Texas Confronted With Spiking Power-Price

Wholesale power prices in Texas have spiked unexpectedly to new heights – according to a WSJ report.

Until last month, high prices were an occasional event in the spot market but weren’t a cause of special concern. In the past eight days, though, blisteringly high prices have become chronic, suggesting something is broken or that manipulation of the market may be occurring.

The spikes in wholesale power prices – ominous and so far unexplained – if persisting, could take a big toll on both power providers and electricity customers. The state’s utility commission held an emergency meeting Thursday, “which shows the level of concern,” said commission spokesman Terry Hadley.

In seven out of the past 10 days, spot-market prices exceeded $2,000 a megawatt hour for various lengths of time each day in certain parts of the state, even though electricity demand was nowhere near the system’s limits, as it might be on a hot summer day. In fact, demand is expected to rise at least 20% from current levels by late summer, adding to concerns about runaway prices.

Market officials and worrying regulators have expressed serious concerns that early signs show a situation that could destabilize the state’s deregulated electricity markets.

Under electricity deregulation in Texas, businesses and individuals can choose to buy their power from more than 100 suppliers, who purchase electricity from power generators or from daily auctions. The price spikes are already overwhelming some small electricity suppliers. Two retail electricity service providers – National Power Co. Inc. and Pre-Buy Electric LLC – have defaulted on certain agreements, and 15,000 of their customers have been reassigned to “providers of last resort,” exposing those customers to very high prices. Additionally, “two or three more providers could exit this week because they’re having major difficulties,” according to energy consultant Denise Stokes, head of Competitive Assets LLC in Red Rock, Texas, near Austin.

Earlier this year, Texas raised the maximum price a generator may seek for selling bulk power in daily energy auctions to $2,250 a megawatt hour from $1,500 a megawatt hour. The state has the highest such bid cap in the U.S.

On May 23, the spot price surged above $4,000 a megawatt hour (equivalent to $4 a kilowatt hour) by 5:30 p.m., one of the highest prices in memory.

Officials fear that if prices continue to be high, it could create a cascading problem in which electricity resellers are driven out of business because they are paying more for electricity than they can charge.

When a retail service provider ceases business, its customers often are transferred to a backup supplier known as the provider of last resort. Texas rules permit that company to charge its new customers as much as 130% of the average spot price for electricity in the preceding month. So the higher the spot price, the more money it can charge its customers.

If a company bought power only at especially high-priced times of the day or if it sold electricity at fixed prices, it could find itself unable to pay for its power purchases and could default, throwing still more consumers onto other suppliers.

The situation elicits feelings of déjà vu. California’s deregulated market went through a crisis from May 2000 until June 2001, when wholesale electricity prices surged, reflecting tight supply conditions that were exploited by some power traders, such as those at Enron Corp.

The state’s biggest utility, Pacific Gas & Electric Co., filed for bankruptcy protection because it obtained its electricity through a spot market at prices far higher than what it was permitted to charge its customers – a mismatch that could happen in Texas, as well.

Another California?

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