About Air and Water

Saturday, May 9, 2009

Spot bids to blame for high electricity bills, AARP says

By ELIZABETH SOUDER - The Dallas Morning News - Thursday, May 7, 2009

AARP says it's found the real reason that Texas electricity prices are so high.

A study, released Tuesday and funded by AARP, concludes that Texas could cut consumer electricity prices by $956 million a year, or $52 annually for the average household, by making the wholesale power market more transparent.

The Electric Reliability Council of Texas, which operates the Texas power grid, waits 60 days to disclose information about some types of wholesale electricity bids. That gives power companies time to operate in secret and potentially manipulate prices, according to the report.

"Because of the lack of transparency, all [observers] know is that the prices are doing something odd. They don't actually know what's happening in the market that's causing the prices to be high," said Robert McCullough, head of McCullough Research and author of the report.

The report calls on state lawmakers to pass legislation filed by Sen. Rodney Ellis, D-Houston, and Rep. Todd Smith, R-Euless, to require that all spot market bids be disclosed within two days. The bills remain in committees in the Texas House and Senate.

The Public Utility Commission, which oversees ERCOT, addressed the transparency issue four years ago by requiring the grid operator to disclose in 48 hours information about the bids that set the market price. In the Texas market, the highest electricity bid that ERCOT accepts at any given moment sets the price for all generators – even those generators that turned in lower bids.

ERCOT must disclose information about all the other bids in 60 days.

Prior to the new rule, ERCOT took six months to disclose bid information.

"I think it works well. I think wholesale prices are down," said PUC Chairman Barry Smitherman. "I think firms, many firms, are reluctant to offer at high prices because they are afraid of the publicity associated with that. That kind of sunshine was exactly what we intended."

Waiting 60 days to reveal certain bids was part of a compromise to prevent a lawsuit. Constellation Energy said a 48-hour transparency rule would require wholesalers to reveal sensitive information and destroy their business.

TXU Wholesale, now a unit of Energy Future Holdings called Luminant, argued at the time that disclosing bid information could even help competitors raise market prices, not lower them.

A small fraction of power trades over the spot market. Most retail electricity companies buy power directly from wholesalers.

But the wholesale market tends to influence negotiation of those one-on-one deals, the report states. Ultimately, the wholesale trades affect all consumers.

The report also states a common complaint about deregulation among consumer advocates. In a regulated environment, the PUC sets consumer rates based on utility costs plus profit margin.
"Deregulation has broken the long-standing bond between what it actually costs to generate electricity and what consumers ultimately pay," the report states.

Commodity markets tend to set prices based on supply and demand, rather than the cost to provide the commodity.
Read more in the Dallas Morning News

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