Texas PUC to monitor market power in generation

The Public Utility Commission of Texas has formed an oversight group in response to lingering concerns about market power in the Texas electricity market. The generation market in the Electric Reliability Council of Texas or ERCOT is the most concentrated, as opposed to competitive, of all electricity control areas in the US. The three largest utilities in ERCOT control 78% of the market share of generation, according to the Energy Information Administration (EIA).

Ann de Rouffignac

The Public Utility Commission of Texas has formed an oversight group in response to lingering concerns about market power in the Texas electricity market. The generation market in the Electric Reliability Council of Texas (ERCOT ) is the most concentrated, as opposed to competitive, of any market in all the electricity control areas in the US.

Only the Mid-American Interconnected Network (MAIN) comes close to the same degree of concentration. All others are not at all concentrated or only moderately concentrated, according to the Energy Information Administration (EIA), a unit of the US Department of Energy.

The three largest utilities in ERCOT control 78% of the electric generating market.

�This will be a big, big challenge for the commission,� says Sarah Goodfriend, former PUC commissioner and Austin economist. �The legislation is one of the best in the country to set up conditions for this market to work. I would hate to see one thing (market concentration) sink the ship.�

Applying the Herfindahl-Hirschman Index, a standard measure for market concentration used by the US Department of Justice and the Federal Trade Commission, the generation market in ERCOT has an index value above 2,500, meaning the market is extremely concentrated, according to EIA. If the HHI is below 1,000, a market is not concentrated or mostly competitive. From 1,000 to 1,800 the market is moderately concentrated. A market with an HHI index value above 1,800 is considered highly concentrated where few players wield considerable market power.

ERCOT most concentrated
�ERCOT has the highest concentration. It is not interconnected to other grids,� says Brett Perlman, commissioner of the PUC.

In response to these concerns, the PUC recently formed a separate market oversight group to oversee market rules and procedures, monitor electricity market robustness, track market power and market share issues, and anticipate and identify market failure.

Industry sources say the PUC must perform this function because ERCOT does not intend to monitor market share or power. Traditionally, independent system operators in other deregulated markets as such as New England have taken responsibility for overseeing market power abuse.

In addition to PUC oversight, the capacity auction as required in the restructuring legislation and fine tuned by the commission is supposed to ameliorate the market power problem.

The auction is a �virtual� auction because ownership of the power plants is not changing hands. The utilities will auction only a portion of the utilities� capacity for certain periods of time. The requirements as set out in the restructuring legislation call for each power generation company (including the one split off from the original integrated utility) to auction capacity equal to at least 15% of the affiliated company�s installed generating capacity.

�The purpose of the auction is to promote competitiveness in the wholesale market through increased availability of generation and increased liquidity,� Brian Tierney, director energy markets at American Electric Power Co. Inc., said at a recent conference of the Gulf Coast Power Association.

Clarence Johnson, director regulatory analysis for Office of Public Utility Council (OPUC), is not so sure this will work to mitigate market power and increase competition.

�This is not much different from simply selling power in a purchased power contract,� says Johnson.

�The auctioned power is still under control of the seller and subject to outages and start-up costs and other conditions.�

Capacity auction key
The success of the capacity auction depends on the terms for the power to be auctioned. If buyers are consulted about what types of products need to be offered, the market might get a boost from the auction, says Goodfriend.

�The firmer the capacity the better,� adds Russell Trifovesti II, senior counsel at Akin, Gump, Strauss, Hauer, & Feld LLP in Austin.

But industry players question if the auction will in the end do much to fix the market power issue.

�We are concerned that the capacity auction will not provide capacity to competitive entities which is equivalent in quality in firmness to capacity retained by the utility,� says Johnson, OPUC director of regulatory analysis. �This undermines the market power mitigation purpose of the capacity auction.�

Whether the capacity to be auctioned is firm or not firm is at the heart of some of the discussion swirling around the auction.

The auction allows the utility to deliver less capacity and energy whenever there is a planned outage or even no capacity when there are emergency conditions or forced outages, according to comments filed Friday by OPUC. These conditions mean capacity auctioned is non-firm capacity. The capacity auctioned to other market participants can be reduced or curtailed at the utility�s discretion, and therefore a lot less valuable. Customers on the utility�s system, on the other hand, with firm load have guaranteed uninterrupted service.

These details remain to be worked out by the commission.

The auctions last for 60 months or until the commission says 40% of residential customers of the incumbent utility�s affiliate are served by nonaffiliated retailers of electricity. After that, it is not clear how the generating companies will meet the 20% rule which says no one entity can own or control more than 20% of the generating capacity in ERCOT. An exception is TXU Corp. that doesn�t have to count certain power plants that they upgrade to comply with environmental rules.

�It (market power) will be a critical issue,� says Mark Smith, partner with Casey Gentz & Sifuentes LLP in Austin. �It�s been a concern for a long time but everybody wants the market to work. The question is will there be enough players out there.�

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