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Topaz Power Stresses "Criticality" of ERCOT Reserve Margin

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September 29, 2010

Texas legislators have to understand the "criticality of the reserve margin," Barbara Clemenhagen, Vice President of Commercial & External Relations for Topaz Power Group, told a record number of attendees at the Gulf Coast Power Association's annual fall meeting in Austin yesterday.

In a panel addressing the upcoming 2011 legislative session, Clemenhagen claimed that the current 12.5% ERCOT reserve margin has "no teeth" since there is no penalty for falling below that margin.

Clemenhagen ominously described recent and projected reserve margins as "hovering" around 12.5%.  Clemenhagen also speculated that the nodal market will prompt the retirement of older, inefficient generators which are located at a less favorable node, prompting the need for new generation.

Phillip Oldham, Partner at Andrews Kurth LLP and speaking for industrial customers, quickly pointed out that if the ERCOT market is designed correctly, reserve margins should be expected to come in right at 12.5%, and any more surplus would be inefficient.

Furthermore, Oldham said that regardless of current projections of revenue inadequacy under a snapshot in time, the ERCOT market is demonstrably healthy given the continued investment by generators, despite the fact there may be revenue inadequacy under current conditions.  Such continued investments show investors' confidence in the current ERCOT market design and ability to recover costs over the long-term, Oldham said.  Oldham further pointed to the rise of revenue streams from the ancillary markets as supporting continued investment.  

The ERCOT market design, which features an energy-only market, has also resulted in power prices falling comparably with natural gas, Oldham added.

Panelists, who also included Marcie Zlotnik, Chairman of StarTex Power, and Tom "Smitty" Smith, Director of the Texas Office of Public Citizen, generally agreed that any legislation this session, particularly bills that would impose new costs on customers, will face an uphill battle as attention is focused on the projected budget deficit as well as redistricting, which will likely crowd out other matters.  The PUCT is also up for Sunset review this session.  Still, panelists noted that several bills will be introduced regardless, including bills addressing: elimination of the deferred payment plan switch hold; a mandate that REPs offer a net metering product; and non-wind RPS carve-outs.

Speaking separately during a keynote address, PUCT Chairman Barry Smitherman reported that legislators have expressed desire for a "clean" Sunset bill that would not be laden with all manner of tangentially related electric policy issues.

Zlotnik noted that forcing all REPs to purchase excess distributed generation from customers would impose costs on other customers, and require REPs devote resources away from investing in areas where individual REPs have unique expertise and could be designing innovative products which would prove more popular in the market than an excess distributed generation purchase plan.  Smith said that because about only four REPs currently offer to purchase excess distributed generation, the voluntary approach has not worked.

As previously reported, Sen. Wendy Davis has already announced that she will file legislation to remove the switch hold allowed to be placed on deferred payment plan customers (Matters, 9/24/10).  In doing so, Davis had argued that REPs were seeking special treatment from the government by requiring the government to act as the REPs' collection agent.  Davis said that REPs should use the tools used by other industries to prevent bad debt, such as security deposits and credit checks.

Zlotnik countered this argument by noting that REPs are subject to a government-mandated obligation to serve.  While REPs may perform credit checks, they cannot deny service based on credit, and may only use credit checks in establishing a deposit -- whose amount is also regulated by a Substantive Rule which typically under-estimates the customer's summer usage and bills.

Accordingly, Zlotnik said that REPs are prevented from managing their bad debt as other industries are permitted to do, and said that a switch hold is equitable given the vast expansion of deferred payment plan eligibility under the amended rules adopted earlier this month.

Zlotnik also said that a priority for REPs will be ensuring that costs of the nodal market are properly still treated as nodal costs after go-live, and are not rolled into the administrative fee paid by load.  The nodal fee is currently paid by QSEs representing generation only, not load.

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