May 19, 2012
Houston Chronicle
Loren Steffy
It's a riddle the Mad Hatter would love: Natural gas prices fall to a decade low. Electricity prices in Texas are pegged to natural gas prices. So what happens to electricity prices?
Why, they go up, of course.
Next month, the Public Utility Commission is set to vote on a plan to raise the ceiling on wholesale electricity prices by 50 percent as early as August.
Lower gas prices were finally supposed to justify the costly fiasco of deregulation. Now, that promise, like so many others related to deregulation, has evaporated.
As I wrote earlier, the deregulated market has eroded generating capacity, which left the state vulnerable to rolling blackouts last year. Under the current system, generators can't justify the cost of building new plants.
Last year, the capacity shortage caused prices to soar, and they bumped up against the state's wholesale price cap of $3,000 a megawatt-hour. So next month, the Public Utility Commission will consider a plan to raise that cap to $4,500.
Generators sell the electricity they produce in the wholesale market, where retailers buy it before reselling it to consumers.
The higher prices are supposed to ensure greater reliability over time by making it economical for generators to build more plants.
In the short term, though, we just get the higher prices, not the additional generation, because new power plants can't be built between now and August.
"There is no chance - none whatsoever - that increasing the cap this summer will lead to new generation construction before 2013," state Rep. Sylvester Turner, D-Houston, wrote in a recent letter to the PUC.
PUC Commissioner Kenneth Anderson echoed those sentiments at a recent commission meeting.
"I don't know what signals it sends this summer, other than panic," he said.
The $4,500 cap is just the beginning. The PUC will consider another measure that would raise the cap even higher next year.
Even before the cap is raised, though, traders tell me they're seeing suspicious activity in the spot markets.
Consider what happened on May 9, a mild day when temperatures peaked in the mid-80s.
Wholesale prices started the day at $23 a megawatt-hour, and the forecast showed plenty of generating capacity. By late afternoon, that excess capacity dried up and the market appeared headed for a shortage. Prices jumped to $32, according to information compiled for me by a trader using data from the Electric Reliability Council of Texas, the grid operator for the deregulated market.
Several electricity traders I spoke with told me they've seen similar patterns in recent months, and they worry the volatility will get worse.
More volatile markets mean electricity retailers - the companies that sell you your power - must spend more to hedge against price swings. The more they hedge, the more it squeezes their razor-thin profit margins. That could force some companies to break their contracts with customers - and raise prices - or be forced out of business.
In 2008, five retailers shut down because of price volatility.
It's not clear what's causing the latest spikes, but Dan Jones, the state's independent market monitor, agreed that the spot markets are behaving differently.
"We know that this spring the weather was really mild and the load levels are pretty low," he told me. "Gas prices are totally upside down from where they've been. The market dynamics are different."
Jones said he hasn't ruled out manipulation, but he's still investigating. Another possibility: With weak gas prices, more generators are running gas plants first and using coal only to meet peak demand. In the past, the opposite was true. Because coal plants take longer to come online, it may be creating capacity gaps, which cause prices to jump.
So far, the impact of these daily price swings to consumers has been minimal, but that could change with the higher wholesale price cap and the summer's increased electricity demands.
Prices are going up no matter what. The deregulated market has become a sort of Mad Tea Party, and consumers are Alice. Bombarded by ridiculous riddles, we can only conclude that deregulation has become expensive nonsense.