Electric Market Redesign Efforts Continue at PUC and ERCOT

by Roslyn Dubberstein

Background
Since Winter Storm Uri in February 2021, the Public Utility Commission of Texas (“PUC”) and Texas’s independent system operator, the Electric Reliability Council of Texas (“ERCOT”), have been laser-focused on evaluating and implementing reforms to the Texas electricity market. ERCOT is regulated by PUC and the Texas Legislature to oversee the power grid, which entails maintaining system reliability and facilitating competitive retail and wholesale markets. In addition to agency attention, numerous stakeholders and legislators are focusing on the future of the market. The proposals being thrown into the ring will have immense impacts on costs and reliability—these developments are crucial for ratepayer pocketbooks and Texas’s ability to keep the lights on.

The Texas electric market operates as an energy-only market, which means that power providers are paid for their actual production of electricity. This differs from a capacity market wherein power providers are paid simply to build and own generation. In the Texas energy-only market, buyers, such as Retail Electric Providers, contract with generators for a long-term supply of electricity at a fixed price. Given the operational difficulty during Winter Storm Uri, the Texas Legislature passed Senate Bill 3, an omnibus energy reform bill, during the 87th Legislative Session. As a result of the Legislature’s directives, PUC opened a docket in summer 2021 to review wholesale electric market design (Docket No. 52373). PUC broke the market redesign process out into two separate phases. Phase I focused on reliability reforms, such as establishing a firm fuel product and modifying the Operating Reserve Demand Curve.

Current Phase II Developments
As part of Phase II, PUC contracted with San-Francisco-based energy consulting firm Energy and Environmental Economics, Inc. (“E3”) to provide consulting services related to market redesign and reliability. On November 10, 2022, after six months of analysis and collaboration with PUC, E3 issued a final report proposing several market structures and ultimately recommending one specific structure—the Forward Reliability Market (“FRM”) design. The key component in providing multiple design options was to analyze each structure’s ability to provide dispatchable generation during extreme weather events.

The FRM design is a forward-looking model built to allocate “reliability credits” to generators based on a generator’s ability to serve load during an anticipated period of high reliability risk. Based on this forecast, ERCOT would determine the number of reliability credits necessary to sustain reliability during no more than one system-wide outage event per decade. The FRM design would cost approximately $460 million annually and would result in an additional 5,630 MW of natural gas capacity on the market.

PUC Chairman Peter Lake disagrees with the E3 Report recommendation and instead promotes another model from the Report—the Performance Credit Mechanism (“PCM”). The PCM model would hold a “retroactive settlement process” at the end of an established compliance period and would reward generators with “performance credits” based on the generator’s performance during the periods of highest reliability risk in the preceding compliance period. Compared to a predictive model like the FRM design, the PCM would be based on proven generator capacity and performance. The PCM is also projected to cost around $460 million annually and result in an additional 5,630 MW of natural gas capacity on the market. As of mid-December, it had not been confirmed whether the other four PUC commissioners agree with Chairman Lake’s preference for the PCM.

Legislative & Stakeholder Assessment of E3 Report
Notably, the E3 Report has received immense skepticism from lawmakers. Both the Senate Business and Commerce Committee and the House State Affairs Committee held hearings after issuance of the E3 Report. Several members of both committees expressed concern that the E3 Report failed to incorporate the February 2021 freeze in the study. Chairman Schwertner of the Senate Business and Commerce Committee emphasized that none of the proposals require generators to invest in new dispatchable generation, which could be incongruent with the Legislature’s directives to procure ancillary or reliability services on a competitive basis. Particularly important are the impacts the proposals in the E3 Report could have on the nature of the Texas market—the PCM or the FRM design would both create a capacity market, which is likely to impose disproportionate costs on consumers.

Several industry stakeholders testified during the November and December hearings and echoed the legislators’ doubts. Carrie Bivens, the Independent Market Monitor for the ERCOT market, pointed out that the E3 Report overstates the amount of thermal generation that may need to be replaced in the next four years. Katie Coleman, representative for the Texas Association of Manufacturers, testified that the PCM could far exceed $460 million annually, and could instead top $5 billion annually. Cathy Webking, General Counsel for the Texas Association of Marketers, refuted Chairman Lake’s estimate that the PCM would take two to three years to implement. Rather, Ms. Webking noted that the PCM model seems to assume certain ERCOT systems are operational when in fact they are years away from completion.

Interplay with Sunset Review
Phase II of the market redesign process is coinciding with the Sunset Commission’s review of PUC, ERCOT, and the Office of Public Utility Counsel (“OPUC”). Sunset Staff issued a report in mid-November finding that “PUC is woefully under-resourced given its critical responsibilities” and emphasizing the need for clearer directives between PUC and ERCOT. The Sunset Commission, made up of members from the Texas Senate and House of Representatives and a few members of the public, held a hearing on December 7, 2022, wherein Commission members pressed testifying witnesses on the best means for improving PUC—particularly with regard to the agency’s relationship with ERCOT. Needless to say, market redesign, PUC, and ERCOT will be key areas of focus during the 88th Legislative Session, which commences on January 10, 2023.

Roslyn Dubberstein is an Associate in the Firm’s Energy and Utilily Practice Group. If you have any questions or would like additional information related to this article or other matters, please contact Roslyn at 512.322.5802 or rdubberstein@lglawfirm.com.