ERCOT adds new pricing zone; design similar to California

Ann de Rouffignac
OGJ Online

HOUSTON, Jan. 28 -- Wholesale electricity prices could rise in Houston during high demand periods after the Texas grid operator added a new Houston pricing zone.

On Jan.1, the Electric Reliability Council of Texas (ERCOT) created the Houston zone to discourage congestion on electricity transmission lines and control costs. Congestion costs soared last August to almost $100 million, five times what ERCOT officials originally expected for a year.

When power is scheduled between zones causing congestion, ERCOT pays generators to stop producing or pay others to start producing to maintain reliability and the integrity of the transmission system. Those costs are the costs of congestion and are borne by all the market participants. But starting Feb. 15, the cost of congestion will be borne by those who cause it.

ERCOT originally planned three zones. Zones encourage power generated in a zone to be consumed there, thus reducing the risk of transmission line congestion. Whether the new zone increases prices won't be fully known until hot weather boosts power demand creating congestion. But Texas market participants expect costs to rise in Houston.

"The added constraint will limit imports [of power] into Houston area," said one Texas market participant. "They might see higher prices relative to the rest of the south zone."

The Texas zonal market design is similar to the system being scrapped in California. "Texas should look with concern at the Texas wholesale market design that bears a strong resemblance to the original California model now explained as built on false premises," said Prof. William Hogan of the Kennedy School of Government at Harvard University, an expert on wholesale electricity market design.

ERCOT is required to determine the commercially significant constrained zones each year and make adjustments, said Sam Jones, chief operating officer. "There is a lot of new generation in South Texas, especially Houston and Corpus Christi," Jones said. "Last summer we had to manage a lot of congestion in and out of Houston. I don't think the new zone will change the pricing much."

He predicted schedulers or "QSEs" will compare prices and may decide it is cheaper to pay the congestion costs. "Whoever is the buyer pays for it," he said.

But creating more zones and directly assigning the costs will create a different set of problems, said Clarence Johnson, director of regulatory analysis for the Office of Public Utility Counsel. "That will just shift the costs to a different area," he said.

In February 2001, Hogan told PUC and ERCOT officials the zonal system would worsen congestion and ERCOT would be forced to add more. "Any time you have to pay someone not to generate power, there has to be something wrong with the design," said Hogan. Only Texas and California have the zonal pricing system, he said.

California also added zones in an attempt to solve the congestion cost problem before it decided to redesign the system, he said. California filed a preliminary proposal to redo its entire wholesale electricity market earlier this month with the Federal Energy Regulatory Commission.

The wholesale market flaw in California was overshadowed by blackouts, the collapse of the retail market and the subsequent bankruptcy protection filing of the state's largest utility, he said. "And this has distracted many from learning the lessons about wholesale market design that have much greater relevance beyond California's borders," Hogan said.

"The failure of the California wholesale market design should be a warning for every other market that has embraced its philosophy and adopted its details." The only way to solve this problem is to "surrender and say the philosophy is wrong," he said.

Contact Ann de Rouffignac at annd@penwell.com

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