Published Thursday, Aug. 2, 2001, in the San Jose Mercury News

Energy costs soar on Texas' first day of deregulation

BALLOONING PRICES AREN'T MALICIOUS, OFFICIALS INSIST BY R.A. DYER Knight Ridder

AUSTIN -- Dramatic price spikes on the first day of the state's new electricity-deregulation system sent the costs of some reserve power soaring to 100 times normal, officials said Wednesday.

Although officials blamed the spikes on a one-time ``mistake'' by power generators, they appeared virtually identical to price increases in California during its flawed introduction to deregulation.

In some cases, the costs rose Monday from a typical price of $10 to $45 per megawatt-hour to $1,000 per megawatt-hour. They rose no further only because of caps imposed by Texas regulators to guard against California-style price gouging.

Tom Noel, director of the Texas power grid, said he was unsure of the precise effect of the price spikes on residential customers, although he thought it would be minimal. He said prices returned to normal Tuesday and Wednesday.

``It happened on the first day, and it was a totally anomalous situation,'' said Noel, chief operating officer of the Electric Reliability Council of Texas. ``It was a mistake in the first round'' of bids.

``There was no malice, in my opinion,'' Noel said.

Price caps kick in

Janee Briesemeister, a senior policy analyst for the Austin office of Consumers Union, said the unexpected spikes illustrate the wisdom of price caps put in place by the Public Utility Commission of Texas. The PUC installed the caps after allegations arose of gaming -- or taking advantage of flaws in the market to artificially inflate prices -- by power suppliers in California.

``There's a gaming potential in anything,'' Briesemeister said. ``But I'm willing to accept the explanation that there were mistakes made. . . . Nonetheless, you're talking about a lot of money, and it shows that the commissioners were very wise to put on these caps as a circuit breaker. . . . Without them, who knows how high the prices could have gone?''

The price spikes occurred during the opening of Texas' deregulation pilot project, in which electric companies can compete for up to 5 percent of the state's electric customers. Although the power-grid operator switched over to the new system Tuesday, the spikes occurred Monday -- during initial ``day-ahead'' bidding for capacity power needed by all utilities.

Under market rules, power companies must maintain a certain amount of unused capacity to ensure the reliability of the overall power grid. Power companies purchase some of that capacity independent of the Electric Reliability Council of Texas (ERCOT), and some through a market overseen by ERCOT.

Under the ERCOT-managed market, the cost of the highest acceptable bid for capacity power dictates the price to all successful bidders.

For example, ERCOT might receive bids ranging from $50 per megawatt-hour to $1,000 per megawatt-hour. If the grid operator needs 100 percent of that capacity to meet demand, then all bidders get the top price, or $1,000 per megawatt-hour.

Top-dollar prices

And that's what happened Monday -- ERCOT did not receive sufficient bids in each separate category of capacity power needed to maintain the reliability of the electric system. The lack of bids, in turn, prompted top-dollar payments to those who did submit bids to ERCOT.

For example, in one category -- reserve capacity from plants that can provide energy within 30 minutes -- the price spiked at $1,000 per megawatt-hour. Later in the day, the cost was set at $500.

By contrast, the cost of that reserve rose no higher than $45 per megawatt-hour Tuesday and $30 on Wednesday.

Likewise, the cost of reserve capacity from plants that provide power at a moment's notice spiked as high as $1,000 per megawatt-hour Monday. By Tuesday, the cost went down to $10 per megawatt-hour and remained below $16.50 on Wednesday, Noel said.

Noel insisted that the spikes were caused neither by gaming from power bidders nor jitters because of unfamiliarity with the new deregulation system. Instead, he said, one of the companies failed to bid by a Monday deadline, which caused a one-time shortfall.

``I don't think people are going to do it again,'' he said.

After three delays, and running two months behind schedule, the deregulation test project has already gotten off to a rocky start. Noel has expressed confidence, however, that the system will be running at full speed Jan. 1, when Texas completely opens to retail electric competition.

Gov. Rick Perry said Wednesday that ERCOT was right to delay the test project, and he expressed optimism that consumers ultimately would benefit from deregulation.

``We certainly would have liked this program to go off without a hitch,'' he said. ``But rather than go forward with a concern about whether or not this will be appropriately implemented, they made the right decision to put it off until they got it right.''

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-- Martin Thompson (mthom1927@aol.com), August 02, 2001