Texas regulators to look at reserve requirements

Texas regulators next week will take up the thorny question of whether to set reserve margin requirements when the electric power industry deregulates in January. At issue is whether the adequacy of generating capacity in the state should be left to the market or whether some other mechanism should be used, and, if so, what.


By the OGJ Online Staff

HOUSTON, July 3 -- Texas regulators next week will take up the thorny question of whether to set reserve margin requirements when the electric power industry deregulates in January.

The staff of the Public Utility Commission has scheduled a July 10 workshop with industry representatives in Austin. Richard Greffe of the PUC market oversight division said the workshop will solicit industry and other parties views on whether the adequacy of generating capacity in the state should be left to the market or whether some other mechanism should be used, and, if so, what.

Presently, the PUC requires regulated utilities to maintain a 15% reserve margin above firm load needs, Greffe said. But with the structure of the market changing under deregulation and as utilities unbundle, the question becomes whether the "PUC needs to be sure reserves are adequate in the long run," Greffe said. "This is a new issue for Texas."

Who pays for the extra capacity has become a significant source of controversy in deregulated markets. American Electric Power Co. Inc. will play a role in the discussion, said spokesman Larry Jones, but has taken no position on the issue.

"Right now people are examining what they think the market will look like," he said. In a regulated market, utilities picked up the cost and passed it on to ratepayers as a part of doing business. But the decision is more complex under deregulation.

Some markets have addressed the problem by instituting so-called installed capacity deficiency charges (ICAP). Under the ICAP system, a charge is levied against utilities and other load-serving entities that don't contract for enough electricity to serve customers and maintain a reasonable generation margin.

The charge is paid to generators and is intended to spur new construction. But critics have charged the system also has led to potential gaming of the market and other market power problems.

In a December 2000 order, federal regulators set an ICAP deficiency charge of $8.75 per kw-month in the ISO New England market. ISO New England had asked the Federal Energy Regulatory Commission to set the rate at 17¢/kw-month.

The Texas PUC is "aware" of ICAP and it will be among the issues to be discussed, Greffe said. He said the staff has set a goal of having some policy direction by October with the commission issuing rules by January.

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