEnergy, a unit of AES Corp., and Enron Energy Services, a unit of Enron Corp., objected to a tolling arrangement under which retailers would have to supply fuel to a plant and take the produced power to sell, according to a transcript of the commission meeting.

NewEnergy, and six others, wanted a finished block of electricity to be auctioned in various times and amounts so retailers could serve their customer load. But the commission, utility affiliates, and large wholesale marketers and traders supported the tolling arrangement.

Fuel price risk
The auctioned capacity would be for a specified heat rate and specified time period. Certain plants will be made available to winning bidders of the capacity for a given time period. They will then take responsibility for supplying the fuel and will take title and dispatch the produced electricity.

Some retailers object to this type of capacity auction because they must bear the pricing risks of the fuel and will need an organization capable of hedging future fuel costs, or they will need to hire a third party to manage that risk.

A few retailers, including affiliates of the incumbent utility, have access to sophisticated trading and marketing organizations, or they are already large players capable of hedging future fuel costs. But capacity auctions will place an extra burden on smaller retailers by introducing a middleman, raising costs, and therefore retail prices, some potential retailers said.

Commission staff argued a capacity auction as described may hurt a smaller retailer.

�We�ve come up with products that are probably more attractive to wholesalers than retailers. It may take some finishing to have that sold to smaller REPs (retailers) who don�t want to be involved with hedging and the things it will take to serve the retail load,� Brian Lloyd, commission staffer, said at the meeting.

�This is a very disappointing ruling,� says Sara Ferris, assistant public counsel for the Office of Public Utility Counsel. �We had hoped to get a product that would bring in more competition on the retail side.�

In addition, the auction of capacity without fuel will have a lower value than an auction of electricity, affecting estimates of stranded cost payments due Texas utilities. The results of a capacity auction will be used to estimate the market value of the power plants and then used to estimate stranded costs.

If the capacity auction yields lower values, observers point out, the amount of stranded costs will rise benefiting the utilities and making it difficult for companies to compete.

�There will be less demand for these auction products so the value will be less,� says Ferris. �This means that stranded costs could be artificially inflated later. We are hoping that the commission will keep a watchful eye on this.�

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